UNITED STATES
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 For the transition period from ________________ to _______________
Commission File Number 0-25131
INFOSPACE, INC.
(Exact name of registrant as specified in its charter)
Delaware 91-1718107
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
15375 N.E. 90/th/ Street 98052
Redmond, Washington (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (425) 602-0600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___.
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class April 30, 2000
----- --------------
Common Stock, Par Value $.0001 229,497,029
INFOSPACE, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I - Financial Information
Item 1. -- Financial Statements
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999..................... 3
Consolidated Statements of Operations for the Three Months Ended
March 31, 2000 and 1999............................................................ 4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2000 and 1999............................................................ 5
Notes to Consolidated Financial Statements................................................. 6
Item 2. -- Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview.................................................................................. 12
Results of Operations..................................................................... 14
Liquidity and Capital Resources........................................................... 17
Factors Affecting InfoSpace's Operating Results, Business Prospects and
Market Price of Stock................................................................. 21
Item 3. -- Quantitative and Qualitative Disclosures About Market Risk.............................. 27
Part II - Other Information
Items 1 through 5 are not applicable with respect to the current reporting period.
Item 6. -- Exhibits and Reports on Form 8-K......................................................... 28
Signatures.......................................................................................... 29
2
Item 1. - Financial Statements
INFOSPACE, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2000 1999
(unaudited)
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 35,561,656 $ 37,985,250
Short-term investments..................................................... 114,459,290 124,720,142
Accounts receivable, net of allowance for doubtful accounts of $705,609 and
$702,960............................................................... 8,273,390 6,663,497
Notes receivable........................................................... 25,578,115 11,580,866
Interest receivable........................................................ 2,771,622 3,333,772
Prepaid expenses and other current assets.................................. 15,142,541 10,304,244
------------- ------------
Total current assets................................................... 201,786,614 194,587,771
Other long-term assets.......................................................... 2,089,664 702,641
Property and equipment, net..................................................... 18,861,989 7,998,957
Long-term investments........................................................... 37,838,717 71,416,776
Other investments............................................................... 63,846,750 17,038,508
Intangible assets, net.......................................................... 385,787,368 73,842,557
------------- ------------
Total........................................................................... $ 710,211,102 $365,587,210
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $ 3,255,313 $ 2,810,141
Accrued expenses........................................................... 24,096,173 18,501,053
Deferred revenues.......................................................... 3,657,588 2,672,531
Other current liabilities.................................................. 71,766 185,742
Short-term debt............................................................ 692,845 856,695
------------- ------------
Total current liabilities.............................................. 31,773,685 25,026,162
Long-term liabilities and minority interest:
Other long-term liabilities................................................ 71,341 73,125
Long-term debt............................................................. 1,622,556 612,637
Minority interest.......................................................... 29,158,321 --
------------- ------------
Total long-term liabilities and minority interest...................... 30,852,218 685,762
Stockholders' equity
Preferred stock, par value $.0001- authorized, 15,000,000 shares: issued and
outstanding, 1 share....................................................... -- --
Common stock, par value $.0001- authorized, 900,000,000 shares; issued and
outstanding, 227,733,868 and 211,853,372 shares............................ 2,277 2,119
Additional paid-in capital................................................. 829,480,458 439,447,478
Accumulated deficit........................................................ (182,227,743) (98,512,435)
Accumulated other comprehensive income..................................... 3,669,531 1,317,448
Deferred expense-warrants.................................................. (2,080,070) (2,311,159)
Unearned compensation-stock options........................................ (1,259,254) (68,165)
------------- ------------
Total stockholders' equity............................................. 647,585,199 339,875,286
------------- ------------
Total........................................................................... $ 710,211,102 $365,587,210
============= ============
See accompanying notes to consolidated financial statements.
3
INFOSPACE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2000 and 1999
(unaudited)
--------------------------------
2000 1999
--------------- -------------
Revenues............................................................... $ 19,005,740 $ 5,259,418
Cost of revenues....................................................... 3,118,772 1,308,500
------------- ------------
Gross profit.................................................. 15,886,968 3,950,918
Operating expenses:
Product development............................................... 4,777,280 2,486,604
Sales and marketing............................................... 8,452,028 5,416,649
General and administrative........................................ 6,077,685 2,650,575
Amortization of intangibles....................................... 7,490,751 299,279
Acquisition and other related charges............................. 86,397,306 --
Other - non-recurring charges..................................... 2,887,609 --
------------- ------------
Total operating expenses...................................... 116,082,659 10,853,107
------------- ------------
Loss from operations.......................................... (100,195,691) (6,902,189)
Other income, net...................................................... 3,462,752 1,265,486
Unrealized gain on investments......................................... 23,597,688 --
Minority interest...................................................... (9,843,321) --
------------- ------------
Loss from operations before income tax expense and cumulative
effect of change in accounting principle............................. (82,978,572) (5,636,703)
Income tax expense..................................................... 17,520 --
------------- ------------
Loss from operations before cumulative effect of change in
accounting principle................................................. (82,996,092) (5,636,703)
Cumulative effect of change in accounting principle.................... (719,216) --
------------- ------------
Net loss............................................................... $ (83,715,308) $ (5,636,703)
============= ============
Comprehensive loss..................................................... $ (81,363,225) $ (5,634,912)
============= ============
Basic and diluted net loss per share................................... $ (0.39) $ (0.03)
============= ============
Shares used in computing basic and diluted net loss per share.......... 217,120,107 179,618,040
============= ============
See accompanying notes to consolidated financial statements.
4
INFOSPACE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2000 and 1999
(unaudited)
---------------------------------
2000 1999
--------------- ---------------
Operating activities
Net loss.................................................................... $ (83,715,308) $ (5,636,703)
Adjustments to reconcile net loss to net cash provided (used) by operating
activities:
Depreciation and other amortization..................................... 8,650,408 1,522,071
Compensation expense-stock options...................................... 258,888 24,029
Warrants expense........................................................ 3,118,698 203,925
Performance warrant revenue............................................. (3,218,222) --
Noncash services exchanged.............................................. 110,000 --
Bad debt expense........................................................ 29,061 150,437
(Equity) loss from joint venture........................................ (81,025) 55,052
Loss on disposal of fixed assets........................................ 14,099 1,905
Unrealized gain on investments.......................................... (23,597,688) --
Cumulative translation adjustment (4,124) --
Minority interest in venture fund....................................... 9,843,321 --
Business acquisition costs 14,684,574 --
In-process research and development..................................... 74,100,000 --
Cumulative effect of change in accounting principle..................... 505,743 --
Cash provided (used) by changes in operating assets and liabilities:
Accounts receivable................................................. (1,057,751) (346,890)
Interest receivable................................................. 562,150 (420,480)
Prepaid expense and other current assets............................ (3,020,563) (933,484)
Other long-term assets.............................................. (14,846) (15,876)
Accounts payable.................................................... 251,204 (2,239,320)
Accrued expenses.................................................... (3,729,167) (2,835,308)
Deferred revenue.................................................... 479,314 87,888
--------------- ---------------
Net cash used by operating activities................................... (5,831,234) (10,382,754)
Investing activities
Capitalized internally developed software............................... (84,493) (214,666)
Purchase of property and equipment...................................... (4,257,509) (1,130,867)
Repayment proceeds of notes receivable.................................. 6,893,826 929
Issuance of notes receivable............................................ (20,873,075) (250,000)
Business acquisitions, net of cash acquired............................. (11,417,506) --
Investment in domain name............................................... -- (100,000)
Minority interest contribution in venture fund.......................... 19,315,000 --
Purchase of other investments........................................... (17,500,000) (500,000)
Short-term investments, net............................................. 10,260,852 68,187,154
Long-term investments, net.............................................. 33,578,059 (45,074,269)
--------------- ---------------
Net cash provided by investing activities............................... 15,915,154 20,918,281
Financing activities:
Proceeds from issuance of ESPP shares................................... 343,126 --
Proceeds from issuance of common stock.................................. -- 1,870,641
Proceeds from exercise of warrants...................................... 91,880 110,966
Proceeds from exercise of stock options................................. 8,480,722 52,784
Short-term and long-term debt, net...................................... (21,423,242) 141,992
--------------- ---------------
Net cash provided (used) by financing activities........................ (12,507,514) 2,176,383
--------------- ---------------
Net increase (decrease) in cash and cash equivalents........................ (2,423,594) 12,711,910
Cash and cash equivalents:
Beginning of period..................................................... 37,985,250 39,986,609
--------------- ---------------
End of period........................................................... $ 35,561,656 $ 52,698,519
=============== ===============
Supplemental disclosure of noncash activities
Stock issued in exchange transaction.................................... 110,000 --
See accompanying notes to consolidated financial statements.
5
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company and Basis of Presentation
InfoSpace, Inc. (the Company or InfoSpace), previously known as InfoSpace.com,
Inc., a Delaware corporation, was founded in March 1996. The Company is a global
Internet information infrastructure services company that provides enabling
technologies and Internet services to Web sites, merchants and wireless devices.
The accompanying unaudited consolidated financial statements include all
adjustments, consisting of normal recurring adjustments that, in the opinion of
management, are necessary to present fairly the financial information set forth
therein. Prior period financial statements have been recast to give effect to
mergers accounted for as a pooling of interests. Certain information and note
disclosures normally included in financial statements, prepared in accordance
with generally accepted accounting principles, have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
Results of operations for the three-month period ended March 31, 2000 are not
necessarily indicative of future financial results.
Investors should read these interim statements in conjunction with the audited
financial statements and notes thereto included in our annual report (Commission
File Number 0-25131) filed on Form 10-K for the fiscal year ended December 31,
1999. Prior period balances have been reclassified to conform to current period
presentation.
Stock split: A two-for-one stock split of the Company's common stock was
effected on April 7, 2000. All references in the financial statements to shares,
share prices and per share amounts have been adjusted retroactively for this
stock split.
Other non-recurring charges: Other non-recurring charges in the first quarter of
2000 represent an expense recorded for the fair market value of warrants issued
by Prio, Inc. Prio had previously issued warrants for services provided. These
warrants were accounted for under variable plan accounting. Subsequent to the
acquisition of Prio, the agreement with this warrants was terminated and the
remaining unvested warrants accelerated to full vesting.
Cumulative effect of change in accounting principle: On January 1, 2000, the
Company adopted SAB 101, Revenue Recognition in Financial Statements, which
established certain criteria for net versus gross recording of sales
transactions. Prior to January 1, 2000, the Company recorded revenues from
customers for development fees, implementation fees and/or integration fees when
the service was completed. If this revenue was recognized on a straight-lined
basis over the term of the related service agreements, in accordance with SAB
101, the Company would have deferred $719,216 of revenue and recognized in 2000
and 2001. In accordance with SAB 101, the Company recorded a cumulative effect
of change in accounting principle of $719,216 and recorded $213,473 in revenue
in the first quarter of 2000 related to previously recognized
6
development, implementation and/or integration fees that would have been
recorded as revenue if the fees were recognized on the straight-lined basis in
prior periods. The remaining balance of $502,743 will be recognized from April
2000 through November 2001.
2. Acquisitions
Millet Software: On March 31, 2000 the Company acquired all of the common stock
of Millet Software (privacybank.com) for purchase consideration of 488,224
shares of the Company's common stock and acquisition expenses of $54,531. Millet
was a privately held company that developed secure technology that provides an
automated process for filling in payment forms. The acquisition was accounted
for as a purchase in accordance with Accounting Principles Board Opinion ("APB")
No. 16. Results of operations for Millet have been included with those of the
Company for the period subsequent to the date of acquisition.
The purchase price was allocated to the assets acquired and liabilities assumed
based on their estimated fair values as follows:
Tangible assets acquired $ 110,354
Liabilities assumed (404,374)
------------
Book value of net liabilities acquired (294,020)
Fair value adjustments:
Fair value of purchased technology, including in-process research and
development 6,000,000
Fair value of assembled workforce 170,000
------------
Fair value of net assets acquired 5,875,980
Purchase price:
Fair value of shares issued 29,647,618
Acquisition costs 54,531
------------
Excess of purchase price over net assets acquired, allocated to goodwill $123,826,169
============
The $6,000,000 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 quarter ended March 31,
2000, include the write-off of $2,400,000 of purchased in-process research and
development. The remaining $3,600,000 represents the purchase of core technology
and existing products which are being amortized over an estimated useful life of
five years. The Company is amortizing the goodwill and assembled workforce over
an estimated life of five years.
Saraide Inc.: On March 10, 2000 the Company acquired eighty percent of the
common stock of Saraide, Inc. (formerly saraide.com, inc.), a privately held
provider of wireless Internet services in Europe, Japan and Canada, for purchase
consideration of 9,233,672 shares of the Company's common stock and acquisition
expenses of $340,489. The acquisition was accounted for as a purchase in
accordance with APB No. 16. Results of operations for Saraide have been included
with those of the Company for the period subsequent to the date of acquisition.
7
The purchase price was allocated to the assets acquired and liabilities assumed
based on their estimated fair values as follows:
Tangible assets acquired $ 15,231,884
Liabilities assumed (31,412,332)
------------
Book value of net liabilities acquired (16,180,448)
Fair value adjustments:
Fair value of purchased technology, including in-process research and
development 97,000,000
Fair value of contract list 16,000,000
Fair value of assembled workforce 2,100,000
------------
Fair value of net assets acquired 98,919,552
Purchase price:
Fair value of shares issued 347,022,206
Acquisition costs 340,489
------------
Excess of purchase price over net assets acquired, allocated to goodwill $248,443,143
============
The $97,000,000 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 quarter ended March 31,
2000, include the write-off of $71,700,000 of purchased in-process research and
development. The remaining $25,300,000 represents the purchase of core
technology and existing products which are being amortized over an estimated
useful life of five years. The Company is amortizing the goodwill, assembled
workforce and contract list over an estimated life of five years.
Minority Interest:
Net liabilities and losses applicable to the minority interest in Saraide exceed
the minority interest equity capital in Saraide. The minority interest portion
of the net liabilities and further losses are charged against the Company, the
majority interest, since the minority interest is not obligated to fund these
net liabilities and further losses. If Saraide has future earnings, the Company
will recognize income to the extent of such losses previously absorbed.
Pro forma information - Saraide acquisition:
The following pro forma information shows the results of the Company for the
quarter ended March 31, 2000 as if the acquisition of Saraide occurred on
January 1, 2000. The unaudited pro forma results of operations 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 dates indicated or which may occur in the future.
8
For the quarter ended March 31, 2000:
- -------------------------------------
Revenues $ 19,718,361
Loss before cumulative effect of change in accounting principle (89,629,692)
Net loss (90,348,908)
Basic and diluted loss per share $ (0.42)
Prio, Inc.: On February 14, 2000, the Company completed the merger with Prio,
Inc., a privately held provider of commerce solutions specializing in the
development of strategic partnerships, technologies and programs that drive
commerce in both traditional and online shopping environments. Under the terms
of the merger, which was accounted for as a pooling-of-interests, the Company
exchanged 9,322,418 shares of the Company's common stock for all of the
preferred and common shares of Prio. The condensed consolidated balance sheet as
of March 31, 2000 and December 31, 1999 and the statement of operations for the
quarters ended March 31, 2000 and 1999 are presented as if Prio was a
wholly-owned subsidiary since inception.
Pro forma information - Prio, Inc. merger:
The following reflects the summarized results of operations for InfoSpace and
Prio for the quarters ended March 31, 2000 and 1999. These results of operations
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 dates indicated or which may occur in the future.
Quarter ended March 31, 2000 1999
- ----------------------------------------------------------------------------
Revenues:
InfoSpace $ 17,686,289 $ 5,259,418
Prio 1,319,459 --
------------ -----------
$ 19,005,748 $ 5,259,418
============ ===========
Net loss:
InfoSpace $(66,327,822) $(1,486,150)
Prio (17,387,486) (4,150,553)
------------ -----------
$(83,715,308) $(5,636,703)
============ ===========
3. Venture Capital Fund
On January 1, 2000, the Company established the InfoSpace Capital Venture Fund
2000 LLC. This fund is an investment vehicle through which the Company will
invest in Internet and technology companies. Investors in this fund are the
Company and its employees. The Company will contribute a total of $30,000,000 to
this fund, $25,450,000 of which had been contributed as of March 31, 2000.
Employees meeting the accredited investor criteria contributed $16,315,000 to
the fund as of March 31, 2000. The Company contributed $3,000,000 of its total
investment on behalf of the employees of the Company employed as of March 31,
2000. The employee contribution vests on March 31, 2003. The Company will
recognize this expense on a straight-lined basis over the three year vesting
term. Amounts forfeited during the vesting term will revert to the Company.
9
The funds investments are selected and managed by an investment committee that
includes members of the Company's management. The Company has a majority and
controlling interest in the fund.
All investments held in the fund are recorded at their fair market value and
unrealized gains and losses on the investments are recorded as gains or losses
in the statement of operations of the fund. As of March 31, 2000, the fund had
$16,320,388 in cash and $49,047,687 in investments. The investment balance is
reflected at fair market value and includes $23,597,688 of unrealized gain that
was recorded in Other income on the Company's Statement of Operations. The
Company has recorded minority interest on the Balance Sheet and Statement of
Operations for the employee-owned portion of the fund.
4. Notes Receivable
On February 28, 2000, the Company loaned $10.0 million to an unrelated company
that the Company plans to acquire. This acquisition is expected to close in the
second quarter of 2000.
On December 1, 1999, the Company loaned an unrelated third party $2.5 million.
This short-term note is due by August 1, 2000, and accrues interest at 12% per
annum. On January 19, 2000 and February 18, 2000, the Company loaned the same
third party an additional $1.0 million and $1.5 million. These two notes are due
by September 1, 2000 and accrue interest at 12% per annum. All three of the
notes are secured by all of the assets and properties of the borrower and are
considered fully collectible. At March 31, 2000, accrued interest on the notes
was $149,667.
From December 21, 1999 to February 29, 2000, the Company loaned a former Officer
of the Company $10.0 million. The promissory note is due on December 6, 2001,
and accrues interest at the prime rate. The note is secured by a pledge of the
officer's shares of the Company's common stock. The pledged shares are valued in
excess of the note balance. At March 31, 2000, accrued interest on this note was
$179,603. At March 31, 2000, the Company also had approximately $399,000 in
short-term loans to employees, related and unrelated parties at various interest
rates.
5. Short-Term and Long-Term Debt
As a result of the merger with Prio, Inc. and the acquisitions of Saraide Inc.
and Millet Software, the Company assumed short-term and long-term debt. The
Company's debt as of March 31, 2000 consists of the following:
Equipment financing and capital leases $ 1,264,506
Notes payable 1,050,895
Current portion (692,845)
-----------
Long-term portion $ 1,622,556
===========
$110,216 of the equipment financing and capital lease obligations is due in the
year ending December 31, 2000. In addition, the Company elected to purchase
leased equipment subsequent
10
to March 31, 2000, which was comprised of $1,154,290 of the total equipment
financing and capital lease obligations noted above. This obligation pay off
will occur in the second quarter of 2000.
The Company assumed a note payable in the merger with Prio which has $1,000,895
of principal and interest due at March 31, 2000. Monthly payments on this loan
are due through March 2002. The loan bears interest at rates ranging from 15.0%
to 16.4% per annum. Principal and interest repayments are due approximately as
follows: April 1, 2000 through December 31, 2000, $544,000; 2001, $340,000;
2002, $117,000.
The Company assumed a note payable to a former shareholder of Millet Software
for $50,000. This note bears interest at 8% and is due on October 15, 2000.
6. Subsequent Events
On April 6, 2000, the Company signed a definitive agreement to acquire Tempe,
Arizona-based IQorder.com, a company that has developed technology that allows
consumers to enter in a model number, UPC code, part number, barcode or ISBN to
locate a product, compare prices and make an instant purchase. Under the terms
of the acquisition, which will be accounted for as a purchase, the Company will
exchange common stock for all of IQorder's outstanding shares, warrants and
options. The number of shares to be exchanged will be determined at the close of
the transaction.
11
Item 2. -- Management's Discussion and Analysis of Financial Condition and
Results of Operations.
You should read the following discussion and analysis in conjunction with our
Consolidated Financial Statements and Notes to Consolidated Financial Statements
thereto included elsewhere in this report. 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 report as being applicable to all
related forward-looking statements wherever they appear in this report. 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 "Factors Affecting Our Operating Results, Business Prospects and Market
Price of Stock" and in our reports filed with the Securities and Exchange
Commission including our annual report on Form 10-K for the year ended December
31, 1999 (the "Form 10-K"). You should not rely on these forward-looking
statements, which reflect only our opinion as of the date of this report. We do
not assume any obligation to revise forward-looking statements.
Overview
InfoSpace, Inc. is a global Internet information infrastructure services
company. InfoSpace provides enabling technologies and Internet services to
wireless devices, merchants and Web sites. 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 with our
consumer services. Revenue in 1998 was also primarily generated through our
consumer services. Throughout 1999 and the first quarter of 2000, we have
expanded our information infrastructure services to enhance our consumer,
merchant and wireless services. The following provides greater detail on each of
our service offerings:
Consumer Services: We provide information of broad appeal to users of wireless
devices and PC's including directories, sports, news and entertainment,
financial data and traffic reports. We also offer an integrated platform of
consumer services that includes community building services such as online
address books, calendars, online chat and message boards and communication
services including device independent e-mail and instant messaging. Our consumer
services are designed for the end user and are distributed through wireless
devices and Web sites.
Revenues from our consumer services are generated from advertising, subscriber
fees and guaranteed transaction fees in lieu of revenue share.
Merchant Services: We provide comprehensive end-to-end merchant services and an
extensive distribution network that includes regional bell operating companies
(known as RBOCs), merchant banks and other local media networks. Our end-to-end
merchant services give
12
merchants the ability to create, promote, sell and distribute their products and
services across multiple channels through our broad distribution network. We
have extensive reseller agreements with RBOCs, including BellSouth, SBC, Bell
Atlantic, GTE and USWEST, merchant banks such as American Express and other
local media networks such as newspapers and television and radio stations who
provide our services to millions of local merchants worldwide.
Our merchant services consist of a comprehensive platform of technology that
enables us to deliver unique services such as:
. the online delivery of promotions to any device that can be used online and
offline;
. buying from anyWeb site directly from a wireless device with a single click;
. Page Express which enables local merchants to create a Web presence;
. StoreBuilder which enables merchants to build on-line stores;
. ActivePromotion which enables merchants to create targeted product promotions
and distribute them across our network;
. ActiveShopper which provides an open marketplace where consumers can find,
research and purchase products from our merchant network.
Revenues from our merchant services are primarily generated from commerce fees
and subscriber fees, including per store/per month or per promotion/per month
fees.
Wireless Services: Our wireless services are comprised of a comprehensive,
integrated suite of wireless portal services that provide mobile users relevant
information services such as real-time stock quotes and traffic reports, the
ability to conduct secure commerce transactions including single click buying,
communication services such as device-independent instant messaging and e-mail,
personalization capabilities and location-based services that enable the user to
search for location-based information such as the restaurant closest to the
mobile user's current location. These services are distributed through wireless
carriers, device manufacturers and software providers.
Our wireless services are private-labeled for each carrier, preserving the brand
of the carrier and their relationship with their customer and creating a barrier
to switch. Revenues are primarily generated from the carrier and include
licensing fees, per subscriber/per month fees in the U.S. and per query/per
message fees in Europe and Japan. In addition we receive commerce revenue for
the transactions delivered on the wireless devices.
All three of our services are built on our core technology platform and use the
same operational infrastructure. We do not allocate development or operating
costs to any of these services.
In February 2000, we acquired Prio, Inc., a provider of commerce solutions
specializing in the development of strategic partnerships, technologies and
programs that drive commerce in both traditional and online shopping
environments. The consolidated financial statements and accompanying notes
reflect the Company's financial position and results of operations as if Prio
was a wholly-owned subsidiary since inception. In March 2000, we acquired an
eighty-percent interest in Saraide Inc. (formerly saraide.com, inc), a provider
of wireless Internet services in Europe, Japan and Canada. Also in March 2000,
we acquired Millet Software
13
(privacybank.com). Millet developed secure technology that provides an automated
process for filling in payment forms.
We have incurred losses since our inception and, as of March 31, 2000, we had an
accumulated deficit of approximately $182.2 million. For the quarter ended March
31, 2000, our net loss totaled $83.7 million, including $86.4 million in
acquisition and related charges associated with the acquisitions of Prio,
Saraide and Millet Software and $2.9 million in other non-recurring charges
related to a one-time warrant expense that resulted from the acquisition of
Prio.
We believe that our future success will depend largely on our ability to
continue to offer consumer, merchant and wireless solutions that are attractive
to our existing and potential future affiliates and distribution partners.
Accordingly, we plan to significantly increase 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 consumer, merchant and wireless services.
After giving effect to our recent acquisitions and continued global expansion,
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 eleven quarters, we do not
believe that our historical growth rates are necessarily sustainable or
indicative of future growth.
Results of Operations
First Quarter 2000 Compared to First Quarter 1999
Revenues. Revenues increased $13.7 million, or 261%, to $19.0 million in the
three-month period ended March 31, 2000, from $5.3 million for the comparable
period in 1999. This increase is due primarily to significant growth in our
consumer and merchant services as a result of the expansion of our affiliate
network, which consists of more that 3,000 Web sites and wireless devices,
increased traffic to our affiliate network that results in increased page views,
and increased use of our consumer, merchant and wireless services, as well as
larger and longer
14
term agreements with advertisers, affiliates and distribution partners. We
entered into 111 new agreements in the first quarter of 2000. A portion of our
revenues represents barter transactions resulting from our exchange with other
companies of banner advertising space for reciprocal banner advertising space,
for content license or for print advertising. Barter revenues for the quarter
ended March 31, 2000 were 4.6% of total revenue. Barter revenues for the quarter
ended March 31, 1999 were 3.5% of total revenue.
Cost of Revenues. Cost of revenues consists of expenses associated with the
enhancement, maintenance and support of our consumer, merchant and wireless
services, including direct personnel expenses, consultant costs, communication
costs such as high-speed Internet access, server equipment depreciation and
content license fees. Cost of revenues were $3.1 million, or 16% of revenues,
for the three-month period ended March 31, 2000 compared to $1.3 million, or 25%
of revenues, for the three-month period ended March 31, 1999. The absolute
dollar increase is primarily attributable to costs incurred in order to support
greatly increased delivery of consumer, merchant and wireless solutions,
including personnel expenses, communication lines, data licenses and equipment.
We expect the absolute dollars spent on personnel, enhanced content and expanded
communications will continue to increase for the foreseeable future. We
currently anticipate that cost of revenues will be in the high teens as a
percentage of revenues for the remainder of 2000.
Product Development Expenses. Product development expenses consist principally
of personnel costs for research, design and development of the proprietary
technology we use to integrate and distribute our consumer, merchant and
wireless services. Product development expenses increased $2.3 million, or 92%,
to $4.8 million in the three-month period ended March 31, 2000, from $2.5
million for the comparable period in 1999. The increase in absolute dollars is
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.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily of
salaries and related benefits for sales and marketing personnel, advertising and
promotion expenses, barter expense, carriage fees, sales office expenses and
travel expenses. Sales and marketing expenses increased $3.0 million, or 56%, to
$8.5 million in the three-month period ended March 31, 2000, from $5.4 million
for the comparable period in 1999. The absolute dollar increase is primarily due
to increased personnel costs and carriage fees paid to certain affiliates to
include our content services on their Web sites and travel expenses.
General and Administrative Expenses. General and administrative expenses consist
primarily of salaries and benefits, fees for professional services, occupancy
and general office expenses. General and administrative expenses were $6.1
million or 32% of revenue for the three-months ended March 31, 2000. This
compares to $2.7 million or 50% of revenue for the comparable period in 1999.
These increases are primarily due to increased staffing levels, office expansion
at our headquarter offices and other North America locations and professional
services.
15
Amortization of Intangibles. Amortization of intangibles includes amortization
of goodwill, core technology, purchased domain names, trademark, contract lists
and assembled workforce. Amortization of intangibles was $7.5 million in the
first quarter of 2000, compared to $299,000 in the first quarter of 1999. The
increases are a result of amortization of intangibles recorded from the
acquisitions of Saraide in March 2000, Zephyr Software and eComLive in December
of 1999, Union-Street in October 1999, the MyAgent technology acquisition in
June 1999 and Outpost Network in July 1998. With the exception of Zephyr,
intangibles of applicable goodwill, core technology, contract list and acquired
workforce for each acquisition are being amortized over five years. The
amortization of goodwill for Zephyr is over three years. On March 31, 2000, we
also acquired Millet Software (privacybank.com). Amortization on the goodwill,
core technology and acquired workforce for this acquisition will be over five
years and will begin in April 2000. As a result of these acquisitions, we expect
amortization of intangibles to be higher in future quarters than the first
quarter of 2000 amortization expense. In the event that we complete additional
acquisitions, which we expect to do, expenses relating to the amortization of
intangibles could increase in the future.
Acquisition and Related Charges. Acquisition and other related charges consist
of in-process research and development and other one-time charges related
directly to acquisitions, such as legal and accounting fees. The acquisition and
related charges in the first quarter of 2000 were one-time in-process research
and development charges and costs incurred in the purchase acquisitions of
Saraide and Millet Software. Also included in acquisition and other related
charges in 2000 are the costs incurred in the acquisition of Prio, which was
accounted for as a pooling-of-interests transaction. Total in-process research
and development charges in the first quarter of 2000 was $74.1 million. We
expect to continue to pursue an aggressive growth strategy to enhance and expand
our consumer, merchant and wireless services. In the event we complete
additional acquisitions, we could incur additional acquisition and related
charges in the future.
Other Non-Recurring Charges. Other non-recurring charges in the first quarter of
2000 represent an expense recorded for the fair market value of warrants issued
by Prio. Prio had previously issued warrants for services provided. These
warrants were accounted for under variable plan accounting. Subsequent to the
acquisition of Prio, the agreement pursuant to which these warrants were granted
was terminated and the remaining unvested warrants accelerated to full vesting.
Unrealized Gain on Investments Held: Unrealized gain on investments held
represents the unrealized gain on the investments in the InfoSpace Venture
Capital Fund 2000. In accordance with Accounting for Investments in Venture
Capital Funds, the investments are recorded at their market value and the
unrealized gains are reflected in the income statement in the Fund, which is
fully consolidated. The unrealized gain recognized in the first quarter of 2000
is not necessarily indicative of future results.
Minority Interest in Venture Capital Fund: As the majority interest in the
InfoSpace Venture Capital Fund 2000, we have recorded 100% of the balance sheet
and statement of operations in our consolidated financial statements. The
non-InfoSpace portion of the net income in the fund has been reflected as
minority interest.
16
Other Income, Net. Other income consists primarily of interest income for all
periods. Other income was $3.5 million in the first quarter of 2000, compared to
$1.3 million from the first quarter in 1999. The increase from the prior year is
primarily due to interest earned on higher average cash balances resulting from
the net proceeds from our follow-on offering, which closed in April 1999.
We have reinvested and will continue to reinvest part of our fixed income
securities in equity investments. We anticipate that our expansion plans may
require greater cash uses in the remainder of 2000 than in prior years. With
these two factors, we anticipate that our interest income from our fixed
securities will decrease in the remainder of 2000, compared with 1999.
Income Taxes Expense. The income tax expense in the first quarter of 2000 is
from our international operations in Europe.
Liquidity and Capital Resources
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
$185.0 million. As of March 31, 2000, we had cash, cash equivalents and
short-term investments of $150.0 million and long-term investments of $101.7
million.
Net cash used by operating activities was $5.8 million in the first quarter of
2000. Cash used in operating activities for the quarter ended March 31, 2000 and
consisted primarily of net operating losses and increases in accounts receivable
and prepaid expenses and the decrease in accrued liabilities. Net cash used by
operating activities was $10.4 million during the quarter ended March 31, 1999
consisted primarily of net operating losses and decreases in accounts payable
and accrued expenses.
Net cash provided by investing activities was $15.9 million in the quarter ended
March 31, 2000. For this period, cash provided by investing activities was
primarily comprised of the reduction of short-term and long-term investments and
inclusion of minority interest. This cash increase was offset by business
acquisition costs, issuance of notes receivable and additional investments. Net
cash provided by investing activities during the quarter ended March 31, 1999
was $20.9 million. This was primarily a result of investing the cash proceeds
from the initial public offering in short and long-term investments.
Cash used in financing activities in the quarter ended March 31, 2000 of $12.5
million was primarily comprised of payments of debt assumed in the acquisition
of Saraide and was offset by proceeds from the exercise of stock options,
warrants and issuance of shares under our 1998 Employee Stock Purchase Plan.
Cash provided by financing activities in the quarter ended March 31, 1999 of
$2.2 was primarily comprised of proceeds from the issuance of common stock. The
proceeds are related to equity financings of Prio and INEX, which have been
accounted for as pooling of interests.
17
We plan to use our cash for strategic investments and acquisitions, investments
in internally developed technology and advertising and marketing initiatives. In
addition, we are relocating our headquarter offices from Redmond, Washington to
Bellevue, Washington at the end of May 2000. Included in the costs of this move
is the construction of a new data center, tenant improvements and furniture. We
will also purchase capital equipment for our headquarters and our other
world-wide locations, including Mountain View, California; Dallas, Texas;
Ottawa, Canada; and Pependrecht, Netherlands. We expect these capital
expenditures to be approximately $24 million in the remainder of 2000. These
costs will be capitalized and amortized over their estimated useful lives.
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
"Factors Affecting Our Operating Results, Business Prospects and Market Price of
Stock."
Acquisitions
Millet Software. On March 31, 2000 we acquired all of the common stock of Millet
Software, a privately held company, for a purchase consideration of 488,224
shares of our common stock and acquisition expenses of $54,531. The acquisition
was accounted for as a purchase in accordance with the provisions of APB No. 16.
In this transaction, we assumed net assets of $5.9 million. This includes $6.0
million in purchased technology which includes in-process research and
development, $170,000 of acquired workforce and $294,020 in net liabilities. We
issued shares with a fair value of $29.6 million and incurred acquisition costs
of $54,531. This resulted in $18.5 million of goodwill.
We recorded a non-recurring charge of $2.4 million for in-process research and
development that had not yet reached technological feasibility and had no
alternative future use. Among the factors we considered in determining the
amount of the allocation of the purchase price to in-process research and
development the estimated stage of development of each module of the technology,
including the complexity and technical obstacles to overcome, estimating the
estimated expected life of each module, estimated cash flows resulting from the
expected revenues, margins, and operating expenses generated from each module,
and discounted the present value the cash flows associated with the in-process
technologies. Considering the inherent difficulty in developing estimates of
future performance for emerging technologies such as the Millet Software
applications, we utilized a relatively high rate of return (30%) to discount to
present value the cash flows associated with the in-process technologies.
18
Within the Millet Software technology there are three technologies, Form L,
Smart Mapper and Screen Walking. As of the date of acquisition, we estimated
that the Form L, Smart Mapper and Screen Walking technologies were 100%, 85% and
65% completed, respectively. The percentage completed pre-acquisition for each
application was based primarily on the evaluation of two major factors:
time-based data and complexity-based data. The core technology reliance for the
Smart Mapper and Screen Walking technologies was 40% and 20%, respectively.
We expect to fully integrate these technologies into our full suite of Internet
information infrastructure 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. 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 subscription and
transaction revenue we expect to generate from our shopping services. Our
expense assumptions for these modules included cost of revenues, which we
estimated to be 3% of revenues as we will incur minimal costs to deliver this
technology on the platforms already developed and in use by us. Sales and
marketing expenses combined with general and administrative expenses were
estimated to be 35% in the first two years, and thereafter to range between 30%
to 35% as a percentage 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.
We do not expect to have the ability to calculate revenues specifically and
exclusively attributable to the integrated Millet 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 competitor's pricing of their own
packaged and integrated offerings.
Saraide Inc. On March 10, 2000 we acquired eighty percent of the common stock of
Saraide, a privately held company, for a purchase consideration of 9,233,672
shares and acquisition expenses of $340,489. The acquisition was accounted for
as a purchase in accordance with the provisions of APB No. 16.
In this transaction, we assumed net liabilities of $16.2 million. The purchase
includes $97.0 million in purchased technology which includes in-process
research and development, $16.0 million of contract list, $2.1 million of
acquired workforce and $16.2 million in net liabilities.
19
We issued shares with a fair value of $347.0 million and incurred acquisition
costs of $340,489. This resulted in $248.4 million of goodwill.
We recorded a non-recurring charge of $71.7 million for in-process research and
development that had not yet reached technological feasibility and had no
alternative future use. 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 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.
At the date of acquisition, Sariade had eight technologies which had not yet
reached technological feasibility: (i) asynchronous bridges, (ii) lookup
service/persistent cache services, (iii) transaction services, (iv) open
standards application provider interface ("API"), (v) SS7 signaling
functionality, (vi) security infrastructure, (vii) location enabler, and (viii)
commerce enabler. With the exception of the asynchronous bridges, all projects
were estimated to be commercially deployable in 2000. Once complete, these
projects will provide the fundamental operating system and infrastructure for
the distributed networked system platform ("DNSP"), Saraide's value added
service platform under development.
The expected life of the modules being developed was assumed to be five to seven
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 carriers
in Europe and North America we estimated would utilize these services, and the
number of messages per month for Europe and the number of subscribers per month
for North America signed up with these carriers that would utilize these
services.
Our expense assumptions for these modules included cost of revenues, which we
estimated to be 65% for 2000 and decreasing to 43% of revenues as we will incur
costs to deploy the technology globally. Research and development costs were
estimated to be of 4.4% of revenues in 2000, decreasing to 2.2%. Sales and
marketing expenses combined with general and administrative expenses were
estimated to be 70% for 2000, and thereafter decreasing to range 20% as a
percentage of revenues in line with industry levels as the Company capitalizes
on economies of scale. 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
technologies are in the process of being integrated and released with our full
suite of integrated Internet information infrastructure technologies and
services for wireless devices. 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
20
technologies such as the Saraide technologies, we utilized a relatively high
rate of return (35.0% to 37.5%) to discount to present value the cash flows
associated with the in-process technologies.
We do not expect to have the ability to calculate revenues specifically and
exclusively attributable to the integrated Saraide technology. Further, the
absence of such attribution will not be material to any module's success. The
amount that we can charge the wireless carriers and device manufacturers for
access and use of these modules will be greatly influenced by market forces and
competitor's pricing of their own packaged and integrated offerings.
Prio, Inc.: On February 14, 2000, we consummated the acquisition, pursuant to an
Agreement and Plan of Acquisition and Amalgamation, of Prio, a privately held
company. The combination was accounted for as a pooling of interests. We issued
9,322,418 shares of our common stock in exchange for all the outstanding common
and preferred stock of Prio.
Prio provides commerce solutions specializing in the development of strategic
partnerships, technologies and programs that drive commerce in both traditional
and online shopping environments developed and marketed Internet commerce
applications that deliver solutions designed for small and medium-sized
merchants to build, manage and promote online storefronts. We have added these
service offerings to our merchant services. The consolidated financial
statements for the three months ended March 31, 2000 and the accompanying notes
reflect our financial position and the results of operations as if Prio was our
wholly-owned subsidiary since inception.
Factors Affecting Our Operating Results, Business Prospects and Market Price of
Stock
In addition to other information in this report, investors evaluating us and our
business should carefully consider the following risk factors. These risks may
impair our operating results and business prospects and the market price of our
stock.
This report contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements include, but are not limited to,
statements regarding our business and growth strategy, the expected demand for
and benefits of our Internet information infrastructure services for our
affiliates, advertisers and content providers, anticipated benefits from the
business and technologies we have acquired or intend to acquire, 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,
increased general and administrative expenses, anticipated capital equipment
expenditures and anticipated cash needs. 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. 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. The risks
set forth below and elsewhere in this report could cause actual results to
differ materially from those projected.
21
We Have a Limited Operating History and a History of Losses.
We have a limited operating history, which makes it difficult to evaluate our
business and prospects. We have incurred net losses from our inception in March
1996 through March 31, 2000. At March 31, 2000, we had an accumulated deficit of
approximately $182.2 million. We expect to incur operating losses on a quarterly
basis in the future. 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 affiliates,
distribution partners and content providers;
. identify and acquire the rights to additional content, technology and
services;
. successfully integrate new features with our consumer, merchant and
wireless services;
. expand our sales and marketing efforts, including relationships with
third parties to sell our merchant services;
. maintain and increase our affiliate, distribution and advertiser base;
. successfully expand into international markets;
. retain and motivate qualified personnel; and
. successfully respond to competitive developments.
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 consumer, merchant and wireless services by our
affiliates and distribution providers;
. the cost of acquiring and the availability of content, technology and
services;
. the growth and overall level of demand for consumer, merchant and
wireless services;
22
. our ability to attract and retain advertisers, content providers,
affiliates and distribution partners;
. seasonal trends in Internet usage and advertising placements;
. the amount and timing of fees we pay to our affiliates to include our
information services on their Web sites and wireless devices;
. the productivity of our direct sales force and the sales forces of our
distribution partners;
. 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,
or any litigation that is filed against us in the future;
. our ability to attract and retain personnel;
. our ability to successfully integrate and manage newly acquired
companies;
. the introduction of new or enhanced services by us, our affiliates or
distribution partners, or other companies that compete with us or our
affiliates;
. price competition or pricing changes in Internet information
infrastructure 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 only began operations in March 1996, and because
the market for Internet infrastructure services such as ours is new and
evolving, it is very difficult to predict future financial results. As a result
of our recent acquisitions and continued global expansion, we have and intend to
continue to significantly increase our sales and marketing, research and
development and general and administrative expenses in the remainder of the year
2000. Our expenses are partially based on our expectations regarding future
revenues and estimated expenses from our acquisitions, which 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.
23
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 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,
content providers and distribution partners;
. 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.
We may not be able to successfully integrate the technology and personnel we
have acquired or the 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 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 471 at March 31, 2000. We now have offices in Redmond,
Washington; San Francisco, San Mateo and Mountain View, California; New York
City and Rochester, New York; Dallas, Texas; Toronto and Ottawa, Canada;
Papendrecht, Netherlands; and London, United Kingdom. This expansion has placed,
and is expected to continue to place, a significant strain on our management and
operational resources. We do not have experience managing multiple offices with
multiple facilities and personnel in disparate locations. As a result, we may
not be able to effectively manage our resources, coordinate our efforts,
supervise our personnel or otherwise successfully manage our resources. We have
recently added a number of key managerial, technical and operations personnel
and we expect to add additional key personnel in the near future. We also plan
to
24
continue to significantly increase our employee base. These additional personnel
may further strain our management resources.
Our relationships with affiliates and distribution partners, content providers
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
affiliates and distribution partners, content providers and advertisers evolve
in an adverse manner, if we get into contractual disputes with affiliates and
distribution partners, content providers or advertisers or if any agreements
with such persons are terminated, our business could suffer.
The rapid growth of our business has strained our ability to meet customer
demands and manage the growing number of affiliate relationships. In addition,
our affiliate relationships are also growing in their size and complexity of
services. As a result of the growth in the size, number, and complexity of our
relationships we may be unable to meet the demands of our customer
relationships, which could result in the loss of customers, subject us to
penalties under our affiliate agreements and harm our business reputation.
To manage the expected growth of our operations and personnel, we must continue
maintaining and improving or replacing existing operational, accounting and
information systems, procedures and controls. Further, we must manage
effectively our relationships with various Internet content providers,
distribution partners, wireless carriers, advertisers, affiliates and other
third parties necessary to our business. If we are unable to manage growth
effectively, our business could suffer.
We Rely on Advertising and Transaction Revenues.
We derive a significant amount of our revenues from the sale of national and
local advertisements, transaction fees and promotions from our affiliates who
use our consumer services, and we expect this to continue into the second or
third quarter of 2000. Our ability to increase and diversify 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 information infrastructure
services by a large number of users who have demographic
characteristics that are attractive to advertisers;
. the availability of attractive advertising space within our private
label solutions;
25
. the ability of our business development and sales personnel to
effectively sell our broad suite of consumer, merchant and wireless
services;
. the development of the Internet as an attractive platform for
electronic commerce;
. the use of our integrated merchant tools by small and medium sized
online and offline merchants;
. the adoption of our wireless services and solutions by wireless
carriers and device manufacturers; and
. the use of our information services by subscribers on their wireless
devices.
We Rely on a Small Number of Customers.
We derive a substantial portion of our revenues from a small number of
customers. We expect that this will continue in the foreseeable future.
Our top ten customers represented 64% of our revenues in the first quarter of
2000 and 61% of our revenues for first quarter of 1999. In particular, 800-U.S.
Search, Inc. accounted for approximately 13% of our revenues for the quarter
ended March 31, 2000 and 28% for the quarter ended March 31, 1999. If we lose
any of these customers or if any of these customers are unable or unwilling to
pay us amounts that they owe us, our financial results will suffer.
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. Additional 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
consumer, merchant and wireless services on their site or service;
. the extent to which we expand our consumer, merchant and wireless
services;
. the extent to which we develop and upgrade our technology and data
network infrastructure;
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. the occurrence, timing, size and success of acquisitions;
. the cash requirements of entities we have acquired;
. the number and amount of investments we make in privately held
technology companies;
. the rate at which we expand internationally; and
. the response of competitors to our service offerings.
Item 3. -- Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risks, including changes in interest rates
and equity price fluctuations.
Interest Rate Risk: We invest our excess cash in high-quality corporate issuers,
and in debt instruments of the U.S. Government and its agencies. By policy, we
limit our credit exposure to any one issuer. We do not have any derivative
instruments in our investment portfolio. We protect and preserve invested funds
by limiting default, market and reinvestment risk. Investments in both fixed
rate and floating rate interest earning instruments carries a degree of interest
rate risk. Fixed rate securities may have their fair market value adversely
impacted due to a rise in interest rates, while floating rate securities may
produce less income than expected if interest rates fall. Due in part to these
factors, the Company's future investment income may fall short of expectations
due to changes in interest rates or the Company may suffer losses in principal
if forced to sell securities which have declined in market value due to changes
in interest rates.
Equity Investment Risk The Company invests in equity instruments of public and
privately-held, technology companies for business and strategic purposes. These
investments are recorded as long-term assets and are classified as
available-for-sale. For the privately-held investments, our policy is to
regularly review the assumptions underlying the operating performance and cash
flow forecasts in assessing the carrying value. For our publicly-held
investments, we are subject to significant fluctuations in fair market value due
to the volatility of the stock market. Changes in fair market value are recorded
as a component of other comprehensive income and do not effect net income until
the securities are sold and a realized gain or loss is incurred.
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PART II -- OTHER INFORMATION
Items 1 through 5
Not applicable with respect to the current reporting period.
Item 6. -- Exhibits and Reports on Form 8-K:
a. Exhibits
3.1 Amended and Restated Articles of Incorporation
10.1 Employment agreement between InfoSpace, Inc., Saraide Inc.
and Arun Sarin dated April 17, 2000
27.1 Financial Data Schedule
b. Reports on Form 8-K
Form 8-K filed with the SEC on January 6, 2000 with respect to the
acquisition of Zephyr Software, Inc.
Form 8-K filed with the SEC on March 29, 2000 with respect to the
acquisition of Prio, Inc., as subsequently amended by a Form 8-K/A
filed with the SEC on April 24, 2000.
Form 8-K filed with the SEC on March 29, 2000 with respect to the
acquisition of Saraide, Inc.
Form 8-K filed with the SEC on April 20, 2000 with respect to the
acquisition of Millet Software, Inc.
Form 8-K filed with the SEC on May 10, 2000 with respect to the
acquisition of IQorder.com, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INFOSPACE, INC.
By: /s/ Tammy D. Halstead
---------------------
Tammy D. Halstead
Vice President. Chief Accounting
Officer and Acting Chief Financial
Officer
Dated: May 12, 2000
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