SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
July 25, 2000
Date of Report
(Date of earliest event reported)
INFOSPACE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
0-25131 91-1718107
(Commission File No.) (IRS Employer Identification Number)
601 108/th/ Avenue N.E., Suite 1200
Bellevue, Washington 98004
(Address of Principal Executive Offices)
425-201-6100
(Registrant's Telephone Number, Including Area Code)
Item 5. Other Events
- ------- ------------
In connection with the acquisition of Prio, Inc. by InfoSpace, Inc., a
Delaware corporation ("InfoSpace"), which was accounted for as a pooling of
interests, InfoSpace recast its financial statements. This Current Report on
Form 8-K includes the recast balance sheets of InfoSpace as of December 31, 1999
and 1998, and the related statements of operations, changes in stockholders'
equity and accumulated other comprehensive income, and cash flows for the years
ended December 31, 1999, 1998 and 1997.
Item 7. Financial Statements and Exhibits
- ------- ---------------------------------
(c) Exhibits.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.
23.2 Consent of KPMG LLP, Independent Auditors.
INDEX TO FINANCIAL STATEMENTS
Page
----
InfoSpace, Inc.:
Independent Auditors' Report............................................. F-2
Independent Auditors' Report............................................. F-3
Consolidated Balance Sheets.............................................. F-4
Consolidated Statements of Operations.................................... F-5
Consolidated Statements of Changes in Stockholders' Equity and
Accumulated Other Comprehensive Income.................................. F-6
Consolidated Statements of Cash Flows.................................... F-7
Notes to Consolidated Financial Statements............................... F-9
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of InfoSpace
Redmond, Washington
We have audited the accompanying consolidated balance sheets of InfoSpace,
Inc. and subsidiaries (the Company) as of December 31, 1999 and 1998, and the
related consolidated statements of operations, changes in stockholders' equity
and accumulated other comprehensive income, and cash flows for the years ended
December 31, 1999, 1998 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The consolidated
financial statements give retroactive effect to the merger of the Company and
Prio, Inc. (Prio), which has been accounted for as a pooling of interests as
described in Note 7 to the consolidated financial statements. We did not audit
the financial statements of Prio for the years ended December 31, 1998 and
1997, which statements reflect total revenues of $9,000 and $74,000,
respectively, net loss of $14,150,000 and $8,283,000 for the respective years
then ended, and total assets of $30,665,000 as of December 31, 1998. Those
financial statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Prio for such periods, is based solely on the report of such other
auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits and the report of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of InfoSpace, Inc. and subsidiaries
as of December 31, 1999 and 1998, and results of their operations and their
cash flows for the years ended December 31, 1999, 1998 and 1997, in conformity
with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Seattle, Washington
March 17, 2000
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Prio, Inc.:
We have audited the balance sheet of Prio, Inc. (the Company), formerly
SaveSmart, Inc., (a development stage enterprise) as of December 31, 1998, and
related statements of operations, shareholders' deficiency, and cash flows for
each of the years in the two-year period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Prio, Inc. (a development
stage enterprise) as of December 31, 1998, and the results of its operations
and its cash flows for each of the years in the two-year period ended December
31, 1998, in conformity with generally accepted accounting principles.
KPMG LLP
Mountain View, California
April 2, 1999
F-3
INFOSPACE, INC.
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
1999 1998 2000
------------ ------------ -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents......... $ 37,985,250 $ 39,986,609 $ 35,561,656
Short-term investments, held-to-
maturity (fair market value
$124,656,361, $74,315,294 and
$110,611,874).................... 124,720,142 74,301,803 114,459,290
Accounts receivable, net of
allowance for doubtful accounts
of $702,960, $603,278 and
$705,609......................... 6,663,497 3,470,364 8,273,390
Interest receivable............... 3,333,772 9,874 2,771,622
Notes receivable, net of allowance
of $12,075, $0 and $9,975........ 11,580,866 35,061 25,578,115
Prepaid expenses and other assets
................................. 10,304,244 3,899,715 15,142,541
------------ ------------ -------------
Total current assets............ 194,587,771 121,703,426 201,786,614
Long-term investments, held-to-
maturity (fair market value
$70,971,645, $1,252,051 and
$39,857,832)....................... 71,416,776 1,252,438 37,838,717
Property and equipment, net ........ 7,998,957 4,126,312 18,861,989
Other long-term assets ............. 702,641 639,106 2,089,664
Other investments .................. 17,038,508 644,391 63,846,750
Intangible assets, net.............. 73,842,557 5,304,256 385,787,368
------------ ------------ -------------
Total assets........................ $365,587,210 $133,669,929 $ 710,211,102
============ ============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................. $ 2,810,141 $ 3,834,505 $ 3,255,313
Accrued expenses.................. 18,501,053 6,656,497 24,096,173
Deferred revenues................. 2,672,531 1,401,865 3,657,588
Other current liabilities and
short-term debt.................. 1,042,437 1,057,560 764,611
------------ ------------ -------------
Total current liabilities....... 25,026,162 12,950,427 31,773,685
Long-term liabilities............... 685,762 989,431 1,693,897
Minority interest................... -- -- 29,158,321
------------ ------------ -------------
Total liabilities............... 25,711,924 13,939,858 62,625,903
Commitments and contingencies (Note
8)
Stockholders' equity:
Preferred stock, par value
$.0001--Authorized, 15,000,000
shares; issued and outstanding,
1, 0 and 1 share................. -- -- --
Common stock, par value $.0001--
Authorized, 900,000,000 shares;
issued and outstanding,
211,853,372, 178,958,716 and
227,733,868 shares............... 21,185 17,896 22,773
Additional paid-in capital........ 440,878,391 164,490,626 829,459,962
Accumulated deficit............... (98,512,435) (40,940,646) (182,227,743)
Deferred expense--warrants........ (2,311,159) (3,126,862) (2,080,070)
Unearned compensation--stock
options.......................... (1,518,144) (668,595) (1,259,254)
Accumulated other comprehensive
income........................... 1,317,448 (42,348) 3,669,531
------------ ------------ -------------
Total stockholders' equity...... 339,875,286 119,730,071 647,585,199
------------ ------------ -------------
Total liabilities and stockholders'
equity............................. $365,587,210 $133,669,929 $ 710,211,102
============ ============ =============
See notes to consolidated financial statements.
F-4
INFOSPACE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
Years Ended December 31, March 31,
--------------------------------------- --------------------------
1999 1998 1997 2000 1999
------------ ------------ ----------- ------------- -----------
(unaudited)
Revenues................ $ 37,390,303 $ 9,631,927 $ 1,816,542 $ 19,005,740 $ 5,259,418
Cost of revenues ....... 7,267,447 2,330,685 492,809 3,118,772 1,308,500
------------ ------------ ----------- ------------- -----------
Gross profit......... 30,122,856 7,301,242 1,323,733 15,886,968 3,950,918
Operating expenses:
Product development.... 11,316,073 7,567,202 4,560,136 4,777,280 2,486,604
Sales and marketing.... 47,651,048 10,783,310 1,476,576 8,452,028 5,416,649
General and
administrative........ 12,486,244 7,378,030 5,069,138 6,077,685 2,650,575
Amortization of
intangibles........... 3,223,031 709,923 64,056 7,490,751 299,279
Acquisition and
related charges....... 13,350,700 2,800,000 0 86,397,306 --
Other--non-recurring
charges............... 11,359,500 4,500,000 137,000 2,887,609 --
------------ ------------ ----------- ------------- -----------
Total operating
expense............. 99,386,596 33,738,465 11,306,906 116,082,659 10,853,107
------------ ------------ ----------- ------------- -----------
Loss from
operations.......... (69,263,740) (26,437,223) (9,983,173) (100,195,691) (6,902,189)
Other income, net....... 11,703,468 593,348 39,258 3,462,752 1,265,486
Equity in loss from
joint venture.......... (11,517) (124,976) -- -- --
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... (57,571,789) (25,968,851) (9,943,915) (82,978,572) (5,636,703)
Income tax expense...... -- -- -- (17,520) --
------------ ------------ ----------- ------------- -----------
Loss from operations
before cumulative
effect of change in
accounting principle... (57,571,789) (25,968,851) (9,943,915) (82,996,092) (5,636,703)
Cumulative effect of
change in accounting
principle.............. -- -- -- (719,216) --
------------ ------------ ----------- ------------- -----------
Net loss................ $(57,571,789) $(25,968,851) $(9,943,915) $ (83,715,308) $(5,636,703)
============ ============ =========== ============= ===========
Basic and diluted net
loss per share......... $ (0.29) $ (0.23) $ (0.11) $ (0.39) $ (0.03)
============ ============ =========== ============= ===========
Shares used in computing
basic net loss per
share.................. 196,222,147 114,519,323 91,469,901 217,120,107 179,618,040
============ ============ =========== ============= ===========
Shares used in computing
diluted net loss per
share.................. 196,222,147 114,519,323 91,696,568 217,120,107 179,618,040
============ ============ =========== ============= ===========
See notes to consolidated financial statements.
F-5
INFOSPACE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND ACCUMULATED OTHER COMPREHENSIVE INCOME
Years Ended December 31, March 31
--------------------------------------- -------------
1999 1998 1997 2000
------------ ------------ ----------- -------------
(unaudited)
Common stock and
additional paid in
capital:
Balance, beginning of
year................... $164,508,522 $ 26,247,955 $ 8,988,597 $ 440,899,576
Common stock issued... 202,757,019 121,765,685 15,606,030 6,908,430
Common stock issued
for acquisitions..... 61,125,843 7,902,309 292,188 376,669,824
Common stock issued
for stock options.... 2,313,210 1,019,850 23 4,661,779
Common stock issued in
exchange
transactions......... 1,414,000 224,726 109,720 --
Common stock issued
for warrants and
preferred shares..... 5,315,541 2,356,412 988,957 --
Common stock issued
for conversion of
special shares and
debentures........... 170,369 -- -- --
Common stock issued
for employee stock
purchase plan........ 286,088 -- -- 343,126
Unearned
compensation--stock
options.............. 3,175,984 1,728,772 262,440 --
Cancelled options for
deferred services.... (167,000) -- -- --
Deferred expense--
warrants............. -- 3,262,813 -- --
------------ ------------ ----------- -------------
Balance, end of year.... 440,899,576 164,508,522 26,247,955 829,482,735
------------ ------------ ----------- -------------
Balance attributed to
common stock........... 21,185 17,896 9,323 22,773
Balance attributed to
additional paid in
capital................ 440,878,391 164,490,626 26,238,632 829,459,962
------------ ------------ ----------- -------------
Balance, common stock
and additional paid in
capital................ 440,899,576 164,508,522 26,247,955 829,482,735
------------ ------------ ----------- -------------
Accumulated deficit:
Balance, beginning of
year................... (40,940,646) (14,971,795) (5,027,880) (98,512,435)
Net loss.............. (57,571,789) (25,968,851) (9,943,915) (83,715,308)
------------ ------------ ----------- -------------
Balance, end of year.... (98,512,435) (40,940,646) (14,971,795) (182,227,743)
------------ ------------ ----------- -------------
Deferred expense--
warrants:
Balance, beginning of
year................... (3,126,862) -- -- (2,311,159)
Deferred expense--
warrants............. -- (3,262,813) -- --
Warrant expense....... 815,703 135,951 -- 231,089
------------ ------------ ----------- -------------
Balance, end of year.... (2,311,159) (3,126,862) -- (2,080,070)
------------ ------------ ----------- -------------
Unearned compensation--
stock options:
Balance, beginning of
year................... (668,595) (189,955) (71,437) (1,518,144)
Unearned
compensation--stock
options.............. (3,175,984) (1,728,722) (262,440) --
Cancelled options for
deferred services.... 167,000 -- -- --
Compensation expense--
stock options........ 2,159,435 1,250,132 143,922 258,890
------------ ------------ ----------- -------------
Balance, end of year.... (1,518,144) (668,545) (189,955) (1,259,254)
------------ ------------ ----------- -------------
Accumulated other
comprehensive income:
Balance, beginning of
year................... (42,348) (25,780) (5,181) 1,317,448
Unrealized gain (loss)
on equity
investments.......... 1,324,301 -- -- 2,409,722
Foreign currency
translation
adjustment........... 35,495 (16,568) (20,599) (57,639)
------------ ------------ ----------- -------------
Balance, end of year.... 1,317,448 (42,348) (25,780) 3,669,531
------------ ------------ ----------- -------------
$339,875,286 $119,730,121 $11,060,425 $ 647,585,199
============ ============ =========== =============
See notes to consolidated financial statements.
F-6
INFOSPACE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
Years Ended December 31, March 31,
------------------------------------- ------------------------
1999 1998 1997 2000 1999
------------ ----------- ---------- ----------- -----------
(unaudited)
Net loss................ (57,571,793) (25,968,851) (9,943,915) (83,715,308) (5,636,703)
Adjustments to
reconcile net loss to
net cash provided
(used) by operating
activities............. -- -- -- -- --
Trademark
amortization.......... 1,500,000 1,500,000 -- -- --
Depreciation and other
amortization.......... 5.545,201 1,578,543 590,325 8,650,408 1,522,071
Write-off of in-
process research and
development........... 9,200,000 2,800,000 -- 74,100,000 --
Write-down of
inventory to net
realizable value...... -- -- 783,000 -- --
Compensation expense--
stock options......... 19,811,694 1,273,132 859,922 258,888 24,089
Currency translation... 42,520,00 (28,308) (29,830) -- --
Warrants expense....... 815,703 135,951 -- 3,118,698 203,925
Noncash issuance of
common stock.......... -- 70,000 -- -- --
Noncash services
exchanged............. 1,414,000 190,436 49,720 110,000 --
Bad debt expense....... 499,464 687,602 47,000 29,061 150,437
Equity in loss in
joint venture......... 25,759 56,976 -- (81,025) 55,052
Gain on disposal of
interest in
investee.............. -- (35,000) -- -- --
Gain on sale of
intangibles........... (7,830,00) -- -- -- --
Loss (gain) on
disposal of fixed
assets................ 21,019 111,229 225,743 14,099 1,905
Warrants--income....... (1,295,325) -- -- (3,218,222) --
Unrealized gain in
investments........... -- -- -- (23,597,688) --
Cumulative translation
adjustment............ -- -- -- (4,124) --
Minority interest in
venture fund.......... -- -- -- 9,843,321 --
Business acquisition
cost ................. -- -- -- 14,684,574 --
Cumulative effect of
change in accounting
principle ............ -- -- -- 505,743 --
Cash provided (used)
by changes in
operating assets and
liabilities, net of
assets acquired in
business
combinations: -- -- -- -- --
Accounts receivable... (3,681,473) (3,656,668) (421,990) (1,057,751) (346,890)
Notes receivable...... (11,314,171) -- -- -- --
Interest receivable... (3,312,082) -- -- 562,150 (420,480)
Prepaid expenses and
other assets......... (8,055,947) (2,506,941) (286,253) (3,020,563) (933,484)
Other long-term
assets............... (90,716) (337,500) -- (14,846) (15,876)
Other tangible
assets............... -- (66,865) -- -- --
Accounts payable...... (1,024,359) 4,332,060 583,374 251,204 (2,239,320)
Accrued expenses...... 11,365,894 4,845,658 199,648 (3,729,167) (2,835,308)
Other long-term
liabilities.......... (57,000) 128,440 -- -- --
Deferred revenue...... 1,273,963 1,337,716 58,261 479,314 87,888
------------ ----------- ---------- ----------- -----------
Net cash used by
operating activities... (34,895,479) (13,552,390) (7,284,995) (5,831,234) (10,382,754)
Investing Activities:
Business acquisitions
net of cash required... (19,514,794) (311,951) (14,000) (11,417,506) --
Other investments....... (13,800,250) (150,000) -- -- --
Purchase of domain
name................... (120,000) -- -- -- (100,000)
Proceeds from sale of
domain name............ 10,000 -- -- -- --
Purchase of trademark... -- (3,290,000) -- -- --
Internally developed
software............... (340,498) -- -- (84,493) (214,666)
Purchase of property
and equipment.......... (5,369,792) (3,938,162) (914,666) (4,257,509) (1,130,867)
Investments in joint
venture................ -- (495,767) -- -- --
Proceeds of notes
receivable............. -- -- -- 6,893,826 929
Repayment of notes
receivable............. -- -- -- (20,873,075) (250,000)
Minority interest
contribution in
venture fund........... -- -- -- 19,315,000 --
Proceeds from sales of
fixed assets........... -- 4,997 -- -- --
Purchase of other
assets................. -- -- -- (17,500,000) (500,000)
Short-term investments,
net.................... (50,418,339) (74,301,803) -- 10,260.852 68,187,154
Long-term investments,
net.................... (70,164,338) (1,252,438) -- 33,578,059 (45,074,269)
Other................... -- -- (29,087) -- --
------------ ----------- ---------- ----------- -----------
Net cash provided
(used) by investing
activities............. (159,718,011) (83,735,124) (957,753) 15,915,154 20,918,281
Financing Activities:
Proceeds from issuance
of common stock....... 66,000 46,153,871 14,348,010 -- 1,870,641
Payment to shareholders
for fractional
shares................ -- (28) -- -- --
Proceeds from public
offerings, net of
expenses.............. 185,039,027 77,830,903 -- -- --
Proceeds from issuance
of long-term debt..... 550,000 1,144,992 2,912,254 -- --
Repayment of long-term
debt.................. (958,000) (868,220) (141,2340) -- --
Repayment of
stockholder loan
payable............... -- (5,116) (39,728) -- --
Proceeds from issuance
of ESPP shares........ 286,088 -- -- 343,126 --
Proceeds from exercise
of warrants........... 5,315,541 40,161 -- 91,880 110,966
Proceeds from exercise
of stock options...... 2,313,210 1,016,210 -- 8,480,722 52,784
Short-term and long-
term investments...... -- -- -- (21,423,242) 141,992
------------ ----------- ---------- ----------- -----------
Net cash provided
(used) by financing
activities............ 192,611,866 125,312,773 17,079,302 (12,507,514) 2,176,383
------------ ----------- ---------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents............ (2,001,624) 28,025,259 8,836,554 (2,423,594) 12,711,910
F-7
INFOSPACE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Three Months Ended
Years Ended December 31, March 31,
---------------------------------- ---------------------
1999 1998 1997 2000 1999
---------- ---------- ---------- ---------- ----------
Cash and cash
equivalents, beginning
of period.............. 39,987,009 11,961,646 3,125,092 37,985,250 39,986,609
---------- ---------- ---------- ---------- ----------
Cash and cash
equivalents, end of
period................. 37,985,385 39,986,905 11,961,646 35,561,656 52,698,519
---------- ---------- ---------- ---------- ----------
Supplemental Disclosure
of Noncash Financing
and Investing
Activities:
Acquisitions from
purchase transactions:
Stock issued........... 61,125,843 7,932,000 382,188 -- --
Net assets assumed..... (149,723) (191,000) (90,000) -- --
Issuance of convertible
preferred stock upon
conversion of note and
accrued interest
payable................ -- -- 1,531,000 -- --
Property and equipment
acquired under
equipment financing and
capital lease
obligations............ 308,000 198,000 376,000 -- --
Issuance of common stock
for notes receivable... -- -- 32,000 -- --
Issuance of warrants and
options for deferred
services and abandoned
financing.............. 2,665,000 216,000 28,000 -- --
Conversion of note
payable as
consideration for
interest in previously
consolidated
subsidiary............. -- 250,000 -- -- --
Compensation expense for
Series E warrants...... 17,652,000 -- -- -- --
Stock issued in exchange
transaction............ 169,000 334,726 102,720 110,000 --
Stock issued for
retirement of
debentures............. 170,369 -- -- -- --
Interest paid........... 132,000 124,923 36,000 -- --
See notes to consolidated financial statements.
F-8
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997 and
Three Months Ended March 31, 2000 and 1999 (unaudited)
Note 1: Summary of Significant Accounting Policies
Description of business: InfoSpace, Inc., (the Company or InfoSpace),
previously known as InfoSpace.com, Inc., a Delaware corporation, was founded in
March 1996. The Company is an international Internet information infrastructure
services company that provides enabling technologies and Internet services to
Web sites, merchants and wireless devices.
Principles of consolidation: The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Business combinations: Business combinations accounted for under the purchase
method of accounting include the results of operations of the acquired business
from the date of acquisition. Net assets of the companies acquired are recorded
at their fair value at the date of acquisition. Amounts allocated to in-process
research and development are expensed in the period of acquisition.
Business combinations accounted for under the pooling-of-interests method of
accounting include the financial position and results of operations as if the
acquired company had been a wholly-owned subsidiary since inception. In such
cases, the assets, liabilities and stockholders' equity of the acquired
entities were combined with the Company's respective amounts at their recorded
values. The equity of the acquired entity is reflected on an as-if-converted
basis to InfoSpace equity at the time of issuance. Prior period financial
statements have been recast to give effect to the merger. Certain
reclassifications have been made to the financial statements of the pooled
entities to conform with the Company.
Cash and cash equivalents: The Company considers all highly liquid debt
instruments with an original maturity of 90 days or less to be cash
equivalents. Cash and cash equivalents are carried at cost, which approximates
market.
Investments: The Company principally invests its available cash in high-
quality corporate issuers, and in debt instruments of the U.S. Government and
its agencies. All debt instruments with original maturities greater than three
months up to one year from the balance sheet date are considered short-term
investments. Investments maturing after twelve months from the balance sheet
date are considered long-term. The Company accounts for investments in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The Company's short-term and long-term investments are
classified as held-to-maturity as of the balance sheet date as the company has
both the ability and the intent to hold the investments to maturity and are
reported at amortized cost.
Property and equipment: Property and equipment are stated at cost.
Depreciation is computed under the straight-line method over the following
estimated useful lives:
Computer equipment and software................................. 3 years
Office equipment................................................ 5 years
Office furniture................................................ 7 years
Leasehold improvements.......................................... lease term
On January 1, 1999, the Company adopted Statement of Position 98-1,
Accounting for the Costs of Computer Software developed or Obtained for
Internal Use. This requires capitalization of certain costs incurred in
connection with developing or obtaining internal use software and amortization
of these costs over future periods, which prior to the adoption of SOP 98-1,
were expensed. For the year ended December 31, 1999, the Company has
capitalized $478,304 of costs associated with internally developed
F-9
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
software. These costs are included in property and equipment on the
accompanying balance sheet and are generally amortized over five years.
Intangible assets: Goodwill, purchased technology and other intangibles are
amortized on a straight-line basis over their estimated useful lives. Goodwill
and purchased technology are generally amortized over three to five years.
Other intangibles, primarily consisting of purchased trademarks and domain name
licenses are amortized over an estimated useful life of three years.
Other investments: The Company invests in equity investments of public and
privately-held technology companies for business and strategic purposes. These
investments are included in long-term assets and are classified as available-
for-sale. Investments in companies whose securities are not publicly traded are
recorded at cost. Investments in companies whose securities are publicly traded
are recorded at fair value. Unrealized gains or losses on these investments are
recorded as comprehensive income in the Company's stockholders' equity.
Realized gains or losses are recorded based on the identified cost of the
investment sold.
Other long-lived assets: Management periodically evaluates long-lived assets,
consisting primarily of purchased technology, goodwill, property and equipment,
to determine whether there has been any impairment of the value of these assets
and the appropriateness of their estimated remaining life. No impairment loss
has been recognized through December 31, 1999.
Revenue recognition: The Company's revenues are derived from its consumer,
merchant and wireless services. These include advertising, content carriage,
licensing fees, e-commerce fees and guaranteed transaction fees in lieu of
revenue share.
Advertising: Revenues from contracts based on the number of impressions
displayed or click throughs provided are recognized as services are rendered.
Content carriage: Revenues from fixed fee content carriage agreements are
recognized ratably over the related contract term. For content carriage fee
contracts that are performance based with an established maximum, the Company
recognizes revenues as the services are rendered, not to exceed the maximum
amount over the fixed term.
Licensing fees: Revenue from licensed services is recognized ratably over the
term of the license agreement.
Commerce fees: Transaction fees are recognized in the period the transaction
occurred and was reported to the Company by the content providers or online
merchants.
Guaranteed transaction fees: Guaranteed minimum payments are recognized
ratably over the term of the agreements. Revenues earned above the guaranteed
minimum payments are recognized ratably over the remaining term of the
agreements.
Also included in revenues are barter revenues generated from exchanging
banners for banners, banners for content or banners for print or other
advertising. Barter revenues are recorded at the lower of the estimated fair
market value of goods and services received or impressions given, and are
recognized when the Company's advertisements are run. For barter agreements,
the Company records a receivable or liability at the end of the reporting
period for the difference in the fair value of the services provided or
received.
Cost of revenues: Cost of revenues consists of expenses associated with the
enhancement, maintenance and support of our content services, including direct
personnel expenses, communication costs
F-10
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
such as high-speed Internet access, server equipment depreciation and content
license fees. Fees paid for content licenses are capitalized and amortized over
the license period.
Product development: Product development expenses consist principally of
personnel costs for research, design, development, enhancement and maintenance
of the proprietary technology used to integrate and distribute the Company's
consumer, merchant and wireless services. These expenses are net of capitalized
internally developed software costs.
Advertising costs: Costs for print advertising are recorded as expense when
the advertisement appears. Advertising costs related to electronic impressions
are recorded as expense as impressions are provided. Advertising expense
totaled approximately $5,369,000, $1,280,000 and $263,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
Unearned compensation: Unearned compensation represents the unamortized
difference between the option exercise price and the fair market value of the
Company's common stock for shares subject to grant at the grant date, for
options issued under the Company's stock incentive plan (Note 5). The
amortization of unearned compensation is charged to operations and is amortized
over the vesting period of the options.
Deferred expense-warrants: Deferred expense-warrants represents the fair
value of the warrants that were issued and is expensed ratably over the four
year vesting period. The amortization of deferred warrant expense is charged to
sales and marketing expense.
Acquisition and other related charges: Acquisition and other related charges
consist of in-process research and development and other one-time charges
related directly to the acquisitions, such as legal and accounting fees.
Other non-recurring charges: Other non-recurring charges in the first quarter
of 2000 consist of 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 these warrants was terminated and
the remaining unvested warrants accelerated to full vesting. Other non-
recurring charges in 1999 consist of costs associated with litigation
settlements.
Foreign currencies: Assets and liabilities denominated in foreign currencies
are translated at the exchange rate on the balance sheet date. Translation
adjustments resulting from this process are charged or credited to other
comprehensive income. Revenue and expenses are translated at average rates of
exchange prevailing during the period. Gains and losses on foreign currency
transactions are included in Other income, net.
Concentration of credit risk: Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of cash
equivalents, short-term investments, and trade receivables. These instruments
are generally unsecured and uninsured. The Company places its cash equivalents
and investments with major financial institutions. The Company operates in one
business segment and sells advertising to various companies across several
industries. Accounts receivable are typically unsecured and are derived from
revenues earned from customers primarily located in the United States operating
in a wide variety of industries and geographic areas. The Company performs
ongoing credit evaluations of its customers and maintains reserves for
potential credit losses. For the years ended December 31, 1999 and 1998, one
customer accounted for approximately 21% and 20% of revenues, respectively. For
the year ended December 31, 1997, no one customer accounted for more than 10%
of
F-11
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
revenues. At December 31, 1999, one customer accounted for approximately 14% of
accounts receivable. At December 31, 1998, one customer accounted for
approximately 26% of accounts receivable.
Income taxes: The Company has adopted Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes. Under SFAS No. 109,
deferred tax assets, including net operating loss carryforwards, and
liabilities are determined based on temporary differences between the book and
tax basis of assets and liabilities. The Company believes sufficient
uncertainty exists regarding the realizability of the deferred tax assets such
that a full valuation allowance is required.
Reclassification: Certain reclassifications have been made to the 1998 and
1997 balances to conform with the 1999 presentation.
Reverse stock split: A one-for-two reverse stock split of the Company's
common stock was effected on August 25, 1998. All references in the financial
statements to shares, share prices, per share amounts and stock plans have been
adjusted retroactively for the one-for-two reverse stock split.
Stock splits: A two-for-one stock split of the Company's common stock was
effected in May 1999. A second two-for-one stock split of the Company's common
stock was effected in January 2000. A third two-for-one stock split of the
Company's common stock was effected in April 2000. All references in the
financial statements to shares, share prices, per share amounts and stock plans
have been adjusted retroactively for these stock splits.
Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual amounts may differ from estimates.
Recent accounting pronouncements: In December 1999, the Securities and
Exchange Commission staff issued Staff Accounting Bulletin (SAB) 101, Revenue
Recognition in Financial Statements. The Company adopted SAB 101 on January 1,
2000. Prior to January 1, 2000 and implementation of the SAB, 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-line 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 (unaudited) in revenue in the first quarter
of 2000 related to previously recognized 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.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivatives and
Hedging Activities. SFAS 133, as amended by SFAS 137, establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. Because the Company has never used
nor currently intends to use derivatives, management does not anticipate that
the adoption of this new standard will have a significant effect on earnings or
the financial position of the Company.
F-12
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2: Balance Sheet Components
Investments at December 31, 1999 consist of the following:
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gain Loss Value
------------ ---------- ---------- ------------
Corporate notes and bonds
......................... $100,604,357 $ 61,109 $(530,513) $100,134,953
U.S. Government securities
......................... 52,920,693 14,198 (249,720) 52,685,171
Commercial paper ......... 27,362,325 147,997 -- 27,510,322
Certificate of deposit ... 15,249,543 79,125 (31,108) 15,297,560
------------ -------- --------- ------------
$196,136,918 $302,429 $(811,341) $195,628,006
============ ======== ========= ============
Maturity information is as follows:
Amortized
Cost Fair Value
------------ ------------
Within one year .................................. $124,720,142 $124,656,361
1 year through 5 years ........................... 71,416,776 70,971,645
------------ ------------
$196,136,918 $195,628,006
============ ============
Investments at December 31, 1998 consist of the following:
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gain Loss Value
----------- ---------- ---------- -----------
Commercial paper ............ $68,810,756 $13,259 $(253) $68,823,762
Municipal securities ........ 1,499,665 485 -- 1,500,150
U.S. Government securities
............................ 5,243,820 -- (387) 5,243,433
----------- ------- ----- -----------
$75,554,241 $13,744 $(640) $75,567,345
=========== ======= ===== ===========
Maturity information is as follows:
Amortized
Cost Fair Value
----------- -----------
Within one year .................................... $74,301,803 $74,315,294
1 year through 5 years ............................. 1,252,438 1,252,051
----------- -----------
$75,554,241 $75,567,345
=========== ===========
F-13
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, December 31,
1999 1998
------------ ------------
Property and equipment:
Computer equipment ............................. $ 6,624,664 $3,561,385
Purchased software ............................. 2,736,850 773,808
Internally developed software .................. 478,304 --
Office equipment ............................... 403,977 152,028
Office furniture ............................... 346,181 296,145
Leasehold improvements ......................... 904,698 431,715
----------- ----------
11,494,674 5,215,081
Accumulated depreciation ....................... (3,495,717) (1,088,769)
----------- ----------
$ 7,998,957 $4,126,312
=========== ==========
Intangible assets:
Goodwill ....................................... $70,436,117 $4,860,671
Core technology ................................ 6,500,000 800,000
Assembled workforce ............................ 420,000 40,000
Other .......................................... 624,590 499,974
----------- ----------
77,980,707 6,200,645
Accumulated amortization ....................... (4,138,150) (896,389)
----------- ----------
$73,842,557 $5,304,256
=========== ==========
Accrued expenses:
Salaries and related expenses .................. $ 2,979,731 $ 193,592
Accrued carriage fees .......................... 907,503 --
Accrued revenue share .......................... 1,064,638 93,067
Accrued settlement costs ....................... 10,500,000 4,500,000
Other .......................................... 3,049,181 1,869,838
----------- ----------
$18,501,053 $6,656,497
=========== ==========
Note 3: Notes Receivable
On June 30, 1999, the Company loaned an unrelated third party $6.0 million at
12% interest per annum. The short-term note and accrued interest was repaid on
February 7, 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 these notes are secured by all of the assets and properties of the
borrower and are considered fully collectible. At December 31, 1999, accrued
interest on this note is $25,000.
On December 21, 1999, the Company loaned a director of the Company $1.9
million. The promissory note is due on December 16, 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 December 31, 1999, accrued interest on this note is $4,405. At
December 31, 1999, the Company also had approximately $1.1 million in short-
term loans to employees and unrelated parties at various interest rates.
Approximately $941,000 of this balance has been repaid subsequent to year-end
(unaudited).
F-14
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4: Long-Term Debt
The Company's long-term debt as of December 31 consists of (in thousands):
1999 1998
----------- -----------
Demand note payable.............................. $ 250,000 $ 250,000
Equipment lease line............................. 1,219,331 1,186,063
Loan related to joint venture.................... -- 144,000
Equipment financing and capitalized leases ...... 187,525 175,143
Current portion.................................. (1,042,436) (1,057,560)
----------- -----------
Long-term portion................................ $ 614,420 $ 697,646
=========== ===========
In January 1996, the Company executed a demand note with a commercial entity
in the amount of $250,000, which is the amount outstanding as of December 31,
1999. The note bears interest at LIBOR (5.82% as of December 31, 1999) plus 1%
per annum, and the full principal amount plus interest is due on demand. The
note may be converted into shares of the Company's preferred stock at the then
prevailing conversion or market price, until the note is paid in full. In
January 2000, the Company exercised its right to repay the demand note in
accordance with the terms of the note payable (the "Terms"), by sending a check
for full amount of principal and accrued interest. Lender attempted to reject
the repayment on the grounds that it had attempted to convert the note in early
1998. Management believes that such lender's claim is without merit based on
the Terms and intends to defend its claim vigorously.
In June 1997, the Company entered into a loan and security agreement (the
"Agreement," as amended in September 1998) with Phoenix Leasing Incorporated.
The Agreement provides the Company with
available borrowings not to exceed $2,124,000, in aggregate, $2,099,000 of
which was drawn through December 31, 1999. Principal and interest are due in 36
equal monthly installments with a final payment equal to 15% of the original
principal amount due on the 37th month from the time of the borrowing. The
notes bear interest at effective rates ranging from 15.0% to 16.4% per annum.
Principal repayments for the borrowings are due as follows: 2000, $607,000;
2001, $561,000; and 2002, $50,000.
In October 1997, the Company entered into a joint venture agreement (the
Joint Agreement) with DataCard to form DSIPL. Pursuant to the terms of the
Joint Agreement, DSIPL will perform development services for DataCard and the
Company. In connection with the Joint Agreement, DataCard loaned Prio $500,000,
the proceeds of which were used by Prio to fund DSIPL. DataCard had the option
to convert $250,000 of the notes payable into 50% ownership interest in DSIPL,
which was exercised by DataCard in May 1998. The remaining amount of the note
of $144,000 was paid in full during 1999.
Note 5: Other Investments
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
securities.
The Company also holds warrants in public and privately-held technology
companies for business and strategic purposes. Certain of these warrant
agreements contain provisions that require the Company to meet specific
performance criteria for the warrants to vest. When the Company meets its
performance obligations it records revenue equal to the difference in the
exercise price of the warrant and the fair market value of the underlying
security. The Company recorded revenue in the amount of $1,895,325 for vesting
in performance warrants and stock for the year ended December 31, 1999.
F-15
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unrealized Carrying
Gain Value
---------- -----------
Investments in public companies...................... $1,324,301 $ 4,060,076
Investments in privately-held companies.............. -- 12,359,800
Investment in joint venture.......................... -- 618,632
---------- -----------
Total other investments.............................. $1,324,301 $17,038,508
========== ===========
Note 6: Stockholders' Equity
Authorized shares: On May 1, 1998, the Company's Certificate of Incorporation
was amended to increase the authorized number of shares of all classes of
Company stock to 55,000,000 shares, consisting of 40,000,000 shares of common
stock with a par value of $.0001 per share and 15,000,000 shares of preferred
stock with a par value of $.0001 per share.
On August 25, 1998, the Board of Directors approved and the Company effected
a one-for-two reverse stock split of the Company's common stock.
Also, on August 25, 1998, the Company filed a Restated Certificate of
Incorporation. The effect was to change the authorized number of all classes of
Company stock to 65,000,000 shares, consisting of 50,000,000 shares of common
stock with a par value of $.0001 per share and 15,000,000 shares of preferred
stock with a par value of $.0001 per share after giving effect to the one-for-
two reverse stock split.
In April 1999, the Company closed a follow-on offering. The Company sold
17,360,000 shares and raised approximately $185 million, net of expenses.
Certain shareholders sold 12,080,000 shares.
On April 6, 1999, the Board of Directors approved a two-for-one stock split
of the Company's common stock. The stock split was effected on May 5, 1999.
On May 24, 1999, the stockholders of the Company approved an amendment to the
Company's Certificate of Incorporation to increase the authorized number of
shares of the Company's common stock to 200,000,000 shares.
On November 29, 1999, the Board of Directors approved a two-for-one stock
split of the Company's common stock. The stock split was effected on January 5,
2000.
On January 21, 2000, the Board of Directors approved a two-for-one stock
split of the Company's common stock. The stock split was effected on April 6,
2000. On April 3, 2000, the stockholders of the Company approved an amendment
to the Company's Certificate of Incorporation to increase the number of
authorized shares to 900,000,000 shares.
Restated 1996 Flexible Stock Incentive Plan: On June 3, 1998, the Board of
Directors approved the Restated 1996 Flexible Stock Incentive Plan (the Plan).
The Plan provides employees (including officers and directors who are
employees) of the Company an opportunity to purchase shares of stock pursuant
to options which may qualify as incentive stock options under Section 422 of
the Internal Revenue Code of 1986, as amended (the Code), and employees,
officers, directors, independent contractors and consultants of the Company an
opportunity to purchase shares of stock pursuant to options which are not
described in Section 422 of the Code (nonqualified stock options). The Plan
also provides for the sale or bonus of stock to eligible individuals in
connection with the performance of service for the Company. Finally, the Plan
authorizes the grant of stock appreciation rights, either separately or in
tandem with stock options, which
F-16
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
entitle holders to cash compensation measured by appreciation in the value of
the stock. Not more than 3,000,000 shares of stock shall be available for the
grant of options or the issuance of stock under the Plan. If an option is
surrendered or for any other reason ceases to be exercisable in whole or in
part, the shares which were subject to option but on which the option has not
been exercised shall continue to be available under the Plan. The Plan is
administered by the Board of Directors. Options granted under the Plan
typically vest over four years, 25% one year from the date of grant and ratably
thereafter on a monthly basis. Additional options have been granted to retain
certain existing employees, which options vest monthly over four years.
On June 3, 1998, the Board of Directors approved the Option Exchange Program
and the Option Replacement Program, allowing employees of the Company to
exchange their nonqualified stock options for incentive stock options.
Nonqualified stock options to purchase a total of 2,900,424 shares were
exchanged for incentive stock options to purchase the equivalent number of
shares with an exercise price equal to the fair market value at the date of
exchange.
On May 24, 1999, the stockholders approved an amendment to the Plan to
increase the number of shares of Common Stock reserved for issuance thereunder
by 8,000,000 shares. On January 21, 2000, the Board of Directors approved the
deletion of this limitation.
On May 24, 1999, the stockholders approved an amendment to the Plan to
annually increase the number of shares reserved for issuance on the first day
of the Company's fiscal year beginning January 1, 2000 by an amount equal to
the lesser of (A) 8,000,000 shares, (B) three percent of the Company's
outstanding shares at the end of the Company's preceding fiscal year, and (C) a
lesser amount determined by the Board of Directors.
On May 24, 1999, the stockholders approved an amendment to the Plan to limit
the number of shares of Common Stock that may be granted to any one individual
pursuant to stock options in any fiscal year of the Company to 8,000,000
shares, plus an additional 8,000,000 shares in connection with his or her
initial employment with the Company, which grant shall not count against the
limit.
Included in the table below as outstanding at December 31, 1999 are options
to purchase 1,630,675 shares that were issued outside of the Plan, of which
754,269 were exercisable as of December 31, 1999. The options issued outside
the Plan include 1,512,971 options that were assumed in acquisitions.
F-17
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Activity and price information regarding the options are summarized as
follows:
Weighted average
Options Exercise price
---------- ----------------
Outstanding, December 31, 1996 ................. 8,650,442 $ 0.03
Granted ...................................... 3,348,054 0.56
Cancelled..................................... (61,865) 0.76
Exercised .................................... (29,470) 0.51
----------
Outstanding, December 31, 1997 ................. 11,907,161 0.18
Granted ...................................... 16,791,512 1.37
Cancelled .................................... (4,137,972) 0.41
Exercised .................................... (2,318,484) 0.45
----------
Outstanding, December 31, 1998 ................. 22,242,217 1.00
Granted ...................................... 8,725,180 13.76
Cancelled .................................... (838,008) 2.91
Exercised .................................... (4,055,202) 0.71
----------
Outstanding, December 31, 1999 ................. 26,074,187 5.26
Granted ...................................... 3,067,527 85.45
Cancelled .................................... (244,120) 17.66
Exercised .................................... (2,865,698) 1.54
----------
Outstanding, March 31, 2000..................... 26,031,896 14.35
==========
Options exercisable, March 31, 2000............. 8,051,025 1.26
==========
Information regarding stock option grants during the years ended December 31,
1999, 1998 and 1997 is summarized as follows:
Year ended Year ended
December 31, 1999 Year ended December 31, 1998 December 31, 1997
--------------------------- ---------------------------- ---------------------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
exercise fair exercise fair exercise fair
Shares price value Shares price value Shares price value
--------- -------- -------- ---------- -------- -------- --------- -------- --------
Exercise price exceeds
market price........... -- $ -- $ -- -- -- $ -- 2,000,000 $0.50 $0.38
Exercise price equals
market price........... 8,354,955 13.99 14.00 14,659,512 1.46 1.50 413,062 0.19 2.01
Exercise price is less
than market price...... 430,756 8.68 14.20 2,132,000 0.17 0.45 934,992 0.10 0.30
The Company granted 3,067,527 options in the first quarter of 2000 at
exercise prices equal to market prices. The weighted average exercise price and
fair market value of these options is $85.45 and $88.28, respectively.
The Company has elected to follow the measurement provisions of Accounting
Principles Board Opinion No. 25, under which no recognition of expense is
required in accounting for stock options granted to employees for which the
exercise price equals or exceeds the fair market value of the stock at the
grant date. In those cases where options have been granted when the option
price is below fair market value, the Company recognizes compensation expense
over the vesting period using the aggregated percentage of compensation accrued
method as prescribed by Financial Standards Accounting Board Interpretation
No. 28. Compensation expense of $884,714, $1,246,132, and $143,922, was
recognized during the years
F-18
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ended December 31, 1999, 1998 and 1997, respectively, and $258,890 for the
quarter ended March 31, 2000 for options granted with exercise prices less than
grant date fair market value.
To estimate compensation expense which would be recognized under SFAS No.
123, Accounting for Stock-based Compensation, the Company uses the modified
Black-Scholes option-pricing model with the following weighted-average
assumptions for options granted through December 31, 1999: risk-free interest
rate ranging from 4.24% to 6.56%; expected dividend yield of 0-%; 121%
volatility; and an expected life of five years for 1999 and six years for 1998
and prior.
Had compensation expense for the Plan been determined based on fair value at
the grant dates for awards under the Plan consistent with SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net losses for the years
ended December 31, 1999, 1998 and 1997, and quarter ended March 31, 2000 would
have been adjusted to the following pro forma amounts:
Year ended Quarter ended
--------------------------------------- -------------
March 31,
1999 1998 1997 2000
------------ ------------ ----------- -------------
Net loss as reported.... $(57,571,793) $(25,968,851) $(9,943,915) $ (83,715,308)
Net loss, pro forma..... (73,024,084) (26,384,715) (9,995,405) (106,554,207)
Basic net loss per
share, pro forma....... $ (0.38) $ (0.23) $ (0.11) $ (0.49)
Additional information regarding options outstanding as of December 31, 1999,
is as follows:
Options outstanding Options exercisable
------------------------------------- -----------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life (yrs.) price Exercisable price
-------- ----------- ----------- -------- ----------- --------
$0.003-- 0.94 7,808,136 6.65 $ 0.13 5,694,528 $ 0.06
1.00-- 4.89 9,850,925 7.97 1.89 2,722,225 1.94
5.35-- 9.97 2,802,776 7.74 6.69 346,779 6.65
10.11--14.32 4,041,800 9.75 16.48 -- --
15.59--28.78 874,000 9.87 22.99 -- --
37.25--50.81 696,550 9.94 45.45 49,784 38.13
---------- ---- ------ --------- ------
26,074,187 8.62 5.26 8,813,316 1.11
========== ==== ====== ========= ======
At December 31, 1999 17,806,060 shares were available for future grants under
the Plan.
In connection with the May and August 1998 private placement offering, the
Company issued warrants to purchase 16,510,688 shares of common stock to five
third-party participants for consulting services performed in identifying,
structuring and negotiating future financings. These warrants expire between
May 21, 2008 and August 6, 2008. The activity and additional information are as
follows:
Outstanding, December 31, 1998............................... 16,510,688
Exercised.................................................... (1,870,872)
----------
Outstanding, December 31, 1999............................... 14,639,816
==========
Range of
Exercise Number
prices Outstanding
-------- -----------
$0.25-0.50.................................................. 7,869,968
0.63-0.75.................................................. 3,415,960
1.25....................................................... 3,353,888
F-19
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In July 1998, the Company issued warrants to purchase 3,823,736 shares of
common stock at an exercise price of $.003 to a former consultant in
conjunction with the acquisition of Outpost (Note 4). All of these warrants
were exercised in 1999.
On August 24, 1998, the Company issued to AOL warrants to purchase up to
7,919,328 shares of common stock, which warrants vest in 16 equal quarterly
installments over four years, conditioned on the delivery by AOL of a minimum
number of searches each quarter on the Company's white pages directory service.
The warrants have an exercise price of $1.50 per share. The warrants were
valued using the fair value method, as required under SFAS No. 123. The fair
value of the warrants was approximately $3,300,000 at the date of grant, and is
being amortized ratably over the four-year vesting period. The underlying
assumptions used to determine the value of the warrants are an expected life of
six years and a 5.5% risk-free interest rate.
The Company assumed warrants to purchase 288,808 shares of the Company's
common stock as a result of the acquisition of INEX Corporation (Note 7). These
warrants were issued to seven third-party participants. Two of the third party
participants exercised 24,486 of the warrants in December 1999. The remaining
warrants expire between January 29, 2000 and July 31, 2000. The range of
exercise prices and number outstanding at December 31, 1999 are as follows:
Range of Number
Exercise prices Outstanding
--------------- -----------
$1.88........................................................ 34,278
4.00........................................................ 85,640
The Company assumed warrants to purchase 474,203 shares of the Company's
stock as a result of the acquisition of Prio, Inc. with an exercise price of
$9.97 per share. The warrants were issued to a third-party participant in
December of 1998 and are exercisable over a maximum of a 48 month period, based
on achievement of performance milestones and other criteria as defined in the
warrant agreement. In 1999, Prio recorded warrant expense for all the warrants
issued, of which 118,551 were unvested at December 31, 1999, of $18 million
based on the fair value of these warrants using the Black-Scholes option
pricing model with the following assumptions: dividend yield of 0%; expected
volatility of 75%; contractual life of nine years; and risk-free interest rate
of 6.37%. The compensation cost for the unvested warrants was remeasured when
vesting occurred and additional warrant expense of $2.9 million was recognized
on March 31, 2000.
Stock purchase rights plan: On June 26, 1998, the Board of Directors approved
the InfoSpace Stock Purchase Rights Plan. The plan was offered to employees of
the Company and its subsidiaries. The purpose of the plan was to provide an
opportunity for employees to invest in the Company and increase their incentive
to remain with the Company. A maximum of 4,000,000 shares of common stock were
available for issuance under the plan. During July 1998, the Company offered
shares to employees under the plan, resulting in the sale of 1,786,008 shares
at $.94 per share. The plan was terminated on August 24, 1998.
1998 Employee Stock Purchase Plan: The Company adopted the 1998 Employee
Stock Purchase Plan (the ESPP) in August 1998. The ESPP was implemented upon
the effectiveness of the initial public offering. The ESPP is intended to
qualify under Section 423 of the Code, and permits eligible employees of the
Company and its subsidiaries to purchase common stock through payroll
deductions of up to 15% of their compensation. Under the ESPP, no employee may
purchase common stock worth more than $25,000 in any calendar year, valued as
of the first day of each offering period. In addition, owners of 5% or more of
the Company or subsidiary's common stock and the Company's executives may not
participate in the ESPP. An aggregate of 3,600,000 shares of common stock are
authorized for issuance under the ESPP.
F-20
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The ESPP was implemented with six-month offering periods, with the first such
period commencing upon the effectiveness of the initial public offering and
ending July 31, 1999. Thereafter, offering periods will begin on each February
1 and August 1. The price of common stock purchased under the ESPP will be the
lesser of 85% of the fair market value on the first day of an offering period
and 85% of the fair market value on the last day of an offering period, except
that the purchase price for the first offering period was equal to the lesser
of 100% of the initial public offering price of the common stock offered hereby
and 85% of the fair market value on July 31, 1999. The ESPP does not have a
fixed expiration date, but may be terminated by the Company's Board of
Directors at any time. There were 152,580 shares issued for the first ESPP
offering period which ended on July 31, 1999.
Note 7: Business Combinations
Millet Software (unaudited): 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.................................................. $23,826,169
===========
The $6,000,000 value of purchased technology includes purchased in-process
research and development for future InfoSpace products. Generally accepted
accounting principles in the U.S. 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. (unaudited): 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
F-21
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 in the United States 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.
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 consolidated balance sheet as of March
31, 2000, December 31, 1999 and December 31, 1998, the statements of operations
and statements of cash flows for the quarters ended March 31, 2000 and 1999 and
the years ended December 31, 1999, 1998 and 1997, and the statement of
stockholders' equity for the years ended December 31, 1999, 1998 and 1997 are
presented as if Prio was a wholly-owned subsidiary since inception.
F-22
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
------------ -----------
(unaudited) (unaudited)
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)
============ ===========
Change in stockholders' equity:
InfoSpace................................... $318,325,098
Prio........................................ (10,615,185)
Zephyr Software Inc: On December 29, 1999, the Company acquired all of the
common stock of Zephyr Software Inc., a privately held company, and its wholly
owned subsidiary Zephyr Software (India) Private Limited ("Zephyr") for a
purchase consideration of 651,392 shares of the Company's common stock and
acquisition expenses of $539,512. The acquisition was accounted for as a
purchase in accordance with Accounting Principles Board Opinion ("APB") No. 16.
Results of operations for Zephyr 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:
Book and
Fair Value
----------
Tangible assets acquired....................................... $ 217,932
Liabilities assumed............................................ (238,622)
----------
Book value of net liabilities acquired....................... (20,690)
Purchase price:
Fair value of shares issued.................................. 8,643,105
Acquisition costs............................................ 539,512
----------
Excess of purchase price over net assets acquired, allocated to
goodwill...................................................... $9,203,307
==========
The Company is amortizing the goodwill over an estimated useful life of three
years.
eComLive.com, Inc.: On December 16, 1999, the Company acquired all of the
common stock of eComLive.com, Inc., a privately held company, for a purchase
consideration of 1,372,712 shares and acquisition expenses of $582,246. The
acquisition was accounted for as a purchase in accordance with the provisions
of APB No. 16.
F-23
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The purchase price was allocated to the assets acquired and liabilities
assumed based on their estimated fair values as follows:
Book and
Fair Value
-----------
Tangible assets acquired...................................... $ 59,128
Liabilities assumed........................................... (60,053)
-----------
Book value of net liabilities acquired...................... (925)
Fair value adjustments:
Fair value of purchased technology, including in-process
research and development................................... 5,300,000
Fair value of assembled workforce........................... 140,000
-----------
Fair value of net assets acquired............................. 5,439,075
Purchase price:
Fair value of shares issued................................. 31,995,220
Acquisition costs........................................... 582,246
-----------
Excess of purchase price over net assets acquired, allocated
to goodwill.................................................. $27,138,391
===========
The $5,300,000 value of purchased technology includes purchased in-process
research and development for future InfoSpace products. Generally accepted
accounting principles require purchased in-process research and development
with no alternative future use to be recorded and charged to expense in the
period acquired. Accordingly, the results of operations for the year ended
December 31, 1999, include the write-off of $2,000,000 of purchased in-process
research and development. The remaining $3,300,000 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
over an estimated life of five years.
Union-Street.com: On October 14, 1999, the Company acquired all of the common
stock of Union-Street.com, a privately held company, for a purchase
consideration of 1,746,588 shares and acquisition expenses of $395,656. The
acquisition was accounted for as a purchase in accordance with the provisions
of APB No. 16.
The purchase price was allocated to the assets acquired and liabilities
assumed based on their estimated fair values as follows:
Book and
Fair Value
-----------
Tangible assets acquired...................................... $ 69,412
Liabilities assumed........................................... (176,631)
-----------
Book value of net liabilities acquired...................... (107,219)
Fair value adjustments:
Fair value of purchased technology, including in-process
research and development................................... 5,300,000
Fair value of assembled workforce........................... 160,000
-----------
Fair value of net assets acquired............................. 5,352,781
Purchase price:
Fair value of shares issued................................. 20,487,518
Acquisition costs........................................... 395,656
-----------
Excess of purchase price over net assets acquired, allocated
to goodwill.................................................. $15,530,393
===========
F-24
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The $5,300,000 value of purchased technology includes purchased in-process
research and development for future InfoSpace products. Generally accepted
accounting principles require purchased in-process research and development
with no alternative future use to be recorded and charged to expense in the
period acquired. Accordingly, the results of operations for the year ended
December 31, 1999, include the write-off of $3,300,000 of purchased in-process
research and development. The remaining $2,000,000 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
over an estimated useful life of five years.
INEX Corporation: On October 14, 1999, the Company completed the merger with
INEX Corporation, a privately held company that developed and marketed Internet
commerce applications to deliver solutions designed for small and medium-sized
merchants to build, manage and promote online storefronts. Under the terms of
the merger , which was accounted for as a pooling-of-interests, the Company
exchanged 3,600,000 shares of common stock for (1) directly to those INEX
shareholders who elected to receive our common stock in exchange for their INEX
shares at the closing of the combination, (2) upon the exchange or redemption
of the exchangeable shares of InfoSpace.com Canada Holdings Inc., an indirect
subsidiary of the Company, which exchangeable shares were issued to those INEX
shareholders who elected to receive exchangeable shares, or who did not make an
election to receive shares of our common stock at the closing, and (3) upon the
exercise of outstanding warrants and options to purchase INEX common shares,
which the Company assumed and which will become exercisable for shares of
InfoSpace common stock. The consolidated financial statements for the three
years ended December 31, 1999 and the accompanying notes reflect the Company's
financial position and the results of operations as if INEX was a wholly-owned
subsidiary since inception.
My Agent technology: On June 30, 1999 the Company acquired the MyAgent
technology and related assets from Active Voice Corporation for $18 million
dollars. The acquisition was accounted for as a purchase in accordance with the
provisions of APB No. 16. Under the purchase method of accounting, the purchase
price is allocated to the assets acquired and the liabilities assumed based on
their fair values at the date of the acquisition. Other than the MyAgent
technology modules, no other assets or liabilities were assumed as part of this
acquisition.
The Company recorded a non-recurring charge of $3.9 million for in-process
research and development that had not yet reached technological feasibility and
had no alternative future use. Separately, the Company also recorded a one-time
charge of approximately $1.0 million for expenses related to bonus payments
made to certain Active Voice MyAgent team employees who accepted employment
with InfoSpace but who are under no agreement to continue their employment with
InfoSpace. The Company also recorded $13.7 million of goodwill and $480,000 of
other intangible assets. These intangibles will be amortized over their useful
life, which the Company has estimated to be five years.
The allocation of the purchase price is summarized as follows:
Fair value of purchased technology, including in-process
research and development..................................... $ 4,300,000
Fair value of assembled workforce............................. 80,000
-----------
Fair value of net assets acquired............................. 4,380,000
Purchase price:
Cash paid................................................... 18,000,000
Acquisition costs........................................... 83,054
-----------
Excess of purchase price over net assets acquired, Allocated
to goodwill.................................................. $13,703,054
===========
F-25
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The $4.3 million value of purchased technology includes purchased in-process
research and development for future InfoSpace products. Generally accepted
accounting principles require purchased in-process research and development
with no alternative future use to be recorded and charged to expense in the
period acquired. Accordingly, the results of operations for the quarter ended
June 30, 1999, include the write-off of $3.9 million of purchased in-process
research and development. The remaining $400,000 represents the purchase of
core technology which is being amortized over an estimated useful life of five
years. The Company is amortizing the goodwill over an estimated life of five
years.
Prior to the acquisition, the MyAgent product team was not accounted for as a
separate entity, a subsidiary, or a line of business, or division of the
business, but rather was an integral part of the research and development
group. Accordingly, historical financial information is not available.
Outpost Network, Inc.: On June 2, 1998, the Company acquired all of the
common stock of Outpost, a privately held company, for a purchase consideration
of 11,999,904 shares of the Company's common stock, cash of $35,000, assumed
liabilities of $264,000, and acquisition expenses of $1,957,000. In conjunction
with the acquisition, the Company was required to issue warrants valued at
$1,902,000 to a former consultant, which are included in acquisition costs. The
transaction was accounted for as a purchase.
Of the purchase price of $7,992,000, $2,800,000 was allocated to in-process
research and development, $800,000 was allocated to core technology and
existing products and $4,543,000 was recorded as goodwill. Generally accepted
accounting principles require purchased in-process research and development
with no alternative future use to be recorded and charged to expense in the
period acquired. Accordingly, the results of operations for the year ended
December 31, 1998, include the write-off of the purchased in-process research
and development. The core technology and goodwill are being amortized over a
useful life of five years.
YPI: On May 16, 1997, the Company acquired all outstanding Membership
Interest Units of YPI, a limited liability company, in a transaction accounted
for as a purchase. YPI operations began to be included in the Company's
financial statements on the effective date of the acquisition, May 1, 1997. In
conjunction with the acquisition, the Company acquired certain advertising
agreements and assumed a note payable for $90,000. The purchase price of
$306,000 was allocated to advertising agreements of $85,417, note payable of
$90,000 and goodwill of $310,383. The aggregate number of shares of the stock
issued was derived from revenues generated by the business during the specified
measurement period. Before December 31, 1997, the number of shares to be issued
was finalized and a total of 680,000 shares were issued to the sellers on
January 2, 1998.
Pro forma information relating to acquisitions (unaudited)
The following unaudited pro forma information shows the results of the
Company for the year ended December 31, 1999 as if the acquisitions of Zephyr
Software, eComLive and Union-Street occurred on January 1, 1999 The pro forma
results of operations are unaudited, have been prepared for comparative
purposes only and do not purport to indicate the results of operations which
would actually have occurred had the combinations been in effect on the dates
indicated or which may occur in the future.
(unaudited)
------------
Revenue....................................................... $ 37,470,483
Net loss...................................................... (70,947,571)
Basic and diluted net loss per share.......................... $ (0.36)
F-26
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8: Commitments and Contingencies
The Company has noncancellable operating leases for corporate facilities. The
leases expire through 2003. Rent expense under operating leases totaled
approximately $1,181,000, $935,000 and $339,000, for the years ended December
31, 1999, 1998 and 1997, respectively. The Company also has noncancellable
carriage fee agreements with certain affiliates.
Future minimum rental payments required under noncancellable operating leases
are as follows for the years ending December 31:
2000............................................................ $1,397,000
2001............................................................ 1,311,000
2002............................................................ 1,296,000
2003............................................................ 596,000
2004............................................................ 17,000
----------
$4,617,000
==========
Future payments required under noncancellable affiliate carriage fee
agreements are as follows for the years ending December 31:
2000........................................................... $12,083,000
2001........................................................... 11,572,000
2002........................................................... 900,000
2003........................................................... 900,000
2004........................................................... 900,000
-----------
$26,355,000
===========
Litigation: On December 15, 1999, a complaint was filed against the Company
on behalf of a former employee in federal court in New Jersey alleging claims
for breach of contract, breach of the covenant of good faith and fair dealing,
fraud, negligent misrepresentation, and promissory estoppel. The former
employee contends he agreed to work for InfoSpace on the basis of certain
misrepresentations, that he entered into an agreement with the Company that
entitles him to an option to purchase 300,000 shares of the Company's common
stock, and that he was terminated without cause. The former employee seeks
(1) the right to purchase the shares of stock, (2) unspecified compensatory and
punitive damages, and (3) litigation costs and attorney's fees. On January 31,
2000, the Company answered the complaint. Discovery is complete. The case has
been transferred to the United States District Court for the Western District
of Washington and a trial date has not yet been set. The Company is currently
investigating the claims at issue and believes the Company has meritorious
defenses to such claims. Nevertheless, litigation is uncertain and the Company
may not prevail in this suit.
One of the shareholders of INEX Corporation filed a complaint on September
22, 1999 alleging that the original shareholders of INEX and INEX itself were
bound by a shareholders agreement that entitled it to pre-emptive rights and
rights of first refusal. The complaint alleges that INEX improperly made
private placements, issued employee options and permitted share transfers after
February 1997. The complainant alleges it should have acquired rights in
approximately 88% of the INEX share capital, which would be less than one
percent of our common stock. The complaint also alleges other breaches of
contract, breach of fiduciary duty, corporate oppression, unlawful interference
with economic relations and conspiracy. The complaint was amended on December
20, 1999 to allege that the Company assumed the obligations of
F-27
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
INEX under the alleged shareholders agreement as a result of our acquisition of
INEX on October 14, 1999. The complaint seeks damages against the Company and
named former INEX shareholders for the difference between the issue or sale
price of INEX shares issued or transferred after February 1997 and before
October 14, 1999 and the highest trading value of shares of the Company's
common stock received or receivable in exchange attained before the date of
trial. In the alternative, the complaint seeks special damages in the amount of
$50,000,000 Canadian. The complaint also seeks $500,000 in punitive damages and
constructive trusts, equitable liens and tracing remedies in both INEX shares
formerly held by certain shareholders and shares of the Company's common stock
received by those shareholders in exchange for their INEX shares. 435,134
shares of the Company's common stock and shares exchangeable into the Company's
common stock that were part of the INEX purchase price which are held to
satisfy this claim. The Company is currently investigating the claims at issue
and believes the Company has meritorious defenses to such claims. Nevertheless,
litigation is uncertain and the Company may not prevail in this suit.
On December 23, 1998, the Company initiated litigation against Internet
Yellow Pages, Inc., or IYP, by filing suit in United States District Court for
the Western District of Washington. On February 3, 1999, the Company served a
first amended complaint on IYP and Greg Crane, an agent of IYP, in which the
Company asserted claims for (a) account stated, (b) breach of contract, and (c)
fraud. On March 5, 1999, IYP answered the Company's complaint in the Washington
action, and asserted claims for breach of contract, fraud, extortion and
Consumer Protection Act violations. IYP seeks relief consisting of
approximately $1,500,000 and other unquantified money damages and treble
damages for the CPA and attorneys' fees. Discovery is complete. The Company is
currently investigating the claims at issue and believes the Company has
meritorious defenses to such claims. Nevertheless, litigation is uncertain and
the Company may not prevail in these suits. The case is scheduled for a
streamlined mini-trial before a federal magistrate on July 31, 2000.
Settlement of litigation: On February 8, 2000, the Company reached a
settlement with an alleged former employee. Under the terms of the settlement,
the alleged former employee received a cash payment of $10.5 million. As this
subsequent event was settled prior to the issuance of the financial statements,
the expense has been recorded in the fourth quarter of 1999 in Other non-
recurring expense.
On February 22, 1999, the Company reached a settlement with a former
employee. Under the terms of the settlement the former employee received a cash
payment of $4.5 million. As this subsequent event was settled after December
31, 1998 but prior to the issuance of the financial statements, the expense was
recorded in the fourth quarter of 1998 in Other non-recurring expense.
Contingencies: In the Company's early stage of development, the Company did
not clearly document arrangements with employees and consultants, including
matters relating to the issuance of stock options. As a result of this
incomplete documentation, the Company may receive claims in the future
asserting rights to acquire common stock.
F-28
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9: Income Taxes
No provision for federal income tax has been recorded as the Company has
incurred net operating losses through December 31, 1999. The tax effects of
temporary differences and net operating loss carryforwards that give rise to
the Company's deferred tax assets and liabilities are as follows:
1999 1998 1997
------------ ------------ -----------
Deferred tax assets:
Net operating loss carryforward .... $ 24,633,500 $ 3,036,000 $ 1,688,000
Tax credits......................... 1,492,000 472,000 273,000
Intangible amortization ............ 428,000 60,000 37,000
Compensation expense--stock options
................................... 204,000 59,000 59,000
Allowance for bad debt ............. 237,000 203,000 16,000
Litigation accrual ................. 3,675,000 1,530,000 47,000
Accrued carriage fees............... 318,000 -- --
Other, net ......................... 473,500 503,000 636,000
Warrants ........................... 6,002,000 46,000 --
Deferred revenue ................... 199,000 473,000 --
Sect. 195 start-up costs............ 7,273,000 5,604,000 1,400,000
State tax assets.................... 4,236,000 2,564,000 445,000
------------ ------------ -----------
Gross deferred tax assets ........ 49,171,000 14,550,000 4,601,000
Deferred tax liabilities:
Purchased technology ............... 868,000 252,000 --
Prepaid expenses ................... 125,000 113,000 --
Depreciation ....................... 115,000 13,000 2,000
Unrealized investment gains ........ 463,000 -- --
Other .............................. 5,000 -- 2,000
------------ ------------ -----------
Gross deferred tax liabilities ... 1,576,000 378,000 4,000
------------ ------------ -----------
Net deferred tax assets .......... 47,595,000 14,172,000 4,597,000
Valuation allowance .................. (47,595,000) (14,172,000) (4,597,000)
------------ ------------ -----------
Deferred tax balance ................. $ -- $ -- $ --
============ ============ ===========
At December 31, 1999, 1998 and 1997, the Company fully reserved its deferred
tax assets. The Company believes sufficient uncertainty exists regarding the
realizability of the deferred tax assets such that a full valuation allowance
is required. The net change in the valuation allowance during the years ended
December 31, 1999, 1998 and 1997, was $33,423,000, $9,575,000 and $3,080,000,
respectively.
As of December 31, 1999, the Company's federal net operating loss
carryforward for income tax purposes was approximately $70 million. If not
utilized, the federal net operating loss carryforwards will begin to expire
between 2011 and 2019. Changes in ownership, as defined by Section 382 of the
Code, may limit the amount of net operating loss carryforwards used in any one
year. The Company's federal research tax credit carryforwards for income tax
purposes are approximately $1,492,000. If not utilized, the federal tax credit
carryforwards will begin to expire between 2011 and 2019.
Deferred tax assets of approximately $17.5 million as of December 31, 1999
pertain to certain net operating loss carryforwards and credit carryforwards
resulting from the exercise of employee stock options. When recognized, the tax
benefit of these loss and credit carryforwards are accounted for as a credit to
additional paid-in capital rather than a reduction of the income tax provision.
F-29
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company acquired Prio, Inc. in February 2000. As of the date of
acquisition, the availability of Prio's tax attributes consisting primarily of
net operating loss carryforwards and credit carryforwards will be limited under
Federal and California tax laws. As of December 31, 1998, Prio, Inc. has
federal net operating loss carryforwards of $20,750,000, which will expire
between 2009 and 2019 and California net operating loss carryforwards of
$21,033,000 which will expire from 2001 through 2004. Prio also has available
research tax credit carryforwards of $1,120,000, which will expire between 2011
and 2019 and California research & manufacturing credits of $693,000 which will
carry forward indefinitely.
Note 10: Net Loss Per Share
The Company has adopted SFAS No. 128, Earnings per Share. Basic earnings per
share is computed using the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed using the
weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares consist of the incremental common
shares issuable upon conversion of the exercise of stock options and warrants
(using the treasury stock method). Common equivalent shares are excluded from
the computation if their effect is antidilutive. The Company had a net loss for
all periods presented herein; therefore, none of the options and warrants
outstanding during each of the periods presented, as discussed in Note 5, were
included in the computation of diluted loss per share as they were
antidilutive. Options and warrants to purchase a total of 31,909,169,
12,757,182 and 5,517,716 shares of common stock were excluded from the
calculations of diluted loss per share for the years ended December 31, 1999,
1998 and 1997, respectively. 680,000 contingently issuable shares of common
stock have been excluded from the calculation of basic earnings per share for
the year ended December 31, 1997 (Note 6).
Note 11: Information on Products and Services
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, SFAS No. 131 establishes standards for the
way that companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers as well as
the reporting of selected information about operating segments in interim
financial statements for the year ended December 31, 1998. The adoption of SFAS
131 did not have a material effect on the Company's primary consolidated
financial statements but did affect the Company's disclosures.
The Company generates substantially all of its revenues through integrated
technology and services delivered through a common physical infrastructure, and
therefore the Company has only one reportable segment. Substantially all
revenues are generated from domestic sources. Substantially all of the
Company's long-lived assets are physically located within the United States.
Total operating expenses are controlled centrally based on established
budgets by operating department. Operating departments include product
development, sales and marketing, account management and customer service, and
finance and administration. Assets, technology, and personnel resources of the
Company are shared and utilized for all of the Company's service offerings.
These resources are allocated based on contractual requirements, the
identification of enhancements to the current service offerings, and other non-
financial criteria. The Company does not prepare operating statements by
revenue source. The Company does not account for, and does not report to
management, its assets or capital expenditures by revenue source.
F-30
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Information
Revenues are derived from the Company's consumer, merchant and wireless
services. These services generate revenues from advertising, content carriage,
licensing fees, commerce transaction fees and guaranteed transaction fees in
lieu of revenue share. Contracts with customers often utilize services from
more than one area of service and include revenue from more than one revenue
source.
Year Ended December 31,
---------------------------------
1999 1998 1997
----------- ---------- ----------
Consumer revenues........................ $29,371,286 $8,370,965 $1,424,748
Merchant revenues........................ 7,355,717 1,260,962 391,794
Wireless revenues........................ 663,300 -- --
----------- ---------- ----------
Total revenues........................... $37,390,303 $9,631,927 $1,816,542
=========== ========== ==========
Note 12: Related-Party Transactions
During the years ended December 31, 1999, 1998 and 1997, the Company sold
advertising to other entities in which the Company's chief executive officer
had equity interests resulting in revenues of $580,912, $19,269 and $200,000,
respectively.
During 1999, the Company entered into a technology license and development
agreement for the development of a shopping cart technology with a software
development company whose majority owner is related to the Company's Chairman.
Under the terms of the agreement the Company paid a development fee of
$400,000. The Company owns all rights to the technology and has granted a
perpetual license to the software development company to use the developed
technology for certain limited uses.
In 1999 and 1998, Prio advanced to its affiliate $325,000 and $175,000,
respectively. Payments which are due in 13 installments, as defined in the
advance agreement, through December 2001, are applied against amounts due
affiliate for consulting services provided by the affiliate to Prio. The total
expense for such consulting services amounted to $100,000 and $270,000 for the
years ended December 31, 1999 and 1998, respectively.
The outstanding current portion of the advance is $187,000 and $100,000 as of
December 31, 1999 and 1998, respectively. The long-term portion of $50,000 as
of December 31, 1999 is included in Other Assets.
Note 13: Investments in Joint Ventures
In 1998, the Company entered into a joint venture with Thomson Directories
Limited to form TDL InfoSpace to replicate the Company's infrastructure
services in Europe. TDL InfoSpace has targeted the United Kingdom as its first
market, and content services were launched in the third quarter of 1998. Under
the license agreement between Thomson and TDL InfoSpace, Thomson licenses its
U.K. directory information database to TDL InfoSpace. Under the Web site
services agreement between Thomson and TDL InfoSpace, Thomson also sells
Internet yellow pages advertising for the joint venture through its local sales
force. Under the Company's license agreement with TDL InfoSpace, the Company
licenses technology and provides hosting services to TDL InfoSpace.
In October 1997, Prio entered into a joint venture agreement with DataCard to
form DSIPL. Pursuant to the terms of the joint venture agreement, DSIPL
performs development services for DataCard and Prio.
F-31
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 14: Subsequent Events (unaudited)
Business Combinations:
On July 3, 2000, the Company acquired 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 in order 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 exchanged
989,959 shares of common stock for all of IQorder's outstanding shares,
warrants and options valued at $58 million.
On March 6, 2000, the Company signed a definitive agreement to acquire
Cupertino, California-based, Orchest, Inc. (MoneyPlant.com). Orchest has
developed a Web site to provide online account information aggregation for
consumers.
Commitments:
In March 2000, the Company entered into a five-year lease agreement which
began in May 2000 for the corporate headquarters in Bellevue, Washington. The
Company will pay a monthly base rent of $250,825 per month during the first
year, $252,647 per month during the second year, $263,551 per month during the
third year, $265,373 per month during the fourth year and $276,276 per month
during the final year.
Investment in Joint Venture:
On May 25, 2000, the Company sold its interest in DSIPL at an amount equal to
the Company's book value.
F-32
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 hereunto duly authorized.
Date: July 25, 2000 InfoSpace, Inc.
By:/s/ Ellen B Alben
-----------------------------
Ellen B. Alben
Senior Vice President, Legal and
Business Affairs, and Secretary
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.
23.2 Consent of KPMG LLP, Independent Auditors.