<PAGE>
As filed with the Securities And Exchange Commission on October 4, 1999
Registration No. 333-86313
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 1
To
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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INFOSPACE.COM, INC.
(Exact name of Registrant as specified in its charter)
Delaware 7375 91-1718107
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
15375 N.E. 90th Street
Redmond, Washington 98052
(425) 602-0600
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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NAVEEN JAIN
Chief Executive Officer
InfoSpace.com, Inc.
15375 N.E. 90th Street
Redmond, Washington 98052
(425) 602-0600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
PATRICK J. SCHULTHEIS
RICHARD C. SOHN
DREW G. MARKHAM
Wilson Sonsini Goodrich & Rosati
Professional Corporation
5300 Carillon Point
Kirkland, Washington 98033
(425) 576-5800
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
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. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
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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 hereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to such Section 8(a),
may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We +
+cannot sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 4, 1999
PROSPECTUS
622,455 Shares
[LOGO OF INFOSPACE.COM APPEARS HERE]
Common Stock
InfoSpace.com is offering 622,455 shares to the holders of exchangeable
shares of InfoSpace.com Canada Holdings Inc., an Ontario corporation and to the
holders of warrants to purchase shares of our common stock. InfoSpace.com
Canada Holdings will issue the exchangeable shares in exchange for outstanding
shares of the common stock of INEX Corporation, an Ontario corporation, in
connection with the proposed combination of InfoSpace.com and INEX. Holders of
exchangeable shares may then exchange one exchangeable share for one share of
our common stock, and in some cases we may redeem each exchangeable share for
one share of our common stock. We describe the process by which exchangeable
shares may be exchanged for our common stock on page 76 of this prospectus
under the heading "Plan of Distribution."
Holders of exchangeable shares may exchange their exchangeable shares for
shares of our common stock immediately upon the completion of the combination
of InfoSpace.com and INEX or at a later time. We are offering the shares of our
common stock on a continuous basis pursuant to Rule 415 under the Securities
Act of 1933 only during the period when the registration statement relating to
this prospectus is effective. We will bear the registration costs incurred in
connection with this offering.
Our common stock is traded on the Nasdaq National Market under the symbol
"INSP." On September 30, 1999, the last reported sale price for the common
stock on the Nasdaq National Market was $41.125 per share. See "Price Range of
Common Stock."
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Investing in the common stock involves a high degree of risk.
See "Risk Factors" beginning on page 5.
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The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is October 4, 1999
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
About Infospace.com................................................ 3
Our Acquisition of INEX Corporation................................ 4
Risk Factors....................................................... 5
Forward-looking Statements......................................... 20
Use of Proceeds.................................................... 21
Dividend Policy.................................................... 21
Price Range of Common Stock........................................ 21
Capitalization..................................................... 22
Selected Consolidated Financial Data............................... 23
Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 24
Business........................................................... 43
Management......................................................... 61
Certain Transactions............................................... 68
Principal Stockholders............................................. 70
Description of Capital Stock....................................... 71
Plan of Distribution............................................... 76
Income Tax Considerations.......................................... 85
Experts............................................................ 93
Additional Information............................................. 93
Index to Financial Statements...................................... F-1
</TABLE>
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You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
We began operations in March 1996 as a Washington corporation and were
incorporated in Delaware in April 1996, at which time the operations of our
Washington corporation predecessor were transferred to the Delaware
corporation. As used in this prospectus, references to "we," "our," "us" and
"InfoSpace.com" refer to InfoSpace.com, Inc., its predecessors and its
consolidated subsidiaries.
Our executive offices are located at 15375 N.E. 90th Street, Redmond,
Washington 98052, and our telephone number is (425) 602-0600.
We maintain a World Wide Web site at www.infospace.com. Information contained
on our Web site does not constitute part of this prospectus.
"InfoSpace" is a registered trademark of ours. We have also applied for
federal registration of other marks, including "InfoSpace.com,"
"ActiveShopper," and our logo. Each logo, product name, tradename or service
mark of any other company appearing in this prospectus belongs to its holder.
Except as otherwise noted, all information in this prospectus gives effect to
a two-for-one stock split of our outstanding common stock consummated in May
1999.
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ABOUT INFOSPACE.COM, INC.
InfoSpace.com is a leading Internet infrastructure company that provides
private label solutions for content, community and commerce to Web sites and
Internet appliances. Our affiliate network consists of more than 1,800 Web
sites. Our affiliates include AOL, Microsoft, Lycos, NBC's Snap, go2net Inc.'s
MetaCrawler, Disney/InfoSeek's GO Network, Network Solutions, DoubleClick, Dow
Jones (The Wall Street Journal Interactive Edition), ABC LocalNet, BellSouth
and US West. Our private label solutions include (1) content services, such as
yellow pages and white pages, maps and directions, classified advertisements,
real-time stock quotes, sports, information on local businesses and events,
weather forecasts and horoscopes, (2) community services, such as online
address books and personal calendars, personal home pages, message boards and
online chat rooms, and (3) our electronic commerce solution, ActiveShopper,
which allows shoppers to research, buy and obtain special promotions for
products offered online, review offline catalogs, locate auction sites where a
product is being offered, conduct online price comparisons and locate
merchants in the shopper's local area.
By aggregating content and commerce information from multiple sources and
integrating it with related information and community services using our
proprietary technology, we help to increase the convenience, relevance and
enjoyment of our affiliate 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 our relationships, services and technology,
affiliates are free to focus on their core competencies.
We have acquired the rights to a wide range of content from more than 65
third-party content providers. The cornerstone of our content solution is our
nationwide yellow pages and white pages directory information. Using our
proprietary technology, we integrate this directory information with other
value-added content to help users find people, places and things in the real
world. As an example of the power of our contextual integration, a salesperson
using our content, community and commerce services can, from the results of a
single query, find the name and address of a new customer, add the address to
his or her online address book, check the customer's online calendar, obtain
directions to his or her office, send a card or gift, 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.
We have developed community and commerce services that we integrate with
related content. Our suite of community services enables affiliates to
increase user loyalty and user visits by offering online personal calendars,
address books, Web-based email, personal home pages and online chat and
message boards. Our recent acquisition of MyAgent technology enables us to
offer real-time Internet communication such as real-time messaging and
enhancements to our community services. We launched our commerce service,
ActiveShopper, in May 1999. ActiveShopper is designed to help our affiliates
retain users and prolong their visits by allowing consumers to make critical
purchase decisions from within a single, fully featured commerce service and
never leave an affiliate's site. ActiveShopper provides the ability to
research, obtain special promotions and purchase products from more than 2,500
online and offline retailers.
We design our private label solutions to be highly flexible and
customizable, enabling affiliates to select from among our broad range of
content, community and commerce services. One of our principal strengths is
our internally developed technology, which enables us to easily and rapidly
add new affiliates by employing a distributed, scalable architecture adapted
specifically for our Internet-based content, community and commerce services.
We help our affiliates build and maintain their brands by delivering these
private label solutions 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. We have designed our technology to support
affiliates across multiple platforms and formats, including the growing number
of emerging Internet appliances. We typically share advertising revenues with
the affiliates whose sites incorporate our content, community and commerce
services where advertisements are placed.
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We derive substantially all of our revenues from national and local
advertising, promotions, including content and commerce promotions, and, to a
lesser extent, non-advertising based private label solutions. Through our
direct sales force, we offer a variety of national advertising and promotions
that enable advertisers to access both broad and targeted audiences. We also
sell local Internet yellow pages advertising through cooperative sales
relationships with Regional Bell Operating Companies (known as RBOCs) and
established independent yellow pages publishers, media companies and direct
marketing companies. We believe that these relationships provide us access to
local sales expertise and customer relationships that give us an advantage over
competitors while minimizing our own sales infrastructure investment.
OUR ACQUISITION OF INEX CORPORATION
On August 13, 1999, we signed a definitive agreement to acquire Toronto-based
INEX Corporation. The combination, which is intended to be accounted for as a
pooling of interests, is expected to be completed during the fourth quarter of
1999, subject to satisfaction of customary closing conditions. We will issue
900,000 shares of our common stock (1) directly to those INEX shareholders who
elect to receive our common stock in exchange for their INEX shares at the
closing of the combination, (2) upon the exchange or redemption of the
exchangeable shares of InfoSpace.com Canada Holdings Inc., an indirect
subsidiary of ours, which exchangeable shares will be issued to those INEX
shareholders who elect to receive exchangeable shares, or who do not make an
election to receive shares of our common stock, at the closing and (3) upon the
exercise of outstanding warrants and options to purchase INEX common shares,
which we will assume and which will become exercisable for shares of our common
stock after the closing. This prospectus relates to the shares of our common
stock issuable upon the exchange or redemption of the exchangeable shares and
the exercise of the warrants we will assume.
INEX Corporation is a software company that develops and markets Internet
commerce solutions designed for the small and medium-sized business merchants.
INEX recruits, develops and manages reseller channels and strategic partners
with a comprehensive support program, sales and marketing tools and resources.
These tactics are designed to help its licensees capitalize on the potential of
the Internet commerce market, to assist the small and medium-sized business
merchant realize the Internet commerce promise and for INEX to realize its
mission to aggressively penetrate and capture market share in the small and
medium-sized business markets.
INEX currently has two electronic commerce storefront product offerings that
consist of:
. INEX ezStore: a feature-rich, OEM solution that reseller channel
licensees and alliance partners can lease for a nominal fee on a monthly
basis to their small and medium-sized business merchants as part of a
complete end-to-end electronic storefront hosting service offering; and
. INEX Commerce Court Suite: an upgrade path from INEX ezStore for
merchants requiring a more sophisticated and powerful electronic
commerce solution.
We believe that the acquisition of INEX will enable us to offer our
affiliates the ability to attract and host online retailers and local merchants
on their sites by offering a complete, affordable and easy-to-use solution for
these retailers and merchants to build, manage and promote online storefronts.
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RISK FACTORS
You should carefully consider the risks and uncertainties described below
before making an investment decision. If any of the following risks actually
occur, our business, financial condition or operating results could be
materially harmed. This could cause the trading price of our common stock to
decline, and you may lose all or part of your investment.
This prospectus contains forward-looking statements that involve known and
unknown risks and uncertainties. These statements relate to our plans,
objectives, expectations and intentions. Our actual results could differ
materially from those discussed in these statements. Factors that could
contribute to these differences include those discussed below and elsewhere in
this prospectus.
You May Be Taxed on the Exchange.
The exchange of exchangeable shares of InfoSpace.com Canada Holdings Inc.
(the exchangeable shares) for shares of our common stock is generally a taxable
event in Canada and the United States. A holder's tax consequences can vary
depending on a number of factors, including the residency of the holder, the
method of the exchange (redemption or exchange) and the length of time that the
exchangeable shares were held prior to exchange. See "Income Tax
Considerations--Canadian Federal Income Tax Considerations" and "--United
States Federal Tax Considerations."
There May Be Differences in Canadian and U.S. Trading Markets.
The exchangeable shares will not be listed on any stock exchange in Canada or
the United States. We have agreed that our shares of common stock issuable from
time to time in exchange for the exchangeable shares will be listed on the
Nasdaq National Market. There is no current intention to list our common stock
on any other stock exchange in Canada or the United States, nor is there any
current intention to establish a trading market for the exchangeable shares. As
a result of the foregoing, we believe that the value of the exchangeable shares
will reflect essentially the equivalent value of our common stock on the Nasdaq
National Market. However, if a market for the exchangeable shares should
develop, there can be no assurances that the market price of the exchangeable
shares would correspond to that of our common stock.
Pending and Potential Acquisitions Involve Risks.
We have acquired complementary technologies or businesses in the past, and
intend to do so in the future. Acquisitions may involve potentially dilutive
issuances of stock, the incurrence of additional debt and contingent
liabilities or large one-time write-offs and amortization expenses related to
goodwill and other intangible assets. Any of these factors could adversely
affect our results of operations or stock price. Acquisitions, including our
pending combination with INEX, involve numerous risks, including:
. difficulties in assimilating the operations, products, technology,
information systems and personnel of the acquired company;
. diverting management's attention from other business concerns;
. impairing relationships with our employees, affiliates, advertisers and
content providers;
. being unable to maintain uniform standards, controls, procedures and
policies;
. entering markets in which we have no direct prior experience; and
. losing key employees of the acquired company.
In June 1998, we acquired Outpost Network, Inc. As a result of this
acquisition, we acquired certain electronic commerce technology and hired
approximately ten employees. We issued approximately 3,000,000 shares of stock
to the former shareholders of Outpost and agreed to offer employment to certain
employees
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of Outpost. In June 1999 we acquired certain MyAgent technology assets from
Active Voice Corporation and hired six employees who helped develop MyAgent
Technology. Upon the closing of our combination with INEX, INEX will become a
subsidiary of ours and we will relocate some INEX employees to our headquarters
in Redmond, Washington. We could issue as many as 900,000 shares of our common
stock as a result of our combination with INEX. We may not be able to
successfully integrate the technology and personnel we acquired from Active
Voice or INEX or any other businesses, technologies or personnel that we
acquire in the future.
We and the businesses acquired by us may require substantial additional
capital, and there can be no assurance as to the availability of such capital
when needed, nor as to the terms on which such capital might be made available
to us. We have retained, and may in the future retain, existing management of
acquired companies or technologies, under the overall supervision of our senior
management. The success of the operations of these acquired companies and
technologies will depend, to a great extent, on the continued efforts of the
management of the acquired companies.
We Have a Limited Operating History and a History of Losses.
We have a very limited operating history, which makes it difficult to
evaluate our business and prospects. We have incurred net losses since our
inception in March 1996. At June 30, 1999, we had an accumulated deficit of
approximately $15.6 million. We expect to incur significant operating losses on
a quarterly basis in the future. We may never be profitable. Our 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. To
address the risks we face and to be able to achieve and sustain profitability,
we must, among other things:
. develop and maintain strategic relationships with potential content
providers and affiliates;
. identify and acquire the rights to additional content and successfully
develop additional information infrastructure services;
. successfully integrate new features with our content, community and
commerce services;
. expand our sales and marketing efforts, including relationships with
third parties to sell local advertising for our Internet yellow pages
directory services;
. maintain and increase our affiliate and advertiser base;
. successfully expand into international markets;
. retain and motivate qualified personnel; and
. successfully respond to competitive developments.
If we do not effectively address the risks we face, our business will suffer
and we may never achieve or sustain profitability. See "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Our Business Model Is Evolving and Unproven.
Our business model is described below. We:
. aggregate content and commerce information from third-parties;
. integrate this content and commerce information with related information
and community services;
. distribute these integrated services on a private label basis to leading
Internet portals, destination sites and suppliers of PCs and other
Internet appliances; and
. generate revenues from the sale of national and local advertisements and
promotions on the Web pages that deliver our content, community and
commerce solutions.
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Our business model is relatively new to the Internet, is unproven and is
likely to continue to evolve. Accordingly, our business model may not be
successful, and we may need to change it. Our ability to generate significant
advertising and promotion revenues by distributing integrated content,
community and commerce services depends, in part, on our ability to
successfully market our content, community and commerce services to Internet
portals and destination sites that currently do not rely on third-party sources
for their content and service infrastructure needs and do not typically utilize
content infrastructure services that are readily available to their
competitors. We intend to continue to develop our business model as we explore
opportunities internationally and in new and unproven areas such as electronic
commerce and in providing content, community and commerce services for emerging
Internet appliances.
Our Financial Results Are Likely to Fluctuate.
Our financial results have varied on a quarterly basis and are likely to
fluctuate substantially in the future. These fluctuations may be caused by
several factors, many of which are beyond our control. These factors include:
. the addition or loss of affiliates;
. variable demand for our private label solutions by our affiliates;
. the cost of acquiring and the availability of content and commerce
information;
. the overall level of demand for content, community and commerce services;
. our ability to attract and retain advertisers and content providers;
. seasonal trends in Internet usage and advertising placements;
. the amount and timing of fees we pay to our affiliates to include our
content, community and commerce solutions on their Web sites;
. the productivity of our direct sales force and the sales forces of the
RBOCs, independent yellow pages publishers, media companies and direct
marketing companies that sell local Internet yellow pages advertising for
us;
. the amount and timing of increased expenditures for expansion of our
operations, including the hiring of new employees, capital expenditures
and related costs;
. our ability to continue to enhance, maintain and support our technology;
. the result of litigation that is currently ongoing against InfoSpace.com,
or any litigation that is filed against us in the future;
. our ability to attract and retain personnel;
. the introduction of new or enhanced services by us or our affiliates, or
other companies that compete with us or our affiliates;
. price competition or pricing changes in Internet advertising and Internet
services, such as ours;
. technical difficulties, system downtime, system failures or Internet
brown-outs;
. political or economic events and governmental actions affecting Internet
operations or content; and
. general economic conditions and economic conditions specific to the
Internet.
If one or more of these factors or other factors occur, our business could
suffer.
In addition, because InfoSpace.com only began operations in March 1996, and
because the market for Internet information infrastructure services such as
ours is new and evolving, it is very difficult to predict future financial
results. We plan to significantly increase our sales and marketing, research
and development
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and general and administrative expenses in the balance of 1999. Our expenses
are partially based on our expectations regarding future revenues, and are
largely fixed in nature, particularly in the short term. As a result, if our
revenues in a period do not meet our expectations, our financial results will
likely suffer.
Our Business Is Seasonal.
During the summer months and year-end holiday season, Internet usage
typically declines, and our affiliates experience reduced user traffic. In
addition, advertising sales in traditional media, such as broadcast and cable
television, generally declines in the first and third quarters of the year.
This seasonality is likely to cause fluctuations in our financial results.
We Rely on Advertising and Promotion Revenues.
We derive substantially all of our revenues from the sale of national and
local advertisements and promotions on the Web pages that deliver our content,
and we expect this to continue in the future. Our ability to increase our
revenues will depend upon a number of factors, including the following:
. the acceptance of the Internet as an advertising medium by national and
local advertisers;
. the acceptance and regular use of our content, community and commerce
solutions by a large number of users who have demographic characteristics
that are attractive to advertisers;
. the success of our strategy to sell local Internet yellow pages
advertising through third parties;
. the expansion and productivity of our advertising sales force; and
. the development of the Internet as an attractive platform for electronic
commerce.
We are relying on revenues from local Internet yellow pages advertising as a
significant source of our future revenues. However, we have not yet generated
significant revenues from local Internet yellow pages advertising. See "--We
Rely on Third Parties for Sales of Internet Yellow Pages Advertising."
We Rely on Our Relationships with Affiliates.
We will be able to continue generating revenues from advertising and
promotions only if we can secure and maintain distribution for our content,
community and commerce solutions on acceptable commercial terms through a wide
range of affiliates. We expect that revenues generated from the sale of
advertisements and promotions delivered through our network of affiliates will
continue to account for a significant portion of our revenues for the
foreseeable future. In particular, we expect that a limited number of our
affiliates, including, America Online, Inc., or AOL, its CompuServe and Digital
City divisions and its Netscape Communications subsidiary and Microsoft
Network, LLC will account for a substantial portion of our affiliate traffic
and, therefore, revenues over time. Our distribution arrangements with our
affiliates typically are for limited durations of between six months and two
years and automatically renew for successive terms thereafter, subject to
termination on short notice. We cannot assure you that such arrangements will
not be terminated or that such arrangements will be renewed upon expiration of
their terms. We generally share with each affiliate a portion of the revenues
generated by advertising on the Web pages that deliver our content services. We
pay carriage fees to certain affiliates, including AOL. These relationships may
not be profitable or result in benefits to us that outweigh the costs of the
relationships.
Our affiliate relationships are in an early stage of development. If
affiliates, especially major affiliates, demand a greater portion of
advertising revenues or require us to make payments for access to their site or
device, our business may suffer. In addition, if we lose a major affiliate, we
may be unable to timely or effectively replace the affiliate with other
affiliates with comparable traffic patterns and user demographics. The loss of
any major affiliate could harm our business. See "Business--Affiliate Network."
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We Rely on Third Parties for Sales of Internet Yellow Pages Advertising.
We rely on arrangements with RBOCs, independent yellow pages publishers,
media companies and direct marketing companies to generate local Internet
yellow pages advertising revenues, both domestically and internationally. These
companies sell enhanced yellow pages listings on our Internet yellow pages
directory services. Under some of our arrangements with independent yellow
pages publishers, we have granted exclusive rights to the publisher to sell
local advertising in a specific geographic area, and we do not restrict the
publisher's ability to sell advertising for any other source. We expect to
derive a greater portion of our advertising revenues from these relationships
in the future. These RBOCs, independent yellow pages publishers, media
companies and direct marketing companies have only recently begun to offer
local Internet yellow pages advertising and, accordingly, have extremely
limited experience in forecasting and executing Internet advertising business
models. We may have to expend significant time and effort in training their
sales forces.
We base our future operating plans, in part, on the local Internet yellow
pages forecasts of the RBOCs, independent yellow pages publishers, media
companies and direct marketing companies with which we have relationships. We
cannot accurately predict the timing or the extent of the success of these
local advertising efforts. Further, the RBOCs, independent yellow pages
publishers, media companies and direct marketing companies have broad
discretion in setting advertising rates, and they may not develop a profitable
business model. We also rely 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 these sales relationships to generate meaningful
revenues for us or for these companies to cease to maintain and support an
advertisement production infrastructure could harm our business. See
"Business--Advertising and Promotions."
Advertisers May Not Adopt the Internet as an Advertising Medium.
Most advertising agencies and potential advertisers, particularly local
advertisers, have only limited experience advertising on the Internet and have
not devoted a significant portion of their advertising expenditures to Internet
advertising. As the Internet evolves, advertisers may find Internet advertising
to be a less effective means of promoting their products and services relative
to traditional methods of advertising and may not continue to allocate funds
for Internet advertising. In addition, advertising on the Internet is at a much
earlier stage of development in international markets compared to the United
States.
Fluid and intense competition in the sale of advertising on the Internet has
led different vendors to quote a wide range of rates and offer a variety of
pricing models for various advertising services. As a result, we have
difficulty projecting future advertising revenues and predicting which pricing
models advertisers will adopt. For example, if many advertisers base their
advertising rates on the number of click throughs from our content services to
their Web pages, instead of solely on the number of impressions received, our
revenues could decrease. There are no widely accepted standards for the
measurement of the effectiveness of Internet advertising, and standards may not
develop sufficiently to support Internet advertising as a significant
advertising medium. We typically base our advertising rates on the number of
impressions received, and our advertising customers may not accept our
measurements or such measurements may contain errors.
Industry analysts and others have made many predictions concerning the growth
of the Internet as a commercial medium. Many of these historical predictions
have overstated the growth of the Internet and should not be relied upon. This
growth may not occur or may occur more slowly than estimated. In addition, if a
large number of consumers use "filter" software programs that limit or remove
advertising from the Web, advertisers may choose not to advertise on the
Internet. 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, our business will suffer. See "Business--Advertising and
Promotions."
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We Rely on a Small Number of Advertising Customers.
We derive a substantial portion of our revenues from a small number of
advertising customers. We expect that this will continue in the forseeable
future. In particular, 800-U.S. Search, Inc. accounted for approximately 20.6%
of our revenues for the year ended December 31, 1998, and 27.1% of our revenues
for the six months ended June 30, 1999. In addition, 800-U.S. Search
represented approximately 27.3% of our accounts receivable as of December 31,
1998 and 19.7% of our accounts receivable as June 30, 1999.
Our top ten advertising customers represented 47.8% of our revenues in 1998
and 58.7% of our revenues for the six months ended June 30, 1999. If we lose
any of these customers, including 800-U.S. Search in particular, or if any of
these customers are unable or unwilling to pay us amounts that they owe us, our
financial results will suffer.
Our Advertising Arrangements Involve Risks.
We typically sell national advertisements pursuant to short-term agreements
of less than six months. As a result, our national advertising customers could
cancel these agreements, change their advertising expenditures or buy
advertising from our competitors on relatively short notice and without
penalty. Because we expect to derive a large portion of our future revenues
from sales of national advertising, these short-term agreements expose us to
competitive pressures and potentially severe fluctuations in our financial
results.
In addition, we typically guarantee our national advertising customers a
minimum number of impressions or click throughs by Web users. These
arrangements expose us to potentially significant risks. If we fail to deliver
these minimum levels, we typically have to provide free advertising to the
customer until the minimum level is met, which could harm our financial
results.
We occasionally guarantee the availability of advertising space in connection
with promotion arrangements and content agreements. In addition, we
occasionally provide customized advertising campaigns for advertisers and agree
with certain advertisers that we will not accept advertising from any other
customer within a particular subject matter. All of these arrangements subject
us to certain risks. These risks include:
. our potential inability to meet the guarantees we make to our customers;
. our allocation of resources to create customized advertising that may not
result in successful advertisements; and
. a requirement to forego advertising from potential customers whose
advertisements would conflict with those of other customers.
Any of these results could harm our financial results.
We Depend on Third Parties for Content.
We typically do not create our own content. Rather, we acquire rights to
information from more than 65 third-party content providers, and our future
success is critically dependent upon our ability to maintain relationships with
these content providers and enter into new relationships with other content
providers.
We typically license content under short-term arrangements that do not
require us to pay royalties or other fees for the use of the content. However,
we do enter into revenue-sharing arrangements with certain content providers,
and we pay certain content providers, including infoUSA and Acxiom Corporation,
a one-time fee or a fee for each query from Web users. In the future, we expect
that certain of our content providers will likely demand a greater portion of
advertising revenues or increase the fees that they charge us for their
content. If we fail to enter into and maintain satisfactory arrangements with
content providers,
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our business will suffer. See "--We Need to Manage Our Growth and Implement
Procedures and Controls."
We Depend on Key Personnel.
Our performance depends on the continued services of our executive officers
and other key personnel. We maintain key person life insurance on Naveen Jain,
our Chief Executive Officer, in the amount of $5.0 million. We do not maintain
key person life insurance policies on any of our other employees. If we lose
the services of any of our executive officers or other key employees, our
business could suffer. See "Business--Employees" and "Management."
We Need to Hire Additional Personnel.
Our future success depends on our ability to identify, attract, hire, train,
retain and motivate highly skilled technical, managerial, sales and marketing
and business development personnel. We intend to hire a significant number of
technical, sales and marketing, business development and administrative
personnel during the next year. If we fail to successfully attract, assimilate
and retain a sufficient number of qualified technical, managerial, sales and
marketing, business development and administrative personnel, our business
could suffer.
We Need to Manage Our Growth and Maintain Procedures and Controls.
We have rapidly and significantly expanded our operations and anticipate
further significant expansion to accommodate expected growth in our customer
base and market opportunities. We have increased the number of employees from
15 at January 1, 1998 to 102 at July 31, 1999. This expansion has placed, and
is expected to continue to place, a significant strain on our management,
operational and financial resources. We are also significantly increasing our
employee base.
We have implemented improvements in our operational, accounting and
information systems, procedures and controls. In the past, our controls have
not been adequate to ensure proper communication within our company regarding,
and to properly document, the terms of certain of our written and verbal
contracts and the termination of certain contracts. In the past, we did not
consistently follow our procedures with respect to the documentation of the
granting of options to new employees, and, at times, we failed to maintain an
appropriate level of internal communication regarding the potential hiring of
new employees, especially management employees. These inadequacies have led to
claims against us, some of which are still pending. See "--We Are Subject to
Pending Legal Proceedings."
Our relationships with content providers, affiliates and advertisers are
subject to frequent change. Prior to implementing procedures and controls in
this area, these changes were often informal. In particular, we may have failed
to perform our obligations under certain commercial contracts that may have
been modified or terminated by verbal agreement. We believe that any failure to
perform our obligations was not significant. This practice of the modification
or termination of past written agreements by verbal agreement has resulted, and
may result in the future, in disputes regarding the existence, interpretation
and circumstances regarding modification or termination of commercial
contracts. We are currently involved in litigation with Internet Yellow Pages,
Inc., a direct marketing company with which we had a cooperative sales
relationship, and have received other claims. If our relationships with content
providers, affiliates and advertisers evolve in an adverse manner, if we get
into contractual disputes with content providers, affiliates or advertisers or
if any agreements with such persons are terminated, our business could suffer.
See "Business--Legal Proceedings."
We have taken a number of steps to improve our accounting and information
systems, procedures and controls and we have adopted certain policies with
respect to the approval, tracking and management of our commercial agreements,
including:
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. standardizing the form of our commercial agreements, where possible;
. requiring our legal and accounting departments to review any proposed
commercial contract and approve contract modifications prior to their
implementation;
. prohibiting ourselves from entering into verbal agreements or verbal
modifications or terminations of agreements; and
. establishing a contracts database to serve as a central source of key
information regarding our commercial contracts, which will facilitate the
tracking and management of these contracts.
Despite these procedures, or as a result of our failure to maintain them,
disputes or issues relating to commercial agreements may arise in the future.
To manage the expected growth of our operations and personnel, we must
continue maintaining and improving our operational, accounting and information
systems, procedures and controls. We will also need to expand, train and manage
our growing employee base, particularly our finance, administrative and
operations staff. Further, we must manage effectively our relationships with
various Internet content providers, advertisers, affiliates and other third
parties necessary to our business. If we are unable to manage growth
effectively, our business could suffer. See "--We Are Subject to Pending Legal
Proceedings," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business--Employees" and "Management."
Our International Expansion Plans Involve Risks.
A key component of our strategy is expanding our operations into
international markets. We have entered into a joint venture agreement with
Thomson Directories Limited to replicate our content, community and commerce
services in Europe. The joint venture, TDL InfoSpace (Europe) Limited, has
targeted the United Kingdom as its first market, and it launched content
services in the third quarter of 1998. We expect that TDL InfoSpace will expand
its content services to other European countries by the end of 1999. Under the
joint venture agreement, each of us is obligated to negotiate with TDL
InfoSpace and the other party to jointly offer content, community and commerce
services in other European countries prior to offering such services
independently or with other parties. In March 1999, we began providing content,
community and commerce services to Canadian affiliates through our wholly-owned
subsidiary, InfoSpaceCanada.com. To date, we have limited experience in
developing and syndicating localized versions of our private label solutions
internationally, and we may not be able to successfully execute our business
model in these markets. In addition, international markets experience lower
levels of Internet usage and Internet advertising than the United States. We
rely on our business partner in Europe for U.K. directory information and local
sales forces and may enter into similar relationships if we expand into other
international markets. Accordingly, our success in these markets will be
directly linked to the success of our business partners in such activities. If
our business partners fail to successfully establish operations and sales and
marketing efforts in these markets, our business could suffer. See "Business--
International Expansion."
In addition, we face a number of risks inherent in doing business in
international markets, including, among others:
. unexpected changes in regulatory requirements;
. potentially adverse tax consequences;
. export controls relating to encryption technology;
. tariffs and other trade barriers;
. difficulties in staffing and managing foreign operations;
. changing economic conditions;
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. exposures to different legal standards (particularly with respect to
intellectual property and distribution of information over the Internet);
. burdens of 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.
If any of these risks occur, our business could suffer.
Our Business Is Highly Competitive.
We operate in the Internet information infrastructure services market, which
is extremely competitive and is rapidly changing. Our current and prospective
competitors include many large companies that have substantially greater
resources than we have. We believe that the primary competitive factors in the
market for Internet content, community and commerce services are:
. 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 Web
sites and Internet appliances to which the services are provided;
. the ability to meet the specific content and service demands of a
particular Web site or Internet appliance;
. the cost-effectiveness and reliability of the content, community and
commerce services;
. the ability to provide content, community and commerce services that are
attractive to advertisers;
. the ability to achieve comprehensive coverage of a particular category of
content; and
. the ability to integrate related information to increase the utility of
the content, community and commerce services offered.
We compete, directly or indirectly, in the following ways, among others:
. our directory services compete with AnyWho? (a division of AT&T), GTE
SuperPages, Switchboard, ZIP2 (which was recently acquired by Compaq),
various RBOCs' directory services, infoUSA's Lookup USA, Microsoft
Sidewalk and Yahoo! Yellow Pages and White Pages;
. other information services we provide, such as classifieds, horoscopes
and real-time stock quotes, compete with specialized content providers;
. our U.K. joint venture competes with British Telecom's YELL service and
Scoot (UK) Limited;
. our community services compete with services offered by Internet portals
such as AOL, Yahoo!, and Excite, as well as specialized content service
providers such as Hotmail; and
. our commerce services compete with Inktomi, Amazon.com's Junglee and
Excite's Jango.
We expect that in the future we will experience competition from other
Internet services companies and providers of Internet software, including
Microsoft, Yahoo!, AOL, Excite, Disney/Infoseek, Lycos, go2net's MetaCrawler
and NBC's Snap. Some of these companies are currently customers of ours, the
loss of which could harm our business. We may also face increased competition
from traditional media companies expanding onto the Internet.
Many of our current customers have established relationships with certain of
our current and potential future competitors. If our competitors develop
content, community and commerce services that are superior to ours or that
achieve greater market acceptance than ours, our business will suffer.
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Our Business Relies on the Performance of Our Systems.
Our success depends, in part, on the performance, reliability and
availability of our content, community and commerce services. Our revenues
depend, in large part, on the number of users that access our content,
community and commerce services. Our computer and communications hardware is
located at our main headquarters in Redmond, Washington and in additional
hosting facilities provided by Exodus Communications, Inc. and Savvis
Communications Corporation in the Seattle, Washington area. Our systems and
operations could be damaged or interrupted by fire, flood, power loss,
telecommunications failure, Internet breakdown, break-in, earthquake and
similar events. We do not have a formal disaster recovery plan, and we do not
carry business interruption insurance that is adequate to compensate us for
losses that may occur. In addition, systems that use sophisticated software may
contain bugs, which could also interrupt service. Any system interruptions
resulting in the unavailability of our content, community and commerce services
would reduce the volume of users able to access our content, community and
commerce services and the attractiveness of our service offerings to our
affiliates, advertisers and content providers, which could harm our business.
Our Industry Is Experiencing Consolidation.
The Internet industry has recently experienced substantial consolidation. For
example, AOL has acquired Netscape, At Home has acquired Excite, and Compaq has
acquired ZIP2. We expect this consolidation to continue. These acquisitions
could affect us in a number of ways, including:
. companies from whom we acquire content could be acquired by one of our
competitors and stop selling us content;
. our customers could be acquired by one of our competitors and stop buying
advertising from us; and
. our customers could merge with other customers, which could reduce the
size of our customer base.
This consolidation in the Internet industry could harm our business.
We Are Subject to Pending Legal Proceedings.
From time to time we have been, and expect to continue to be, subject to
legal proceedings and claims in the ordinary course of our business, including
claims of alleged infringement of third-party trademarks and other intellectual
property rights by us. Such claims, even if not meritorious, could require the
expenditure of significant financial and managerial resources, which could harm
our business.
An alleged former employee has filed a complaint alleging that he was
terminated without cause and that he entered into an agreement with us that
entitles him to an option to purchase 2,000,000 shares of our common stock or
10% of our stock. The complaint alleges breach of contract, breach of the
covenant of good faith, breach of fiduciary duty, misrepresentation, promissory
estoppel, intentional interference with contractual relations and unfair and
deceptive acts and practices, seeking specific performance of the alleged
agreement for 10% of our stock, damages equal to the value of 10% of our stock,
punitive damages and attorneys' fees and costs and treble damages. To the
extent that we are required to issue shares of our common stock or options to
purchase common stock as a result of these claims filed by the alleged former
employee, we would recognize an expense equal to the number of shares issued
multiplied by the fair value of our common stock on the date of issuance, less
the exercise price of any options required to be issued. This could harm our
results of operations, and any such issuance would be dilutive to existing
stockholders, the impact of which may be mitigated to the extent it is offset
by shares of common stock in the escrow account described in "Business--Legal
Proceedings."
We have filed a complaint against Internet Yellow Pages, Inc., or IYP,
asserting claims for (a) account stated, (b) breach of contract, and (c) fraud.
IYP has filed a complaint against us asserting causes of action for breach of
contract, fraud, extortion and racketeering and seeks relief consisting of
$1,500,000 and other unquantified money damages, punitive damages, treble
damages and attorney's fees.
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We believe we have meritorious defenses to all of these claims against us.
Nevertheless, litigation is inherently uncertain, and we may not prevail in
these suits.
We had discussions with a number of individuals in the past regarding
employment by us and also hired and subsequently terminated a number of
individuals as employees or consultants. Furthermore, primarily during our
early stage of development, our procedures with respect to the manner of
granting options to new employees were not clearly documented. As a result of
these factors, and in light of the receipt of the above claims, we have in the
past received, and may in the future receive, similar claims from one or more
individuals asserting rights to acquire shares of our stock or to receive cash
compensation. We cannot predict whether such future claims will be made or the
ultimate resolution of any currently outstanding or future claim. Naveen Jain,
our Chief Executive Officer, has placed into escrow 2,000,000 shares of our
stock beneficially owned by him to indemnify us and our directors for a period
of five years for certain liabilities relating to events prior to September 30,
1998. The indemnification agreement, however, does not provide for
indemnification for certain matters known by the Board prior to September 30,
1998 or losses less than $100,000. Satisfaction of such liabilities through the
issuance of escrowed shares could result in the recognition of future expenses,
which could harm our results of operations. See "Business--Legal Proceedings."
We Rely on Internally Developed Software and Systems.
We have developed custom software for our network servers our community
services and our ActiveShopper commerce service. This software may contain
undetected errors, defects or bugs. Although we have not suffered significant
harm from any errors or defects to date, we may discover significant errors or
defects in the future that we may or may not be able to fix. We must expand and
upgrade our technology, transaction-processing systems and network
infrastructure if the volume of traffic on our Web site or our affiliates' Web
sites increases substantially. In addition, as we continue to expand into
electronic commerce services, we may have to significantly modify our systems.
We could experience periodic temporary capacity constraints, which may cause
unanticipated system disruptions, slower response times and lower levels of
customer service. We may be unable to accurately project the rate or timing of
increases, if any, in the use of our private label solutions or expand and
upgrade our systems and infrastructure to accommodate these increases in a
timely manner. Any inability to do so could harm our business. See "Business--
Technology and Infrastructure."
Rapid Technological Change Affects Our Business.
Rapidly changing technology, evolving industry standards, evolving customer
demands and frequent new product and service introductions characterize our
market. Our market's early stage of development exacerbates these
characteristics. Our future success depends in significant part on our ability
to improve the performance, content and reliability of our private label
solutions in response to both the evolving demands of the market and
competitive product offerings. Our efforts in these areas may not be
successful. If a large number of affiliates adopt new Internet technologies or
standards, we may need to incur substantial expenditures modifying or adapting
our private label solutions.
We Rely on the Internet System Infrastructure.
Our success depends, in large part, on other companies maintaining the
Internet system infrastructure. In particular, we rely on other companies to
maintain a reliable network backbone that provides adequate speed, data
capacity and security and to develop products that enable reliable Internet
access and services. If the Internet continues to experience significant growth
in the number of users, frequency of use and amount of data transmitted, the
Internet system infrastructure may be unable to support the demands placed on
it, and the Internet's performance or reliability may suffer as a result of
this continued growth. In addition, the
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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. Any such degradation of Internet
performance or reliability could cause advertisers to reduce their Internet
expenditures. If other companies do not develop the infrastructure or
complementary products and services necessary to establish and maintain the
Internet as a viable commercial medium, or if the Internet does not become a
viable commercial medium or platform for advertising, promotions and electronic
commerce, our business could suffer.
We Receive Information that May Subject Us to Liability.
We obtain content and commerce information from third parties. When we
integrate and distribute this information over the Internet, we may be liable
for the data that is contained in that content. This could subject us to legal
liability for such things as defamation, negligence, intellectual property
infringement and product or service liability. Many of the agreements by which
we obtain content do not contain indemnity provisions in favor of us. Even if a
given contract does contain indemnity provisions, these provisions may not
cover a particular claim. While we carry general business insurance with a
limit of $1.0 million for each occurrence and $2.0 million in the aggregate,
this coverage may be inadequate.
In addition, individuals whose names appear in our yellow pages and white
pages directories have occasionally contacted us. These individuals believed
that their phone numbers and addresses were unlisted, and our directories are
not always updated to delete phone numbers or addresses when they are changed
from listed to unlisted. While we have not received any claims from these
individuals, we may receive claims in the future. Any liability that we incur
as a result of content we receive from third parties could harm our financial
results.
Our Networks Face Security Risks.
Even though we have implemented security measures, our networks may be
vulnerable to unauthorized access by hackers or others, computer viruses and
other disruptive problems. Someone who is able to circumvent security measures
could misappropriate our proprietary information or cause interruptions in our
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. We may need to expend significant capital or other
resources protecting against the threat of security breaches or alleviating
problems caused by breaches. Although we intend to continue to implement
industry-standard security measures, persons may be able to circumvent the
measures that we implement 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 our content
services, any of which could harm our business. See "Business--Technology and
Infrastructure--Data Network Infrastructure" and "Business--Facilities."
Users of online commerce services are highly concerned about the security of
transmissions over public networks. Concerns over security and the privacy of
users may inhibit the growth of the Internet and other online services
generally, and the Web in particular, especially as a means of conducting
commercial transactions. As we expand our electronic commerce services, we
intend to rely on encryption and authentication technology licensed from third
parties to provide the security and authentication necessary to securely
transmit confidential information, such as customer credit card numbers. Users
could possibly circumvent the measures we take to protect customer transaction
data. To the extent that our activities involve the storage and transmission of
proprietary information, such as credit card numbers, security breaches could
damage our reputation and expose us to a risk of loss or litigation and
possible liability. Any compromise of our security could harm our business.
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We May Be Unable to Adequately Protect or Enforce Our Intellectual Property
Rights.
Our success depends significantly upon our proprietary technology. To protect
our proprietary rights, we rely on a combination of copyright and trademark
laws, patents, trade secrets, confidentiality agreements with employees and
third parties and protective contractual provisions. Despite our efforts to
protect our proprietary rights, unauthorized parties may copy aspects of our
products or services or obtain and use information that we regard as
proprietary. In addition, others could possibly independently develop
substantially equivalent intellectual property. If we do not effectively
protect our intellectual property, our business could suffer.
Companies in the computer industry have frequently resorted to litigation
regarding intellectual property rights. We may have to litigate to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of other parties' proprietary rights. From time to time, we
have received, and we may receive in the future, notice of claims of
infringement of other parties' proprietary rights. Any such claims could be
time-consuming, result in costly litigation, divert management's attention,
cause product or service release delays, require us to redesign our products or
services or require us to enter into royalty or licensing agreements. These
royalty or licensing agreements, if required, may not be available on
acceptable terms or at all. If a successful claim of infringement were made
against us and we could not develop non-infringing technology or license the
infringed or similar technology on a timely and cost-effective basis, our
business could suffer. See "Business--Intellectual Property" and "--Legal
Proceedings."
We May Become Subject to Governmental Regulation.
Because of the increasing use of the Internet, the government may adopt laws
and regulations with regard to the Internet covering issues such as user
privacy, pricing, content, taxation, copyrights, distribution and product and
services quality. For a description of certain risks relating to government
regulation, see "Business--Governmental Regulation."
We May Require Additional Funding.
Although we believe that our cash reserves and cash flows from operations
will be adequate to fund our operations for at least the next 12 months, such
sources may be inadequate. Consequently, we may require additional funds during
or after such period. Financing may not be available on favorable terms or at
all. If we raise additional funds by selling stock, the percentage ownership of
our then current stockholders will be reduced. If we cannot raise adequate
funds to satisfy our capital requirements, we may have to limit our operations
significantly. Our future capital requirements depend upon many factors,
including, but not limited to:
. the rate at which we expand our sales and marketing operations;
. the amount and timing of fees paid to affiliates to include our private
label solutions on their site or service;
. the extent to which we expand our content, community and commerce
services;
. the extent to which we develop and upgrade our technology and data
network infrastructure;
. the occurrence, timing, size and success of acquisitions;
. the rate at which we expand internationally; and
. the response of competitors to our service offerings.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
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Management Owns a Large Percentage of Our Stock.
Our officers, directors and affiliated persons will beneficially own
approximately 43% of our common stock after all of the shares offered in this
prospectus or issuable directly to INEX shareholders upon the closing of our
combination with INEX are issued. Naveen Jain, our Chief Executive Officer,
will beneficially own approximately 33% of our common stock. As a result, our
officers, directors and affiliated persons may effectively be able to:
. elect, or defeat the election of, our directors;
. amend or prevent amendment of our Certificate of Incorporation or Bylaws;
. effect or prevent a merger, sale of assets or other corporate
transaction; and
. control the outcome of any other matter submitted to the stockholders for
vote.
Our public stockholders may have little control over the outcome of such
transactions. Management's stock ownership may discourage a potential acquirer
from making a tender offer or otherwise attempting to obtain control of
InfoSpace.com, which in turn could reduce our stock price or prevent our
stockholders from realizing a premium over our stock price. See "Management,"
"Certain Transactions" and "Principal Stockholders."
Year 2000 Compliance Issues Could Adversely Impact Our Business.
We are in the process of assessing and remediating any Year 2000 issues
associated with our computer systems and software and other property and
equipment. Despite our testing and remediation efforts, our systems and those
of third parties, including content providers, advertisers, affiliates, and end
users may contain errors or faults with respect to the Year 2000. Our efforts
to address this issue are described in more detail in "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Year 2000
Compliance." Known or unknown errors or defects that affect the operation of
our software and systems and those of third parties, including content
providers, advertisers, affiliates, and end users could result in delay or loss
of revenue, interruption of services, cancellation of customer contracts,
diversion of development resources, damage to our reputation, increased service
and warranty costs, and litigation costs, any of which could harm our business.
Our Stock Price Has Been and May Continue to be Volatile.
The trading price of our common stock has been and is likely to continue to
be highly volatile. Since we began trading on December 15, 1998, our stock
price has ranged from $7.50 to $72.625. Our stock price could be subject to
wide fluctuations in response to factors such as the following:
. 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
us or our 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;
. our announcements of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
. additions or departures of key personnel;
. sales of our common stock;
. general market conditions; and
. other events or factors, many of which are beyond our control.
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In addition, the stock market in general, and the Nasdaq National Market and
the market for Internet and technology companies in particular, have
experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of these companies.
These broad market and industry factors may materially and adversely affect our
stock price, regardless of our 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. These trading
prices and price-earnings ratios may not be sustained.
Future Sales of Our Common Stock May Depress Our Stock Price.
Sales of a substantial number of shares of our common stock in the public
market could adversely affect the market price of our common stock. After this
offering and the consummation of our combination, 48,198,112 shares of our
common stock will be outstanding. In the past 12 months, we completed two
offerings of our common stock. All of the shares sold in these offerings are
freely tradeable unless held by affiliates of InfoSpace.com. See "Shares
Eligible for Future Sale."
Certain Anti-Takeover Provisions May Affect the Price of Our Stock.
Certain provisions of our Certificate of Incorporation and Bylaws and
Washington and Delaware law could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders. Also, if
we receive a proposal from another company that could result in the acquisition
of InfoSpace.com, our agreement with AOL requires us to negotiate with AOL
before entertaining discussions with the other company. This provision could
discourage companies other than AOL from presenting acquisition proposals to us
and could delay, deter or prevent a change of control of us. See "Description
of Capital Stock."
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FORWARD-LOOKING STATEMENTS
You should not rely on forward-looking statements in this prospectus. This
prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends," "may," "will," "should," "estimates,"
"predicts," "potential," "continue" and similar expressions to identify such
forward-looking statements. These forward-looking statements include, but are
not limited to, statements regarding our business and growth strategy, the
expected benefits of our private label solutions for the content, community and
commerce needs of our affiliates, advertisers and content providers, the
expectation that AOL and its business divisions will meet certain contractual
minimum commitments, the expectation that actual carriage fee payments under
our agreements with AOL will exceed the sales and marketing expense recorded
for the periods in which payments are made, future carriage fees, increased
advertising and public relations expenditures, increased operating expenses and
the reasons for such increases, expected operating losses, increased product
development expenditures, increased costs of revenues, increased product
development expenses, increased sales and marketing expenses, future levels of
bad debt expense, increased general and administrative expenses, anticipated
capital equipment expenditures, anticipated cash needs, the absence of material
Year 2000 compliance problems and the time frame and cost of addressing any
Year 2000 problems and the successful integration of technology acquired from
Active Voice and INEX and the cost thereof. This prospectus also contains
forward-looking statements attributed to third parties relating to their
estimates regarding the growth of certain markets. Forward-looking statements
are subject to known and unknown risks, uncertainties and other factors that
may cause our and the strategic Internet services industry's actual results,
levels of activity, performance, achievements and prospects to be materially
different from those expressed or implied by such forward-looking statements.
These risks, uncertainties and other factors include, among others, those
identified under "Risk Factors" and elsewhere in this prospectus.
These forward-looking statements apply only as of the date of this
prospectus. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties, and assumptions,
the forward-looking events discussed in this prospectus might not occur. Our
actual results could differ materially from those anticipated in these forward-
looking statements for many reasons, including the risks faced by us described
above and elsewhere in this prospectus. See "Risk Factors."
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USE OF PROCEEDS
Of the 622,455 shares of our common stock offered in this prospectus, we will
issue approximately 550,253 shares of our common stock upon exchange or
redemption of the exchangeable shares; we will receive no net cash proceeds
upon the issuance of such shares. We may receive up to approximately
$1.7 million in net cash proceeds (assuming an exchange rate of Canadian
dollars to U.S. dollars of approximately 0.68:1), subject to fluctuations in
the exchange rate between Canadian dollars and U.S. dollars, in connection with
the exercise of warrants to purchase shares of our common stock being offered
in this prospectus. We will use these proceeds for general corporate purposes.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings and therefore do not anticipate
paying any cash dividends in the foreseeable future.
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the Nasdaq National Market under the
symbol "INSP" since December 15, 1998, the date of our initial public offering.
Prior to that time, there was no public market for our common stock. The
following table sets forth, for the periods indicated, the high and low sales
prices for our common stock as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
Fiscal Year Ended December 31, 1998:
Fourth Quarter (from December 15, 1998)................... $ 26.00 $ 7.50
Fiscal Year Ending December 31, 1999:
First Quarter............................................. $49.625 $ 14.25
Second Quarter............................................ $72.625 $ 35.25
Third Quarter............................................. $58.938 $36.875
</TABLE>
On September 30, 1999 the last reported sale price for our common stock on
the Nasdaq National Market was $41.125 per share. As of July 31, 1999, there
were approximately 217 holders of record of our common stock. See "Risk
Factors--Our Stock Price Has Been and May Continue to be Volatile."
21
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999. This
table should be read in conjunction with our 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, 1999
------------------
(in thousands,
except share data)
<S> <C>
Stockholders' equity:
Preferred Stock, $0.0001 par value per share; 15,000,000
shares authorized; no shares issued and outstanding...... $ --
Common Stock, $0.0001 par value per share; 200,000,000
shares authorized; 47,359,177 shares issued and
outstanding.............................................. 5
Additional paid-in capital................................ 292,949
Accumulated deficit....................................... (15,588)
Unearned warrants......................................... (2,719)
Unearned compensation--stock options...................... (215)
--------
Total stockholders' equity.............................. 274,432
--------
Total capitalization.................................. $274,432
========
</TABLE>
- --------
(1) Excludes as of June 30, 1999:
. 5,624,561 shares of common stock issuable upon exercise of outstanding
options at a weighted average exercise price of $6.89 per share;
. 7,063,438 shares of our common stock issuable upon exercise of
outstanding warrants at a weighted average exercise price of $3.39 per
share; and
. 5,016,736 shares of our common stock reserved for future issuance under
our Restated 1996 Flexible Stock Incentive Plan and 1998 Employee Stock
Purchase Plan.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except share and per share 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," our 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 years ended
December 31, 1997 and December 31, 1998 and the selected consolidated balance
sheet data at December 31, 1997 and 1998 are derived from our audited
consolidated financial statements, which have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports included elsewhere
herein, and are included elsewhere in this prospectus. The selected
consolidated statements of operations data for the six months ended June 30,
1998 and 1999 and the selected consolidated balance sheet data as of June 30,
1999 are derived from unaudited consolidated financial statements included
elsewhere in this prospectus. The selected consolidated balance sheet data at
December 31, 1996 have been derived from audited consolidated financial
statements that have not been included herein.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
March 1 to December 31, June 30,
December 31, ------------------------ ------------------------
1996 1997 1998 1998 1999
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues.............. $ 199 $ 1,685 $ 9,414 $ 2,855 $ 11,875
Cost of revenues...... 97 400 1,605 499 1,960
----------- ----------- ----------- ----------- -----------
Gross profit........ 102 1,285 7,809 2,356 9,915
Operating expenses:
Product
development........ 109 213 599 148 537
Sales and
marketing.......... 231 841 5,541 952 10,197
General and
administrative..... 164 480 3,001 833 3,387
Amortization of
intangibles........ -- 64 710 121 604
Acquisition and
related charges.... -- -- 2,800 2,800 4,913
Other--non-recurring
charges............ -- 137 4,500 240 210
----------- ----------- ----------- ----------- -----------
Total operating
expenses......... 504 1,735 17,151 5,094 19,848
----------- ----------- ----------- ----------- -----------
Loss from operations.. (402) (450) (9,342) (2,738) (9,933)
Other income, net..... 21 21 410 43 4,287
Equity in loss from
joint venture........ -- -- (125) -- (76)
----------- ----------- ----------- ----------- -----------
Net loss.............. $ (381) $ (429) $ (9,057) $ (2,695) $ (5,722)
=========== =========== =========== =========== ===========
Basic and diluted net
loss per share....... $ (0.02) $ (0.02) $ (0.33) $ (0.12) $ (0.13)
=========== =========== =========== =========== ===========
Shares used in
computing basic and
diluted net loss per
share................ 18,560,326 21,996,314 27,120,536 23,144,812 44,680,837
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31,
December 31, --------------- June 30,
1996 1997 1998 1999
------------ ------ -------- --------
<S> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and short-term investments......... $ 690 $ 324 $ 86,750 $167,627
Working capital......................... 825 543 85,780 175,891
Total assets............................ 1,072 1,398 102,258 281,143
Total stockholders' equity.............. 1,020 1,028 94,248 274,432
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
"Selected Consolidated Financial Data" and our Consolidated Financial
Statements and Notes thereto included elsewhere in this prospectus. In addition
to historical information, the following discussion contains certain forward-
looking statements that involve known and unknown risks and uncertainties, such
as statements of our plans, objectives, expectations and intentions. You should
read the cautionary statements made in this prospectus as being applicable to
all related forward-looking statements wherever they appear in this prospectus.
Our 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. See
"Forward-Looking Statements."
Overview
InfoSpace.com is a leading Internet infrastructure company that provides
private label solutions for content, community and commerce to Web sites and
Internet appliances. We began operations in March 1996. During the period from
inception through December 31, 1996, we had insignificant revenues and were
primarily engaged in the development of technology for the aggregation,
integration and distribution of Internet content and the hiring of employees.
In 1997, we expanded our operations, adding business development and sales
personnel in order to capitalize on the opportunity to generate Internet
advertising revenues. We began generating material revenues in 1997 through the
sale of advertising on Web pages that deliver our content services.
We currently derive substantially all of our revenues from national and local
advertising, promotions, including promotions for content, community and
commerce, and, to a lesser extent, non-advertising based private label
solutions. National advertising consists of banner advertisements and other
forms of national advertising that are sold on a cost per thousand impressions,
or CPM, basis on Web pages that deliver our content, community and commerce
services. Examples of banner advertisements include:
. mass market placements for general rotation;
. targeted placements for specified audiences; and
. targeted placements for specified audiences in specified geographic
areas.
The most common of our nonbanner advertisements are known as "button
advertisements" and "textlinks," but also include customized advertising
solutions developed for specific advertisers. We recognize revenues from
national advertising ratably over the related contractual term. We share a
portion of our advertising revenues with affiliates whose sites incorporate our
content, community and commerce services where advertisements are placed.
National advertising agreements generally have terms of less than six months
and guarantee a minimum number of impressions. CPMs vary depending on the type
of advertisement purchased and the specificity of targeting requested. Our
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 may fluctuate. Our
guarantee of minimum levels of impressions exposes us to potentially
significant financial risks, including the risk that we may fail to deliver
required minimum levels of user impressions, in which case we typically
continue to provide advertising without additional compensation until such
levels are met. See "Risk Factors--We Rely on Advertising and Promotion
Revenues."
Local advertising consists of revenues generated from cooperative sales
relationships with leading independent yellow pages publishers, media companies
and direct marketing companies to sell local Internet
24
<PAGE>
yellow pages advertising on our 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 our 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 our cooperative sales relationships typically have terms of one to five
years and provide for revenue sharing, which varies from relationship to
relationship. Typically, we receive guaranteed minimum levels of payments based
on floor prices of the listing enhancements that are sold. We recognize revenue
from these guaranteed minimum payments ratably over the related contract term
and recognize revenues earned above the guaranteed minimum payment over the
term that the local advertising is provided.
In addition to our CPM-based national advertising, we also sell promotions.
Promotions are integrated packages of advertising that bundle such features as
button and textlink advertisements, sponsorships of specific categories of
content within our private label solutions and electronic commerce features.
Promotions also include co-branding and distribution services that we provide
to content providers, for which we receive carriage revenues. Promotion
arrangements vary in terms and duration, but they generally have longer terms
than arrangements for our 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. If the advertiser offers an electronic commerce opportunity in its
promotion, we may derive transaction revenues based on the level of
transactions made through the promotion.
Under our non-advertising based private label solution arrangements,
affiliates pay us on a fixed fee, per-click or page view basis while typically
keeping any revenues generated by our content, community and commerce
solutions. These arrangements vary in terms and duration, and the fees are
individually negotiated with the affiliate.
In order to evaluate and forecast revenue derived from these different
revenue sources, the principal revenue metric we utilize is productivity per
page. This metric measures our ability to generate revenue from traffic. We
calculate productivity per thousand pages by dividing total revenue for a
reporting period by the total number of page views in the same period, then
multiplying by 1,000. Productivity per page will vary due to the delay in
generating revenue from our increasing traffic. For the six-month period ended
June 30, 1999, traffic totaled 2.6 billion page views. Revenue per thousand
page views was $4.81 for the second quarter of 1999, an increase of $0.58 from
$4.23 for the first quarter of 1999. We expect revenue per thousand page views
for the remainder of 1999 to range between $3.75 and $5.00.
In May 1997, we acquired Yellow Pages on the Internet, LLC, or YPI, a
Washington limited liability company that provided Internet yellow pages
directory information. In June 1998, we acquired Outpost, a Washington
corporation engaged primarily in electronic commerce through the sale of cards
and gifts via the Internet. These acquisitions were accounted for under the
purchase method and, accordingly, are included in our operating results from
the date of acquisition forward. The impact of the YPI acquisition on our
consolidated statement of operations was not substantial. The acquisition of
Outpost resulted in a write-off of in-process research and development,
goodwill and core technology amortization and product development costs.
Revenues resulting from the Outpost acquisition have been negligible.
In July 1998, we entered into a joint venture agreement with Thomson to form
TDL InfoSpace to replicate our content, community and commerce 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. We also will license our technology and provide
hosting services to TDL InfoSpace. Thomson and we each purchased a 50% interest
in TDL InfoSpace and are required to provide reasonable working capital to TDL
InfoSpace. As of June 30, 1999, we had contributed $496,000 to the joint
venture. We account for our investment in the joint venture
25
<PAGE>
under the equity method. For the year ended December 31, 1998, we recorded a
loss from the joint venture of $125,000. For the six months ended June 30, 1999
we recorded a loss from the joint venture of $76,000.
Effective as of July 1, 1998, we entered into two trademark license
agreements with Netscape to license two of Netscape's trademarks for a one-time
nonrefundable license fee. We capitalized the trademark license fees and are
amortizing them over one year, the expected useful life of the trademarks.
These trademarkes were fully amortized as of June 30, 1999.
On August 24, 1998, we entered into agreements with AOL to provide white
pages directory and classifieds information services to AOL. Pursuant to the
white pages directory services agreement, we have agreed to provide to AOL
white pages listings and directory services. We are required to pay to AOL a
quarterly carriage fee, the retention of which is conditioned on the quarterly
achievement of a minimum number of searches on the AOL white pages site. We pay
the quarterly carriage fee in advance at the beginning of the quarter in which
the searches are expected to occur and record the carriage fee as a prepaid
expense in the quarter it is paid. The fee is refundable if we do not achieve
the minimum number of searches on the AOL white pages site for such quarter. In
addition, AOL has guaranteed us a minimum number of searches over the term of
the agreement. If AOL does not deliver the guaranteed minimum number of
searches over the term of the agreement, AOL will pay us a cash penalty
payment. We will share with AOL revenues generated by advertising on our white
pages directory services delivered to AOL. We are entitled to a greater
percentage of advertising revenue than is AOL if the amount of revenue we
receive is less than the carriage fees paid to AOL.
We have agreed to provide white pages directory services to AOL for a three-
year term beginning on November 19, 1998, which term may be extended for four
additional one-year terms at AOL's discretion. AOL may terminate the agreement
for any reason after 18 months or at any time upon the acquisition by AOL of a
competing white pages directory services business. In the event of any such
termination, AOL is required to pay us a termination fee. In addition, without
the payment of a termination fee, AOL has the right to terminate the agreement
if we undergo a change of control.
We have agreed to provide classifieds information services to AOL for a two-
year term, with up to three one-year extensions at AOL's discretion. Pursuant
to this agreement, we supply classifieds information services to AOL's
proprietary service, AOL.com, its CompuServe and Digital City divisions and its
Netscape Communications subsidiary. AOL has agreed to pay us a quarterly fee
and will share with us revenues generated from payments by individuals and
commercial listing services for listings on the AOL classifieds service.
Pursuant to the terms of these agreements, we have granted AOL the right to
negotiate with us 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 us or other merger, asset sale or other disposition
that effectively results in a change of control of us.
In connection with the agreements, on August 24, 1998, we issued to AOL
warrants to purchase up to 1,979,832 shares of our common stock. The warrants
vest in 16 equal quarterly installments over four years, conditioned on the
delivery by AOL of a minimum number of searches each quarter on our white pages
directory service. The warrants are vested as to 123,738 shares on February 11,
1999, 123,740 shares on May 1, 1999, and 123,740 shares on August 1, 1999. The
warrants have an exercise price of $6.00 per share.
We will account for revenue and revenue sharing under the agreements with AOL
under our existing revenue recognition policies described in our Notes to
Consolidated Financial Statements. AOL provided in excess of the minimum number
of searches for the six months ended May 31, 1999, and we expect AOL to meet
the minimum number of searches each subsequent quarter. Accordingly, the total
carriage fee payments to be made under the white pages directory services
agreement will be recognized ratably over the term of the agreement as sales
and marketing expense. However, if AOL does not deliver the minimum
26
<PAGE>
searches on the AOL white pages during that quarter, then AOL is obligated to
refund the quarterly carriage fee paid for that specific quarter, in which case
we would credit prepaid expense and reduce the total cost of the white pages
directory services agreement by the amount of the refund. The adjusted total
cost of the agreement would be recognized ratably over the remaining term of
the agreement as sales and marketing expense, which term would include the
quarter in which AOL did not deliver the minimum number of searches. For at
least the first two years of the white pages agreement, we expect that actual
carriage fee payments will exceed the sales and marketing expense recorded for
the quarter in which the payment is made. As such, we expect to experience
increases in our prepaid expense account during this time. Any termination fee
paid to us by AOL will be recognized as revenue when paid. The warrants will be
valued under the fair value method, as required under Statement of Financial
Accounting Standards ("SFAS") 123, and amortized ratably over the four-year
vesting period.
On June 30, 1999 we entered into an agreement with AOL to provide white pages
directory services to AOL's CompuServe and Digital City divisions and its
Netscape Communications subsidiary for a two-year term. Pursuant to the
agreement, we are required to pay to AOL a bi-annual carriage fee. In return,
AOL has agreed to deliver a certain number of searches of our white pages
directory services in each year of the agreement. If AOL delivers a greater
number of searches in either or both of the years, we are required to pay AOL
additional fess on a cost per search basis. In the event that AOL delivers a
lesser number of searches as of the end of the intial two-year term of the
agreement, AOL will extend the term for six months or until the shortfall is
made up, whichever occurs first. We will account for revenue and revenue
sharing under the agreements with AOL under our existing revenue recognition
policies described in our Notes to Consolidated Financial Statements. The total
carriage fee payments to be made under the white pages directory services
agreement will be recognized based on actual searches delivered over the term
of the agreement as sales and marketing expense.
We anticipate that carriage fees paid to certain affiliates to include our
content services on their Web sites will continue for the foreseeable future,
and we may also pay such carriage fees to other affiliates under arrangements
similar to those with AOL. Further, we incurred material additional costs in
the second quarter of 1999, and anticipate incurring substantially larger
amounts for the remainder of 1999 and thereafter, for more traditional forms of
advertising and public relations. See "--Quarterly Results of Operations."
We have incurred losses since our inception and, as of June 30, 1999, had an
accumulated deficit of approximately $15.6 million. For the six months ended
June 30, 1999, our net loss totaled $5.7 million, including $4.9 million in
acquisition and related charges associated with the acquisition of the MyAgent
Technology from Active Voice. See "--MyAgent Technology Acquisition." For the
year ended December 31, 1998, our net loss totaled $9.1 million, including a
$2.8 million write-off associated with our acquisition of Outpost and a $4.5
million cash payment to settle a lawsuit filed by a former employee. See "--
Technology from the Outpost Acquisition" and "Business--Legal Proceedings."
We believe that our future success will depend largely on our ability to
continue to offer content, community and commerce solutions that are attractive
to our existing and potential future affiliates. Accordingly, we plan to
increase significantly our operating expenses in order to, among other things:
. expand our affiliate network, which may require us to pay additional
carriage fees to certain affiliates;
. expand our sales and marketing operations and hire more salespersons;
. increase our advertising and promotional activities;
. develop and upgrade our technology and purchase equipment for our
operations and network infrastructure;
. expand internationally; and
. expand our content, community and commerce offerings.
27
<PAGE>
Accordingly, we expect to incur significant operating losses on a quarterly
basis in the future. In light of the rapidly evolving nature of our business
and limited operating history, we believe that period-to-period comparisons of
our revenues and operating results are not necessarily meaningful, and you
should not rely upon them as indications of future performance. Although we
have experienced sequential quarterly growth in revenues over the past six
quarters, we do not believe that our historical growth rates are necessarily
sustainable or indicative of future growth.
Historical Results of Operations
The following table sets forth the historical results of our operations
expressed as a percentage of total revenues.
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
March 1 to December 31, June 30,
December 31, ------------- -------------
1996 1997 1998 1998 1999
------------ ------ ----- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................. 48.5 23.7 17.0 17.5 16.5
------- ------ ----- ----- -----
Gross profit................... 51.5 76.3 83.0 82.5 83.5
Operating expenses:
Product development............ 55.0 12.6 6.4 5.2 4.5
Sales and marketing............ 115.8 50.0 58.9 33.3 85.8
General and administrative..... 82.2 28.5 31.9 29.2 28.5
Amortization of intangibles.... -- 3.8 7.5 4.2 5.1
Acquisition and related
charges....................... -- -- 29.7 98.1 41.4
Other--non-recurring charges... -- 8.1 47.8 8.4 1.8
------- ------ ----- ----- -----
Total operating expenses..... 253.0 103.0 182.2 178.4 167.1
------- ------ ----- ----- -----
Loss from operations............. (201.5) (26.7) (99.2) (95.9) (83.6)
Other income, net................ 10.6 1.3 4.4 1.5 36.1
Equity in loss from joint
venture......................... -- -- (1.3) -- (.6)
------- ------ ----- ----- -----
Net loss......................... (190.9)% (25.4)% (96.1)% (94.4)% (48.1)%
======= ====== ===== ===== =====
</TABLE>
Results of Operations for the Years ended December 31, 1996, 1997, and 1998 and
Six Months ended June 30, 1998 and 1999
Revenues. We currently derive substantially all of our revenues from
advertising, which includes national, local and classifieds, promotions, which
includes content carriage and syndication, and to a lesser extent, commerce
transactions and technology licensing. Revenues were $199,000 for the period
ended December 31, 1996, $1.7 million for the year ended December 31, 1997 and
$9.4 million for the year ended December 31, 1998. The increases year to year
are due primarily to increased expansion of our affiliate network, increased
traffic to our affiliate network that results in increased page views, and
increased use of our content, community and commerce services. Additionally, in
1997, we began selling promotion arrangements, including content carriage,
syndication, and commerce, that contributed to the increase in revenues.
Revenues were $2.9 million for the six months ended June 30, 1998 and $11.9
million for the six months ended June 30, 1999. The increases are primarily due
to increased expansion of our affiliate network, which now consists of more
than 1,800 Web sites and Internet appliances, increased traffic to our
affiliate network that results in increased page views, increased use of our
content, community and commerce services, as well as larger and longer term
agreements with certain advertisers and affiliates.
28
<PAGE>
A portion of our revenues represents barter transactions resulting from our
exchange with other companies of banner advertising space for reciprocal banner
advertising space or for content licenses. Barter revenues totaled $853,000, or
9.1% of revenues for the year ended December 31, 1998, and $317,000, or 2.7% of
revenues for the six months ended June 30, 1999.
We have experienced, and expect to continue to experience, seasonality in our
business, with reduced user traffic on our 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 our
results of operations.
Cost of Revenues. Cost of revenues consists of expenses associated with the
enhancement, maintenance and support of our content, community and commerce
services, including direct personnel expenses, communication costs such as
high-speed Internet access with dedicated DS-3 communication lines, server
equipment depreciation, and license fees related to third-party content. For
the year ended December 31, 1997, cost of revenues also includes amortization
of purchased advertising agreements. Cost of revenues were $97,000, or 48.5% of
revenues, for the period ended December 31, 1996 as compared to $400,000, or
23.7% of revenues, for the year ended December 31, 1997 and approximately $1.6
million, or 17.0% of revenues, for the year ended December 31, 1998. Cost of
revenues was $499,000, or 17.5% of revenues for the six months ended June 30,
1998. This compares to $1.96 million for the six months ended June 30, 1999, or
16.5% of revenues. The absolute dollar increases from year to year are
primarily attributable to personnel, content licenses and communication system
costs incurred in order to support greatly increased delivery of our content,
community and commerce solutions. We expect the absolute dollars spent on
personnel, enhanced content and expanded communication backbone will continue
to increase for the foreseeable future. We currently anticipate cost of
revenues will remain relatively constant as a percentage of revenues in the
range of high teens to low twenties for the remainder of 1999.
Product Development Expenses. Product development expenses consist
principally of personnel costs, and include expenses for research, design and
development of the proprietary technology we use to aggregate, integrate and
distribute our content, community and commerce services. Product development
expenses were $109,000, or 55.0% of revenues, for the period ended December 31,
1996 as compared to $213,000, or 12.6% of revenues, for the year ended December
31, 1997 and $599,000, or 6.4% of revenues, for the year ended December 31,
1998. These expenses have declined significantly as a percentage of revenues
due to our rapid revenue growth. For the six months ended June 30, 1998,
product development expenses were $148,000, or 5.2% of revenues, compared to
$537,000, or 4.5% of revenues for the six months ended June 30, 1999. The year-
to-year increases in absolute dollars are primarily attributable to increases
in engineering personnel needed for continued development of our products and
service offerings. We believe that significant investments in technology are
necessary to remain competitive. Accordingly, we expect product development
expenses to continue to increase in absolute dollars as we hire additional
engineering personnel who will develop and enhance our proprietary technology.
On January 1, 1999 we adopted Statement of Position 98-1 (SOP 98-1),
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use, which requires certain product development costs to be
capitalized and amortized over future periods, which, prior to the adoption of
SOP 98-1, were expensed. For the six months ended June 30, 1999, we capitalized
approximately $143,000 of product development costs.
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, trademark licensing and carriage fees and
distribution revenue share paid to certain affiliates to include our content
29
<PAGE>
services on their Web sites, sales office expenses and travel expenses. Sales
and marketing expenses were $231,000, or 115.8% of revenues, for the period
ended December 31, 1996 as compared to $841,000, or 50.0% of revenues, for the
year ended December 31, 1997 and approximately $5.5 million, or 58.9% of
revenues, for the year ended December 31, 1998. Sales and marketing expenses
were $952,000, or 33.3% or revenues for the six months ended June 30, 1998.
This compares to $10.2 million, or 85.8% or revenues for the six months ended
June 30, 1999. The increases from the prior year were primarily due to
trademark licensing and carriage fees paid to certain affiliates under
agreements entered into during the third and fourth quarters of 1998, the
launching of our first advertising campaign during the second quarter of 1999,
expansion of our business development group in Redmond and expansion of our
sales offices in San Francisco and New York.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries, fees for professional services, occupancy and
general office expenses, B&O tax paid to the State of Washington on gross
revenues and franchise tax paid to the State of Delaware on total assets and
outstanding shares, and bad debt expense. General and administrative expenses
were $164,000, or 82.2% of revenues, for the period ended December 31, 1996 as
compared to $480,000, or 28.5% of revenues, for the year ended December 31,
1997 and approximately $3.0 million, or 31.9% of revenues, for the year ended
December 31, 1998, primarily due to increased staffing levels necessary to
manage and support our expanding operations and expansion of our facilities.
For the six months ended June 30, 1998, general and administrative expenses
were $833,000, or 29.2% of revenues, compared to $3.4 million, or 28.5% of
revenues for the six months ended June 30, 1999. We anticipate that general and
administrative expenses will continue to increase in absolute dollars due to a
number of factors including the expected hiring of additional personnel to
support expanded operations, and higher occupancy expense associated with a new
facility planned for early 2000. We expect general and administrative expenses
to be in the range of low to mid thirties as a percentage of revenues during
the remainder of 1999.
Amortization of Intangibles. Amortization of intangibles includes
amortization of goodwill, core technology, purchased domain names, trademark
and assembled workforce. As part of the June 1999 MyAgent technology
acquisition, we recorded intangible assets related to goodwill, core technology
and acquired workforce in the amount of $14.2. These assets are being amortized
over a five-year period beginning in July 1999. As part of the Outpost Network,
Inc. acquisition in the second quarter of 1998, we recorded intangible assets
related to goodwill, core technology and acquired workforce in the amount of
$5.8 million. These intangibles are being amortized over a five-year period
which began in June 1998. In the event we complete additional acquisitions,
expenses relating to the amortization of intangibles could increase in the
future.
Acquisition and Related Charges. Acquisition and other related charges
consists of in-process research and development and other one-time charges
related directly to acquisitions. In the second quarter of 1999, we recorded
$4.91 million in acquisition and other related charges in connection with the
purchase of the MyAgent technology. See "--MyAgent Acquisition." In the second
quarter of 1998, we recorded $2.8 million in acquisition and other related
charges as part of the Outpost acquisition. See "--Technology from the Outpost
Acquisition." In the event we complete additional acquisitions, we could incur
additional acquisition and related charges in the future.
Other-non-recurring. Other-non-recurring charges in 1998 and 1999 consists of
costs associated with litigation settlements. On February 22, 1999, we reached
a settlement with a former employee. Under the terms of the settlement, the
former employee received a cash payment of $4.5 million. We accrued a liability
of $240,000 for estimated settlement costs in the quarter ended June 30, 1998.
We recorded an expense of $4,260,000 for the difference between the accrued
liability and the actual settlement amount in the quarter ended December 31,
1998. On July 23, 1999, we settled a patent infringment claim in exchange for a
lump sum royalty payment of $209,500. This settlement expense was accrued on
June 30, 1999.
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Other Income, Net. Other income consists primarily of interest income for all
periods. Other income was $21,000 for the period ended December 31, 1996,
$21,000 for the year ended December 31, 1997, $411,000 for the year ended
December 31, 1998, $43,000 for the six months ended June 30, 1998, and
$4.3 million for the six months ended June 30, 1999, primarily due to interest
earned on higher average cash balances resulting from private financings in
July and August of 1998, the net proceeds from our initial public offering
completed on December 15, 1998, and the net proceeds from our follow-on
offering, which closed April 6, 1999.
Equity in Loss from Joint Venture. Equity in loss from joint venture consists
of losses attributable to our 50% interest in TDL InfoSpace, our joint venture
with Thomson Directories Limited in the United Kingdom. Beginning in the
quarter ended September 30, 1998, and continuing through December 31, 1998, we
recorded joint venture losses totaling approximately $125,000 in this joint
venture, due primarily to start-up operating costs associated with the venture.
For the six months ended June 30, 1999 we recorded a loss from the joint
venture of $76,000, due primarily to direct selling costs.
Provision for Income Taxes. Net operating losses have been incurred to date
on a cumulative basis, and no tax benefit has been recorded, as sufficient
uncertainty exists regarding unrealizability of the deferred tax assets.
Net Loss. Our losses increased from $381,000 for the period ended December
31, 1996 to $429,000 for the year ended December 31, 1997 and to $9.1 million
for the year ended December 31, 1998. This loss includes the $2.8 million
write-off of in-process research and development from the Outpost acquisition
and the $4.5 million expense to settle a lawsuit filed by a former employee.
Our losses increased from $2.7 million for the six months ended June 30, 1998
to $5.7 million for the six months ended June 30, 1999. This loss includes the
$4.9 million write-off of in-process research and development from the MyAgent
Technology acquisition. Our cumulative losses sustained since inception total
$15.6 million.
Liquidity and Capital Resources
From our inception in March 1996 through May 1998, we funded operations with
approximately $1.5 million in equity financing and, to a lesser extent, from
revenues generated for services performed. In May 1998, we completed a $5.1
million private placement of our common stock, and in July and August 1998, we
completed an additional private placement of our common stock for $8.2 million.
Sales of our common stock to employees pursuant to our 1998 Stock Purchase
Rights Plan also raised $1.7 million in July 1998. Our initial public offering
in December 1998 yielded net proceeds of $77.8 million and a follow-on public
offering in April 1999 yielded net proceeds of $185.1 million. As of June 30,
1999, we had cash, cash equivalents and short-term investments of $167.6
million and long-term investments of $70.9 million.
Net cash used by operating activities was $462,000 from our inception in
March 1996 through December 31, 1996, $202,000 in the year ended December 31,
1997 and $978,000 in the year ended December 31, 1998. Cash used in operating
activities from inception through December 31, 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 provided
(used) by operating activities was $597,000 for the six months ended June 30,
1998 and $(3.9 million) for the six months ended June 30, 1999. Cash used in
operating activities for the six months ended June 30, 1999 was primarily
comprised of net operating losses, increases in accounts receivable and prepaid
expenses and other assets, and decreases in accounts payable and accrued
expenses. These uses of cash were partially offset with the write-off of in-
process research and development.
Net cash used by investing activities was $219,000 in the period from
inception through December 31, 1996, $164,000 in the year ended December 31,
1997 and $78.6 million in the year ended December 31, 1998. Cash used in
investing activities consists primarily of short-term investments of net
proceeds from our initial public offering and private placements of common
stock and, to a lesser extent, from purchases of
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trademark licenses, businesses and purchase of property and equipment. Cash
provided by financing activities consists of net proceeds from our initial
public offering and, to a lesser extent, from private placements of common
stock. Net cash used by investing activities for the six months ended June 30,
1998 was $385,000 and $87.4 million for the six months ended June 30, 1999. Net
cash used by investing activities for the six months ended June 30, 1999 was
primarily comprised of business acquisitions, securities investments, other
investments and note receivable. The change in securities investments is
primarily a result of investing proceeds from our follow-on offering in short
and long-term investments.
Net cash of $93.9 million provided by financing activities for the year ended
December 31, 1998 was primarily from proceeds received from private placements
in May, July and August and from our initial public offering in December 1998.
Net cash of $185.4 million provided by financing activities for the six months
ended June 30, 1999 was primarily from proceeds received in the follow-on
offering in April 1999.
We anticipate that we will spend up to $1.0 million for capital equipment in
the remainder of 1999. We have also entered into various agreements that
provide for us to make payments for carriage agreements of $4.2 million for the
remainder of 1999 and for carriage fees of $7.4 million for the period from
2000 through 2001.
At June 30, 1999, we had $238.5 million in cash and investments. We plan to
use this cash for strategic investments and acquisitions, investments in
internally developed technology and advertising and marketing initiatives.
We believe that existing cash balances, cash equivalents and cash generated
from operations will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 12 months.
However, the underlying assumed levels of revenues and expenses may not prove
to be accurate. We 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 favorable terms. If we raise
additional funds by issuing equity securities, dilution to existing
stockholders will result. If funding is insufficient at any time in the future,
we may be unable to develop or enhance our products or services, take advantage
of business opportunities or respond to competitive pressures, any of which
could harm our business. See "Risk Factors--We May Require Additional Funding."
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Quarterly Results of Operation
The following table sets forth certain consolidated statements of operations
data for our eight most recent quarters, as well as such data expressed as a
percentage of revenues. We have derived this information from our unaudited
consolidated financial statements. In management's opinion, we have prepared
this unaudited information on the same basis as the audited annual consolidated
financial statements, and this information includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation for the
quarters presented. You should read this information in conjunction with our
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>
March 31, June 30, September 30, December 31, March 31, June 30,
1998 1998 1998 1998 1999 1999
--------- -------- ------------- ------------ --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $1,015 $ 1,840 $2,519 $ 4,040 $5,142 $ 6,733
Cost of revenues........ 212 287 474 632 833 1,127
------ ------- ------ ------- ------ -------
Gross profit.......... 803 1,553 2,045 3,408 4,309 5,606
Operating expenses:
Product development... 50 99 156 295 196 342
Sales and marketing... 446 506 1,570 3,019 3,849 6,348
General and
administrative....... 310 523 953 1,215 1,672 1,715
Amortization of
intangibles.......... 14 107 293 296 299 305
Acquisition and
related charges...... 0 2,800 0 0 0 4,913
Other--non-recurring
charges.............. 0 240 0 4,260 0 210
------ ------- ------ ------- ------ -------
Total operating
expenses........... 820 4,275 2,972 9,085 6,016 13,833
------ ------- ------ ------- ------ -------
Loss from operations.... (17) (2,722) (927) (5,677) (1,707) (8,227)
Other income, net....... 5 38 110 259 1,071 3,217
Equity in loss from
joint venture.......... 0 0 (76) (49) (70) (6)
------ ------- ------ ------- ------ -------
Net loss................ $ (12) $(2,684) $ (893) $(5,467) $ (706) $(5,016)
====== ======= ====== ======= ====== =======
<CAPTION>
March 31, June 30, September 30, December 31, March 31, June 30,
1998 1998 1998 1998 1999 1999
--------- -------- ------------- ------------ --------- --------
(as a percentage of revenues)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 20.9 15.6 18.8 15.6 16.2 16.7
------ ------- ------ ------- ------ -------
Gross profit.......... 79.1 84.4 81.2 84.4 83.8 83.3
Operating expenses:
Product development... 4.9 5.4 6.2 7.3 3.8 5.1
Sales and marketing... 43.9 27.5 62.3 74.7 74.9 94.3
General and
administrative....... 30.5 28.4 37.8 30.1 32.5 25.5
Amortization of
intangibles.......... 1.4 5.8 11.6 7.3 5.8 4.5
Acquisition and
related charges...... 0.0 152.2 0.0 0.0 0.0 73.0
Other--non-recurring
charges.............. 0.0 13.0 0.0 105.4 0.0 3.1
------ ------- ------ ------- ------ -------
Total operating
expenses........... 80.7 232.3 117.9 224.8 117.0 205.5
------ ------- ------ ------- ------ -------
Loss from operations.... (1.6) (147.9) (36.7) (140.4) (33.2) (122.2)
Other income, net....... 0.5 2.1 4.4 6.4 20.8 47.8
Equity in loss from
joint venture.......... 0.0 0.0 (3.0) (1.2) (1.4) (0.1)
------ ------- ------ ------- ------ -------
Net loss................ (1.1)% (145.9)% (35.3)% (135.2)% (13.8)% (74.5)%
====== ======= ====== ======= ====== =======
</TABLE>
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<PAGE>
Factors Affecting Quarterly Results of Operations
Our financial results have varied on a quarterly basis and are likely to
fluctuate substantially in the future. These fluctuations may be caused by
several factors, many of which are beyond our control. These factors include:
. the addition or loss of affiliates;
. variable demand for our private label solutions by our affiliates;
. the cost of acquiring and the availability of content and commerce
information;
. the overall level of demand for content, community and commerce services;
. our ability to attract and retain advertisers and content providers;
. seasonal trends in Internet usage and advertising placements;
. the amount and timing of fees we pay to our affiliates to include our
content, community and commerce solutions on their Web sites;
. the productivity of our direct sales force and the sales forces of the
RBOCs, independent yellow pages publishers, media companies and direct
marketing companies that sell local Internet yellow pages advertising for
us;
. the amount and timing of increased expenditures for expansion of our
operations, including the hiring of new employees, capital expenditures
and related costs;
. our ability to continue to enhance, maintain and support our technology;
. the result of litigation that is currently ongoing against InfoSpace.com,
or any litigation that is filed against us in the future;
. our ability to attract and retain personnel;
. the introduction of new or enhanced services by us or our affiliates, or
other companies that compete with us or our affiliates;
. price competition or pricing changes in Internet advertising and Internet
services, such as ours;
. technical difficulties, system downtime, system failures or Internet
brown-outs;
. political or economic events and governmental actions affecting Internet
operations or content; and
. general economic conditions and economic conditions specific to the
Internet.
If one or more of these factors or other factors occur, our business could
suffer.
In addition, because InfoSpace.com only began operations in March 1996, and
because the market for Internet information infrastructure services such as
ours is new and evolving, it is very difficult to predict future financial
results. We plan to significantly increase our sales and marketing, research
and development and general and administrative expenses in the balance of 1999.
Our expenses are partially based on our expectations regarding future revenues,
and are largely fixed in nature, particularly in the short term. As a result,
if our revenues in a period do not meet our expectations, our financial results
will likely suffer.
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<PAGE>
INEX Corporation Acquisition
On August 13, 1999, we signed a definitive agreement to acquire Toronto-based
INEX Corporation. Under the terms of the acquisition, which will be accounted
for as a pooling of interests, we will exchange 900,000 shares of common stock
for all of INEX's outstanding shares, warrants and options. The acquisition is
expected to be completed in October, and is subject to customary conditions,
including the receipt of regulatory approval and INEX shareholder approval.
INEX Corporation Business Overview
INEX Corporation is a software company that develops and markets Internet
commerce solutions designed for the small and medium-sized business merchants.
INEX recruits, develops and manages reseller channels and strategic partners
with a comprehensive support program, sales and marketing tools and resources.
These tactics are designed to help its licensees capitalize on the potential of
the Internet commerce market, to assist the small and medium-sized business
merchant realize the Internet commerce promise and for INEX to realize its
mission to aggressively penetrate and capture market share in the small and
medium-sized business markets.
INEX Corporation ("Pre-INEX") was incorporated on June 28, 1996 and later
amalgamated with Ack-Sys Inc. ("Ack-Sys") on February 5, 1997 to form INEX.
Prior to the amalgamation, Ack-Sys held the rights to certain software that was
licensed to Pre-INEX pursuant to a licensing agreement with Ack-Sys. The
100,000 shares of Pre-INEX that were held by Ack-Sys were cancelled and the
1,000,000 outstanding shares of Ack-Sys were exchanged on a 10:1 basis for
common shares in INEX. INEX's fiscal year end is December 31.
INEX currently has two product offerings that consist of:
. INEX ezStore: a feature-rich, OEM solution that reseller channel
licensees and alliance partners can lease for a nominal fee on a monthly
basis to their small and medium-sized business merchants as part of a
complete end-to-end electronic commerce hosting service offering; and
. INEX Commerce Court Suite: an upgrade path from INEX ezStore for
merchants requiring a more sophisticated and powerful electronic commerce
solution.
The full range of Internet commerce solutions can be offered by the OEM
channel licensees or hosting service providers. Current partners of INEX
include: Compaq Computer Corporation, 9Net Avenue, Inc., Concentric
Corporation, Data Return Corporation, Maritime Telephone & Telegraph, Citibank,
Cybercash, Inc., and SkipjackIC Merchant Services.
The majority of revenues since inception have been derived from sales of the
INEX Commerce Court Suite. INEX ezStore became commercially available in April
1999 and has not yet contributed substantially to INEX's revenues. This trend
is expected to continue until the market penetration of INEX ezStore
substantially increases.
INEX has incurred losses since its inception and, as of December 31, 1998,
had an accumulated deficit of approximately $4.1 million. For the year ended
December 31, 1998, INEX's net loss totaled $2.8 million.
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<PAGE>
Historical Results of INEX Operations
(in thousands)
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
---------------- ----------------
1997 1998 1998 1999
------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C>
Revenue..................................... $ 57 $ 209 $ 54 $ 266
Cost of revenues............................ 19 30 10 26
------- ------- ------- -------
Gross Profit.............................. 38 179 44 240
Operating expenses:
Product development....................... 170 645 258 519
Sales and marketing....................... 635 744 312 743
General and administrative................ 464 1,574 874 598
------- ------- ------- -------
Total operating expenses................ 1,269 2,963 1,444 1,860
------- ------- ------- -------
Loss from operations........................ (1,231) (2,784) (1,400) (1,620)
Other income (expense)...................... (1) 22 14 7
------- ------- ------- -------
Net loss.................................... (1,232) (2,762) (1,386) (1,613)
Deficit--Beginning of period................ (136) (1,368) (1,368) (4,130)
------- ------- ------- -------
Deficit--End of period...................... $(1,368) $(4,130) $(2,754) $(5,743)
======= ======= ======= =======
</TABLE>
Results of INEX Operations
Years ended December 31, 1997 and 1998
Revenues. Prior to the launch of INEX ezStore in April 1999, INEX derived
substantially all of its revenues from the sale of INEX Commerce Court Suite
through INEX's reseller channels. Revenues were $57,446 for the year ended
December 31, 1997 and $208,910 for the year ended December 31, 1998. The year
over year increase is primarily due to the increased number of reseller
partners, increasing from approximately 10 in 1997 to 40 in 1998.
Cost of Revenues. Cost of revenues consists of product packaging expenses and
reseller marketing and training expenses. Costs of revenues were $18,932 or 33%
of revenues, for the year ended December 31, 1997 and $29,720 or 14% of
revenues, for the year ended December 31, 1998. The year over year percentage
decrease is primarily attributed to the discontinued reseller co-op credit
marketing program.
Product Development Expenses. Product development expenses consist
principally of personnel costs, and include expenses for research, design and
development of the proprietary technology for INEX's Internet commerce product
applications. Product development expenses were $170,459 or 297% of revenues,
for the year ended December 31, 1997 and $644,965 or 308% of revenues, for the
year ended December 31, 1998. The year to year increase in absolute dollars is
primarily attributed to the increase in development staff needed for ongoing
development of INEX's products.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of salaries and related benefits for sales and marketing personnel, advertising
and promotional expenses, public relations, tradeshow activities and travel
expenses. Sales and marketing expenses were $635,502 or 1,106% of revenues, for
the year ended December 31, 1997 and $744,636 or 356% of revenues, for the year
ended December 31, 1998. Such expenses were incurred primarily to support our
existing reseller channels and to generate greater awareness for INEX in the
industry.
General and Administrative Expenses. General and administrative expenses
consist primarily of fees for professional services, occupancy and general
office expenses and salaries and related benefits for administrative and
executive staff. General and administrative expenses were $463,740 or 807% of
revenues,
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<PAGE>
for the year ended December 31, 1997 and $1,573,980 or 753% of revenues, for
the year ended December 31, 1998. The year to year increase in absolute dollars
is primarily attributed to stock-based compensation expenses resulting from the
repricing of senior executive options in June 1998.
Other Income (Expense). Other income (expense) consists primarily of interest
and investment income, interest expense and foreign exchange gains and losses.
Other income (expense) was ($1,038) for the year ended December 31, 1997 and
$22,146 for the year ended December 31, 1998.
Net Loss. INEX's losses increased from $1.2 million for the year ended
December 31, 1997 to $2.8 million for the year ended December 31, 1998. INEX's
cumulative losses since inception total $4.1 million.
Six Month Periods ended June 30, 1998 and 1999
Revenues. Revenues were $53,790 for the six month period ended June 30, 1998
and $266,111 for the six month period ended June 30, 1999. The year to year
increase in absolute dollars is primarily due to the increase in the number of
resellers of INEX Commerce Court Suite. There were approximately 25 as of June
30, 1998 and 70 as of June 30, 1999.
Cost of Revenues. Cost of revenues were $9,677 or 18% of revenue, for the six
month period ended June 30, 1998 and $25,555 or 10% of revenues, for the six
month period ended June 30, 1999. The year to year decrease in percentage of
revenues is primarily the result of lower per unit product packaging costs.
Product Development Expenses. Product development expenses were $257,872 or
479% of revenues, for the six month period ended June 30, 1998 and $518,793 or
195% of revenues, for the six month period ended June 30, 1999. The year to
year increase in absolute dollars is primarily attributed to the expanded
development staff needed for the ongoing research, design and development of
INEX's technology.
Sales and Marketing Expenses. Sales and marketing expenses were $312,229 or
580% of revenues, for the six month period ended June 30, 1998 and $743,391 or
279% of the revenues, for the six month period ended June 30, 1999. The year to
year increase in absolute dollars is primarily attributed to the increased
sales and marketing activities needed to attract new partners and rollout the
INEX ezStore product offering.
General and Administrative Expenses. General and administrative expenses were
$873,872 or 1,625% of revenues, for the six month period ended June 30, 1998
and $598,093 or 225% of revenues, for the six month period ended June 30, 1999.
The year to year decrease in absolute dollars is primarily attributed to the
stock-based compensation expense included in 1998.
Other Income (Expense). Other income (expense) was $14,302 for the six month
period ended June 30, 1998 and $7,296 for the six month period ended June 30,
1999.
Net Loss. INEX's losses were $1,385,558 for the six month period ended June
30, 1998 and $1,612,425 for the six month period ended June 30, 1999. INEX has
incurred losses since inception.
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
accept four digit entries to distinguish 21st century dates. As a result, many
companies may need to upgrade, repair or replace their computer systems and
software ("IT Systems") and other property and equipment not directly
associated with IT Systems ("Non-IT Systems"), including ones with embedded
technology such as microcontrollers, in order to comply with Year 2000
requirements.
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<PAGE>
InfoSpace.com
We have conducted an internal review of most of our internal IT Systems and
Non-IT Systems. Because we developed our software products and services
internally, beginning at inception in 1996 when the Year 2000 problem already
had some visibility, we were largely able to anticipate four digit
requirements. In conjunction with ongoing reviews of our own products and
services, we are also reviewing our IT infrastructure, including network
equipment and servers. We do not anticipate material problems with network
equipment, as our current configuration was installed in 1998. Similarly, most
of our servers were purchased in 1997 and 1998, and each server is being
amortized over a three-year period. With this relatively current equipment, we
do not anticipate material Year 2000 compliance problems, and any servers that
we find cannot be updated will be replaced either in the normal replacement
cycle or on an accelerated basis. We have also internally standardized our
machines on Windows NT 4.0, using reasonably current service packs, which we
are advised by our vendor are Year 2000 compliant.
We use multiple software systems for internal business purposes, including
accounting, email, development, human resources, customer service and support,
and sales tracking systems. All of these applications have been purchased
within the last three years. We have made inquiries of vendors of systems we
believe to be mission critical to our business regarding their Year 2000
readiness. Although we have received various assurances, we have not received
affirmative documentation of Year 2000 compliance from any of these vendors,
and we have not performed any operational tests on our internal systems. We
generally do not have any contractual rights with third party providers should
their equipment or software fail due to Year 2000 issues. If this third party
equipment or software does not operate properly with regard to Year 2000, we
may incur unexpected expenses to remedy any problems. These expenses could
potentially include purchasing replacement hardware and software. We have not
determined the state of compliance of certain third-party suppliers of services
such as phone companies, long distance carriers, financial institutions and
electric companies, the failure of any one of which could severely disrupt our
ability to carry on our business.
We anticipate that our review of Year 2000 issues and any remediation efforts
will continue throughout calendar 1999. To date, we have spent less than an
estimated $10,000 to remediate our Year 2000 issues. If any Year 2000 issues
are uncovered with respect to these systems or our other internal systems, we
believe that these problems will be able to be resolved without material
difficulty, as replacement systems are available on commercially reasonable
terms. We presently estimate that the total remaining cost of addressing Year
2000 issues will not exceed $100,000. These estimates were derived utilizing a
number of assumptions, including the assumption that we have already identified
our most significant Year 2000 issues. However, these assumptions may not be
accurate, and actual results could differ materially from those anticipated. In
view of our Year 2000 review and remediation efforts to date, the recent
development of our products and services, the recent installation of our
networking equipment and servers, and the limited activities that remain to be
completed, we do not consider contingency planning to be necessary at this
time.
Our applications operate in complex network environments and directly and
indirectly interact with a number of other hardware and software systems. We
are unable to predict to what extent our business may be affected if our
systems or the systems that operate in conjunction with it experience a
material Year 2000 failure. Known or unknown errors or defects that affect the
operation of our software and systems could result in delay or loss of revenue,
interruption of services, cancellation of customer contracts, diversion of
development resources, damage to our reputation, increased service and warranty
costs, and litigation costs, any of which could adversely affect our business,
financial condition and results of operations. The most likely worst case
scenario is that the Internet fails and we are unable to offer our content,
community and commerce services.
INEX Corporation
All of the current versions of INEX's significant software products have been
designed to recognize and use a four digit date in order to accommodate the
Year 2000. INEX's software products obtain date information, such as creation
dates and modification dates, directly from the computer's operating system
38
<PAGE>
and other software applications. The current versions of INEX's products are
dependent upon the operating systems upon which they run and the software
applications that they interact with. There can be no assurances that such
operating systems or software applications will be Year 2000 compliant or that
unforeseen technical problems resulting from the calendar change for the Year
2000 will not adversely affect INEX's software products.
Although INEX does not believe there are any material operations issues or
costs associated with preparing its internal systems for Year 2000 compliance,
there can be no assurances that it will not experience serious unanticipated
negative consequences and/or material costs caused by undetected errors or
defects in the technology used in its internal systems.
MyAgent Technology Acquisition
On June 30, 1999 we acquired the MyAgent technology and related assets from
Active Voice Corporation for a cash payment of $18 million dollars. In addition
we hired six employees that comprised the MyAgent development team at Active
Voice. The acquisition was accounted for as a purchase in accordance with the
provisions of Accounting Principles Board Opinion ("APB") No. 16. Under the
purchase method of accounting, the purchase price is allocated to the assets
acquired and the liabilities assumed based on their fair values at the date of
the acquisition. Other than the MyAgent technology modules, no other assets or
liabilities were assumed as part of this acquisition.
The total purchase price of the acquisition of the MyAgent technology was
$18.1 million including direct acquisition expenses of $100,000. The purchase
price was allocated to the assets acquired based on their estimated fair values
as follows:
<TABLE>
<S> <C>
In-process research and development........................... $ 3,900,000
Core technology............................................... 400,000
Goodwill...................................................... 13,720,000
Acquired workforce............................................ 80,000
-----------
$18,100,000
===========
</TABLE>
We recorded a non-recurring charge of $3.9 million for in-process research
and development that had not yet reached technological feasibility and had no
alternative future use. We also recorded a one-time charge of $1.0 million for
expenses incurred in connection with the transaction, which was separate from
the purchase price paid to Active Voice. These expenses consisted of bonus
payments made to the Active Voice MyAgent team employees who accepted
employment with us on the date of the MyAgent technology acquisition, but who
have no obligation to continue their employment with us.
Among the factors we considered in determining the amount of the allocation
of the purchase price to in-process research and development were various
factors such as estimating the stage of development of each module of the
technology, including the complexity and technical obstacles to overcome,
estimating the amount of core technology leveraged into the in-process
projects, estimating the expected life of each module, estimating cash flows
resulting from the expected revenues, margins, and operating expenses generated
from each module, and discounting to present value the cash flows associated
with the in-process technologies. We utilized a rate of return of 30% to
discount to present value the cash flows associated with the in-process
technologies.
Within the MyAgent technology there are three main modules, the Client,
Server Intelligence, and Web Interface. We intend to integrate the MyAgent
technology into the InfoSpace.com Web site and launch the technology with our
desktop portal. We also plan to offer a co-branded version to our affiliates as
part of our suite of co-branded service offerings. As of the date of
acquisition, we estimated that the Client, Server Intelligence, and Web
Interface were 50%, 49%, and 29% completed, respectively. The percentage
completed pre-acquisition for each module was based primarily on the evaluation
of three major factors: time-based data, cost-based data, and complexity-based
data.
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<PAGE>
The expected life of the modules being developed was assumed to be five
years, after which substantial modification and enhancement would be required
for the modules to remain competitive.
Our revenue assumptions for these modules were based on the number of page
views we estimate the desktop portal will generate and the portion of those
page views we estimate will be attributable to the MyAgent technology modules.
We estimated that the number of page views will double as a result of the
launch of the desktop portal. We estimated that 50% of the incremental page
view growth would be attributable to the MyAgent modules. Page view revenue
generated by the desktop portal will vary from our standard page view revenue
since fewer advertisements can be placed on the desktop portal.
Our expense assumptions for these modules included cost of revenues, which we
estimated to be 17% of revenues in the first year and thereafter to drop to 9%
as we will incur minimal costs as we leverage the technology in future periods.
Sales and marketing expenses combined with general and administrative expenses
were estimated to be 34% in the first year, and thereafter to drop to 22% of
revenues. However, cost of revenues, sales and marketing expenses and general
and administrative expenses may vary, both in absolute dollars and as a
percentage of revenues.
While we believe that the assumptions discussed above were made in good faith
and were reasonable when made, such assumptions remain largely untested, as the
three modules are not yet in service. Accordingly, the assumptions we made may
prove to be inaccurate, and there can be no assurance that we will realize the
revenues, gross profit, growth rates, expense levels or other variables set
forth in such assumptions. Considering the inherent difficulty in developing
estimates of future performance for emerging technologies such as the MyAgent
modules, we utlized a relatively high rate of return (30%) to discount to
present value the cash flows associated with the in-process technologies. The
discount rate was selected based on evaluation of our weighted average cost of
capital, the weighted average return on assets, the internal rate of return
implied from the transaction, and management's assessment of the risk inherent
in the future performance estimates utlized in the valuation.
The Client and Server Intelligence are scheduled for completion and beta
testing in the fourth quarter of 1999 and for release in the first quarter of
2000. The Web Interface is scheduled for release in the second or third quarter
of 2000. Significant technology development efforts are necessary before any
one of these modules can successfully be completed and integrated into our full
suite of service offerings of on-line services available both on the our Web
site and on those of the our many affiliates Web sites. We plan to make the
Client modular and reduce its size considerably in order shorten the download
time. As acquired, the Client does not have a mechanism to support co-branding.
This will need to be designed, developed, and tested.
We expect these modules to be fully integrated into our full suite of
Internet service offerings. Further, the modules will not be distinguishable
market segments for financial reporting purposes or for management purposes.
Consequently, there will be no separate and distinguishable allocations or
utilizations of net working capital, and no specific charges for use of
contributory assets. None of our operating expenses are allocated to specific
service offerings.
We do not expect to have the ability to calculate revenues specifically and
exclusively attributable to the integrated MyAgent technology. Further, the
absence of such attribution will not be material to any module's success. The
amount that we can charge customers for access and use of these modules will be
greatly influenced by market forces and competitors' pricing of their own
packaged and integrated offerings.
The MyAgent product team was not accounted for by Active Voice as a separate
entity, a subsidiary, or a line of business, or division of the business, but
rather was rolled up as part of the research and development group.
Accordingly, historical financial information was not available and we were
unable to utilize historical results of operations in the valuation of the
MyAgent technology.
40
<PAGE>
Technology from the Outpost Acquisition
In June 1998, we acquired Outpost, which included the acquisition of the
Outpost Technology and the hiring of approximately ten employees. In the second
quarter of 1998, we wrote off approximately $2.8 million in connection with the
Outpost acquisition.
In connection with the acquisition, we conducted a valuation of the assets
acquired from Outpost, including core technology, assembled workforce and in-
process research and development, utilizing the following major assumptions:
. 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; and
. 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 we have integrated or intend 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. Subsequent
to the acquisition date, we revised our strategy with respect to the
transaction proxy module, with the result being that most of the in-process
technology was discarded. Accordingly, no value was assigned to this module in
connection with our valuation of the assets acquired from Outpost. The four
modules are:
. integrated content that will provide users with product pricing and
merchant information;
. transaction proxy that will allow us 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; and
. universal shopping cart that will allow users to make multiple purchases
at different retailers in one execution.
These modules have been integrated into our full suite of Internet service
offerings. The integrated content module was completed and integrated into our
Web site in the third quarter of 1998. Relevant portions of the transaction
proxy, branding and universal shopping cart modules were completed and
integrated into the version 1.0 release of our ActiveShopper electronic
commerce private label solution that was launched in May 1999. Other portions
of these modules are estimated to be completed in the fourth quarter of 1999.
The direct impact of the smart-shopping service on current and future results
of operations, liquidity and capital resources is not known, as we do not have
the ability to calculate revenues specifically and exclusively attributable to
Outpost's integrated technology. Further, the modules are not distinguishable
market segments for financial reporting purposes or for management purposes.
However, we believe that these services will allow our affiliates to broaden
and enhance their core programming at minimal cost and to generate additional
advertising and transaction revenue opportunities for both us and our
affiliates,
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<PAGE>
initially through our launching, and affiliates utilizing, ActiveShopper as a
private label electronic commerce solution. Further, the benefits to us and our
affiliates can potentially extend beyond electronic commerce transactions by:
. enabling us to apply the Outpost Technology to other functions such as
building employment classifieds and databases of local events;
. allowing end users to access consolidated bank statements or statements
of airline frequent flyer miles; and
. attracting additional Web users who are then exposed to the many other
features in our suite of content, community and commerce solutions.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivatives and
Hedging Activities, effective for fiscal years after June 2000, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. Because
we have never used and do not currently intend to use derivatives, management
does not anticipate that the adoption of this new standard will have a
significant effect on our earnings or financial position.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risks, including changes in interest
rates. We typically do not attempt to reduce or eliminate our market exposures
on our investment securities because the majority of our investments are short
term. We do not have any derivative instruments.
The fair value of our investment portfolio or related income would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates due mainly to the short-term nature of a significant portion of
our investment portfolio. In addition, we intend to hold our investments to
their maturity, which mitigates our risk with respect to fluctuating interest
rates.
All of the potential changes noted above are based on sensitivity analysis
performed on our balances as of June 30, 1999.
42
<PAGE>
BUSINESS
Overview
InfoSpace.com, a leading Internet infrastructure company, provides private
label solutions for content, community and commerce to Web sites and Internet
appliances. Our affiliate network consists of more than 1,800 Web sites. Our
affiliates include AOL, Microsoft, Lycos, NBC's Snap, go2net Inc.'s
MetaCrawler, Disney/InfoSeek's GO Network, Network Solutions, DoubleClick, Dow
Jones (The Wall Street Journal Interactive Edition), ABC LocalNet, BellSouth
and US West. Our private label solutions include (1) content services, such as
yellow pages and white pages, maps and directions, classified advertisements,
real-time stock quotes, sports, information on local businesses and events,
weather forecasts and horoscopes, (2) community services, such as online
address books and personal calendars, personal home pages, message boards and
online chat rooms, and (3) our electronic commerce solution, ActiveShopper,
which allows shoppers to research, buy and obtain special promotions for
products offered online, review offline catalogs, locate auction sites where a
product is being offered, conduct online price comparisons and locate merchants
in the shopper's local area.
By aggregating content and commerce information from multiple sources and
integrating it with related information and community services using our
proprietary technology, we help to increase the convenience, relevance and
enjoyment of our affiliate 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 our relationships, services and technology,
affiliates are free to focus on their core competencies.
We design our infrastructure services to be highly flexible and customizable,
enabling affiliates to select from among our broad range of content, community
and commerce services. One of our principal strengths is our internally
developed technology, which enables us to easily and rapidly add new affiliates
by employing a distributed, scalable architecture adapted specifically for our
Internet-based infrastructure services. We help our affiliates build and
maintain their brands by delivering our content, community and commerce
services 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. We have designed our technology to support affiliates across
multiple platforms and formats, including the growing number of emerging
Internet appliances. We typically share advertising revenues with the
affiliates whose sites incorporate our content, community and commerce services
where advertisements are placed.
We derive substantially all of our revenues from national and local
advertising, promotions, including promotions for content, community and
commerce, and, to a lesser extent, non-advertising based private label
solutions. Through our direct sales force, we offer a variety of national
advertising and promotions that enable advertisers to access both broad and
targeted audiences. We also sell local Internet yellow pages advertising
through cooperative sales relationships with RBOCs, established independent
yellow pages publishers, media companies and direct marketing companies. We
believe that these relationships provide us access to local sales expertise and
customer relationships that give us an advantage over competitors while
minimizing our own sales infrastructure investment.
Our Private Label Solutions
Our private label solutions include (1) content services, such as yellow
pages and white pages, maps and directions, classified advertisements, real-
time stock quotes, sports, information on local businesses and events, weather
forecasts and horoscopes, (2) community services, such as online address books
and personal calendars, personal home pages, message boards and online chat
rooms, and (3) our electronic commerce solution, ActiveShopper, which allows
shoppers to research, buy and obtain special promotions for products offered
online, review offline catalogs, locate auction sites where a product is being
offered, conduct online price comparisons and locate merchants in the shopper's
local area.
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<PAGE>
We have acquired the rights to a wide range of content from more than 65
third-party content providers. The cornerstone of our content solution is our
nationwide yellow pages and white pages directory information. Using our
proprietary technology, we integrate this directory information with other
value-added content to help users find people, places and things in the real
world. As an example of the power of our contextual integration, a salesperson
using our content, community and commerce services can, from the results of a
single query, find the name and address of a new customer, add the address to
his or her online address book, check the customer's online calendar, obtain
directions to his or her office, send a card or gift, 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.
We have developed community and commerce services that we integrate with
related content. Our suite of community services enables affiliates to increase
user loyalty and user visits by offering online personal calendars, address
books, Web-based email, personal home pages and online chat and message boards.
Our recent acquisition of MyAgent technology enables us to offer real-time
Internet communication such as real-time messaging and enhancements to our
community services. We launched our commerce service, ActiveShopper, in May
1999. ActiveShopper is designed to help our affiliates retain users and prolong
their visits by allowing consumers to make critical purchase decisions from
within a single, fully featured commerce service and never leave an affiliate's
site. ActiveShopper provides the ability to research, obtain special promotions
and purchase products from more than 2,500 online and offline retailers.
Content Services
We seek to provide our affiliates with content of broad appeal to end users,
including local information, financial data and news and entertainment. We
believe that such content can provide advertisers with opportunities to both
reach a broad audience and target specific subgroups within that audience. In
most cases, we receive regular data feeds from our content providers and store
the content on our Web servers in order to maintain its reliability and
increase its accessibility. In other cases, our proprietary technology allows
Web users to transparently access content that is stored directly on the
content provider's system. In either case, our technology enables us to
aggregate heterogeneous content into an integrated service, which is then
delivered to our affiliates. Our 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 Internet appliance.
We have acquired rights to third-party content pursuant to more than 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 us a carriage fee for syndication of
its content to our network of affiliates. In other instances, we share with the
content provider advertising revenues attributable to end-user access of the
provider's content. For certain of our content, including our core directory
and map content, we pay a one-time or periodic fee or fee per content query to
the content provider. We typically enter into nonexclusive arrangements with
our content providers. However, in certain instances we have entered into
exclusive relationships, which may limit our ability to enter into additional
content agreements.
Directory Services
We license what we believe to be the most comprehensive and accurate database
of businesses in the United States and Canada through a five-year agreement
with infoUSA (formerly known as American Business Information, Inc.). infoUSA
is a leading provider of online yellow pages directory information. Pursuant to
our agreement with infoUSA, we pay infoUSA an annual fee and have built a co-
branded version of our directory services for infoUSA's Web site. We will share
with infoUSA any revenues generated by this co-branded Web site. We receive
access to infoUSA's business data, and infoUSA is required to update its
information monthly. We enhance this content with expanded yellow pages
information obtained
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<PAGE>
under agreements with independent yellow pages publishers that we estimate,
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.
We license our white pages directory information for the United States and
Canada under a three-year agreement with Acxiom Corporation, which is
automatically renewed for additional annual terms unless terminated by either
party prior to the end of the initial three-year term or any subsequent term.
Pursuant to our agreement, we pay Acxiom an annual fee, and receive household
data from Acxiom that they update on a monthly basis.
We integrate our yellow pages and white pages information with each other and
utilize yellow pages category headings in combination with a natural word
search feature to provide a user-friendly interface and navigation vehicle for
our directory services. We also typically include maps and directions for
addresses included in our directory services. We further enhance the relevance
and accuracy of responses to user queries by employing a radial search feature
to our 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.
Information Services
In addition to our directory services, we distribute other valuable
information of broad appeal. We seek to provide a comprehensive offering of
content services with everyday significance. Principal categories of content
currently offered by us include:
Yellow Pages White Pages
find businesses, companies phone numbers, email
online, maps, directions addresses, reverse lookup,
online phone calls
Classifieds Public Records
autos, homes, apartments, "Find Anyone!", background
jobs, businesses, personals checks, SS# checks, adoption
reunions
Business Services City Guide
supplies, travel, trade links, concerts, weather,
shows schools
Finance News Break
real-time quotes, the top stories, world news, business,
markets, loan center, technology, sports
insurance center
Net Search International
arts, computers, games, slide shows, directory
health, home, reference, services for Canada, the
sports United Kingdom, France,
Germany, Denmark and other
countries
Government Entertainment
federal, state, local movies, page greetings,
officials lottery, horoscopes
Our future success will depend in large part on our ability to aggregate,
integrate and distribute content of broad appeal. Our ability to maintain our
relationships with content providers and to build new relationships with
additional content providers is critical to the success of our business. See
"Risk Factors--We Depend on Third Parties for Content."
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Community Services
In April 1999, we introduced a private label suite of community services that
are integrated with our content and commerce services. These services allow
users to utilize the Internet to organize their lives within an affiliate's Web
site or Internet appliance. We enhance these services by integrating them with
our content and commerce services. Our community services allow our affiliates
to offer Web-based personal calendars, address books and e-mail, personal home
pages, message boards and online chat. We offer these services to our
affiliates on a co-branded basis to help increase their users' loyalty and
prolong their visits. In June 1999, we acquired the MyAgent technology and
related assets from Active Voice to add real-time online messaging from PCs and
other Internet appliances and to enhance the performance and utility of our
current communications service solution.
Commerce Services
In May 1999, we launched ActiveShopper, our integrated commerce service.
ActiveShopper utilizes our proprietary integration technology to combine
merchant information, decision-making services and merchandising services in a
single shopping platform. ActiveShopper provides research tools to enable users
to come to a conclusion about a product through access to product reviews,
participation in online forums such as message boards, as well as search for
Web sites for additional information. Once a buying decision has been made,
ActiveShopper enables a consumer to find promotional bargains and sales, as
well as search for products for sale by online merchants and auction sites,
offline catalogs and through online classifieds services and locate merchants
in their local area.
We offer ActiveShopper to our affiliates to provide them with electronic
commerce capabilities from their own Web site to retain users who would
otherwise go directly to an online retailer's site. By offering a fully-
featured commerce service, a consumer can make critical purchase decisions
without leaving an affiliate's site. Upon consummation of our combination with
INEX, we intend to utilize INEX's commerce applications to provide merchants a
complete, affordable and easy-to-use means to build, manage and promote online
storefronts. These features will enable affiliates to attract and host online
and local merchants on their sites by providing the necessary online storefront
building tools.
Affiliate Network
We provide our infrastructure services to a network of Web sites and Internet
appliances, such as cellular phones, pagers, screen phones, television set-top
boxes, online kiosks and personal digital assistants. We have more than 100
affiliates representing more than 1,800 Web sites.
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<PAGE>
Internet Portals, Destination Sites and Online Service Providers
Our affiliates include leading Internet portals, a wide variety of
destination sites and online service providers, such as the following:
Internet Portals
<TABLE>
<CAPTION>
Affiliate Location or Web Site Address
--------- ----------------------------
<C> <S>
America Online AOL service, aol.com, Netscape's Netcenter
(netscape.com), CompuServe service,
compuserve.com and digitalcities.com
AT&T WorldNet att.net
Disney/Infoseek's GO network go.com
go2net Metacrawler.com
Lycos lycos.com
Microsoft Network essentials.msn.com
Snap snap.com
Destination Sites
<CAPTION>
Affiliate Web Site Address
--------- ----------------
<C> <S>
ABC News Abcnews.com and individual ABC network
affiliate Web sites (e.g., WABC's
7online.com, KOMO's komotv.com)
Paxson Communications affiliate television station Web sites (e.g.,
pax.net/WCPX)
Deja News dejanews.com
Disney OnLine family.com
Dow Jones wsj.com
EarthLink earthlink.com
FindLaw findlaw.com
Market Guide marketguide.com
Morris Online savannah.com
OnRadio onradio.com
Playboy playboy.com
World Now worldnow.com
Xoom xoom.com
Online Service Providers
<CAPTION>
Affiliate Web Site Address
--------- ----------------
<C> <S>
DoubleClick doubleclick.com
Network Solutions networksolutions.com
</TABLE>
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<PAGE>
We design our private label solutions to be highly flexible and customizable,
enabling affiliates to select from among our broad range of content, community
and commerce services and to specify the placement of the selected services
within their own Web sites and devices. For example, one of our affiliates,
local television station WABC's 7online.com, has selected our yellow pages
directory information, classifieds information and ActiveShopper services, and
offers these services on its Web site. go2net, another affiliate, uses a broad
range of our services, including our classifieds, white pages and yellow pages
directory information services and weather and community services.
In response to user queries originating from an affiliated Web site or
device, our 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 our affiliates build and maintain their brands by
creating the impression to end users that they have not left the affiliate's
site. We manage the access of content and commerce information and process user
queries from our own Web server until we deliver these services to an
affiliate, serving as a cost-effective single source supplier of content and
services.
Our arrangements with affiliates typically provide for sharing a portion of
the revenues generated by advertising on the Web pages that deliver our
content, community and commerce services. Both we and the affiliate typically
retain the rights to sell such advertising. Our distribution arrangements with
our affiliates typically are for limited durations of between six months and
two years and automatically renew for successive terms thereafter, subject to
termination on short notice. There can be no assurance that such arrangements
will not be terminated or that such arrangements will be renewed upon
expiration of their terms. We have also entered into a strategic alliance with
AOL, the largest Internet portal measured in terms of user traffic to provide
some of our services on the Netscape home page (Netcenter), CompuServe's
service and compuserve.com, Digital City, AOL's proprietary service and
AOL.com.
Netscape, CompuServe, Digital City. In June 1999 we entered into an agreement
with AOL to provide white pages directory services to AOL's CompuServe and
Digital City divisions and its Netscape Communications subsidiary for a two-
year term. Pursuant to the agreement, we are required to pay to AOL a bi-annual
carriage fee. In return, AOL has agreed to deliver a certain number of searches
of our white pages directory services in each year of the agreement. If AOL
delivers a greater number of searches in either or both of the years, we are
required to pay AOL additional fees on a cost-per-search basis. In the event
that AOL delivers a lesser number of searches as of the end of the initial two-
year term of the agreement, AOL will extend the term for six months or until
the shortfall is made up, whichever occurs first. We will account for revenue
and revenue sharing under the agreements with AOL under our existing revenue
recognition policies described in our Notes to Consolidated Financial
Statements. The total carriage fee payments to be made under the white pages
directory services agreement will be recognized based on actual searches
delivered over the term of the agreement as sales and marketing expense.
AOL. In August 1998 we entered into agreements with AOL to provide white
pages directory services and classifieds information services to AOL. Under the
terms of the agreement related to our white pages directory services, we have
agreed to place our white pages directory services on AOL's NetFind home page
and throughout various other parts of AOL's proprietary service and AOL.com.
The white pages directory services are to be provided to AOL for a three-year
term, beginning on November 19, 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 us. Under this agreement, we will
pay to AOL a quarterly carriage fee and share with AOL revenues generated by
advertising on our white pages directory services delivered to AOL. Under the
terms of the agreement related to our classifieds information services, we have
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.
Pursuant to the agreement, we supply classifieds information services to AOL's
proprietary service, AOL.com, its CompuServe and Digital City
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<PAGE>
divisions and its Netscape Communications subsidiary. AOL will pay to us a
quarterly fee and share with us 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 our common
stock and has certain rights of first negotiation in the event of a proposed
sale of us. See "Description of Capital Stock--Warrants" and "--Antitakeover
Effects of Certain Provisions of Certificate of Incorporation and Washington
and Delaware Law; Right of First Negotiation."
Internet Appliances
We are working with certain PC manufacturers that are incorporating Internet
access as part of the start-up menu of the PC. In addition, we believe that the
growing number of non-PC Internet appliances presents a significant potential
distribution channel for our private label solutions. 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. We have entered into
agreements with numerous providers of Internet appliances, including the
following:
Selected Internet Appliance Affiliates
<TABLE>
<CAPTION>
Means of Internet Access Company
------------------------ -------
<C> <S>
PCs Acer America; The Pixel Company (for Packard
Bell NEC)
Cellular Phones AT&T Wireless; @Mobile; Nokia
Pagers WolfeTech (for Motorola PageWriter)
Screen Telephones InfoGear; Mitel; Mitsui; Lucent
Television Set-Top Boxes American Interactive Media; @Home; Lucent; On
Command; Planetweb; Source Media
Online Kiosks King kiosk platform; Lexitech kiosk software
platform
Personal Digital
Assistants AT&T Wireless; AvantGo; InfoGear; Vaden
</TABLE>
We believe that users of Internet appliances, in particular, seek useful
information and services of everyday relevance and are more likely to access
the Internet for specific real-world information and services. Since providers
of Internet appliances generally do not generate their own content and services
or have less content and services available to them than Web sites, we believe
there is an opportunity for our content, community and commerce services to be
an integral part of the information services bundled with these appliances. We
are working with these affiliates to identify, acquire and integrate new
information services that bring additional value to their devices. Our
technology allows us to readily adapt the delivery of our services to the
individual format and display features of our Internet appliance affiliates.
Typically, our agreements with Internet appliance affiliates have terms of
between one and three years and, in some cases, provide for the sharing of
revenues between the affiliate and us generated by advertising included with
the delivery of our content, community and commerce services. In other cases,
we receive license fees on a per query or per device basis or through other
arrangements for use of our private label solutions.
Our affiliate arrangements involve a number of risks. See "Risk Factors--We
Rely on our Relationships with Affiliates."
Revenue Sources
We derive substantially all of our revenues from national and local
advertising, promotions, including promotions for content, community and
commerce, and, to a lesser extent, non-advertising based private label
solutions. Our clients include a broad range of businesses that advertise on
the Internet, including certain of our content providers and affiliates.
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Advertising and Promotions
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 our content, community and commerce 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 our
private label solutions. Targeted placements deliver banner advertisements to
specified audiences. For example, advertisers can reach consumers in general by
placing banner advertisements that rotate throughout our 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 our real-time stock quotes or potential
used car buyers by advertising only on pages containing our automobile
classifieds.
Other National Advertising. We also sell 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.
Our national advertising agreements generally have terms of less than six
months and guarantee a minimum number of impressions. We charge fees for banner
advertising based on the specificity of the target audience. Our 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 may fluctuate. Our guarantee
of minimum levels of impressions exposes us to potentially significant
financial risks, including the risk that we may fail to deliver required
minimum levels of user impressions, in which case we typically continue to
provide advertising without compensation until such levels are met.
In order to evaluate and forecast revenue derived from these different
revenue sources, the principal revenue metric we utilize is productivity per
page. This metric measures our ability to generate revenue from traffic. We
calculate productivity per thousand pages by dividing total revenue for a
reporting period by the total number of page views in the same period, then
multiplying this amount by 1,000. Productivity per page will vary due to the
delay in generating revenue from increasing traffic. For the six-month period
ended June 30, 1999, traffic totaled 2.6 billion page views. Revenue per
thousand page views was $4.81 for the second quarter of 1999, an increase of
$0.58 from $4.23 of revenue per thousand page views for the first quarter of
1999. We expect revenue per thousand page views for the remainder of 1999 to
range between $3.75 and $5.00.
See "Risk Factors--We Rely on Advertising and Promotion Revenues."
Local Internet Yellow Pages Advertising
We believe that local Internet advertising represents an attractive and
largely unexploited market opportunity. Spending on Internet advertising by
local businesses is currently a small but growing percentage of their overall
advertising expenditures. We believe that our affiliate network provides an
attractive Internet platform for local advertisers to reach a broader audience
and extends the reach of their advertising beyond their geographic area, as
well as to achieve targeted advertising within their geographic area.
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We generate 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, we generate
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 advertisers 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.
We have formed cooperative sales relationships with RBOCs such as Intelligent
Media Ventures, Inc. (BellSouth), SBC Interactive (Southwestern Bell) and
Ameritech Interactive Media, Inc., independent yellow pages publishers,
including TransWestern Publishing Company, Ltd. and R.H. Donnelley, Inc., and
media companies, including Guy Gannett Communications and E.W. Scripps, which
provide access to more than 7,500 salespeople and their local sales contacts.
Further, we have built relationships with direct marketing companies, whose
mail and telephone solicitations complement the sales forces of the RBOCs,
independent yellow pages publishers and media companies. Our agreements with
these companies typically have terms of one to five years and provide for
revenue sharing, which varies from relationship to relationship. The local
sales forces of these companies are empowered to sell Internet yellow pages
advertising on our directory services, which are either bundled with the
traditional print advertising they sell or sold by a specialized Internet sales
force. As such, we believe our Internet yellow pages advertising offers these
sales forces attractive incremental revenue opportunities from their existing
client bases as well as an opportunity to expand their sales to new clients.
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, we provide 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 our directory services. We believe that these
relationships provide local expertise and access to local advertisers, as well
as established advertising production capabilities, that give us an advantage
over competitors while minimizing our investment in our own sales force and
operations.
Our dependence on advertising and promotion revenues involves a number of
risks. See "Risk Factors--We Rely on Advertising and Promotion Revenues," "--We
Rely on Third Parties for Sales of Internet Yellow Pages Advertising," "--
Advertisers May Not Adopt the Internet as an Advertising Medium" and "--Our
Advertising Arrangements Involve Risks."
Promotions
In addition to our CPM-based national advertising, we also sell promotions,
which are integrated packages of advertising that bundle such features as:
. button and textlink advertisements;
. sponsorships of specific categories of content within our private label
solutions; and
. electronic commerce features.
Promotions also include distribution and co-branding services that we provide
to content providers, for which we receive a carriage fee. These arrangements
are individually negotiated 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
our promotions are
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"sponsorships," which allow advertisers to sponsor a specific category of
content within our private label solutions. These sponsorships consist of a
button advertisement or text link that appears prominently on the page each
time that content category is queried by a user. Our promotions are
specifically designed to allow advertisers to integrate various forms of online
advertising, such as button advertisements and text links, content sponsorship
and electronic commerce links and also include innovative specially-designed
advertising campaigns to fully exploit the reach of our private label
solutions. In some cases, we have entered into exclusive sponsorship
arrangements for certain 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. For example, we have
entered into an agreement with Bookout Furniture, Inc. (FurnitureFind.com)
under which FurnitureFind.com receives banner and button advertising and is
fully integrated as a sponsor in our ActiveShopper electronic commerce service
and our yellow pages and white pages directory services. FurnitureFind.com pays
to us a percentage of revenues they receive for sales generated from the
integrated pages they sponsor.
Promotion arrangements vary in terms and duration, but generally have longer
terms than arrangements for our 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. If the advertiser offers an electronic commerce opportunity in its
promotion, we may derive transaction revenues based on the level of
transactions made through the promotion.
In addition, we work with advertisers to develop customized advertising
solutions that may include both CPM-based national advertising and non-CPM-
based promotions. For example, our 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 our private label
solutions, such as the "Find Anyone!" service. Our advertising agreement with
800-U.S. Search has a four-year term. Revenues generated from 800-U.S. Search
accounted for approximately 20.6% of our revenues for 1998 and 27.1% of our
revenues for the first six months of 1999. See "Risk Factors--We Rely on a
Small Number of Advertising Customers."
As of June 30, 1999, we had agreements with more than 50 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 our content, community and commerce services during 1999:
<TABLE>
<S> <C>
800-U.S. Search KnowX
Apartments for Rent Leisure Planet
AT&T Locate-Me
AutoNation.com Microsoft
BarnesandNoble.com Multiple Zones
CareerPath Nth Dimension
Catalog City Netscape
FTD Net-Temps
InsWeb NextCard
Intel uBid
iVillage Women.com
</TABLE>
Non-advertising Based Private Label Solutions
Under our non-advertising based private label solution arrangements,
affiliates pay us on a fixed fee, per-click or page view basis while typically
keeping any revenues generated by our content, community and commerce services.
These arrangements vary in terms and duration, and the fees are individually
negotiated with the affiliate. For example, under our agreement with AOL, AOL
pays us a quarterly fee and shares with us revenue generated from payments by
individuals and commercial listings on the AOL classifieds service. Another
affiliate, NBC's Snap, pays us on a CPM-basis on the number of pages of
services we deliver to them.
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Technology and Infrastructure
One of our principal strengths is our internally developed technology, which
we have designed specifically for our Internet-based content, community and
commerce services. Our technology architecture features specially adapted
capabilities to enhance performance, reliability and scalability, consisting of
multiple proprietary software modules that support the core functions of our
operations. These modules include Web Server Technology, Database Technology, a
Web Scraping Engine and Gateway Technology.
Web Server Technology
We designed our Web Server Technology 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, our
technology enables us to deliver content in a manner optimized to the unique
display formats of existing and emerging Internet appliances, such as cellular
phones, pagers, screen phones, television set-top boxes, online kiosks and
personal digital assistants.
Our Web Server Technology includes other features designed to optimize the
performance of our content, community and commerce services, including:
. an HTML compressor that enables modifications of file content to reduce
size, thereby reducing download time for users;
. 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
. 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
We have developed proprietary database technology to address the specific
requirements of our business strategy and private label solutions. We designed
our Co-operative Database Architecture to function with a high degree of
efficiency within the unique operating parameters of the Internet, as opposed
to commonly used database systems that were developed prior to the widespread
acceptance of the Internet. The architecture is tightly integrated with our Web
Server Technology and incorporates the following features:
Heterogeneous Database Clustering. Our 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 our 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, our
pre-search and post-search processing capabilities enable users to modify
search parameters in real time before and after querying a database.
Dynamic Parallel Index Traversal. Our 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 us to
achieve an efficient balance between disk space and compression/decompression
when storing or accessing data.
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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. Our 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. We incorporate 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 our services, we
believe we provide end users with a more intuitive mechanism to search for and
locate information.
Data Warehouse. For our commerce initiatives we have developed a
comprehensive enterprise-wide data warehouse. This data warehouse contains
information relating to merchants, products, services, users, customers,
profiles, storefronts, purchases, site traffic and metrics. The aggregation of
this information in one place allows us to leverage our development efforts and
reduce redundant information.
Web Scraping Engine
We have developed our Web Scraping 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. Our
State Machine-Based Profiling system catalogs the data on each source site,
which is later accessed by our Web Scraping 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 Web Scraping 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 price comparison feature of our ActiveShopper
commerce 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.
Gateway Technology
Our Gateway Technology allows us to take content from one source protocol and
forward it to a device destination that does not include any of the hardware or
software necessary for establishing an internet connection. The content can be
sent directly or may have some processing performed before transmission to the
destination. This can be used for a single message, or multiple messages sent
on a timed basis such as weather, stock quotes, news and horoscopes. Messages
may be sent to a single user or group of users.
Data Network Infrastructure
We maintain a carrier-class data network center designed to ensure high-level
performance and reliability of our content, community and commerce services. We
connect directly to the Internet from our facilities in Redmond, Washington
through redundant, dedicated DS-3 communication lines provided by multiple
telecommunication service providers. Our hardware resides in a secure climate-
controlled room, with local directors providing load balancing and failover. In
addition to the facilities located at our headquarters, we contract for co-
location facilities with Exodus Communications and Savvis Communications at
their sites near Seattle, Washington. As we expand our operations, we expect to
locate server facilities at various strategic geographic locations.
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Product Development
We believe that strong product development capabilities are essential to
developing the technology necessary to successfully implement our strategy of
expanding our affiliate network, acquiring value-added content to add to our
content, community and commerce services, expanding internationally and into
other services and maintaining the attractiveness and competitiveness of our
content, community and commerce services. We have invested significant time and
resources in creating our proprietary technology. Product development expenses
were $110,000 for the period from March 1, 1996 (inception) to December 31,
1996, $213,000 for the year ended December 31, 1997, $604,000 for the year
ended December 31, 1998, $149,000 for the six months ended June 30, 1998 and
$537,000 for the six months ended June 30, 1999.
Rapidly changing technology, evolving industry standards, evolving customer
demands and frequent new product and service introductions characterize our
market. See "Risk Factors--Rapid Technological Change Affects Our Business" for
a discussion of certain risks in this regard.
International Expansion
We intend to capitalize on what we perceive to be a significant opportunity
for our private label solutions in international markets. We expect 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.
We entered into a joint venture with Thomson to form TDL InfoSpace to
replicate our content, community and commerce 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. Pursuant to the terms of the joint
venture agreement, both we and Thomson entered into license agreements with TDL
InfoSpace for offsetting payments to each party of (Pounds)50,000. These
amounts were not intended to represent the fair market value of the license
agreements to an unrelated third party. Under the license agreement between
Thomson and TDL InfoSpace, Thomson licenses its U.K. directory information
database to TDL InfoSpace. Under the joint venture agreement, Thomson also
sells Internet yellow pages advertising for the joint venture through its local
sales force. Under our license agreement with TDL InfoSpace, we license our
technology and provide hosting services to TDL InfoSpace. In addition, under
our license agreement, TDL InfoSpace is obligated to reimburse us for any
incremental costs incurred by us for our efforts with respect to the hosting
services. In the event that TDL InfoSpace expands into other countries, it is
required to pay to us an additional technology license fee of up to $50,000 per
additional country. Our license agreement also provides that, in the event that
we no longer hold any ownership interest in the joint venture, TDL InfoSpace
and we will negotiate an arm's-length license fee for our technology, not to
exceed $1 million. Each party purchased a 50% interest in TDL InfoSpace and is
required to provide reasonable working capital to TDL InfoSpace.
We expect that TDL InfoSpace will expand its private label solutions to other
European countries by the end of 1999. Under the joint venture agreement, each
of us and Thomson is obligated to negotiate with TDL InfoSpace and the other
party to jointly offer private label solutions in other European countries
prior to offering such services independently or with other parties. In March
1999, we began providing private label solutions to Canadian affiliates through
our wholly-owned subsidiary, InfoSpaceCanada.com. In addition, we are currently
investigating additional international opportunities. The expansion into
international markets involves a number of risks. See "Risk Factors--Our
International Expansion Plans Involve Risks."
Intellectual Property
Our success depends significantly upon our proprietary technology. To protect
our proprietary rights, we rely on a combination of copyright and trademark
laws, patents, trade secrets, confidentiality agreements
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with employees and third parties and protective contractual provisions. All of
our employees have executed confidentiality and nonuse agreements that transfer
any rights they may have in copyrightable works or patentable technologies to
us. In addition, prior to entering into discussions with potential content
providers and affiliates regarding our business and technologies, we generally
require that such parties enter into a nondisclosure agreements with us. If
these discussions result in a license or other business relationship, we also
generally require that the agreement setting forth the parties' respective
rights and obligations include provisions for the protection of our
intellectual property rights. For example, our standard affiliate agreement
provides that we retain ownership of all patents and copyrights in our
technology and requires our customers to display our copyright and trademark
notices.
"InfoSpace" is a registered trademark of ours. We have also applied for
registration of certain other service marks and trademarks, including
"InfoSpace.com," "ActiveShopper" and our logo in the United States and in other
countries, and will seek to register additional service marks and trademarks,
as appropriate. We may not be successful in obtaining the service marks and
trademarks that we have applied for. Approximately 15 U.S. patent applications
have been filed relating to various aspects of our technology for querying and
developing databases, for developing and constructing web pages, for electronic
commerce for on-line directory services and for web scraping. Additional patent
applications are in preparation on other features of our technology. We have
instituted a formal patent program and anticipate increased patent application
activity in the future. Patents with respect to our technology may not be
granted, and, if granted, patents may be challenged or invalidated. In
addition, issued patents may not provide us with any competitive advantages and
may be challenged by third parties.
Despite our efforts to protect our proprietary rights, unauthorized parties
may copy aspects of our products or services or obtain and use information that
we regard 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 we do not currently have any patents or patent applications pending in any
foreign country. In addition, others could possibly independently develop
substantially equivalent intellectual property. If we do not effectively
protect our intellectual property, our business could suffer.
Companies in the computer industry have frequently resorted to litigation
regarding intellectual property rights. We may have to litigate to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of other parties' proprietary rights. From time to time, we
have received, and may receive in the future, notice of claims of infringement
of other parties' proprietary rights. Any such claims could be time-consuming,
result in costly litigation, divert management's attention, cause product or
service release delays, require us to redesign our products or services or
require us to enter into royalty or licensing agreements. These royalty or
licensing agreements, if required, may not be available on acceptable terms or
at all. If a successful claim of infringement were made against us and we could
not develop non-infringing technology or license the infringed or similar
technology on a timely and cost-effective bases, our business could suffer. See
"Business--Legal Proceedings."
Competition
We operate in the Internet information infrastructure services market, which
is extremely competitive and is rapidly changing. Our current and prospective
competitors include many large companies that have substantially greater
resources than we have. We believe that the primary competitive factors in the
market for Internet content, community and commerce services are:
. 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 Web
sites and Internet appliances to which the services are provided;
. the ability to meet the specific content and service demands of a
particular Web site or Internet appliance;
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. the cost-effectiveness and reliability of the content, community and
commerce services;
. the ability to provide content, community and commerce services that are
attractive to advertisers;
. the ability to achieve comprehensive coverage of a particular category of
content; and
. the ability to integrate related information to increase the utility of
the content, community and commerce services offered.
We compete, directly or indirectly, in the following ways, among others:
. our directory services compete with AnyWho? (a division of AT&T), GTE
SuperPages, Switchboard, ZIP2 (which was recently acquired by Compaq),
various RBOCs' directory services, infoUSA's Lookup USA, Microsoft
Sidewalk and Yahoo! Yellow Pages and White Pages;
. other information services we provide, such as classifieds, horoscopes
and real-time stock quotes, compete with specialized content providers;
. our U.K. joint venture competes with British Telecom's YELL service and
Scoot (UK) Limited;
. our community services compete with services offered by Internet portals
such as AOL, Yahoo!, and Excite, as well as specialized content service
providers such as Hotmail; and
. our commerce services compete with Inktomi, Amazon.com's Junglee and
Excite's Jango.
We expect that in the future we will experience competition from other
Internet services companies and providers of Internet software, including
Microsoft, Yahoo!, AOL, Excite, Disney/Infoseek, Lycos, go2net's MetaCrawler
and NBC's Snap. Some of these companies are currently customers of ours, the
loss of which could harm our business. We may also face increased competition
from traditional media companies expanding onto the Internet.
Many of our current customers have established relationships with certain of
our current and potential future competitors. If our competitors develop
content, community and commerce services that are superior to ours or that
achieve greater market acceptance than ours, our business will suffer.
Governmental Regulation
Because of the increasing use of the Internet, the government may adopt laws
and regulations relating to the Internet, addressing issues such as user
privacy, pricing, content, taxation, copyrights, distribution and product and
services quality.
We may be subject to provisions of the Federal Trade Commission Act that
regulate advertising in all media, including the Internet, and require
advertisers to substantiate advertising claims before disseminating
advertising. The Federal Trade Commission has the power to enforce this Act. It
has recently brought several actions charging deceptive advertising via the
Internet and is actively seeking new cases involving advertising via the
Internet.
We may also be subject to the provisions of the recently enacted
Communications Decency Act. This Act imposes substantial monetary fines and/or
criminal penalties on anyone who distributes or displays certain prohibited
material over the Internet. Although some court decisions have cast doubt on
the constitutionality of this Act, it could subject us to substantial
liability.
These or any other laws or regulations that may be enacted in the future
could have several adverse effects on our business. These effects include:
. we may be subject to substantial liability, including fines and criminal
penalties;
. we could be prevented from offering certain products or services; and
. the growth in Internet usage could be substantially limited.
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Government regulation may present a risk to our business. See "Risk Factors--
We May Become Subject to Government Regulation."
Employees
As of July 31, 1999, we had 102 employees. None of our employees is
represented by a labor union, and we consider our employee relations to be
good. Competition for qualified personnel in our industry is intense,
particularly among software development and other technical staff. We believe
that our future success will depend in part on our continued ability to
attract, hire and retain qualified personnel. See "Risk Factors--We Need to
Manage Our Growth and Implement Procedures and Controls" and "--We Depend on
Key Personnel" and "--We Need to Hire Additional Personnel."
Facilities
Our principal administrative, engineering, marketing and sales facilities
total approximately 16,864 square feet and are located in Redmond, Washington.
Under the current lease, which commenced on July 13, 1998, and expires on
August 31, 2003, we pay a monthly base rent of $19,775 during the first three
years of the lease and $22,030 during the final two years of the lease. We have
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. Under this right of
first opportunity we have expanded into an additional 6,587 square foot space
at a rate of $7,875 per month under a sublease that expires on April 30, 2000.
We also plan to expand into an additional 6,305 square foot space in the same
complex in the near future. We expect that we will need to relocate to
significantly larger facilities during 2000. We maintain a sales office housed
in an approximately 2,271-square-foot space in San Francisco, California under
a lease that expires on November 30, 2001 with a monthly base rent of $5,299.
We also maintain a sales office in New York City for 1,900 square feet with a
monthly base rent of $3,667, under a lease that expires April 2004. Under the
lease at our former location in Redmond, we paid an aggregate rent of $28,840
for the first seven months of 1998 and an aggregate rent of $49,440 during
1997. We do not own any real estate.
Substantially all of our computer and communications hardware is located at
our facilities in Redmond, Washington and we also lease redundant network
facilities at two locations in the Seattle, Washington area under a month-to-
month agreement and an agreement that expires in July 2001. We intend to
install additional hardware and high-speed Internet connections at a location
outside the West Coast as well as in the United Kingdom to support our joint
venture, TDL InfoSpace.
Our 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. See "Risk Factors--Our Business Relies on
the Performance of Our Systems."
Legal Proceedings
From time to time we have been, and expect to continue to be, subject to
legal proceedings and claims in the ordinary course of our business, including
claims of alleged infringement of third-party trademarks and other intellectual
property rights by us. These claims, even if not meritorious, could require the
expenditure of significant financial and managerial resources.
On April 16, 1998, one of our former employees filed a complaint in the
Superior Court for Santa Clara County, California alleging, among other things,
that he had the right in connection with his employment to purchase shares of
our common stock representing up to 5% of our equity as of an unspecified date.
We settled this lawsuit in February 1999. Under the settlement, we made a cash
payment of $4.5 million.
On December 7, 1998, a complaint was filed against us on behalf of an alleged
former employee in Superior Court for Suffolk County in the Commonwealth of
Massachusetts alleging that he was terminated without cause and that he entered
into an agreement with us that entitles him to an option to purchase 2,000,000
shares of our common stock or 10% of our equity. The complaint alleges breach
of contract,
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breach of the covenant of good faith, breach of fiduciary duty,
misrepresentation, promissory estoppel, intentional interference with
contractual relations and unfair and deceptive acts and practices, seeking
specific performance of the alleged agreement for 10% of our equity, damages
equal to the value of 10% of our equity, punitive damages and attorneys' fees
and costs and treble damages under the Massachusetts Consumer Protection Act
(Mass. G.L. Chapter 93A). On January 7, 1999, the suit was removed to the
United States District Court for the District of Massachusetts. Discovery has
commenced and a trial is tentatively scheduled for March 2000. We are currently
investigating the claims at issue and believe we have meritorious defenses to
such claims. Nevertheless, litigation is inherently uncertain and we may not
prevail in this suit. To the extent that we are required to issue shares of our
common stock or options to purchase common stock as a result of the suit, we
would recognize an expense equal to the number of shares issued multiplied by
the fair value of our common stock on the date of issuance, less the exercise
price of any options required to be issued. This could harm our results of
operations, and any such issuances would be dilutive to existing stockholders,
the impact of which may be mitigated to the extent it is offset by shares of
common stock in the escrow account described below in this section.
On December 23, 1998, we initiated litigation against Internet Yellow Pages,
Inc. ("IYP") by filing suit in United States District Court for the Western
District of Washington. On February 3, 1999, we served a first amended
complaint on IYP and Greg Crane, an agent of IYP, in which we asserted claims
for (a) account stated, (b) breach of contract, and (c) fraud. On February 11,
1999, we were served with a complaint filed by IYP in Arizona Superior Court
for Maricopa County, which complaint was filed on February 3, 1999. In its
complaint, IYP asserts causes of action for breach of contract, fraud,
extortion, and racketeering under Arizona Revised Statutes, Section 13-
2301(D)(l) and (t), and seeks relief consisting of $1,500,000 and other
unquantified money damages, punitive damages, treble damages under Arizona
Revised Statutes, Sec. 13-2314.04, and attorney's fees. On March 5, 1999, IYP
answered our complaint in the Washington action, and asserted claims for breach
of contract, fraud, extortion and Consumer Protection Act violations. IYP seeks
relief consisting of $1,500,000 and other unquantified money damages, treble
damages under the CPA, and attorneys' fees. Trial in the Washington action is
set for April 2000, and discovery is ongoing; the Arizona action is presently
stayed. We are currently investigating the claims at issue and believe we have
meritorious defenses to such claims. Nevertheless, litigation is uncertain and
we may not prevail in these suits.
On February 18, 1999, a former consultant filed a complaint in the Superior
Court for Santa Clara County, California alleging, among other things, that he
had the right in connection with his consulting to the Company to purchase
28,462 shares of our common stock. We settled this lawsuit in September 1999.
Under the settlement, the former consultant was permitted to purchase 16,536
shares at a price of $.10 per share.
On January 26, 1999, Civix-DDI, LLC filed a complaint in the U.S. District
Court in Colorado against us and 19 other defendants for infringement of two
patents relating to electronic mapping systems. In July 1999 we settled this
litigation by entering into a license agreement for these patents, pursuant to
which we made a single lump sum royalty payment.
We had discussions with a number of individuals in the past regarding
employment by us and also hired and subsequently terminated a number of
individuals as employees or consultants. Furthermore, primarily during our
early stage of development, our procedures with respect to the manner of
granting options to new employees were not clearly documented. As a result of
these factors, and in light of the receipt of the above claims, we have in the
past received, and may in the future receive, similar claims from one or more
individuals asserting rights to acquire shares of our stock or to receive cash
compensation. We cannot predict whether such future claims will be made or the
ultimate resolution of any currently outstanding or future claim. Naveen Jain,
our Chief Executive Officer, has placed into escrow 2,000,000 shares of our
stock beneficially owned by him to indemnify us and our directors for a period
of five years for certain liabilities relating to events prior to September 30,
1998. The indemnification agreement, however, does not provide
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for indemnification for certain matters known by the Board prior to September
30, 1998 or losses less than $100,000. Satisfaction of liabilities through the
issuance of escrowed shares could result in the recognition of future expenses,
which could harm our results of operations.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information as of August 1, 1999 with
respect to our executive officers and directors:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Naveen Jain............... 39 Chief Executive Officer and Chairman of the
Board
Bernee D. L. Strom........ 52 President, Chief Operating Officer and Director
Vice President, Legal and Business Affairs and
Ellen B. Alben............ 36 Secretary
Douglas A. Bevis.......... 54 Vice President and Chief Financial Officer
Tammy D. Halstead......... 36 Vice President and Chief Accounting Officer
John E. Cunningham, IV
(1)...................... 41 Director
Peter L. S. Currie (2).... 42 Director
Gary C. List (1).......... 47 Director
Rufus W. Lumry, III....... 52 Director
Carl Stork(2)............. 39 Director
</TABLE>
- --------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Naveen Jain founded InfoSpace.com in March 1996. Mr. Jain has served as our
Chief Executive Officer since its inception, as its President since its
inception to November 1998 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.
Bernee D. L. Strom joined InfoSpace.com in November 1998 as President and
Chief Operating Officer and became a director in December 1998. Since 1990, Ms.
Strom served as President and Chief Executive Officer of the Strom Group, a
venture investment and business advisory firm specializing in high technology.
From April 1995 through June 1997, Ms. Strom served as President and Chief
Executive Officer of USA Digital Radio, LP, a partnership of Westinghouse
Electric Corporation and Gannett Co., Inc. that develops technology for AM and
FM digital radio broadcasting. From 1990 through 1994, she was President and
Chief Executive Officer of MBS Technologies, Inc., a software company. Ms.
Strom was a founder of Gemstar Development Corporation, which developed the
VCRPlus+(R) Instant Programmer, and served as its Vice President from its
founding in 1989 to 1993. Ms. Strom serves as a member of the Board of
Directors of the Polaroid Corporation, Krug International Corporation,
MilleCom, an Internet-based communications company, Walker Digital, an
intellectual property studio, and Quantum Development, a software and services
company. She is a trustee of the National Public Radio Foundation and a member
of CIGNA's Telecommunications Board of Advisors. She also serves as a member of
the Board of Advisors of the J. L. Kellogg Graduate School of Management at
Northwestern University. Ms. Strom holds a B.S., M.A. and Ph.D. from New York
University and an M.B.A. from the Anderson Graduate School of Management at
UCLA.
Ellen B. Alben joined InfoSpace.com 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., a private-
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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, 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 InfoSpace.com 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 Inc., 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 the
Harvard Graduate School of Business Administration.
Tammy D. Halstead joined InfoSpace.com in July 1998 as Corporate Controller.
In December 1998, she was appointed Vice President and Chief Accounting
Officer. From March 1997 to June 1998, she worked at the Seattle office of
USWeb Corporation, an Internet professional services firm, where she served as
Director of Finance and Administration and later as Vice President, Finance and
Administration. From April 1996 to March 1997, she was the Director of Finance
and Administration at Cosmix, Inc., which was acquired by USWeb Corporation in
March 1997. From December 1993 to February 1996, she served as Controller of
ConnectSoft, Inc., a software development company. Prior to joining
ConnectSoft, Inc., she spent eight years in private industry with a division of
Gearbulk Ltd., an international shipping company, and in public accounting with
Ernst & Whinney (now Ernst & Young LLP). She holds a B.A. in Business
Administration from Idaho State University and is a licensed CPA.
John E. Cunningham, IV has served as a director of InfoSpace.com since July
1998. Since April 1995 he has served as President of Kellett Investment
Corporation, an investment fund for high-growth private companies. He is on the
Board of Advisors of Petra Mezzanine Fund, LLC, ArrayCom, Inc., Satellink, Inc.
and 1st Virtual Bank. 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 InfoSpace.com since July 1998.
Since May 1999, Mr. Currie has served as President of the Barksdale Group, a
private venture capital investment firm. From April 1995 to May 1999, he held
various management positions with Netscape Communications Corporation, most
recently as its Executive Vice President and Chief Administrative Officer. From
April 1989 to April 1995, Mr. Currie held various management positions at McCaw
Cellular Communications, Inc., 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 InfoSpace.com 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
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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.
Rufus W. Lumry, III has served as a director of InfoSpace.com since December
1998. Since 1992, Mr. Lumry has served as President of Acorn Ventures, Inc., a
venture capital firm he founded. Prior to founding Acorn Ventures, Mr. Lumry
served as a director and Chief Financial Officer of McCaw Cellular
Communications. Mr. Lumry was one of the founders of McCaw in 1982, and retired
from McCaw in 1990 as Executive Vice President and Chief Financial Officer. Mr.
Lumry holds an A.B. from Harvard University and an M.B.A. from the Harvard
Graduate School of Business Administration.
Carl Stork has served as a director of InfoSpace.com since September 1998.
Since April 1998, 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
Our 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.
We currently have seven directors.
Our Board of Directors is divided into three classes, with each class to be
as equal in number as possible. Each Class 1 director will serve until our next
annual meeting of stockholders, each Class 2 director will serve until the
following annual meeting of stockholders, and each Class 3 director will 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. Messrs. Cunningham and List serve as
Class 1 directors, Messrs. Lumry and Stork and Ms. Strom serve as Class 2
directors and Messrs. Jain and Currie serve as Class 3 directors. 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
our executive officers, administers our Stock Incentive Plan and makes
recommendations to the Board of Directors regarding such matters.
The Audit Committee consists of Messrs. Currie and Stork. 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 our independent auditors, reviews
our balance sheet, statement of operations and cash flows and reviews and
evaluates our internal control functions.
Compensation Committee Interlocks and Insider Participation
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 our Board of
Directors or Compensation Committee.
Director Compensation
We pay directors $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. We also
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reimburse directors for travel expenses incurred to attend meetings of the
Board of Directors or committee meetings. Directors are eligible to participate
in the Stock Incentive Plan. See "--Benefit Plans--Stock Option Program for
Nonemployee Directors."
Limitation of Liability and Indemnification Matters
Our 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:
. for any breach of their duty of loyalty to the corporation or its
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
. for any transaction from which the director derived an improper personal
benefit.
Our Restated Bylaws provide that we shall indemnify our directors and
officers and may indemnify its employees and agents to the full extent
permitted by law. We believe that indemnification under our Restated Bylaws
covers at least negligence and gross negligence on the part of indemnified
parties. We have entered into agreements to indemnify our directors and
executive officers. These agreements, among other things, indemnify our
directors and officers for certain expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by them in any action or
proceeding arising out of their services as a director or officer. We believe
that these agreements are necessary to attract and retain qualified directors
and officers.
On December 11, 1998, InfoSpace.com, all of our directors and Naveen Jain,
our Chief Executive Officer, entered into an Indemnification Agreement whereby
Mr. Jain placed 2,000,000 shares of our common stock beneficially owned by him
in an escrow account to indemnify us and our directors for certain known and
unknown liabilities that may have arisen prior to September 30, 1998. See
"Business--Legal Proceedings."
Executive Compensation
The following table sets forth the compensation earned by our Chief Executive
Officer in the fiscal year ended December 31, 1998. No executive officer earned
more than $100,000 in salary and bonus from us in the fiscal year ended
December 31, 1998. Naveen Jain, our Chief Executive Officer, received no salary
or compensation for his services from the time of our inception to July 1998.
On February 22, 1999, Mr. Jain was granted an option to purchase 175,000 shares
of common stock, 150,000 of which will vest over a period of four years and
25,000 of which will vest on the sixth anniversary of the grant date or earlier
if specified revenue and net income criteria are met. In addition, on February
22, 1999, our board of directors raised Mr. Jain's base compensation to
$250,000 per year.
<TABLE>
<CAPTION>
Annual
Compensation
------------
Name and Principal Position Year Salary ($)
--------------------------- ---- ------------
<S> <C> <C>
Naveen Jain, Chief Executive Officer..................... 1998 $ 62,500
</TABLE>
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Employment Agreement
Pursuant to an employment agreement with Bernee D. L. Strom, our President
and Chief Operating Officer, we have agreed to provide Ms. Strom with:
. an annual salary of $250,000;
. insurance and other employee benefits;
. options to purchase 1,000,000 shares of common stock which vest over a
period of four years; and
. options to purchase an additional 500,000 shares of common stock that
vest on the sixth anniversary of Ms. Strom's start date or earlier if
specified revenue and net income criteria are met.
In addition, the agreement contains a severance arrangement whereby Ms. Strom
is entitled to receive a payment equal to one year of her base salary and
benefits in the event we terminate her employment for any reason other than for
cause.
Benefit Plans
Restated 1996 Flexible Stock Incentive Plan
We adopted the Restated 1996 Flexible Stock Incentive Plan, or the Stock
Incentive Plan, in 1996. The purpose of the Stock Incentive Plan is to provide
an opportunity for employees, officers, directors, independent contractors and
consultants of InfoSpace.com to acquire our common stock. The Stock Incentive
Plan provides for grants of stock options, stock appreciation rights, or SARs,
and stock awards. We have authorized an aggregate of 10,000,000 shares of
common stock for issuance under the Stock Incentive Plan. At our Annual Meeting
in May 1999, our stockholders adopted an amendment to the Stock Incentive Plan
that provides that beginning with the year 2000, on the first day of our fiscal
year, the number of shares reserved for issuance under the Stock Incentive Plan
will automatically increase by the lesser of (a) 1,000,000 shares, (b) three
percent (3%) of our outstanding shares at the end of our preceding fiscal year,
and (c) a lesser amount as may be determined by our Board of Directors. As of
June 30, 1999, options to purchase 5,624,561 shares of common stock were
outstanding under the Stock Incentive Plan at a weighted average exercise price
of $6.89 per share, and options to purchase 4,091,736 shares were available for
future grant.
Stock Option Grants. Either the Board of Directors or the Compensation
Committee may administer the Stock Incentive Plan. The plan administrator has
the authority to select individuals who are to receive options under the Stock
Incentive 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 our common
stock on the date of grant with respect to incentive stock options), vesting
provisions and the option term; provided, however, that no more than 2,000,000
shares may be granted in any fiscal year to an optionee (in addition to a
maximum of 2,000,000 shares that may be granted to such optionee on his or her
initial employment, which does not count against the annual limit).
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 our 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 Stock Incentive Plan as may be established by the plan
administrator.
Stock Awards. The plan administrator is authorized under the Stock Incentive
Plan to issue shares of our common stock to eligible individuals on such terms
and conditions and subject to such restrictions, if any, as the plan
administrator may determine.
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Adjustments. Proportional adjustments to the aggregate number of shares
issuable under the Stock Incentive 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 shall terminate and
any restricted stock shall be reconveyed to or repurchased by the Company
immediately prior to the specified effective date of the Corporate Transaction;
provided, however, that to the extent permitted by applicable law, any unvested
option, SARs or any restricted stock shall vest and become exercisable as to
25% of the unvested shares or become nonforfeitable as to 25% of the
forfeitable shares, as the case may be, immediately prior to the specified
effective date of the Corporate Transaction. Notwithstanding the foregoing,
options, SARs or restricted stock shall not terminate if, in connection with
the Corporate Transaction, they are to be assumed or substituted for by the
successor corporation or its parent company, pursuant to options, SARs or
restricted stock agreements providing substantially equal value and having
substantially equivalent provisions as the options, SARs or restricted stock
granted pursuant to the Stock Incentive Plan. If options, SARs or restricted
stock purchase rights are not assumed or substituted for by the successor
corporation or its parent company, such options, SARs or restricted stock
purchase rights shall become exercisable as to an additional 25% of the
unvested shares or forfeitable shares, as the case may be, 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 us prior to the effective date of the
Corporate Transaction.
"Corporate Transaction," as defined in the Stock Incentive Plan, includes:
. a merger or consolidation in which we are not the surviving entity (other
than a transaction to change our state of incorporation or a transaction
in which holders of our outstanding securities immediately before such
transaction own more than 50% of the voting power of the entity following
such transaction);
. the disposition of all or substantially all of our assets (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
. certain reverse mergers in which we are the surviving entity but our
stockholders immediately prior to such merger do not hold more than 50%
of our total voting power immediately following such merger.
Stock Option Program for Nonemployee Directors
Under the Stock Incentive Plan, we grant a nonqualified stock option to
purchase 20,000 shares of common stock to each nonemployee director on the date
the director is first appointed or elected to the Board of Directors.
Nonemployee directors serving at the time of the adoption of the program each
received an option to purchase 2,500 shares of common stock. On November 19,
1998, each nonemployee director received a supplemental option to purchase
20,000 shares of common stock. At each Annual Meeting of Stockholders, we will
grant to each nonemployee director an additional nonqualified stock option to
purchase 5,000 shares of common stock immediately following such Annual Meeting
of Stockholders, except for those nonemployee directors who were elected to the
Board of Directors at such Annual Meeting of Stockholders or within the three-
month period prior to such Annual Meeting of Stockholders. All options granted
under the program for nonemployee directors fully vest on the first anniversary
of the date of such grant.
1998 Employee Stock Purchase Plan
We adopted the 1998 Employee Stock Purchase Plan in August 1998. The Purchase
Plan is intended to qualify under Section 423 of the Internal Revenue Code of
1986 and permits eligible employees to purchase our common stock through
payroll deductions of up to 15% of their compensation. Under the Purchase
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Plan, no employee may purchase 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 our common stock may not participate in the Purchase Plan. We
have authorized an aggregate of 900,000 shares of common stock for issuance
under the Purchase Plan.
The Purchase Plan is implemented with six-month offering periods. Offering
periods begin on each February 1 and August 1. The first offering period began
on December 15, 1998, the date of our initial public offering, and ended on
July 31, 1999. Participants purchase common stock under the Purchase Plan at a
price equal to the lesser of 85% of the fair market value on the first day of
an offering period and 85% of the fair market value on the last day of an
offering period. The Purchase Plan does not have a fixed expiration date, but
may be terminated by the Board of Directors at any time. No shares of common
stock have been issued under the Purchase Plan.
In the event of a merger, consolidation, or acquisition by another
corporation of all or substantially all of our assets, or our liquidation or
dissolution, 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.
INEX Options
Upon the closing of our combination with INEX, we have agreed to assume
outstanding options that will be exercisable for approximately 102,544 shares
of our common stock.
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CERTAIN TRANSACTIONS
On April 10, 1996, Naveen Jain purchased 20,000,000 shares of our common
stock for an aggregate price of $2,000. In April 1996, Mr. Jain made an
interest-free loan to us in the amount of $150,000, which we fully repaid. On
April 10, 1996, we granted an option to purchase 500,000 shares of common stock
at an exercise price of $0.01 per share to Anuradha Jain, Mr. Jain's wife, in
connection with her employment as our Director of Human Resources, and granted
an option to purchase 300,000 shares of common stock at an exercise price of
$0.01 per share to Punam Agrawal, Mr. Jain's sister-in-law, in connection with
her employment as our Director of Marketing. In a private placement with other
investors on May 21, 1998, we sold 50,000 shares of common stock at $2.00 per
share to Siddarth Agrawal, Mr. Jain's brother-in-law, and 200,000 shares of
common stock to TEOCO Corporation at $2.00 per share. In addition, on June 29,
1999, we entered into an agreement with TEOCO Corporation for the development
of certain electronic commerce technology, pursuant to which we are obligated
to pay TEOCO an aggregate of $400,000 if certain development milestones are
met. The work by TEOCO Corporation is scheduled to be completed by the end of
October 1999. Atul Jain, Mr. Jain's brother, is President of TEOCO Corporation.
On May 21, 1998, we completed a private placement in which we sold shares of
common stock at a purchase price of $2.00 per share and issued warrants to
purchase shares of common stock at a weighted average exercise price of $2.935
per share as follows:
<TABLE>
<CAPTION>
No. of No. of Shares
Name Shares Subject to Warrants
---- --------- -------------------
<S> <C> <C>
Acorn Ventures-IS, LLC....................... 1,895,000 3,377,458
Kellet Partners LLP.......................... 312,500 460,562
John and Carolyn Cunningham.................. 62,500 153,524
</TABLE>
Rufus W. Lumry, III, one of our directors, is the principal stockholder, sole
director and President of Acorn Ventures, Inc., the sole member of Acorn
Ventures. John E. Cunningham, IV, one of our directors, 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 private placement, on August 6, 1998, we
issued shares of common stock and warrants to purchase common stock at a
weighted average exercise price of $2.935 in exchange for the termination of
certain anti-dilution rights as follows:
<TABLE>
<CAPTION>
No. of No. of Shares
Name Shares Subject to Warrants
---- --------- -------------------
<S> <C> <C>
Acorn Ventures-IS, LLC....................... 33,360 60,094
Kellet Partners LLP.......................... 4,854 7,156
John and Carolyn Cunningham.................. 964 2,372
</TABLE>
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, we entered into Consulting Agreements with Acorn Ventures,
John E. Cunningham, IV and Kellett Partners, pursuant to which we are required
to pay reasonable out-of-pocket expenses incurred by them in connection with
their services as consultants. In addition, we have 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 them in any action or proceeding in which they are parties or
participants arising out of their services as consultants. These consulting
services include assistance in defining our business strategy, identifying and
meeting with sources of financing and assisting us 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.
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In July 1998, we sold 50,000 shares of common stock at $4.00 per share in a
private placement transaction to the Bevis Family Trust. Douglas A. Bevis, our
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 proportionate interest in the trust. In addition, in July
1998, we sold 160,000 shares of common stock at $3.75 per share to Mr. Bevis
pursuant to our 1998 Stock Purchase Rights Plan.
In July 1998, we sold 25,000 shares of common stock at $4.00 per share to
Steven Brady in a private placement with other investors. Mr. Brady is the
brother of Ellen B. Alben, our Vice President, Legal and Business Affairs and
Secretary.
Thomson Directories Limited entered into a joint venture agreement with us in
July 1998. Gary C. List, one of our directors, is Chief Executive Officer of
Thomson and a beneficial shareholder and the Chief Executive Officer of TDL
Group Limited, the holding company of Thomson. We sold Mr. List 25,000 shares
of common stock at $4.00 per share in a private placement with other investors
in July 1998.
On August 6, 1998, we sold shares of common stock at a purchase price of
$4.00 per share in a private placement as follows:
<TABLE>
<CAPTION>
No. of
Name Shares
---- -------
<S> <C>
Acorn Ventures-IS, LLC............................................. 125,000
Kellet Partners LLP................................................ 281,250
John and Carolyn Cunningham........................................ 31,250
</TABLE>
Acorn Ventures, Kellett Partners and John and Carolyn Cunningham are entitled
to certain registration rights with respect to the shares purchased in this
private placement. See "Description of Capital Stock--Registration Rights."
We believe that all the transactions set forth above were made on terms no
less favorable to us than could have been obtained from unaffiliated third
parties. Any future transactions, including loans, between us and our 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 us than
could be obtained from unaffiliated third parties.
We have entered into indemnification agreements with each of our executive
officers and directors. See "Management--Limitation of Liability and
Indemnification Matters."
On December 11, 1998, InfoSpace.com, all of our directors and Naveen Jain
entered into an Indemnification Agreement. See "Business--Legal Proceedings"
and "Management--Limitation of Liability and Indemnification Matters."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our outstanding common stock as of June 30, 1999 for
(a) each person or entity that we know beneficially owns more than 5% of our
common stock, (b) each of our directors, (c) our Chief Executive Officer and
(d) all of our directors and executive officers as a group. Except as otherwise
indicated, we believe 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>
Shares Beneficially
Owned(1)
-----------------------
Name of Beneficial Owner Number Percent
------------------------ ------------ ----------
<S> <C> <C>
Naveen Jain (2)...................................... 16,135,623 33.8%
c/o InfoSpace.com, Inc.
15375 N.E. 90th Street
Redmond, WA 98052
Acorn Ventures-IS, LLC (3) .......................... 5,502,612 10.8%
1309 114th Avenue S.E.
Suite 200
Bellevue, WA 98004
Rufus W. Lumry, III (3).............................. 5,502,612 10.8%
John E. Cunningham, IV (4)........................... 246,486 *
Gary C. List (5)..................................... 37,500 *
Peter L. S. Currie (5)............................... 12,500 *
Carl Stork........................................... 80,000 *
Bernee D. L. Strom (6)............................... 220,000 *
All directors and executive officers as a group (10
persons) (7)........................................ 22,583,213 43.8%
</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 14,933,332 shares of common stock held in the name of Naveen and
Anuradha Jain, 1,000,000 shares of common stock held by the Jain Family
Irrevocable Trust, 2,000,000 shares of common stock held by Naveen Jain
GRAT No. 1, 2,000,000 shares of common stock held by Anuradha Jain GRAT No.
1 and 422,291 shares subject to options exercisable by Anuradha Jain within
60 days of June 30, 1999. Anuradha Jain is Mr. Jain's spouse. Mr. Jain has
placed 2,000,000 shares of common stock held by Naveen Jain GRAT No. 1 in
escrow pursuant to an Indemnification Agreement dated as of December 11,
1998. Mr. Jain retains voting control over those shares placed in escrow.
See "Certain Transactions."
(3) Includes 3,437,552 shares of common stock issuable upon exercise of
warrants currently exercisable. Rufus W. Lumry, III is the principal
stockholder, sole director and President of Acorn Ventures, Inc., the sole
member of Acorn Ventures.
(4) Includes 155,896 shares of common stock issuable upon exercise of warrants
currently exercisable. Also includes 59,376 shares of Common Stock held by
Clear Fir Partners, LP, an affiliate of Mr. Cunningham. Also includes 2,500
shares subject to options exercisable within 60 days of June 30, 1999.
(5) Includes 2,500 shares subject to options exercisable within 60 days of June
30, 1999.
(6) Includes 200,000 shares subject to options exercisable within 60 days of
June 30, 1999.
(7) Includes 4,249,712 shares subject to options and warrants exercisable
within 60 days of June 30, 1999.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 200,000,000 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 following summary of certain provisions of our 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 our
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 July 31, 1999, there were 47,400,652 shares of common stock outstanding
held by approximately 217 holders of record. There will be 48,198,112 shares of
common stock outstanding after giving effect to (1) the issuance of the 622,455
shares of our common stock offered in this prospectus and (2) the issuance of
175,005 shares of our common stock issued directly to INEX shareholders at the
closing of our combination with them.
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 InfoSpace.com, 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--Management Owns a Large Percentage of Our
Stock" and "Dividend Policy."
Preferred Stock
No shares of preferred stock are outstanding, however, upon the closing of
the combination with INEX, one share of preferred stock will be issued to the
trustee as described below. Pursuant to our 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 or
make removal of management more difficult. Additionally, the issuance of
preferred stock may have the effect of decreasing the market price of the
common stock, and may adversely affect the voting and other rights of the
holders of common stock. We have no plans to issue any preferred stock. See
"Risk Factors--Certain Antitakeover Provisions May Affect the Price of Our
Stock."
Our Voting Share
Prior to the closing of our combination with INEX, we will enter into a
voting and exchange trust agreement with InfoSpace.com Canada Holdings and
Montreal Trust Company of Canada, as trustee. Unless our charter or applicable
law prevents us from doing so, the voting and exchange trust agreement will
require us to issue a voting share to the trustee who will hold the voting
share in trust for the benefit of the holders of exchangeable shares. The
voting share will entitle the trustee to vote at meetings of the holders of
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our common stock. For each exchangeable share which is not held by us or our
subsidiaries, the trustee will have the number of votes to which a holder of
one share of our common stock is entitled with respect to any vote. Unless our
charter or applicable law requires otherwise, the trustee and the holders of
our common stock will vote together as a single class in the election of
directors and in all matters which are submitted to a vote of our stockholders.
The voting share will not entitle the trustee to receive dividends. In the
event of our dissolution, liquidation or the winding up of our affairs, the
trustee will receive an amount equal to the par value of the voting share. This
amount will be adjusted to reflect the effect of any stock split, stock
dividend, combination or similar change on the voting share. When there are no
longer any outstanding exchangeable shares other than those exchangeable shares
which are held by us or our subsidiaries, the voting share will cease to have
any rights. In such event, we will redeem the voting share for an amount equal
to the par value of the voting share and it will automatically return to being
an authorized but unissued share of our preferred stock.
Warrants
As of June 30, 1999, there were outstanding warrants to purchase 6,595,720
shares of common stock. Five investors hold warrants to purchase an aggregate
of 4,057,046 and 70,626 shares of common stock, which expire on May 21, 2008
and August 6, 2008, respectively, at a weighted average exercise price of $2.93
per share. One investor holds a warrant to purchase 955,934 shares at an
exercise price of $0.01 per share. This warrant expires on October 30, 2002. On
August 24, 1998, in connection with the agreement relating to our white pages
directory services, we issued to AOL warrants to purchase up to 1,979,832
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 our white pages directory service and vested as to 371,219 shares on August
1, 1999. The warrants have an exercise price of $6.00 per share.
INEX Warrants
Upon consummation of our combination with INEX, we will assume warrants that
are exercisable for approximately 72,202 shares of our common stock. See "Plan
of Distribution--INEX Warrants."
Antitakeover Effects of Certain Provisions of Certificate of Incorporation and
Washington and Delaware Law; Right of First Negotiation
As noted above, our Board of Directors, without stockholder approval, has the
authority under our 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 or make removal of management more
difficult.
Election and Removal of Directors. Effective with the first annual meeting of
stockholders following this offering, our Bylaws provide for the division of
our Board of Directors into three classes, as nearly equal in number as
possible, with the directors in each class serving for a three-year term, and
one class being elected each year by our 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 InfoSpace.com 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. Our 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 our assets other than in the usual and
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<PAGE>
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 our Certificate of Incorporation and 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. Our 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.
Washington Statute. The laws of Washington, where our 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, or 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 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:
. the corporation has a class of voting stock registered pursuant to
Section 12 or 15 of the Securities Exchange Act of 1934;
. the corporation's principal executive office is located in Washington;
. any of:
. more than 10% of the corporation's stockholders of record are
Washington residents;
. more than 10% of its shares of record are owned by Washington
residents; or
. 1,000 or more of its stockholders of record are Washington residents;
. a majority of the corporation's employees are Washington residents or
more than 1,000 Washington residents are employees of the corporation;
and
. 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 we meet 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.
Delaware Statute. We are subject to Section 203 of the Delaware General
Corporation law, which prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an
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"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless:
. 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;
. 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
. 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:
. owns 15% or more of the corporation's voting stock; or
. 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.
AOL Agreement. Pursuant to certain agreements with AOL, if we receive an
unsolicited proposal, or we determine to solicit proposals or otherwise enter
into discussions that would result in a sale of a controlling interest in
InfoSpace.com or other merger, asset sale or other disposition that effectively
results in a change of control (a "Disposition"), then we are required to give
written notice to AOL, and AOL has seven days to provide notice to us of its
desire to negotiate in good faith with us regarding a Disposition involving
AOL. In the event that AOL timely delivers such a notice, then we will
negotiate exclusively and in good faith with AOL regarding a Disposition for a
period of 30 days from the date of delivery of our initial notice to AOL, after
which we will be free to negotiate a Disposition with other third parties if we
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 our 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.
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.
Registration Rights
Pursuant to certain Investor Rights Agreements dated as of May 21, 1998,
three investors holding an aggregate of 2,229,178 shares of common stock and
warrants to purchase 3,593,448 shares of common stock (the "Holders") are
entitled to certain rights with respect to the registration of such shares
under the Securities Act of 1933. If we propose to register any of our
securities under the Securities Act, either for our 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 our
expense. Additionally, the Holders are entitled to certain demand registration
rights pursuant to which they may require us to file a registration statement
under the Securities Act at our expense with respect to their shares of common
stock, and we are required to use our commercially reasonable efforts to effect
such registration. Further, the Holders may require us to file up to three
additional registration statements on Form S-3 (and no more than two in any
calendar year), and we will bear 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.
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Pursuant to a Stockholder Rights Agreement dated as of August 6, 1998, six
investors holding an aggregate of 925,000 shares of common stock are entitled
to notice of registration if we propose to register any of our securities under
the Securities Act, either for our own account or for the account of other
security holders, and are entitled to include shares of common stock in such
registration at our 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 170,000 shares of common
stock may require us 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 1,979,832 shares of common stock, is
entitled to notice of registration if we propose to register any of our
securities under the Securities Act, either for our 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 our
expense. Further, AOL may require us to file up to four additional registration
statements on Form S-3, and we will bear 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
Our common stock is listed on the Nasdaq National Market under the symbol
"INSP."
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PLAN OF DISTRIBUTION
You should consult your own tax advisors with respect to the United States,
Canadian and other tax consequences of exchanging your exchangeable shares for
shares of our common stock as described below. For more information, see
"Income Tax Considerations."
Your Exchangeable Shares
On September 13, 1999, the shareholders of INEX voted to approve a plan of
arrangement pursuant to Section 182 of the Business Corporations Act (Ontario).
In accordance with the plan of arrangement, INEX shareholders will receive
either exchangeable shares issued by InfoSpace.com Canada Holdings or our
common shares. Additionally, we will assume all obligations under INEX's
warrants and upon exercise thereof shares of our common stock will be issued.
The exchangeable shares and our common shares will be issued at a ratio of
.20405 shares for each INEX share.
We have filed with the SEC a registration statement on Form S-1 with respect
to our common stock being offered under this prospectus. This prospectus forms
a part of the registration statement. We have agreed to use our reasonable best
efforts to keep the registration statement effective until there are no
exchangeable shares outstanding. We have not engaged a broker, dealer or
underwriter in connection with the offering of our common stock described in
this prospectus.
You may obtain our common stock in exchange for your exchangeable shares in
the following ways:
. you may require InfoSpace.com Canada Holdings to exchange your
exchangeable shares for an equivalent number of shares of our common
stock. For more information, see "--Retraction of Exchangeable Shares."
. InfoSpace.com Canada Holdings will automatically redeem your exchangeable
shares for shares of our common stock at September 15, 2010 or upon the
occurrence of certain events. For more information, see "--Redemption of
Exchangeable Shares" and "--Early Redemption."
. upon our liquidation or the liquidation of InfoSpace.com Canada Holdings,
you may be required to, or may choose to, exchange your exchangeable
shares for shares of our common stock. For more information, see "--
Liquidation Rights with Respect to InfoSpace.com Canada Holdings" and "--
Liquidation Rights with Respect to InfoSpace.com."
We will bear all of the expenses of this distribution. We estimate that these
expenses will total approximately $125,000.
How You May Retract Or Redeem Your Exchangeable Shares
Retraction of Exchangeable Shares
Holders of the exchangeable shares will be entitled at any time following the
combination to retract (i.e. require InfoSpace.com Canada Holdings to redeem)
any or all of the exchangeable shares held by such holder for a retraction
price per share equal to the market price of our common stock on the last
business day prior to the date you request redemption plus, on the designated
payment date therefor, all declared but unpaid dividends. Holders of the
exchangeable shares may effect such retraction by presenting a certificate or
certificates to InfoSpace.com Canada Holdings or the Trustee representing the
number of exchangeable shares the holder desires to retract together with a
duly executed retraction request indicating the number of exchangeable shares
the holder desires to retract and the date upon which the holder desires to
receive the InfoSpace.com common shares, and such other documents as may be
required to effect the retraction.
When a holder requests InfoSpace.com Canada Holdings to redeem exchangeable
shares, InfoSpace.com Nova Scotia Company will have an overriding right to
purchase all but not less than all of the
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retracted shares, at a purchase price per share equal to the market price of
our common stock on the last business day prior to the date you request
redemption plus, on the designated payment date therefor, to the extent it is
not paid by InfoSpace.com Canada Holdings, all declared but unpaid dividends.
Upon receipt of a request for retraction, InfoSpace.com Canada Holdings will
immediately notify InfoSpace.com Nova Scotia Company. InfoSpace.com Nova Scotia
Company must then advise InfoSpace.com Canada Holdings within five business
days as to whether it will exercise its retraction right. If InfoSpace.com Nova
Scotia Company does not so advise InfoSpace.com Canada Holdings, InfoSpace.com
Canada Holdings will notify the holder as soon as possible thereafter that
InfoSpace.com Nova Scotia Company will not exercise the right. If InfoSpace.com
Nova Scotia Company advises InfoSpace.com Canada Holdings that InfoSpace.com
Nova Scotia Company will exercise the right within such five business day
period, then provided the request is not revoked by the holder as described
below, the retraction request shall thereupon be considered only to be an offer
by the holder to sell the shares to InfoSpace.com Nova Scotia Company in
accordance with its right.
A holder may revoke its request for retraction, in writing, at any time prior
to the close of business on the business day preceding the retraction date, in
which case the shares will neither be purchased by InfoSpace.com Nova Scotia
Company nor be redeemed by InfoSpace.com Canada Holdings. If the holder does
not revoke its retraction request on the retraction date, the shares will be
purchased by InfoSpace.com Nova Scotia Company or redeemed by InfoSpace.com
Canada Holdings, as the case may be, in each case as set out above.
InfoSpace.com Canada Holdings or InfoSpace.com Nova Scotia Company, as the case
may be, will deliver the aggregate of the price per share market price of our
common stock on the last business day prior to the date of retraction request
plus, on the designated payment date therefor, all declared but unpaid
dividends to the holder recorded in the securities register for the
exchangeable shares or at the address specified in the holder's retraction
request or, if so requested in the retraction request, will hold the same for
pick up by the holder at the registered office of InfoSpace.com Canada Holdings
or the office of the transfer agent as specified by InfoSpace.com Canada
Holdings, in each case, less any amounts required to be deducted and withheld
therefrom on account of tax.
If, as a result of solvency requirements or applicable law, InfoSpace.com
Canada Holdings is not permitted to redeem all retracted shares tendered by a
retracting holder, InfoSpace.com Canada Holdings will redeem only those shares
tendered by the holder (rounded down to a whole number of shares) as would not
be contrary to such provisions of applicable law. The Trustee, on behalf of the
holder of any retracted shares not so redeemed by InfoSpace.com Canada
Holdings, will require InfoSpace.com to purchase the shares not redeemed on the
retraction date pursuant to the exchange right.
Redemption of Exchangeable Shares
Subject to applicable law and the overriding right of InfoSpace.com Nova
Scotia Company to purchase all of the exchangeable shares from all of the
holders of exchangeable shares (other than us and our affiliates) on a certain
date in exchange for our common shares, on an established date no earlier than
September 15, 2010 InfoSpace.com Canada Holdings will redeem all of the then
outstanding exchangeable shares for a redemption price per share equal to the
market price of our common stock on the last business day prior to the date we
request redemption plus, on the designated payment date therefor, all declared
but unpaid dividends. InfoSpace.com Canada Holdings will, at least 60 days
prior to the relevant date, or such number of days as the board of directors of
InfoSpace.com Canada Holdings may determine to be reasonably practicable under
the circumstances in respect of a redemption date arising in connection with
certain events, provide the registered holders of the exchangeable shares with
written notice of the proposed redemption of the exchangeable shares by
InfoSpace.com Canada Holdings or the purchase of the exchangeable shares by
InfoSpace.com Nova Scotia Company pursuant to the redemption call right
described below.
On or after the redemption date, upon the holder's presentation and surrender
of the certificates representing the exchangeable shares and such other
documents as may be required at the office of the transfer agent or the
registered office of InfoSpace.com Canada Holdings, InfoSpace.com Canada
Holdings
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will deliver the price per share equal to the market price of our common stock
on the last business day prior to the date of redemption request plus, on the
designated payment date therefor, all declared but unpaid dividends as at such
date to the holder by mailing the same to the holder at the address of the
holder recorded in the securities register for the exchangeable shares or by
holding the same for pick up by the holder at the registered office of
InfoSpace.com Canada Holdings or the office of the transfer agent as specified
in the written notice of redemption in each case less any amounts required to
be deducted and withheld therefrom on account of tax.
InfoSpace.com Nova Scotia Company will have an overriding right to purchase
on the redemption date all of the exchangeable shares then outstanding (other
than exchangeable shares held by us and our affiliates) for a purchase price
per share equal to the market price of our common stock on the last business
day prior to the date you request redemption plus, on the designated payment
date therefor, to the extent it is not paid by InfoSpace.com Canada Holdings,
all declared but unpaid dividends. Upon the exercise of this right, holders
will be obligated to sell their exchangeable shares to InfoSpace.com Nova
Scotia Company. If InfoSpace.com Nova Scotia Company exercises this right,
InfoSpace.com Canada Holdings's right and obligation to redeem the exchangeable
shares on such redemption date will terminate.
Early Redemption
In certain circumstances, InfoSpace.com Canada Holdings has the right to
require a redemption of the exchangeable shares prior to September 15, 2010. An
early redemption may occur upon (i) there being fewer than 57,000 exchangeable
shares outstanding (other than exchangeable shares held by us and our
affiliates); (ii) the occurrence of a merger, amalgamation, tender offer,
material sale of shares or rights or interests therein or thereto or similar
transactions involving us, or any proposal to do so; (iii) a proposal for
certain matters in respect of which holders of exchangeable shares are entitled
to vote as shareholders of InfoSpace.com Canada Holdings; or (iv) the failure
to approve or disapprove, as applicable, certain matters in respect of which
holders of exchangeable shares are entitled to vote as shareholders of
InfoSpace.com Canada Holdings regarding changes required to maintain the
equivalence of exchangeable shares and our common shares.
If, prior to September 15, 2010, we are involved in any merger, amalgamation,
tender offer, material sale of shares or rights or interests therein or thereto
or similar transactions, or any proposal to do so, provided that the board of
directors of InfoSpace.com Canada Holdings determines, in good faith and in its
sole discretion, that it is not reasonably practicable to substantially
replicate the terms and conditions of the exchangeable shares in connection
with such a transaction and that the redemption of all but not less than all of
the outstanding exchangeable shares is necessary to enable the completion of
such transaction in accordance with its terms, the board of directors of
InfoSpace.com Canada Holdings may accelerate the redemption date discussed
above to such date prior to September 15, 2010 as it may determine, upon such
number of days prior written notice to the registered holders of the
exchangeable shares as the board of directors of InfoSpace.com Canada Holdings
may determine to be reasonably practicable in such circumstances.
An example of an event referred to above at (iii) is one to approve an
amalgamation involving InfoSpace.com Canada Holdings where the amalgamation
proposes changes to the exchangeable shares that, if contained in a proposed
amendment to InfoSpace.com Canada Holdings's articles, would entitle the
holders thereof to a vote under applicable corporate law or a sale of all or
substantially all of the assets of InfoSpace.com Canada Holdings where the
exchangeable shares would be affected differently from any other class of
shares of InfoSpace.com Canada Holdings. Such an event excludes that described
at (iv) above, and, for greater certainty, excludes any matter in respect of
which holders of exchangeable shares are entitled to vote (or instruct the
Trustee to vote) in their capacity as Beneficiaries under (and as that term is
defined in) the Voting and Exchange Trust Agreement. If, prior to September 15,
2010, such an event is proposed, provided that the board of directors of
InfoSpace.com Canada Holdings has determined, in good faith and in its sole
discretion, that it is not reasonably practicable to accomplish the business
purpose
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intended by the event, which business purpose must be bona fide and not for the
primary purpose of causing the occurrence of a redemption date, in any other
commercially reasonable manner that does not result in such an event, the
redemption date shall be the business day prior to the record date for any
meeting or vote of the holders of the exchangeable shares to consider the event
and the board of directors of InfoSpace.com Canada Holdings shall give such
number of days prior written notice of such redemption to the registered
holders of the exchangeable shares as the board of directors of InfoSpace.com
Canada Holdings may determine to be reasonably practicable in such
circumstances.
An event described at (iv) above means any matter in respect of which holders
of exchangeable shares are entitled to vote as shareholders of InfoSpace.com
Canada Holdings in order to approve or disapprove, as applicable, any change
to, or in the rights of the holders of, the exchangeable shares, where the
approval or disapproval, as applicable, of such change would be required to
maintain the equivalence of the exchangeable shares and the InfoSpace.com
common shares. If, prior to September 15, 2010, such an event is proposed and
the holders of the exchangeable shares fail to take the necessary action at a
meeting or other vote of holders of exchangeable shares, to approve or
disapprove, as applicable, the event, the redemption date shall be the business
day following the day on which the holders of the exchangeable shares failed to
take such action and the board of directors of InfoSpace.com Canada Holdings
shall give such number of days prior written notice of such redemption to the
registered holders of the exchangeable shares as the board of directors of
InfoSpace.com Canada Holdings may determine to be reasonably practicable in
such circumstances.
See "Income Tax Considerations--Canadian Federal Income Tax Considerations."
Liquidation Rights with Respect to InfoSpace.com Canada Holdings
In the event of the liquidation, dissolution or winding-up of InfoSpace.com
Canada Holdings or any other proposed distribution of the assets of
InfoSpace.com Canada Holdings among its shareholders for the purpose of
winding-up its affairs, holders of the exchangeable shares will have, subject
to applicable law, preferential rights to receive from InfoSpace.com Canada
Holdings, for each exchangeable share held, an amount equal to the market price
of our common stock on the last business day prior to the liquidation. Upon the
occurrence of such liquidation, dissolution or winding-up, InfoSpace.com Nova
Scotia Company will have an overriding right to purchase all of the outstanding
exchangeable shares (other than exchangeable shares held by us and our
affiliates) from the holders thereof on the effective date of such liquidation,
dissolution or winding-up for a purchase price per share equal to the market
price of our common stock on the last business day prior to the liquidation,
plus, to the extent it is not paid by InfoSpace.com Canada Holdings, the full
amount of all prior dividends, if any, declared and unpaid on exchangeable
shares.
Upon, and during the continuance of, insolvency of InfoSpace.com Canada
Holdings, a holder of exchangeable shares will be entitled to instruct the
Trustee to exercise the exchange right with respect to any or all of the
exchangeable shares held by such holder, thereby requiring us to purchase such
exchangeable shares from the holder. As soon as practicable following the
occurrence of such an insolvency of InfoSpace.com Canada Holdings or any event
which may, with the passage of time and/or the giving of notice, lead to
insolvency of InfoSpace.com Canada Holdings, we and InfoSpace.com Canada
Holdings will give written notice thereof to the Trustee. As soon as
practicable thereafter, the Trustee will then notify each holder of
exchangeable shares of such event or potential event and will advise the holder
of its rights with respect to the exchange right. The purchase price payable by
us for each exchangeable share purchased under this right will be satisfied by
the issuance of one share of our common stock plus, to the extent not paid by
InfoSpace.com Canada Holdings, the full amount of all prior dividends, if any,
declared and unpaid on exchangeable shares.
Liquidation Rights with Respect to InfoSpace.com
In order for the holders of the exchangeable shares to participate on a pro
rata basis with the holders of our common stock in the event of our
liquidation, on the fifth business day prior to the effective date of such
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an event, each exchangeable share will automatically be exchanged for an
equivalent number of shares of our common stock, plus, to the extent not paid
by InfoSpace.com Canada Holdings, the full amount of all prior dividends, if
any, declared and unpaid on exchangeable shares. Upon a holder's request and
surrender of exchangeable share certificates, duly endorsed in blank and
accompanied by such instruments of transfer as we may reasonably require, we
will deliver to such holder certificates representing an equivalent number of
shares of our common stock plus, to the extent not paid by InfoSpace.com Canada
Holdings, the full amount of all prior dividends, if any, declared and unpaid
on exchangeable shares for each exchangeable share exchanged pursuant to this
automatic exchange right. For a description of certain of our obligations with
respect to the dividend and liquidation rights of the holders of exchangeable
shares, see "InfoSpace.com Support Obligation" below.
Certain Rights and Restrictions of Exchangeable Shares
Dividend Rights
Holders of exchangeable shares will be entitled to receive, subject to
applicable law, dividends (i) in the case of a cash dividend declared on our
common stock, in an amount in cash for each exchangeable share corresponding to
the cash dividend declared on each of our common shares, (ii) in the case of a
stock dividend declared on our common stock to be paid in shares of our common
stock, in such number of exchangeable shares for each exchangeable share as is
equal to the number of our common shares to be paid on each share of our common
stock, or (iii) in the case of a dividend declared on our common stock in
property other than cash or our common shares, in such type and amount of
property as is the same as, or economically equivalent to, the type and amount
of property declared as a dividend on each of our common shares. Cash dividends
on the exchangeable shares are payable in U.S. dollars or the Canadian dollar
equivalent thereof, at the option of InfoSpace.com Canada Holdings. The
declaration date, record date and payment date for dividends on the
exchangeable shares will be the same as the relevant date for the corresponding
dividends on the shares of our common stock.
Ranking
The exchangeable shares will be entitled to a preference over the common
shares and the preferred shares of InfoSpace.com Canada Holdings and any other
shares ranking junior to the exchangeable shares with respect to the payment of
dividends and the distribution of assets in the event of a liquidation,
dissolution or winding-up of InfoSpace.com Canada Holdings, whether voluntary
or involuntary, or any other distribution of the assets of InfoSpace.com Canada
Holdings, among its shareholders for the purpose of winding-up its affairs.
Certain Restrictions
InfoSpace.com Canada Holdings will not, without the approval of the holders
of the exchangeable shares, as set forth below under "Amendment and Approval":
(a) pay any dividends on the common shares or the preferred shares of
InfoSpace.com Canada Holdings, or any other shares ranking junior to
the exchangeable shares, other than stock dividends payable in common
shares or preferred shares of InfoSpace.com Canada Holdings, or any
such other shares ranking junior to the exchangeable shares, as the
case may be;
(b) redeem, purchase or make any capital distribution in respect of common
shares or preferred shares of InfoSpace.com Canada Holdings, or any
other shares ranking junior to the exchangeable shares;
(c) redeem or purchase any other shares of InfoSpace.com Canada Holdings
ranking equally with the exchangeable shares with respect to the
payment of dividends or on any liquidation distribution; or
(d) issue any exchangeable shares or any other shares of InfoSpace.com
Canada Holdings ranking equally with, or superior to, the exchangeable
shares other than by way of stock dividends to the holders of such
exchangeable shares.
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The restrictions in clauses (a), (b), (c) and (d) above will not apply at any
time when the dividends on the outstanding exchangeable shares corresponding to
dividends declared and paid on our common stock have been declared and paid in
full.
Amendment and Approval
The rights, privileges, restrictions and conditions attaching to the
exchangeable shares may be added to, changed or removed only with the approval
of the holders thereof. Any such approval or any other approval or consent to
be given by the holders of the exchangeable shares will be deemed to have been
sufficiently given if given in accordance with applicable law subject to a
minimum requirement that such approval or consent be evidenced by a special
resolution passed by not less than two-thirds of the votes cast on such
resolution at a meeting of the holders of exchangeable shares duly called and
held at which holders of at least fifty percent (50%) of the then outstanding
exchangeable shares are present or represented by proxy. In the event that no
such quorum is present at such meeting within one-half hour after the time
appointed therefor, then the meeting will be adjourned to such place and time
(not less than five days later) as may be designated by the Chairman of such
meeting. At such adjourned meeting, the holders of exchangeable shares present
or represented by proxy may transact the business for which the meeting was
originally called and a special resolution passed thereat by the affirmative
vote of not less than two-thirds of the votes cast on such resolution will
constitute the approval or consent of the holders of the exchangeable shares.
Our Support Obligation
Pursuant to an Exchangeable Share Support Agreement, we will make the
following covenants for so long as any exchangeable shares (other than
exchangeable shares owned by us or our affiliates) remain outstanding: (i) we
will not declare or pay dividends on our common stock unless InfoSpace.com
Canada Holdings is able to declare and pay and simultaneously declares or pays,
as the case may be, an equivalent dividend on the exchangeable shares; (ii) we
will advise InfoSpace.com Canada Holdings in advance of the declaration of any
dividend on our common stock and ensure that the declaration date, record date
and payment date for dividends on the exchangeable shares are the same as that
for the corresponding dividend on our common stock; (iii) we will ensure that
the record date for any dividend declared on our common stock is not less than
ten business days after the declaration date of such dividend; (iv) we will
take all actions and do all things reasonably necessary or desirable to enable
and permit InfoSpace.com Canada Holdings, in accordance with applicable law, to
pay to the holders of the exchangeable shares the applicable InfoSpace.com
Canada Holdings amounts described above in the event of a liquidation,
dissolution or winding-up of InfoSpace.com Canada Holdings, a retraction
request by a holder of exchangeable shares or a redemption of exchangeable
shares by InfoSpace.com Canada Holdings; and (v) we will take all actions and
do all things reasonably necessary or desirable to enable and permit
InfoSpace.com Nova Scotia Company, in accordance with applicable law, to
perform its obligations arising upon the exercise by it of its rights,
including the delivery of our common stock in accordance with the provisions of
the applicable right.
The Exchangeable Share Support Agreement and the provisions of the
exchangeable shares provide that, without the prior approval of InfoSpace.com
Canada Holdings and the holders of the exchangeable shares as set forth above
under "Amendment and Approval," we will not issue or distribute additional
shares of our common stock, securities exchangeable for or convertible into or
carrying rights to acquire our common stock or rights to subscribe therefor or
other assets to all or substantially all holders of shares of our common stock,
nor change our common stock, unless the same or an economically equivalent
distribution on or change to the exchangeable shares (or in the rights of the
holders thereof) is made simultaneously. The InfoSpace.com Canada Holdings
board of directors is conclusively empowered to determine in good faith and in
its sole discretion whether any corresponding distribution on or change to the
exchangeable shares is the same as or economically equivalent to any proposed
distribution on or change to our common stock. In the event of any proposed
tender offer, share exchange offer, issuer bid, take-over bid or similar
transaction with respect to our common stock which is recommended by our board
of directors
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and in connection with which the exchangeable shares are not redeemed by
InfoSpace.com Canada Holdings or purchased by InfoSpace.com Nova Scotia Company
pursuant to the redemption call right, we will use reasonable efforts to enable
holders of exchangeable shares to participate in such transaction to the same
extent and on an economically equivalent basis as the holders of shares of our
common stock.
InfoSpace.com Canada Holdings is required to notify us and InfoSpace.com Nova
Scotia Company of the occurrence of certain events, such as the liquidation,
dissolution or winding-up of InfoSpace.com Canada Holdings, and of its receipt
of a retraction request from a holder of exchangeable shares.
Under the Exchangeable Share Support Agreement, we have agreed not to
exercise any voting rights attached to the exchangeable shares owned by us or
any of our affiliates on any matter considered at meetings of holders of
exchangeable shares.
With the exception of administrative changes for the purpose of adding
covenants for the protection of the holders of the exchangeable shares, making
certain necessary amendments or curing ambiguities or clerical errors (in each
case provided that our board of directors and the board of directors of each of
InfoSpace.com Canada Holdings and InfoSpace.com Nova Scotia Company are of the
opinion that such amendments are not prejudicial to the interests of the
holders of the exchangeable shares), the Exchangeable Share Support Agreement
may not be amended without the approval of the holders of the exchangeable
shares as set forth above under "Amendment and Approval."
INEX Warrants
On August 13, 1999, there were outstanding INEX common share purchase
warrants which, when vested, would be exercisable to acquire a total of 353,844
INEX common shares at prices per share of between Cdn.$3.75 to Cdn.$8.00 with
various expiry dates to 2002.
Upon the closing of the combination, we will assume INEX's obligations under
all of the above INEX warrants. Each warrant will be exchanged for a warrant to
purchase a number of shares of our common stock that is equal to the product
obtained by multiplying .20405 by the number of INEX common shares subject to
such warrant (rounded down to a whole number of shares). The warrant will
provide for an exercise price per share of our common stock equal to the
exercise price per INEX common share of such INEX warrant immediately prior to
the consummation of the combination divided by .20405. The term to expiry,
conditions to and the manner of exercising, vesting schedule, and all other
terms and conditions of such warrant shall otherwise be unchanged, and any
document or agreement previously evidencing an INEX warrant shall thereafter
evidence and be deemed to evidence the assumed warrant.
Resale of Exchangeable Shares and Our Common Shares Received in the Transaction
The exchangeable shares and our common shares issuable to the INEX
shareholders upon the closing of our combination with INEX will not be
registered under the Securities Act of 1933, as amended (the "Securities Act").
Such shares will instead be issued in reliance upon the exemption provided by
Section 3(a)(10) of the Securities Act. Section 3(a)(10) exempts from
registration securities issued in exchange for one or more outstanding
securities where the terms and conditions of the issuance and exchange of such
securities have been approved by any court of competent jurisdiction, after a
hearing upon the fairness of the terms and conditions of the issuance and
exchange at which all persons to whom such securities will be issued have the
right to appear. The Court is authorized to conduct a hearing to determine the
fairness of the terms and conditions of the Arrangement, including the proposed
issuance of securities in exchange for other outstanding securities. The Court
entered an Interim Order on August 20, 1999 and, subject to the approval of the
Arrangement by the INEX shareholders, a hearing on the fairness of the
Arrangement will be held on October 4, 1999 by the Court. The registration
statement of which this prospectus forms a part is intended to register our
common shares to be issued upon exchange of the exchangeable shares and
exercise of the warrants assumed.
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The exchangeable shares and our common shares received in exchange for INEX
shares in the combination will be freely transferable under U.S. Federal
securities laws, except for exchangeable shares held by persons who are deemed
to be "affiliates" (as such term is defined under the Securities Act) of INEX
prior to the transaction which may be resold by them only in transactions
permitted by the resale provisions of Rule 145(d)(1), (2), or (3) promulgated
under the Securities Act or as otherwise permitted under the Securities Act.
Rule 145(d)(1) generally provides that "affiliates" of either INEX or us may
not resell the exchangeable shares and our common shares unless such sale is
effected pursuant to an effective registration statement or pursuant to the
volume, current public information, manner of sale and timing limitations of
Rule 144 promulgated under the Securities Act. These limitations generally
require that any sales made by an affiliate in any three-month period shall not
exceed the greater of one percent of the outstanding shares of the securities
being sold or the average weekly trading volume over the four calendar weeks
preceding the placement of the sell order and that such sales be made in
unsolicited, open market "brokers transactions." Rules 145(d)(2) and (3)
generally provide that the foregoing limitations lapse for our non-affiliates
after a period of one or two years, respectively, depending upon whether
certain of our currently available information continues to be available.
Persons who may be deemed to be affiliates of an issuer generally include
individuals or entities that control, are controlled by, or are under common
control with, such issuer and may include certain officers and directors of
such issuer as well as principal shareholders of such issuer. In the event that
this registration statement is declared effective, our common shares issuable
upon exchange of the exchangeable shares and upon exercise of the warrants that
we assume from INEX will be transferable in the manner and under the
circumstances described in the foregoing paragraph.
In the event that this registration statement is not declared effective, our
common shares issuable upon exchange of the exchangeable shares and upon
exercise of the warrants that we assume from INEX will be "restricted"
securities within the meaning of and as under the Securities Act and may not be
offered or sold except in accordance with Regulation S under the Securities
Act, pursuant to registration under the Securities Act or pursuant to an
available exemption from registration under the Securities Act. Accordingly, we
have agreed, in the event that this registration statement is not declared
effective, to file a registration statement under the Securities Act with the
Securities and Exchange Commission prior to the closing of the combination in
order to register the resale of our common shares issuable upon exchange of the
exchangeable shares and exercise of the warrants that we assume from INEX. We
have agreed to use our best efforts to cause that registration statement to
become effective and to remain effective until the date on which all shares of
our common stock have been issued. Under the terms of the combination, we may
suspend the use of such registration statement for such time as may be
necessary to update or amend it to correct any misstatement or omission of a
material fact. In addition, we may delay the filing if any such amendment or
supplement to such registration statement, for a period not to exceed ninety
days, if we in good faith determine the such amendment or supplement would
require us to disclose a material development or potential material development
and such disclosure would have a material adverse effect on us.
In the event that this registration statement is not declared effective,
holders of exchangeable shares who acquire our common shares pursuant to the
exchange of exchangeable shares or the exercise of the warrants which we assume
from INEX after the fourth anniversary of the effective date of the
registration statement pertaining to the resale of our common stock may not
offer or sell our common stock except in compliance with an available exemption
from registration under the Securities Act.
We have agreed to register under the Securities Act on Form S-8 the shares of
our common stock issuable upon exercise of employee options issued in exchange
for INEX employee options. Our common shares issuable upon exercise of those
options may be resold without restriction in the United States by persons who
are not our affiliates. Optionholders who are our affiliates must comply with
the volume, current public information and manner of sale limitations of Rule
144 under the Securities Act.
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Prior to the closing of the combination each of the INEX affiliates will
enter into agreements restricting them in connection with the requirements for
pooling-of-interests accounting treatment and restricting the sale, pledge or
other disposal of exchangeable shares, our common shares and INEX shares.
Future Issuances of Shares
The articles of InfoSpace.com Canada Holdings authorize the issuance of an
unlimited number of exchangeable shares. The exchangeable shares that are
authorized may be issued, without approval of holders of exchangeable shares,
at such time or times, to such persons and for such consideration as
InfoSpace.com Canada Holdings may determine, except as may otherwise be
required by applicable laws and subject to all dividends on the outstanding
exchangeable shares corresponding to dividends declared and paid on the
outstanding shares of our common stock having been declared and paid at the
relevant times.
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INCOME TAX CONSIDERATIONS
Canadian Federal Income Tax Considerations
You should consider the following discussion of Canadian federal income taxes
before you acquire exchangeable shares or exchange exchangeable shares for
common stock. The following summarizes the principal Canadian federal income
tax considerations that generally apply to you if, under Canadian federal
income tax law, you are considered to
. hold as capital property
. your exchangeable shares,
. the voting rights relating to those shares, and
. the other ancillary rights relating to those shares;
. deal at arm's length with us, INEX, InfoSpace.com Canada Holdings, and
InfoSpace.com Nova Scotia Company.
If we are or will be a foreign affiliate of you under the Canadian federal
income tax laws, this summary will not apply to you. This summary does not
address the tax consequences of the transactions, including the arrangement, in
which you acquire the exchangeable shares, or the exercise of the warrants
which we assumed from INEX, or the sale of the shares obtainable upon exercise
of those warrants.
Under Canadian federal income tax laws, your exchangeable shares will
generally be considered to be capital property to you unless you are considered
to hold your exchangeable shares
. in the course of carrying on a business, or
. in an adventure in the nature of trade.
If you are resident in Canada but your shares might not otherwise qualify as
capital property, you may be entitled to make an irrevocable election to
qualify those shares as capital property. If you do not hold your exchangeable
shares as capital property, you should consult your own advisers regarding your
particular circumstances. If you are a "financial institution" under the
Canadian federal income tax laws applicable to securities held by financial
institutions, the summary does not apply to you; instead, you should consult
your own advisers regarding the application to you of the "mark-to-market"
rules.
The current provisions of the Income Tax Act (Canada) and regulations, the
current provisions of the income tax treaty between Canada and the United
States and counsel's understanding of the current administrative practices of
Revenue Canada form the basis of this summary. This summary takes into account
the proposed amendments to the Income Tax Act (Canada) and regulations that the
Minister of Finance has publicly announced prior to the date of this prospectus
and assumes that those proposed amendments will be enacted in their present
form. Counsel can give no assurances, however, that the proposed amendments
will be enacted in the form proposed, or at all.
Except for the proposed amendments, this summary does not take into account
or anticipate any changes in law, whether by legislative, administrative or
judicial decision or action, nor does it take into account provincial,
territorial or foreign income tax legislation or considerations, which may
differ from the Canadian federal income tax considerations described herein. We
have neither sought nor obtained an advance tax ruling from Revenue Canada to
confirm the tax consequences of any of the transactions we describe.
WHILE THIS SUMMARY ADDRESSES THE MATERIAL CANADIAN FEDERAL INCOME TAX
CONSIDERATIONS GENERALLY APPLICABLE TO YOU, IT IS NOT INTENDED TO BE, NOR
SHOULD IT BE CONSTRUED TO BE, LEGAL, BUSINESS OR TAX ADVICE TO YOU.
FURTHERMORE, AS REQUIRED BY THE "PLAIN ENGLISH" REQUIREMENTS OF THE SEC,
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THIS SUMMARY MAKES MINIMAL USE OF DEFINED TERMS. YOU SHOULD KNOW THAT MANY OF
THE WORDS AND PHRASES USED IN THIS SUMMARY HAVE VERY SPECIFIC MEANINGS UNDER
CANADIAN INCOME TAX LAW.
THEREFORE, YOU SHOULD CONSULT YOUR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES APPLICABLE TO YOU IN YOUR PARTICULAR CIRCUMSTANCES.
For Canadian tax purposes, you must express all amounts, including dividends,
adjusted cost base and proceeds of disposition, in Canadian dollars, and you
must convert amounts denominated in United States dollars into Canadian dollars
based on the United States dollar exchange rate generally prevailing when those
amounts arise.
Shareholders Resident In Canada
If you are resident or deemed to be resident in Canada under Canadian federal
income tax laws, the following portion of the summary applies to you.
Dividends on Exchangeable Shares. If you are an individual, the dividends
that you receive or are deemed to receive on your exchangeable shares will be
included in computing your income. Generally, they will be subject to the
gross-up and dividend tax credit rules that normally apply to taxable dividends
received from taxable Canadian corporations. If you are a corporation, the
dividends that you receive or are deemed to receive on your exchangeable shares
will be included in computing your income.
If you are a corporation, you must include dividends that you receive or are
deemed to receive on the exchangeable shares in your income and these dividends
will normally be deductible in computing your taxable income unless you are a
specified financial institution, in which case the deduction is generally
denied.
If you are a private corporation or any other corporation resident in Canada
controlled or deemed to be controlled by or for the benefit of an individual
(other than a trust) or a related group of individuals (other than trusts), you
may be liable to pay a refundable tax of 33 1/3 percent on dividends that you
receive or are deemed to receive on the exchangeable shares that are deductible
in computing your taxable income. If you are a "Canadian-controlled private
corporation," you may be liable to pay an additional refundable tax of 6
2/3 percent on dividends you receive or are deemed to receive that are not
deductible in computing your taxable income.
Under Canadian federal income tax laws, the exchangeable shares will be
taxable preferred shares and short-term preferred shares and term preferred
shares. Accordingly, InfoSpace.com Canada Holdings will be subject to a 66
2/3 percent tax on dividends (other than excluded dividends) that it pays or is
deemed to pay on the exchangeable shares. In certain circumstances,
InfoSpace.com Canada Holdings may be entitled to deductions that will
substantially offset the impact of this tax. If you are a corporation,
dividends that you receive or are deemed to receive on the exchangeable shares
will not be subject to the 10 percent tax under Part IV.1 of the Income Tax Act
(Canada).
If the Company or any person with whom the Company does not deal at arm's
length for purposes of the Income Tax Act (Canada) is a "specified financial
institution" at the time a dividend is paid on an exchangeable share and you
are a corporation, then, subject to the exemption described below, the
dividends that you receive or are deemed to receive will not be deductible in
computing your taxable income. Accordingly, as discussed above, those dividends
will be fully includible in computing your income. Generally, we will be a
specified financial institution for these purposes if
. we are, or are related to, an entity or corporation that is a bank, a
trust company, a credit union, or an insurance corporation, or
. our principal business, or the principal business of an entity or
corporation to which we are related, is (a) the lending of money to
persons with whom we deal at arm's length, (b) the purchasing of debt
obligations issued by persons with whom we deal at arm's length, or (c) a
combination of both (a) and (b).
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The same rules will apply to determine whether a person with whom we do not
deal at arm's length is a specified financial institution for these purposes.
Nonetheless, if you are a corporation, you will not be denied the dividend
deduction if at the time you receive a dividend or are deemed to receive a
dividend
. the exchangeable shares are listed on a prescribed stock exchange in
Canada,
. we control InfoSpace.com Canada Holdings, and
. you (together with any person with whom you do not deal at arm's length,
with any partnership of which you or that person is a member, and with
any trust of which you or that person is a beneficiary) do not receive
dividends on more than 10 percent of the issued and outstanding
exchangeable shares.
Redemption Or Exchange Of Exchangeable Shares
If InfoSpace.com Canada Holdings redeems (or you retract) your exchangeable
shares, you will generally be deemed to have received a dividend equal to the
amount, if any, by which the fair market value of the consideration you receive
as part of the redemption or retraction exceeds the aggregate of the paid-up
capital (as determined under Canadian federal income tax laws) of your
exchangeable shares at the time InfoSpace.com Canada Holdings redeems or you
retract your exchangeable shares.
The amount of any deemed dividend will generally be subject to the tax
treatment described above under "Dividends." On the redemption of your
exchangeable shares, you will also be considered to have disposed of your
exchangeable shares for proceeds of disposition equal to the paid-up capital of
your exchangeable shares redeemed or retracted. In general, you will realize a
capital gain (or a capital loss) equal to the amount by which the proceeds of
disposition of the exchangeable shares, net of reasonable costs of disposition
exceed (or are less than) the adjusted cost base of such shares (see "--
Taxation of Capital Gain or Capital Loss" below). If you are a corporation, in
some circumstances, the amount of any dividend you are deemed to have received
may be treated as proceeds of disposition and not as a dividend.
If you exchange exchangeable shares with InfoSpace.com Nova Scotia Company
for shares of common stock, other than on the redemption or retraction of
exchangeable shares, in general, you will realize a capital gain (or a capital
loss) to the extent the proceeds of disposition of the exchangeable shares, net
of any reasonable costs of disposition, exceed (or are less than) the adjusted
cost base of such shares to you. For these purposes, the proceeds of
disposition will be the aggregate fair market value, at the time of the
exchange, of the consideration you receive (see "--Taxation of Capital Gain or
Capital Loss" below).
Because of the rights relating to the exchangeable shares, you cannot control
whether you will receive shares of common stock upon the redemption of your
exchangeable shares or upon InfoSpace.com Nova Scotia Company's purchase of
your exchangeable shares. As described above, the tax consequences to you of a
redemption by InfoSpace.com Canada Holdings differ from those of an exchange
with InfoSpace.com Nova Scotia Company.
Taxation Of Capital Gain Or Capital Loss
You must include in your income for the year of disposition the taxable
portion of any capital gain you realize. The taxable portion of any capital
gain you realize (the "taxable capital gain") will be three-quarters of that
amount. You must deduct against such taxable capital gains for the year of
disposition three-quarters of any capital loss you realize in that year. If
three-quarters of any capital loss you realize in a taxation year exceeds your
taxable capital gains in that year, you may carry back the excess up to three
taxation years or forward indefinitely and deduct those excess amounts against
net taxable capital gains in those other years, subject to certain limitations
and in certain circumstances.
87
<PAGE>
If you are an individual or trust, other than certain trusts, capital gains
that you realize may give rise to alternative minimum tax. If you are a
Canadian-controlled private corporation, you may be liable to pay an additional
refundable tax of 6 2/3 percent on taxable capital gains. If you are a
corporation, subject to certain limitations and under certain circumstances,
you may be required to reduce the amount of any capital loss arising when you
dispose or are deemed to dispose of any exchangeable shares by the amount of
dividends you received or are deemed to have received on those shares. Similar
rules may apply to you if you are:
. a corporation that is a member of a partnership that owns exchangeable
shares;
. a corporation that is a beneficiary of a trust that owns exchangeable
shares;
. a member of a partnership that is a member of another partnership that
owns exchangeable shares;
. a member of a partnership that is a beneficiary of a trust that owns
exchangeable shares;
. a beneficiary of a trust that is a member of a partnership that owns
exchangeable shares; or
. a beneficiary of a trust that is the beneficiary of another trust that
owns exchangeable shares.
Taxation of Our Common Stock
Acquisition And Disposition Of Shares Of Our Common Stock. The cost amount of
shares of common stock that you receive on the retraction, redemption or
exchange of exchangeable shares will in general be equal to the fair market
value of those shares at that time.
If you dispose or are deemed to have disposed of shares of common stock,
generally, you will have a capital gain (or capital loss) to the extent that
the proceeds of disposition, net of any reasonable costs of disposition, exceed
(or are less than) the adjusted cost base to you of such shares immediately
before the disposition. In computing the adjusted cost base of a share of our
common stock, you must average the cost of the share with the adjusted cost
base of any other shares of our common stock that you hold as capital property
at that time.
Dividends On Shares Of Common Stock. In computing your income, you must
include dividends that you receive or are deemed to receive on shares of common
stock. If you are an individual, these dividends will not be subject to the
gross-up and the dividend tax credit rules that normally apply to taxable
dividends received from taxable Canadian corporations. If you are a
corporation, these dividends will not be deductible in computing your taxable
income. In certain circumstances, you may be entitled to a foreign tax credit
in respect of any U.S. withholding tax payable in connection with these
dividends. If you are a Canadian-controlled private corporation, you may be
liable to pay an additional refundable tax of 6 2/3 percent on such dividends.
Foreign Property Information Reporting. If you are a "specified Canadian
entity" for a taxation year or a fiscal period and your total cost amounts of
"specified foreign property," including the shares of common stock, at any time
in the year or fiscal period exceed Cdn. $100,000, you must file an information
return for the year or period disclosing prescribed information, including
. your cost amount,
. any dividends you received in the year, and
. any gains or losses you realized in the year,
in respect of that property.
With some exceptions, generally, if you are a taxpayer resident in Canada in
the year, you will be a specified Canadian entity. You should consult your own
advisors about whether you must comply with these rules.
88
<PAGE>
Shareholders Not Resident In Canada
The following portion of the summary is applicable to shareholders who, for
purposes of the Canadian Tax Act, have not been and will not be resident or
deemed to be resident in Canada at any time while they have held INEX common
shares or will hold exchangeable shares or shares of common stock.
Dividends On Exchangeable Shares. Dividends received or deemed to have been
received by a non-resident holder of exchangeable shares will be subject to
Canadian non-resident withholding tax at a rate of 25 percent, unless the rate
is reduced under the provisions of an applicable tax treaty.
Redemption Or Exchange Of Exchangeable Shares. Refer to the discussion above
for a description of the manner in which dividends will be deemed to have been
received by a shareholder and proceeds of disposition will be computed on the
redemption or exchange of exchangeable shares. Dividend withholding tax, as
described above, will apply to dividends deemed to have been received by a non-
resident holder on the redemption of an exchangeable share by InfoSpace.com
Canada Holdings.
Unless the exchangeable shares are listed on a prescribed stock exchange at
the time they are disposed of, they will be taxable Canadian property of a non-
resident holder. As a result, you will be subject to tax under the Canadian Tax
Act on gains realized on the exchange of exchangeable shares for shares of
common stock unless an applicable bilateral income tax convention between
Canada and the jurisdiction in which you reside exempts such gains from
Canadian tax.
You will be required to comply with certain notification requirements imposed
by section 116 of the Canadian Tax Act. Specifically, you must notify Revenue
Canada of your intention to dispose of the exchangeable shares prior to such
disposition or within ten days after such disposition. Revenue Canada will
issue a certificate in respect of such proposed disposition or disposition
provided you have complied with the requirements imposed by the Canadian Tax
Act, which may in some circumstances include payment of an amount equal to 33
1/3 percent of the amount by which the proceeds of disposition exceed your
adjusted cost base of the exchangeable shares, or the provision of acceptable
security in respect of the disposition. Evidence of that adjusted cost base
acceptable to Revenue Canada may have to be provided. Unless InfoSpace.com
Canada Holdings or InfoSpace.com Nova Scotia Company, as the case may be, is in
receipt of a copy of such certificate on or prior to the date of the redemption
or exchange, it will withhold 33 1/3 percent of the payment otherwise due to
the shareholder. If InfoSpace.com Canada Holdings or InfoSpace.com Nova Scotia
Company, as the case may be, has not received such certificate within 30 days
of the end of the month in which the redemption or exchange occurs, it will be
required to remit such withheld amount in cash to the Receiver General, as tax
on your behalf and will take all such action necessary to convert on your
behalf the 33 1/3 percent of the payment withheld to cash proceeds for the
remittance to the Receiver General.
The relevant notification form is Revenue Canada form T2062. A copy of the
form will be sent to INEX shareholders who indicate that they are not resident
in Canada.
United States Federal Income Tax Considerations
You should consider the following discussion of United States federal income
taxes before you acquire exchangeable shares or exchange exchangeable shares
for common stock. This discussion does not address all the federal income tax
considerations that may be relevant to you. In addition, this discussion does
not address the tax consequences of transactions in which you acquire your
exchangeable shares, including the arrangement, or the exercise of the warrants
which we will assume from INEX. Furthermore, this discussion does not address
any foreign, state, or local tax considerations.
89
<PAGE>
WE STRONGLY URGE YOU TO CONSULT YOUR OWN TAX ADVISORS REGARDING THE SPECIFIC
TAX CONSIDERATIONS THAT APPLY TO YOU.
The laws, regulations, court decisions, and IRS rulings and regulations
effective on the date of this prospectus form the basis of this discussion.
This discussion is for general information only. No law, court decision, or
ruling or regulation directly addresses certain of the tax consequences of the
ownership of instruments and rights comparable to the exchangeable shares and
the rights attached to those shares.
Consequently, some aspects of the tax treatment of the arrangement, including
the exchange of exchangeable shares for shares of common stock, are uncertain.
We have neither sought nor obtained any advance income tax ruling regarding the
tax consequences of any of the transactions we describe.
Tax Considerations That Apply To U.S. Holders
If you are:
. an individual citizen or resident of the United States,
. a corporation or partnership created in the United States or under the
laws of the United States or of any state, or
. a United States estate or trust,
and you hold your exchangeable shares as capital assets, the following tax
considerations will generally apply to you.
Exchange Of Exchangeable Shares. Except as we describe below, when you
exchange your exchangeable shares for shares of common stock, you will
generally recognize gain or loss. Your gain or loss will equal the difference
between (a) the fair market value of the shares of common stock at the time you
exchange your exchangeable shares and (b) your tax basis in the exchangeable
shares you exchange. Your gain or loss will generally be a capital gain or
loss. You may, however, recognize ordinary income with respect to any declared
but unpaid dividends on the exchangeable shares. A capital gain or loss will be
long-term capital gain or loss if your holding period for the exchangeable
shares is more than one year. Your tax basis in the shares of common stock will
be their fair market value at the time of the exchange. Your holding period for
the shares of common stock that you receive will begin on the day after the
exchange.
In view of the likelihood that you will recognize gain or loss when you
exchange the exchangeable shares for shares of common stock, you may wish to
consider delaying the exchange until either
. you intend to dispose of the shares of common stock that you receive in
exchange for your exchangeable shares, or
. the exchange may be characterized as tax-free.
The gain or loss you realize when you exchange your exchangeable shares for
shares of common stock generally will be treated as United States source gain
or loss. Under the terms of the United States-Canada income tax treaty,
however, your gain may be treated as sourced in Canada. Subject to certain
limitations, you may be entitled to credit your United States taxes for any
Canadian tax imposed on the exchange. If you are ineligible for a credit for
any Canadian tax that you pay, you may be entitled to deduct that tax in
computing your United States taxable income.
Distributions On The Exchangeable Shares. If any distributions are paid to
you as a holder of exchangeable shares, we and InfoSpace.com Canada Holdings
intend to treat those distributions as distributions from InfoSpace.com Canada
Holdings, rather than from us. We and InfoSpace.com Canada Holdings can not
assure you, however, that the IRS or a court would agree that our intended
treatment is correct. Assuming that treatment is proper, these distributions
will be treated as dividends and will be
90
<PAGE>
taxable to you as ordinary income if InfoSpace.com Canada Holdings has earnings
and profits. Those dividends generally will be treated as foreign source
passive income for foreign tax credit limitation purposes. Under the U.S.-
Canada Tax Treaty, such dispositions generally will be subject to a Canadian
withholding tax at a rate of 15 percent. Subject to certain limitations, you
should generally be entitled to either credit your United States income tax
liability with, or deduct in computing your United States taxable income, any
Canadian income taxes withheld from these distributions.
Tax Considerations That Apply To Non-U.S. Holders
If you are not
. an individual citizen or resident of the United States,
. a corporation or partnership created in the United States or under the
laws of the United States or of any state, or
. a United States estate or trust,
the following summary applies to you.
Exchange Of Exchangeable Shares. Generally, you will not be subject to United
States federal income tax when you exchange your exchangeable shares for shares
of our common stock, unless your exchangeable shares were an asset of your
United States trade or business.
Distributions On The Exchangeable Shares. You should not be subject to United
States tax on dividends that you receive on the exchangeable shares. Therefore,
we and InfoSpace.com Canada Holdings do not intend to withhold any United
States taxes from those dividends. The IRS, however, may assert that dividends
paid to you on the exchangeable shares are subject to tax. As a result, you
could be subject to tax at a rate of 30 percent. An applicable treaty in effect
between the United States and your country of residence may reduce the rate. If
you are a resident of Canada, a maximum rate of 15 percent applies to dividends
paid to you.
Distributions On Shares Of Common Stock. Dividends that you receive on the
common stock generally will be subject to tax at a rate of 30 percent. An
applicable income tax treaty may reduce that rate. If you are a resident of
Canada, a maximum rate of 15 percent applies to dividends paid to you.
Gain On Sale Or Exchange Of Common Stock. Generally, you will not be subject
to tax when you sell or exchange your shares of common stock unless either
. your common stock was an asset of your United States trade or business
or, if a tax treaty applies, is attributable to your United States
permanent establishment; or
. you are an individual, you are present in the United States for 183 days
or more, or you satisfy certain other conditions.
If at any time we are a United States real property holding corporation, you
may be subject to certain additional rules. These rules would require
withholding of tax on the gross proceeds of your sale of shares of common
stock. We believe that we are not a United States real property holding
corporation. Although we consider it unlikely that we will become a United
States real property holding corporation, we can provide no assurance as to
this issue.
Federal Estate Taxes. If you are an individual who is not a citizen or
resident (as defined for United States federal estate tax purposes) of the
United States at the time of death, shares of common stock that you own will be
includable in your gross estate for United States federal estate tax purposes
(unless an applicable estate tax treaty provides otherwise), and therefore may
be subject to United States federal estate tax.
91
<PAGE>
Backup Withholding, Information Reporting and Other Reporting
Requirements. We must report annually to the Internal Revenue Service and to
each of you the amount of dividends paid to, and the tax withheld with respect
to, each of you. These reporting requirements apply regardless of whether
withholding was reduced or eliminated by an applicable tax treaty. Copies of
this information also may be made available under the provisions of a specific
treaty or agreement with the tax authorities of your country.
Under currently effective United States Treasury regulations, United States
backup withholding tax (which generally is imposed at the rate of 31 percent on
certain payments to persons that fail to furnish the information required under
the United States information reporting requirements) and information reporting
requirements (other than those discussed above) generally will not apply to
dividends paid on common stock if you have an address outside the United
States. Backup withholding and information reporting generally will apply to
dividends paid on shares of common stock if you have an address in the United
States, or if you fail to establish an exemption or to provide certain other
information to us. Under United States Treasury regulations that are effective
for payments made after December 31, 2000, if you fail to certify your status
in accordance with these regulations, you may be subject to backup withholding
on payments of dividends.
The payment of proceeds from the disposition of common stock to or through a
United States office of a broker will be subject to information reporting and
backup withholding unless you, under penalties of perjury, certify, among other
things, your status as a non-U.S. Holder or otherwise establish an exemption.
In general, backup withholding and information reporting will not apply to the
payment of the proceeds of a sale of common stock by or through a foreign
office of a broker. If, however, such broker is, for United States federal tax
purposes, a United States person, a "controlled foreign corporation" for U.S.
federal income tax purposes or a foreign person 50 percent or more of whose
gross income from certain periods is effectively connected with a United States
trade or business or has as partners one or more United States persons that, in
the aggregate, hold more than 50 percent of the income or capital interests in
the partnership, such payments will be subject to information reporting, but
not backup withholding, unless such broker has documentary evidence in its
records that you are a non-U.S. holder and certain other conditions are met or
you otherwise establish an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from a payment to you will be refunded or credited
against your United States federal income tax liability, if any, provided that
the required information is furnished to the Internal Revenue Service.
92
<PAGE>
EXPERTS
The consolidated financial statements of InfoSpace.com, Inc. as of December
31, 1997 and December 31, 1998, and for the period from March 1, 1996 (date of
inception) through December 31, 1996, the years ended December 31, 1997 and
December 31, 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 INEX Corporation as of December 31, 1997 and
December 31, 1998, and for each of the years ended December 31, 1996, 1997 and
1998, included in this Prospectus have been audited by PricewaterhouseCoopers
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
We have 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 InfoSpace.com 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.
We are also subject to the informational requirements of the Securities
Exchange Act and, in accordance therewith, file reports, proxy statements and
other information with the Commission. The registration statement, including
exhibits filed therewith, and the reports, proxy statements and other
information that we file 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
InfoSpace.com, that file electronically with the Commission.
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.
93
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited Pro Forma Combined Consolidated Financial Statements:
INEX Corporation Acquisition.............................................. F-2
Pro Forma Combined Consolidated Balance Sheet as of June 30, 1999......... F-3
Pro Forma Combined Consolidated Statement of Operations for the Six Months
Ended
June 30, 1999............................................................ F-4
Pro Forma Combined Consolidated Statement of Operations for the Six Months
Ended
June 30, 1998............................................................ F-5
Pro Forma Combined Consolidated Statement of Operations for the Year Ended
December 31, 1998........................................................ F-6
Pro Forma Combined Consolidated Statement of Operations for the Year Ended
December 31, 1997........................................................ F-7
Pro Forma Combined Consolidated Statement of Operations for the Year Ended
December 31, 1996........................................................ F-8
Notes to Unaudited Pro Forma Combined Consolidated Financial Statements... F-9
InfoSpace.com, Inc.:
Independent Auditors' Report.............................................. F-10
Consolidated Balance Sheets............................................... F-11
Consolidated Statements of Operations..................................... F-12
Consolidated Statements of Changes in Stockholders' Equity................ F-13
Consolidated Statements of Cash Flows..................................... F-14
Notes to Consolidated Financial Statements................................ F-15
INEX Corporation:
Report of Independent Accountants......................................... F-35
Balance Sheets............................................................ F-36
Statements of Operations.................................................. F-37
Statements of Changes in Stockholders' Equity............................. F-38
Statements of Comprehensive Loss.......................................... F-39
Statements of Cash Flows.................................................. F-40
Notes to Financial Statements............................................. F-41
</TABLE>
F-1
<PAGE>
INEX Corporation Acquisition
On August 13, 1999, the Company signed a definitive agreement to acquire
Toronto-based INEX Corporation. Under the terms of the acquisition, which will
be accounted for as a pooling of interests, the Company will exchange
approximately 900,000 shares of common stock for all of INEX's outstanding
shares, warrants and options. The acquisition is expected to be completed in
October, and is subject to customary conditions, including the receipt of
regulatory approval and INEX shareholder approval.
F-2
<PAGE>
INFOSPACE.COM, INC. AND INEX CORPORATION
PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
As of June 30, 1999
<TABLE>
<CAPTION>
INEX Pro Forma Pro Forma
InfoSpace.com Corporation Adjustments Combined
------------- ----------- ------------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $108,686,020 $ 927,202 $109,613,222
Short-term
investments.......... 58,940,865 -- 58,940,865
Accounts receivable,
net of allowance..... 4,383,098 84,888 4,467,986
Notes receivable...... 6,000,000 -- 6,000,000
Prepaid expenses and
other assets......... 4,591,830 15,914 4,607,744
------------ ---------- ------------
182,601,813 1,028,004 183,629,817
Long-term investments... 70,890,183 -- 70,890,183
Property and equipment,
net.................... 1,987,114 132,496 2,119,610
Intangible assets, net.. 19,094,433 -- 19,094,433
Other investments....... 6,194,331 -- 6,194,331
Other................... 374,937 -- 374,937
------------ ---------- ------------
Total assets............ $281,142,811 $1,160,500 $282,303,311
============ ========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...... $ 606,337 $ 162,535 $ 768,872
Accrued expenses...... 4,139,413 -- 4,139,413
Deferred revenues..... 1,964,932 257 1,965,189
------------ ---------- ------------
Total current
liabilities........ 6,710,682 162,792 6,873,474
Convertible debentures.. -- 169,837 169,837
Shareholders' equity:
Common stock, par
value $.0001......... 4,736 -- 90(Note 4) 4,826
Common stock.......... -- 2,413,846 (2,413,846)(Note 4) 0
Class A preference
shares............... -- 859,056 (859,056)(Note 4) 0
Special warrants,
Series A............. -- 659,698 (659,698)(Note 4) 0
Special warrants,
Series B............. -- 1,727,603 (1,727,603)(Note 4) 0
Additional paid-in
capital.............. 292,949,083 957,480 5,660,113(Note 4) 299,566,676
Accumulated deficit... (15,587,566) (5,742,886) (21,330,452)
Cumulative translation
adjustment........... -- 3,989 3,989
Deferred expense--
warrants............. (2,719,011) -- (2,719,011)
Unearned
compensation--stock
options.............. (215,113) (50,915) (266,028)
------------ ---------- ------------
Total stockholders'
equity............. 274,432,129 827,871 -- 275,260,000
------------ ---------- ------------
Total liabilities and
stockholders' equity... $281,142,811 $1,160,500 -- $282,303,311
============ ========== ============
</TABLE>
See accompanying notes to pro forma combined consolidated financial statements.
F-3
<PAGE>
INFOSPACE.COM, INC. AND INEX CORPORATION
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
INEX Pro Forma Pro Forma
InfoSpace.com Corporation Adjustments Combined
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues................ $11,874,788 $ 266,111 $12,140,899
Cost of revenues........ 1,960,140 25,555 1,985,695
----------- ----------- -----------
Gross profit.......... 9,914,648 240,556 10,155,204
Operating expenses:
Product development... 537,484 518,793 1,056,277
Sales and marketing... 10,196,949 743,391 10,940,340
General and
administrative....... 3,387,287 598,093 3,985,380
Amortization of
intangibles.......... 603,940 -- 603,940
Acquisition and
related charges...... 4,912,500 -- 4,912,500
Other--non-recurring
charges.............. 209,500 -- 209,500
----------- ----------- -----------
Total operating
expenses........... 19,847,660 1,860,277 21,707,937
----------- ----------- -----------
Loss from operations.... (9,933,012) (1,619,721) (11,552,733)
Other income (expense),
net.................... 4,287,577 7,296 4,294,873
Equity in loss from
joint venture.......... (76,459) -- (76,459)
----------- ----------- -----------
Net loss................ $(5,721,894) $(1,612,425) $(7,334,319)
=========== =========== ===========
Basic and diluted net
loss per share......... $ (0.13) $ (0.16)
=========== ===========
Shares used in computing
basic and diluted net
loss per share
calculations........... 44,680,837 585,810(Note 4) 45,580,837
=========== ======= ===========
</TABLE>
See accompanying notes to pro forma combined consolidated financial statements.
F-4
<PAGE>
INFOSPACE.COM, INC. AND INEX CORPORATION
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
INEX Pro Forma Pro Forma
InfoSpace.com Corporation Adjustments Combined
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues................ $ 2,855,010 $ 53,790 $ 2,908,800
Cost of revenues........ 498,653 9,677 508,330
----------- ----------- -----------
Gross profit.......... 2,356,357 44,113 2,400,470
Operating expenses:
Product development... 148,509 257,872 406,381
Sales and marketing... 951,671 312,229 1,263,900
General and
administrative....... 833,543 873,872 1,707,415
Amortization of
intangibles.......... 120,805 -- 120,805
Acquisition and
related charges...... 2,800,000 -- 2,800,000
Other--non-recurring
charges.............. 240,000 -- 240,000
----------- ----------- -----------
Total operating
expenses........... 5,094,528 1,443,973 6,538,501
----------- ----------- -----------
Loss from operations.... (2,738,171) (1,399,860) (4,138,031)
Other income (expense),
net.................... 43,206 14,302 57,508
Equity in loss from
joint venture.......... -- -- --
----------- ----------- -----------
Net loss................ $(2,694,965) $(1,385,558) $(4,080,523)
=========== =========== ===========
Basic and diluted net
loss per share......... $ (0.12) $ (0.17)
=========== ===========
Shares used in computing
basic and diluted net
loss per share
calculations........... 23,144,812 376,514(Note 4) 24,044,812
=========== ======= ===========
</TABLE>
See accompanying notes to pro forma combined consolidated financial statements.
F-5
<PAGE>
INFOSPACE.COM, INC. AND INEX CORPORATION
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
INEX Pro Forma Pro Forma
InfoSpace.com Corporation Adjustments Combined
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues................ $ 9,414,450 $ 208,910 $ 9,623,360
Cost of revenues........ 1,605,006 29,720 1,634,726
----------- ----------- ------------
Gross profit.......... 7,809,444 179,190 7,988,634
Operating expenses:
Product development... 599,673 644,965 1,244,638
Sales and marketing... 5,541,261 744,636 6,285,897
General and
administrative....... 3,001,434 1,573,980 4,575,414
Amortization of
intangibles.......... 709,923 -- 709,923
Acquisition and
related charges...... 2,800,000 -- 2,800,000
Other--non-recurring
charges.............. 4,500,000 -- 4,500,000
----------- ----------- ------------
Total operating
expenses........... 17,152,291 2,963,581 20,115,872
----------- ----------- ------------
Loss from operations.... (9,342,847) (2,784,391) (12,127,238)
Other income (expense),
net.................... 411,365 22,146 433,511
Equity in loss from
joint venture.......... (124,976) -- (124,976)
----------- ----------- ------------
Net loss................ $(9,056,458) $(2,762,245) $(11,818,703)
=========== =========== ============
Basic and diluted net
loss per share......... $ (0.33) $ (0.42)
=========== ============
Shares used in computing
basic and diluted net
loss per share
calculations........... 27,120,536 422,315(Note 4) 28,020,536
=========== ======= ============
</TABLE>
See accompanying notes to pro forma combined consolidated financial statements.
F-6
<PAGE>
INFOSPACE.COM, INC. AND INEX CORPORATION
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
INEX Pro Forma Pro Forma
InfoSpace.com Corporation Adjustments Combined
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues................ $1,685,096 $ 57,446 $ 1,742,542
Cost of revenues........ 399,877 18,932 418,809
---------- ----------- -----------
Gross profit.......... 1,285,219 38,514 1,323,733
Operating expenses:
Product development... 212,677 170,459 383,136
Sales and marketing... 841,074 635,502 1,476,576
General and
administrative....... 480,398 463,740 944,138
Amortization of
intangibles.......... 64,056 -- 64,056
Acquisition and
related charges...... -- -- --
Other--non-recurring
charges.............. 137,000 -- 137,000
---------- ----------- -----------
Total operating
expenses........... 1,735,205 1,269,701 3,004,906
---------- ----------- -----------
Loss from operations.... (449,986) (1,231,187) (1,681,173)
Other income (expense),
net.................... 21,296 (1,038) 20,258
Equity in loss from
joint venture.......... -- -- --
---------- ----------- -----------
Net loss................ $ (428,690) $(1,232,225) $(1,660,915)
========== =========== ===========
Basic and diluted net
loss per share......... $ (0.02) $ (0.07)
========== ===========
Shares used in computing
basic and diluted net
loss per share
calculations........... 21,996,314 279,131(Note 4) 22,896,314
========== ======= ===========
</TABLE>
See accompanying notes to pro forma combined consolidated financial statements.
F-7
<PAGE>
INFOSPACE.COM, INC. AND INEX CORPORATION
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
INEX Pro Forma Pro Forma
InfoSpace.com Corporation Adjustments Combined
------------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues................ $ 199,372 $ -- $ 199,372
Cost of revenues........ 96,641 -- 96,641
---------- --------- ----------
Gross profit.......... 102,731 -- 102,731
Operating expenses:
Product development... 109,671 39,212 148,883
Sales and marketing... 230,774 26,154 256,928
General and
administrative....... 163,896 70,271 234,167
Amortization of
intangibles.......... -- -- --
Acquisition and
related charges...... -- -- --
Other--non-recurring
charges.............. -- -- --
---------- --------- ----------
Total operating
expenses........... 504,341 135,637 639,978
---------- --------- ----------
Loss from operations.... (401,610) (135,637) (537,247)
Other income (expense),
net.................... 21,086 -- 21,086
Equity in loss from
joint venture.......... -- -- --
---------- --------- ----------
Net loss................ $ (380,524) $(135,637) $ (516,161)
========== ========= ==========
Basic and diluted net
loss per share......... $ (0.02) $ (0.03)
========== ==========
Shares used in computing
basic and diluted net
loss per share
calculations........... 18,560,326 204,429(Note 4) 19,460,326
========== ======= ==========
</TABLE>
See accompanying notes to pro forma combined consolidated financial statements.
F-8
<PAGE>
INFOSPACE.COM, INC. AND INEX CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED
CONSOLIDATED FINANCIAL STATEMENTS
Note 1: The Periods Combined
The InfoSpace.com, Inc. consolidated statements of operations for the years
ended December 31, 1996, 1997 and 1998 and for the six months ended June 30,
1998 and 1999 have been combined with the INEX Corporation statements of
operations for the same periods as if the merger had occurred as of the
beginning of the period.
Note 2: Pro Forma Basis of Presentation
The pro forma adjustments made in connection with the development of the pro
forma information 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 Statement of Operations for the years ended
December 31, 1997 and 1998 and for the six months ended June 30, 1998 and 1999
reflect the issuance of 900,000 shares of InfoSpace.com, Inc. Common Stock in
exchange for all of the outstanding stock, warrants, and options of INEX
Corporation. 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.
Note 3: Pro Forma Earnings Per Share
The Unaudited Pro Forma Combined Consolidated Statements of Operations 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.
Note 4: Pro Forma 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 combined for the periods presented. Pro Forma Adjustments
represent the issuance of shares of InfoSpace.com, Inc. Common Stock (1) in
exchange for the exchangeable shares of InfoSpace Canada Holdings Inc. issued
in respect of INEX common shares upon the closing of the combination, (2)
issued directly to INEX Corporation shareholders upon the closing and (3)
issuable upon the exercise or conversion of warrants, stock options and
convertible debentures. 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.
F-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of InfoSpace.com, Inc.
Redmond, Washington
We have audited the accompanying consolidated balance sheets of
InfoSpace.com, Inc. and subsidiary (the Company) as of December 31, 1997 and
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, and the years ended December 31, 1997 and
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. and subsidiary
as of December 31, 1997 and 1998, and results of their operations and their
cash flows for the period from March 1, 1996 (inception) to December 31, 1996,
and the years ended December 31, 1997 and 1998, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Seattle, Washington
February 24, 1999 (August 13,
1999 as to Note 14)
F-10
<PAGE>
INFOSPACE.COM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1997 1998 1999
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 324,415 $ 14,590,634 $108,686,020
Short-term investments, held-to-
maturity........................... -- 72,159,522 58,940,865
Accounts receivable, net of
allowance for doubtful accounts of
$47,000, $597,000 and $562,000
(unaudited)........................ 467,187 3,409,672 4,383,098
Notes receivable.................... -- -- 6,000,000
Prepaid expenses and other current
assets............................. 121,573 3,630,476 4,591,830
---------- ------------ ------------
Total current assets.............. 913,175 93,790,304 182,601,813
Long-term investments, held-to-
maturity............................. -- 1,252,438 70,890,183
Property and equipment, net........... 216,439 1,161,936 1,987,114
Intangible assets, net................ 268,420 5,276,880 19,094,433
Other investments..................... -- 370,790 6,194,331
Other................................. -- 405,906 374,937
---------- ------------ ------------
Total assets...................... $1,398,034 $102,258,254 $281,142,811
========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................... $ 85,814 $ 1,586,118 606,337
Accrued expenses.................... 204,311 5,032,450 4,139,413
Note payable........................ 30,000 -- --
Deferred revenues................... 50,000 1,391,849 1,964,932
---------- ------------ ------------
Total current liabilities......... 370,125 8,010,417 6,710,682
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, par value $.0001--
Authorized, 15,000,000 shares:
issued and outstanding, no shares.. -- -- --
Common stock, par value $.0001--
Authorized, 30,000,000, 50,000,000
and 200,000,000 (unaudited) shares;
issued and outstanding, 22,060,506,
42,283,604 and 47,359,177
(unaudited) shares................. 2,206 4,228 4,736
Additional paid-in capital.......... 1,997,152 107,546,932 292,949,083
Accumulated deficit................. (809,214) (9,865,672) (15,587,566)
Deferred expense--warrants.......... -- (3,126,862) (2,719,011)
Unearned compensation--stock
options............................ (162,235) (310,789) (215,113)
---------- ------------ ------------
Total stockholders' equity........ 1,027,909 94,247,837 274,432,129
---------- ------------ ------------
Total liabilities and stockholders'
equity............................... $1,398,034 $102,258,254 $281,142,811
========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
INFOSPACE.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
March 1 to Years Ended Six Months Ended
December 31, December 31, June 30,
------------ ----------------------- ------------------------
1996 1997 1998 1998 1999
------------ ---------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 199,372 $1,685,096 $ 9,414,450 $ 2,855,010 $11,874,788
Cost of revenues........ 96,641 399,877 1,605,006 498,653 1,960,140
---------- ---------- ----------- ----------- -----------
Gross profit.......... 102,731 1,285,219 7,809,444 2,356,357 9,914,648
Operating expenses:
Product development... 109,671 212,677 599,673 148,509 537,484
Sales and marketing... 230,774 841,074 5,541,261 951,671 10,196,949
General and
administrative....... 163,896 480,398 3,001,434 833,543 3,387,287
Amortization of
intangibles.......... -- 64,056 709,923 120,805 603,940
Acquisition and
related charges...... -- -- 2,800,000 2,800,000 4,912,500
Other--non-recurring
charges.............. -- 137,000 4,500,000 240,000 209,500
---------- ---------- ----------- ----------- -----------
Total operating
expenses........... 504,341 1,735,205 17,152,291 5,094,528 19,847,660
---------- ---------- ----------- ----------- -----------
Loss from
operations......... (401,610) (449,986) (9,342,847) (2,738,171) (9,933,012)
Other income, net....... 21,086 21,296 411,365 43,206 4,287,577
Equity in loss from
joint venture.......... -- -- (124,976) -- (76,459)
---------- ---------- ----------- ----------- -----------
Net loss................ $ (380,524) $ (428,690) $(9,056,458) $(2,694,965) $(5,721,894)
========== ========== =========== =========== ===========
Basic and diluted net
loss per share......... $ (0.02) $ (0.02) $ (0.33) $ (0.12) $ (0.13)
========== ========== =========== =========== ===========
Shares used in computing
basic net loss per
share.................. 18,560,326 21,882,980 27,120,536 23,144,812 44,680,837
========== ========== =========== =========== ===========
Shares used in computing
diluted net loss per
share.................. 18,560,326 21,996,314 27,120,536 23,144,812 44,680,837
========== ========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
INFOSPACE.COM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common stock
----------------- Paid-in Accumulated Deferred Unearned
Shares Amount capital deficit expense Compensation Total
---------- ------ ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 1, 1996
(inception)............ -- $ -- $ -- $ -- $ -- $ -- $ --
Common stock issued..... 21,890,506 2,190 1,369,010 -- -- -- 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................... 21,890,506 2,190 1,470,260 (380,524) -- (71,437) 1,020,489
Common stock issued for
acquisition............ 170,000 16 292,172 -- -- -- 292,188
Unearned compensation--
stock options.......... -- -- 234,720 -- -- (234,720) --
Compensation expense--
stock options.......... -- -- -- -- -- 143,922 143,922
Net loss................ -- -- -- (428,690) -- -- (428,690)
---------- ------ ------------ ------------ ----------- --------- ------------
Balance, December 31,
1997................... 22,060,506 2,206 1,997,152 (809,214) -- (162,235) 1,027,909
Common stock and
warrants issued for
acquisition............ 2,999,976 300 7,902,009 -- -- -- 7,902,309
Common stock issued to
employees.............. 446,502 44 1,674,350 -- -- -- 1,674,394
Common stock issued in
initial public
offering............... 11,500,000 1,150 77,829,753 -- -- -- 77,830,903
Other common stock
issued to investors.... 4,724,790 472 13,438,086 -- -- -- 13,438,558
Warrants issued......... -- -- 40,161 -- -- -- 40,161
Exercise of stock
options................ 551,830 56 1,016,154 -- -- -- 1,016,210
Deferred expense--
warrants............... -- -- 3,262,813 -- (3,262,813) -- --
Warrants expense........ -- -- -- -- 135,951 -- 135,951
Unearned compensation--
stock options.......... -- -- 386,454 -- -- (386,454) --
Compensation expense--
stock options.......... -- -- -- -- -- 237,900 237,900
Net loss................ -- -- -- (9,056,458) -- -- (9,056,458)
---------- ------ ------------ ------------ ----------- --------- ------------
Balance, December 31,
1998................... 42,283,604 4,228 107,546,932 (9,865,672) (3,126,862) (310,789) 94,247,837
Common stock issued in
follow-on public
offering (unaudited)... 4,340,000 434 185,104,627 -- -- -- 185,105,061
Initial public offering
costs (unaudited)...... -- -- (55,464) -- (55,464)
Exercise of stock
options (unaudited).... 303,119 31 353,031 -- -- -- 353,062
Exercise of stock
warrants (unaudited)... 432,454 43 (43) -- -- -- --
Warrants expense
(unaudited)............ -- -- -- -- 407,851 -- 407,851
Unearned compensation--
stock options
(unaudited)............ -- -- -- -- -- 95,676 95,676
Net loss (unaudited).... -- -- -- (5,721,894) -- -- (5,721,894)
---------- ------ ------------ ------------ ----------- --------- ------------
Balance, June 30, 1999
(unaudited)............ 47,359,177 $4,736 $292,949,083 $(15,587,566) $(2,719,011) $(215,113) $274,432,129
========== ====== ============ ============ =========== ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE>
INFOSPACE.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
March 1 to Years Ended December Six Months Ended
December 31, 31, June 30,
------------ ---------------------- -------------------------
1996 1997 1998 1998 1999
------------ --------- ----------- ----------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net loss............... $(380,524) $(428,690) $(9,056,458) $(2,694,965) $ (5,721,894)
Adjustments to
reconcile net loss to
net cash provided
(used) by operating
activities:
Trademark
amortization.......... -- -- 1,500,000 -- 1,500,000
Depreciation and other
amortization.......... 23,513 224,270 991,749 207,307 924,979
Compensation expense--
stock options......... 29,813 143,922 237,900 98,799 95,676
Warrants expense....... -- -- 135,951 -- 407,851
Write-off of in process
research and
development........... -- -- 2,800,000 2,800,000 3,900,000
Noncash issuance of
common stock.......... -- -- 70,000 -- --
Noncash services
exchanged............. -- (60,000) (7,290) 25,873 --
Bad debt expense....... -- 47,000 687,602 255,813 245,783
Equity in loss from
joint venture......... -- -- 124,976 -- 76,459
Loss on disposal of
fixed assets.......... -- 3,743 (3,771) -- 1,904
Gain on sale of
intangible............ -- -- -- -- (7,830)
Cash provided (used) by
changes in operating
assets and
liabilities:
Accounts receivable... (126,574) (387,613) (3,630,087) (687,792) (1,219,209)
Prepaid expense and
other current
assets............... (59,334) (33,152) (2,072,308) 3,140 (2,461,354)
Other long-term
assets............... -- -- (337,500) -- 30,969
Other intangibles..... -- -- (66,865) (30,913) --
Accounts payable...... 39,553 46,261 1,500,305 40,601 (979,781)
Accrued expenses...... 4,663 199,648 4,805,428 412,271 (893,037)
Deferred revenue...... 7,239 42,761 1,341,849 166,387 173,083
--------- --------- ----------- ----------- ------------
Net cash provided
(used) by operating
activities............ (461,651) (201,850) (978,519) 596,521 (3,926,401)
Investing Activities:
Business acquisitions,
net of cash acquired.. -- (14,000) (311,951) (311,951) (18,083,054)
Purchase of
trademark(s).......... -- -- (3,290,000) -- --
Investment in joint
venture............... -- -- (495,767) -- --
Issuance of note
receivable............ -- -- -- -- (6,000,000)
Other investments...... -- -- -- -- (5,500,000)
Purchase of domain
name.................. -- -- -- -- (100,000)
Capitalized internally
developed software.... -- -- -- -- (142,712)
Sale of domain name.... -- -- -- -- 10,000
Purchase of fixed
assets................ (219,375) (120,822) (1,150,807) (73,009) (1,146,018)
Proceeds from sale of
fixed assets.......... -- -- 4,997 -- --
Short-term investments
(purchase) sale....... -- -- (72,159,522) -- 13,218,658
Long-term investments
purchase.............. -- -- (1,252,438) -- (69,637,746)
Other.................. -- (29,087) -- -- --
--------- --------- ----------- ----------- ------------
Net cash used by
investing activities.. (219,375) (163,909) (78,655,488) (384,960) (87,380,872)
Financing Activities:
Proceeds from follow-on
offering, net of
expenses.............. -- -- -- -- 185,105,061
Proceeds from issuance
of common stock to
employees............. -- -- 1,674,394 -- --
Payments for
shareholders for
fractional shares..... -- -- (28) -- --
Proceeds from sale of
warrants.............. -- -- 40,161 -- --
Proceeds from initial
public offering, net
of expenses........... -- -- 77,830,903 -- (55,464)
Proceeds from issuance
of other common stock
to investors.......... 1,371,200 -- 13,338,586 5,238,748 --
Proceeds from exercise
of stock options...... -- -- 1,016,210 -- 353,062
--------- --------- ----------- ----------- ------------
Net cash provided by
financing activities.. 1,371,200 -- 93,900,226 5,238,748 185,402,659
--------- --------- ----------- ----------- ------------
Net Increase (Decrease)
in Cash and Cash
Equivalents............ 690,174 (365,759) 14,266,219 5,450,309 94,095,386
Cash and Cash
Equivalents:
Beginning of period.... -- 690,174 324,415 324,415 14,590,634
--------- --------- ----------- ----------- ------------
End of period.......... $ 690,174 $ 324,415 $14,590,634 $ 5,774,724 $108,686,020
========= ========= =========== =========== ============
Supplemental Disclosure of Noncash
Financing and Investing Activities:
Acquisition of
membership interest of
Yellow Pages on the
Internet, LLC (YPI)
through the Issuance
of common stock and
assumption of $90,000
payable............... $ -- $ 382,188 $ -- $ -- $ --
Acquisition of common
stock of Outpost
Network, Inc. through
the 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 -- --
Settlement of note
payable for noncash
services.............. -- -- 30,000 30,000 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Period from March 1, 1996 (inception) to December 31, 1996, Years Ended
December 31, 1997 and 1998 and Six Months Ended June 30, 1998 and 1999
(unaudited)
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
March 1996. The Company is a leading Internet infrastructure company that
provides private label solutions for content, community and commerce to Web
sites and Internet appliances. The Company focuses on real-world content, 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 completed an initial public offering in December 1998.
The Company derives revenues primarily from national and local advertising,
promotions, including content and commerce promotions, and, to a lesser extent,
non-advertising based private label solutions.
Principles of consolidation: The consolidated financial statements include
the accounts of the Company, InfoSpace Canada.com and its wholly owned
subsidiary Outpost Network, Inc. (Outpost). All significant intercompany
accounts and transactions have been eliminated.
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. Cash and cash equivalents are carried at cost, which approximates
market.
Investments: The Company principally invests its available cash in high-
quality corporate issuers, and in debt instruments of the U.S. Government and
its agencies. At December 31, 1998, the short-term investments consist entirely
of short-term debt instruments. All debt instruments with original maturities
greater than three months from the balance sheet date are considered
investments. Investments maturing after twelve months from the balance sheet
date are considered long-term. The Company accounts for investments in
accordance with SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities. The Company's short-term and long-term investments are
classified as held-to-maturity as of the balance sheet date and are reported at
amortized cost.
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 and software................................. 3 years
Office furniture and equipment.................................. 7 years
Leasehold improvements.......................................... Lease term
</TABLE>
Intangible assets: Goodwill, purchased technology and other intangibles are
amortized on a straight-line basis over their estimated useful lives. All
goodwill, purchased technology and internally developed software currently
recorded are amortized over five years. The trademark is amortized over its
remaining life of nine years and four months. Other intangibles, primarily
consisting of purchased domain name licenses, are amortized over an estimated
useful life of three years.
Other investments: The Company invests in equity instruments of privately-
held, information technology companies for business and strategic purposes.
These investments are included in other long-term assets and are accounted for
under the cost method.
F-15
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other Long-lived 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 loss has been recognized through December 31, 1998.
Revenue recognition: The Company's revenues are primarily derived from
advertising agreements in which the Company receives a fixed fee or performance
based fee.
Local advertising: Guaranteed minimum payments are recognized ratably over
the term of the agreements. Revenues earned above the guaranteed minimum
payments are recognized ratably over the remaining term of the agreements.
National advertising: Revenues from contracts based on the number of
impressions displayed or click throughs provided are recognized as services are
rendered.
Promotions: Revenues from fixed fee content carriage and syndication
agreements are recognized ratably over the related contract term. For content
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.
Commerce: Transaction fees are recognized in the period the transaction
occurred and was reported to the Company by the content providers or online
merchants.
Also included in revenues are barter revenues generated from exchanging
banners for banners, banners for content, or banners for print or other
advertising. Barter revenues are recorded as advertising revenues at the lower
of the estimated fair market value of goods and services received or
impressions given, and are recognized when the Company's advertisements are
run. For barter agreements, the Company records a receivable or liability at
the end of a reporting period for the difference in the fair value of the
services provided or received.
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 consists of expenses associated with the
enhancement, maintenance and support of our content services, including direct
personnel expenses, communication costs such as high-speed Internet access with
dedicated DS-3 communication lines, server equipment depreciation, and license
fees related to third-party content. Fees paid for content licenses are
capitalized and amortized under the straight-line method over the license
period.
Product development: Product development expenses consist principally of
personnel costs for research, design and development of the proprietary
technology used to aggregate, integrate and distribute the Company's content,
community and commerce services.
Advertising costs: Design and production costs for print advertising are
recorded as expense the first time an advertisement appears. Print advertising
costs are expensed when the print advertising appears. Advertising costs
related to electronic impressions are recorded as expense as impressions are
provided. Advertising expense totaled $8,908, $217,798, and $1,261,338, for the
years ended December 31, 1996, 1997, and 1998, respectively. Advertising
expense totaled $415,920 and $1,689,728 for the six months ended June 30, 1998
and 1999 (unaudited), respectively.
F-16
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unearned compensation: Unearned compensation represents the unamortized
difference between the option exercise price and the deemed 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 (Note 4). The
amortization of deferred compensation is charged to operations and is amortized
over the vesting period of the options.
Deferred expense-warrants: Deferred expense-warrants represents the fair
value of the warrants that were issued and will be expensed ratably over the
four year vesting period. The amortization of deferred warrant expense is
charged to sales and marketing expense and is amortized over the term of the
contractual agreement with America Online, Inc. (see Notes 4 and 6).
Concentration of credit risk: Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of cash
equivalents, short-term investments, and trade receivables. The Company places
its cash equivalents and investments 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, 1997 and 1996, no one customer accounted for more than 10% of revenues. For
the year ended December 31, 1998, one customer accounted for approximately 21%
of revenues. For the six months ended June 30, 1999, one customer accounted for
27% (unaudited) of revenues. At December 31, 1997, one customer accounted for
approximately 14% of gross accounts receivable. At December 31, 1998, one
customer accounted for approximately 27% of gross accounts receivable. At June
30, 1999, one customer accounted for approximately 20% (unaudited) of gross
accounts receivable. These instruments are generally unsecured and uninsured.
Income taxes: The Company has adopted SFAS No. 109, Accounting for Income
Taxes. Under SFAS No. 109, deferred tax assets, including net operating loss
carryforwards, and liabilities are determined based on temporary differences
between the book and tax basis of assets and liabilities. The Company believes
sufficient uncertainty exists regarding the realizability of the deferred tax
assets such that a full valuation allowance is required.
Reclassifications: Management determined that distribution revenue share
costs, previously classified as Cost of Revenues, were more appropriately
classified as Sales and Marketing. Under these agreements, affiliates are paid
a portion of certain advertising revenues generated from traffic on co-branded
distribution pages. This reclassification has been made to the 1998 and prior
financial statements to conform with the 1999 presentation.
To reflect ongoing expenses from core operations, management determined that
amortization of intangibles was more appropriately classified in one line item.
This reclassification has been made to the 1998 and prior financial statements
to conform with the 1999 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.
Stock split: A two-for-one stock split of the Company's common stock was
effected in May 1999. All references in the financial statements to shares,
share prices, per share amounts and stock plans have been adjusted
retroactively for the two-for-one stock split.
F-17
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 years ended December 31, 1997 and 1998.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivatives and
Hedging Activities, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. Because the Company has never used nor currently intends to use
derivatives, management does not anticipate that the adoption of this new
standard will have a significant effect on earnings or the financial position
of the Company.
Note 2: Balance Sheet Components
The following balance sheet components are presented as of the dates noted
below.
Cash and Cash Equivalents:
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1997 1998 1999
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
Cash.................................. $324,415 $ 173,566 $ 1,032,271
Commercial paper...................... -- -- 86,426,697
Money market.......................... -- 14,417,068 19,277,052
Other................................. -- -- 1,950,000
-------- ----------- ------------
$324,415 $14,590,634 $108,686,020
======== =========== ============
</TABLE>
Short and Long-Term Investments at December 31, 1998:
<TABLE>
<CAPTION>
Amortized Fair- Unrealized Unrealized
Cost Value Gain Loss
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Commercial paper.............. $66,668,475 $66,681,481 $13,259 $(253)
Municipal securities.......... 1,499,665 1,500,150 485 --
U.S. Government securities.... 5,243,820 5,243,433 -- (387)
----------- ----------- ------- -----
$73,411,960 $73,425,064 $13,744 $(640)
=========== =========== ======= =====
</TABLE>
F-18
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Maturity information is as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Within one year..................................... $72,159,522 $72,173,013
1 year through 5 years.............................. 1,252,438 1,252,051
----------- -----------
$73,411,960 $73,425,064
=========== ===========
</TABLE>
Short and Long-Term Investments at June 30, 1999 (unaudited):
<TABLE>
<CAPTION>
Amortized Market Unrealized Unrealized
Cost Value Gain Loss
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Corporate notes and
bonds................... $ 66,609,635 $ 65,525,101 $ 2,133 $(1,086,667)
U.S. Government
securities.............. 26,604,503 28,409,384 1,973,537 (168,656)
Commercial paper......... 22,547,855 22,532,673 -- (15,182)
Certificate of deposit... 14,069,055 13,985,472 373 (83,956)
------------ ------------ ---------- -----------
$129,831,048 $130,452,630 $1,976,043 $(1,354,461)
============ ============ ========== ===========
</TABLE>
Maturity information is as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
------------ ------------
<S> <C> <C>
Within one year................................... $ 58,940,865 $ 58,639,936
1 year through 5 years............................ 70,890,183 71,812,694
------------ ------------
$129,831,048 $130,452,630
============ ============
</TABLE>
Prepaid expenses and other assets:
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1997 1998 1999
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
Prepaid carriage fees.................. $ -- $1,171,874 $2,265,204
Prepaid trademark license.............. -- 1,500,000 --
Interest receivable.................... -- 9,874 980,502
Other.................................. 121,573 948,728 1,346,124
-------- ---------- ----------
$121,573 $3,630,476 $4,591,830
======== ========== ==========
</TABLE>
Property and equipment:
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1997 1998 1999
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
Computer equipment.................... $207,817 $1,390,988 $2,206,079
Office equipment...................... 3,044 54,366 149,108
Office furniture...................... 8,514 77,789 141,917
Software.............................. -- -- 128,341
Leasehold improvements................ -- 17,632 55,600
-------- ---------- ----------
219,375 1,540,775 2,681,045
Accumulated depreciation.............. (23,513) (378,839) (693,931)
-------- ---------- ----------
$195,862 $1,161,936 $1,987,114
======== ========== ==========
</TABLE>
F-19
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangibles assets:
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1997 1998 1999
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
Goodwill.............................. $ 310,583 $4,860,671 $18,563,725
Core technology....................... -- 800,000 1,200,000
Trademark............................. -- 290,000 290,000
Other................................. -- 40,000 262,713
Domain name........................... -- 60,000 156,875
Advertising contracts................. 85,417 85,417 85,417
--------- ---------- -----------
396,000 6,136,088 20,558,730
Accumulated amortization.............. (127,580) (859,208) (1,464,297)
--------- ---------- -----------
$ 268,420 $5,276,880 $19,094,433
========= ========== ===========
</TABLE>
Accrued expenses:
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1997 1998 1999
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
Compensation and related.............. $ 33,777 $ 193,592 $1,552,596
Carriage fees and revenue share....... -- 93,067 1,626,215
Legal fees............................ 12,717 -- 321,450
Settlement costs...................... 137,000 4,500,000 209,500
Other................................. 20,817 245,791 429,652
--------- ---------- ----------
$ 204,311 $5,032,450 $4,139,413
========= ========== ==========
</TABLE>
Note 3: Notes Receivable (unaudited)
On June 30, 1999, the Company loaned an unrelated third party $6.0 million.
The short-term note is due March 31, 2000 and accrues interest at 12% per
annum. The note is secured by all of the assets of the borrower.
Note 4: 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.
F-20
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Also, 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.
On April 6, 1999 Board of Directors approved a two-for-one stock split of the
Company's common stock. The stock split was effective on May 5, 1999. All
references in the financial statements to shares, share prices, per share
amounts and stock plans have been adjusted retroactively for the two-for-one
stock split.
On May 24, 1999, the stockholders of the Company approved an amendment to the
Company's Certificate of Incorporation to increase the authorized number of
shares of the Company's common stock to 200,000,000 shares. (unaudited).
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 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 6,000,000 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. Additional options have been
granted to retain certain existing employees, which options vest monthly over
four years.
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 725,106 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.
On May 24, 1999, the stockholders' of the Company approved an amendment to
the Company's 1996 Flexible Stock Incentive Plan to increase the number of
share reserved for issuance by 4,000,000. The stockholders' also approved an
amendment to the Stock Incentive Plan to annually increase the number of shares
reserved for issuance on the first day of the Company's fiscal year beginning
in 2000 by the amount equal to the lesser of (A) 1,000,000 (B) three percent
(3%) of the Company's outstanding shares at the end of the Company's preceding
fiscal year, and (C) a lesser amount determined by the Board of Directors. The
stockholders' also approved an amendment to the Stock Incentive Plan to limit
the number of shares of Common Stock that may be granted to one individual
pursuant to stock options in any fiscal year of the
F-21
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company to 2,000,000 (plus an additional 2,000,000 shares in connection with
his or her initial employment with the Company, which grant shall not count
against the limit). (unaudited).
Included in the table below as outstanding at June 30, 1999, are options to
purchase 30,625 (unaudited) shares that were issued outside of the Plan, 625 of
which were exercisable as of June 30, 1999.
Activity and price information regarding the options are summarized as
follows:
<TABLE>
<CAPTION>
Weighted
average
Options exercise price
--------- --------------
<S> <C> <C>
Outstanding, March 1, 1996 (inception)................ -- $ --
Granted............................................. 2,063,462 0.07
---------
Outstanding, December 31, 1996........................ 2,063,462 0.07
Granted............................................. 702,500 1.54
---------
Outstanding, December 31, 1997........................ 2,765,962 0.44
Granted............................................. 3,967,204 5.15
Cancelled........................................... (725,106) 77
Exercised........................................... (551,830) 1.84
Forfeited........................................... (156,750) 2.15
---------
Outstanding, December 31, 1998........................ 5,299,480 3.73
Granted (unaudited)................................. 655,200 30.33
Cancelled (unaudited)............................... (27,000) 27.42
Exercised (unaudited)............................... (303,119) 1.21
---------
Outstanding, June 30, 1999 (unaudited)................ 5,624,561 --
=========
Options exercisable, December 31, 1998................ 1,509,466 0.66
=========
Options exercisable, June 30, 1999 (unaudited)........ 1,763,803 1.25
=========
</TABLE>
Information regarding stock option grants during the period from March 1,
1996 to December 31, 1996, the years ended December 31, 1997 and 1998 and six
months ended June 30, 1999 (unaudited) is summarized as follows:
<TABLE>
<CAPTION>
Years Ended
---------------------------------------------------------
March 1, 1996 to December 31,
1996 December 31, 1997 December 31, 1998
----------------------------- --------------------------- -----------------------------
Weighted Weighted Weighted
Average Weighted Average Weighted Average Weighted
exercise Average exercise Average exercise Average
Shares price fair value Shares price fair value Shares price fair value
--------- -------- ---------- ------- -------- ---------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise price
exceeds market
price.......... 110,000 $1.00 $0.02 500,000 $2.00 $ -- -- $ -- $ --
Exercise price
equals market
price.......... 1,800,000 0.01 -- -- -- -- 3,449,284 5.82 1.33
Exercise price
is less than
market price... 153,462 0.03 .80 202,500 0.39 1.33 518,000 .69 1.38
<CAPTION>
Six months ended
June 30, 1999
(unaudited)
---------------------------
Weighted
Average Weighted
exercise Average
Shares price fair value
------- -------- ----------
<S> <C> <C> <C>
Exercise price
exceeds market
price.......... -- $ -- $ --
Exercise price
equals market
price.......... 650,200 30.33 40.45
Exercise price
is less than
market price... -- -- --
</TABLE>
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 market value of the stock at the
grant date. In those cases where options have been granted when the option
price is below fair market value, the Company recognizes compensation expense
over the vesting period using the aggregated percentage of
F-22
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
compensation accrued method as prescribed by Financial Accounting Standards
Board Interpretation No. 28. Compensation expense of $29,813, $143,922,
$237,900 was recognized during the period from March 1, 1996 (inception) to
December 31, 1996, and for the years ended December 31, 1997 and 1998,
respectively, for options granted with exercise prices less than grant date
fair market 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 December 31, 1998: risk-free interest
rate ranging from 4.24% to 6%; expected dividend yield of 0%; no volatility
(prior to becoming a public company); and an 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
period from March 1, 1996 (inception) to December 31, 1996, and the years ended
December 31, 1997 and 1998, would have been adjusted to the following pro forma
amounts:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Net loss as reported........................ $(380,524) $(428,690) $(9,056,458)
Net loss, pro forma......................... (380,859) (430,180) (9,472,322)
Basic net loss per share, pro forma......... (0.02) (0.02) (0.35)
</TABLE>
Additional information regarding options outstanding as of December 31, 1998,
is as follows:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
-------------------------------------- --------------------------
Weighted
average
remaining Weighted Weighted
Range of Number contractual average Number average
exercise prices Outstanding life (yrs.) Exercise price Exercisable exercise price
--------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.01 1,965,876 7.31 $0.01 1,273,480 $0.01
0.10 28,462 7.67 0.10 28,462 0.10
1.00-1.50 44,646 8.28 1.23 24,750 1.00
2.00-3.00 693,396 8.93 2.02 74,916 2.00
3.75-4.00 233,000 9.56 3.88 -- --
6.00-7.50 2,330,100 9.93 7.41 107,858 7.50
23.53 4,000 10.00 23.53 -- --
--------- ---------
5,299,480 8.78 $3.73 1,509,466 $0.66
========= =========
</TABLE>
At December 31, 1998, 769,900 shares were available for future grants under
the Plan.
In connection with the May and August 1998 private placement offering, the
Company issued warrants to purchase 4,127,672 shares of common stock to five
third-party participants for consulting services performed in identifying,
structuring and negotiating future financings. These warrants expire between
May 21, 2008 and August 6, 2008. The exercise prices are as follows:
<TABLE>
<CAPTION>
Shares Price
------ -----
<S> <C>
2,201,424............................... $2.00
963,124............................... 3.00
963,124............................... 5.00
</TABLE>
F-23
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In July 1998, the Company issued warrants to purchase 955,934 shares of
common stock at an exercise price of $0.01 to a former consultant in
conjunction with the acquisition of Outpost (Note 4). These warrants expire on
October 30, 2002.
On August 24, 1998, the Company issued to AOL warrants to purchase up to
1,979,832 shares of common stock, which warrants vest in 16 equal quarterly
installments over four years, conditioned on the delivery by AOL of a minimum
number of searches each quarter on the Company's white pages directory service.
The warrants have an exercise price of $6.00 per share.
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 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
446,502 shares at $3.75 per share. The plan was terminated on August 24, 1998.
1998 Employee Stock Purchase Plan: The Company adopted the 1998 Employee
Stock Purchase Plan (the ESPP) in August 1998. The ESPP was implemented upon
the effectiveness of the 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 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 900,000 shares of common stock are authorized for issuance under
the ESPP.
The ESPP was implemented with six-month offering periods, with the first such
period commencing upon the effectiveness of the initial public offering and
ending July 31, 1999. Thereafter, offering periods will begin on each February
1 and August 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 July 31, 1999. 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 as of June 30,
1999 (unaudited).
Note 5: 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. YPI is a yellow pages sales consortium business. In
conjunction with the acquisition, the Company acquired certain advertising
agreements and assumed a note payable for $90,000.
In connection with the acquisition of YPI during May 1997, 2,000,000 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
170,000 escrow shares were issued to the sellers on January 2, 1998. These
shares were included in the calculation of basic earnings
F-24
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
per share as of January 1, 1998, and in the calculation of diluted earnings per
share as of the effective date of acquisition, May 1, 1997. The remaining
1,830,000 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.
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, as determined after the release of shares
from escrow was finalized, is summarized as follows:
<TABLE>
<CAPTION>
Book and
fair value
----------
<S> <C>
Book value of net liabilities assumed at cost................. $(90,000)
Fair value adjustments:
Fair value of purchased advertising contracts............... 85,417
--------
Fair value of net assets acquired............................. (4,583)
Purchase price:
Acquisition costs........................................... 14,000
Fair value of 170,000 shares issued......................... 292,000
--------
Excess of purchase price over net assets acquired, allocated
to goodwill (amortized over five years)...................... $310,583
========
</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 2,999,976 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 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 assumed at cost................ $ (191,000)
Fair value adjustments:
Fair value of purchased technology, including in-process
research and development.................................. 3,600,000
Fair value of assembled workforce.......................... 40,000
----------
Fair value of net assets acquired............................ 3,449,000
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 five years)..................... $4,543,000
==========
</TABLE>
F-25
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The $3,600,000 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
with no alternative future use to be recorded and charged to expense in the
period acquired. Accordingly, the results of operations for the year ended
December 31, 1998, include the write-off of $2,800,000 of purchased in-process
research and development. The remaining $800,000 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 years ended December 31, 1998 and 1997, 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, 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>
(unaudited)
1997 1998
----------- ------------
<S> <C> <C>
Revenue......................................... $ 1,915,990 $ 9,333,459
Net loss........................................ (3,130,332) (10,551,855)
Basic and diluted net loss per share............ (0.13) (0.37)
</TABLE>
My Agent Technology (unaudited): On June 30, 1999 the Company acquired the
MyAgent technology and related assets from Active Voice Corporation for $18
million dollars. The acquisition was accounted for as a purchase in accordance
with the provisions of Accounting Principles Board Opinion ("APB") No. 16.
Under the purchase method of accounting, the purchase price is allocated to the
assets acquired and the liabilities assumed based on their fair values at the
date of the acquisition. Other than the MyAgent technology modules, no other
assets or liabilities were assumed as part of this acquisition.
The Company recorded a non-recurring charge of $3.9 million for in-process
research and development that had not yet reached technological feasibility and
had no alternative future use. The Company also recorded a one-time charge of
$1.0 million for expenses incurred with the transaction. These expenses
consisted of bonus payments made to certain Active Voice MyAgent team employees
who accepted employment with InfoSpace.com but who are under no agreement to
continue their employment with InfoSpace. The Company also recorded $13.7
million of goodwill and $480,000 of other intangible assets. These intangibles
will be amortized over their useful life, which the Company has estimated to be
five years.
The allocation of the purchase price is summarized as follows:
<TABLE>
<S> <C>
Fair value of purchased technology, including in-process
Research and development.................................... $ 4,300,000
Fair value of assembled workforce............................ 80,000
-----------
Fair value of net assets acquired............................ 4,380,000
Purchase price:
Cash paid.................................................. 18,000,000
Acquisition costs.......................................... 100,000
-----------
Excess of purchase price over net assets acquired, Allocated
to goodwill (amortized over five years)..................... $13,720,000
===========
</TABLE>
F-26
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The $4.3 million 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
with no alternative future use to be recorded and charged to expense in the
period acquired. Accordingly, the results of operations for the quarter ended
June 30, 1999, include the write-off of $3.9 million of purchased in-process
research and development. The remaining $400,000 represents the purchase of
core technology which is being amortized over an estimated useful life of five
years.
The MyAgent product team was not accounted for as a separate entity, a
subsidiary, or a line of business, or division of the business, but rather was
part of the research and development group. Accordingly, historical financial
information is not available. The Company expects these modules to be fully
integrated into the Company's full suite of Internet service offerings.
Further, the modules will not be distinguishable market segments for financial
reporting purposes or for management purposes.
Note 6: Commitments and Contingencies
The Company has noncancellable operating leases for corporate facilities. The
leases expire through June, 2004. Rent expense under operating leases totaled
$36,000, $83,000 and $179,000 for the period from March 1, 1996 (inception) to
December 31, 1996, the years ended December 31, 1997 and 1998, respectively.
Rent expense under operating leases totaled $41,000 and $187,000 (unaudited)
for the six months ended June 30, 1998 and 1999, respectively. The Company also
has noncancellable carriage fee agreements with certain affiliates.
Future minimum rental payments required under noncancellable operating leases
are as follows for the periods ending December 31:
<TABLE>
<S> <C>
1999............................................................ $ 307,576
2000............................................................ 308,184
2001............................................................ 314,160
2002............................................................ 269,511
2003............................................................ 179,131
----------
$1,378,562
==========
</TABLE>
Future payments required under noncancellable affiliate carriage fee
agreements are as follows for the periods ending December 31:
<TABLE>
<S> <C>
1999............................................................ $5,830,141
2000............................................................ 2,807,143
2001............................................................ 1,750,000
2002............................................................ 750,000
----------
$1,137,284
==========
</TABLE>
Trademark license agreements: Effective as of July 1, 1998, the Company
entered into two trademark license agreements with Netscape Communications
Corporation (Netscape) to license two of Netscape's trademarks for one-time
nonrefundable license fees totaling $3,000,000. The trademark license fees were
capitalized and amortized over one year, the expected useful life of the
trademarks. The trademarks were fully amortized at June 30, 1999 (unaudited).
F-27
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Directory services agreements: The Company entered into two directory
services agreements with Netscape effective as of July 1, 1998. Under these
agreements, which provide for a one-year term, with automatic renewal, the
Company serves as the exclusive provider of co-branded yellow pages and white
pages directory services on the Netscape home page (Netcenter). Netscape has
guaranteed the Company a minimum level of use of the Company's yellow pages and
white pages directories, and the Company has agreed to pay Netscape a carriage
fee each quarter equal to the product of (x) the cost per click through as
specified in the applicable directory services agreement and (y) the number of
click throughs delivered by Netscape, up to a specified maximum. The Company
accrues monthly a liability for the estimated click throughs delivered.
Netscape reports the number of click throughs by month on a quarterly basis and
invoices the Company on a quarterly basis. Payments to Netscape will be
recorded as sales and marketing expenses during the quarter in which the click
throughs occur. This minimum payment is included in the noncancellable
affiliate carriage fee payments disclosed above. The Company expects Netscape
to meet the minimum guaranteed click throughs during the period of the
directory services agreements. In the event that Netscape fails to deliver the
guaranteed minimum number of click throughs, Netscape has agreed to either
continue the link to the Company's content services beyond the term of the
agreement until the guaranteed minimum click throughs have been achieved or
deliver to the Company a program of equivalent value as a remedy for the
shortfall in click throughs. Netscape and the Company will share advertising
revenue generated from a search of the Company's directory services initiated
on Netscape's home page.
Interactive Marketing Agreement (unaudited): On June 30, 1999 the Company
entered into an agreement with AOL to provide white page directory services to
AOL's Compuserve and Digital City divisions and its Netscape Communications
subsidiary for a two year term. Pursuant to the agreement, the Company agreed
to provide white pages listings and directory services. The Company is required
to pay to AOL a bi-annual carriage fee. In return, AOL has agreed to deliver a
minimum number of searches each year. If AOL delivers more searches in either
or both of the years, we are required to pay AOL additional fees on a cost per
search basis. In the event that there is a shortfall in searches as of the end
of the initial two year term of the agreement, AOL will extend the term for six
months or until the shortfall is made up, whichever occurs first. The Company
will account for revenue and revenue sharing under the agreements with AOL
under our existing revenue recognition policies described in our Note 1. The
total carriage fee payments to be made under the white pages directory services
agreement will be recognized based on actual searches delivered over the term
of the agreement as sales and marketing expense.
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. Pursuant to the white
pages directory services agreement, the Company has agreed to provide to AOL
white pages listings and directory service. The Company is required to pay to
AOL a quarterly carriage fee, the retention of which is conditioned on the
quarterly achievement of a minimum number of searches on the AOL white pages
site. The quarterly carriage fee is paid in advance at the beginning of the
quarter in which the searches are expected to occur and is recorded as a
prepaid expense in the quarter it is paid. The fee is refundable if the minimum
number of searches on the AOL white pages site for such quarter is not
achieved. In addition, AOL has guaranteed to the Company a minimum number of
searches over the term of the agreement. In the event that AOL does not deliver
the guaranteed minimum number of searches over the term of the agreement, AOL
has agreed to pay to the Company a cash penalty payment. The Company will share
with AOL revenues generated by advertising on the Company's white pages
directory services delivered to AOL. The Company is entitled to a greater
percentage of advertising revenues than is AOL if the amount of such revenues
received by the Company is less than the carriage fees paid to AOL.
The Company has agreed to provide white pages directory services to AOL for a
three-year term beginning on November 19, 1998, which term may be extended for
four additional one-year terms at AOL's
F-28
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
discretion. The agreement may be terminated by AOL for any reason after 18
months or at any time upon the acquisition by AOL of a competing white pages
directory services business. In the event of any such termination, AOL is
required to pay a termination fee to the Company. In addition, without the
payment of a termination fee, AOL has the right to terminate the agreement in
the event of a change of control of the Company.
The Company has agreed to provide classifieds information services to AOL for
a two-year term, with up to three one-year extensions at AOL's discretion. AOL
has agreed to pay to the Company a quarterly fee and will share with the
Company revenues generated from payments by individuals and commercial listing
services for listings on the AOL classifieds 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 1,979,832 shares of common stock, which warrants
vest in 16 equal quarterly installments over four years, conditioned on the
delivery by AOL of a minimum number of searches each quarter on the Company's
white pages directory service. The warrants have an exercise price of $6.00 per
share.
The revenue and revenue sharing under the agreements with AOL will be
accounted for under the Company's existing revenue recognition policies
described in Note 1. The Company expects AOL to meet the minimum number of
searches each quarter. Accordingly, the total carriage fee payments to be made
under the white pages directory services agreement will be recognized ratably
over the term of the agreement as sales and marketing expense. However, if AOL
does not deliver the minimum searches on the AOL white pages during that
quarter, then AOL is obligated to refund the quarterly carriage fee paid for
that specific quarter, in which case the Company would credit prepaid expense
and reduce the total cost of the white pages directory services agreement by
the amount of the refund. The adjusted total cost of the agreement would be
recognized ratably over the remaining term of the agreement as sales and
marketing expense, which term would include the quarter in which AOL did not
deliver the minimum number of searches. For at least the first two years of the
white pages agreement, the Company expects that actual carriage fee payments
will exceed the sales and marketing expense recorded for the quarter in which
the payment is made. As such, the Company expects to experience increases in
its prepaid expense account during this time. These fees are included in the
noncancellable affiliate carriage fee payments disclosed above. Any termination
fee paid to the Company by AOL will be recognized as revenue when paid. The
warrants were valued using the fair value method, as required under SFAS No.
123. The fair value of the warrants was approximately $3,300,000 at the date of
grant, and is being amortized ratably over the four-year vesting period. The
underlying assumptions used to determine the value of the warrants are an
expected life of six years and a 5.5% risk-free interest rate.
Litigation: On December 7, 1998, a complaint was filed against the Company on
behalf of an alleged former employee in Superior Court for Suffolk County in
the Commonwealth of Massachusetts alleging that he was terminated without cause
and that he entered into an agreement with us that entitles him to an option to
purchase 4,000,000 shares of common stock or 10% of the Company's equity. The
complaint alleges breach of contract, breach of the covenant of good faith,
breach of fiduciary duty, misrepresentation, promissory estoppel, intentional
interference with contractual relations and unfair and deceptive acts and
practices, seeking specific performance of the alleged agreement for 10% of the
Company's equity, damages
F-29
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
equal to the value of 10% of the Company's equity, punitive damages and
attorneys' fees and costs and treble damages under the Massachusetts Consumer
Protection Act (Mass. G.L. Chapter 93A). On January 7, 1999, the suit was
removed to the United States District Court for the District of Massachusetts.
Discovery has commenced and a trial is tentatively scheduled for March 2000.
The Company is currently investigating the claims at issue and believes that it
has meritorious defenses to such claims. Nevertheless, litigation is inherently
uncertain and the Company may not prevail in this suit. To the extent that 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. This could have a material adverse effect on the Company's
results of operations, and any such issuances would be dilutive to existing
stockholders, the dilutive impact of which may be mitigated to the extent it is
offset by shares of common stock in an escrow account established by the
Company's Chief Executive Officer.
On December 23, 1998, the Company initiated litigation against Internet
Yellow Pages, Inc., or IYP, by filing suit in United States District Court for
the Western District of Washington. On February 3, 1999, the Company served a
first amended complaint on IYP and Greg Crane, an agent of IYP, in which the
Company asserted claims for (a) account stated, (b) breach of contract, and (c)
fraud. Neither IYP nor Crane have answered our complaint. On February 11, 1999,
however, the Company was served with a complaint filed by IYP in Arizona
Superior Court for Maricopa County, which complaint was filed on February 3,
1999. In its complaint, IYP asserts causes of action for breach of contract,
fraud, extortion, and racketeering under Arizona Revised Statutes, Section 13-
2301(D)(l) and (t), and seeks relief consisting of $1,500,000 and other
unquantified money damages, punitive damages, treble damages under Arizona
Revised Statutes, Sec. 13-2314.04, and attorney's fees. On March 5, 1999, IYP
answered the Company's complaint in the Washington action, and asserted claims
for breach of contract, fraud, extortion and Consumer Protection Act, or CPA,
violations. IYP seeks relief consisting of $1,500,000 and other unquantified
money damages, treble damages under the CPA, and attorneys' fees. Trial in the
Washington action is set for April 2000, and discovery is ongoing; the Arizona
action is presently stayed. The Company is currently investigating the claims
and believes it has meritorious defenses to such claims. Nevertheless,
litigation is uncertain and the Company may not prevail in this suit.
On February 24, 1999, the Company received a letter from counsel for a former
content provider claiming that it is entitled to an option to acquire up to 5%
of InfoSpace.com. The Company reviewed the claim and believes that it is
entirely without merit. The Company responded to the counsel accordingly in a
letter dated March 4, 1999 and intends to vigorously defend any suit if filed.
To the extent that the Company is required to issue shares of its common stock
or options to purchase common stock as a result of the claim, the Company would
recognize an expense equal to the number of shares issued multiplied by the
fair value of the Company's common stock on the date of issuance, less the
exercise price of any options required to be issued. This could harm the
Company's results of operations, and any such issuances would be dilutive to
existing stockholders, the impact of which may be mitigated to the extent it is
offset by shares of common stock in an escrow account established by the
Company's Chief Executive Officer.
Other-Non-recurring: On February 22, 1999, the Company reached a settlement
with a former employee. Under the terms of the settlement the former employee
will receive a cash payment of $4.5 million. The Company had previously accrued
a liability of $240,000 for estimated settlement costs. Accordingly, the
Company has recorded an additional expense of $4,260,000 for the difference
between the accrued liability and the actual settlement amount. As this
subsequent event was settled after December 31, 1998 but prior to the issuance
of the financial statements, the additional expense has been recorded in the
fourth quarter of 1998.
F-30
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On July 23, 1999, the Company settled the patent infringement claim that was
filed by Civix-DDI, LLC in January 1999. Under the settlement agreement, the
patents have been licensed to the Company in exchange for a lump sum royalty
payment of $209,500 (unaudited). This settlement payment has been accrued in
the quarter ended June 30, 1999 and is reflected in Other-non-recurring
charges.
Contingencies: In the Company's early stage of development, the Company did
not clearly document arrangements with employees and consultants, including
matters relating to the issuance of stock options. As a result of this
incomplete documentation, the Company may receive claims in the future
asserting rights to acquire common stock.
Note 7: Income Taxes
No provision for federal income tax has been recorded as the Company has
incurred net operating losses through December 31, 1998 and through the six
months ended June 30, 1999 (unaudited). 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,
1997 1998 1999
--------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward......... $ 106,000 $ 36,000 $ 3,777,000
Intangible amortization................. 37,000 60,000 61,000
Compensation expense--stock options..... 59,000 59,000 --
Allowance for bad debt.................. 16,000 203,000 191,000
Litigation accrual...................... 47,000 1,530,000 --
Warrants................................ -- 46,000 185,000
Deferred revenue........................ -- 473,000 473,000
Accrued carriage fees................... -- -- 383,000
Other, net.............................. 10,000 34,000 66,000
--------- ----------- -----------
Gross deferred tax assets............. 275,000 2,441,000 5,136,000
Deferred tax liabilities:
Purchased technology.................... -- 252,000 242,000
Prepaid advertising..................... -- 113,000 --
Depreciation............................ 2,000 13,000 12,000
Compensation expense -- stock options
and ESPP............................... -- -- 2,255,000
Other, net.............................. 2,000 -- 42,000
--------- ----------- -----------
Gross deferred tax liabilities........ 4,000 378,000 2,551,000
--------- ----------- -----------
Net deferred tax assets................... 271,000 2,063,000 2,585,000
Valuation allowance....................... (271,000) (2,063,000) (2,585,000)
--------- ----------- -----------
Deferred tax balance...................... $ -- $ -- $ --
========= =========== ===========
</TABLE>
At December 31, 1997 and 1998 and June 30, 1999 (unaudited), 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 years ended December 31, 1997 and 1998, was $144,000 and
$1,792,000, respectively.
F-31
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8: 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 4, were
included in the computation of diluted loss per share as they were
antidilutive. Options and warrants to purchase a total of 2,025,000, 2,726,000,
12,362,918 and 12,245,859 shares of common stock were excluded from the
calculations of diluted loss per share for the period from March 1 to December
31, 1996, the years ended December 31, 1997 and 1998 and the six months ended
June 30, 1999, respectively. 170,000 contingently issuable shares of common
stock have been excluded from the calculation of basic earnings per share for
the year ended December 31, 1997 (Note 4).
Note 9: Information on Products and Services
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 statements for the year ended December 31, 1998. The adoption of SFAS
No. 131 did not have a material effect on the Company's primary consolidated
financial statements but did affect the Company's disclosures.
The Company generates substantially all of its revenues through common,
aggregated and integrated content delivered through a common physical
infrastructure, and therefore the Company has only one reportable segment.
Substantially all revenues are generated from domestic sources. All Company
long-lived assets are physically located within the United States.
Total operating expenses are controlled centrally based on established
budgets by operating department. Operating departments include product
development, sales and marketing, account management and customer service, and
finance and administration. Assets, technology, and personnel resources of the
Company are shared and utilized for all of the Company's service offerings.
These resources are allocated based on contractual requirements, the
identification of enhancements to the current service offerings, and other non-
financial criteria. The Company does not prepare operating statements by
revenue source. The Company does not account for, and does not report to
management, its assets or capital expenditures by revenue source.
F-32
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Information
Revenues are derived from three revenue sources: advertising, promotions, and
non-advertising based private label solutions. Advertising revenue includes
national and local advertising, and classifieds. Promotions revenue includes
content carriage and syndication. Other revenues include technology licensing,
co-brand fees, and e-commerce transactions. Contracts with customers often
include revenue from more than one revenue source.
<TABLE>
<CAPTION>
Years ended December 31, Six months ended June 30,
------------------------------ --------------------------
1996 1997 1998 1998 1999
-------- ---------- ---------- ------------ -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Advertising revenues.... $168,679 $1,465,354 $7,321,752 $ 2,047,549 $ 9,367,512
Promotions revenues..... 10,000 189,106 1,620,924 640,030 2,368,828
Other revenues.......... 20,693 30,636 471,774 167,431 138,448
-------- ---------- ---------- ------------ -------------
Total revenues.......... $199,372 $1,685,096 $9,414,450 $ 2,855,010 $ 11,874,788
======== ========== ========== ============ =============
</TABLE>
Customer Information
For the six months ended June 30, 1999, one customer accounted for
approximately 27% (unaudited) of revenues. For the year ended December 31,
1998, the same customer accounted for approximately 21% of revenues. For the
year ended December 31, 1997 and for the period from March 1, 1996 (inception)
to December 31, 1996, no one customer accounted for more than 10% of revenues.
Note 10: Related-party transactions
During the period from March 1, 1996 (inception) to December 31, 1996, years
ended December 31, 1997 and 1998, the Company sold advertising to an entity in
which the Company's chief executive officer has an equity interest resulting in
revenues of $10,000, $200,000 and $19,269. For the six months ended June 30,
1998 and 1999, the Company sold advertising to the same entity resulting in
revenues of $174 and $297,905 (unaudited), respectively.
Note 11: Investment in Joint Venture
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. Pursuant to the terms of the Joint
Venture Agreement, both the Company and its joint venture partner entered into
license agreements with TDL InfoSpace for offsetting payments to each of the
Company and its joint venture partner of (Pounds)50,000. These amounts were not
intended to represent the fair market value of the license agreements to an
unrelated third party. Under the license agreement between the joint venture
partner and TDL InfoSpace, the joint venture partner licenses its U. K.
directory information database to TDL InfoSpace. Under the Joint Venture
Agreement, the joint venture partner also sells Internet yellow pages
advertising of the joint venture through its local sales force. Under the
license agreement between the Company and TDL InfoSpace, the Company licenses
its technology and provides hosting services to TDL InfoSpace. In addition,
under the Company's license agreement, TDL InfoSpace is obligated to reimburse
F-33
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Company for any incremental costs incurred by the Company for its efforts
with respect to the hosting services. In the event that TDL InfoSpace expands
into other countries, it is required to pay to the Company an additional
technology license fee of $50,000 per additional country. The Company's license
agreement also provides that, in the event that the Company no longer holds any
ownership interest in the joint venture, InfoSpace and the Company will
negotiate an arm's-length license fee for the Company's technology, not to
exceed $1,000,000. 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 accounts for its investment in the joint venture under
the equity method. For the year ended December 31, 1998, the Company recorded a
loss from the joint venture of $125,000. For the six months ended June 30,
1999, the Company recorded a loss from the joint venture of $76,000
(unaudited).
Note 12: Other Investments
The Company invests in equity instruments of privately-held, information
technology companies for business and strategic purposes. These investments are
included in other long-term assets and are accounted for under the cost method.
For these investments, the Company's policy is to regularly review the
assumptions underlying the operating performance and cash flow forecasts in
assessing the carrying values. The Company identifies and records impairment
losses on long-lived assets when events and circumstances indicate that such
assets might be impaired. To date, no such impairment has been recorded.
On January 1, 1999 the Company purchased 250,000 shares of Series D
Convertible Preferred Stock of a privately held online merchant company at
$2.00 per share in a private placement transaction. On June 30, 1999, the
Company received 80,000 shares of Series F Convertible Preferred Stock of the
same online merchant company in lieu of cash payment for services to be
performed by the Company in the future. These shares were valued at $5.00 per
share in a private placement transaction. The revenue on this transaction has
been deferred and will be recognized when the services are performed.
On June 15, 1999, the Company purchased 611,996 (unaudited) shares of Series
E Convertible Preferred Shares of a privately held provider of content
solutions on the Internet at $8.17 per share in a private placement
transaction.
Note 13: Follow-on Offering (unaudited)
In April 1999, the Company closed a follow-on offering. The Company sold
4,340,000 shares and raised approximately $185 million, net of expenses.
Certain shareholders sold 3,020,000 shares.
Note 14: Subsequent Event
Acquisition of INEX Corporation: On August 13, 1999, the Company signed a
definitive agreement to acquire Toronto-based INEX Corporation, a software
company that develops Internet commerce solutions designed for small and medium
business merchants. Under the terms of the acquisition, which will be accounted
for as a pooling of interests, the Company will exchange approximately 900,000
shares of common stock for all of INEX's outstanding shares, warrants and
options. The acquisition is expected to close in September, and is subject to
customary conditions, including the receipt of regulatory approval and INEX
shareholder approval. On August 13, 1999, the Company loaned INEX $1.0 million
for operating capital.
F-34
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
INEX Corporation
In our opinion, the accompanying balance sheets and the related statements of
operations, comprehensive loss, changes in stockholders' equity and cash flows
present fairly, in all material respects, the financial position of INEX
Corporation as at December 31, 1998 and 1997 and the results of its operations,
comprehensive loss and its cash flows for each of the three years ended
December 31, 1998, 1997 and 1996 in conformity with generally accepted
accounting principles in the United States of America. 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 in Canada, which require that we plan and perform an audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in note 1 to the
financial statements, the company has incurred losses and negative cash flows
from operations since inception, which raise substantial doubt about the
company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Canada
February 11, 1999
(except for note 12, which is as of August 13, 1999)
F-35
<PAGE>
INEX CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1997 1998 1999
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 34,231 $ 583,375 $ 927,202
Accounts receivable................... 11,043 60,305 84,888
Prepaid expenses...................... 12,638 25,992 15,914
----------- ----------- -----------
Total current assets................ 57,912 669,672 1,028,004
Property and equipment -- net........... 57,813 76,866 132,496
----------- ----------- -----------
Total assets........................ $ 115,725 $ 746,538 $ 1,160,500
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities.......................... $ 135,804 $ 97,262 $ 162,535
Deferred revenue...................... 15,000 10,016 257
Promissory notes payable.............. 20,972 -- --
Stockholder's loan payable............ 5,304 -- --
----------- ----------- -----------
Total current liabilities........... 177,080 107,278 162,792
Convertible debentures.................. 174,764 163,343 169,837
----------- ----------- -----------
Total liabilities................... 351,844 270,621 332,629
Commitments (Note 10)
Stockholders' Equity (Deficiency):
Common stock
Authorized unlimited; 1,982,290 and
1,575,088 issued and outstanding in
1998 and 1997...................... 1,047,190 2,337,801 2,413,846
Class A preference shares, Series 1
Authorized 1,625,000 issuable in
series; 240,271 and 0 issued and
outstanding in 1998 and 1997......... -- 859,056 859,056
Special warrants, Series A
250,000 and 0 issued and outstanding
in 1998 and 1997..................... -- 659,698 659,698
Special warrants, Series B
360,000 issued and outstanding in
1999................................. -- -- 1,727,603
Additional paid-in capital............ 110,687 910,257 957,480
Deferred stock-based compensation..... -- (118,086) (50,915)
----------- ----------- -----------
1,157,877 4,648,726 6,566,768
Cumulative translation adjustment....... (25,780) (42,348) 3,989
Accumulated deficit..................... (1,368,216) (4,130,461) (5,742,886)
----------- ----------- -----------
Total stockholders' equity
(deficiency)....................... (236,119) 475,917 827,871
----------- ----------- -----------
Total liabilities and stockholder's
equity............................. $ 115,725 $ 746,538 $ 1,160,500
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE>
INEX CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31, Six months ended June 30,
------------------------------------ --------------------------
1996 1997 1998 1998 1999
---------- ----------- ----------- ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ $ -- $ 57,446 $ 208,910 $ 53,790 $ 266,111
Cost of revenues........ -- 18,932 29,720 9,677 25,555
---------- ----------- ----------- ------------ ------------
Gross profit........ -- 38,514 179,190 44,113 240,556
Operating expenses:
Product development... 39,212 170,459 644,965 257,872 518,793
Sales and marketing... 26,154 635,502 744,636 312,229 743,391
General and
administrative....... 70,271 463,740 1,573,980 873,872 598,093
---------- ----------- ----------- ------------ ------------
Total operating
expenses........... 135,637 1,269,701 2,963,581 1,443,973 1,860,277
---------- ----------- ----------- ------------ ------------
Loss from operations.... (135,637) (1,231,187) (2,784,391) (1,399,860) (1,619,721)
Other income (expense),
net.................... -- (1,038) 22,146 14,302 7,296
---------- ----------- ----------- ------------ ------------
Net loss................ $ (135,637) $(1,232,225) $(2,762,245) $ (1,385,558) $ (1,612,425)
========== =========== =========== ============ ============
Basic and diluted net
loss per share......... $ (0.14) $ (0.96) $ (1.58) $ (0.85) $ (0.81)
========== =========== =========== ============ ============
Shares used in computing
basis and diluted net
loss per share......... 1,001,859 1,289,897 1,753,249 1,622,546 1,997,676
========== =========== =========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE>
INEX CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Class A Class A Special warrants,
special shares Common shares preference shares Series A and B Additional Deferred
------------------ -------------------- ------------------ ------------------- paid-in Stock-based
Shares Amount Shares Amount Shares Amount Warrants Amount Capital Compensation
------- --------- --------- ---------- -------- --------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1995......... -- $ -- 900,000 $ 659 -- -- -- $ -- $ -- $ --
Issued for
cash............ 34,847 77,047 -- -- -- -- -- -- -- --
Issued for
software and
trademark....... -- -- 100,000 43,441 -- -- -- -- -- --
Net loss for the
year............ -- -- -- -- -- -- -- -- -- --
------- --------- --------- ---------- -------- --------- ------- ---------- --------- -----------
Balance, December
31, 1996......... 34,847 77,047 1,000,000 44,100 -- -- -- -- -- --
In respect of
services
rendered........ 10,112 25,564 -- -- -- -- -- -- -- --
Issued for
cash............ -- -- 341,405 679,030 -- -- -- -- -- --
Issued for cash,
together with a
common share
purchase
warrant......... -- -- 167,224 188,309 -- -- -- -- 84,648 --
Converted into
common shares on
October 16,
1997............ (44,959) (102,611) 44,959 102,611 -- -- -- -- -- --
Issued in
respect of
services
rendered on
December 17,
1997............ -- -- 18,300 33,117 -- -- -- -- -- --
Issued in
respect of
services
rendered
throughout the
year............ -- -- -- -- -- -- -- -- 26,039 --
Issued for cash
on exercise of
employee stock
options......... -- -- 3,200 23 -- -- -- -- -- --
Net loss for the
year............ -- -- -- -- -- -- -- -- -- --
------- --------- --------- ---------- -------- --------- ------- ---------- --------- -----------
Balance, December
31, 1997......... -- -- 1,575,088 1,047,190 -- -- -- -- 110,687 --
Issued for
cash............ -- -- -- -- 240,271 859,056 250,000 659,698 503,217 --
Issued for cash
on exercise of
warrants........ -- -- 179,392 378,928 -- -- -- -- (84,648) --
Issued for cash
on exercise of
employee stock
options......... -- -- 227,810 911,683 -- -- -- -- (908,043) --
Issued in
connection with
promissory
notes........... -- -- -- -- -- -- -- -- 160,377 --
Issued in
respect of
services
rendered........ -- -- -- -- -- -- -- -- 2,349 --
Deferred
compensation
related to stock
option grants... -- -- -- -- -- -- -- -- 1,126,318 (1,126,318)
Amortization of
stock-based
compensation.... -- -- -- -- -- -- -- -- -- 1,008,232
Net loss for the
year............ -- -- -- -- -- -- -- -- -- --
------- --------- --------- ---------- -------- --------- ------- ---------- --------- -----------
Balance, December
31, 1998......... -- -- 1,982,290 2,337,801 240,271 859,056 250,000 659,698 910,257 (118,086)
Issued for
cash............ -- -- -- -- -- -- 360,000 1,727,603 123,142 --
Issued for cash
on exercise of
employee stock
options......... -- -- 18,332 76,045 -- -- -- -- (75,919) --
Amortization of
stock-based
compensation.... -- -- -- -- -- -- -- -- -- 67,171
Net loss for the
period.......... -- -- -- -- -- -- -- -- -- --
------- --------- --------- ---------- -------- --------- ------- ---------- --------- -----------
Balance, June 30,
1999
(unaudited)...... -- $ -- 2,000,622 $2,413,846 240,271 $ 859,056 610,000 $2,387,301 $ 957,480 $ (50,915)
======= ========= ========= ========== ======== ========= ======= ========== ========= ===========
<CAPTION>
Accumulated
Deficit Total
------------ ------------
<S> <C> <C>
Balance, December
31, 1995......... $ (354) $ 305
Issued for
cash............ -- 77,047
Issued for
software and
trademark....... -- 43,441
Net loss for the
year............ (135,637) (135,637)
------------ ------------
Balance, December
31, 1996......... (135,991) (14,844)
In respect of
services
rendered........ -- 25,564
Issued for
cash............ -- 679,030
Issued for cash,
together with a
common share
purchase
warrant......... -- 272,957
Converted into
common shares on
October 16,
1997............ -- --
Issued in
respect of
services
rendered on
December 17,
1997............ -- 33,117
Issued in
respect of
services
rendered
throughout the
year............ -- 26,039
Issued for cash
on exercise of
employee stock
options......... -- 23
Net loss for the
year............ (1,232,225) (1,232,225)
------------ ------------
Balance, December
31, 1997......... (1,368,216) (210,339)
Issued for
cash............ -- 2,021,971
Issued for cash
on exercise of
warrants........ -- 294,280
Issued for cash
on exercise of
employee stock
options......... -- 3,640
Issued in
connection with
promissory
notes........... -- 160,377
Issued in
respect of
services
rendered........ -- 2,349
Deferred
compensation
related to stock
option grants... -- --
Amortization of
stock-based
compensation.... -- 1,008,232
Net loss for the
year............ (2,762,245) (2,762,245)
------------ ------------
Balance, December
31, 1998......... (4,130,461) 518,265
Issued for
cash............ -- 1,850,745
Issued for cash
on exercise of
employee stock
options......... -- 126
Amortization of
stock-based
compensation.... -- 67,171
Net loss for the
period.......... (1,612,425) (1,612,425)
------------ ------------
Balance, June 30,
1999
(unaudited)...... $(5,742,886) $ 823,882
============ ============
</TABLE>
See accompanying notes to financial statements.
F-38
<PAGE>
INEX CORPORATION
STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Years ended December 31, Six months ended June 30,
----------------------------------- --------------------------
1996 1997 1998 1998 1999
--------- ----------- ----------- ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net loss for the
period................. $(135,637) $(1,232,225) $(2,762,245) $ (1,385,558) $ (1,612,425)
Other comprehensive
income:
Foreign currency
translation
adjustments.......... (5,181) (20,599) (16,568) 2,395 46,337
--------- ----------- ----------- ------------ ------------
Comprehensive loss for
the period............. $(140,818) $(1,252,824) $(2,778,813) $ (1,383,163) $ (1,566,088)
========= =========== =========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-39
<PAGE>
INEX CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31, Six months ended June 30,
----------------------------------- --------------------------
1996 1997 1998 1998 1999
--------- ----------- ----------- ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net loss............. $(135,637) $(1,232,225) $(2,762,245) $ (1,385,558) $ (1,612,425)
Adjustments to
reconcile net loss
to net cash used by
operating
activities:
Depreciation and
amortization...... 1,549 61,055 26,794 12,082 25,137
Non-cash expense
for services
rendered.......... -- 84,720 162,726 101,019 --
Amortization of
stock-based
compensation...... -- -- 1,008,232 617,240 67,171
Cash provided (used) by
changes in operating
assets and
liabilities:
Accounts receivable.. (1,404) (9,377) (51,581) (39,427) (21,887)
Prepaid expenses..... (972) (12,101) (14,633) (57,372) 10,962
Accounts payable and
accrued
liabilities......... 34,173 101,113 (31,900) 57,884 59,750
Deferred revenue..... -- 15,500 (4,133) 10,054 (10,019)
--------- ----------- ----------- ------------ ------------
Net cash used by
operating
activities...... (102,291) (991,315) (1,666,740) (684,078) (1,481,311)
Investing Activities:
Purchase of property
and equipment....... (18,969) (60,844) (50,355) (12,608) (77,004)
--------- ----------- ----------- ------------ ------------
Net cash used by
investing
activities...... (18,969) (60,844) (50,355) (12,608) (77,004)
Financing Activities:
Issuance of capital
stock -- net of
issue costs......... 77,047 952,010 2,319,891 1,079,788 1,850,871
Issuance of
promissory notes
payable............. 1,253 21,670 235,992 243,309 --
Repayment of
promissory notes
payable............. -- (1,234) (256,220) (90,372) --
Change in
stockholder's loan
payable............. 45,893 (39,728) (5,116) (5,116) --
Issuance of
debentures payable.. -- 180,584 -- -- --
--------- ----------- ----------- ------------ ------------
Net cash provided
by financing
activities...... 124,193 1,113,302 2,294,547 1,227,609 1,850,871
Impact of foreign
exchange rate changes
on cash............... (15) (29,830) (28,308) (17,546) 51,271
--------- ----------- ----------- ------------ ------------
Net Increase in Cash
and Cash Equivalents.. 2,918 31,313 549,144 513,377 343,827
Cash and cash
equivalents:
Beginning of period.. -- 2,918 34,231 34,231 583,375
--------- ----------- ----------- ------------ ------------
End of period........ $ 2,918 $ 34,231 $ 583,375 $ 547,608 $ 927,202
========= =========== =========== ============ ============
Supplemental cash flow
information
Common shares issued
for services
rendered............ $ -- $ 58,681 $ -- $ -- $ --
Options issued for
services rendered... -- 26,039 2,349 2,349 --
Warrants issued in
connection with
promissory notes.... -- -- 160,377 98,670 --
Common shares issued
for software and
trademarks.......... 43,441 -- -- -- --
Interest paid........ -- -- 14,923 2,364 --
</TABLE>
See accompanying notes to financial statements.
F-40
<PAGE>
INEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
Note 1: Organization and basis of presentation
The company, pursuant to an agreement and as confirmed by articles of
amalgamation dated February 5, 1997, amalgamated with Ack-Sys Inc. to continue
as INEX Corporation. As both of these companies had been under common control,
this business combination has been accounted for using a basis similar to the
pooling of interests method of accounting whereby the financial statements
reflect the combined historical carrying value of the assets, liabilities,
stockholders' equity (deficiency) and the historical operating results of Ack-
Sys Inc. and INEX Corporation for each of the years presented.
The company has sustained losses and negative cash flows from operations
since its inception. The company's ability to meet its obligations in the
ordinary course of business is dependent upon its ability to raise additional
financing through public or private equity financings, establish profitable
operations, enter into collaborative or other arrangements with corporate
sources, or secure other sources of financing to fund operations. During 1998,
the company received cash and services of approximately $3.4 million through
the issuance of common shares, Class A preference shares and special warrants,
Series A. In February 1999, the company received approximately $1.9 million
through the issuance of special warrants, Series B.
Management intends to obtain additional financing from the company with which
it is transacting a merger (note 12) in the current year. If anticipated
financing transactions and operating results are not achieved, management has
the intent and believes it has the ability to delay or reduce expenditures so
as not to require additional financial resources, if such resources were not
available on terms acceptable to the company. Nevertheless, these matters raise
substantial doubt about the company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
The company has a limited operating history and its prospects are subject to
the risks, expenses and uncertainties frequently encountered by companies in
the new and rapidly evolving markets for Internet products and services. These
risks include the failure to develop and extend the company's products, the
rejection of the company's products by Internet consumers, vendors and/or
advertisers, as well as other risks and uncertainties.
Note 2: Summary of significant accounting policies
Cash and cash equivalents
The company considers all highly liquid investments purchased with original
maturities of 90 days or less to be cash equivalents. Cash equivalents consist
primarily of deposits in money market funds.
Property and equipment
Property and equipment, which are recorded at cost, are depreciated over
their estimated useful lives using the straight-line method as follows:
<TABLE>
<S> <C>
Computer equipment........................................... 3 years
Furniture and fixtures....................................... 5 years
Office equipment............................................. 5 years
Leasehold improvements....................................... lease term
</TABLE>
F-41
<PAGE>
INEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income taxes
Income taxes are accounted for using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year
and deferred tax assets and liabilities for the future tax consequences of
events that have been recognized in the company's financial statements or tax
returns. The measurement of current and deferred tax assets and liabilities are
based on provisions of the enacted tax law; the effects of future changes in
tax laws or rates are not anticipated. A valuation allowance is recognized, if,
based on available evidence, it is more likely than not that some portion of
the deferred tax asset will not be realized.
Revenue recognition and deferred revenue
Revenue from the sales of computer software licences are recognized once
substantially all of the obligations under the sales agreements have been
satisfied. Full provision is made for any anticipated returns.
The company recognizes support revenue from contracts for ongoing technical
support ratably over the term of the contract, which is generally one year.
Deferred revenues are comprised of services that have yet to be provided and
contracts that have not been recorded as revenue as the earning process is not
complete.
Research and development
Research and development costs are expensed as incurred.
Acquired software is capitalized and amortized over its estimated useful life
not to exceed one year.
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed," issued by the
Financial Accounting Standards Board requires capitalization of certain
software development costs subsequent to the establishment of technological
feasibility. To date, costs incurred following the establishment of
technological feasibility, but prior to general release, have been
insignificant.
Stock-based compensation
In 1997, the company adopted the disclosure provisions of the Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation." The company
has elected to continue accounting for stock-based compensation issued to
employees using Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees," and, accordingly, pro forma disclosures
required under SFAS No. 123 have been presented (see note 7). Under APB Opinion
No. 25, compensation expense is based on the difference, if any, on the date of
the grant, between the fair value of the company's stock and the exercise
price. Stock issued to non-employees has been accounted for in accordance with
SFAS No. 123 and valued using the Black-Scholes model.
Concentration of credit risk
Financial instruments that potentially subject the company to a concentration
of credit risk consist of cash and cash equivalents and accounts receivable.
Cash and cash equivalents are deposited with a Canadian bank. The company
maintains allowances for potential credit losses and such losses have been
within
F-42
<PAGE>
INEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
management's expectations. There were no customers with a balance due to the
company in excess of 10% of aggregate accounts receivable as of December 31,
1998.
Comprehensive income
Effective for the fiscal years commencing after December 15, 1997, the
company adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting comprehensive income
and its components in financial statements. Comprehensive income, as defined,
includes all changes in equity during a period from non-owner sources.
Use of estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair value of financial instruments
Financial instruments are initially recorded at historical cost. If
subsequent circumstances indicate that a decline in the fair value is other
than temporary, the financial asset is written down to its fair value. Unless
otherwise indicated, the fair values of financial instruments approximate their
recorded amounts.
Foreign currency translation
The company's functional currency is the Canadian dollar ("C$"). Assets and
liabilities are translated into United States dollars at the exchange rate
prevailing at the balance sheet date, and the results of their operations are
translated at average exchange rates for the year. The resulting translation
adjustments are reflected in the cumulative translation adjustment account.
Other exchange gains or losses are included in the statement of operations.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and hedging activities and
requires companies to recognize all derivatives as either assets or liabilities
in the statement of financial position and measures those instruments at fair
value. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Management does not believe that the
implementation of SFAS No. 133 will have any impact on the financial
instruments since the company does not engage in derivative or hedging
activities.
F-43
<PAGE>
INEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 3: Property and equipment
<TABLE>
<CAPTION>
June 30, 1999
------------------------------
(unaudited)
Accumulated
Cost depreciation Net
-------- ------------ --------
<S> <C> <C> <C>
Computer equipment......................... $119,814 $54,156 $ 65,658
Furniture and fixtures..................... 50,001 6,014 43,987
Office equipment........................... 25,316 9,709 15,607
Leasehold improvements..................... 8,451 1,207 7,244
-------- ------- --------
$203,582 $71,086 $132,496
======== ======= ========
<CAPTION>
December 31, 1998
------------------------------
Accumulated
Cost depreciation Net
-------- ------------ --------
<S> <C> <C> <C>
Computer equipment......................... $ 85,364 $34,104 $ 51,260
Furniture and fixtures..................... 13,387 2,778 10,609
Office equipment........................... 21,979 6,982 14,997
-------- ------- --------
$120,730 $43,864 $ 76,866
======== ======= ========
<CAPTION>
December 31, 1997
------------------------------
Accumulated
Cost depreciation Net
-------- ------------ --------
<S> <C> <C> <C>
Computer equipment......................... $ 54,082 $14,945 $ 39,137
Furniture and fixtures..................... 5,278 1,144 4,134
Office equipment........................... 17,604 3,062 14,542
-------- ------- --------
$ 76,964 $19,151 $ 57,813
======== ======= ========
</TABLE>
Note 4: Promissory notes payable
On January 29, 1998, the company received proceeds of C$100,000 in exchange
for the issuance of promissory notes and issued 26,667 common share purchase
warrants with an exercise price of C$3.75 per common share, which expire in two
years. The notes were repaid in 1998.
On February 20, 1998, the company received proceeds of C$250,000 in exchange
for the issuance of a promissory note and issued 66,667 common share purchase
warrants with an exercise price of C$3.75 per common share, which expire in two
years. The note was repaid in 1998.
The promissory note payable at December 31, 1997 was unsecured, bore interest
at 5% per annum and was payable to one of the directors of the company, who is
also a stockholder. The note was repaid in 1998.
Note 5: Stockholder's loan payable
The stockholder's loan payable was unsecured, non-interest bearing and due on
demand. The note was repaid in 1998.
Note 6: Convertible debentures
The convertible debentures are unsecured, non-interest bearing and
convertible at the lender's option into 104,515 common shares at the rate of
C$2.392 per share, maturing on September 5, 2000. They are due to directors and
stockholders of the company.
F-44
<PAGE>
INEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 7: Capital stock
Authorized and issued share capital
The authorized share capital consists of an unlimited number of common shares
and 1,625,000 Class A preference shares, issuable in series.
By certificate of amalgamation dated February 5, 1997, INEX Corporation and
Ack-Sys Inc. amalgamated to form INEX Corporation and the shareholdings were
reorganized as follows:
. 1,000,000 common shares of Ack-Sys Inc. were converted into 100,000
common shares of the amalgamated INEX Corporation;
. 900,000 common shares of INEX Corporation were converted into 900,000
common shares of the amalgamated INEX Corporation;
. 100,000 common shares of INEX Corporation held by Ack-Sys Inc. were
cancelled; and
. 44,959 Class A special shares of INEX Corporation were converted into
44,959 Class A special shares of the amalgamated INEX Corporation.
Class A special shares
As a result of passing a special resolution on June 19, 1997, Class A special
shares were converted on a one-for-one basis for common shares on October 16,
1997. The company cancelled the authorized Class A special shares, Class B
special shares and Class C special shares.
Class A preference shares
During 1998, 240,271 Class A preference shares, Series 1 were issued for
gross cash proceeds of $1 million. These shares are convertible into common
shares at a rate of C$5.91 per share and retractable on April 3, 2003 at the
issue price.
Special warrants, Series A
During 1998, 250,000 special warrants, Series A were issued for net cash
proceeds of $1,135,213. When exercised, each special warrant will convert into
one common share for no additional consideration. The special warrants become
exercisable at the earlier date of five days after a receipt is issued for a
final prospectus by a securities regulator and April 28, 2000.
F-45
<PAGE>
INEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Common share purchase warrants and brokers warrants
<TABLE>
<CAPTION>
Years ended Six months
December 31, ended
---------------- June 30,
1997 1998 1999
------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Issued:
Common share purchase warrants issued in
connection with common shares exchangeable
for one common share for additional
consideration of C$2.392 per common share,
expiring April 1998....................... 104,515 -- --
Brokers warrants issued in connection with
the common share and common share purchase
warrants issued, exchangeable for one
common share for additional consideration
of C$2.392, expiring April 1998........... 5,226 -- --
Common share purchase warrants issued in
connection with common shares issued,
exchangeable for one common share for
additional consideration of C$2.392 per
common share, expiring July 1998.......... 62,709 -- --
Brokers warrants issued in connection with
common shares issued, exchangeable for one
common share for additional consideration
of C$3.06, expiring October 1998.......... 6,943 -- --
Common share purchase warrants issued in
connection with the issue of promissory
notes exchangeable for one common share
for additional consideration of C$3.75 per
common share, expiring January 2000....... -- 26,667 --
Common share purchase warrants issued in
connection with the issue of a promissory
note exchangeable for one common share for
additional consideration of C$3.75 per
common share, expiring February 2000...... -- 66,667 --
Brokers warrants issued in connection with
the issued special warrants, Series A,
exchangeable for one common share for
additional consideration of C$8.00 per
common share, 137,500 expiring April 2000
and 137,500 expiring June 2000............ -- 275,000 --
Brokers warrants issued in connection with
the issue of Class A preference shares,
exchangeable for one common share for
additional consideration of C$5.91 per
common share, expiring April 2001......... -- 14,416 --
Broker warrants issued in connection with
the issue of special warrants, Series B,
exchangeable for one common share for
additional consideration of C$8.00 per
common share, expiring January 2002....... -- -- 50,080
------- -------- -------
179,393 382,750 50,080
------- -------- -------
Exercised:
At C$2.392 per common share................ -- (172,449) --
At C$3.06 per common share................. -- (6,943) --
Expired...................................... -- (1) --
------- -------- -------
-- (179,393) --
------- -------- -------
Balance--Beginning of period................. -- 179,393 382,750
------- -------- -------
Balance--End of period....................... 179,393 382,750 432,830
======= ======== =======
</TABLE>
F-46
<PAGE>
INEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The fair value of the 382,750 (1997--179,393) warrants issued is $663,594
(1997--$84,648), of which $503,217 (1997--$84,648) has been recorded as a cost
of issue and $160,377 (1997--$nil) as interest expense. The fair value of each
warrant issued to non-employees is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: dividend yield-nil, risk-free interest rate - 4.8%, expected
volatility - 65%, expected life - 1.5 years.
Subsequent to year-end, in connection with the issue of special warrants,
Series B, the company issued 50,080 brokers warrants exchangeable into common
shares for additional consideration of C$8.00 per common share, expiring in
January 2002. The company has committed to issue an additional 149,920 broker
warrants if certain levels of additional financing are obtained or if the
company is sold for proceeds in excess of a predetermined amount.
Stock Option Plan
The company established a Stock Option Plan in April 1997 under which 400,000
shares of common stock were reserved for issuance. During 1998, the company
amended the 1997 Plan and increased the number of shares of common stock
reserved under the 1997 Plan by 75,000 shares to 475,000 shares. Under the
Stock Option Plan, options can be issued to employees, officers, directors and
other key contributors of the company at an exercise price determined by the
Board of Directors. On June 30, 1998, the exercise price of outstanding options
to senior management was amended to C$0.01 per option, creating deferred stock-
based compensation of $1,126,318, which will be amortized over the remaining
vesting period of the options.
Vesting and expiry provisions are determined by the Board of Directors.
Generally, options issued to employees vest over three years and expire after
five years.
Option activity under the Stock Option Plan is as follows:
<TABLE>
<CAPTION>
Weighted
Options Options average
Authorized outstanding exercise price
---------- ----------- --------------
C$
<S> <C> <C> <C>
Options authorized................... 400,000 --
Options granted...................... -- 382,645 0.24
Options exercised.................... -- (3,200) 0.01
Options cancelled.................... -- (4,000)
------- --------
Balance--December 31, 1997........... 400,000 375,445 0.24
Options authorized................... 75,000 --
Options granted...................... -- 88,599 5.87
Options exercised.................... -- (227,810) 0.02
Options cancelled.................... -- (43,067) 0.16
------- --------
Balance--December 31, 1998........... 475,000 193,167 3.02
======= ========
</TABLE>
F-47
<PAGE>
INEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Options outstanding
--------------------------------------------
Weighted- Number
Number average vested and
outstanding at remaining exercisable at
Exercise December 31, contractual December 31,
price 1998 life 1998
-------- -------------- ----------- --------------
C$ (years)
<S> <C> <C> <C>
$0.01 77,666 1.3 4,066
$7.70 10,000 2.4 10,000
$5.91 34,000 2.7 10,000
$2.50 27,000 3.2 9,000
$3.06 20,001 3.9 1,999
$6.50 2,000 4.4 --
$7.00 12,000 4.7 --
$7.50 10,500 4.8 --
------- ------
193,167 35,065
======= ======
</TABLE>
Options granted for marketing services rendered
The company recorded an expense of $2,349 (1997--$26,039; 1996--$nil) in
connection with options granted for marketing services rendered.
SFAS 123
The company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option plan,
which are described below. Had compensation cost for the company's stock option
plans been determined based on the fair market value at the grant dates for
awards under the Plan consistent with the method provided by SFAS No. 123,
Accounting for Stock-Based Compensation, the company's net loss would have been
increased to the following pro forma amounts for the periods ended December 31,
1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Net loss--as reported................................ $(1,232,225) $(2,762,245)
Net loss--pro forma.................................. (1,265,067) (2,900,154)
Basic and fully diluted loss per share--pro forma.... (0.98) (1.65)
</TABLE>
The fair value of each option issued to employees is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted-
average assumptions: dividend yield--nil, risk-free interest rate--4.9%,
expected volatility--0%, expected life--2 years.
Net loss per share
The company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share." Under the provisions of SFAS No. 128, basic net loss per
share is computed by dividing the net loss available to common stockholders for
the period by the weighted average number of common shares outstanding during
the period. Diluted net loss per share is computed by dividing the net loss for
the period by the weighted average number of common shares and common
equivalent shares outstanding during the period. Common equivalent shares,
composed of incremental common shares issuable upon the exercise of stock
options and warrants and upon conversion of Class A preference shares,
convertible debentures and special warrants, Series A, are included in the
diluted net loss per share computation to the extent such shares are dilutive.
F-48
<PAGE>
INEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 8: Income taxes
The company did not incur any income taxes for the years ended December 31,
1996, 1997 and 1998 as a result of operating losses.
The company has approximately $2,805,000 of non-capital losses available to
reduce future years' taxable income that expire as follows:
<TABLE>
<S> <C>
2002............................................................ $ 20,000
2003............................................................ 184,000
2004............................................................ 993,000
2005............................................................ 1,608,000
----------
$2,805,000
==========
</TABLE>
Significant components of the company's deferred taxes as of December 31,
1996, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- --------- -----------
<S> <C> <C> <C>
Deferred tax assets
Tax loss carry-forwards................ $ 9,000 $ 571,000 $ 1,241,000
Other timing differences............... 2,000 2,000 14,000
-------- --------- -----------
Net deferred tax assets................ 11,000 573,000 1,255,000
Valuation allowance.................... (11,000) (573,000) (1,255,000)
-------- --------- -----------
Net deferred tax assets................ $ -- $ -- $ --
======== ========= ===========
</TABLE>
The company has established valuation allowances equal to the net deferred
tax assets due to uncertainties regarding the realization of deferred tax
assets based on the company's lack of earnings history.
The company's provisions for income taxes differs from the expected tax
benefit amounts computed by applying the statutory income tax rate of 44.62% to
income before income taxes primarily as a result of the valuation allowances.
Note 9: Related party transactions
During the year, the company paid marketing costs of $10,478 (1997--$91,643;
1996--$3,520) to a company owned by a stockholder of the company.
Note 10: Commitments
The company has entered into various operating leases for equipment,
services, and premises requiring minimum annual payments as follows:
<TABLE>
<S> <C>
1999.............................................................. $189,000
2000.............................................................. 146,000
2001.............................................................. 44,000
Thereafter........................................................ --
</TABLE>
F-49
<PAGE>
INEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 11: Business segments
SFAS No. 131 requires companies to report financial and other information
about key revenue segments of the entity for which such information is
available and is utilized by the chief operating decision maker. SFAS No. 131
is effective for fiscal years commencing after December 15, 1997. The company
conducts its business within one business segment primarily within North
America. Revenues from customers outside of North America were less than 10% of
net revenues for all periods presented in the accompanying statements of
operations. No customer represented more than 10% of net revenues for any year
presented.
Note 12: Subsequent events
On February 11, 1999, the company issued 360,000 special warrants, Series B
for net cash proceeds of $1.9 million. When exercised, each special warrant,
Series B will convert into one common share and one common share purchase
warrant for no additional consideration. The special warrants, Series B become
exercisable at the earlier date of five days after a receipt is issued for a
final prospectus by a securities regulator and July 31, 2000. Each common share
purchase warrant entitles the holder to purchase one common share for C$8.00 on
or before July 31, 2000.
On August 13, 1999, the company entered into an agreement and plan of
acquisition and arrangement with InfoSpace.com, Inc. (InfoSpace). Upon closing,
which is expected to occur in September 1999, the company will become a wholly-
owned subsidiary of InfoSpace.
F-50
<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 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, and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $ 9,221
Nasdaq National Market listing fee................................. 17,500
Printing and engraving expenses.................................... 5,000
Legal fees and expenses............................................ 50,000
Accounting fees and expenses....................................... 25,000
Miscellaneous expenses............................................. 18,279
--------
Total............................................................ $125,000
========
</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 20,000,000 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 534,632 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 $0.41 per share.
(3) An aggregate of 1,219,512 shares of common stock was issued in a
private placement on June 17, 1996, to three investors. The aggregate
consideration received for such shares was $999,999.84 or $0.82 per share.
(4) An aggregate of 136,364 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 $1.10 per share.
(5) An aggregate of 2,000,000 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 170,000
shares of common stock was issued to the former members of YPI. The
remaining 1,830 shares held in the escrow account were released to the
registrant and canceled.
(6) An aggregate of 55,000 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 $2.00 per share.
(7) An aggregate of 25,000 shares of common stock was issued on April 20,
1998 to a former employee of the registrant in connection with the
settlement of a dispute involving compensation.
(8) An aggregate of 15,000 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.
II-2
<PAGE>
(9) An aggregate of 250,000 shares of common stock was issued in a
private placement on May 21, 1998 to two investors. The aggregate
consideration was $500,000 or $2.00 per share.
(10) An aggregate of 2,290,000 shares of common stock and warrants for
the purchase of 4,057,046 shares of common stock at a weighted average
exercise price of $2.94 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.
(11) An aggregate of 2,999,976 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 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.
(12) An aggregate of 10,000 shares of common stock was issued on June 30,
1998 to a consultant in exchange for services.
(13) An aggregate of 446,502 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 $3.75 per share.
(14) A warrant for the purchase of 955,934 shares of common stock with an
exercise price of $0.01 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 2,040,000 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 $4.00
per share.
(16) An aggregate of 39,790 shares of common stock and warrants to
purchase 70,626 shares of common stock with a weighted average exercise
price of $2.94 per share were issued on August 6, 1998 to five investors in
connection with the May 1998 Stock Purchase.
(17) Warrants to purchase up to 1,979,832 shares of common stock at an
exercise price of $6.00 per share were issued on August 24, 1998 to a
strategic partner.
(18) An option to purchase 500,000 shares of common stock at an exercise
price of $7.00 per share was exercised by a former consultant on October
28, 1998.
(19) On March 22, 1999, the registrant issued 432,454 shares of common
stock upon the net exercise of warrants by an investor at a weighted
average exercise price of $2.94 per share. The warrants were issued on May
21,1998 and August 6, 1998 in connection with the May 1998 Stock Purchase.
(20) From April 1996 through June 30, 1999, the registrant granted stock
options to purchase an aggregate of 6,354,156 shares of common stock to
employees, consultants and directors with exercise prices ranging from
$.01-$67.44 per share pursuant to the registrant's Restated 1996 Flexible
Stock Incentive Plan in consideration for services. From April 10, 1996 to
December 31, 1998, the registrant also granted stock options outside of the
plan to purchase 1,009,210 shares of common stock, with a weighted average
exercise price of $1.00 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>
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.
2.2. Agreement and Plan of Acquisition and Arrangement, dated as of August
13, 1999, among the registrant and INEX Corporation.
3.1.* Restated Certificate of Incorporation of the registrant.
3.2.* Restated Bylaws of the registrant.
4.1.+ Form of Certificate of the Powers, Designations, Preferences and
Rights of Series A Preferred Stock.
5.1.+ Opinion of Wilson Sonsini Goodrich & Rosati, P.C. 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 and Terms of Stock Option
Grant Program for Nonemployee Directors under the Restated 1996
Flexible Stock Incentive Plan.
10.3.* 1998 Employee Stock Purchase Plan
10.4.* Lease, dated May 14, 1998, between the registrant and TIAA Realty,
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.).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
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.* Letter Agreement with Bernee D. L. Strom, dated November 22, 1998.
10.19.* Indemnification Agreement dated as of December 11, 1998 between the
registrant, Naveen Jain, and all the current and future members of the
registrant's board of directors (excluding Mr. Jain).
21.1. Subsidiaries of the registrant.
23.1. Consent of Deloitte & Touche LLP, Independent Auditors.
23.2. Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.3.+ Consent of Wilson Sonsini Goodrich & Rosati, P.C. (contained in the
opinion filed as Exhibit 5.1 hereto).
24.1.+ Power of Attorney (contained on signature page hereto).
99.1.+ Form of Plan of Arrangement under Section 182 of the Business
Corporations Act (Ontario) of INEX Corporation.
99.2.+ Form of Voting and Exchange Trust Agreement among the Company,
InfoSpace.com Canada Holdings Inc., and Montreal Trust Company of
Canada, as trustee.
99.3.+ Form of Exchangeable Share Support Agreement among the Company,
InfoSpace.com Nova Scotia Company, InfoSpace.com Canada Holdings Inc.
and Montreal Trust Company of Canada, as trustee.
</TABLE>
- --------
* Incorporated by reference to the Registration Statement on Form S-1 (No. 333-
62323) filed by the registrant on August 27, 1998, as amended.
+ Previously filed.
++ Incorporated by reference to the Registration Statement on Form S-8 (No.
333-81593) filed by the registrant on June 25, 1999.
(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
The undersigned registrant hereby undertakes;
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of
II-5
<PAGE>
securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) ((S)230.424(b) of this chapter) if, in the aggregate,
the changes in volume and price represent no more than a 20% change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
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 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-6
<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 4th day of October, 1999.
InfoSpace.com, Inc.
/s/ Ellen B. Alben
By: _________________________________
Ellen B. Alben,
Senior Vice President, Business
and Legal Affairs
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 4th day of October, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
* Naveen Jain Chief Executive Officer and Chairman of the
___________________________________________ Board (Principal Executive Officer)
Naveen Jain
* Douglas A. Bevis Vice President and Chief Financial Officer
___________________________________________ (Principal Financial Officer)
Douglas A. Bevis
* Tammy D. Halstead Vice President and Chief Accounting Officer
___________________________________________ (Principal Accounting Officer)
Tammy D. Halstead
* 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
* Rufus W. Lumry, III Director
___________________________________________
Rufus W. Lumry, III
* Carl Stork Director
___________________________________________
Carl Stork
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
* Bernee D. L. Strom Director
___________________________________________
Bernee D. L. Strom
</TABLE>
/s/ Ellen B. Alben
*By: _____________________
Ellen B. Alben
Attorney-in-Fact
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
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.
2.2. Agreement and Plan of Acquisition and Arrangement, dated as of August
13, 1999, by and between the registrant and INEX Corporation.
3.1.* Restated Certificate of Incorporation of the registrant.
3.2.* Restated Bylaws of the registrant.
4.1.+ Form of Certificate of the Powers, Designations, Preferences and
Rights of Series A Preferred Stock.
5.1.+ Opinion of Wilson Sonsini Goodrich & Rosati, P.C. 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 and Terms of Stock Option
Grant Program for Nonemployee Directors under the Restated 1996
Flexible Stock Incentive Plan.
10.3.* 1998 Employee Stock Purchase Plan
10.4.* Lease, dated May 14, 1998, between the registrant and TIAA Realty,
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.17.* Development and Management Agreement, dated as of August 24, 1998,
between the registrant and America Online, Inc.
10.18.* Letter Agreement with Bernee D. L. Strom, dated November 22, 1998.
10.19.* Indemnification Agreement dated as of December 11, 1998 between the
registrant, Naveen Jain, and all the current and future members of the
registrant's board of directors (excluding Mr. Jain).
21.1. Subsidiaries of the registrant.
23.1. Consent of Deloitte & Touche LLP, Independent Auditors.
23.2. Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.3.+ Consent of Wilson Sonsini Goodrich & Rosati, P.C. (contained in the
opinion filed as Exhibit 5.1 hereto).
24.1.+ Power of Attorney (contained on signature page hereto).
99.1.+ Form of Plan of Arrangement under Section 182 of the Business
Corporations Act (Ontario) of INEX Corporation.
99.2.+ Form of Voting and Exchange Trust Agreement among the Company,
InfoSpace.com Canada Holdings Inc., and Montreal Trust Company of
Canada, as trustee.
99.3.+ Form of Exchangeable Share Support Agreement among the Company,
InfoSpace.com Nova Scotia Company, InfoSpace.com Canada Holdings Inc.
and Montreal Trust Company of Canada, as trustee.
</TABLE>
- --------
* Incorporated by reference to the Registration Statement on Form S-1 (No. 333-
62323) filed by the registrant on August 27, 1998, as amended.
+ Previously filed.
++ Incorporated by reference to the Registration Statement on Form S-8 (No.
333-81593) filed by the registrant on June 25, 1999.
<PAGE>
EXHIBIT 2.2
Execution Copy
AGREEMENT AND PLAN OF
ACQUISITION AND
ARRANGEMENT
by and between
INFOSPACE.COM, INC.
and INEX CORPORATION
Dated as of August 13, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. Definitions................................................................... 2
2. The Transactions.............................................................. 9
2.1 Description of the Transactions......................................... 9
2.2 Closing................................................................. 11
2.3 Accounting Consequences................................................. 11
2.4 Adjustments to Exchange Ratio........................................... 11
2.5 Tax Treatment........................................................... 11
3. Representations and Warranties of the Company................................. 11
3.1 Organization and Good Standing.......................................... 11
3.2 Authority; No Conflict.................................................. 12
3.3 Capitalization.......................................................... 13
3.4 Financial Statements.................................................... 13
3.5 Books and Records....................................................... 14
3.6 Title to Properties; Encumbrances....................................... 14
3.7 Condition and Sufficiency of Assets..................................... 15
3.8 Accounts Receivable..................................................... 15
3.9 No Undisclosed Liabilities.............................................. 15
3.10 Taxes................................................................... 15
3.11 No Material Adverse Change.............................................. 16
3.12 Employee Matters and Benefit Plans...................................... 17
3.13 Compliance with Legal Requirements; Governmental Authorizations......... 18
3.14 Legal Proceedings; Orders............................................... 19
3.15 Absence of Certain Changes and Events................................... 20
3.16 Contracts; No Defaults.................................................. 21
3.17 Insurance............................................................... 23
3.18 Environmental and Product Matters....................................... 24
3.19 Intellectual Property................................................... 25
3.20 Certain Payments........................................................ 29
3.21 Disclosure.............................................................. 29
3.22 Relationships with Related Persons...................................... 29
3.23 Brokers or Finders...................................................... 29
3.24 Customers............................................................... 30
3.25 Authenticity and Entirety of Document................................... 30
3.26 Shareholder Approval.................................................... 30
3.27 Sales and Assets in the United States................................... 30
3.28 Fairness Opinion........................................................ 30
4. Representations and Warranties of Parent...................................... 30
4.1 Organization and Good Standing.......................................... 30
</TABLE>
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
4.2 Authority; No Conflict....................................... 31
4.3 Capitalization............................................... 31
4.4 Certain Proceedings.......................................... 32
4.5 SEC Documents................................................ 32
4.6 Brokers or Finders........................................... 33
4.7 Suspension and Trading....................................... 33
4.8 NASDAQ Listing............................................... 33
4.9 Prospectus Exemptions........................................ 33
4.10 No Material Adverse Change................................... 33
4.11 Pooling...................................................... 34
5. Covenants of the Company........................................... 34
5.1 Access and Investigation..................................... 34
5.2 Operation of the Businesses of the Company................... 34
5.3 Negative Covenant............................................ 34
5.4 Required Approvals........................................... 34
5.5 Notification................................................. 35
5.6 Payment of Indebtedness by Related Persons................... 35
5.7 Covenants Regarding Non-Solicitation......................... 35
5.8 Notice by the Company of Superior Proposal Determination;
Acquisition Proposal Acceptance.............................. 36
5.9 Best Efforts................................................. 37
5.10 Moral Rights................................................. 37
5.11 Shareholder Approval......................................... 37
6. Covenants of Parent................................................ 37
6.1 Approvals of Governmental Bodies............................. 37
6.2 Best Efforts................................................. 38
6.3 SEC Filings.................................................. 38
6.4 Negative Covenant............................................ 38
6.5 Notification................................................. 38
6.6 Payment of Professional Fees................................. 38
6.7 Support Agreement and Voting and Exchange Trust Agreement.... 39
6.8 Registration Statement; Form S-8 Registration Statement...... 39
6.9 Release of Operating Results................................. 42
6.10 Canadian Securities Compliance............................... 42
7. Conditions Precedent to Parent's Obligation to Close............... 43
7.1 Accuracy of Representations.................................. 43
7.2 The Company's Performance.................................... 43
</TABLE>
-11-
<PAGE>
TABLE CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
7.3 Consents.................................................... 43
7.4 Additional Documents........................................ 43
7.5 No Proceedings.............................................. 44
7.6 No Claim Regarding Stock Ownership or Sale Proceeds......... 44
7.7 No Prohibition.............................................. 44
7.8 Shareholder Approval........................................ 45
7.9 Canadian Approvals.......................................... 45
7.10 Nasdaq Listing.............................................. 45
7.12 Court Approval.............................................. 45
7.13 Effectiveness of Registration Statement..................... 45
8. Conditions Precedent to the Company's Obligation to Close............ 45
8.1 Accuracy of Representations................................. 46
8.2 Parent's Performance........................................ 46
8.3 Consents.................................................... 46
8.4 Additional Documents........................................ 46
8.5 No Proceedings.............................................. 47
8.6 No Injunction............................................... 47
8.7 Shareholder Approval........................................ 47
8.8 Canadian Approvals.......................................... 47
8.9 Nasdaq Listing.............................................. 47
8.10 Court Approval.............................................. 47
8.11 Effectiveness of Registration Statement..................... 47
9. Termination.......................................................... 48
9.1 Termination Events.......................................... 48
9.2 Effect of Termination....................................... 48
10. Escrow Fund.......................................................... 49
10.1 Escrow Shares............................................... 49
10.2 Damage Threshold............................................ 50
10.3 Escrow Period............................................... 50
10.4 Claims upon Escrow Fund..................................... 50
10.5 Objections to Claims........................................ 51
10.6 Resolution of Conflicts; Arbitration........................ 51
10.7 Company Agent............................................... 52
10.8 Actions of the Company Agent................................ 52
10.9 Third-Party Claims.......................................... 53
11. General Provisions................................................... 53
</TABLE>
iii
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
11.1 Expenses and Liability...................................... 53
11.2 Public Announcements........................................ 54
11.3 Confidentiality............................................. 54
11.4 Notices..................................................... 54
11.5 Jurisdiction; Service of Process............................ 55
11.6 Further Assurances.......................................... 55
11.7 Waiver...................................................... 56
11.8 Entire Agreement and Modification........................... 56
11.9 Disclosure Letter........................................... 56
11.10 Assignments, Successors, and No Third-Party Rights.......... 56
11.11 Severability................................................ 57
11.12 Section Headings, Construction.............................. 57
11.13 Time of Essence............................................. 57
11.14 Governing Law............................................... 57
11.15 Counterparts................................................ 57
</TABLE>
-iv-
<PAGE>
AGREEMENT AND PLAN OF ACQUISITION AND ARRANGEMENT
This Agreement and Plan of Acquisition and Arrangement, dated as of August
13, 1999 (the "Agreement"), is entered into by and between InfoSpace.com, Inc.,
---------
a Delaware corporation ("Parent") and INEX Corporation, an Ontario company (the
"Company").
-------
Witnesseth:
"Whereas the Boards of Directors of Parent and the Company have each
determined that it is advisable and in the best interests of their respective
shareholders for Parent to acquire control of the Company through a statutory
arrangement involving the exchange of all of the issued and outstanding shares
of the Company for shares in Parent or an indirect wholly owned subsidiary of
Parent (the "Acquisition Sub") upon the terms and conditions set forth herein
---------------
(the "Arrangement");
-----------
Whereas, as contemplated herein, Parent shall incorporate an unlimited
liability company in Nova Scotia (the "ULC") which shall in turn incorporate the
---
Acquisition Sub under the Business Corporations Act (Ontario);
Whereas application will be made to the Ontario Superior Court pursuant to
the Business Corporations Act (Ontario) for an interim order and directions and
a final order with respect to a plan of arrangement (the "Plan of Arrangement")
-------------------
substantially in the form of the plan of arrangement annexed hereto as Exhibit
-------
A;
- -
Whereas upon receipt of a final order of the Superior Court of Ontario
approving the Plan of Arrangement, articles of arrangement substantially in the
form annexed hereto as Exhibit B (the "Articles of Arrangement") shall be filed
--------- -----------------------
with the Ministry of Consumer and Commercial Relations for the Province of
Ontario giving effect to the Arrangement and the share exchange;
Whereas pursuant to the Plan of Arrangement, once approved, the preference
shareholders of the Company shall exchange their Shares for common shares in the
capital of Parent and the common shareholders shall have the option of
exchanging their Shares for common shares in the capital of Parent or
exchangeable shares in the capital of Acquisition Sub (the "Exchangeable
------------
Shares");
- ------
Whereas as contemplated by the Plan of Arrangement and pursuant to the
terms of the Exchangeable Shares, and pursuant to the Support Agreement and the
Voting and Exchange Trust Agreement (each as defined herein) by and between
Parent, the Acquisition Sub and the trustee for holders of Exchangeable Shares
(and the ULC in the case of the Voting and Exchange Trust Agreement), the
Exchangeable Shares shall be exchangeable by the holders for shares of Common
Stock, $0.0001 par value per share in the capital of Parent (the "Parent Common
-------------
Shares") on a one-for-one basis at any time on or before a date eleven years
- ------
after the Effective Time (as defined herein);
<PAGE>
Whereas at the Effective Time, Parent shall assume each of the then
outstanding Options and pursuant to their respective terms, each such Option
shall become a warrant, convertible debenture or option to purchase Parent
Common Shares; and
Whereas for accounting purposes it is intended that the Transaction (as
defined in Section 2.1 hereof) shall be accounted for by Parent as a pooling of
interests under U.S. generally accepted accounting principles.
AGREEMENT
The parties, intending to be legally bound, agree as follows:
1. Definitions.
-----------
For purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1:
"Acquisition Shares" --the Parent Common Shares issuable upon exchange of
------------------
the Exchangeable Shares and issued directly to holders of Shares pursuant to the
Plan of Arrangement.
"Acquisition Sub" -as defined in the recitals to this Agreement.
---------------
"Applicable Contract" --any Contract (a) under which the Company has or may
-------------------
acquire any rights, (b) under which the Company has or may become subject to any
obligation or liability, or (c) by which the Company or any of the assets owned
or used by it is or may become bound.
"Arrangement" --as defined in the recitals to this Agreement.
-----------
"Articles" -- as defined in the recitals to this Agreement.
--------
"Articles of Arrangement" --as defined in the recitals to this Agreement.
-----------------------
"Balance Sheet" --as defined in Section 3.4.
-------------
"Best Efforts" --the efforts that a prudent Person desirous of achieving a
------------
result would use in similar circumstances to ensure that such result is achieved
as expeditiously as possible; provided, however, that an obligation to use Best
------------------
Efforts under this Agreement does not require the Person subject to that
obligation to take actions that would result in a materially adverse change in
the benefits to such Person of this Agreement and the Contemplated Transactions.
"Breach" --a "Breach" of a representation, warranty, covenant, obligation,
------
or other provision of this Agreement or any instrument delivered pursuant to
this Agreement will be deemed to have occurred if there is or has been any
inaccuracy in or breach of, or any failure to perform or comply with, such
representation, warranty, covenant, obligation, or other provision.
"Closing" --as defined in Section 2.2.
-------
-2-
<PAGE>
"Closing Date" --the date and time as of which the Closing actually takes
------------
place.
"Commission" --the U.S. Securities and Exchange Commission.
----------
"Common Shares" --the Common Shares of the Company.
-------------
"Company" --as defined in the first paragraph of this Agreement.
-------
"Company Affiliate Agreements" --as defined in Section 7.4(c).
----------------------------
"Company Employee Plan" --any plan, program, policy, practice, contract,
---------------------
agreement or other arrangement providing for compensation, severance,
termination pay, performance awards, stock or stock-related awards, fringe
benefits or other employee benefits or remuneration of any kind, whether written
or unwritten or otherwise, funded or unfunded, including without limitation,
each "employee benefit plan," within the meaning of Section 3(3) of ERISA (as
defined in this Section) which is or has been maintained, contributed to, or
required to be contributed to, by the Company for the benefit of any Employee.
"Company Fairness Opinion" -as defined in Section 3.28.
------------------------
"Consent" --any approval, consent, ratification, waiver, or other
-------
authorization (including any Governmental Authorization).
"Contemplated Transactions" --all of the transactions contemplated by this
-------------------------
Agreement, including:
(a) the Transactions (as defined in this Section) and Parent's
exercise of control over the Company;
(b) the execution, delivery, and performance of the Key Employee
Employment Agreements, the Noncompetition Agreements, the Principal Seller's
Releases, the Company Affiliate Agreements, the Escrow Agreement, the Support
Agreement and the Voting and Exchange Trust Agreement; and
(c) the performance by Parent and the Company of their respective
covenants and obligations under this Agreement.
"Contract" --any agreement, contract, obligation, promise, or undertaking
--------
(whether written or oral and whether express or implied) that is legally
binding.
"Court" --the Ontario Superior Court.
-----
"Damages" --as defined in Section 10.1.
-------
"Director" --the director appointed pursuant to Section 278 of the Ontario
--------
Act.
-3-
<PAGE>
"Disclosure Letter" --the disclosure letter delivered by the Company to
-----------------
Parent concurrently with the execution and delivery of this Agreement.
"Dissent Rights" --means a shareholder of the Company's rights of dissent
--------------
in respect of the Arrangement described in Section 3.1 of the Plan of
Arrangement.
"$" and "Dollars" --United States dollars.
- -------
"Effective Time" --as defined in Section 2.1(b) of this Agreement.
--------------
"Employee" --any current employee, officer, or director of the Company.
--------
"Employee Agreement" --each management, employment, severance, consulting,
------------------
relocation, repatriation, expatriation, visas, work permit or similar agreement
or contract between the Company and any Employee or consultant.
"Employee Options" --all outstanding options or rights to purchase shares
----------------
of capital stock of the Company issued under the Share Option Plan.
"Encumbrance" --any charge, claim, community property interest, condition,
-----------
equitable interest, lien, option, pledge, security interest, right of first
refusal, or restriction of any kind, including any restriction on use, voting,
transfer, receipt of income, or exercise of any other attribute of ownership.
"Environmental Laws" --as defined in Section 3.18.
------------------
"ERISA" --the Employee Retirement Income Security Act of 1974 or any
-----
successor law, and regulations and rules issued pursuant to that Act or any
successor law.
"Escrow Agent" --as named in Section 10.1.
------------
"Escrow Agreement" --as defined in Section 10.1.
----------------
"Exchange Ratio" --the ratio of 0.20405 Exchangeable Shares or Parent
--------------
Common Shares (as the case may be) for each Share.
"Exchangeable Shares" --as defined in the recitals to this Agreement.
-------------------
"Facilities" --any real property, leaseholds, or other interests currently
----------
or formerly owned or operated by the Company and any buildings, plants,
structures, or equipment (including motor vehicles) currently or formerly owned
or operated by the Company.
"Final Order" --as defined in Section 2.1(b).
-----------
-4-
<PAGE>
"GAAP" --generally accepted Canadian accounting principles, applied on a
----
basis consistent with the basis on which the Balance Sheet and the other
financial statements referred to in Section 3.4(b) were prepared.
"Governmental Authorization" --any approval, consent, license, permit,
--------------------------
waiver, or other authorization issued, granted, given, or otherwise made
available by or under the authority of any Governmental Body or pursuant to any
Legal Requirement.
"Governmental Body" --any:
-----------------
(a) nation, province, state, county, city, town, village, district, or
other jurisdiction of any nature;
(b) federal, provincial, state, local, municipal, foreign, or other
government;
(c) governmental or quasi-governmental authority of any nature
(including any governmental agency, branch, department, official, or entity and
any court or other tribunal);
(d) multi-national organization or body; or
(e) body exercising, or entitled to exercise, any administrative,
executive, judicial, legislative, police, regulatory, or taxing authority or
power of any nature.
"Intellectual Property Assets" --as defined in Section 3.19(a).
----------------------------
"Interim Balance Sheet" --as defined in Section 3.4.
---------------------
"Interim Order" --as defined in Section 2.1(a).
-------------
"IRC" --the Internal Revenue Code of 1986 or any successor law and
---
regulations issued by the IRS pursuant thereto.
"IRS" --the United States Internal Revenue Service or any successor and, to
---
the extent relevant, the United States Department of the Treasury.
"Key Employee Employment Agreements" --as defined in Section 7.4(b).
----------------------------------
"Key Employees" --the employees of the Company identified on Schedule A
-------------
attached hereto.
"Knowledge" --an individual will be deemed to have "Knowledge" of a
---------
particular fact or other matter if:
(a) such individual is actually aware of such fact or other matter; or
-5-
<PAGE>
(b) a prudent individual could be expected to discover or otherwise
become aware of such fact or other matter in the course of conducting a
reasonable investigation concerning the existence of such fact or other matter.
A Person (other than an individual) will be deemed to have "Knowledge" of a
particular fact or other matter if any individual who is serving as a director,
officer, partner, executor, or trustee of such Person (or in any similar
capacity) has, or at any time had, "Knowledge" of such fact or other matter.
"Legal Requirement" --any federal, provincial, state, local, municipal,
-----------------
foreign, international, multinational, or other administrative order,
constitution, law, ordinance, principle of common law, regulation, statute, or
treaty.
"Noncompetition Agreements" --as defined in Section 7.4(f).
-------------------------
"Nonemployee Options" --all options, warrants or rights to purchase shares
-------------------
of capital stock of the Company, other than Employee Options.
"Ontario Act" --the Business Corporations Act (Ontario).
-----------
"Options" -collectively, the Employee Options and the Nonemployee Options.
-------
"Order" --any award, decision, injunction, judgment, order, ruling,
-----
subpoena, or verdict entered, issued, made, or rendered by any court,
administrative agency, or other Governmental Body or by any arbitrator.
"Ordinary Course of Business" --an action taken by a Person will be deemed
---------------------------
to have been taken in the "Ordinary Course of Business" only if:
(a) such action is consistent with the past practices of such Person
and is taken in the ordinary course of the normal day-to-day operations of such
Person;
(b) such action is not required to be authorized by the board of
directors of such Person (or by any Person or group of Persons exercising
similar authority) and is not required to be specifically authorized by the
parent company (if any) of such Person; and
(c) such action is similar in nature and magnitude to actions
customarily taken, without any authorization by the board of directors (or by
any Person or group of Persons exercising similar authority), in the ordinary
course of the normal day-to-day operations of other Persons that are in the same
line of business as such Person.
"Organizational Documents" --(a) the articles or certificate of
------------------------
incorporation and the bylaws of a corporation; (b) any charter or similar
document adopted or filed in connection with the creation, formation, or
organization of a Person; and (c) any amendment to any of the foregoing.
-6-
<PAGE>
"OSA" --the Securities Act (Ontario) or any successor law, and rule and
---
regulations issued pursuant to that Act or any successor law.
"Parent" --as defined in the first paragraph of this Agreement.
------
"Parent Common Shares" --the Common Stock, $0.0001 par value per share, of
--------------------
Parent.
"Person" --any individual, corporation (including any non-profit
------
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union, or other entity
or Governmental Body.
"Plan of Arrangement" --defined in the recitals to this Agreement.
-------------------
"Preferred Shares" --the Class A Preference Shares, Series 1 of the
----------------
Company.
"Principal Sellers" --the Persons set forth on Schedule B attached hereto.
-----------------
"Principal Seller's Releases" --as defined in Section 7.4(e).
---------------------------
"Proceeding" --any action, arbitration, audit, hearing, investigation,
----------
litigation, or suit (whether civil, criminal, administrative, investigative, or
informal) commenced, brought, conducted, or heard by or before, or otherwise
involving, any Governmental Body or arbitrator.
"Registrable Shares" --the Acquisition Shares, and the Parent Common Shares
------------------
issuable upon exercise or conversion of the Replacement Nonemployee Options.
"Registration Statement" --as defined in Section 6.8.
----------------------
"Related Person" --with respect to a particular individual:
--------------
(a) each other member of such individual's Family;
(b) any Person that is directly or indirectly controlled by such
individual or one or more members of such individual's Family;
(c) any Person in which such individual or members of such
individual's Family hold (individually or in the aggregate) a Material Interest;
and
(d) any Person with respect to which such individual or one or more
members of such individual's Family serves as a director, officer, partner,
executor, or trustee (or in a similar capacity).
With respect to a specified Person other than an individual:
(a) any Person who beneficially owns, directly or indirectly, ten
percent (10%) of the issued and outstanding equity securities or equity
interests in the specified Person;
-7-
<PAGE>
(b) any Person who beneficially owns, directly or indirectly, ten
percent (10%) of voting securities or other voting interests in the specified
Person;
(c) any Person who has the right to designate a director in the
specified Person;
(d) any Person who has the right to appoint the chief executive
officer of the specified Person;
(e) any entity in which a Related Person owns twenty-five percent
(25%) or more of the issued and outstanding equity securities or equity
interests in such entity;
(f) each Person that serves as a director, officer, partner, executor,
or trustee of such specified Person (or in a similar capacity);
(g) any Person in which such specified Person holds a Material
Interest;
(h) any Person with respect to which such specified Person serves as a
general partner or a trustee (or in a similar capacity); and
(i) any Related Person of any individual described in clause (b) or
(c).
For purposes of this definition, (a) the "Family" of an individual includes
(i) the individual, (ii) the individual's spouse, (iii) any other natural person
who is related to the individual or the individual's spouse within the second
degree, and (iv) any other natural person who resides with such individual, and
(b) "Material Interest" means direct or indirect beneficial ownership (as
defined in Rule 13d-3 under the Securities Exchange Act of 1934) of voting
securities or other voting interests representing at least 10% of the
outstanding voting power of a Person or equity securities or other equity
interests representing at least 10% of the outstanding equity securities or
equity interests in a Person.
"Replacement Employee Options" --the Replacement Options into which the
----------------------------
Employee Options shall be converted pursuant to the Plan of Arrangement.
"Replacement Nonemployee Options" -- the Replacement Options into which the
-------------------------------
Nonemployee Options shall be converted pursuant to the Plan of Arrangement.
"Replacement Option" --as defined in Section 2.2(d) of the Plan of
------------------
Arrangement.
"Representative" --with respect to a particular Person, any director,
--------------
officer, employee, agent, consultant, advisor, or other representative of such
Person, including legal counsel, accountants, and financial advisors.
"Securities Act" --the U.S. Securities Act of 1933, as amended, or any
--------------
successor law, and regulations and rules issued pursuant to that Act or any
successor law.
"Share Option Plan" --the INEX Corporation Share Option Plan.
-----------------
-8-
<PAGE>
"Shares" --collectively, the Common Shares and the Preferred Shares of the
------
Company.
"Subsidiary" --with respect to any Person (the "Owner"), any corporation or
----------
other Person of which securities or other interests having the power to elect a
majority of that corporation's or other Person's board of directors or similar
governing body, or otherwise having the power to direct the business and
policies of that corporation or other Person (other than securities or other
interests having such power only upon the happening of a contingency that has
not occurred) are held by the Owner or one or more of its Subsidiaries; when
used without reference to a particular Person, "Subsidiary" means a Subsidiary
of the Company.
"Support Agreement" --the Exchangeable Share Support Agreement, as defined
-----------------
in Section 6.7.
"Tax" --includes income tax, purchase tax, value added tax, excise tax,
---
sales tax, Goods and Services Tax, Provincial Sales Tax and any other tax of any
kind imposed on the Company, its assets or its properties.
"Tax Return" --any return (including any information return), report,
----------
statement, schedule, notice, form, or other document or information filed with
or submitted to, or required to be filed with or submitted to, any Governmental
Body in connection with the determination, assessment, collection, or payment
of any Tax or in connection with the administration, implementation, or
enforcement of or compliance with any Legal Requirement relating to any Tax.
"Threatened" --a claim, Proceeding, dispute, action, or other matter will
----------
be deemed to have been "Threatened" if any demand or statement has been made
(orally or in writing) or any notice has been given (orally or in writing) that
would lead a prudent Person to conclude that such a claim, Proceeding, dispute,
action, or other matter is likely to be asserted, commenced, taken, or otherwise
pursued in the future.
"Transactions" --the transactions described in Section 2.1 of this
------------
Agreement.
"ULC" --a defined in the recitals to this agreement.
---
"Voting and Exchange Trust Agreement" --as defined in Section 6.7.
-----------------------------------
2. The Transactions.
----------------
2.1 Description of the Transactions.
-------------------------------
(a) As promptly as practicable, the Company shall apply to the
Court pursuant to Section 182 of the Ontario Act for an interim order in form
and substance reasonably satisfactory to Parent and the Company (the "Interim
Order") providing for, among other things the calling and holding of a special
meeting of the shareholders of the Company (the "Company Shareholder Meeting")
for the purpose of considering and, if deemed advisable, approving the
Arrangement under Section 182 of the Ontario Act and pursuant to this Agreement
and the Plan of
-9-
<PAGE>
of Arrangement, with such changes, modifications and additions thereto as the
parties may reasonably agree upon. The notice of motion for the application for
the Interim Order shall request that the Interim Order provide (a) for the class
of Persons to whom notice shall be provided in respect of the Arrangement and
the Company Shareholder Meeting and for the manner in which such notice shall be
provided, (b) that the requisite shareholder approval for the special resolution
approving the Arrangement shall be 66-2/3% of the votes cast on such special
resolution by holders of Common Shares and Preferred Shares, each voting
separately as a class, present in person or by proxy at the Company Shareholder
Meeting, (c) that, in all other respects, the terms, restrictions and conditions
of the Articles of Incorporation and By-Laws of the Company, including quorum
requirements and all other matters, shall apply in respect of the Company
Shareholder Meeting and (d) for the grant of the rights of dissent in respect of
the arrangement described in Section 3.1 of the Plan of Arrangement.
(b) If the shareholders of the Company shall approve the Arrangement
in accordance with the Interim Order, and subject to the satisfaction or waiver
of the other conditions set forth in Article 7 and 8, the Company shall as
promptly as practicable (a) take all necessary steps to submit the Arrangement
to the Court and apply for a final order of the Court approving the Arrangement
in such fashion as the Court may direct (the "Final Order"). At 12:01 a.m. (the
"Effective Time") on the date (the "Effective Date") shown on the Certificate of
Arrangement issued by the Director giving effect to the Arrangement, the
reorganization of capital and other transactions set out in clauses (a) through
(f), inclusive, of Section 2.2 of the Plan of Arrangement shall occur and shall
be deemed to occur in the order set forth in such Section 2.2 without any
further act or formality.
(c) Pursuant to the terms of the Plan of Arrangement and subject to
the Escrow Agreement, commencing at the Effective Time, the following events
will occur:
(i) each outstanding Common Share (other than Common Shares held
by shareholders who exercise their Dissent Rights) will be transferred by the
holder thereof, at the shareholder's election, either (i) to Acquisition Sub in
exchange for that number of fully paid and non-assessable Exchangeable Shares
equal to the Exchange Ratio, or (ii) to ULC in exchange for that number of fully
paid and non-assessable Parent Common Shares equal to the Exchange Ratio;
(ii) each outstanding Common Share in respect of which an
election has not been made by the holder thereof, or in respect of which an
effective election has not been made (other than Common Shares held by a
shareholders who exercise their Dissent Rights), will be transferred by the
holder thereof to Acquisition Sub in exchange for that number of fully paid and
non-assessable Exchangeable Shares equal to the Exchange Ratio;
(iii) each outstanding Preferred Share (other than Preferred
Shares held by a shareholder who exercises its Dissent Rights) will be
transferred by the holder thereof to ULC in exchange for that number of fully
paid and non-assessable Parent Common Shares equal to the Exchange Ratio; and
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<PAGE>
(iv) each Option shall be converted, without any act or formality
on the part of the holder thereof, into a Replacement Option.
2.2 Closing.
-------
Unless this Agreement shall have been terminated and the transactions
herein contemplated shall have been abandoned pursuant to Section 9 hereof, and
subject to the satisfaction or waiver of the conditions set forth in Sections 7
and 8 hereof, the closing of the Transactions (the "Closing") will take place as
-------
promptly as practicable after satisfaction or waiver of the conditions set forth
in Sections 7 and 8 hereof, at the offices of Fasken Campbell Godfrey, Toronto
Dominion Bank Tower, 66 Wellington Street West, Suite 4200, Toronto, Ontario,
unless another date, time or place is agreed to in writing by the parties
hereto. At the Closing, the parties hereto shall deliver the documents
contemplated hereby together with such other customary documents as may be
reasonably requested by the parties.
2.3 Accounting Consequences.
-----------------------
It is intended by the parties hereto that the Transactions shall qualify
for accounting treatment as a pooling of interests under U.S. generally accepted
accounting principles.
2.4 Adjustments to Exchange Ratio.
-----------------------------
The Exchange Ratio shall be adjusted to reflect fully the effect of any
stock split, reverse split, stock dividend (including any dividend or
distribution of securities convertible into Parent Common Shares or the Shares),
reorganization, recapitalization or other like change with respect to Parent
Common Shares or the Shares occurring after the date hereof and prior to the
Effective Time.
2.5 Tax Treatment.
-------------
It is intended that the Transactions shall generally constitute (i) a
taxable exchange for United States federal income tax purposes (not qualifying
under Sections 368 or 351 of the IRC) to holders of Shares who are U.S.
residents or who are otherwise subject to taxation in the United States on the
sale or exchange of Shares, and (ii) a tax deferred reorganization for Canadian
federal income tax purposes for owners of Shares who are residents of Canada for
Canadian federal income tax purposes who receive Exchangeable Shares as a
consequence of the Arrangement.
3. Representations and Warranties of the Company.
---------------------------------------------
The Company represents and warrants to Parent as follows:
3.1 Organization and Good Standing.
------------------------------
(a) The Company has no Subsidiaries. Part 3.1 of the
Disclosure Letter contains a complete and accurate list for the Company of its
name, its jurisdiction of incorporation, its principal place of business, other
jurisdictions in which it is authorized to do business, and its
-11-
<PAGE>
capitalization (including a true, correct and complete list of the identity of
each beneficial holder of Shares and Options, the number of Shares held by each
and the number of Shares subject to Options held by each and the residence or
principal place of business of each holder). The Company is a corporation
incorporated and validly existing, and in good standing under the laws of the
Province of Ontario, with full corporate power and authority to conduct its
business as it is now being conducted, to own or use the properties and assets
that it purports to own or use, and to perform all its obligations under
Applicable Contracts. The Company is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each state or other
jurisdiction in which either the ownership or use of the properties owned or
used by it, or the nature of the activities conducted by it, requires such
qualification.
(b) The Company has delivered to Parent a copy of the
Organizational Documents of the Company, as currently in effect.
3.2 Authority; No Conflict.
----------------------
(a) This Agreement constitutes the legal, valid, and binding
obligation of the Company, enforceable against the Company in accordance with
its terms subject to bankruptcy, insolvency and other similar laws effecting
creditors' rights generally and to general principles of equity. Subject to the
approval of this Agreement by the Company's shareholders, the Company has the
absolute and unrestricted right, power, authority, and capacity to execute and
deliver this Agreem ent and to perform its obligations under this Agreement.
(b) Except as set forth in Part 3.2 of the Disclosure Letter,
neither the execution and delivery of this Agreement nor the consummation or
performance of the obligations of the Company in connection with the
Transactions will, directly or indirectly (with or without notice or lapse of
time):
(i) contravene, conflict with, or result in a violation of
(A) any provision of the Organizational Documents of the Company, or (B) any
resolution adopted by the board of directors or the stockholders of the Company;
(ii) contravene, conflict with, or result in a violation of,
or give any Governmental Body or other Person the right to challenge any of the
Contemplated Transactions or to exercise any remedy or obtain any relief under,
any Legal Requirement or any Order to which the Company or any of the assets
owned or used by the Company, may be subject;
(iii) contravene, conflict with, or result in a violation of
any of the terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate, or modify, any Governmental
Authorization that is held by the Company or that otherwise relates to the
business of, or any of the assets owned or used by, the Company;
(iv) cause the Company to become subject to, or to become
liable for the payment of, any Tax;
-12-
<PAGE>
(v) cause any of the assets owned by the Company to be
reassessed or revalued by any taxing authority or other Governmental Body;
(vi) contravene, conflict with, or result in a violation or
breach of any provision of, or give any Person the right to declare a default or
exercise any remedy under, or to accelerate the maturity or performance of, or
to cancel, terminate, or modify, any Applicable Contract; or
(vii) result in the imposition or creation of any
Encumbrance upon or with respect to any of the assets owned or used by the
Company.
Except as set forth in Part 3.2 of the Disclosure Letter, the Company is
not or will not be required to give any notice to or obtain any Consent from any
Person in connection with the execution and delivery of this Agreement or the
consummation or performance of any of its obligations in connection with the
Transactions.
3.3 Capitalization.
--------------
The authorized equity securities of the Company consists of an unlimited
number of Common Shares and 1,625,000 Class A Preference Shares, of which
2,000,622 Common Shares are issued and outstanding and 240,271 Class A
Preference Shares, Series 1 are issued and outstanding, which collectively
constitute all of the outstanding Shares. Except as set forth in Part 3.3 of
the Disclosure Letter, no legend or other reference to any purported Encumbrance
appears upon any certificate representing equity securities of the Company. All
of the outstanding equity securities of the Company have been duly authorized
and validly issued and are fully paid and non-assessable. Except as described in
Part 3.3 of the Disclosure Letter, there are no Options or other Contracts to
which the Company is a party that relates to the issuance, sale, or transfer of
any equity securities or other securities of the Company. None of the
outstanding equity securities or other securities of the Company was issued in
violation of the Securities Act, the OSA or any other Legal Requirement. The
Company does not own, or have any Contract to acquire, any equity securities or
other securities of any Person or any direct or indirect equity or ownership
interest in any other business.
3.4 Financial Statements.
--------------------
The Company has delivered to Parent: (a) a balance sheet of the Company as
at December 31, 1998 (including the notes thereto, the "Balance Sheet"), and the
-------------
related statements of operations and deficit for the fiscal year then ended,
together with the report thereon of PricewaterhouseCoopers LLP, independent
chartered accountants, and (b) an unaudited balance sheet of the Company as at
March 31, 1999 (the "Interim Balance Sheet") and the related unaudited
---------------------
statements of operations and deficit for the three months then ended, including
in each case the notes thereto. Such financial statements and notes fairly
present the financial condition and the results of operations, and cash flow of
the Company as at the respective dates of and for the periods referred to in
such financial statements, all in accordance with GAAP, subject, in the case of
interim financial statements, to normal recurring year-end adjustments (the
effect of which will not, individually or in the aggregate, be materially
adverse) and the absence of notes (that, if presented, would not differ
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<PAGE>
materially from those included in the Balance Sheet); the financial statements
referred to in this Section 3.4 reflect the consistent application of such
accounting principles throughout the periods involved. No financial statements
of any Person other than the Company are required by GAAP to be included in the
financial statements of the Company.
3.5 Books and Records.
-----------------
The books of account, minute books and share certificate books of the
Company, all of which have been made available to Parent, are complete and
correct and have been maintained in accordance with sound business practices,
including the maintenance of an adequate system of internal controls. The minute
books of the Company contain accurate and complete records of all meetings held
of, and corporate action taken by, the shareholders, the Boards of Directors,
and committees of the Boards of Directors of the Company, and no meeting of any
such shareholders, Board of Directors, or committee has been held for which
minutes have not been prepared and are not contained in such minute books. At
the Closing, all of those books and records will be in the possession of the
Company.
3.6 Title to Properties; Encumbrances.
---------------------------------
Part 3.6 of the Disclosure Letter contains a complete and accurate list of
all real property, leaseholds, or other real property interests owned by the
Company. The Company owns all the properties and assets (whether real,
personal, or mixed and whether tangible or intangible) that they purport to own,
located in the Facilities owned or operated by the Company or reflected as owned
in the books and records of the Company, including all of the properties and
assets reflected in the Balance Sheet and the Interim Balance Sheet (except for
assets held under capitalized leases disclosed or not required to be disclosed
in Part 3.6 of the Disclosure Letter and personal property sold since the date
of the Balance Sheet and the Interim Balance Sheet, as the case may be, in the
Ordinary Course of Business), and all of the properties and assets purchased or
otherwise acquired by the Company since the date of the Interim Balance Sheet
(except for personal property acquired and sold since the date of the Interim
Balance Sheet in the Ordinary Course of Business), which subsequently purchased
or acquired properties and assets (other than inventory and short-term
investments) are listed in Part 3.6 of the Disclosure Letter. Except as set
forth in Part 3.6 of the Disclosure Letter, all material properties and assets
reflected in the Balance Sheet and the Interim Balance Sheet are free and clear
of all Encumbrances except, with respect to all such properties and assets, (a)
mortgages or security interests shown on the Balance Sheet or the Interim
Balance Sheet as securing specified liabilities or obligations, with respect to
which no default (or event that, with notice or lapse of time or both, would
constitute a default) exists, (b) mortgages or security interests incurred in
connection with the purchase of property or assets after the date of the Interim
Balance Sheet (such mortgages and security interests being limited to the
property or assets so acquired), with respect to which no default (or event
that, with notice or lapse of time or both, would constitute a default) exists,
and (c) liens for current taxes not yet due.
-14-
<PAGE>
3.7 Condition and Sufficiency of Assets.
-----------------------------------
The building, plants, structures, and equipment of the Company are
sufficient for the continued conduct of the Company's businesses after the
Closing in substantially the same manner as conducted prior to the Closing.
3.8 Accounts Receivable.
-------------------
All accounts receivable of the Company that are reflected on the Interim
Balance Sheet or on the accounting records of the Company as of the Closing Date
(collectively, the "Accounts Receivable") represent or will represent valid
-------------------
obligations arising from sales actually made or services actually performed in
the Ordinary Course of Business. Unless paid prior to the Closing Date, the
Accounts Receivable are or will be as of the Closing Date collectible net of the
respective reserves shown on the Interim Balance Sheet or on the accounting
records of the Company as of the Closing Date (which reserves are adequate and
calculated consistent with past practice and, in the case of the reserve as of
the Closing Date, will not represent a materially greater percentage of the
Accounts Receivable as of the Closing Date than the reserve reflected in the
Interim Balance Sheet represented of the Accounts Receivable reflected therein
and will not represent a material adverse change in the composition of such
Accounts Receivable in terms of aging). Subject to such reserves, each of the
Accounts Receivable is or will be collectible without any set-off. There is no
contest, claim, or right of set-off, other than returns in the Ordinary Course
of Business, under any Contract with any obligor of an Accounts Receivable
relating to the amount or validity of such Accounts Receivable. Part 3.8 of the
Disclosure Letter contains a complete and accurate list of all Accounts
Receivable as of the date of the Interim Balance Sheet, which list sets forth
the aging of such Accounts Receivable.
3.9 No Undisclosed Liabilities.
--------------------------
Except as set forth in Part 3.9 of the Disclosure Letter, the Company has
no material liabilities or obligations of any nature (whether known or unknown
and whether absolute, accrued, contingent, or otherwise) except for liabilities
or obligations reflected or reserved against in the Balance Sheet or the Interim
Balance Sheet and current liabilities incurred in the Ordinary Course of
Business since the respective dates thereof.
3.10 Taxes.
-----
(a) The Company has filed or caused to be filed (on a timely
basis since February 5, 1997) all Tax Returns that are or were required to be
filed by it pursuant to applicable Legal Requirements. The Company has delivered
or made available to Parent copies of, and Part 3.10 of the Disclosure Letter
contains a complete and accurate list of, all such Tax Returns reporting a tax
liability of $25,000 or more relating to income or other taxes filed since
February 5, 1997. The Company has paid, or made provision for the payment of,
all Taxes that have or may have become due, pursuant to those Tax Returns
(whether or not shown on such Tax Returns) or otherwise, or pursuant to any
assessment received by the Company, except such Taxes, if any, as are listed in
Part 3.10 of the Disclosure Letter and are being contested in good faith and as
to which
-15-
<PAGE>
adequate reserves (determined in accordance with GAAP) have been provided in the
Balance Sheet and the Interim Balance Sheet.
(b) Part 3.10 of the Disclosure Letter contains a complete and
accurate list of all audits of all such Tax Returns, including a reasonably
detailed description of the nature and outcome of each audit. All deficiencies
proposed as a result of such audits have been paid, reserved against, settled,
or, as described in Part 3.10 of the Disclosure Letter, are being contested in
good faith by appropriate proceedings. Part 3.10 of the Disclosure Letter
describes all adjustments to the Tax Returns filed by the Company for all
taxable years since inception, and the resulting deficiencies proposed by the
appropriate tax authorities. Except as described in Part 3.10 of the Disclosure
Letter, the Company has not been given or been requested to give waivers or
extensions (or is or would be subject to a waiver or extension given by any
other Person) of any statute of limitations relating to the payment of Taxes of
the Company or for which the Company may be liable.
(c) The charges, accruals, and reserves with respect to Taxes on
the respective books of the Company are adequate (as determined in accordance
with GAAP) and are at least equal to the Company's liability for Taxes. There
exists no proposed tax assessment against the Company except as disclosed in the
Balance Sheet or in Part 3.10 of the Disclosure Letter. All Taxes that the
Company is or was required by Legal Requirements to withhold or collect have
been duly withheld or collected and, to the extent required, have been paid to
the proper Governmental Body or other Person.
(d) All Tax Returns filed by the Company are true, correct, and
complete. There is no tax sharing agreement that will require any payment by the
Company after the date of this Agreement.
(e) No claims have been made, which are currently pending, by any
Canadian, Ontario or any other taxing authority in connection with any of the
returns and reports referred to in Subsection (a) above.
(f) All Canadian, U.S. and foreign income, profits, franchise,
sales, use, occupancy, property, severance, excise, value added and other taxes
(including interest and penalties) due from the Company, have been fully paid,
or have been or will be adequately provided for in the Balance Sheet and Interim
Balance Sheet.
(g) The Company is not subject to any adjustment or penalty by
reason of underpayment or violation of any order, rule or regulation of, or a
default with respect to, any return or report required to be filed with, any
federal, provincial, state, local, foreign or other governmental taxing agency,
department, commission, board, bureau or instrumentality to which they are
subject.
3.11 No Material Adverse Change.
--------------------------
Since the date of the Balance Sheet, there has not been any material
adverse change in the business, operations, properties, prospects, assets, or
condition of the Company, and, to the
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<PAGE>
Knowledge of the Company, no event has occurred or circumstance exists that is
reasonably likely to result in such a material adverse change.
3.12 Employee Matters and Benefit Plans.
----------------------------------
Part 3.12 of the Disclosure Letter contains a complete and accurate list of
the following information for each Employee or consultant of the Company,
including: each Employee on leave of absence or layoff status: name; job title;
aggregate annual remuneration (gross salary); vacation accrued; and service
credited for purposes of vesting and eligibility to participate under a Company
Employee Plan or any retirement, severance pay or employee benefit plan. For
the purposes hereof "remuneration" includes bonuses but excludes non-monetary
fringe benefits and additional costs to the Company in respect of remuneration.
(a) There are no retired Employees of the Company.
(b) To the Company's Knowledge, no Employee or consultant of the
Company is in violation of any term of any employment, employment contract,
patent disclosure agreement or any other contract or agreement relating to the
relationship of any such person with the Company or any other party because of
the nature of the business conducted or to be conducted by the Company. To the
Company's Knowledge, no Employee or consultant of the Company is a party to, or
is otherwise bound by, any agreement or arrangement, including any
confidentiality, non-competition, or proprietary rights agreement, between such
Employee or consultant and any other Person ("Proprietary Rights Agreement")
----------------------------
that in any way adversely affects or will affect (i) the performance of his
duties as an Employee or consultant of the Company, (ii) the ability of the
Company to conduct its business, including any Proprietary Rights Agreement with
any such Employee or consultant or (iii) the ability of such Employee or
consultant to assign to the Company or to any other Person any rights to any
invention, improvement or discovery. The Company is currently not party to, and
since its inception has never been party to, any collective bargaining
agreements or other labor Contracts covering any of its Employees. Since
February 5, 1997 there has not been, there is not presently pending or existing,
and, to the Company's Knowledge, there is not Threatened, any strike, slowdown,
picketing, work stoppage, or employee grievance process. The Company has
complied in all respects with all Legal Requirements required to be complied
with by the Company relating to employment, equal employment opportunity,
nondiscrimination, immigration, wages, hours, benefits, collective bargaining,
the payment of social security and similar taxes and occupational safety and
health. The Company is not liable for the payment of any compensation, damages,
taxes, fines, penalties, or other amounts, however designated, for failure to
comply with any of the foregoing Legal Requirements. To the Knowledge of the
Company, there is no Key Employee who has any plans to terminate his or her
employment with the Company.
(c) Each Company Employee Plan has been established, maintained
and administered in compliance with its terms and conditions and with the
requirements prescribed by any and all statutory or regulatory laws that are
applicable to such Company Employee Plan. Furthermore, no Company Employee Plan
has unfunded liabilities, that as of the Closing, will not be offset by
insurance or fully accrued. Except as required by law, no condition, other than
approval of
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<PAGE>
such action by the Company's board of directors, exists that would prevent the
Company from terminating or amending any Company Employee Plan.
3.13 Compliance with Legal Requirements; Governmental Authorizations
---------------------------------------------------------------
(a) Except as set forth in Part 3.13 of the Disclosure Letter:
(i) the Company is, and at all times since February 5, 1997
has been, in full compliance with each Legal Requirement that is or was
applicable to it or to the conduct or operation of its business or the ownership
or use of any of its assets;
(ii) no event has occurred or circumstance exists that (with
or without notice or lapse of time) (A) may constitute or result in a violation
by the Company of, or a failure on the part of the Company to comply with, any
Legal Requirement, or (B) may give rise to any obligation on the part of the
Company to undertake, or to bear all or any portion of the cost of, any remedial
action of any nature; and
(iii) the Company has not received, at any time since
February 5, 1997, any notice or other communication (whether oral or written)
from any Governmental Body or any other Person regarding (A) any actual,
alleged, possible, or potential violation of, or failure to comply with, any
Legal Requirement, or (B) any actual, alleged, possible, or potential obligation
on the part of the Company to undertake, or to bear all or any portion of the
cost of, any remedial action of any nature.
(b) Part 3.13 of the Disclosure Letter contains a complete and
accurate list of each Governmental Authorization that is held by the Company or
that otherwise relates to the business of, or to any of the assets owned or used
by, the Company. Each Governmental Authorization listed or required to be listed
in Part 3.13 of the Disclosure Letter is valid and in full force and effect.
Except as set forth in Part 3.13 of the Disclosure Letter:
(i) the Company is, and at all times has been, in full
compliance with all of the terms and requirements of each Governmental
Authorization identified or required to be identified in Part 3.13 of the
Disclosure Letter;
(ii) no event has occurred or circumstance exists that may
(with or without notice or lapse of time) (A) constitute or result directly or
indirectly in a violation of or a failure to comply with any term or requirement
of any Governmental Authorization listed or required to be listed in Part 3.13
of the Disclosure Letter, or (B) result directly or indirectly in the
revocation, withdrawal, suspension, cancellation, or termination of, or any
modification to, any Governmental Authorization listed or required to be listed
in Part 3.13 of the Disclosure Letter;
(iii) the Company has not received any notice or other
communication (whether oral or written) from any Governmental Body or any other
Person regarding (A) any actual, alleged, possible, or potential violation of or
failure by the Company to comply with any term or requirement of any
Governmental Authorization, or (B) any actual,
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<PAGE>
proposed, possible, or potential revocation, withdrawal, suspension,
cancellation, termination of, or modification to any Governmental Authorization
held by the Company; and
(iv) all applications required to have been filed for the
renewal of the Governmental Authorizations listed or required to be listed in
Part 3.13 of the Disclosure Letter have been duly filed on a timely basis with
the appropriate Governmental Bodies, and all other filings required to have been
made with respect to such Governmental Authorizations have been duly made by the
Company on a timely basis with the appropriate Governmental Bodies.
(c) The Governmental Authorizations listed in Part 3.13 of the
Disclosure Letter collectively constitute all of the Governmental Authorizations
necessary to permit the Company to lawfully conduct and operate its businesses
in the manner it currently conducts and operates such businesses and to permit
the Company to own and use its assets in the manner in which it currently owns
and uses such assets.
3.14 Legal Proceedings; Orders.
-------------------------
(a) Except as set forth in Part 3.14(a) of the Disclosure
Letter, there is no pending Proceeding:
(i) that has been commenced by or against the Company or
that otherwise relates to the business of, or any of the assets owned or used
by, the Company; or
(ii) to the Knowledge of the Company, that challenges, or
that may have the effect of preventing, delaying, making illegal, or otherwise
interfering with, any of the Contemplated Transactions.
(b) To the Knowledge of the Company, except as set forth in Part
3.14(b) of the Disclosure Letter, (1) no such Proceeding has been Threatened by
or against the Company, and (2) no event has occurred or circumstance exists
that may give rise to or serve as a basis for the commencement of any such
Proceeding by or against the Company. The Company has delivered to Parent
copies of all pleadings, correspondence, and other documents relating to each
Proceeding listed in Part 3.14 of the Disclosure Letter. The Proceedings listed
in Part 3.14 of the Disclosure Letter will not have a material adverse effect on
the business, operations, assets, condition, or prospects of the Company.
(c) There is no Order to which the Company, or any of the assets
owned or used by the Company, is subject; and
(d) To the Knowledge of the Company, no Employee is subject to
any Order that prohibits such Employee from engaging in or continuing any
conduct, activity, or practice relating to the business of the Company.
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<PAGE>
3.15 Absence of Certain Changes and Events.
-------------------------------------
Except as set forth in Part 3.15 of the Disclosure Letter, since the date
of the Interim Balance Sheet, the Company has conducted its businesses only in
the Ordinary Course of Business and there has not been any:
(a) change in the Company's authorized or issued capital stock;
grant of any stock option or right to purchase shares of capital stock of the
Company; issuance of any security convertible into such capital stock; grant of
any registration rights; purchase, redemption, retirement, or other acquisition
by the Company of any shares of any such capital stock; or declaration or
payment of any dividend or other distribution or payment in respect of shares of
capital stock;
(b) amendment to the Organizational Documents of the Company;
(c) payment or increase by the Company of any bonuses, salaries,
or other compensation to any stockholder, director, officer, or (except in the
Ordinary Course of Business) Employee or entry into any employment, severance,
or similar Contract by the Company with any Employee;
(d) adoption of, or increase in the payments to or benefits
under, any Company Employee Plan for or with any Employees;
(e) damage to or destruction or loss of any asset or property of
the Company, whether or not covered by insurance, materially and adversely
affecting the properties, assets, business, financial condition, or prospects of
the Company;
(f) entry into, termination of, or receipt of notice of
termination of (i) any license, distributorship, dealer, sales representative,
joint venture, credit, or similar agreement, or (ii) any Contract or transaction
involving a total remaining commitment by or to the Company of at least $20,000;
(g) sale (other than sales of inventory in the Ordinary Course
of Business), lease, or other disposition of any asset or property of the
Company or mortgage, pledge, or imposition of any lien or other encumbrance on
any material asset or property of the Company, including the sale, lease, or
other disposition of any of the Intellectual Property Assets;
(h) cancellation or waiver of any claims or rights with a value
to the Company in excess of $10,000;
(i) material change in the accounting methods used by the
Company; or
(j) agreement, whether oral or written, by the Company to do any
of the foregoing.
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<PAGE>
3.16 Contracts; No Defaults.
----------------------
(a) Part 3.16(a) of the Disclosure Letter contains a complete
and accurate list, and the Company has delivered to Parent true and complete
copies, of:
(i) each Applicable Contract that involves performance of
services or delivery of goods or materials by the Company of an amount or value
in excess of $25,000;
(ii) each Applicable Contract that involves performance of
services or delivery of goods or materials to the Company of an amount or value
in excess of $25,000;
(iii) each Applicable Contract that was not entered into in
the Ordinary Course of Business and that involves expenditures or receipts of
the Company in excess of $10,000;
(iv) each lease, rental or occupancy agreement, license,
installment and conditional sale agreement, and other Applicable Contract
affecting the ownership of, leasing of, title to, use of, or any leasehold or
other interest in, any real or personal property (except personal property
leases and installment and conditional sales agreements having a value per item
or aggregate payments of less than $25,000 and with terms of less than one
year);
(v) each licensing agreement or other Applicable Contract
with respect to patents, trademarks, copyrights, or other intellectual property,
including agreements with current or former Employees, consultants, or
contractors regarding the appropriation or the non-disclosure of any of the
Intellectual Property Assets;
(vi) each collective bargaining agreement and other
Applicable Contract to or with any labor union or other Employee representative
of a group of Employees;
(vii) each joint venture, partnership, and other Applicable
Contract (however named) involving a sharing of profits, losses, costs, or
liabilities by the Company with any other Person;
(viii) each Applicable Contract containing covenants that in
any way purport to restrict the business activity of the Company or any
Affiliate of the Company or limit the freedom of the Company or any Affiliate of
the Company to engage in any line of business or to compete with any Person;
(ix) each Applicable Contract providing for payments to or
by any Person based on sales, purchases, or profits, other than direct payments
for goods;
(x) each power of attorney executed by the Company that
is currently effective and outstanding;
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<PAGE>
(xi) each Applicable Contract entered into other than in
the Ordinary Course of Business that contains or provides for an express
undertaking by the Company to be responsible for consequential damages;
(xii) each Applicable Contract for capital expenditures in
excess of $10,000;
(xiii) each written warranty, guaranty, and or other similar
undertaking with respect to contractual performance extended by the Company
other than in the Ordinary Course of Business; and
(xiv) each amendment, supplement, and modification (whether
oral or written) in respect of any of the foregoing.
(b) Except as set forth in Part 3.16(b) of the Disclosure
Letter, each Applicable Contract identified or required to be identified in Part
3.16(a) of the Disclosure Letter is in full force and effect and is valid and
enforceable against the Company in accordance with its terms.
(c) Except as set forth in Part 3.16(c) of the Disclosure
Letter:
(i) the Company is, and at all times since February 5,
1997 has been, in compliance with all applicable terms and requirements of each
Applicable Contract under which the Company has or had any obligation or
liability or by which the Company or any of the assets owned or used by the
Company is or was bound;
(ii) to the Knowledge of the Company, each other Person
that has or had any obligation or liability under any Applicable Contract under
which the Company has or had any rights is, and at all times since the Company's
inception has been, in compliance with all applicable terms and requirements of
such Applicable Contract;
(iii) to the Knowledge the Company, no event has
occurred or circumstance exists that (with or without notice or lapse of time)
may contravene, conflict with, or result in a violation or breach of, or give
the Company or other Person the right to declare a default or exercise any
remedy under, or to accelerate the maturity or performance of, or to cancel,
terminate, or modify, any Applicable Contract; and
(iv) the Company has not been given or received from
any other Person, any notice or other communication (whether oral or written)
regarding any actual, alleged, possible, or potential violation or breach of, or
default under, any Applicable Contract.
(d) There are no renegotiations of, attempts to renegotiate, or
outstanding rights to renegotiate any material amounts paid or payable to the
Company under current or completed Applicable Contracts with any Person and no
such Person has made written demand to the Company for such renegotiation.
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<PAGE>
3.17 Insurance.
---------
(a) The Company has delivered to Parent:
(i) true and complete copies of all policies of insurance
to which the Company is a party or under which the Company, or any director of
the Company, is or has been covered at any time within the two years preceding
the date of this Agreement; and
(ii) true and complete copies of all pending applications
for policies of insurance.
(b) Part 3.17(b) of the Disclosure Letter describes:
(i) any material self-insurance arrangement by the
Company, including any reserves established thereunder; and
(ii) all material obligations of the Company to third
parties with respect to insurance (including such obligations under leases and
service agreements) and identifies the policy under which such coverage is
provided.
(c) Part 3.17(c) of the Disclosure Letter sets forth, by year,
for the current policy year and the preceding policy year:
(i) a summary of any material loss experience under each
policy;
(ii) a statement describing each claim under an insurance
policy for an amount in excess of $20,000, which sets forth:
(1) the name of the claimant;
(2) a description of the policy by insurer, type of
insurance, and period of coverage; and
(3) the amount and a brief description of the claim;
and
(4) a statement describing the loss experience for all
claims that were self-insured, including the number and aggregate cost of such
claims.
(d) Except as set forth on Part 3.17(d) of the Disclosure
Letter:
(i) all policies to which the Company is a party or that
provide coverage to the Company, or any director or officer of the Company:
(1) to the Knowledge of the Company are valid,
outstanding, and enforceable;
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<PAGE>
(2) are sufficient for compliance with all Legal
Requirements and Contracts to which the Company is a party or by which any of
them is bound;
(3) will continue in full force and effect following
the consummation of the Contemplated Transactions; and
(4) do not provide for any retrospective premium
adjustment or other experienced-based liability on the part of the Company.
(ii) The Company has not received (A) any refusal of
coverage or any notice that a defense will be afforded with reservation of
rights, or (B) any notice of cancellation or any other indication that any
insurance policy is no longer in full force or effect or will not be renewed or
that the issuer of any policy is not willing or able to perform its obligations
thereunder.
(iii) The Company has paid all premiums due, and has
otherwise performed all of its respective obligations, under each policy to
which the Company is a party or that provides coverage to the Company or any
director thereof.
(iv) The Company has given notice to the insurer of all
claims that may be insured thereby.
3.18 Environmental and Product Matters.
---------------------------------
Except as set forth in Part 3.18 of the Disclosure Letter:
(a) there are no claims, actions, suits, permit revocations,
requests for information, prosecutions, investigations, orders or other
proceedings asserted by third parties or governmental agencies involving the
Company relating to the protection of the environment or human health, safety
and welfare or reproductive capacity ("Environmental Claim"). The Company has
-------------------
not received any notice of any pending Environmental Claim against the Company.
To the Knowledge of the Company, there are no facts or circumstances that would
give rise to an Environmental Claim, nor is there any intent to commence any
Environmental Claims;
(b) the Company has not transported, used, stored, manufactured,
released, disposed of or exposed employees who have worked at the Company to any
materials which are regulated by any governmental authority in violation of any
statutes, regulations, rules, ordinances, by-laws, policies and guidelines
("Environmental Laws").
------------------
(c) all of the operations of the Company and, to the Knowledge
of the Company, any real property used in connection with the operations of the
Company comply in all respects with applicable Environmental Laws and the
Company and, to the Knowledge of the Company, nor anyone acting on behalf of any
of the Company, has engaged in or permitted any operations or activities upon
any real property for the purpose of or involving the treatment, storage, use,
generation, release, discharge, emission or disposal of materials regulated
under Environmental Laws except in compliance with applicable Environmental
Laws; and
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<PAGE>
(d) there are and have been no citations or decisions by any
governmental or regulatory body that any product manufactured, marketed or
distributed at any time by the Company ("Product") is defective or fails to meet
any standards promulgated by any such governmental or regulatory body. To the
Knowledge of the Company, no Proceeding is pending or Threatened against the
Company which may result in such citation or decision. There are no existing
or, to the Knowledge of the Company, Threatened claims against the Company for
services or merchandise which are defective or fail to meet any service or
product warranties or any defects or problems which, if discovered by a third
party, would support such a claim. No claim has been asserted against the
Company for renegotiation or price redetermination of any business transaction,
and other than concessions in the Ordinary Course of Business, there are no
facts upon which any such claim could be based. There is no fact relating to
any Product that may impose upon the Company a duty to warn customers of a
defect in any Product, or latent or overt defect in any Product which has been
or is being distributed by the Company, which is likely to result in claims for
breach of warranty with respect to such Products in excess of the warranty
reserve reflected in the Balance Sheet or Interim Balance Sheet. For purposes
of the foregoing, with respect to a software product, a "defect" shall include,
without limitation, any characteristic of the product which may, when the
product is used with the computer and operating system with which the product is
used, result in material undesired errors in processing or output, cessation of
system function, or loss of or damage to data, whether during the operation of
the product or during the operation of another program as a result of effects
caused by the product.
3.19 Intellectual Property.
---------------------
(a) Intellectual Property Assets--The term "Intellectual
Property Assets" includes:
(i) the Company's name, all fictional business names,
trading names, registered and unregistered trademarks, service marks, and
applications (collectively, "Marks");
-----
(ii) all patents, patent applications, and inventions and
discoveries that may be patentable (collectively, "Patents");
-------
(iii) all copyrights in both published works and
unpublished works (collectively, "Copyrights"); and
----------
(iv) all know-how, trade secrets, confidential
information, customer lists, software, technical information, data, process
technology, plans, drawings, and blue prints (collectively, "Trade Secrets");
used, or licensed by the Company as licensee or licensor.
(b) Agreements--Part 3.19(b) of the Disclosure Letter contains
----------
a complete and accurate list and summary description, including any royalties
paid or received by the Company, of all Applicable Contracts relating to the
Intellectual Property Assets to which the Company is a
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<PAGE>
party or by which the Company is bound, except for any license implied by the
sale of a product and perpetual, paid-up licenses for commonly available
software programs with a value of less than $5,000 under which the Company is
the licensee. There are no outstanding and, to the Company's Knowledge, no
Threatened disputes or disagreements with respect to any such agreement.
(c) Know-How Necessary for the Business.
-----------------------------------
(i) The Intellectual Property Assets are all those
necessary for the operation of the Company's business as it is currently
conducted. The Company is the owner of all right, title, and interest in and to
each of the Intellectual Property Assets, free and clear of all liens, security
interests, charges, encumbrances, equities, and other adverse claims, and has
the right to use without payment to a third party all of the Intellectual
Property Assets.
(ii) Except as set forth in Part 3.19(c) of the Disclosure
Letter, all former and current Employees have executed written Contracts with
the Company that assign to the Company all rights to any inventions,
improvements, discoveries, or information relating to the business of the
Company. To the Knowledge of the Company, no Employee has entered into any
Contract that restricts or limits in any way the scope or type of work in which
the Employee may be engaged or requires the employee to transfer, assign, or
disclose information concerning his work to anyone other than the Company.
(d) Patents.
-------
(i) The Company owns no Patents and has not applied for any
Patents.
(ii) To the Knowledge of the Company, none of the products
manufactured and sold, nor any process or know-how used, by the Company
infringes or is alleged to infringe any patent or other proprietary right of any
other Person.
(e) Trademarks.
----------
(i) Part 3.19(e) of Disclosure Letter contains a complete
and accurate list and summary description of all Marks. The Company is the owner
of all right, title, and interest in and to each of the Marks, free and clear of
all liens, security interests, charges, encumbrances, equities, and other
adverse claims other than as set out in Part 3.19(e) of the Disclosure Letter.
(ii) All Marks that have been registered with the relevant
Canadian or United States Patent and Trademark Office are currently in
compliance with all formal legal requirements (including the timely post-
registration filing of affidavits of use and incontestability and renewal
applications), are valid and enforceable, and are not subject to any maintenance
fees or taxes or actions falling due within ninety days after the Closing Date.
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<PAGE>
(iii) Other than as disclosed in Part 3.19(e) of the
Disclosure Letter, no Mark has been or is now involved in any opposition,
invalidation, or cancellation and, to the Company's Knowledge, no such action is
Threatened with the respect to any of the Marks.
(iv) To the Company's Knowledge there is no potentially
interfering trademark or trademark application of any third party.
(v) To the Knowledge of the Company, no Mark is infringed
or has been challenged or Threatened in any way. To the Knowledge of the
Company, none of the Marks used by the Company infringes or is alleged to
infringe any trade name, trademark, or service mark of any third party, except
as described in Part 3.19(e) of the Disclosure Letter.
(vi) All products and materials containing a Mark bear the
proper federal registration notice where permitted by law.
(f) Copyrights.
----------
(i) Part 3.19(f) of the Disclosure Letter contains
a complete and accurate list and summary description of all Copyrights. The
Company is the owner of all right, title, and interest in and to each of the
Copyrights, free and clear of all liens, security interests, charges,
encumbrances, equities, and other adverse claims.
(ii) No Copyrights have been registered and the
Company has not applied for registration of any Copyrights.
(iii) To the Knowledge of the Company, no Copyright
is infringed or has been challenged or Threatened in any way. To the Knowledge
of the Company, none of the subject matter of any of the Copyrights infringes or
is alleged to infringe any copyright of any third party or is a derivative work
based on the work of a third party.
(iv) All works encompassed by the Copyrights have
been marked with the proper copyright notice.
(g) Trade Secrets.
-------------
(i) With respect to each Trade Secret, the
documentation relating to such Trade Secret is current, accurate, and sufficient
in detail and content to identify and explain it and to allow its full and
proper use without reliance on the knowledge or memory of any individual.
(ii) The Company has taken all reasonable
precautions to protect the secrecy, confidentiality, and value of their Trade
Secrets.
(iii) The Company has good title and an absolute (but
not necessarily exclusive) right to use the Trade Secrets. The Trade Secrets are
not part of the public knowledge or literature, and, to the Company's Knowledge,
have not been used, divulged, or
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<PAGE>
appropriated either for the benefit of any Person (other than one or more of the
Company) or to the detriment of the Company. No Trade Secret is subject to any
adverse claim or has been challenged or, to the Company's Knowledge, Threatened
in any way.
(h) Identifying Software--Part 3.19(h) of the Disclosure
--------------------
Letter contains a complete list of all software (the "Software") subdivided into
categories as follows:
(i) developed and owned by the Company;
(ii) otherwise owned by the Company;
(iii) customized software licensed for use by the
Company; and
(iv) off-the-shelf software licensed for use by the
Company;
along with, in the case of categories (i) and (ii), details as to the
individuals who developed the Software and their employment status. The
Software in the case of category (i) above has been developed entirely by
Employees within the scope of their employment.
(i) Quality of Products Related to Intellectual Property
----------------------------------------------------
(i) The source code version of the Software of the
Company and its documentation is sufficient to allow the Acquisition Sub, with
the assistance of competent software maintenance professionals, possessing
ordinary skills and experience, to further develop, maintain and operate the
Software with further recourse to Employees.
(ii) The Software does not contain any clock, timer,
counter or other limiting or disabling code, design or routine that would cause
the Software to be erased, made inoperable or otherwise rendered incapable of
performing in accordance with its applicable specifications or would prevent or
prohibit or otherwise diminish the use of thereof by the Acquisition Sub for the
purpose of providing maintenance and support or otherwise limit or restrict the
Acquisition Sub's ability to use or copy the Software after a specific or random
number of uses or copies, or after the lapse or occurrence of any similar
triggering prompt or due to the use of a central processing unit; and
(iii) All versions of the Software owned by the
Company shall function accurately and without interruption before, during and
after January 1, 2000 (including responding to dates - whether represented by
two digits or four digits and whether the date is entered directly or through
interfacing software- in a way that permits the product to function accurately
and without interruption).
(j) Independent Contractors.
-----------------------
Except as set forth in Part 3.19(j) of the Disclosure Letter, all
independent contractors engaged by the Company to develop or maintain the
Intellectual Property Assets (including, without
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<PAGE>
limitation, the Software) have assigned in writing all of their intellectual
property rights and waived their moral rights in the works they have produced
for the Company. The Company has not received notice that any independent
contractor who has not waived his or her moral rights intends to assert such
moral rights.
3.20 Certain Payments.
----------------
Since its inception, neither the Company nor, to the Company's Knowledge,
any Employee or any other Person associated with or acting for or on behalf of
the Company, has directly or indirectly (a) made any contribution, gift, bribe,
rebate, payoff, influence payment, kickback, or other payment to any Person,
private or public, regardless of form, whether in money, property, or services
(i) to obtain favorable treatment in securing business, (ii) to pay for
favorable treatment for business secured, (iii) to obtain special concessions or
for special concessions already obtained, for or in respect of the Company or
any Affiliate of the Company, or (iv) in violation of any applicable Legal
Requirement, (b) established or maintained any fund or asset that has not been
recorded in the books and records of the Company.
3.21 Disclosure.
----------
(a) No representation or warranty of the Company in this
Agreement and no statement in the Disclosure Letter omits to state a material
fact necessary to make the statements herein or therein, in light of the
circumstances in which they were made, not misleading.
(b) No notice given pursuant to Section 5.5 will contain any
untrue statement or omit to state a material fact necessary to make the
statements therein or in this Agreement, in light of the circumstances in which
they were made, not misleading.
3.22 Relationships with Related Persons.
----------------------------------
Except as set forth in Part 3.22 of the Disclosure Letter, to the Company's
Knowledge no Related Person of the Company has, or has had, any interest in any
property (whether real, personal, or mixed and whether tangible or intangible),
used in or pertaining to the Company's businesses. To the Company's Knowledge,
no Related Person of the Company is, or has owned (of record or as a beneficial
owner) an equity interest or any other financial or profit interest in, a Person
that has (i) had business dealings or a material financial interest in any
transaction with any Acquired Company, or (ii) engaged in competition with the
Company with respect to any line of the products or services of the Company (a
"Competing Business") in any market presently served by the Company. Except as
set forth in Part 3.22 of the Disclosure Letter, no Related Person of the
Company is a party to any Contract with, or has any claim or right against, the
Company.
3.23 Brokers or Finders.
------------------
Other than as described in Part 3.23 of the Disclosure Letter, the Company
has incurred no obligation or liability, contingent or otherwise, for brokerage
or finders' fees or agents' commissions or other similar payment in connection
with this Agreement or the Contemplated Transactions.
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<PAGE>
3.24 Customers.
---------
Part 3.24 of the Disclosure Letter lists all the customers, distributors
and agents, from February 5, 1997 until the date of this Agreement, of the
products manufactured and services performed by or for the Company the value of
which products or services provided by such party total more than $25,000.
3.25 Authenticity and Entirety of Documents.
--------------------------------------
True and complete copies of all documents referred to in the Agreement
(including without limitation this section) have been furnished to Parent by the
Company.
3.26 Shareholder Approval.
--------------------
The Company has no reason to believe that any shareholder or group of
shareholders representing more that 10% of the outstanding Shares entitled to
vote will exercise Dissent Rights in connection with shareholder approval of
this Agreement and the Transactions.
3.27 Sales and Assets in the United States.
-------------------------------------
(a) During its most recent fiscal year ended December 31, 1998,
the Company made aggregate sales in or into the United States of less than $25
million; and
(b) As of its most recent balance sheet, had assets in the
United States having an aggregate book value of less than $15 million.
3.28 Fairness Opinion.
----------------
The Company's Board of Directors has received the written opinion of First
Marathon Securities Limited (the "Company Fairness Opinion") to the effect that
the Exchange Ratio is fair from a financial point of view to the shareholders of
the Company. The Company has delivered a true and correct copy of the Company
Fairness Opinion to Parent.
4. Representations and Warranties of Parent.
----------------------------------------
Parent represents and warrants to the Company as follows:
4.1 Organization and Good Standing.
------------------------------
Parent is a corporation duly organized, validly existing, and in good
standing under the laws of the State of Delaware, with full corporate power and
authority to conduct its business as it is now being conducted and to own or use
the properties and assets that it purports to own or use. Parent is duly
qualified to conduct business as a foreign corporation and is in good standing
under the laws of each state or other jurisdiction in which either the ownership
or use of the properties owned or used by it, or the nature of the activities
conducted by it, requires such qualification.
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4.2 Authority; No Conflict.
----------------------
(a) This Agreement constitutes the legal, valid, and binding
obligation of Parent, enforceable against it in accordance with its terms. Upon
the execution and delivery by Parent of the Escrow Agreement, the Voting and
Exchange Trust Agreement, and the Support Agreement, each of these three
agreements will constitute the legal, valid, and binding obligations of Parent
enforceable against it in accordance with its respective terms. Parent has the
absolute and unrestricted right, power, and authority to execute and deliver
this Agreement, the Escrow Agreement, the Voting and Exchange Trust Agreement
and the Support Agreement and to perform its obligations under this Agreement,
the Escrow Agreement, the Voting and Exchange Trust Agreement and the Support
Agreement.
(b) Neither the execution and delivery of this Agreement, the
Voting and Exchange Trust Agreement, the Escrow Agreement or the Support
Agreement by Parent nor the consummation or performance of any of the
Transactions by Parent will directly or indirectly (with or without notice or
lapse of time):
(i) contravene, conflict with, or result in a violation of
(A) any provision of the Organizational Documents of Parent, or (B) any
resolution adopted by the board of directors or the stockholders of Parent;
(ii) contravene, conflict with, or result in a violation
of, or give any Governmental Body or other Person the right to challenge any of
the Contemplated Transactions or to exercise any remedy or obtain any relief
under, any Legal Requirement or any Order to which Parent or any of the assets
owned or used by Parent, may be subject;
(iii) contravene, conflict with, or result in a violation of
any of the terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate, or modify, any Governmental
Authorization that is held by Parent or Acquisition Sub or that otherwise
relates to the business of, or any of the assets owned or used by, Parent; or
(iv) any Contract to which Parent is a party or by which
Parent may be bound.
(c) Except for the approval of Parent's board of directors
Parent will not be required to obtain any Consent from any Person in connection
with the execution and delivery of this Agreement, the Escrow Agreement, the
Voting and Exchange Trust Agreement and the Support Agreement or the
consummation or performance of any of the Transactions.
4.3 Capitalization.
--------------
The authorized capital stock of Parent consists of 50,000,000 Parent Common
Shares and 15,000,000 shares of Preferred Stock, $0.0001 par value per share
("Parent Preferred Stock"). At the close of business on June 30, 1999,
47,359,177 Parent Common Shares were outstanding, and 13,292,819 Parent Common
Shares were issuable upon the exercise of outstanding stock options and
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warrants. No Parent Common Shares were held by Parent in its treasury, and no
shares of Parent Preferred Stock were outstanding. All outstanding Parent Common
Shares are validly issued, fully paid, non-assessable and free of preemptive
rights. The Parent Common Shares and the Exchangeable Shares, when issued and
delivered in accordance with the terms of this Agreement and the Support
Agreement (in the case of the Parent Common Shares issuable in respect of the
Exchangeable Shares), and the Parent Common Shares issuable upon exercise or
conversion of the Replacement Options, will have been duly authorized and
validly issued, fully paid and non-assessable. The issuance of the Exchangeable
Shares, the Acquisition Shares, the Parent Common Shares to the holders of
Preferred Shares pursuant to the Arrangement and the Parent Common Shares
issuable upon exercise or conversion of the Replacement Options, when issued and
delivered in accordance with this Agreement, the Plan of Arrangement and the
Articles of Arrangement, will have been duly authorized and validly issued,
fully-paid and non-assessable, and will be exempt from the prospectus and
registration requirements of the OSA. The issuance and first resale of the
Acquisition Shares issued upon the exchange of the Exchangeable Shares from time
to time and the Parent Common Shares issued from time to time upon exercise of
the Replacement Options will be exempt from the prospectus and registration
requirements of the OSA, in each case without qualification with or approval of
or the obtaining of any further order, ruling or consent from any Governmental
Body or regulatory authority under Canadian federal or provincial laws. Except
as disclosed above or in the Parent SEC Documents or as otherwise contemplated
by this Agreement, as of June 30, 1999, there were no outstanding subscriptions,
options, calls, contracts, commitments, understandings, restrictions,
arrangements, rights or warrants, including any right of conversion or exchange
under any outstanding security, instrument or other agreement and also including
any rights plan or other anti-takeover agreement, obligating Parent or any
subsidiary thereof to issue, deliver or sell, or cause to be issued, delivered
or sold, additional shares of the capital stock of Parent, or obligating or any
subsidiary of Parent to grant, extend or enter into any such agreement or
commitment.
4.4 Certain Proceedings.
-------------------
There is no pending Proceeding that has been commenced against Parent and
that challenges, or may have the effect of preventing, delaying, making illegal,
or otherwise interfering with, any of the Contemplated Transactions. To Parent's
Knowledge, no such Proceeding has been Threatened.
4.5 SEC Documents.
-------------
Parent has furnished the Company with a true and complete copy of each
form, statement, annual, quarterly and other report, registration statement
(including exhibits and amendments) and definitive proxy statement filed by
Parent with the U.S. Securities and Exchange Commission ("SEC") since December
31, 1998 (the "Parent SEC Documents"), which are all the documents (other than
preliminary material) that Parent was required to file with the SEC since such
date. As of their respective filing dates, the Parent SEC Documents complied in
all material respects with the requirements of the U.S. Securities Exchange Act
of 1934, as amended, and the rules and regulations thereunder, and none of the
Parent SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements
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made therein, in light of the circumstances in which they were made, not
misleading. Since the filing of the most recent Quarterly Report on Form 10-Q
included in the Parent SEC Documents, none of Parent's Organizational Documents
has been amended or modified. The balance sheets and the related statements of
operations, stockholders' equity (deficit) and cash flows (including the related
notes thereto) of Parent included in the Parent SEC Documents complied in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto, are in accordance with
the books and records of Parent, have been prepared in accordance with U.S.
generally accepted accounting principles applied on a basis consistent with
prior periods (except as otherwise noted therein), and present fairly the
financial position of Parent as of their respective dates, and the results of
its operations and its cash flows for the periods presented therein (subject, in
the case of the interim financial statements, to normal year-end adjustments).
4.6 Brokers or Finders.
------------------
Parent and its officers and agents have incurred no obligation or
liability, contingent or otherwise, for brokerage or finders' fees or agents'
commissions or other similar payment in connection with this Agreement.
4.7 Suspension and Trading.
----------------------
No order ceasing or suspending trading securities of the Parent is
currently outstanding and no proceedings for this purpose have been instituted
or, to the Knowledge of the Parent, are pending, contemplated or Threatened.
4.8 NASDAQ Listing.
--------------
The Parent Common Shares are currently listed for trading on the NASDAQ
National Market.
4.9 Prospectus Exemptions.
---------------------
Neither Parent nor Acquisition Sub is a reporting issuer under the OSA. At
the Effective Time, after giving effect to the issuance of the Acquisition
Shares and the Parent Common Shares issuable upon conversion or exercise of the
Replacement Options, the Persons or companies whose last address as shown on the
books of the Parent was in Ontario and who held Parent Common Shares (i) did not
hold more than 10% of Parent's Common Shares; and (ii) do not represent a number
more than 10% of the total number of holders of Parent Common Shares.
4.10 No Material Adverse Change.
--------------------------
Since March 31, 1999, there has not been any material adverse change in the
business, operations, properties, prospects, assets or condition of the Parent,
and no event has occurred or circumstance exists that is reasonably likely to
result in such a material adverse change.
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4.11 Pooling.
-------
Neither Parent nor any of its affiliates (as such term is defined in Rule
405 under the Securities Act) has taken or agreed to take any action that would
affect the ability of Parent to account for the Transactions as a pooling of
interests.
5. Covenants of the Company.
------------------------
5.1 Access and Investigation.
------------------------
Between the date of this Agreement and the Closing Date, the Company will
(a) afford Parent and its Representatives full and free access to the Company's
personnel, properties, contracts, books and records, and other documents and
data, (b) furnish Parent and its Representatives with copies of all such
contracts, books and records, and other existing documents and data as Parent
may reasonably request, and (c) furnish Parent and its Representatives with such
additional financial, operating, and other data and information as Parent may
reasonably request.
5.2 Operation of the Businesses of the Company.
------------------------------------------
Between the date of this Agreement and the Closing Date, the Company will:
(a) conduct the business of the Company only in the Ordinary
Course of Business;
(b) use its Best Efforts to preserve intact the current business
organization of the Company, keep available the services of the current
Employees and agents of the Company, and maintain the relations and good will
with suppliers, customers, landlords, creditors, Employees, agents, and others
having business relationships with the Company;
(c) confer with Parent concerning operational matters of a
material nature; and
(d) otherwise report periodically to Parent concerning the
status of the business, operations, and finances of the Company.
5.3 Negative Covenant.
-----------------
Except as otherwise expressly permitted by this Agreement, between the date
of this Agreement and the Closing Date, the Company will not, without the prior
consent of Parent, take any affirmative action, or fail to take any reasonable
action within its control, as a result of which any of the changes or events
listed in Section 3.15 is likely to occur.
5.4 Required Approvals.
------------------
As promptly as practicable after the date of this Agreement, the Company
will make all filings required by Legal Requirements by the Company to be made
by them in order to consummate
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the Contemplated Transactions. Between the date of this Agreement and the
Closing Date, the Company will (a) cooperate with Parent with respect to all
filings that Parent elects to make or is required by Legal Requirements to make
in connection with the Contemplated Transactions, and (b) cooperate with Parent
in obtaining the Consents identified in Section 4.2 hereof and (c) information
necessary for the filing of the Registration Statement.
5.5 Notification.
------------
Between the date of this Agreement and the Closing Date, the Company will
promptly notify Parent in writing if the Company becomes aware of any fact or
condition that causes or constitutes a Breach of any of the Company's
representations and warranties as of the date of this Agreement, or if the
Company becomes aware of the occurrence after the date of this Agreement of any
fact or condition that would (except as expressly contemplated by this
Agreement) cause or constitute a Breach of any such representation or warranty
had such representation or warranty been made as of the time of occurrence or
discovery of such fact or condition. Should any such fact or condition require
any change in the Disclosure Letter if the Disclosure Letter were dated the date
of the occurrence or discovery of any such fact or condition, the Company will
promptly deliver to Parent a supplement to the Disclosure Letter specifying such
change. During the same period, the Company will promptly notify Parent of the
occurrence of any Breach of any covenant of the Company in this Section 5 or of
the occurrence of any event that may make the satisfaction of the conditions in
Section 7 impossible or unlikely.
5.6 Payment of Indebtedness by Related Persons.
------------------------------------------
Except as expressly provided in this Agreement, the Company will cause all
indebtedness owed to the Company by any Principal Seller or any Related Person
of any Principal Seller to be paid in full prior to Closing.
5.7 Covenants Regarding Non-Solicitation.
------------------------------------
(a) The Company shall not, directly or indirectly, through any
officer, director, Employee, representative or agent of the Company, (i)
solicit, initiate or knowingly encourage (including by way of furnishing
information or entering into any form of agreement, arrangement or
understanding) the initiation of any inquiries or proposals regarding a merger,
arrangement, consolidation, sale of assets, reorganization or recapitalization
with any party other than Parent and its affiliates (an "Acquisition Proposal"),
(ii) participate in any discussions or negotiations regarding any Acquisition
Proposal, (iii) withdraw or modify in a manner adverse to Parent the approval of
the Board of Directors of the Company of the Contemplated Transactions (iv)
approve or recommend any Acquisition Proposal or (v) cause the Company to enter
into any agreement related to any Acquisition Proposal; provided, however, that,
subject to section 5.8 but notwithstanding the preceding part of this section
5.7(a) and any other provision of this Agreement, nothing shall prevent the
Board of Directors of the Company from considering, negotiating, approving,
recommending to the Company shareholders or entering into an agreement in
respect of an unsolicited bona fide written Acquisition Proposal that the Board
of Directors of the Company determines in good faith, after consultation with
financial advisors and after receiving an opinion of
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outside counsel to the effect that it is appropriate that the Board of Directors
of the Company take such action in order to discharge properly its fiduciary
duties, would, if consummated in accordance with its terms, result in a
transaction (x) more favourable to the Company's shareholders than the
transaction contemplated by this Agreement and (y) having a value per Share
greater than the per share value attributable thereto under the transaction
contemplated by this Agreement (any such Acquisition Proposal being referred to
herein as a "Superior Proposal").
(b) the Company shall promptly notify Parent, at first orally
and then in writing, of all current Acquisition Proposals, and of all future
Acquisition Proposals, of which the Company's directors or senior officers are
or become aware, or any amendments to the foregoing, or any request for non-
public information relating to the Company in connection with an Acquisition
Proposal or for access to the properties, books or records of the Company by any
Person that informs the Company that it is considering making, or has made, an
Acquisition Proposal. Such notice shall include a description of the material
terms and conditions of any proposal and provide such details of the proposal,
inquiry or contact as Parent may reasonably request including the identity of
the Person making such proposal, inquiry or contact.
(c) If the Company receives a request for material non-public
information from a Person who proposes a bona fide Acquisition Proposal in
respect of the Company (the existence and content of which have been disclosed
to Parent), and the Board of Directors of the Company determines that such
proposal would be likely to be a Superior Proposal pursuant to section 5.7(a)
having received the advice referred to therein, then, and only in such case, the
Board of Directors of the Company may, subject to the execution by such Person
of a confidentiality agreement, provide such Person with access to information
regarding the Company; provided, however, that the Person making the Acquisition
Proposal shall not be precluded under such confidentiality agreement from making
the Acquisition Proposal, and provided further that the Company sends a copy of
any such confidentiality agreement to Parent immediately upon its execution and
Parent is provided with a list of or copies of the information provided to such
Person and immediately provided with access to similar information to which such
Person was provided.
(d) the Company shall ensure that its Employees and any
financial advisors or other advisors or representatives retained by it are aware
of the provisions of this section 5.7, and it shall be responsible for any
breach of this section 5.7 by its financial advisors or other advisors or
representatives.
5.8 Notice by the Company of Superior Proposal Determination;
---------------------------------------------------------
Acquisition Proposal Acceptance.
- ------------------------------
(a) The Company shall not accept, approve, recommend to its
shareholders or enter into any agreement in respect of an Acquisition Proposal
(an "Acquisition Proposal Acceptance") (other than a confidentiality agreement
contemplated by section 5.7(c)) on the basis that it would constitute a Superior
Proposal unless (i) it has provided Parent with a copy of the Acquisition
Proposal document which the Board of Directors of the Company has determined
would be a Superior Proposal, and (ii) five Business Days shall have elapsed
from the later of the date Parent received notice of the Company's proposed
determination to accept, approve,
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<PAGE>
recommend or enter into an agreement in respect of such Acquisition Proposal,
and the date Parent received a copy of the Acquisition Proposal.
During such five Business Day period, the Company
acknowledges that Parent shall have the opportunity, but not the obligation, to
offer to amend the terms of this Agreement. The Board of Directors of the
Company will review any offer by Parent to amend the terms of this Agreement in
good faith in order to determine, in its discretion in the exercise of its
fiduciary duties, whether Parent's offer upon acceptance by the Company would
result in the Acquisition Proposal not being a Superior Proposal. If the Board
of Directors of the Company so determines, it will enter into an amended
agreement with Parent reflecting Parent's amended proposal. If the Board of
Directors of the Company continues to believe, in good faith and after
consultation with financial advisors and outside counsel, that the Acquisition
Proposal is nonetheless a Superior Proposal, it may reject Parent's amended
proposal.
(b) In the event of an Acquisition Proposal Acceptance or a
breach of the Company's obligations in Section 5.7 or Section 5.8, the Company
shall pay to Parent, as reimbursement to Parent, $4,500,000 (plus documented
out-of-pocket expenses, including attorneys' fees, less any payments made to
Parent under Section 11.1) and upon such payment, Parent shall have no other
remedy for any breach of this Agreement.
5.9 Best Efforts.
------------
Between the date of this Agreement and the Closing Date, the Company will
use its Best Efforts to cause the conditions in Sections 7 and 8 to be
satisfied.
5.10 Moral Rights.
------------
The Company shall use its Best Efforts to cause those Employees,
independent contractors and agents who have developed Software programs and who
are currently employed or contracted by the Company to sign an agreement waiving
their moral rights in such Software programs, which waiver shall be in a form
acceptable to Parent, acting reasonably.
5.11 Shareholder Approval.
--------------------
As soon as practicable following the execution of this Agreement, the
Company shall call a special meeting of it shareholders for the purpose of
seeking approval of this Agreement and the Transactions.
6. Covenants of Parent.
-------------------
6.1 Approvals of Governmental Bodies.
--------------------------------
As promptly as practicable after the date of this Agreement, Parent will,
and will cause each of its Related Persons to, make all filings required by
Legal Requirements to be made by them to consummate the Contemplated
Transactions. Between the date of this Agreement and the Closing
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Date, Parent will, and will cause each Related Person to, cooperate with the
Company with respect to all filings the Company is required by Legal
Requirements to make in connection with the Contemplated Transactions, and (ii)
cooperate with the Company in obtaining all consents identified in Part 3.2 of
the Disclosure Letter; provided that this Agreement will not require Parent to
dispose of or make any change in any portion of its business or to incur any
other burden to obtain a Governmental Authorization.
6.2 Best Efforts.
------------
Except as set forth in the proviso to Section 6.1, between the date of this
Agreement and the Closing Date, Parent will use its Best Efforts to cause the
conditions in Sections 7 and 8 to be satisfied.
6.3 SEC Filings.
-----------
Parent will, within five (5) business days of the filing thereof, deliver
to the Company a true and correct copy of all forms, statements, annual,
quarterly and other reports, registration statements and definitive proxy
statements filed by Parent with the SEC after the date of this Agreement and
prior to the Closing Date.
6.4 Negative Covenant.
-----------------
Except as otherwise expressly permitted by this Agreement, between the date
of this Agreement and the Closing Date, Parent will not, without the prior
consent of the Company, (a) amend or repeal any of its Organizational Documents
or (b) declare or pay any dividend or make any other distribution or payment in
respect of its capital stock.
6.5 Notification.
------------
Between the date of this Agreement and the Closing Date, Parent will
promptly notify the Company in writing if Parent becomes aware of any fact or
condition that causes or constitutes a Breach of any of Parent's representations
and warranties as of the date of this Agreement, or if the Parent becomes aware
of the occurrence after the date of this Agreement of any fact or condition that
would (except as expressly contemplated by this Agreement) cause or constitute a
Breach of any such representation or warranty had such representation or
warranty been made as of the time of occurrence or discovery of such fact or
condition. During the same period, Parent will promptly notify the Company of
the occurrence of any Breach of any covenant of Parent in this Section 6 or of
the occurrence of any event that may make the satisfaction of the conditions in
Section 8 impossible or unlikely.
6.6 Payment of Professional Fees.
----------------------------
As promptly as practicable after Closing, Parent will pay or cause the
Company to pay all professional fees incurred by the Company in connection with
the Transaction.
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6.7 Support Agreement and Voting and Exchange Trust Agreement.
---------------------------------------------------------
Prior to the Effective Time, Parent shall execute and deliver the
Exchangeable Share Support Agreement in the form of Exhibit 6.7(a) (the "Support
-------
Agreement") and the Voting and Exchange Trust Agreement in the form of Exhibit
- ---------
6.7(b) (the "Voting and Exchange Trust Agreement").
-----------------------------------
6.8 Registration Statement; Form S-8 Registration Statement.
-------------------------------------------------------
(a) For purposes of this Section 6.8, "register," "registered,"
and "registration" refer to a registration effected by preparing and filing a
"Registration Statement" or similar document in compliance with the Securities
----------------------
Act, and the declaration or ordering of effectiveness of such Registration
Statement or document, and "Holders" refers to the holders of Exchangeable
-------
Shares and Replacement Nonemployee Options in respect of which Registrable
Shares may be issued pursuant to the Exchange Registration Statement or, as the
case may be, resold pursuant to the Resale Registration Statement.
(b) Subject to Section 6.8(c) below, promptly following the
execution and delivery of this Agreement by the parties, Parent shall prepare
and file a Registration Statement under the Securities Act covering the issuance
of the Registrable Shares and shall use its Best Efforts to cause such
Registration Statement to become effective (such Registration Statement
specifically, the "Exchange Registration Statement").
-------------------------------
(c) Upon the mutual consent of Parent and the Company, or in the
event that Parent shall have received written notice from the Commission or
shall have otherwise determined that the registration of the issuance of the
Registrable Shares pursuant to the Exchange Registration Statement is not
feasible or is in violation of applicable law, then promptly following the
Effective Time, Parent shall prepare and file a Registration Statement covering
the resale of the Registrable Shares to the general public and shall use its
Best Efforts to cause such Registration Statement to become effective (such
Registration Statement specifically, the "Resale Registration Statement").
-----------------------------
(d) In connection with any Exchange Registration Statement or
Resale Registration Statement, Parent will:
(i) Prepare and file with the Commission a Registration
Statement with respect to such securities, and use its Best Efforts to cause
such Registration Statement to become effective, and prepare and file with the
Commission such amendments to such Registration Statement and supplements to the
prospectus contained therein as may be necessary to keep such Registration
Statement effective until (x) in the case of an Exchange Registration Statement
filed pursuant to Section 6.8(b), such time as all the Registrable Shares have
been issued by the Company, or (y) in the case of a Resale Registration
Statement filed pursuant to Section 6.8(c), four years from the date of
effectivesness of such Registration Statement;
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(ii) Furnish to the Holders such reasonable number of
copies of the Registration Statement, the prospectus filed therewith and such
other documents as may be reasonably required in order to facilitate the
issuance of such securities;
(iii) Use its Best Efforts to register or qualify the
Registrable Shares under such state securities or blue sky laws of such
jurisdictions as the Holders may reasonably request in writing, except that
Parent shall not for any purpose be required to execute a general consent to
service of process or to qualify to do business as a foreign corporation in any
jurisdiction wherein it is not so qualified;
(iv) Notify the Holders, promptly after it shall receive
notice thereof, of the time when such Registration Statement has become
effective or a supplement to any prospectus forming part of such Registration
Statement has been filed;
(v) Notify the Holders promptly as to any request by the
Commission for the amending or supplementing of such Registration Statement or
prospectus or for additional information;
(vi) Prepare and promptly file with the Commission and
promptly notify the Holders of the filing of such amendment or supplement to
such Registration Statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Securities Act, any event shall
have occurred as the result of which any such prospectus or any other prospectus
as then in effect would include an untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein, in the
light of the circumstances in which they were made, not misleading; provided,
however, that Parent may delay the filing of any such amendment or supplement
(for a period not to exceed 90 days), if Parent shall in good faith determine
that such amendment or supplement would require Parent to disclose a material
development or potential material development involving Parent, the disclosure
of which would have a material adverse effect on Parent; provided, further, that
Parent may suspend use of such Registration Statement in such instance or for
such time as may be reasonably necessary to update or amend such Registration
Statement to correct any untrue statement of a material fact in, or an omission
of a material fact from, such Registration Statement; and
(vii) Advise the Holders, promptly after it shall receive
notice or obtain knowledge thereof, of the issuance of any stop order by the
Commission suspending the effectiveness of such Registration Statement or the
initiation or threatening of any proceeding for that purpose and promptly use
its Best Efforts to prevent the issuance of any stop order or to obtain its
withdrawal if such stop order should be issued.
(e) All fees, costs and expenses of and incidental to the
registration required by this Section 6.8 shall be borne by Parent other than
any underwriting discounts or fees (if any) which shall be borne by the Holders.
The fees, costs and expenses of registration to be borne by Parent shall
include, without limitation, all registration and filing fees, printing
expenses, fees and disbursements of counsel and accountants for Parent, all
legal fees and disbursements and other
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expenses of complying with state securities or blue sky laws of any
jurisdictions in which the securities to be offered are to be registered or
qualified, the premiums and other costs of policies of insurance against
liability (if any) arising out of such public offering.
(f) Parent will indemnify and hold harmless each Holder, its
directors and officers, and any underwriter (as defined in the Securities Act)
for such Holder and each person, if any, who controls such Holder or such
underwriter within the meaning of the Securities Act, from and against and will
reimburse such Holder and each such underwriter and controlling person with
respect to, any and all loss, damage, liability, cost and expense to which such
Holder or any such underwriter or controlling person may become subject under
the Securities Act or otherwise, insofar as such losses, damages, liabilities,
costs or expenses are caused by any untrue statement or alleged untrue statement
of any material fact contained in such Registration Statement, any prospectus
contained therein or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading; provided,
however, that Parent will not be liable in any such case to the extent that any
such loss, damage, liability, cost or expense arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission so
made in conformity with information furnished by such Holder, such underwriter
or such controlling person in writing specifically for use in the preparation
thereof.
(g) Each Holder Shares will indemnify and hold harmless Parent,
its directors and officers, any controlling person and any underwriter with
respect to, any and all loss, damage, liability, cost or expense to which Parent
or any controlling person and/or any underwriter may become subject under the
Securities Act or otherwise, insofar as such losses, damages, liabilities, costs
or expenses are caused by any untrue statement or alleged untrue statement of
any material fact contained in such Registration Statement, any prospectus
contained therein or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was so made in reliance upon
and in strict conformity with written information furnished by such Holder to
Parent specifically for use in the preparation thereof.
(h) Promptly after receipt by an indemnified party pursuant to
the provisions of paragraph (d) or (e) of this Section 6.8 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions such indemnified party will, if a claim thereof is to be
made against the indemnifying party pursuant to the provisions of said paragraph
(d) or (e), promptly notify the indemnifying party of the commencement thereof;
but the omission to so notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than
hereunder. In case such action is brought against any indemnified party and it
notifies the indemnifying party of the commencement thereof, the indemnifying
party shall have the right to participate in, and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel
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<PAGE>
satisfactory to such indemnified party; provided, however, if the defendants in
any action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or in addition to those available to the indemnifying party, or if there is
a conflict of interest which would prevent counsel for the indemnifying party
from also representing the indemnified party, the indemnified party or parties
shall have the right to select separate counsel to participate in the defense of
such action on behalf of such indemnified party or parties. After notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party pursuant to the provisions of said paragraph (d) or (e) for
any legal or other expense subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation, unless (i) the indemnified party shall have employed counsel in
accordance with the provision of the preceding sentence, (ii) the indemnifying
party shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after the notice of the
commencement of the action, or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party.
(i) In addition, Parent shall use its Best Efforts to cause the
Parent Common Shares issuable upon the exercise or conversion of Replacement
Employee Options to be registered under the Securities Act on Form S-8.
6.9 Release of Operating Results.
----------------------------
Parent shall use its Best Efforts to publicly release, as soon as
practicable following the end of such month of combined operations, combined
operating results of Parent and Acquisition Sub that include the month of
operations for the month immediately following the month in which Closing
occurs.
6.10 Canadian Securities Compliance.
------------------------------
Parent shall use its Best Efforts to obtain all orders required from the
applicable Canadian securities authorities to permit the issuance and first
resale of (a) the Exchangeable Shares and Parent Common Shares issued pursuant
to the Contemplated Transactions, (b) the Parent Common Shares issued upon
exchange of the Exchangeable Shares from time to time, and (c) the Parent Common
Shares issued from time to time upon the exercise of the Replacement Options
(the "Canadian Securities Orders"), in each case without qualification with or
approval of or the filing of any document, including any prospectus or similar
document, or the taking of any proceeding with or the obtaining of any further
order, ruling or consent from, any Governmental Body or regulatory authority
under any Canadian federal, provincial or territorial securities or other laws
or pursuant to the rules and regulations of any regulatory authority
administering such laws, or the fulfillment of any other legal requirement in
any such jurisdiction (other than, with respect to such first resales, any
restrictions on transfer by reason of, among other things, a holder being a
"control person" of Parent or Acquisition Sub for purposes of Canadian
provincial securities laws).
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<PAGE>
7. Conditions Precedent to Parent's Obligation to Close.
----------------------------------------------------
Parent's obligation to consummate the Transactions and to take the other
actions required to be taken by Parent at the Closing is subject to the
satisfaction, at or prior to the Closing, of each of the following conditions
(any of which may be waived by Parent, in whole or in part):
7.1 Accuracy of Representations.
---------------------------
(a) All of the Company's representations and warranties in this
Agreement (considered collectively), and each of these representations and
warranties (considered individually), must have been accurate in all material
respects as of the date of this Agreement, and must be accurate in all material
respects as of the Closing Date as if made on the Closing Date, without giving
effect to any supplement to the Disclosure Letter.
(b) Each of the Company's representations and warranties in
Sections 3.3, 3.4, 3.9, 3.11, and 3.21 must have been accurate in all respects
as of the date of this Agreement, and must be accurate in all respects as of the
Closing Date as if made on the Closing Date, without giving effect to any
supplement to the Disclosure Letter.
7.2 The Company's Performance.
-------------------------
(a) All of the covenants and obligations that the Company is
required to perform or to comply with pursuant to this Agreement at or prior to
the Closing (considered collectively), and each of these covenants and
obligations (considered individually), must have been duly performed and
complied with in all material respects.
(b) Each of the covenants and obligations in Section 5.4 must
have been performed and complied with in all respects.
7.3 Consents.
--------
Each of the Consents identified in Part 3.2 of the Disclosure Letter, and
each Consent identified in Schedule 4.2, must have been obtained and must be in
full force and effect.
7.4 Additional Documents.
--------------------
Each of the following documents must have been delivered to Parent:
(a) an opinion of Wildeboer Rand Thomson Apps & Dellelce dated
the Closing Date, in the form of Exhibit 7.4(a);
(b) Employment agreements, each in the form of Exhibit 7.4(b)
(the "Key Employee Employment Agreements"), executed by each Key Employee, and
----------------------------------
each such Key Employee Employment Agreement shall be in full force and effect
and Parent shall not have received any notice that any Key Employee intends to
fail to perform his or her obligations under his or her Key Employee Employment
Agreement;
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(c) from each person who is identified as an "affiliate" of the
Company, a Company Affiliate Agreement in the form of Exhibit 7.4(c) (the
"Company Affiliate Agreements"), and each such Company Affiliate Agreement shall
----------------------------
be in full force and effect;
(d) the Parent shall have received the Deloitte & Touche Pooling
Letter and the PricewaterhouseCoopers Poolability Letter;
(e) from each Principal Seller, a Principal Seller's Release in
the form of Exhibit 7.4(e) (the "Principal Seller's Releases");
---------------------------
(f) from each Employee identified on Schedule C, an executed
Noncompetition Agreement in the form of Exhibit 7.4(f) ("Noncompetition
--------------
Agreements") the , and each such Noncompetition Agreement shall be in full force
- ----------
and effect and Parent shall not have received any notice that any such Employee
intends to fail to perform his or her obligations under his or her
Noncompetition Agreement;
(g) from the trustee for the holders of Shares not exercising
Dissent Rights, the Support Agreement, the Escrow Agreement and the Voting and
Exchange Trust Agreement;
(h) the Canadian Securities Orders, in form and substance
reasonably satisfactory to Parent; and
(i) from the Company, an executed copy of the Articles of
Arrangement.
7.5 No Proceedings.
--------------
Since the date of this Agreement, there must not have been commenced or
Threatened against Parent, or against any Person affiliated with Parent, any
Proceeding (a) involving any challenge to, or seeking damages or other relief in
connection with, any of the Contemplated Transactions, or (b) that may have the
effect of preventing, delaying, making illegal, or otherwise interfering with
any of the Contemplated Transactions.
7.6 No Claim Regarding Stock Ownership or Sale Proceeds.
---------------------------------------------------
Except as set forth on Part 3.1 of the Disclosure Letter, there must not
have been made or Threatened by any Person any claim asserting that such Person
is the holder or the beneficial owner of, or has the right to acquire or to
obtain beneficial ownership of, any stock of, or any other voting, equity, or
ownership interest in, any of the Company.
7.7 No Prohibition.
--------------
Neither the consummation nor the performance of any of the Contemplated
Transactions will, directly or indirectly (with or without notice or lapse of
time), materially contravene, or conflict with, or result in a material
violation of, or cause Parent or any Person affiliated with Parent to suffer
-44-
<PAGE>
any material adverse consequence under, (a) any applicable Legal Requirement or
Order, or (b) any Legal Requirement or Order that has been published,
introduced, or otherwise formally proposed by or before any Governmental Body.
7.8 Shareholder Approval.
--------------------
This Agreement and the Arrangement shall have been approved and adopted by
the affirmative requisite vote of the shareholders of the Company.
7.9 Canadian Approvals.
------------------
The Company and Parent each shall have filed all notices and information
(if any) required under (i) the Investment Canada Act (Canada) and (ii) Part IX
of the Competition Act (Canada) and the Parent, acting reasonably, shall be
satisfied that the transaction may proceed without approval under either statute
or that all such approvals have been obtained.
7.10 Nasdaq Listing.
--------------
The Acquisition Shares and the Parent Common Shares issuable upon exercise
or conversion of the Replacement Options shall have been approved for listing,
subject to notice of issuance, on the Nasdaq National Market.
7.11 Dissent Rights.
--------------
Holders of not more than five percent (5%) of the Shares shall have
exercised Dissent Rights or other statutory appraisal rights.
7.12 Court Approval.
--------------
The Court shall have issued the Interim Order and the Final Order approving
the Arrangement in form and substance reasonably satisfactory to Parent and
reflecting the terms hereof, and such Final Order shall not have been set aside
or modified in any manner unacceptable to Parent on appeal or otherwise.
7.13 Effectiveness of Registration Statement.
---------------------------------------
The Exchange Registration Statement shall have been declared effective by
the Commission, or Parent shall be reasonably satisfied that effectiveness of
the Exchange Registration Statement at the Effective Time is not required under
the Securities Act of the rules and regulations thereunder.
8. Conditions Precedent to the Company's Obligation to Close.
---------------------------------------------------------
The Company's obligation to consummate the Arrangement and to take the
actions required to be taken by the Company at the Closing is subject to the
satisfaction, at or prior to the Closing, of each of the following conditions
(any of which may be waived by the Company, in whole or in part):
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8.1 Accuracy of Representations.
---------------------------
All of Parent's representations and warranties in this Agreement
(considered collectively), and each of these representations and warranties
(considered individually), must have been accurate in all material respects as
of the date of this Agreement and must be accurate in all material respects as
of the Closing Date as if made on the Closing Date.
8.2 Parent's Performance.
--------------------
All of the covenants and obligations that Parent is required to perform or
to comply with pursuant to this Agreement at or prior to the Closing (considered
collectively), and each of these covenants and obligations (considered
individually), must have been performed and complied with in all material
respects.
8.3 Consents.
--------
Each of the Consents identified in Part 3.2 of the Disclosure Letter must
have been obtained and must be in full force and effect.
8.4 Additional Documents.
--------------------
Parent must have caused the following documents to be delivered to the
Company:
(a) an opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, dated the Closing Date, in the form of Exhibit 8.4(a);
(b) an opinion of Fasken Campbell Godfrey, Canadian counsel to
the Parent, dated the Closing Date, in the form of Exhibit 8.4(b);
(c) executed copies of the Articles of Arrangement, the Support
Agreement, the Escrow Agreement and the Voting and Exchange Trust Agreement;
(d) the Canadian Securities Orders, in form and substance
reasonably satisfactory to the Company; and
(e) such other documents as the Company may reasonably request
for the purpose of (i) enabling their counsel to provide the opinion referred to
in Section 7.4(a), (ii) evidencing the accuracy of any representation or
warranty of Parent, (iii) evidencing the performance by Parent of, or the
compliance by Parent with, any covenant or obligation required to be performed
or complied with by Parent, (ii) evidencing the satisfaction of any condition
referred to in this Section 8, or (v) otherwise facilitating the consummation of
any of the Contemplated Transactions.
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<PAGE>
8.5 No Proceedings.
--------------
Since the date of this Agreement, there must not have been commenced or
Threatened against the Company, or against any Person affiliated with the
Company, any Proceeding (a) involving any challenge to, or seeking damages or
other relief in connection with, any of the Contemplated Transactions, or (b)
that may have the effect of preventing, delaying, making illegal, or otherwise
interfering with any of the Contemplated Transactions.
8.6 No Injunction.
-------------
There must not be in effect any Legal Requirement or any injunction or
other Order that (a) prohibits the consummation of the Arrangement, and (b) has
been adopted or issued, or has otherwise become effective, since the date of
this Agreement.
8.7 Shareholder Approval.
--------------------
This Agreement and the Transactions shall have been approved and adopted by
the affirmative requisite vote of the shareholders of the Company.
8.8 Canadian Approvals.
------------------
The Company and Parent each shall have filed all notices and information
(if any) required under (i) the Investment Canada Act (Canada) and (ii) Part IX
of the Competition Act (Canada) and the Parent, acting reasonably, shall be
satisfied that the transaction may proceed without approval under either statute
or that all such approvals have been obtained.
8.9 Nasdaq Listing.
--------------
The Acquisition Shares and the Parent Common Shares issuable upon the
exercise or conversion of the Replacement Options shall have been approved for
listing, subject to notice of issuance, on the Nasdaq National Market.
8.10 Court Approval.
--------------
The Court shall have issued the Interim Order and the Final Order approving
the Arrangement in form and substance reasonably satisfactory to the Company and
reflecting the terms hereof, and such Final Order shall not have been set aside
or modified in any manner unacceptable to the Company on appeal or otherwise.
8.11 Effectiveness of Registration Statement.
---------------------------------------
The Exchange Registration Statement shall have been declared effective by
the Commission, or Parent shall be reasonably satisfied that effectiveness of
the Exchange Registration Statement at the Effective Time is not required under
the Securities Act of the rules and regulations thereunder.
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<PAGE>
9. Termination.
-----------
9.1 Termination Events.
------------------
This Agreement may, by notice given prior to or at the Closing, be
terminated:
(a) by either Parent, on the one hand, or the Company, on the
other, if a material Breach of any provision of this Agreement has been
committed by the other party and such Breach has not been waived;
(b) (i) by Parent if any of the conditions in Section 7 has not
been satisfied as of the Closing Date or if satisfaction of such a condition is
or becomes impossible (other than through the failure of Parent to comply with
its obligations under this Agreement) and Parent has not waived such condition
on or before the Closing Date; or (ii) by the Company, if any of the conditions
in Section 8 has not been satisfied as of the Closing Date or if satisfaction of
such a condition is or becomes impossible (other than through the failure of the
Company to comply with its obligations under this Agreement) and the Company has
not waived such condition on or before the Closing Date;
(c) by Parent if (i) the Company's Board of Directors withdraws
or modifies its recommendation of the Transactions (other than for the purpose
of accepting an Acquisition Proposal or by reason of Parent's failure to comply
with its obligations under this Agreement), (ii) an Acquisition Proposal is
accepted by the Company, (iii) the Company willfully breaches this Agreement,
(iv) the Company's shareholders do not approve the Arrangement on or before
September 30, 1999 or (v) shareholders of the Company owning more than five
percent (5%) of the Company Shares exercise Dissent Rights or other statutory
appraisal rights;
(d) by the Company (i) if Parent willfully breaches this
Agreement or Parent's Board of Directors withdraws or modifies its
recommendation of the Transactions (other than by reason of the failure of the
Company to comply with its obligations under this Agreement), or (ii) upon (x)
the determination of the Company's Board of Directors that an Acquisition
Proposal constitutes a Superior Proposal, and (y) payment by the Company of the
amount set forth in Section 5.8(b) hereof;
(e) by mutual consent of Parent and the Company; or
(f) by either Parent or the Company if the Closing has not
occurred (other than through the failure of any party seeking to terminate this
Agreement to comply fully with its obligations under this Agreement) on or
before September 30, 1999, or such later date as the parties may agree upon.
9.2 Effect of Termination.
---------------------
Each party's right of termination under Section 9.1 is in addition to any
other rights it may have under this Agreement or otherwise, and the exercise of
a right of termination will not be an
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<PAGE>
election of remedies. If this Agreement is terminated pursuant to Section 9.1,
all further obligations of the parties under this Agreement will terminate,
except that the obligations in Sections 11.1, 11.2 and 11.3 will survive and the
rights and obligations of the parties under Sections 5.7 and 5.8 shall survive
for ninety (90) days beyond the date this Agreement is terminated; provided,
however, that if this Agreement is terminated by a party because of the Breach
of the Agreement by the other party or because one or more of the conditions to
the terminating party's obligations under this Agreement is not satisfied as a
result of the other party's failure to comply with its obligations under this
Agreement, the terminating party's right to pursue all legal remedies will
survive such termination unimpaired, subject to the provisions of Section 11.1
hereof.
10. Escrow Fund.
-----------
10.1 Escrow Shares.
-------------
As soon as practicable after the Effective Time, 10% of the Exchangeable
Shares and 10% of the Parent Common Shares issuable to the holders of Preferred
Shares pursuant to the Plan of Arrangement (collectively the "Escrow Shares")
-------------
shall be registered in the name of, and be deposited with Montreal Trust Company
of Canada (or other institution selected by Parent with the reasonable consent
of the Company) as escrow agent (the "Escrow Agent"), such deposit to constitute
------------
the Escrow Fund and to be governed by the terms set forth herein and in the
Escrow Agreement attached hereto as Exhibit 10.1 (the "Escrow Agreement"). The
----------------
Escrow Fund (but only up to a maximum of the value of the Escrow Shares) shall
be available to compensate Parent for any loss, liability, claim, damage
(including incidental and consequential damages), expense (including costs of
investigation and defense and reasonable attorneys' fees) or diminution of
value, whether or not involving a third-party claim (collectively, "Damages"),
-------
arising, directly or indirectly, from or in connection with:
(a) any Breach of any representation or warranty made by the
Company in this Agreement as if such representation or warranty were made on and
as of the Closing Date, other than any such Breach that is disclosed in a
supplement to the Disclosure Letter;
(b) any Breach by the Company of any covenant or obligation of
the Company in this Agreement that is not waived on or prior to Closing; or
(c) resolution or settlement of any Proceeding arising out of
the claims described in Part 3.14(b) of the Disclosure Letter.
Parent and its affiliates shall act in good faith and in a commercially
reasonable manner to mitigate any Damages they may suffer. Any claim for
indemnification for Damages hereunder shall be offset or reduced by (i) any tax
benefit received by Parent or its affiliates as a result of such Damages and
(ii) in the case of third-party claims, by any amount actually recovered by
Parent or its affiliates pursuant to counterclaims made by any of them directly
relating to the facts giving rise to such third-party claims.
Parent and Company each acknowledge that such Damages, if any, would relate
to unresolved contingencies existing at the Closing, which if resolved at the
Closing would have led to
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<PAGE>
a reduction in the total number of shares Parent would have agreed to issue in
connection with the Contemplated Transactions. Resort to the Escrow Fund shall
be the exclusive remedy of Parent after the Closing for any such breaches and
misrepresentations.
10.2 Damage Threshold.
----------------
Notwithstanding the foregoing, Parent may not receive any shares from the
Escrow Fund unless and until an Officer's Certificate or Certificates (as
defined in Section 10.4 below) identifying Damages the aggregate amount of which
exceeds $100,000 has been delivered to the Escrow Agent as provided in Section
10.4 below and such amount is determined pursuant to this Article 10 to be
payable, in which case Parent shall receive shares equal in value to the full
amount of the Damages; provided, however, that in no event shall Parent receive
more than the Escrow Shares.
10.3 Escrow Period.
-------------
The Escrow Period shall terminate with respect to the Escrow Shares upon
the earlier to occur of: (i) the first anniversary of the Closing Date, or (ii)
the issuance of Parent's audited financial statements for the year ending
December 31, 1999, which include the results of the Company; provided, however,
that a portion of the Escrow Shares, which, in the reasonable judgment of
Parent, subject to the objection of the Company Agent (as defined in Section
10.7 below) and the subsequent arbitration of the matter in the manner provided
in Section 10.6 hereof, are necessary to satisfy any unsatisfied claims
specified in any Officer's Certificate theretofore delivered to the Escrow Agent
prior to termination of the Escrow Period with respect to the facts and
circumstances existing prior to expiration of the Escrow Period, shall remain in
the Escrow Fund until such claims have been resolved. Any and all releases of
the Escrow Shares upon termination of the Escrow Period shall be released to the
Company shareholders on a pro rata basis according to such shareholder's
ownership of Shares at the Closing Date.
10.4 Claims upon Escrow Fund.
-----------------------
(a) Upon receipt by the Escrow Agent on or before the last day
of the Escrow Period of a certificate signed by the Chief Executive Officer, the
President, the Chief Financial Officer or the General Counsel of Parent (an
"Officer's Certificate"):
(i) stating that Damages exist in an aggregate amount
greater than $100,000, and
(ii) specifying in reasonable detail the individual items of
such Damages included in the amount so stated, the date each such item was paid,
or properly accrued or arose, the nature of the misrepresentation, breach of
warranty or claim to which such item is related, the Escrow Agent shall, subject
to the provisions of Article 10 hereof, deliver to Parent out of the Escrow
Fund, as promptly as practicable, Exchangeable Shares whose value is equal to
the amount of the Damage.
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<PAGE>
(b) For the purpose of compensating Parent for its Damages
pursuant to this Agreement, the Exchangeable Shares in the Escrow Fund shall be
valued at a price per share equal to the closing price of one Parent Common
Share on the date immediately prior to the Closing Date (as adjusted for stock
splits, reverse stock splits and similar events).
10.5 Objections to Claims.
--------------------
At the time of delivery of any Officer's Certificate to the Escrow Agent, a
duplicate copy of such Officer's Certificate shall be delivered to the Company
Agent (defined in Section 10.7 below) and for a period of thirty (30) days after
such delivery, the Escrow Agent shall make no delivery of Exchangeable Shares
pursuant to Section 10.4 hereof unless the Escrow Agent shall have received
written authorization from the Company Agent to make such delivery. After the
expiration of such thirty (30) day period, the Escrow Agent shall make delivery
of the Exchangeable Shares in accordance with Section 10.4 hereof, provided that
no such payment or delivery may be made if the Company Agent shall object in a
written statement to the claim made in the Officer's Certificate, and such
statement shall have been delivered to the Escrow Agent and to Parent prior to
the expiration of such thirty (30) day period.
10.6 Resolution of Conflicts; Arbitration.
------------------------------------
(a) In case the Company Agent shall so object in writing to any
claim or claims by Parent made in any Officer's Certificate, Parent shall have
forty-five (45) days to respond in a written statement to the objection of the
Company Agent. If after such forty-five (45) day period there remains a dispute
as to any claims, the Company Agent and Parent shall attempt in good faith for
sixty (60) days to agree upon the rights of the respective parties with respect
to each of such claims. If the Company Agent and Parent should so agree, a
memorandum setting forth such agreement shall be prepared and signed by both
parties and shall be furnished to the Escrow Agent. The Escrow Agent shall be
entitled to rely on any such memorandum and shall distribute the Exchangeable
Shares from the Escrow Fund in accordance with the terms thereof.
(b) If no such agreement can be reached after good faith
negotiation, either Parent or the Company Agent may, by written notice to the
other, demand arbitration of the matter unless the amount of the damage or loss
is at issue in pending litigation with a third party, in which event arbitration
shall not be commenced until such amount is ascertained or both parties agree to
arbitration; and in either such event the matter shall be settled by arbitration
conducted by three arbitrators. Within fifteen (15) days after such written
notice is sent, Parent and the Company Agent shall each select one arbitrator,
and the two arbitrators so selected shall select a third arbitrator. The
decision of the arbitrators as to the validity and amount of any claim in such
Officer's Certificate shall be binding and conclusive upon the parties to this
Agreement, and notwithstanding anything in Section 10.6 hereof, the Escrow Agent
shall be entitled to act in accordance with such decision and make or withhold
payments out of the Escrow Fund in accordance therewith.
(c) Judgment upon any award rendered by the arbitrators may be
entered in any court having jurisdiction. Any such arbitration shall be held in
King County, Washington
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under the commercial rules then in effect of the American Arbitration
Association. For purposes of this Section 10.6(c), in any arbitration hereunder
in which any claim or the amount thereof stated in the Officer's Certificate is
at issue, Parent shall be deemed to be the Non-Prevailing Party unless the
arbitrators award Parent more than one-half (1/2) of the amount in dispute, plus
any amounts not in dispute; otherwise, the Company shareholders for whom the
Exchangeable Shares otherwise issuable to them have been deposited in the Escrow
Fund shall be deemed to be the Non-Prevailing Party. The Non-Prevailing Party to
an arbitration shall pay its own expenses, the fees of each arbitrator, the
administrative fee of the American Arbitration Association, and the expenses,
including without limitation, attorneys' fees and costs, reasonably incurred by
the other party to the arbitration.
10.7 Company Agent.
-------------
(a) Laurence Gutcher shall be constituted and appointed as agent
("Company Agent") for and on behalf of the Company shareholders to give and
receive notices and communications, to authorize delivery to Parent of the
Exchangeable Shares in satisfaction of claims by Parent, to object to such
deliveries, to agree to, negotiate, enter into settlements and compromises of,
and demand arbitration and comply with orders of courts and awards of
arbitrators with respect to such claims, and to take all actions necessary or
appropriate in the judgment of the Company Agent for the accomplishment of the
foregoing. Such agency may be changed by the holders of a majority in interest
of the Escrow Fund from time to time upon not less than 10 days' prior written
notice to Parent. No bond shall be required of the Company Agent, and the
Company Agent shall receive no compensation for his services. Notices or
communications to or from the Company Agent shall constitute notice to or from
each of the Company's shareholders.
(b) The Company Agent shall not be liable for any act done or
omitted hereunder, as the Company Agent while acting in good faith and in the
exercise of reasonable judgment, and any act done or omitted pursuant to the
advice of counsel shall be conclusive evidence of such good faith. The Company
shareholders shall severally indemnify the Company Agent and hold him harmless
against any loss, liability or expense incurred without gross negligence or bad
faith on the part of the Company Agent and arising out of or in connection with
the acceptance or administration of his duties hereunder.
(c) The Company Agent shall have reasonable access to
information about the Company and the reasonable assistance of the Company's and
Acquisition Sub's officers and employees for purposes of performing its duties
and exercising its rights hereunder, provided that the Company Agent shall treat
confidentially and not disclose any nonpublic information from or about the
Company to anyone (except on a need to know basis to individuals who agree to
treat such information confidentially).
10.8 Actions of the Company Agent.
----------------------------
A decision, act, consent or instruction of the Company Agent shall
constitute a decision of all Company shareholders for whom Exchangeable Shares
otherwise issuable to them are deposited in the Escrow Fund and shall be final,
binding and conclusive upon each such Company shareholder, and the Escrow Agent
and Parent may rely upon any decision, act, consent or instruction of the
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Company Agent as being the decision, act, consent or instruction of each and
every such Company shareholder. The Escrow Agent and Parent are hereby relieved
from any liability to any person for any acts done by them in accordance with
such decision, act, consent or instruction of the Company Agent.
10.9 Third-Party Claims.
------------------
In the event Parent becomes aware of a third-party claim which Parent
believes may result in a demand against the Escrow Fund, Parent shall notify the
Company Agent of such claim, and the Company Agent and the Company shareholders
for whom Exchangeable Shares otherwise issuable to them are deposited in the
Escrow Fund shall be entitled, at their expense, to participate in any defense
of such claim. Parent shall have the right in it sole discretion to settle any
such claim; provided, however, that Parent may not affect the settlement of any
such claim without the consent of the Company Agent, which consent shall not be
unreasonably withheld. In the event that the Company Agent has consented to any
such settlement, the Company Agent shall have no power or authority to object
under Section 10.5 or any other provision of this Article X to the amount of any
claim by Parent against the Escrow Fund for indemnity with respect to such
settlement.
11. General Provisions.
------------------
11.1 Expenses and Liability.
----------------------
(a) Except as otherwise expressly provided in this Agreement,
each party to this Agreement will bear its respective expenses incurred in
connection with the preparation, execution, and performance of this Agreement
and the Contemplated Transactions, including all fees and expenses of agents,
representatives, counsel, and accountants.
(b) In the event of termination of this Agreement, the
obligation of each party to pay its own expenses will be subject to any rights
of such party arising from a breach of this Agreement by another party. In
addition, (i) in the event of a termination of this Agreement by Parent pursuant
to Section 9.1(c)(i) or 9.1(c)(iii), the Company shall promptly, but in any
event within three (3) days of such termination, pay Parent the amount of
$2,000,000 (plus documented out-of-pocket expenses of Parent) as reimbursement
for expenses incurred by Parent in connection with the Contemplated
Transactions, and (ii) in the event of a termination of this Agreement by the
Company pursuant to Section 9.1(d), Parent shall promptly, but in any event
within three (3) days of such termination, pay the Company the amount of
$2,000,000 (plus documented out-of-pocket expenses of the Company) (which
payment may be by means of cancellation of indebtedness) as reimbursement for
expenses incurred by the Company in connection with the Contemplated
Transactions.
(c) The liability of either party for damages with respect to
any breach of any representation, warranty or covenant if the Closing does not
occur shall be limited to an amount equal to $4,500,000 (plus documented out-of-
pocket expenses, less any amount that may be payable pursuant to Section
11.1(b)).
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<PAGE>
11.2 Public Announcements.
--------------------
Any public announcement or similar publicity with respect to this Agreement
or the Contemplated Transactions will be issued, if at all, at such time and in
such manner as Parent determines. Unless consented to by Parent in advance or
required by Legal Requirements, prior to the Closing the Company shall keep this
Agreement strictly confidential and may not make any disclosure of this
Agreement to any Person other than Employees and Company shareholders. The
Company and Parent will consult with each other concerning the means by which
the Company's Employees, customers, and suppliers and others having dealings
with the Company will be informed of the Contemplated Transactions, and Parent
will have the right to be present for any such communication.
11.3 Confidentiality.
---------------
Between the date of this Agreement and the Closing Date, Parent, and the
Company will maintain in confidence, and will cause the directors, officers,
employees, agents, and advisors of Parent and the Company to maintain in
confidence, any information furnished by one party to another party in
connection with this Agreement or the Contemplated Transactions, unless (a) such
information is already known to such party or to others not bound by a duty of
confidentiality or such information becomes publicly available through no fault
of such party, (b) the use of such information is necessary or appropriate in
making any filing or obtaining any consent or approval required for the
consummation of the Contemplated Transactions, or (c) the furnishing or use of
such information is required by or necessary or appropriate in connection with
legal proceedings. If the Contemplated Transactions are not consummated, each
party will return or destroy as much of such written information as the other
party may reasonably request.
11.4 Notices.
-------
All notices, consents, waivers, and other communications under this
Agreement must be in writing and will be deemed to have been duly given when (a)
delivered by hand (with written confirmation of receipt), (b) sent by telecopier
(with written confirmation of receipt), provided that a copy is mailed by
registered mail, return receipt requested, or (c) when received by the
addressee, if sent by a nationally recognized overnight delivery service
(receipt requested), in each case to the appropriate addresses and telecopier
numbers set forth below (or to such other addresses and telecopier numbers as a
party may designate by notice to the other parties):
The Company: INEX Corporation
------------
20 Toronto Street
Suite 400
Toronto, Ontario M5C 2B8
Attention: Omaya Elguindi
Facsimile No.: (416) 214-4675
with a copy to: Wildeboer Rand Thomson Apps & Dellelce
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<PAGE>
Suite 810, P.O. Box 4
1 First Canadian Place
Toronto, Ontario M5X 1A9
Attention: Rory Cattanach, Esq.
Facsimile No.: (416) 361-1790
Parent: InfoSpace.com, Inc.
------
15375 N.E. 90/th/ Street
Redmond, Washington 98052
Attention: Ellen B. Alben, Esq.
Facsimile No.: (425) 883-4846
with a copy to: Wilson Sonsini Goodrich & Rosati, P.C.
5300 Carillon Point
Kirkland, Washington 98033
United States of America
Attention: Patrick J. Schultheis, Esq.
Richard C. Sohn, Esq.
Facsimile No.: (425) 576-5899
and a copy to: Fasken Campbell Godfrey
4200 TD Bank Tower
P.O. Box 20, Stn. Toronto Dom.
Toronto, Ontario M5K 1N6
Attention: C. Ian Kyer, Esq.
Facsimile No.: (416) 366-8381
11.5 Jurisdiction; Service of Process.
--------------------------------
Any action or proceeding seeking to enforce any provision of, or based on
any right arising out of, this Agreement may be brought against any of the
parties in the United States District Court for the Western District of
Washington, and each of the parties consents to the jurisdiction of such courts
(and of the appropriate appellate courts) in any such action or proceeding and
waives any objection to venue laid therein. Process in any action or proceeding
referred to in the preceding sentence may be served on any party anywhere in the
world.
11.6 Further Assurances.
------------------
The parties agree (a) to furnish upon request to each other such further
information, (b) to execute and deliver to each other such other documents, and
(c) to do such other acts and things, all as the other party may reasonably
request for the purpose of carrying out the intent of this Agreement and the
documents referred to in this Agreement.
-55-
<PAGE>
11.7 Waiver.
------
The rights and remedies of the parties to this Agreement are cumulative and
not alternative. Neither the failure nor any delay by any party in exercising
any right, power, or privilege under this Agreement or the documents referred to
in this Agreement will operate as a waiver of such right, power, or privilege,
and no single or partial exercise of any such right, power, or privilege will
preclude any other or further exercise of such right, power, or privilege or the
exercise of any other right, power, or privilege. To the maximum extent
permitted by applicable law, (a) no claim or right arising out of this Agreement
or the documents referred to in this Agreement can be discharged by one party,
in whole or in part, by a waiver or renunciation of the claim or right unless
in writing signed by the other party; (b) no waiver that may be given by a party
will be applicable except in the specific instance for which it is given; and
(c) no notice to or demand on one party will be deemed to be a waiver of any
obligation of such party or of the right of the party giving such notice or
demand to take further action without notice or demand as provided in this
Agreement or the documents referred to in this Agreement.
11.8 Entire Agreement and Modification.
---------------------------------
This Agreement supersedes all prior agreements between the parties with
respect to its subject matter and constitutes (along with the documents referred
to in this Agreement) a complete and exclusive statement of the terms of the
agreement between the parties with respect to its subject matter. This Agreement
may not be amended except by a written agreement executed by the party to be
charged with the amendment.
11.9 Disclosure Letter.
-----------------
(a) The disclosures in the Disclosure Letter, and those in any
Supplement thereto, must relate only to the representations and warranties in
the Section of the Agreement to which they expressly relate and not to any other
representation or warranty in this Agreement.
(b) In the event of any inconsistency between the statements in
the body of this Agreement and those in the Disclosure Letter (other than an
exception expressly set forth as such in the Disclosure Letter with respect to a
specifically identified representation or warranty), the statements in the body
of this Agreement will control.
11.10 Assignments, Successors, and No Third-Party Rights.
--------------------------------------------------
Neither party may assign any of its rights under this Agreement without the
prior consent of the other parties except that Parent may assign any of its
rights under this Agreement to any Subsidiary of Parent, provided that the
Parent continues to be liable for its obligations hereunder. Subject to the
preceding sentence, this Agreement will apply to, be binding in all respects
upon, and inure to the benefit of the successors and permitted assigns of the
parties. Nothing expressed or referred to in this Agreement will be construed to
give any Person other than the parties to this Agreement any legal or equitable
right, remedy, or claim under or with respect to this Agreement or
-56-
<PAGE>
any provision of this Agreement. This Agreement and all of its provisions and
conditions are for the sole and exclusive benefit of the parties to this
Agreement and their successors and assigns.
11.11 Severability.
------------
If any provision of this Agreement is held invalid or unenforceable by any
court of competent jurisdiction, the other provisions of this Agreement will
remain in full force and effect. Any provision of this Agreement held invalid or
unenforceable only in part or degree will remain in full force and effect to the
extent not held invalid or unenforceable.
11.12 Section Headings, Construction.
------------------------------
The headings of Sections in this Agreement are provided for convenience
only and will not affect its construction or interpretation. All references to
"Section" or "Sections" refer to the corresponding Section or Sections of this
Agreement. All words used in this Agreement will be construed to be of such
gender or number as the circumstances require. Unless otherwise expressly
provided, the word "including" does not limit the preceding words or terms.
11.13 Time of Essence.
---------------
With regard to all dates and time periods set forth or referred to in this
Agreement, time is of the essence.
11.14 Governing Law.
-------------
This Agreement will be governed by the laws of the State of Washington
without regard to conflicts of laws principles.
11.15 Counterparts.
------------
This Agreement may be executed in one or more counterparts, each of which
will be deemed to be an original copy of this Agreement and all of which, when
taken together, will be deemed to constitute one and the same agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first written above.
INFOSPACE.COM, INC.
By: /s/ Bernee D.L. Strom
----------------------------------
Name: Bernee D.L. Strom
--------------------------------
Title: President and Chief Operating
-------------------------------
Officer
---------
INEX CORPORATION
By: /s/ Omaya Elguindi
-----------------------------------
Name: Omaya Elguindi
---------------------------------
Title: Chairman
--------------------------------
[Signature page to Agreement and Plan of Acquisition and Arrangement]
<PAGE>
SCHEDULE A
Key Employees
Alex Barrotti
Martin Tarvydas
Mark Sandori
Ivan Chachkov
<PAGE>
SCHEDULE B
Alex Barrotti
Rory Cattanach
Peter Chambers
Omaya Elguindi
Laurence Gutcher
Martin Tarvydas
Christian Wedell
<PAGE>
SCHEDULE C
Paolo Illing
Roger Hauk
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. Definitions........................................................................................... 2
2. The Transactions...................................................................................... 9
2.1 Description of the Transactions................................................................. 9
2.2 Closing......................................................................................... 11
2.3 Accounting Consequences......................................................................... 11
2.4 Adjustments to Exchange Ratio................................................................... 11
2.5 Tax Treatment................................................................................... 11
3. Representations and Warranties of the Company......................................................... 11
3.1 Organization and Good Standing.................................................................. 11
3.2 Authority; No Conflict.......................................................................... 12
3.3 Capitalization.................................................................................. 13
3.4 Financial Statements............................................................................ 13
3.5 Books and Records............................................................................... 14
3.6 Title to Properties; Encumbrances............................................................... 14
3.7 Condition and Sufficiency of Assets............................................................. 15
3.8 Accounts Receivable............................................................................. 15
3.9 No Undisclosed Liabilities...................................................................... 15
3.10 Taxes........................................................................................... 15
3.11 No Material Adverse Change...................................................................... 16
3.12 Employee Matters and Benefit Plans.............................................................. 17
3.13 Compliance with Legal Requirements; Governmental Authorizations................................. 18
3.14 Legal Proceedings; Orders....................................................................... 19
3.15 Absence of Certain Changes and Events........................................................... 20
3.16 Contracts; No Defaults.......................................................................... 21
3.17 Insurance....................................................................................... 23
3.18 Environmental and Product Matters............................................................... 24
3.19 Intellectual Property........................................................................... 25
3.20 Certain Payments................................................................................ 29
3.21 Disclosure...................................................................................... 29
3.22 Relationships with Related Persons.............................................................. 29
3.23 Brokers or Finders.............................................................................. 29
3.24 Customers....................................................................................... 30
3.25 Authenticity and Entirety of Documents.......................................................... 30
3.26 Shareholder Approval............................................................................ 30
3.27 Sales and Assets in the United States........................................................... 30
3.28 Fairness Opinion................................................................................ 30
4. Representations and Warranties of Parent.............................................................. 30
4.1 Organization and Good Standing.................................................................. 30
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement of
InfoSpace.com, Inc. on Form S-1 of our report dated February 24, 1999, August
13, 1999 as to Note 14, appearing in the Prospectus, which is part of this
Amendment No. 1 to Registration Statement, and to the reference to us under the
headings "Selected Consolidated Financial Data" and "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
October 4, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Amendment No. 1 to Registration
Statement of InfoSpace.com, Inc. on Form S-1 of our report dated February 11,
1999 (except for note 12, which is as of August 13, 1999) relating to the
financial statements of INEX Corporation, which appear in such Registration
Statement. We also consent to the reference to us under the heading "Experts"
in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Canada
October 4, 1999
