<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-26825
N2H2, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
91-1686754
(I.R.S. EMPLOYER IDENTIFICATION NO.)
900 FOURTH AVENUE, SUITE 3400, SEATTLE, WA 98164
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 336-1501
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of May 8, 2000, the registrant had outstanding 22,453,191 shares of common
stock, no par value.
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N2H2, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I--FINANCIAL INFORMATION ....................................................... 3
Item 1. Financial Statements ................................................ 3
CONDENSED CONSOLIDATED BALANCE SHEETS ............................... 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ..................... 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ..................... 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ................ 6
Item 2. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations ........................................... 7
Item 3. Quantitative And Qualitative Disclosures About Market Risk .......... 11
PART II--OTHER INFORMATION .......................................................... 11
Item 1. Legal Proceedings ................................................... 11
Item 2. Changes In Securities And Use Of Proceeds ........................... 11
Item 3. Defaults Upon Senior Securities ..................................... 11
Item 4. Submission Of Matters To A Vote Of Security Holders ................. 11
Item 5. Other Information ................................................... 12
Item 6. Exhibits And Reports On Form 8-K .................................... 12
SIGNATURES .......................................................................... 12
</TABLE>
2
<PAGE> 3
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
N2H2, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 1999
----------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Current assets:
Cash ............................................ $ 5,362 $ 7,743
Investments ..................................... 32,167 27,937
Accounts receivable, net ........................ 1,693 1,434
Prepaid expenses and other assets ............... 850 1,136
-------- --------
Total current assets ............................ 40,072 38,250
Long-term investments ................................. 4,704 24,698
Acquired intangible assets, net ....................... 15,965 --
Property and equipment, net ........................... 8,463 3,990
Other assets .......................................... 1,327 618
-------- --------
Total assets .................................... $ 70,531 $ 67,556
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable ................................ $ 1,049 $ 1,871
Royalties payable ............................... 148 100
Accrued liabilities ............................. 1,072 1,062
Deferred revenue ................................ 405 1,304
Current portion of capital leases ............... 164 466
-------- --------
Total current liabilities ....................... 2,838 4,803
Deferred revenue ...................................... 350 303
Capital lease obligations ............................. 390 952
-------- --------
Total liabilities ............................... 3,578 6,058
-------- --------
Shareholders' equity:
Common stock .................................... 91,995 75,528
Notes receivables from shareholders ............. -- (25)
Deferred stock options compensation expense ..... (1,250) (1,940)
Accumulated other comprehensive income .......... (15) --
Accumulated deficit ............................. (23,777) (12,065)
-------- --------
Total shareholders' equity ...................... 66,953 61,498
-------- --------
Total liabilities and shareholder's equity ...... $ 70,531 $ 67,556
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
N2H2, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues ....................................... $ 2,925 $ 1,416 $ 5,182 $ 2,605
Cost of revenues ............................... 1,603 350 2,898 579
------------ ------------ ------------ ------------
Gross profit ................................... 1,322 1,066 2,284 2,026
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing ...................... 4,024 519 6,595 882
Research and development ................. 967 370 2,082 684
General administrative ................... 3,532 1,442 6,451 2,228
------------ ------------ ------------ ------------
Total operating expenses ................. 8,523 2,331 15,128 3,794
------------ ------------ ------------ ------------
Operating loss ................................. (7,201) (1,265) (12,844) (1,768)
Interest income (expense), net ................. 608 (98) 1,156 (246)
Loss on sale of investments .................... -- -- (24) --
------------ ------------ ------------ ------------
Net loss ....................................... (6,593) (1,363) (11,712) (2,014)
------------ ------------ ------------ ------------
Unrealized loss on foreign currency ............ (15) -- (15) --
------------ ------------ ------------ ------------
Comprehensive income ........................... $ (6,608) $ (1,363) $ (11,727) $ (2,014)
============ ============ ============ ============
Basic and diluted net loss per share ........... $ (0.31) $ (0.11) $ (0.54) $ (0.19)
============ ============ ============ ============
Basic and diluted weighted average shares
outstanding .................................... 21,565,043 11,866,530 21,795,046 10,461,472
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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N2H2, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED MARCH 31,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................... $(11,712) $ (2,014)
Adjustments to reconcile net loss to net cash used in
operating activities: --
Depreciation and amortization ........................ 1,369 352
Amortization of deferred stock compensation .......... 747 121
Compensation expense on stock, stock options and
warrants ........................................... -- 185
Changes in certain assets and liabilities:
Accounts receivable .................................. (234) (414)
Prepaid expenses and other current assets ............ 286 14
Other assets ......................................... (659) --
Accounts payable ..................................... (876) 201
Royalties payable .................................... 48 (25)
Accrued liabilities .................................. 10 160
Deferred revenue ..................................... (852) (6)
-------- --------
Net cash used by operating activities: ..................... (11,873) (1,426)
-------- --------
Cash flows from investing activities:
Maturities of investments ............................ 15,765 --
Additions to property and equipment .................. (5,471) (417)
Transaction costs incurred for iseek, Ltd.
acquisition, net of cash acquired .................. (229) --
-------- --------
Net cash provided by (used in) investing activities ........ 10,065 (417)
-------- --------
Cash flows from financing activities:
Issuance of common stock ............................. -- 1,957
Exercise of stock options and warrants ............... 306 19
Payments under capital lease obligations ............. (864) (201)
Borrowings under notes payable ....................... -- 2,000
Repayments of notes payable .......................... -- (669)
-------- --------
Net cash provided by (used in) financing activities ........ (558) 3,106
-------- --------
Effects of exchange rate changes ..................... (15) --
-------- --------
Net increase (decrease) in cash ............................ (2,381) 1,263
Cash, beginning of period .................................. 7,743 121
-------- --------
Cash, end of period ........................................ $ 5,362 $ 1,384
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ..................................... $ 279 $ 259
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
Relating to the acquisition of Iseek, Limited:
Stock issued ............................................. $ 16,104 $ --
======== ========
Additions to property and equipment ...................... $ 101 $ --
======== ========
Additions to intangibles and other ....................... $ 51 $ --
======== ========
Additions to accounts payable ............................ $ 54 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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N2H2, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of N2H2, Inc. and
subsidiaries (the Company) are unaudited. In the opinion of management, the
financial statements include all adjustments, consisting only of normal
recurring items, necessary for their fair presentation in conformity with
generally accepted accounting principles. Preparing financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue, and expenses. Actual results may differ
from these estimates. Operating results for the three and six month periods
ended March 31, 2000 are not necessarily indicative of results to be expected
for a full year. The information included in this Form 10-Q should be read in
conjunction with Management's Discussion and Analysis and financial statements
and notes thereto included in the Company's annual report on Form 10-K for the
year ended September 30, 1999.
2. NET LOSS PER SHARE
Basic net loss per share is computed on the basis of the weighted average
number of common shares outstanding. Diluted net loss per share includes common
equivalent shares during the period, if dilutive. As the Company had a net loss
attributable to common shareholders in each of the periods presented, basic and
diluted net loss per share are the same.
The components of basic and diluted earnings per share were as follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Net loss ................................... $ (6,593,000) $ (1,363,000) $(11,712,000) $ (2,014,000)
Denominator:
Basic and diluted weighted average
common shares outstanding ................ 21,565,043 11,866,530 21,795,046 10,461,472
------------ ------------ ------------ ------------
Basic and diluted net loss per share ..... $ (0.31) $ (0.11) $ (0.54) $ (0.19)
============ ============ ============ ============
</TABLE>
3. BUSINESS COMBINATION
On February 23, 2000, the Company acquired iseek, Limited, a privately
held company incorporated in Queensland, Australia, in an all-stock transaction.
Under the terms of the acquisition, the shareholders of iseek received 925,000
shares of N2H2 common stock. The transaction was accounted for as a purchase.
The total purchase price was as follows:
<TABLE>
<S> <C>
Common stock issued .................. $16,104,000
Acquisition costs incurred ........... 287,000
Liabilities assumed .................. 54,000
-----------
Total purchase price ............... $16,445,000
===========
</TABLE>
6
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The total purchase price of $16,445,000 was allocated to the fair value of
the assets acquired as follows:
<TABLE>
<CAPTION>
Amortization
Life
------------
<S> <C> <C>
Tangible assets .................... $ 160,000
Intangible assets:
Client redirect software ......... 969,000 5
Customer lists ................... 572,000 5
Goodwill ......................... 14,744,000 5
-----------
Total intangible assets ........ 16,285,000
-----------
Total purchase price ............... $16,445,000
===========
</TABLE>
The following pro forma financial information gives effect to the
acquisition, assuming that the acquisition took place as of October 1, 1998:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED MARCH 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenue ................................. $ 5,212,000 $ 2,605,000
Net loss ................................ $(13,677,000) $ (3,665,000)
Basic and diluted net loss per share .... $ (0.60) $ (0.32)
</TABLE>
4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, SEC Staff Accounting Bulletin: No. 101 - Revenue
Recognition in Financial Statements (SAB 101), was issued. This pronouncement
summarizes certain of the SEC Staff's views on applying generally accepted
accounting principles to revenue recognition. SAB 101 is required to be adopted
by the Company for the year ended September 30, 2001. The Company is currently
reviewing the requirements of SAB 101. Adoption of this standard could have a
material impact on the Company's financial statements.
In March 2000, the EITF issued EITF 00-2 - Accounting for Web Site
Development Costs. This statement defines requirements for capitalization and
expensing of costs incurred during the development of a web site. The statement
is effective for interim periods beginning July 1, 2000. Costs incurred during
the planning stage should be expensed; costs incurred during the web application
and infrastructure development stage should be capitalized; and generally the
costs incurred during the operation stage should be expensed. The Company's
website and maintenance costs are currently expensed as incurred, therefore the
adoption of this statement is not expected to have any material effect on the
Company's results of operations or its financial position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD LOOKING INFORMATION
Statements made in this filing that are not historical facts are
forward-looking statements. Forward-looking statements include, but are not
limited to, statements containing the words will, should, expect, plan, intend,
anticipate, believe, estimate, predict, potential, believes or continue, the
negative of such terms or other comparable terminology. Actual results may
differ materially from those projected in any forward-looking statements. Such
forward-looking statements are subject to various known and unknown risks and
uncertainties and are therefore not a guarantee of future performance. The
potential risks and uncertainties which could cause actual results to differ
materially include, but are not limited to, the competitive nature of the
Internet filtering industry, changes in domestic market conditions, the success
of our brand and systems development efforts, the absence of patent protection
for N2H2's technology, the fact that others have patented various filtering
technologies, and customer acceptance of our services, products and fee
structures. Further information on the factors and risks that could affect
N2H2's business, financial condition and results of operations are included in
Part 1, Item 1 to the registrant's Form 10-K for the year ended September 30,
1999, which has been filed with the Securities and Exchange Commission and is
available at http://www.sec.gov.
7
<PAGE> 8
OVERVIEW
N2H2 is a leading Internet infrastructure company specializing in
filtering, Internet management and content delivery services for work, home and
school. The company reviews and categorizes Web content and delivers it with
integrated Internet products and services through a global interactive network.
During the period the company reached record user growth and revenues. The
company added 2.5 million new users during the quarter, achieving more than 12.5
million users and a network of more than 1,500 filtering-enabled servers in the
U.S., Canada, Australia, UK, Japan, Germany, Chile, Mexico, India, and Bermuda.
Based on annual industry forecasts from Quality Education Data, N2H2 estimates
it achieved over 80% market share in U.S. public schools initially adopting
filtering during the quarter. N2H2 landed statewide filtering contracts with
Arkansas, Idaho, and Massachusetts, and recently added the state of Iowa as well
as one of the nation's largest Education Service Centers in Houston. The
company's enterprise and consumer market efforts are positioned to generate a
significant portion of the Company's revenues in fiscal 2001, primarily through
strategic partnerships.
THREE MONTHS ENDED MARCH 31, 2000
Revenues
We generate our revenues from installations, subscriptions and advertising
fees.
Advertising revenue during the quarter contributed $1.0 million or 33% of
total revenues, up from $85,000 or 6% of total revenues for the comparable
period in the prior fiscal year. The increase primarily comes from the increased
usage and ad impressions on the N2H2 ResourceBar, which is offered on every page
viewed by education users.
Also included in revenues for the quarter are barter revenues generated
from exchanging advertising services for user access to Microsoft Encarta Online
via the N2H2 ResourceBar. Such transactions are recorded at the fair value of
advertisements delivered. Revenue from barter transactions is recognized when
advertising is provided, and services received are charged to expense on a
straight-line basis over the contract period. This quarter's results included
the first of ten quarters of such barter revenue from Microsoft's corporate
sponsorship.
Installation revenues increased by 93% to $0.8 million from $0.4 million
for the comparable period in the prior fiscal year. Subscription revenues
increased by 27% to $1.2 million from $0.9 million for the comparable period in
the prior fiscal year. The increase in installation and subscription revenues
reflect growth from both domestic and international markets and is offset by
decreases in education fees as schools adopting N2H2's sponsor-based filtering
option received free or reduced price installations.
Cost of revenues
Cost of revenues during the quarter were $1.6 million or 55% of total
revenues, up from $0.4 million or 25% of total revenues for the comparable
period in the prior fiscal year. Included in the cost of revenues are costs for
customer support and Web review, bandwidth and server depreciation expenses.
Beginning in April 1999, we have included search processing and hosting fees as
cost of revenues associated with the new advertising model. The inclusion of
search processing and hosting fees has contributed to the increase in cost of
revenues. In addition, increased Searchopolis traffic has resulted in additional
search processing and hosting costs. N2H2 continues to expand its support
infrastructure to address emerging demands for its current and future products.
Sales and marketing
Sales expenses consist primarily of salaries and commissions. Marketing
expenses consist primarily of salaries, marketing brochures, trade show costs,
direct mailing programs, advertising, public relations and travel.
Sales and marketing expenses for the three months ended March 31, 2000
increased 675% to $4.0 million from $0.5 million for the comparable period in
the prior fiscal year. This increase is due to continued effort to improve our
market position. Particularly, we incurred significant trade show costs during
the period, increased staffing in the sales department, and incurred costs to
expand our enterprise and consumer market efforts. We also incurred additional
sales and marketing costs through the consolidation of iseek Limited, a wholly
owned subsidiary acquired during the quarter to enhance our market presence in
Australia.
8
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Research and development
Research and development costs consist primarily of salaries and benefits
for software developers plus consulting fees. Development costs and all costs
related to internal research and development have been expensed as incurred.
Research and development expenses for the quarter increased by 161% to
$1.0 million from $0.4 million for the comparable period in the prior fiscal
year. The increase was primarily due to continued hiring of additional engineers
and other technical staff.
General and administrative
General and administrative expenses consist primarily of salaries,
benefits and related costs for executive, finance, human resources and
administrative personnel, third party professional service fees, the cost of
facilities and general depreciation expenses.
General and administrative expenses for the three months ended March 31,
2000 increased by 145% to $3.5 million from $1.4 million for the comparable
period in the prior fiscal year. This increase was primarily due to increases in
the number of employees and other costs supporting the growth of the company.
SIX MONTHS ENDED MARCH 31, 2000
Revenues
Advertising revenue for the six month period contributed $1.4 million or
26% of total revenues, up from $0.2 million or 7% of total revenues for the
comparable period in the prior fiscal year. Toward the end of fiscal 1999, the
company began offering customers the choice of receiving filtering services in
exchange for allowing us to sell sponsorship rights to advertisers and to make
Searchopolis the default search engine on their networks. Recognizing N2H2's
audience reach, new sponsors including Nickelodeon, Chevron, and others were
added during the period. We continue to work closely with 24/7 Media
to develop sponsorships and generate advertising revenue.
Also included in revenues for the quarter are barter revenues generated
from exchanging advertising services for user access to Microsoft Encarta Online
via the N2H2 ResourceBar. Such transactions are recorded at the fair value of
advertisements delivered. Revenue from barter transactions is recognized when
advertising is provided, and services received are charged to expense on a
straight-line basis over the contract period. This quarter's results included
the first of ten quarters of such barter revenue from Microsoft's corporate
sponsorship.
Installation revenues increased by 81% to $1.5 million from $0.8 million
for the comparable period in the prior fiscal year. Subscription revenues
increased by 44% to $2.3 million from $1.6 million for the comparable period in
the prior fiscal year. The increase in installation and subscription revenues
reflect growth from both domestic and international markets and is offset by
decreases in education fees as schools adopting N2H2's sponsor-based filtering
choice received free or reduced price installations.
Cost of revenues
Cost of revenues during the quarter were $2.9 million or 56% of total
revenues, up from $0.6 million or 22% of total revenues for the comparable
period in the prior fiscal year. Included in the cost of revenues are costs for
customer support and Web review, bandwidth and server depreciation expenses.
Beginning in April 1999, we have included search processing and hosting fees as
cost of revenues associated with the new advertising model. The inclusion of
search processing and hosting fees has contributed to the increase in cost of
sales. In addition, increased customer support personnel and Web site review
costs were incurred to support our expanding operations.
Sales and marketing
Sales and marketing expenses for the six months ended March 31, 2000
increased 648% to $6.6 million from $0.9 million for the comparable period in
the prior fiscal year. This increase is due to continued effort to improve our
market position. Particularly, we incurred significant trade show costs
during the period, increased staffing in the sales department, and incurred
costs to expand our enterprise and consumer market efforts.
9
<PAGE> 10
Research and development
Research and development expenses for the six months ended March 31, 2000
increased by 204% to $2.1 million from $0.7 million for the comparable period in
the prior fiscal year. The increase was primarily due to the continued hiring of
additional engineers and other technical staff.
General and administrative
General and administrative expenses for the six months ended March 31,
2000 increased by 190% to $6.5 million from $2.2 million for the comparable
period in the prior fiscal year. This increase was primarily due to increases in
the number of employees and other costs supporting the growth of the company.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and marketable securities were $39 million or 55% of
total assets at March 31, 2000 compared to $57 million or 84% of total assets at
September 30, 1999. The decrease is due primarily to cash used in operating
activities. Cash flow used in operations totaled $11.9 million for the six
months ended March 31, 2000, compared to $1.4 million for the comparable period
of the prior fiscal year. We had working capital of $37.2 million at
March 31, 2000, compared to $33.4 million at September 30, 1999.
We made $5.5 million in capital expenditures during the six
months ended March 31, 2000, compared to $0.4 million during the comparable
period of the prior fiscal year. The additions during the six months ended March
31, 2000 primarily represent field servers and computer hardware purchased to
support our growth in customer base. Additional computer hardware and
software were purchased to augment our information systems
infrastructure and provide computer equipment for our increased number of
employees. We also incurred capital expenditures for leasehold
improvements related to the expansion of our leased facilities.
Financing activities consumed $0.8 million for the six months ended March
31, 2000, primarily due to $0.9 million of payments under capital lease
obligations plus $0.2 million of cash paid for the acquisition of iseek,
Limited, offset by $0.2 million cash received from the exercise of options to
purchase our common stock.
We believe that current cash balances, along with ongoing maturity of
securities, will be sufficient to fund its activities for at least the next 12
months.
10
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have assessed our vulnerability to certain market risks, including
interest rate risk associated with financial instruments included in cash and
investments. Due to the our investment policies and procedures, we have
determined that the risk associated with interest rate fluctuations related to
these financial instruments does not pose a material risk to the Company.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no litigation matters pending.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the registrant's initial public offering, the
registrant received net proceeds of approximately $59.8 million. From the
effective date of the registration statement to March 31, 2000, the registrant
has used those proceeds as follows:
<TABLE>
<CAPTION>
(thousands)
-----------
<S> <C>
Increase in short term investments ..................... 32,167
Increase in long term investments ...................... 4,704
Construction of facilities - leasehold improvements .... 654
Purchase of equipment .................................. 6,900
Acquisition of iseek, Limited .......................... 229
Repayment of indebtedness .............................. 2,631
General operations ..................................... 12,560
--------
Total ............................................ $ 59,845
========
</TABLE>
None of the above uses involved direct or indirect payments to directors,
officers, affiliates or 10% owners of the registrant.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Shareholders Meeting on March 9, 2000 at which
time the shareholders voted on the following proposals:
(1) Election of four directors for a one-year term:
<TABLE>
<CAPTION>
Name of Candidate For Withheld
----------------- --- --------
<S> <C> <C>
Hollis R. Hill .............. 15,923,646 79,465
Richard R. Rowe ............. 15,993,306 9,805
Mark A. Segale .............. 15,924,306 78,805
Peter H. Nickerson .......... 15,993,106 10,005
</TABLE>
The aforesaid nominees have been elected, as Directors for the term set
forth above.
(2) Approval of the Company's Employee Stock Purchase Plan:
The vote was 14,017,114 for, 118,580 against, 15,585 abstentions and
1,851,832 broker non-votes. The Employee Stock Purchase Plan was approved.
(3) Approval of the Company's 2000 Stock Option Plan:
The vote was 12,505,250 for, 1,634,094 against, 11,935 abstentions and
1,851,832 broker non-votes. The 2000 Stock Option Plan was approved.
11
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(4) Ratification of the appointment of PricewaterhouseCoopers LLP as the
Company's independent auditors:
The vote was 15,993,937 for, 6,132 against and 3,042 abstentions. There were
no broker non-votes. The appointment of PricewaterhouseCoopers LLP was approved.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
<TABLE>
<S> <C>
10.1 Distribution Agreement dated March 6, 2000
between Microsoft Corporation and the registrant*
27.1 Financial Data Schedule
</TABLE>
* Information has been omitted pursuant to a request for
confidential treatment and has been filed separately with the
Securities and Exchange Commission.
b) Reports on Form 8-K.
The Company filed a Form 8-K and a Form 8-K/A regarding the
acquisition of iseek, Limited on February 23, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
N2H2, INC.
Dated: May 12, 2000 By: /s/ Peter H. Nickerson
-----------------------------------------
Peter H. Nickerson
Chairman, President and Chief Executive
Officer (principal executive officer)
Dated: May 12, 2000 By: /s/ John F. Duncan
-----------------------------------------
John F. Duncan
Vice President - Chief Financial Officer,
Secretary, and Treasurer (principal
financial and accounting officer)
12
<PAGE> 1
* INFORMATION HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
EXHIBIT 10.1
DISTRIBUTION AGREEMENT
This Agreement, by and between MICROSOFT CORPORATION ("Microsoft"), a
Washington corporation, with its principal offices at One Microsoft Way,
Redmond, WA 98052, and N2H2, INC. a Washington corporation, with its principal
offices at 900 Fourth Ave, Suite 3400, Seattle, WA 98164 ("Company") is made and
entered into as of the later of the two signature dates below (the "Effective
Date").
RECITALS
WHEREAS Company provides internet network solutions including, but not limited
to, the Bess Filtering System (the "Bess Filtering System") to schools and/or
libraries and owns and operates a web site currently located at
http://www.searchopolis.com (the "Searchopolis Site") which provides users with
tools enabling them to do internet searches;
WHEREAS Microsoft owns and operates a web site currently titled Encarta Online
Deluxe ("EOD") that is currently located at http://encarta.msn.com/encarta ("EOD
Site") as it may exist and/or evolve from time to time throughout the Term of
the Agreement, which provide end-users with, among other things, educational and
reference information and tools; and
WHEREAS Microsoft and Company desire to work together to allow Company to
promote and offer subscriptions to Microsoft's fee-based, secure product/service
known as Encarta Online Deluxe, to Company's prospective school and library
users in conjunction with Company's Bess Filtering System.
NOW THEREFORE, the parties agree as follows:
1. SUBSCRIPTIONS. Company will promote and offer subscriptions to Encarta Online
Deluxe ("EOD Subscriptions") in conjunction with Company's Bess Filtering System
and the Searchopolis Site to its prospective school and library users. In
addition, users who receive EOD Subscriptions in conjunction with Company's Bess
Filtering System will also be able to access EOD via the Searchopolis Site.
1.1 RESTRICTIONS. Company shall promote and offer EOD Subscriptions to
its North American school and library users [ *** ], * in conjunction with the
Bess Filtering System and the Searchopolis Site. Company will not promote or
make available EOD Subscriptions to its [ *** ]. * Company will also not promote
or make available EOD with any other educational service other then in
conjunction with its Bess Filtering System, unless first approved by Microsoft.
[ *** ] * and be able to access the EOD Site via the Encarta link on the [ ***
].* [ *** ], * will link to the Encarta Online "free site", currently located at
http://encarta.msn.com, instead of Encarta Online Deluxe, via the Encarta link
on the Searchopolis Site.
1.2 FUTURE DISCUSSIONS. Microsoft and Company agree to continue
discussions about the possibility of extending Company's promotion and offer of
EOD Subscriptions to Company's Workplace and Home users, but no EOD
Subscriptions shall be marketed or sold except as provided in this Agreement
without the express written approval of Microsoft. Likewise, Microsoft and
Company agree to discuss, in the near future, the possibility of Company
promoting and offering other Microsoft products via Company's Site to its users.
Additionally, Microsoft and Company will meet quarterly, as needed, during the
Term of the Agreement to discuss the implementation of this Agreement.
1.3 EXCLUSIVITY. [ *** ].*
Microsoft Confidential
<PAGE> 2
1.4 AUTHENTICATION AND LINKS:
(a) The parties agree that EOD Subscribers will gain access to
EOD via the authentication processes, which Company shall be responsible for, as
described in Section 1 of Exhibit A, and each party will take such actions as
necessary to enable such authentication and access to occur.
(b) Company will provide Bess Filtering System users access to
the EOD Site (and the Encarta Online "free Site" in the case of Searchopolis
users who are not also Bess Filtering System users) through integrated links on
the Bess Filtering System Tool Bar and Company's Searchopolis Site, as shown in
Exhibits D and E. Microsoft will provide the necessary urls for these links, and
Company will adhere to the Microsoft Guidelines for Displaying the Encarta
Online Logo and Microsoft Logo attached in Exhibits B and C. The search results
will be similar in nature to those in Exhibit F.
1.5 SUBSCRIPTION AGREEMENT AND/OR SIMILAR NOTICE. Company will include
substantially the following, in a notice to its school and library users who
receive EOD Subscriptions in conjunction with the Bess Filtering System: "All
uses of the Microsoft Encarta Online Deluxe encyclopedia are subject to and must
be at all times in accordance with the Terms of Use contained within Encarta
Online Deluxe Encyclopedia, presently located at
http://www.msn.com/help/legal/terms.htm, as such Terms of Use may be updated
from time to time." Company also agrees that it will incorporate the above
language into its new Bess Filtering System subscription agreements and renewal
agreements as soon as practicable, but no later than August 1, 2000. .
1.6 MICROSOFT PROMOTIONAL ACTIVITIES. Microsoft will provide Company
with promotion/marketing support, such as electronic files for marketing
collateral, promotional/marketing literature and sales support material as
needed to assist Company in the promotion of their EOD Subscription offer.
1.7 COMPANY PROMOTIONAL ACTIVITIES. All Company materials which promote
EOD Subscriptions must be submitted to Microsoft for its approval prior to
distribution. Company acknowledges that such trademarks are the exclusive
property of Microsoft and that Company is not entitled either by implication or
otherwise to any title in the trademarks. This Agreement is neither a trademark
license nor an authorized user trademark agreement. Company will give Microsoft
at least 30 days notice of any promotion which might substantially increase
usage of EOD and will provide Microsoft with page view forecasts for the
upcoming months.
2. OWNERSHIP.
2.1 Microsoft retains all right, title and interest in and to Encarta
Online and its trademarks, service marks and logos. Neither Company nor any of
its employees, agents or resellers shall have any right to make any
representation, warranty, or promise regarding Encarta Online (including,
without limitation, the EOD Site), or give any instruction for the use of the
EOD Site which is not authorized in writing by Microsoft.
2.2 Company retains all right, title and interest in and/or a valid
license or licenses to use its Bess Filtering System, the Searchopolis Site, and
its trademarks, service marks and logos. Neither Microsoft nor any of its
employees, agents or resellers shall have any right to make any representation,
warranty, or promise regarding the Bess Filtering System or give any instruction
for the use of the Bess Filtering System which is not authorized in writing by
Company.
3. USER INFORMATION. Company will provide to Microsoft on a quarterly basis,
available subscriber user information for EOD Subscribers that will consist
simply of which schools and/or libraries are receiving EOD Subscriptions and
available user counts. ("User Information"). Microsoft and Company shall jointly
own the User Information. In addition to user counts, and as part of the
quarterly review mentioned in 1.1, Company agrees to provide certain aggregate
usage information (10 most popular searches on EOD, length of searches, length
of time on top 10 sites) to help in strategic planning. Company and Microsoft
may not sell or disclose to any third party any
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<PAGE> 3
User Information except solely to satisfy any applicable law, regulation, legal
process or governmental request. Company and Microsoft agree to adhere to
applicable law and industry standards with regard to information gathering,
dissemination, privacy protection and other practices related to the privacy of
subscriber information including the standards set forth by TRUSTe and
BBBOnline. Except as expressly provided in Exhibit A, Microsoft will notify
Company before depositing cookies on user sites accessing Encarta Online.
4. SUBSCRIPTION PRICING. Pricing for EOD Subscriptions sold by Company shall be
determined solely by Company.
5. REPORTING AND AUDIT RIGHTS. Company will track and report to Microsoft on a
quarterly basis, the number of EOD Subscriptions it provides to its school and
library users for the preceding quarter's EOD Subscription activity and results.
Company will use [ *** ] * enrollment data overlaid with its customer database.
[ *** ].* In addition, Company shall promptly notify Microsoft of any EOD
Subscription(s) which has the potential to significantly increase traffic to the
EOD Site (e.g., a state-wide or consortium contract). During the Term of this
Agreement and for one (1) year thereafter, Company agrees to keep all usual and
proper records and books of account and all usual and proper entries relating to
the total amount of the revenue described above. During the Term and for a
period of one (1) year following the expiration or termination of this
Agreement, Microsoft shall have the right to cause an audit and/or inspection to
be made of the applicable records of Company in order to verify statements
issued by Company and Company's compliance with the terms of this Agreement. Any
such audit shall be conducted by an independent certified public accountant
selected by Microsoft (other than on a contingent fee basis). Any audit and/or
inspection shall be conducted during regular business hours at Company's
facilities with no less than thirty (30) days advance written notice.
6. BILLING AND CUSTOMER SUPPORT; PAYMENTS TO MICROSOFT.
6.1 Company will be solely responsible for all subscriber authentication
for EOD Subscriptions offered in conjunction with Company's Bess Filtering
System or via Company's Searchopolis Site. Company shall provide
subscription-related customer service to EOD Subscribers on the same basis as
Company provides support to end-users of other services included within
Company's Site. Company will consult with Microsoft on EOD Site end user
customer support. Company will be responsible for customer support on matters of
account management, billing, and authentication. Similarly, Microsoft will
provide support to Company for the trusted URL as detailed in Exhibit A and
access to Microsoft's web based support form for all other product support for
EOD, on the same basis as Microsoft provides support to other end users of the
EOD product.
6.2 Company shall pay Microsoft [ *** ] * during the Term of the
Agreement. Payment shall be made monthly in the amount of $[ *** ] * for the
term of the agreement. In addition, for all individual EOD users over [ *** ] *
that Company delivers through subscriptions under this Agreement, Company shall
pay an additional fee to Microsoft equal to [ *** ] * per EOD user per year on a
prorated basis. Any additional payment are due 30 days after the end of each
quarterly reporting period, as discussed in Section 5 above
Payments shall be made to the following address:
Microsoft Corporation
PO Box 7247-7123
Philadelphia, PA 19170-7123
6.3 In consideration of Microsoft's obligations set forth in this
Agreement, Microsoft shall receive, during the Term of the Agreement, an
advertising sponsorship package on Company's Site valued at $[ *** ].* This will
be computed quarterly [ *** ] * over the 10 quarters covered by the Agreement,
with the volume determined based on Company's comparable ad rates for that
period. As an advertising sponsor, Microsoft will receive logo placement on the
Bess Tool Bar as shown in Exhibits D and E. Company's use of the Microsoft Logo
shall be in compliance with the Guidelines set forth in Exhibit C.
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<PAGE> 4
7. TAXES AND EXPENSES. Company shall be liable for all sales, use, value added,
duties, tariffs or other similar taxes of any nature whatsoever associated with
providing EOD Subscriptions to school and/or library users as permitted
hereunder, and shall indemnify and hold Microsoft harmless from and against any
and all such taxes and expenses.
8. TERM/DEFAULT/TERMINATION.
8.1 TERM. The term of this Agreement (the "Term") shall begin on the
Effective Date and shall continue until June 30, 2002. The Term may be extended
for successive one (1) year periods upon the written agreement of both parties.
Each party shall have the right to terminate this Agreement at any time without
cause upon sixty (60) days prior written notice to the other.
8.2 TERMINATION FOR CAUSE. In addition to any other rights and/or
remedies that either party may have under the circumstances, all of which are
expressly reserved, this Agreement may be terminated immediately upon written
notice at any time as follows:
(a) by either party if the other party is in material breach of
any material warranty, representation, term, condition or covenant of
this Agreement, other than those contained in Section 11.2, and fails to
cure that breach within thirty (30) days after written notice thereof;
or
(b) by either party if the other party is in material breach of
Section 11.2; or
(c) by either party if the other party becomes insolvent or makes
any assignment for the benefit of creditors or similar transfer
evidencing insolvency; or suffers or permits the commencement of any
form of insolvency or receivership proceeding; or has any petition under
any bankruptcy law filed against it, which petition is not dismissed
within sixty (60) days of such filing; or has a trustee or receiver
appointed for its business or assets or any part thereof.
8.3 EFFECT OF TERMINATION.
(a) Upon termination or expiration of this Agreement, Company
shall immediately cease promoting and offering EOD Subscriptions. Each party
shall additionally provide reasonable assistance to the other for such
reasonable time and upon such terms and conditions as shall be mutually agreed
upon in order to assure an orderly wind down in such a manner as shall minimize
disruption to current subscribers.
(b) In the event of termination or expiration of this Agreement
for any reason, each and every clause which by its nature is intended to survive
the termination of this Agreement including, without limitation, Sections 2, 5,
6 (solely to the extent necessary to make payments accrued during the Term), 7,
8.3. 9.1 and 9.2 indemnifications only, 9.3, 9.4, 10, 11.2, 13 and 15 through 18
shall survive termination. Upon termination or expiration both parties shall,
upon written request, return or certify destruction of Confidential Information
of the other party. Neither party shall be liable to the other for damages of
any sort resulting solely from terminating this Agreement in accordance with its
terms.
9. WARRANTIES/INDEMNITY/LIMITATION OF LIABILITY.
9.1 COMPANY. Company warrants and represents that: (i) it has sufficient
authority to enter into this Agreement; (ii) to its knowledge all materials made
available by Company to Microsoft and/or to EOD Subscribers pursuant to this
Agreement (including logos) do not infringe the copyrights, trademarks, service
marks or any other proprietary right of any third party; (iii) the Bess
Filtering System and any other Company-owned or Company-licensed products or
services, subscriptions or access to which are offered and/or sold as part of
Company's services, shall be in compliance with all applicable laws and do not
infringe the copyrights, trademarks, service marks or other proprietary right of
any third party; except that Company's warranty with respect to patent rights
shall be to the best of its knowledge, and (iv) the promotion and offering of
EOD subscriptions in connection with the Bess Filtering System service by
Company shall be in compliance with all applicable laws. Company will indemnify
Microsoft
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<PAGE> 5
from and against any loss, claim, liability, damage, action or cause of action
(including, without limitation, reasonable attorneys' fees) brought against
Microsoft by a third party and arising from or related to materials (including
any intellectual property) made available by Company to Microsoft and/or to
Company's school or library users accessing the Searchopolis Site or any breach
by Company of the foregoing warranties, provided that Microsoft cooperates as
set forth in Section 9.3.
9.2 MICROSOFT. Microsoft warrants and represents that: (i) it has
sufficient authority to enter into this Agreement and (ii) all materials made
available by Microsoft to Company pursuant to this Agreement (including logos)
do not infringe the copyrights, trademarks, service marks or any other
proprietary right of any third party. Microsoft will indemnify Company from and
against any loss, claim, liability, damage, action or cause of action
(including, without limitation, reasonable attorneys' fees) brought against
Company by a third party and arising from or related to materials (including any
intellectual property) made available by Microsoft to Company or for any breach
by Microsoft of the foregoing warranties, provided that Company cooperates as
set forth in Section 9.3.
9.3 INDEMNIFICATION PROCESS. If any action shall be brought against
either party (the "Claimant") in respect to which indemnity may be sought from
the other party (the "Indemnifying Party") pursuant to the provisions of this
Section 9, the Claimant shall promptly notify the Indemnifying Party in writing,
specifying the nature of the action and the total monetary amount sought or
other such relief as is sought therein. The Claimant shall cooperate with the
Indemnifying Party at the Indemnifying Party's expense in all reasonable
respects in connection with the defense of any such action. The Indemnifying
Party may upon written notice to Claimant undertake to conduct all proceedings
or negotiations in connection therewith, assume the defense thereof, and if it
so undertakes, it shall also undertake all other required steps or proceedings
to settle or defend any such action, including the employment of counsel which
shall be satisfactory to Claimant, and payment of all expenses. Claimant shall
have the right to employ separate counsel and participate in the defense. The
Indemnifying Party shall reimburse Claimant upon demand for any payments made or
loss suffered by it at any time after the date of tender, based upon the
judgment of any court of competent jurisdiction or pursuant to a bona fide
compromise or settlement of claims, demands, or actions, in respect to any
damages to which the foregoing relates.
9.4 LIMITATION OF LIABILITY. With the exception of liability under the
indemnity provisions of Paragraph 9 or for breach of Paragraph 11.2, IN NO EVENT
SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY SPECIAL, CONSEQUENTIAL,
INCIDENTAL, OR INDIRECT DAMAGES, HOWEVER CAUSED, ON ANY THEORY OF LIABILITY, AND
WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
10. DISCLAIMER.
10.1 ENCARTA ONLINE (OF WHICH THE EOD SITE IS A PART) IS PROVIDED "AS
IS," AND MICROSOFT MAKES NO EXPRESS OR IMPLIED REPRESENTATIONS OR WARRANTIES
REGARDING THE USABILITY, CONDITION OR OPERATION THEREOF EXCEPT AS MAY BE
SPECIFICALLY SET FORTH HEREIN. MICROSOFT MAKES NO WARRANTY THAT ACCESS TO OR USE
OF ENCARTA ONLINE WILL BE UNINTERRUPTED OR ERROR-FREE, OR THAT ANY SOFTWARE OR
SERVICES WILL MEET ANY PARTICULAR CRITERIA OF PERFORMANCE OR QUALITY EXCEPT AS
MAY BE SPECIFICALLY SET FORTH HEREIN. UNLESS OTHERWISE SET FORTH HEREIN,
MICROSOFT EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING WITHOUT
LIMITATION, WARRANTIES OF MERCHANTABILITY, TITLE, FITNESS FOR A PARTICULAR
PURPOSE, NON-INFRINGEMENT, COMPATIBILITY, SECURITY OR ACCURACY.
11. PRESS RELEASES/CONFIDENTIALITY.
11.1 Subject to the prior written approval of the other party, either
party may use the name of such other party in a press release or public
announcement(s) relating to the rights and obligations set forth in this
Agreement
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<PAGE> 6
and/or the relationship established by this Agreement; provided that neither
party shall issue any press release or make any public announcement(s) without
the express prior written consent of the other party which consent shall not be
unreasonably withheld or delayed.
11.2 The parties acknowledge and agree that the Microsoft Non-Disclosure
Agreement dated as of March 1, 2000_ ("NDA") entered into by and between the
parties applies to this Agreement as if fully set forth herein and that all of
the terms of this Agreement (including but not limited to its existence) and all
discussions and negotiations related thereto are considered Confidential
Information under the NDA.
12. NOTICES. All notices and requests in connection with this Agreement shall be
deemed given as of the day they are received either by messenger, delivery
service, or confirmed fax, and three days after placed in the United States of
America mails, postage prepaid, certified or registered, return receipt
requested, and addressed as follows,
NOTICES TO COMPANY: NOTICES TO MICROSOFT:
N2H2. Microsoft Corporation
900 Fourth Ave, Suite 3400 One Microsoft Way
Seattle, WA 98164 Redmond, WA 98052
Attn.:
Attn:
Telephone:
Telephone: Fax:
Fax: Email address:
Email address:
Copy to:
Copy to: Microsoft Law & Corporate Affairs
Jim Johnston One Microsoft Way
Lane Powell Spears Lubersky LLP Redmond, WA 98052
1420 Fifth Ave, Suite 4100 Fax: (425) 936-7409
Seattle, WA 98101
(Fax) (206) 223-7107
or to such other address as the party to receive the notice or request so
designates by at least ten (10) days prior written notice to the other.
13. INDEPENDENT CONTRACTOR. Company and Microsoft are independent contractors,
and nothing in this Agreement shall be construed as creating an
employer-employee relationship, partnership, or joint venture between the
parties.
14. ATTORNEY'S FEES. In any suit or action to enforce any right or remedy under
this Agreement or to interpret any provision of this Agreement, the prevailing
party will be entitled to recover its costs, including reasonable attorneys'
fees.
15. ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of
each party's respective successors and lawful assigns; provided, however,
neither party may assign this Agreement, or any rights or obligations hereunder
without the consent of the other party, which consent shall not be unreasonably
withheld, delayed, or conditioned, except that the Agreement may be assigned by
either party without consent to a third party that acquires it by merger or
consolidation or acquires substantially all of its assets.
16. HEADINGS. The section headings used in this Agreement are intended for
convenience only and shall not be deemed to affect in any manner the meaning or
intent of this Agreement or any provision hereof.
17. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between
the parties with respect to the subject matter hereof and supersedes all prior
and contemporaneous agreements or communications. This Agreement
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<PAGE> 7
shall not be modified except by a written agreement dated subsequent to the date
of this Agreement and signed on behalf of Company and Microsoft by their
respective duly authorized representatives. No waiver of any breach of any
provision of this Agreement shall constitute a waiver of any prior, concurrent
or subsequent breach of the same or any other provisions hereof, and no waiver
shall be effective unless made in writing and signed by an authorized
representative of the waiving party.
18. SEVERABILITY. In the event that any provision of this Agreement conflicts
with governing law or if any provision is held to be null, void or otherwise
ineffective or invalid by a court of competent jurisdiction, (i) such provision
shall be deemed to be restated to reflect as nearly as possible the original
intentions of the Parties in accordance with applicable law, and (ii) the
remaining terms, provisions, covenants and restrictions of this Agreement shall
remain in full force and effect.
19. This Agreement does not constitute an offer by Microsoft and it shall not be
effective until signed by both parties.
MICROSOFT CORPORATION N2H2, INC.
By By
--------------------------- ----------------------------
Name (Print) Name (Print)
----------------- ------------------
Title Title
------------------------ -------------------------
Date Date
------------------------- --------------------------
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<PAGE> 8
EXHIBIT A
TECHNICAL SPECIFICATION FOR AUTHENTICATION
1. COMPANY'S AUTHENTICATION PROCESS [ *** ] *
[ *** ] *
- [ *** ]. *
- [ *** ]. *
2. SUPPORT
Support for Company customers will be of two types.
a. Site reliability and functionality of trusted URL authentication
mechanism
These kinds of issues affect all Company customers and
should be escalated directly to Microsoft.
b. User questions and support issues with EOD
These kinds of inquiries should be referred to Microsoft's
online support form at
http://encarta.msn.com/help/support/form.asp. Support issues
will be handled by Microsoft Product Support Services the same
as all site support inquiries.
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EXHIBIT B
GUIDELINES FOR DISPLAYING THE ENCARTA ONLINE LINK LOGO
[ENCARTA LOGO]
1. Except as Microsoft may authorize elsewhere, you may display only the link
logo shown above ("Logo"). By downloading the Logo and signing the
Agreement, you agree to be bound by these Policies.
2. Company may display the Logo as specified in this Agreement and in the
Exhibits thereto, but not in any other manner. The Logo must always be an
active link to the Encarta Online Deluxe home page at
http://encarta.msn.com/encarta, except in the case of Searchopolis users who
are not also Bess Filtering System users, in which case the logo will link
to the Encarta Online "free site" home page at http://encarta.msn.com.
3. The Logo GIF "Encarta" should link to the urls referenced above. You may not
remove or alter it or any other element of the Logo.
4. Except as agreed by Microsoft elsewhere in the Agreement or its Exhibits,
you may not display the Logo in any manner that implies sponsorship,
endorsement, or license by Microsoft or any affiliated company.
5. The Logo must appear by itself, with a minimum spacing between each side of
the Logo and other graphic or textual elements on your page. Examples are
found in Exhibit D and E. The Logo may not be used as a feature or design
element of any other logo.
6. Except for size subject to the terms herein, you may not alter the Logo in
any manner, including proportions, colors, elements, etc., or animate, morph
or otherwise distort its perspective or two-dimensional appearance.
7. These Policies do not grant a license or any other right in Microsoft's
logos or trademarks. Subject to the Agreement, Microsoft reserves the right
in its sole discretion to terminate or modify permission to display the Logo
at any time. Microsoft reserves the right to take action against any use
that does not conform to these Policies, infringes any Microsoft
intellectual property or other right, or violates other applicable law.
8. MICROSOFT DISCLAIMS ANY WARRANTIES THAT MAY BE EXPRESS OR IMPLIED BY LAW
REGARDING THE LOGO, INCLUDING WARRANTIES AGAINST INFRINGEMENT.
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EXHIBIT C
MICROSOFT LOGO USE GUIDELINES
[MICROSOFT LOGO]
- - Company may use the above Microsoft Logo (the "Microsoft Logos") only as
provided by Microsoft electronically. Company may not alter the Microsoft
Logos in any manner, including proportions, colors, elements, etc., or
animate, morph or otherwise distort its perspective or two-dimensional
appearance.
- - Company may use the Microsoft Logos on Company's Web site solely as follows
[or, solely in connection with the activities set forth in the attached
agreement/letter]. Any other uses of the Microsoft Logos must be approved in
advance by Microsoft.
- - Company's Web page title and any other trademarks and logos must always
appear at least as prominent as the Microsoft Logos. The Microsoft Logos may
not be used in any manner that expresses or might imply Microsoft's
affiliation, sponsorship, endorsement, certification, or approval, other
than as contemplated herein.
- - Company shall not use the Microsoft Logos in association with any third
party trademarks in any manner that might suggest co-branding or otherwise
create potential confusion as to source or sponsorship of Company's Web site
or ownership of the Microsoft Logos.
- - Company may not display the Microsoft Logos on any site that disparages
Microsoft or its products or services, infringes Microsoft's intellectual
property or other rights, or violates any state, federal or international
law.
- - The Microsoft Logos may not be included in any third party trade or business
name, domain name, product or service name, logo, trade dress, design,
slogan, or other trademarks.
- - The Microsoft Logos may not be combined with any other symbols, including
words, logos, icons, graphics, photos, slogans, numbers, or other design
elements. A minimum amount of empty space (minimum 30 pixels) must be left
between each of the Microsoft Logos and any other object such as type,
photography, borders, edges, etc.
- - The Microsoft Logos (including but not limited to Microsoft's logos,
logotypes, trade dress, and other elements of product packaging and Web
sites) may not be imitated in any manner in Company's Web site, or other
materials.
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EXHIBIT D
BESS FILTERING SYSTEM TOOL BAR SCREENSHOT
[BESS FILTERING SYSTEM TOOL BAR SCREENSHOT GRAPHICS]
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EXHIBIT E
SEARCHOPOLIS SCREENSHOT
[SEARCHOPOLIS SCREENSHOT GRAPHICS]
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EXHIBIT F
SEARCHOPOLIS RESULTS PAGE
[SEARCHOPOLIS RESULTS PAGE GRAPHICS]
Page 13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 5,362
<SECURITIES> 36,871
<RECEIVABLES> 1,899
<ALLOWANCES> 206
<INVENTORY> 0
<CURRENT-ASSETS> 40,072
<PP&E> 11,191
<DEPRECIATION> 2,728
<TOTAL-ASSETS> 70,531
<CURRENT-LIABILITIES> 2,838
<BONDS> 554
0
0
<COMMON> 91,995
<OTHER-SE> (25,042)
<TOTAL-LIABILITY-AND-EQUITY> 70,531
<SALES> 0
<TOTAL-REVENUES> 5,182
<CGS> 0
<TOTAL-COSTS> 2,898
<OTHER-EXPENSES> 15,128
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,156)
<INCOME-PRETAX> (11,712)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,712)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,712)
<EPS-BASIC> (0.54)
<EPS-DILUTED> (0.54)
</TABLE>
