As filed with the Securities And Exchange Commission on September 13, 2000
Registration No. 333-86313
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Post-Effective
Amendment No. 3
To
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
INFOSPACE, INC.
(Exact name of Registrant as specified in its charter)
Delaware 7375 91-1718107
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
601 108th Avenue N.E., Suite 1200
Bellevue, Washington 98004
(425) 201-6100
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
----------------
ELLEN B. ALBEN, ESQ.
Senior Vice President, Legal and Business Affairs
InfoSpace, Inc.
601 108th Avenue N.E., Suite 1200
Bellevue, Washington 98004
(425) 201-6100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
PATRICK J. SCHULTHEIS, ESQ.
RICHARD C. SOHN, ESQ.
DREW G. MARKHAM, ESQ.
Wilson Sonsini Goodrich & Rosati
Professional Corporation
5300 Carillon Point
Kirkland, Washington 98033
(425) 576-5800
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] ___________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ___________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ___________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall hereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to such Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We +
+cannot sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 13, 2000
PROSPECTUS
1,084,177 Shares
[LOGO OF INFOSPACE APPEARS HERE]
Common Stock
InfoSpace is offering 1,084,177 shares of common stock to the holders of
exchangeable shares of InfoSpace.com Canada Holdings Inc., an Ontario
corporation and to the holders of warrants to purchase shares of our common
stock. InfoSpace.com Canada Holdings issued the exchangeable shares in exchange
for outstanding shares of the common stock of INEX Corporation, an Ontario
corporation, in connection with the combination of InfoSpace and INEX. Holders
of exchangeable shares may exchange one exchangeable share for one share of our
common stock, and in some cases we may redeem each exchangeable share for one
share of our common stock. We describe the process by which exchangeable shares
may be exchanged for our common stock on page 67 of this prospectus under the
heading "Plan of Distribution."
Since completion of the combination of InfoSpace and INEX on October 14,
1999, holders of exchangeable shares may exchange their exchangeable shares for
shares of our common stock at any time. We are offering the shares of our
common stock on a continuous basis pursuant to Rule 415 under the Securities
Act of 1933 only during the period when the registration statement relating to
this prospectus is effective. We will bear the registration costs incurred in
connection with this offering.
Our common stock is traded on the Nasdaq National Market under the symbol
"INSP." On September 11, 2000, the last reported sale price for the common
stock on the Nasdaq National Market was $40.3125 per share. See "Price Range of
Common Stock."
--------
Investing in the common stock involves a high degree of risk.
See "Risk Factors" beginning on page 5.
--------
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is , 2000
TABLE OF CONTENTS
Page
----
About Infospace, Inc. ............................................. 3
Recent Acquisitions................................................ 4
Risk Factors....................................................... 5
Forward-Looking Statements......................................... 16
Use of Proceeds.................................................... 17
Dividend Policy.................................................... 17
Price Range of Common Stock........................................ 17
Capitalization..................................................... 18
Selected Consolidated Financial Data............................... 19
Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 20
Business........................................................... 36
Management......................................................... 49
Certain Relationships and Related Transactions..................... 57
Security Ownership of Certain Beneficial Owners and Management..... 59
Description of Capital Stock....................................... 62
Plan of Distribution............................................... 67
Income Tax Considerations.......................................... 76
Legal Matters...................................................... 84
Experts............................................................ 84
Additional Information............................................. 84
Index to Financial Statements...................................... F-1
----------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
We began operations in March 1996 as a Washington corporation and were
incorporated in Delaware in April 1996, at which time the operations of our
Washington corporation predecessor were transferred to the Delaware
corporation. As used in this prospectus, references to "we," "our," "us" and
"InfoSpace" refer to InfoSpace, Inc., its predecessors and its consolidated
subsidiaries.
Our executive offices are located at 601 108th Avenue N.E., Suite 1200,
Bellevue, Washington 98004, and our telephone number is (425) 201-6100.
We maintain a World Wide Web site at www.infospace.com. Information contained
on our Web site does not constitute part of this prospectus.
"InfoSpace" and "ActiveShopper" are registered trademarks of ours. We have
also applied for federal registration of other marks, including
"ActivePromotion" and our logo. Each logo, product name, tradename or service
mark of any other company appearing in this prospectus belongs to its holder.
Except as otherwise noted, all information in this prospectus gives effect to
two-for-one stock splits of our common stock consummated in May 1999, in
January 2000 and in April 2000.
2
ABOUT INFOSPACE, INC.
InfoSpace is an international information infrastructure services company.
InfoSpace provides commerce, information and communication infrastructure
services for wireless devices, merchants and Web sites. Our affiliates utilize
and distribute these services through a network of wireless and other non-PC
devices including PCs, cellular phones, pagers, screen telephones, television
set-top boxes, online kiosks, and personal digital assistants as well as to PC-
based Web sites. We have relationships with AT&T Wireless, Verizon Wireless,
Vodafone Airtouch, ALLTEL, SBC, VoiceStream, Qwest, Intel, Ericsson, Nokia,
Mitsui and Acer America. InfoSpace's affiliate network also consists of more
than 3,100 Web sites that include America Online, Microsoft, Disney's GO
Network, NBC's Snap, Lycos, Go2Net Inc., and ABC LocalNet, among others.
We have developed a scalable, flexible technology platform that enables us to
deliver a broad, integrated suite of services to Web sites, merchants and
wireless carriers. All of our consumer, merchant and wireless services utilize
the same core technology platform within the same operational infrastructure.
Our consumer services are designed for the end user and are distributed through
wireless devices and Web sites. These services include four main components:
(1) unified communication services, including device-independent email and
instant messaging; (2) information services, such as integrated directory,
news, and lifestyle information; (3) community services, including the "sticky"
services such as online address books and calendars; and (4) the ability to
offer collaboration services, including real-time document sharing. We target
merchant services to local merchants (including service-based merchants such as
restaurants and dry cleaners) and distribute these services through our
relationships with the regional bell operating companies (RBOCs), merchant
banks and other financial institutions and other local media networks,
including newspapers and television and radio stations. These services include
commerce services such as online storebuilding and technology that promotes
merchant services. We target wireless services to mobile users, whether on a
cellular phone, personal digital assistant (or PDA), pager or other non-PC
device, and distribute these services through our relationships with wireless
carriers and device manufacturers. These services include the ability to
conduct secure commerce using single-click buying, integrated information
services such as real-time stock quotes and traffic reports, and services that
manage users' lives, including online address books and calendars.
We design our infrastructure services to be highly flexible and customizable,
enabling affiliates to select from among our broad range of consumer, merchant
and wireless services. One of our principal strengths is our internally
developed technology, which enables us to easily and rapidly add new affiliates
and distribution partners by employing a distributed, scalable architecture
adapted specifically to our Internet-based infrastructure services. We help our
affiliates and distribution partners build and maintain their brands by
delivering our consumer, merchant and wireless services with the look and feel
and navigation features specific to each affiliate's delivery platform and
format, including the growing number of emerging wireless devices.
We have built a large distribution network through our direct sales force and
through reseller channels. Our reseller channels are based on distribution
agreements with online advertising networks, such as DoubleClick and Flycast,
who offer both our consumer and merchant services to their network of thousands
of Web sites; reseller agreements with RBOCs, including BellSouth, SBC, Bell
Atlantic and Qwest; merchant banks; and other local media networks who provide
our services to local merchants.
A key component of our strategy is expanding our operations into
international markets. In the United Kingdom, we began providing content
services through a joint venture in the third quarter of 1998. In March 1999 we
began providing infrastructure services to Canadian affiliates through a
Canadian subsidiary. In addition, with our acquisition of Saraide, we have
begun to expand our wireless services into Europe, Japan and Canada. We expect
to launch our subsidiary in India to provide comprehensive, localized consumer,
merchant and wireless services to the India market. We have also entered into
agreements to expand our services into Brazil, China and Australia and are
currently investigating other international opportunities.
3
RECENT ACQUISITIONS
Orchest, Inc. On August 4, 2000, we acquired all of the outstanding capital
stock of Orchest, Inc., a privately held company based in Cupertino,
California, for a purchase consideration of 255,288 shares of our common stock.
Orchest is an online provider of financial services that enables users to
access a consolidated view of their personal financial information from
multiple institutions. The acquisition was accounted for as a purchase.
Acquisition of Go2Net, Inc. On July 26, 2000 we announced that we had entered
into a definitive agreement to acquire Go2Net, Inc. a public company. Under the
terms of the agreement, we will exchange 1.82 of our shares for each share of
Go2Net, and Go2Net will become our wholly-owned subsidiary. Go2Net operates
several financial, entertainment and e-commerce Web sites. We believe that the
acquisition of Go2Net will allow us to offer a broader range of e-commerce
services and enhance the delivery of our services over broadband. We expect to
complete the acquisition in the fourth quarter of 2000, subject to customary
conditions, including approval of the stockholders of Go2Net. The acquisition
is expected to be accounted for as a pooling of interests.
TDLI.com Limited. TDLI.com Limited, a privately held company based in
Hampshire, England ("TDLI") owned 50% of the share capital of TDL InfoSpace
(Europe) Limited, a privately held company based in Hampshire, England (" TDL
InfoSpace"). TDL InfoSpace operated under a joint venture agreement between
TDLI and InfoSpace Investments Limited, one of our English subsidiaries, and
seeks to aggregate and syndicate content on the Internet that satisfies the
needs of end users in Europe. On August 31, 2000, we acquired all of the
outstanding shares and options of TDLI for a purchase consideration of
approximately $131 million in shares of our common stock. The acquisition was
accounted for as a purchase.
IQorder.com, Inc. On July 3, 2000, we acquired all of the outstanding shares,
warrants and options of IQorder.com, Inc., a privately held company based in
Tempe, Arizona, for a purchase consideration of 989,959 shares of our common
stock. IQorder's technology allows consumers to enter a model number, UPC code,
part number, barcode or ISBN, or to scan in a UPC code, in order to locate a
product, compare prices and make an instant purchase with a single click. The
acquisition will be accounted for as a purchase.
Millet Software. On March 31, 2000 we acquired all of the common stock of
Millet Software, a privately held company based in Berkeley, California, for a
purchase consideration of 488,224 shares of our common stock and acquisition
expenses of $54,531. Millet develops e-commerce solutions to make online
transactions more convenient, while enabling shoppers to check the privacy
policies of online merchants at the point of purchase. The acquisition was
accounted for as a purchase.
Saraide Inc. On March 10, 2000 we acquired eighty percent of the common stock
of Saraide, a privately held company based in San Mateo, California, for a
purchase consideration of 9,233,672 shares and acquisition expenses of
$340,489. Saraide provides wireless Internet services in Europe, Japan and
Canada. The acquisition was accounted for as a purchase.
Prio, Inc. On February 14, 2000, we acquired Prio, a privately held company
based in Mountain View, California. The combination was accounted for as a
pooling of interests. Prio provides "e-nabled" commerce solutions and
specializes in the development of strategic partnerships, technologies and
programs that drive commerce in both traditional and online shopping
environments. We issued 9,322,418 shares of our common stock in exchange for
all the outstanding common and preferred stock of Prio. The Consolidated
Financial Statements and Notes thereto and other consolidated financial data
included elsewhere in this prospectus are presented as if Prio was a wholly-
owned subsidiary during all periods presented.
4
RISK FACTORS
You should carefully consider the risks and uncertainties described below
before making an investment decision. If any of the following risks actually
occur, our business, financial condition or operating results could be
materially harmed. This could cause the trading price of our common stock to
decline, and you may lose all or part of your investment.
This prospectus contains forward-looking statements that involve known and
unknown risks and uncertainties. These statements relate to our plans,
objectives, expectations and intentions. Our actual results could differ
materially from those discussed in these statements. Factors that could
contribute to these differences include those discussed below and elsewhere in
this prospectus.
We Have a Limited Operating History and a History of Losses.
We have a limited operating history, which makes it difficult to evaluate our
business and prospects. We have incurred net losses from our inception in March
1996 through June 30, 2000. At June 30, 2000, we had an accumulated deficit of
approximately $213.5 million. We expect to incur operating losses on a
quarterly basis in the future. Our prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in their
early stage of development, particularly companies in new and rapidly evolving
markets such as Internet services. To address the risks we face and to be able
to achieve and sustain profitability, we must, among other things:
. develop and maintain strategic relationships with potential affiliates,
distribution partners and content providers;
. identify and acquire the rights to additional content, technology and
services;
. successfully integrate new features with our consumer, merchant and
wireless services;
. expand our sales and marketing efforts, including relationships with
third parties to sell our merchant services;
. successfully expand into international markets;
. retain and motivate qualified personnel; and
. successfully respond to competitive developments.
If we do not effectively address the risks we face, our business will suffer
and we may not sustain profitability. See "Selected Consolidated Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Our Financial Results Are Likely to Fluctuate.
Our financial results have varied on a quarterly basis and are likely to
fluctuate substantially in the future. These fluctuations may be caused by
several factors, many of which are beyond our control. These factors include:
. the addition or loss of affiliates;
. variable demand for our consumer, merchant and wireless services by our
affiliates and distribution providers;
. the cost of acquiring and the availability of content, technology and
services;
. the growth and overall level of demand for consumer, merchant and
wireless services;
. our ability to attract and retain advertisers, content providers,
affiliates and distribution partners;
5
. seasonal trends in Internet usage and advertising placements;
. the amount and timing of fees we pay to our affiliates to include our
information services on their Web sites and wireless devices;
. the productivity of our direct sales force and the sales forces of our
distribution partners;
. the amount and timing of increased expenditures for expansion of our
operations, including the hiring of new employees, capital expenditures
and related costs;
. our ability to continue to enhance, maintain and support our technology;
. the result of litigation that is currently ongoing against InfoSpace, or
any litigation that is filed against us in the future;
. our ability to attract and retain personnel;
. our ability to successfully integrate and manage newly acquired
companies;
. the introduction of new or enhanced services by us, our affiliates or
distribution partners, or other companies that compete with us or our
affiliates;
. price competition or pricing changes in Internet information
infrastructure services, such as ours;
. technical difficulties, system downtime, system failures or Internet
brown-outs;
. political or economic events and governmental actions affecting Internet
operations or content; and
. general economic conditions and economic conditions specific to the
Internet.
If one or more of these factors or other factors occur, our business could
suffer.
In addition, because InfoSpace only began operations in March 1996, and
because the market for Internet infrastructure services such as ours is new and
evolving, it is very difficult to predict future financial results. As a result
of our recent acquisitions and continued global expansion, we have
significantly increased our sales and marketing, research and development and
general and administrative expenses and intend to continue to do so for the
remainder of the year 2000. Our expenses are partially based on our
expectations regarding future revenues and estimated expenses from our
acquisitions, which are largely fixed in nature, particularly in the short
term. As a result, if our revenues in a period do not meet our expectations,
our financial results will likely suffer.
Pending and Potential Acquisitions Involve Risks.
We have acquired complementary technologies or businesses in the past, and
intend to do so in the future. Acquisitions may involve potentially dilutive
issuances of stock, the incurrence of additional debt and contingent
liabilities or large one-time write-offs and amortization expenses related to
goodwill and other intangible assets. Any of these factors could adversely
affect our results of operations or stock price. Acquisitions involve numerous
risks, including:
. difficulties in assimilating the operations, products, technology,
information systems and personnel of the acquired company;
. diverting management's attention from other business concerns;
. impairing relationships with our employees, affiliates, content
providers and distribution partners;
. being unable to maintain uniform standards, controls, procedures and
policies;
. entering markets in which we have no direct prior experience; and
. losing key employees of the acquired company.
6
We may not be able to successfully integrate the technology and personnel we
have acquired or the other businesses, technologies or personnel that we
acquire in the future. We and the businesses acquired by us may require
substantial additional capital, and there can be no assurance as to the
availability of such capital when needed, nor as to the terms on which such
capital might be made available to us. We have retained, and may in the future
retain, existing management of acquired companies or technologies, under the
overall supervision of our senior management. The success of the operations of
these acquired companies and technologies will depend, to a great extent, on
the continued efforts of the management of the acquired companies.
We Need to Manage Our Growth and Maintain Procedures and Controls.
We have rapidly and significantly expanded our operations and anticipate
further significant expansion to accommodate expected growth in our customer
base and market opportunities. We have increased the number of employees from
15 at January 1, 1998 to 502 at June 30, 2000. We now have offices in Bellevue,
Washington; San Francisco, San Mateo and Mountain View, California; New York
City and Rochester, New York; Toronto and Ottawa, Canada; Papendrecht,
Netherlands; London, United Kingdom, and recently established offices in
Australia and Brazil. This expansion has placed, and is expected to continue to
place, a significant strain on our management and operational resources. We do
not have experience managing multiple offices with multiple facilities and
personnel in disparate locations. As a result, we may not be able to
effectively manage our resources, coordinate our efforts, supervise our
personnel or otherwise successfully manage our resources. We have recently
added a number of key managerial, technical and operations personnel and we
expect to add additional key personnel in the near future. We also plan to
continue to significantly increase our employee base. These additional
personnel may further strain our management resources.
Our relationships with affiliates and distribution partners, content
providers and advertisers are subject to frequent change. Prior to implementing
procedures and controls in this area, these changes were often informal. In
particular, we may have failed to perform our obligations under certain
commercial contracts that may have been modified or terminated by verbal
agreement. We believe that any failure to perform our obligations was not
significant. This practice of the modification or termination of past written
agreements by verbal agreement has resulted, and may result in the future, in
disputes regarding the existence, interpretation and circumstances regarding
modification or termination of commercial contracts. If our relationships with
affiliates and distribution partners, content providers and advertisers evolve
in an adverse manner, if we get into contractual disputes with affiliates and
distribution partners, content providers or advertisers or if any agreements
with such persons are terminated, our business could suffer. See "Business--
Legal Proceedings."
The rapid growth of our business has strained our ability to meet customer
demands and manage the growing number of affiliate relationships. In addition,
our affiliate relationships are also growing in their size and complexity of
services. As a result of the growth in the size, number, and complexity of our
relationships we may be unable to meet the demands of our customer
relationships, which could result in the loss of customers, subject us to
penalties under our affiliate agreements and harm our business reputation.
To manage the expected growth of our operations and personnel, we must
continue maintaining and improving or replacing existing operational, accounting
and information systems, procedures and controls. Further, we must manage
effectively our relationships with various Internet content providers,
distribution partners, wireless carriers, advertisers, affiliates and other
third parties necessary to our business. If we are unable to manage growth
effectively, our business could suffer. See "--We Are Subject to Pending Legal
Proceedings" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
7
We Depend on Third Parties for Content.
We typically do not create our own content. Rather, we acquire rights to
information from more than 85 third-party content providers, and our future
success is critically dependent upon our ability to maintain relationships with
these content providers and enter into new relationships with other content
providers.
We typically license content under short-term arrangements that do not
require us to pay royalties or other fees for the use of the content. However,
we do enter into revenue-sharing arrangements with certain content providers,
and we pay certain content providers a one-time fee, a periodic fee or a fee
for each query from Web users. In the future, we expect that certain of our
content providers will likely demand a greater portion of advertising revenues
or increase the fees that they charge us for their content. If we fail to enter
into and maintain satisfactory arrangements with content providers, our
business will suffer. See "--We Need to Manage Our Growth and Maintain
Procedures and Controls."
We Depend on Key Personnel.
Our performance depends on the continued services of our executive officers
and other key personnel, particularly within our merchant services and wireless
services business areas. We maintain key person life insurance on Naveen Jain,
our Chairman, in the amount of $5.0 million. We do not maintain key person life
insurance policies on any of our other employees. If we lose the services of
any of our executive officers or other key employees, our business could
suffer. See "Business--Employees" and "Management--Executive Officers and
Directors."
We Need to Hire Additional Personnel.
Our future success depends on our ability to identify, attract, hire, train,
retain and motivate highly skilled technical, managerial, sales and marketing
and business development personnel. We intend to hire a significant number of
technical, sales and marketing, business development and administrative
personnel during the next year. Our services and the industries to which we
provide our services are relatively new, particularly with respect to our
wireless and merchant services. As a result, qualified technical personnel with
relevant experience to our business are scarce and therefore difficult to
recruit. If we fail to successfully attract, assimilate and retain a sufficient
number of qualified technical, managerial, sales and marketing, business
development and administrative personnel, our business could suffer.
Our International Expansion Plans Involve Risks.
A key component of our strategy is expanding our operations into
international markets. We entered into a joint venture agreement with Thomson
Directories Limited to replicate our infrastructure services in Europe. The
joint venture, TDL InfoSpace (Europe) Limited, launched content services in the
United Kingdom in the third quarter of 1998. On August 31, 2000, we acquired
all of the issued and outstanding shares and options of TDLI.com Limited. This
gave us complete control of TDL InfoSpace. In March 1999, we began providing
infrastructure services to Canadian affiliates through our wholly-owned
subsidiary, InfoSpaceCanada.com. We expect to launch InfoSpace.com India to
provide comprehensive localized consumer, merchant and wireless services to the
Indian market. In addition, with our acquisition of Saraide, we have begun to
expand our wireless services into Europe, Japan and Canada. We have also
entered into agreements to expand our services into Brazil, China and Australia
and are currently investigating other international opportunities.
To date, we have limited experience in developing and syndicating localized
versions of our information infrastructure services internationally, and we may
not be able to successfully execute our business model in these markets. In
addition, international markets experience lower levels of Internet usage and
Internet advertising than the United States. We rely on our business partner in
Europe for U.K. directory information and local sales forces and may enter into
similar relationships if we expand into other
8
international markets. Accordingly, our success in these markets will be
directly linked to the success of our business partners in such activities. If
our business partners fail to successfully establish operations and sales and
marketing efforts in these markets, our business could suffer. See "Business--
International Expansion."
In addition, we face a number of risks inherent in doing business in
international markets, including, among others:
. unexpected changes in regulatory requirements;
. potentially adverse tax consequences;
. export controls relating to encryption technology;
. tariffs and other trade barriers;
. difficulties in staffing and managing foreign operations;
. changing economic conditions;
. exposures to different legal standards (particularly with respect to
intellectual property, data privacy and distribution of information over
the Internet and employment laws);
. burdens of complying with a variety of foreign laws;
. fluctuations in currency exchange rates; and
. seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world.
If any of these risks occur, our business could suffer.
Our Business Is Highly Competitive.
We operate in the Internet information infrastructure services market, which
is extremely competitive and is rapidly changing. Our current and prospective
competitors include many large companies that have substantially greater
resources than we have.
Some of the companies we compete with are currently customers of ours, the
loss of which could harm our business. We may also face increased competition
from traditional media companies expanding onto the Internet. Many of our
current customers have established relationships with certain of our current
and potential future competitors. If our competitors develop Internet
information infrastructure services that are superior to ours or that achieve
greater market acceptance than ours, our business will suffer. For a
description of our competitors and competitive factors in our industry, see
"Business--Competition."
Our Business Relies on the Performance of Our Systems.
Our success depends, in part, on the performance, reliability and
availability of our consumer, merchant and wireless services. Our revenues
depend, in large part, on the number of users that access our consumer,
merchant and wireless services. We are currently transitioning our computer and
communications hardware from our former headquarters in Redmond, Washington to
our new headquarters in Bellevue, Washington.
With the acquisitions of Prio and Saraide, we have data centers in Mountain
View, California serving the promotions technology and Papendrecht, Netherlands
serving wireless customers in Europe. None of our data centers are currently
redundant. Our success on a global basis will depend in part on our ability to
create carrier class infrastructure systems and build network operations
centers worldwide that can support the delivery of integrated consumer,
merchant and wireless services and the expected growth of these services. We
may be unable to develop or successfully manage the infrastructure necessary to
meet current or future demands for reliability and scalability of our systems.
The Company has entered into Service Level Agreements with certain merchant
services distributors including merchant banks and most of our wireless
customers. These agreements call for system up times
9
and 24/7 support, and include penalties for non-performance. We may be unable
to fulfill these commitments, which could subject us to penalties under our
agreements, harm our reputation and result in the loss of customers and
distributors, which would harm our business.
Our systems and operations could be damaged or interrupted by fire, flood,
power loss, telecommunications failure, Internet breakdown, break-in,
earthquake and similar events. We do not have a formal disaster recovery plan,
and we do not carry business interruption insurance that is adequate to
compensate us for all the losses that may occur. In addition, systems that use
sophisticated software may contain bugs, which could also interrupt service.
Any system interruptions resulting in the unavailability of our consumer,
merchant and wireless services would reduce the volume of users able to access
our consumer, merchant and wireless services and the attractiveness of our
service offerings to our affiliates, advertisers and content providers, which
could harm our business.
We Rely on Advertising and Transaction Revenues.
We have derived a significant amount of our revenues from the sale of
national and local advertisements, and transaction fees from our affiliates who
use our consumer services, and we expect this to continue into the third
quarter of 2000. Our ability to increase and diversify our revenues will depend
upon a number of factors, including the following:
. the acceptance of the Internet as an advertising medium by national and
local advertisers;
. the acceptance and regular use of our information infrastructure
services by a large number of users who have demographic characteristics
that are attractive to advertisers;
. the availability of attractive advertising space within our private
label solutions;
. the ability of our business development and sales personnel to
effectively sell our broad suite of consumer, merchant and wireless
services;
. the development of the Internet as an attractive platform for electronic
commerce;
. the use of our integrated merchant tools by small and medium sized
online and offline merchants;
. the adoption of our wireless services and solutions by wireless carriers
and device manufacturers; and
. the use of our information services by subscribers on their wireless
devices.
Our ability to maintain or increase our advertising revenues will also be
affected by changes in fee levels and structures. Many of our advertising
contracts provide for fees to be paid for us on a cost per thousand impressions
(CPM) basis. If CPMs decrease in future contracts, or we fail to provide
required minimum levels of user impressions, our revenue growth may slow or
revenues may even decrease.
We Rely on Our Relationships with Affiliates.
We will be able to continue generating revenues from advertising, transaction
fees and promotions only if we can secure and maintain distribution for our
information infrastructure services on acceptable commercial terms through a
wide range of affiliates. In particular, we expect that a limited number of our
affiliates, including America Online, Inc. (or AOL), its CompuServe and Digital
City divisions and its Netscape Communications subsidiary and Microsoft
Network, LLC, will account for a substantial portion of our affiliate traffic.
Our distribution arrangements with our affiliates typically are for limited
durations of between six months and two years and automatically renew for
successive terms thereafter, subject to termination on short notice. We cannot
assure you that such arrangements will not be terminated or that such
arrangements will be renewed upon expiration of their terms. We generally share
with each affiliate a portion of the revenues generated by advertising on the
Web pages that deliver our content services. We pay carriage fees to certain
affiliates, including AOL. These relationships may not be profitable or result
in benefits to us that outweigh the costs of the relationships. In addition, if
we lose a major affiliate, we may be unable to timely or effectively replace the
affiliate with other affiliates with comparable traffic patterns and user
demographics. The loss of any major affiliate could harm our business.
10
Our Affiliates May Be Unable to Raise Sufficient Capital or May Experience
Adverse Business Conditions.
As a result of unfavorable conditions in the public equity markets, some of
our affiliates may have difficulty raising sufficient capital to support their
long-term operations. As a result, these affiliates may not be able to pay us
some or all of the fees they are required to pay us under their existing
agreements. In addition, our affiliates may experience adverse business
conditions due to market conditions, industry conditions or other factors,
which may render them unable to fulfill their contractual obligations to us.
Such conditions may also prevent potential affiliates to enter into contractual
relationships or other strategic business relationships with us.
We Rely on a Small Number of Customers.
We derive a substantial portion of our revenues from a small number of
customers. We expect that this will continue in the foreseeable future.
Our top ten customers represented 53% of our revenues in the first six months
of 2000 and 57% of our revenues for fiscal year 1999. In particular, Knight
Rider and 800-U.S. Search, Inc. each accounted for 11% of our revenues for the
six months ended June 30, 2000, and 800-U.S. Search, Inc. accounted for
approximately 21% of our revenues for the year ended December 31, 1999. If we
lose any of these customers, or if any of these customers are unable or
unwilling to pay us amounts that they owe us, our financial results will
suffer.
Our Industry Is Experiencing Consolidation.
The Internet industry has recently experienced substantial consolidation. For
example, AOL has acquired Netscape and has agreed to acquire Time Warner, At
Home has acquired Excite, and Compaq has acquired ZIP2. We expect this
consolidation to continue. These acquisitions could affect us in a number of
ways, including:
. companies from whom we acquire content could be acquired by one of our
competitors and stop licensing us content;
. our customers could be acquired by one of our competitors and terminate
their relationship with us; and
. our customers could merge with other customers, which could reduce the
size of our customer base.
This consolidation in the Internet industry could harm our business.
We Rely on Internally Developed Software and Systems.
We have developed custom software for our network servers and our private
label solutions. This software may contain undetected errors, defects or bugs.
Although we have not suffered significant harm from any errors or defects to
date, we may discover significant errors or defects in the future that we may
or may not be able to fix. We must expand and upgrade our technology,
transaction-processing systems and network infrastructure if the volume of
traffic on our Web site or our affiliates' Web sites increases substantially.
In addition, as we continue to expand our merchant and wireless services, we
may have to significantly modify our systems. We could experience periodic
temporary capacity constraints, which may cause unanticipated system
disruptions, slower response times and lower levels of customer service. We may
be unable to accurately project the rate or timing of increases, if any, in the
use of our consumer, merchant and wireless services or expand and upgrade our
systems and infrastructure to accommodate these increases in a timely manner.
Any inability to do so could harm our business.
Rapid Technological Change Affects Our Business.
Rapidly changing technology, evolving industry standards, evolving customer
demands and frequent new product and service introductions characterize our
market. Our market's early stage of development
11
exacerbates these characteristics. Our future success depends in significant
part on our ability to develop and introduce compelling services on a timely
and competitive basis and to improve the performance, content and reliability
of our consumer, merchant and wireless services in response to both the
evolving demands of the market and competitive product offerings. Our efforts
in these areas may not be successful. If a large number of affiliates adopt new
Internet technologies or standards, we may need to incur substantial
expenditures modifying or adapting our enabling technologies and Internet
information infrastructure services.
We Rely on the Internet System Infrastructure.
Our success depends, in large part, on other companies maintaining the
Internet system infrastructure. In particular, we rely on other companies to
maintain a reliable network backbone that provides adequate speed, data
capacity and security and to develop products that enable reliable Internet
access and services. If the Internet continues to experience significant growth
in the number of users, frequency of use and amount of data transmitted, the
Internet system infrastructure may be unable to support the demands placed on
it, and the Internet's performance or reliability may suffer as a result of
this continued growth. In addition, the Internet could lose its commercial
viability as a form of media due to delays in the development or adoption of
new standards and protocols to process increased levels of Internet activity.
Any such degradation of Internet performance or reliability could cause
advertisers to reduce their Internet expenditures. If other companies do not
develop the infrastructure or complementary products and services necessary to
establish and maintain the Internet as a viable commercial medium, or if the
Internet does not become a viable commercial medium or platform for
advertising, promotions and electronic commerce, our business could suffer.
We Receive Information that May Subject Us to Liability.
We obtain content and commerce information from third parties. When we
integrate and distribute this information over the Internet, we may be liable
for the data that is contained in that content. This could subject us to legal
liability for such things as defamation, negligence, intellectual property
infringement and product or service liability. Many of the agreements by which
we obtain content do not contain indemnity provisions in favor of us. Even if a
given contract does contain indemnity provisions, these provisions may not
cover a particular claim. We carry general business insurance, however, this
coverage may be inadequate.
In addition, individuals whose names appear in our yellow pages and white
pages directories have occasionally contacted us. These individuals believed
that their phone numbers and addresses were unlisted, and our directories are
not always updated to delete phone numbers or addresses when they are changed
from listed to unlisted. While we have not received any claims from these
individuals, we may receive claims in the future. Any liability that we incur
as a result of content we receive from third parties could harm our financial
results.
We also gather personal information from users in order to provide
personalized services. Gathering and processing this personal information may
subject us to legal liability for negligence, defamation, invasion of privacy,
product or service liability. We may also be subject to laws and regulations,
both in the United States and abroad, regarding user privacy. See "Business--
Governmental Regulation."
We May Become Subject to Governmental Regulation.
Because of the increasing use of the Internet, the government may adopt laws
and regulations with regard to the Internet covering issues such as user
privacy, pricing, content, taxation, copyrights, distribution and product and
services quality. For a description of certain risks relating to government
regulation, see "Business--Governmental Regulation."
12
Our Networks Face Security Risks.
Even though we have implemented security measures, our wireless and wireline
networks may be vulnerable to unauthorized access by hackers or others,
computer viruses and other disruptive problems. Someone who is able to
circumvent security measures could misappropriate our proprietary information
or cause interruptions in our Internet operations. Internet and online service
providers have in the past experienced, and may in the future experience,
interruptions in service as a result of the accidental or intentional actions
of Internet users, current and former employees or others. Our wireless
Internet services may present additional security risks that could lead to
interruptions in services, security breaches and related problems. We may need
to expend significant capital or other resources protecting against the threat
of security breaches or alleviating problems caused by breaches. Although we
intend to continue to implement industry-standard security measures, persons
may be able to circumvent the measures that we implement in the future.
Eliminating computer viruses and alleviating other security problems may
require interruptions, delays or cessation of service to users accessing Web
pages that deliver our content services, any of which could harm our business.
See "Business--Technology and Infrastructure--Data Network Infrastructure."
Users of online commerce services are highly concerned about the security of
transmissions over public networks. Concerns over security and the privacy of
users may inhibit the growth of the Internet and other online services
generally, and the Web in particular, especially as a means of conducting
commercial transactions. As we expand our merchant services, we intend to rely
on encryption and authentication technology licensed from third parties to
provide the security and authentication necessary to securely transmit
confidential information, such as member profiles and customer credit card
numbers. Users could possibly circumvent the measures we take to protect
customer transaction data. To the extent that our activities involve the
storage and transmission of proprietary information, such as credit card
numbers, security breaches could damage our reputation and expose us to a risk
of loss or litigation and possible liability. Any compromise of our security
could harm our business.
We May Be Unable to Adequately Protect or Enforce Our Intellectual Property
Rights.
Our success depends significantly upon our proprietary technology. To protect
our proprietary rights, we rely on a combination of copyright and trademark
laws, patents, trade secrets, confidentiality agreements with employees and
third parties and protective contractual provisions. Despite our efforts to
protect our proprietary rights, unauthorized parties may copy aspects of our
products or services or obtain and use information that we regard as
proprietary. In addition, others could possibly independently develop
substantially equivalent intellectual property. If we do not effectively
protect our intellectual property, our business could suffer.
Companies in the computer industry have frequently resorted to litigation
regarding intellectual property rights. We may have to litigate to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of other parties' proprietary rights. From time to time, we
have received, and we may receive in the future, notice of claims of
infringement of other parties' proprietary rights. Any such claims could be
time-consuming, result in costly litigation, divert management's attention,
cause product or service release delays, require us to redesign our products or
services or require us to enter into royalty or licensing agreements. These
royalty or licensing agreements, if required, may not be available on
acceptable terms or at all. If a successful claim of infringement were made
against us and we
could not develop non-infringing technology or license the infringed or similar
technology on a timely and cost-effective basis, our business could suffer. See
"Business--Intellectual Property" and "--Legal Proceedings."
13
Our Stock Price Has Been and May Continue to Be Volatile.
The trading price of our common stock has been and is likely to continue to
be highly volatile. Since we began trading on December 15, 1998, our stock
price has ranged from $1.875 to $138.50. Our stock price could be subject to
wide fluctuations in response to factors such as the following:
. actual or anticipated variations in quarterly results of operations;
. the addition or loss of affiliates, distribution partners or content
providers;
. announcements of technological innovations, new products or services by
us or our competitors;
. changes in financial estimates or recommendations by securities
analysts;
. conditions or trends in the Internet and online commerce industries;
. changes in the market valuations of other Internet, online service or
software companies;
. our announcements of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
. additions or departures of key personnel;
. sales of our common stock;
. general market conditions; and
. other events or factors, many of which are beyond our control.
In addition, the stock market in general, and the Nasdaq National Market and
the market for Internet and technology companies in particular, have
experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of these companies.
These broad market and industry factors may materially and adversely affect our
stock price, regardless of our operating performance. The trading prices of the
stocks of many technology companies are at or near historical highs and reflect
price-earnings ratios substantially above historical levels. These trading
prices and price-earnings ratios may not be sustained.
We Are Subject to Pending Legal Proceedings.
From time to time we have been, and expect to continue to be, subject to
legal proceedings and claims in the ordinary course of our business, including
claims of alleged infringement of third-party trademarks and other intellectual
property rights by us. Such claims, even if not meritorious, could require the
expenditure of significant financial and managerial resources, which could harm
our business.
On February 8, 2000, we reached a settlement with an alleged former employee.
Under the terms of the settlement, the alleged employee received a cash payment
of $10.5 million.
On December 15, 1999, a complaint was filed against us by a former employee
alleging claims for breach of contract, fraud, negligent misrepresentation, and
promissory estoppel. The former employee contends he agreed to work for us on
the basis of certain misrepresentations, that he entered into an agreement with
us that entitles him to an option to purchase 300,000 shares of our common
stock, and that he was terminated without cause. The former employee is seeking
the right to purchase the shares of stock, unspecified compensatory and
punitive damages, and litigation costs and attorney's fees.
On December 23, 1998, we filed a complaint against Internet Yellow Pages,
Inc., or IYP, and Greg Crane, asserting claims for (a) account stated, (b)
breach of contract, and (c) fraud. IYP has asserted counterclaims against us
for breach of contract, fraud, extortion and violation of the Washington
Consumer Protection Act, and seeks relief consisting of $1,500,000 and other
unquantified money damages, punitive damages, treble damages and attorney's
fees.
14
We believe we have meritorious defenses to all of these claims against us.
Nevertheless, litigation is inherently uncertain, and we may not prevail in
these suits.
We had discussions with a number of individuals in the past regarding
employment by us and also hired and subsequently terminated a number of
individuals as employees or consultants. Furthermore, primarily during our
early stage of development, our procedures with respect to the manner of
granting options to new employees were not clearly documented. As a result of
these factors, and in light of the receipt of the above claims, we have in the
past received, and may in the future receive, similar claims from one or more
individuals asserting rights to acquire shares of our stock or to receive cash
compensation. We cannot predict whether such future claims will be made or the
ultimate resolution of any currently outstanding or future claim. See
"Business--Legal Proceedings."
We May Require Additional Funding.
Although we believe that our cash reserves and cash flows from operations
will be adequate to fund our operations for at least the next 12 months, such
sources may be inadequate. Consequently, we may require additional funds during
or after such period. Additional financing may not be available on favorable
terms or at all. If we raise additional funds by selling stock, the percentage
ownership of our then current stockholders will be reduced. If we cannot raise
adequate funds to satisfy our capital requirements, we may have to limit our
operations significantly. Our future capital requirements depend upon many
factors, including, but not limited to:
. the rate at which we expand our sales and marketing operations;
. the amount and timing of fees paid to affiliates to include our
consumer, merchant and wireless services on their site or service;
. the extent to which we expand our consumer, merchant and wireless
services;
. the extent to which we develop and upgrade our technology and data
network infrastructure;
. the occurrence, timing, size and success of acquisitions;
. the cash requirements of entities we have acquired;
. the number and amount of investments we make in privately held
technology companies;
. the rate at which we expand internationally; and
. the response of competitors to our service offerings.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
Management Owns a Large Percentage of Our Stock.
As of July 31, 2000, our officers, directors and affiliated persons
beneficially owned approximately 31% of our common stock. Naveen Jain, our
Chairman, beneficially owned approximately 22% of our common stock as of that
date. As a result, our officers, directors and affiliated persons may
effectively be able to:
. elect, or defeat the election of, our directors;
. amend or prevent amendment of our Certificate of Incorporation or
Bylaws;
. effect or prevent a merger, sale of assets or other corporate
transaction; and
. control the outcome of any other matter submitted to the stockholders
for vote.
Our public stockholders may have little control over the outcome of such
transactions. Management's stock ownership may discourage a potential acquirer
from making a tender offer or otherwise attempting to obtain control of
InfoSpace, which in turn could reduce our stock price or prevent our
stockholders from realizing a premium over our stock price.
15
FORWARD-LOOKING STATEMENTS
You should not rely on forward-looking statements in this prospectus. This
prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends," "may," "will," "should," "estimates,"
"predicts," "potential," "continue" and similar expressions to identify such
forward-looking statements. These forward-looking statements include, but are
not limited to:
. statements regarding our business and growth strategy,
. the expected demand for and benefits of our Internet infrastructure
services for our affiliates, advertisers, content providers and
distribution partners,
. anticipated benefits from the businesses and technologies we have
acquired or intend to acquire,
. future carriage fees,
. increased advertising and public relations expenditures,
. increased operating expenses and the reasons for such increases,
. expected operating losses,
. increased costs of revenues,
. increased product development expenses,
. increased sales and marketing expenses,
. increased general and administrative expenses,
. anticipated capital equipment expenditures and
. anticipated cash needs.
This prospectus also contains forward-looking statements attributed to third
parties relating to their estimates regarding the growth of certain markets.
Forward-looking statements are subject to known and unknown risks,
uncertainties and other factors that may cause our and the strategic Internet
services industry's actual results, levels of activity, performance,
achievements and prospects to be materially different from those expressed or
implied by such forward-looking statements. These risks, uncertainties and
other factors include, among others, those identified under "Risk Factors" and
elsewhere in this prospectus.
These forward-looking statements apply only as of the date of this
prospectus. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties, and assumptions,
the forward-looking events discussed in this prospectus might not occur.
16
USE OF PROCEEDS
Of the 1,084,177 shares of our common stock offered in this prospectus, we
will issue approximately 795,369 shares of our common stock upon exchange or
redemption of the exchangeable shares; we will receive no net cash proceeds
upon the issuance of such shares. We may receive up to approximately
$1.7 million in net cash proceeds (assuming an exchange rate of Canadian
dollars to U.S. dollars of approximately 0.68:1), subject to fluctuations in
the exchange rate between Canadian dollars and U.S. dollars, in connection with
the exercise of warrants to purchase 288,808 shares of our common stock being
offered in this prospectus. We will use these proceeds for general corporate
purposes.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings and therefore do not anticipate
paying any cash dividends in the foreseeable future.
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the Nasdaq National Market under the
symbol "INSP" since December 15, 1998, the date of our initial public offering.
Prior to that time, there was no public market for our common stock. The
following table sets forth, for the periods indicated, the high and low sales
prices for our common stock as reported by the Nasdaq National Market. These
prices have been adjusted to give effect to two-for-one stock splits of our
common stock consummated in May 1999, in January 2000 and in April 2000.
High Low
--------- --------
Fiscal Year Ended December 31, 1998:
Fourth Quarter (from December 15, 1998)................. $ 6.50 $ 1.875
Fiscal Year Ending December 31, 1999:
First Quarter........................................... $ 12.4063 $ 3.5625
Second Quarter.......................................... $ 18.1563 $ 8.8125
Third Quarter........................................... $ 14.7345 $ 9.2188
Fourth Quarter.......................................... $ 54.25 $ 9.6875
Fiscal Year Ending December 31, 2000:
First Quarter........................................... $138.50 $40.25
Second Quarter.......................................... $ 78.25 $37.125
Third Quarter (through September 11, 2000).............. $ 60.00 $25.50
On September 11, 2000, the last reported sale price for our common stock on
the Nasdaq National Market was $40.3125 per share. As of August 28, 2000, there
were approximately 813 holders of record of our common stock. See "Risk
Factors--Our Stock Price Has Been and May Continue to Be Volatile."
17
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000. This
table should be read in conjunction with our Consolidated Financial Statements
and Notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.
As of
June 30, 2000
------------------
(in thousands,
except share data)
Stockholders' equity:
Preferred Stock, $0.0001 par value per share; 15,000,000
shares authorized; one share issued and outstanding...... $ --
Common Stock, $0.0001 par value per share; 900,000,000
shares authorized; 231,915,485 shares issued and
outstanding(1)........................................... 23
Additional paid-in capital................................ 838,467
Accumulated deficit....................................... (213,457)
Accumulated other comprehensive income.................... (1,979)
Deferred expense--warrants................................ (1,903)
Unearned compensation--stock options...................... (1,008)
---------
Total stockholders' equity.............................. 620,143
---------
Total capitalization.................................. $ 620,143
=========
- --------
(1) Excludes as of June 30, 2000:
. 33,376,685 shares of common stock issuable upon exercise of outstanding
options at a weighted average exercise price of $31.40 per share;
. 19,932,048 shares of our common stock issuable upon exercise of
outstanding warrants at a weighted average exercise price of $0.94 per
share; and
. 15,399,094 shares of our common stock reserved for future issuance under
our Restated 1996 Flexible Stock Incentive Plan and 1998 Employee Stock
Purchase Plan.
18
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except share and per share data)
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," our Consolidated Financial Statements and Notes
thereto and other financial information included elsewhere in this prospectus.
The selected consolidated statements of operations data for the years ended
December 31, 1997, 1998 and 1999 and the selected consolidated balance sheet
data at December 31, 1998 and 1999 are derived from our audited consolidated
financial statements which have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports included elsewhere herein, and
are included elsewhere in this prospectus. The 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. The balance sheet of Prio,
Inc. (a development stage enterprise) as of December 31, 1998, and the related
statements of operations, shareholders' deficiency, and cash flows for each of
the years in the two-year period ended December 31, 1998, have been audited by
KPMG LLP, independent auditors, as stated in their reports included elsewhere
herein, and are included elsewhere in this prospectus. The selected
consolidated statements of operations data for the three months ended March 31,
1999 and 2000 and the selected consolidated balance sheet data as of March 31,
2000 are derived from unaudited consolidated financial statements included
elsewhere in this prospectus. The selected consolidated statements of
operations data for the period from March 1, 1996 (inception of InfoSpace) to
December 31, 1996 and the selected consolidated balance sheet data at
December 31, 1996 and 1997 have been derived from audited consolidated
financial statements that have not been included herein.
The financial statement data below has been recast to reflect the pooling of
interests with Prio, Inc. Accordingly, the data presented below for the periods
prior to the inception of InfoSpace relate to Prio only. The selected
consolidated statements of operations data for the year ended December 31, 1995
and the selected consolidated balance sheet data at December 31, 1995 have been
derived from unaudited financial statements of Prio. This data, in the opinion
of management, includes all adjustments that are necessary for a fair
presentation of Prio's financial position and results of operations for these
periods.
Years Ended Months Ended
December 31, June 30,
-------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
------ ------- ------- -------- -------- -------- ---------
Consolidated Statements
of Operations Data:
Revenues............... -- $ 199 $ 1,817 $ 9,632 $ 37,390 $ 12,240 $ 43,578
Cost of revenues....... -- 96 493 2,331 7,267 2,954 7,596
------ ------- ------- -------- -------- -------- ---------
Gross profit......... -- 103 1,324 7,301 30,123 9,286 35,982
Operating expenses:
Product development.. 250 1,989 4,560 7,567 11,316 4,925 10,427
Sales, general and
administrative...... 262 2,576 6,546 18,161 60,137 18,702 35,468
Amortization of
intangibles......... -- -- 64 710 3,223 604 27,428
Acquisition and
related charges..... -- -- -- 2,800 13,351 4,969 86,599
Other--non-recurring
charges............. -- -- 137 4,500 11,359 209 2,888
------ ------- ------- -------- -------- -------- ---------
Total operating
expenses........... 512 4,565 11,307 33,738 99,386 29,409 162,810
------ ------- ------- -------- -------- -------- ---------
Loss from operations... (512) (4,462) (9,983) (26,437) (69,263) (20,123) (126,828)
Other income, net...... 6 95 39 468 11,691 4,626 6,046
Unrealized gain on
investments........... -- -- -- -- -- -- 15,150
Minority interest...... -- -- -- -- -- -- (6,398)
Restructuring
charges............... -- -- -- -- -- -- (2,171)
Income tax expense..... -- -- -- -- -- -- (24)
Cumulative effect of
change in accounting
principle............. -- -- -- -- -- -- (719)
------ ------- ------- -------- -------- -------- ---------
Net loss............... $ (506) $(4,367) $(9,944) $(25,969) $(57,572) $(15,497) $(114,944)
====== ======= ======= ======== ======== ======== =========
Basic and diluted net
loss per share........ $(0.38) $ (0.07) $ (0.11) $ (0.23) $ (0.29) $ (0.08) $ (0.51)
====== ======= ======= ======== ======== ======== =========
Shares used in
computing basic net
loss per share........ 1,315 64,455 91,470 114,519 196,222 189,086 223,708
====== ======= ======= ======== ======== ======== =========
Shares used in
computing diluted net
loss per share........ 1,315 64,455 91,697 114,519 196,222 189,086 223,708
====== ======= ======= ======== ======== ======== =========
December 31,
-------------------------------------- June 30,
1995 1996 1997 1998 1999 2000
---- ------ -------- ------- -------- --------
Consolidated Balance Sheet
Data:
Cash and short-term
investments................. $236 $3,125 $ 11,961 114,266 $162,705 $143,415
Working capital.............. (17) 3,284 10,561 108,753 169,562 172,195
Total assets................. 284 4,859 14,470 133,670 365,587 676,675
Total stockholders' equity... 30 3,884 11,061 119,730 339,875 620,143
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
"Selected Consolidated Financial Data" and our Consolidated Financial
Statements and Notes thereto included elsewhere in this prospectus. In addition
to historical information, the following discussion contains certain forward-
looking statements that involve known and unknown risks and uncertainties, such
as statements of our plans, objectives, expectations and intentions. You should
read the cautionary statements made in this prospectus as being applicable to
all related forward-looking statements wherever they appear in this prospectus.
Our actual results could differ materially from those discussed in the forward-
looking statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below and in the section
entitled "Risk Factors," as well as those discussed elsewhere herein. See
"Forward-Looking Statements." You should not rely on these forward-looking
statements, which reflect only our opinion as of the date of this prospectus.
We do not assume any obligation to revise forward-looking statements.
Overview
InfoSpace, Inc. is an international information infrastructure services
company. Infospace provides commerce, information and communication
infrastructure services for wireless devices, merchants and Web sites. We began
operations in March 1996. During the period from inception through December 31,
1996, we had insignificant revenues and were primarily engaged in the
development of technology for the aggregation, integration and distribution of
Internet content and the hiring of employees. In 1997, we expanded our
operations, adding business development and sales personnel in order to
capitalize on the opportunity to generate Internet advertising revenues. We
began generating material revenues in 1997 with our consumer services. Revenues
in 1998 were also primarily generated through our consumer services. Throughout
1999 and the first quarter of 2000, we have expanded our infrastructure
services to enhance our consumer, merchant and wireless services. The following
provides greater detail on each of our service offerings:
Consumer Services: We provide information of broad appeal to users of
wireless devices and PC's including directories, sports, news and
entertainment, financial data and traffic reports. We also offer an integrated
platform of consumer services that includes community building services such as
online address books, calendars, online chat and message boards, and
communication services including device independent e-mail and instant
messaging. Our consumer services are designed for the end user and are
distributed through wireless devices and Web sites.
Revenues from our consumer services are generated from advertising,
subscriber fees and guaranteed transaction fees in lieu of revenue share.
Merchant Services: We provide comprehensive end-to-end merchant services and
an extensive distribution network that includes regional bell operating
companies (known as RBOCs), merchant banks and other local media networks. Our
end-to-end merchant services give merchants the ability to create, promote,
sell and distribute their products and services across multiple channels
through our broad distribution network. We have extensive reseller agreements
with RBOCs, including BellSouth, SBC, Bell Atlantic, and Qwest, merchant banks
such as American Express and other local media networks such as newspapers and
television and radio stations who provide our services to millions of local
merchants worldwide.
Our merchant services consist of a comprehensive platform of technology that
enables us to deliver unique services such as:
. the online delivery of promotions to any device that can be used online
and offline;
. buying from any Web site directly from a wireless device with a single
click;
20
. PageExpress(TM) which enables local merchants to create a Web presence;
. StoreBuilder which enables merchants to build online stores;
. ActivePromotion(TM) which enables merchants to create targeted product
promotions and distribute them across our network;
. ActiveShopper(TM) which provides an open marketplace where consumers can
find, research and purchase products from our merchant network; and
. Yellow page listings and enhanced listings.
Revenues from our merchant services are primarily generated from commerce
fees and subscriber fees, including per store/per month or per promotion/per
month fees. Our national and local merchant network consists of more than
600,000 local and national merchants.
Wireless Services: Our wireless services are comprised of a comprehensive,
integrated suite of wireless portal services that provide mobile users relevant
information services such as real-time stock quotes and traffic reports, the
ability to conduct secure commerce transactions including single click buying,
communication services such as device-independent instant messaging and e-mail,
personalization capabilities and location-based services that enable the user
to search for location-based information such as the restaurant closest to the
mobile user's current location. These services are distributed through wireless
carriers, device manufacturers and software providers. Our wireless affiliates
include Verizon Wireless, AT&T Wireless, SBC and ALLTELL.
Our wireless services are private-labeled for each carrier, preserving the
brand of the carrier and their relationship with their customer and creating a
barrier to switch. Revenues are primarily generated from the carrier and
include licensing fees, per subscriber/per month fees in the U.S. and per
query/per message fees in Europe and Japan. In addition we receive commerce
revenue for the transactions delivered on the wireless devices.
All of our services are built on our core technology platform and use the
same operational infrastructure. We do not allocate development or operating
costs to any of these services.
Recent Acquisitions
In May 1997, we acquired Yellow Pages on the Internet, LLC, or YPI, a
Washington limited liability company that provided Internet yellow pages
directory information. In June 1998, we acquired Outpost, a Washington
corporation engaged primarily in electronic commerce through the sale of cards
and gifts via the Internet. In June 1999, we acquired the MyAgent technology
and related assets from Active Voice Corporation. In October 1999, we acquired
Union-Street.com, a provider of business services including private label e-
mail, address book, calendar, personal home page, chat and message boards. In
December 1999, we acquired eComLive.com, Inc., a provider of Web-based real-
time collaboration and interaction solutions specialized for consumer-to-
consumer, business-to-business and business-to-consumer vertical markets and
Zephyr Software Inc., an infrastructure services company for the Indian market.
These acquisitions were accounted for under the purchase method and,
accordingly, are included in our operating results from the date of acquisition
forward. The impact of the YPI acquisition on our consolidated statement of
operations was not substantial. The acquisitions of Outpost, MyAgent, Union-
Street and eComLive resulted in write-offs of in-process research and
development and the recording of goodwill, assembled workforce and core
technology. The acquisition of Zephyr Software resulted in the recording of
goodwill. We have integrated these businesses and the acquired technologies
with our other products and services.
In October 1999, we acquired INEX Corporation, a developer of Internet
commerce solutions designed for small and medium-sized merchants. This
transaction was accounted for as a pooling of interests. The
21
consolidated financial statements for the three years ended December 31, 1999
and the accompanying notes reflect the Company's financial position and results
of operations as if INEX was a wholly-owned subsidiary since inception.
In February 2000, we acquired Prio, Inc., a provider of commerce solutions
specializing in the development of strategic partnerships, technologies and
programs that drive commerce in both traditional and online shopping
environments. The consolidated financial statements and accompanying notes
reflect the Company's financial position and results of operations as if Prio
was a wholly-owned subsidiary since inception. In March 2000, we acquired an
eighty-percent interest in Saraide Inc. (formerly saraide.com, inc), a provider
of wireless Internet services in Europe, Japan and Canada. Also in March 2000,
we acquired Millet Software (privacybank.com). Millet developed secure
technology that provides an automated process for filling in payment forms. The
acquisitions of Saraide and Millet are accounted for as purchases and their
results of operations are included in the consolidated financial statements
from the date of acquisition.
In July 1998, we entered into a joint venture agreement with TDLI.com
Limited, a subsidiary of Thomson Directories Limited to form TDL InfoSpace to
replicate our content, community and consumer services in Europe. TDL InfoSpace
launched content services in the United Kingdom in the third quarter of 1998.
Under the Web site services agreement, Thomson provides its directory
information to TDL InfoSpace and sell Internet yellow pages advertising for the
joint venture through its local sales forces. We also license our technology
and provide hosting services to TDL InfoSpace. Thomson and we each purchased a
50% interest in TDL InfoSpace and are required to provide reasonable working
capital to TDL InfoSpace. As of December 31, 1999, we had contributed $496,000
to the joint venture. We account for our investment in the joint venture under
the equity method. For the years ended December 31, 1999 and 1998, we recorded
a loss from the joint venture of $12,000 and $125,000, respectively. On August
31, 2000, we acquired all of the issued and outstanding capital stock of
TDLI.com, Limited. This acquisition gave us 100% control of TDL InfoSpace.
We have incurred losses since our inception and, as of June 30, 2000, we had
an accumulated deficit of approximately $213.5 million. For the six months
ended June 30, 2000, our net loss totaled $114.9 million, including
amortization of intangibles of $27.4 million, $86.6 million in acquisition and
related charges associated with the acquisitions of Prio, Saraide and Millet
and $2.9 million in other non-recurring charges related to warrants issued by
Prio for services provided. For the year ended December 31, 1999, our net loss
totaled $57.6 million, including $13.4 million in acquisition and related
charges and $11.4 million in other non-recurring charges. See "--Acquisitions"
and "Business--Legal Proceedings."
We believe that our future success will depend largely on our ability to
continue to offer consumer, merchant and wireless solutions that are attractive
to our existing and potential future affiliates and distribution partners.
Accordingly, we plan to significantly increase our operating expenses in order
to, among other things:
. expand our affiliate network, which may require us to pay additional
carriage fees to certain affiliates;
. expand our business development and marketing operations and hire more
sales and business development personnel;
. increase our advertising and promotional activities;
. develop and upgrade our technology and purchase equipment for our
operations and network infrastructure;
. expand internationally; and
. expand our commerce, merchant and wireless services.
After giving effect to our recent acquisitions, we expect to incur
significant operating losses on a quarterly basis in the future. In light of
the rapidly evolving nature of our business and limited operating
22
history, we believe that period-to-period comparisons of our revenues and
operating results are not necessarily meaningful, and you should not rely upon
them as indications of future performance. Although we have experienced
sequential quarterly growth in revenues over the past eleven quarters, we do
not believe that our historical growth rates are necessarily sustainable or
indicative of future growth. For information on recent and pending acquisitions
see "--Acquisitions."
Historical Results of Operations
The following table sets forth the historical results of our operations
expressed as a percentage of total revenues.
Six
Months
Year Ended Ended
December 31, June 30,
------------------ -----------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
Revenues.................................... 100 % 100 % 100 % 100 % 100 %
Cost of revenues............................ 27 24 19 24 17
---- ---- ---- ---- ----
Gross profit.............................. 73 76 81 76 83
Operating expenses:
Product development....................... 251 79 30 40 24
Sales, general and administrative......... 360 189 160 153 81
Amortization of intangibles............... 4 7 9 5 63
Acquisition and related charges........... -- 29 36 41 199
Other--non-recurring charges.............. 8 47 30 2 7
---- ---- ---- ---- ----
Total operating expenses................ 623 351 265 241 374
---- ---- ---- ---- ----
Loss from operations........................ (550) (275) (184) (165) (291)
Other income, net........................... 20 65 31 38 14
Unrealized gain on investments.............. -- -- -- -- 35
Minority interest........................... -- -- -- -- (15)
..................................... -- -- -- -- (6)
---- ---- ---- ---- ----
Net loss.................................... (530)% (270)% (153)% (127)% (263)%
==== ==== ==== ==== ====
Results of Operations for the Years Ended December 31, 1997, 1998 and 1999 and
Six Months Ended June 30, 1999 and 2000
Revenues. Currently our revenues are derived from our consumer, merchant and
wireless services. These include advertising, subscriber fees, commerce
transaction fees, and guaranteed transaction fees in lieu of revenue share. We
tailor agreements to fit the needs of our customers, affiliates and
distribution partners, and under any one agreement we may earn revenue from a
combination of these sources. We also have agreements that utilize services
from more than one of our areas of service. Revenues were $37.4 million the
year ended December 31, 1999, $9.6 million the year ended December 31, 1998 and
$1.8 million for the year ended December 31, 1997. The increases are primarily
due to significant growth in our consumer and merchant services as a result of
increased expansion of our affiliate network, increased traffic to our
affiliate network that results in increased page views, increased use of our
consumer, merchant and wireless services, as well as larger and longer term
agreements with advertisers, affiliates and distribution partners. We entered
into 286 new agreements with advertisers, affiliates and distribution partners
during the year ended December 31, 1999.
Revenues increased $31.3 million, or 256%, to $43.6 million in the six-month
period ended June 30, 2000. This increase is due primarily to significant
growth in our consumer and merchant services as a result of the expansion of
our affiliate network, which consists of more that 3,100 Web sites and wireless
devices
23
and increased use of our consumer, merchant and wireless services, as well as
larger and longer term agreements with advertisers, affiliates and distribution
partners.
Cost of Revenues. Cost of revenues consists of expenses associated with the
enhancement, maintenance and support of our consumer, merchant and wireless
services, including direct personnel expenses, communication costs such as
high-speed Internet access, server equipment depreciation, and content license
fees. Cost of revenues were $7.3 million, or 19% of revenues, for the year
ended December 31, 1999 compared to $2.3 million, or 24% of revenues, for the
year ended December 31, 1998 and $493,000, or 27% of revenues, for the year
ended December 31, 1997. Cost of revenues were $7.6 million, or 17% of
revenues, for the six-month period ended June 30, 2000 compared to $3.0
million, or 24% of revenues, for the six-month period ended June 30, 1999. The
absolute dollar increases are primarily attributable to personnel costs and
other costs incurred in order to support greatly increased delivery of our
consumer, merchant and wireless solutions, including communication lines, data
licenses and equipment. We expect the absolute dollars spent on personnel,
enhanced content and expanded communications will continue to increase in the
forseeable future. We currently anticipate that cost of revenues will be in the
high teens as a percentage of revenues for the remainder of 2000.
Product Development Expenses. Product development expenses consist
principally of personnel costs for research, design and development of the
proprietary technology we use to integrate and distribute our consumer,
merchant and wireless services. Product development expenses were $11.3 million
or 30% of revenues for the year ended December 31, 1999, compared to $7.6
million or 79% of revenues, for the year ended December 31, 1998 and $4.6
million, or 251% of revenues, for the year ended December 31, 1997. Product
development expenses increased $5.5 million to $10.4 million in the six-month
period ended June 30, 2000, from $4.9 million for the comparable period in
1999. The increases in absolute dollars are primarily attributable to increases
in engineering personnel needed for continued development of our products and
service offerings. We believe that significant investments in technology are
necessary to remain competitive. Accordingly, we expect product development
expenses to continue to increase in absolute dollars as we hire additional
personnel who will develop and enhance our proprietary technology.
Sales, General and Administrative Expenses. Sales, general and administrative
expenses consist primarily of salaries and related benefits for sales, general
and administrative personnel, advertising and promotion expenses, carriage
fees, professional service fees, occupancy and general office expenses and
travel expenses. Sales, general and administrative expenses were $60.1 million
or 161% of revenues, for the year ended December 31, 1999 compared to $18.2
million or 189% of revenues, for the year ended December 31, 1998 and $6.5
million or 360% of revenues, for the year ended December 31, 1997. The absolute
dollar increases from the prior year were primarily due to increased staffing
levels necessary to manage and support our sales and operations teams, carriage
fees paid to certain affiliates, increased advertising and expansion of our
facilities and professional services. Sales, general and administrative
expenses were $35.5 million, or 81% in the six-month period ended June 30,
2000, compared to $18.7 million or 153% for the comparable period in 1999. The
absolute dollar increase is primarily due to increased personnel costs,
carriage fees paid to certain affiliates to include our content services on
their Web sites and travel expenses. Included in the 1999 expense is $17.7
million of expense recorded for the fair market value of warrants issued by
Prio, Inc. Prio had issued warrants for services provided.
Amortization of Intangibles. Amortization of intangibles includes
amortization of goodwill, core technology, purchased domain names, trademark,
contract lists and assembled workforce. Amortization of intangibles was
$3.2 million in 1999, compared to $710,000 in 1998 and $64,000 in 1997.
Amortization of intangibles was $27.4 million in the six months ended June 30,
2000, compared to $604,000 in the six months ended June 30, 1999. The increases
are a result of amortization of intangibles recorded from the acquisitions of
Saraide and Millet Software in March 2000, Zephyr Software and eComLive in
December of 1999, Union-Street in October 1999, the MyAgent technology
acquisition in June 1999 and Outpost Network in July 1998. With the exception
of Zephyr, intangibles of applicable goodwill, core technology,
24
contract list and acquired workforce for each acquisition are being amortized
over five years. The amortization of goodwill for Zephyr is over three years.
We acquired IQOrder on July 3, 2000. Amortization expense for the intangibles
acquired in this transaction will be included in the third quarter of 2000. In
the event that we complete additional acquisitions, which we expect to do,
expenses relating to the amortization of intangibles could increase in the
future.
Acquisition and Related Charges. Acquisition and other related charges
consist of in-process research and development and other one-time charges
related directly to acquisitions, such as legal and accounting fees. The
acquisition and related charges in 1999 were one-time in-process research and
development charges and costs incurred in the purchase acquisitions of
eComLive, Union-Street and the My Agent technology. Also included in
acquisition and other related charges in 1999 are the costs incurred in the
acquisition of INEX, which was accounted for as a pooling of interests. Total
in-process research and development charges in 1999 were $9.2 million. The
acquisition and related charges in the six months ended June 30, 2000 were one-
time in-process research and development charges and costs incurred in the
purchase acquisitions of Saraide and Millet Software. Also included in
acquisition and other related charges in 2000 are the costs incurred in the
acquisition of Prio, which was accounted for as a pooling of interests
transaction. Total in-process research and development charges in the first six
months of 2000 was $74.1 million. We expect to continue to pursue an aggressive
growth strategy to enhance and expand our consumer, merchant and wireless
services. In the event we complete additional acquisitions, we could incur
additional acquisition and related charges in the future.
Other Non-Recurring Charges. Other non-recurring charges in 1999 consist of
costs associated with litigation settlements. In February 2000, we reached a
settlement with an alleged employee in a lawsuit for a cash payment of $10.5
million. We accrued and expensed this liability in 1999. On July 23, 1999, we
settled a patent infringement claim in exchange for a lump sum royalty payment
of $209,500. This expense was recorded in 1999. On February 22, 1999, we
reached a settlement with a former employee for a cash payment of $4.5 million.
We accrued and expensed this liability in 1998.
In the six months ended June 30, 2000 other non-recurring charges consisted
of an expense recorded for the fair market value of warrants issued by Prio.
Prio had previously issued warrants for services which vested as the services
were provided. These warrants were accounted for under variable plan
accounting. Subsequent to the acquisition of Prio, the agreement pursuant to
which these warrants were granted was terminated and the remaining unvested
warrants accelerated to full vesting. For 1999 the warrant expense was
$17,652,693 and for the six months ended June 30, 2000 the warrant expense was
$2,887,609. As these warrants are fully vested, no additional expense for these
warrants will be recorded in future quarters.
Unrealized Gain on Investments Held. Unrealized gain on investments held
represents the unrealized gain on the investments in the InfoSpace Venture
Capital Fund 2000 of which InfoSpace owned 59.2% as of June 30, 2000. In
accordance with Accounting for Investments in Venture Capital Funds, the
investments are recorded at their market value and the unrealized gains are
reflected in the income statement in the Fund, which is fully consolidated. The
unrealized gain recognized in the six months ended June 30, 2000 is not
necessarily indicative of future results.
Minority Interest in Venture Capital Fund. As the majority holder of the
InfoSpace Venture Capital Fund 2000, we have recorded 100% of the balance sheet
and statement of operations in our consolidated financial statements. The non-
InfoSpace portion of the net income in the fund has been reflected as minority
interest. As of June 30, 2000, InfoSpace owned 59.2% of the fund; our employees
owned the remaining 40.8% of the fund.
Restructuring Charges. Restructuring charges of $2.2 million for the six
months ended June 30, 2000 reflect actual and estimated costs associated with
the closure of our Dallas, Texas facility. These costs are primarily comprised
of the write off of leasehold improvements, early lease termination penalties,
relocation costs and other personnel costs. We acquired this facility in the
acquisition of Saraide Inc. in March of 2000.
25
Our decision to close this office was primarily due to duplicated efforts in
this facility and our other locations and the forecasted cost savings from the
closure of the facility.
Other Income, Net. Other income consists primarily of interest income for all
periods. Other income was $11.7 million in 1999, $593,000 in 1998 and $39,000
in 1997. Other income was $6.0 million in the six months ended June 30, 2000,
compared to $4.6 million from the comparable period of 1999. The increase from
the prior years is primarily due to interest earned on higher average cash
balances resulting from private financings in July and August of 1998, the net
proceeds from our initial public offering completed in December 1998, and the
net proceeds from our follow-on offering, which closed in April 1999.
We have reinvested and will continue to reinvest part of our fixed income
securities in equity investments. We anticipate that our expansion plans may
require greater cash uses in the remainder 2000 than in prior years. With these
two factors, we anticipate that our interest income from our fixed securities
will decrease in the remainder 2000, compared with 1999.
Provision for Income Taxes. Net operating losses have been incurred to date
on a cumulative basis, and no tax benefit has been recorded, as sufficient
uncertainty exists regarding the realizability of the deferred tax assets. The
income tax expense in the six months ended June 30, 2000 is from our
international operations in Europe.
Balance Sheet Commentary
Accounts Receivable. As we enter into agreements for larger amounts with
larger, well established companies, we periodically must provide extended
payment terms beyond our standard 15 to 30 day terms. In addition, we are
issuing single invoices for larger dollar amounts. For example, at June 30,
2000, the receivable from one customer represented 23% of the accounts
receivable balance. This amount was received within payment terms subsequent to
period end.
Allowance for Doubtful Accounts. We reserve an amount based on specific
identification, historical experience amd industry trends.
We have a stringent credit review process and require payment in advance from
those customers that do not qualify under our trade credit guidelines.
Deferred Revenue. The increase in the six months ending June 30, 2000 was
primarily due to prepayment under two new large contracts closed during the six
months and our policy put in place at the beginning of the year of obtaining
payment from customers in advance of delivering services whenever practicable.
Liquidity and Capital Resources
From our inception in March 1996 through May 1998, we funded operations with
approximately $1.5 million in equity financing and, to a lesser extent, from
revenues generated for services performed. In May 1998, we completed a $5.1
million private placement of our common stock, and in July and August 1998, we
completed an additional private placement of our common stock for $8.2 million.
Sales of our common stock to employees pursuant to our 1998 Stock Purchase
Rights Plan also raised $1.7 million in July 1998. Our initial public offering
in December 1998 yielded net proceeds of $77.8 million and a follow-on public
offering in April 1999 yielded net proceeds of $185.0 million. As of June 30,
2000, we had cash, cash equivalents and short-term investments of $146.7
million and long-term investments of $76.5 million.
Net cash used by operating activities was $34.9 million in 1999. Cash used in
operating activities for the year ended December 31, 1999 consisted primarily
of net operating losses and increases in accounts receivable, notes receivable
and prepaid expenses. These uses of cash were partially offset by increases in
26
accrued expenses. Net cash used by operating activities was $13.6 million in
1998. Cash used in operating activities in 1998 consisted primarily of net
operating losses and increases in accounts receivable and prepaid expenses.
These uses of cash were partially offset by increases in accrued expenses. Net
cash used by operating activities was $7.3 million in 1997, which was primarily
comprised of the net loss. Net cash used by operating activities was $21.1
million in the six months ended June 30, 2000, consisting primarily of net
operating losses and decreases in accounts payable. Net cash used by operating
activities was $13.5 million during the six months ended June 30, 1999
consisting primarily of net operating losses.
Net cash used by investing activities was $159.7 million in the year ended
December 31, 1999. For 1999, cash used in investing activities was primarily
comprised of business acquisitions, securities investments, other investments
and purchase of fixed assets. The change in securities investments is primarily
a result of investing proceeds from our follow-on offering in short and long-
term investments. Net cash used in investing activities in 1998 was $83.7
million. This was primarily a result of investing the cash proceeds from the
initial public offering in short and long-term investments. Net cash used by
investing activities in 1997 was $958,000 and was primarily for the purchase of
fixed assets. Net cash provided by investing activities was $23.9 million in
the six months ended June 30, 2000. For this period, cash provided by investing
activities was primarily comprised of the reduction of short-term and long-term
investments and inclusion of minority interest. This cash increase was offset
by business acquisition costs, issuance of notes receivable and additional
investments. Net cash provided by investing activities during the six months
ended June 30, 1999 was $104.4 million. This was primarily a result of
investing the cash proceeds from the initial public offering in short and long-
term investments.
Cash provided by financing activities in 1999 was $192.6 million and was
primarily comprised of our net proceeds from our follow-on offering in April
1999. Cash provided by financing activities in 1998 was $125.3 million. The
1998 net proceeds were primarily from our initial public offering and, to a
lesser extent, from private placements of common stock. Cash provided by
financing activities in 1997 was primarily from private placements of our
common stock. Cash used in financing activities in the six months ended June
30, 2000 of $4.8 million was primarily comprised of payments of debt assumed in
the acquisition of Saraide and was offset by proceeds from the exercise of
stock options, warrants and issuance of shares under our 1998 Employee Stock
Purchase Plan. Cash provided by financing activities in the six months ended
June 30, 1999 of $187.8 million was primarily comprised of proceeds from the
issuance of common stock in our follow-on offering in April 1999.
We plan to use our cash for strategic investments and acquisitions,
investments in internally developed technology, global expansion of our
services and continued build-out of infrastructure in Europe, Asia and South
America.
We believe that existing cash balances, cash equivalents and cash generated
from operations will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 12 months.
However, the underlying assumed levels of revenues and expenses may not prove
to be accurate. We may seek additional funding through public or private
financings or other arrangements prior to such time. Adequate funds may not be
available when needed or may not be available on favorable terms. If we raise
additional funds by issuing equity securities, dilution to existing
stockholders will result. If funding is insufficient at any time in the future,
we may be unable to develop or enhance our products or services, take advantage
of business opportunities or respond to competitive pressures, any of which
could harm our business. See "Risk Factors--We May Require Additional Funding."
Acquisitions
Orchest, Inc. On August 4, 2000, we acquired all of the outstanding capital
stock of Orchest, Inc., a privately held company based in Cupertino,
California, for a purchase consideration of 255,288 shares of our common stock.
Orchest is an online provider of financial services that enables users to
access a consolidated
27
view of their personal financial information from multiple institutions. The
acquisition was accounted for as a purchase.
Acquisition of Go2Net, Inc. On July 26, 2000 we entered into a definitive
agreement to acquire Go2Net, Inc. a public company. Under the terms of the
agreement, we will exchange 1.82 of our shares for each share of Go2Net, and
Go2Net will become our wholly-owned subsidiary. Go2Net operates several
financial, entertainment and e-commerce Web sites. We believe that the
acquisition of Go2Net will allow us to offer a broader range of e-commerce
services and enhance the delivery of our services over broadband. We expect to
complete the acquisition in the fourth quarter of 2000, subject to customary
conditions, including approval of the stockholders of Go2Net. The acquisition
is expected to be accounted for as a pooling of interests.
TDLI.com Limited. TDLI.com Limited, a privately held company based in
Hampshire, England ("TDLI") owns 50% of the share capital of TDL InfoSpace
(Europe), a privately held company based in Hampshire, England ("TDL
InfoSpace".) TDL InfoSpace currently operates under a joint venture agreement
between TDLI and InfoSpace Investments Limited, one of our English
subsidiaries, and seeks to aggregate and syndicate content on the Internet that
satisfies the needs of end users in Europe. On July 24, 2000, we entered into a
definitive agreement with the shareholders of TDLI to acquire all of the
outstanding shares and options of TDLI for a purchase consideration of between
approximately $118 million and $144 million in shares of our common stock,
including between approximately $14.4 million and $17.6 million in shares of
Saraide Inc. ("Saraide"), one of our majority-owned subsidiaries. The election
by the TDLI shareholders to take part of the consideration in the shares of
Saraide Inc. is subject to the consent of certain of the minority shareholders
of Saraide to our transfer of these shares from us to the TDLI shareholders. If
that consent is not obtained by us prior to the effectiveness of this
Registration Statement, the agreement provides that the TDLI shareholders will
automatically receive all consideration in the shares of our common stock. We
expect to complete the acquisition in the third quarter of 2000, subject to
customary conditions, including the effectiveness of this Registration
Statement. The acquisition will be accounted for as a purchase.
IQorder.com, Inc. On July 3, 2000, we acquired all of the outstanding shares,
warrants and options of IQorder.com, Inc., a privately held company based in
Tempe, Arizona, for a purchase consideration of 989,959 shares of our common
stock. IQorder's technology allows consumers to enter a model number, UPC code,
part number, barcode or ISBN, or to scan in a UPC code, in order to locate a
product, compare prices and make an instant purchase with a single click. The
acquisition will be accounted for as a purchase.
Millet Software. On March 31, 2000 we acquired all of the common stock of
Millet Software, a privately held company, for a purchase consideration of
488,224 shares of our common stock and acquisition expenses of $54,531. The
acquisition was accounted for as a purchase in accordance with the provisions
of APB No. 16.
In this transaction, we assumed net assets of $5.9 million. This includes
$6.0 million in purchased technology which includes in-process research and
development, $170,000 of acquired workforce and $294,020 in net liabilities. We
issued shares with a fair value of $29.6 million and incurred acquisition costs
of $54,531. This resulted in $18.5 million of goodwill.
We recorded a non-recurring charge of $2.4 million for in-process research
and development that had not yet reached technological feasibility and had no
alternative future use. Among the factors we considered in determining the
amount of the allocation of the purchase price to in-process research and
development the estimated stage of development of each module of the
technology, including the complexity and technical obstacles to overcome,
estimating the estimated expected life of each module, estimated cash flows
resulting from the expected revenues, margins, and operating expenses generated
from each module, and discounted the present value of cash flows associated
with the in-process technologies. Considering the inherent difficulty in
developing estimates of future performance for emerging technologies such as
the
28
Millet Software applications, we utilized a relatively high rate of return
(30%) to discount to present value the cash flows associated with the in-
process technologies.
Within the Millet Software technology there are three technologies, Form L,
Smart Mapper and Screen Walking. As of the date of acquisition, we estimated
that the Form L, Smart Mapper and Screen Walking technologies were 100%, 85%
and 65% completed, respectively. The percentage completed pre-acquisition for
each application was based primarily on the evaluation of two major factors:
time-based data and complexity-based data. The core technology reliance for the
Smart Mapper and Screen Walking technologies was 40% and 20%, respectively.
We expect to fully integrate these technologies into our full suite of
Internet information infrastructure service offerings. Further, the modules
will not be distinguishable market segments for financial reporting purposes or
for management purposes. Consequently, there will be no separate and
distinguishable allocations or utilizations of net working capital, and no
specific charges for use of contributory assets. None of our operating expenses
are allocated to specific service offerings. The expected life of the modules
being developed was assumed to be five years, after which substantial
modification and enhancement would be required for the modules to remain
competitive.
Our revenue assumptions for these modules were based on the subscription and
transaction revenue we expect to generate from our shopping services. Our
expense assumptions for these modules included cost of revenues, which we
estimated to be 3% of revenues as we will incur minimal costs to deliver this
technology on the platforms already developed and in use by us. Sales and
marketing expenses combined with general and administrative expenses were
estimated to be 35% in the first two years, and thereafter to range between 30%
to 35% as a percentage of revenues. However, cost of revenues, sales and
marketing expenses and general and administrative expenses may vary, both in
absolute dollars and as a percentage of revenues.
While we believe that the assumptions discussed above were made in good faith
and were reasonable when made, such assumptions remain largely untested, as the
three modules are not yet in service. Accordingly, the assumptions we made may
prove to be inaccurate, and there can be no assurance that we will realize the
revenues, gross profit, growth rates, expense levels or other variables set
forth in such assumptions.
We do not expect to have the ability to calculate revenues specifically and
exclusively attributable to the integrated Millet technology. Further, the
absence of such attribution will not be material to any module's success. The
amount that we can charge customers for access and use of these modules will be
greatly influenced by market forces and competitor's pricing of their own
packaged and integrated offerings.
Saraide Inc. On March 10, 2000 we acquired eighty percent of the common stock
of Saraide, a privately held company, for a purchase consideration of 9,233,672
shares and acquisition expenses of $340,489. The acquisition was accounted for
as a purchase in accordance with the provisions of APB No. 16.
In this transaction, we assumed net liabilities of $16.2 million. The
purchase includes $97.0 million in purchased technology which includes in-
process research and development, $16.0 million of contract list, $2.1 million
of acquired workforce and $16.2 million in net liabilities.
We issued shares with a fair value of $347.0 million and incurred acquisition
costs of $340,489. This resulted in $248.4 million of goodwill.
We recorded a non-recurring charge of $71.7 million for in-process research
and development that had not yet reached technological feasibility and had no
alternative future use. Among the factors we considered in determining the
amount of the allocation of the purchase price to in-process research and
development were various factors such as estimating the stage of development of
each module of the technology, including the complexity and technical obstacles
to overcome, estimating the expected life of each module,
29
estimating cash flows resulting from the expected revenues, margins, and
operating expenses generated from each module, and discounting to present value
the cash flows associated with the in-process technologies.
At the date of acquisition, Sariade had eight technologies which had not yet
reached technological feasibility: (1) asynchronous bridges, (2) lookup
service/persistent cache services, (3) transaction services, (4) open standards
application provider interface ("API"), (5) SS7 signaling functionality, (6)
security infrastructure, (7) location enabler, and (8) commerce enabler. With
the exception of the asynchronous bridges, all projects were estimated to be
commercially deployable in 2000. Once complete, these projects will provide the
fundamental operating system and infrastructure for the distributed networked
system platform ("DNSP"), Saraide's value added service platform under
development.
The expected life of the modules being developed was assumed to be five to
seven years, after which substantial modification and enhancement would be
required for the modules to remain competitive.
Our revenue assumptions for these modules were based on the number of
carriers in Europe and North America we estimated would utilize these services,
and the number of messages per month for Europe and the number of subscribers
per month for North America signed up with these carriers that would utilize
these services.
Our expense assumptions for these modules included cost of revenues, which we
estimated to be 65% for 2000 and decreasing to 43% of revenues as we will incur
costs to deploy the technology globally. Research and development costs were
estimated to be 4.4% of revenues in 2000, decreasing to 2.2%. Sales and
marketing expenses combined with general and administrative expenses were
estimated to be 70% for 2000, and thereafter decreasing to 20% as a percentage
of revenues in line with industry levels as the Company capitalizes on
economies of scale. However, cost of revenues, sales and marketing expenses and
general and administrative expenses may vary, both in absolute dollars and as a
percentage of revenues.
While we believe that the assumptions discussed above were made in good faith
and were reasonable when made, such assumptions remain largely untested, as the
technologies are in the process of being integrated and released with our full
suite of integrated Internet information infrastructure technologies and
services for wireless devices. Accordingly, the assumptions we made may prove
to be inaccurate, and there can be no assurance that we will realize the
revenues, gross profit, growth rates, expense levels or other variables set
forth in such assumptions. Considering the inherent difficulty in developing
estimates of future performance for emerging technologies such as the Saraide
technologies, we utilized a relatively high rate of return (35.0% to 37.5%) to
discount to present value the cash flows associated with the in-process
technologies.
We do not expect to have the ability to calculate revenues specifically and
exclusively attributable to the integrated Saraide technology. Further, the
absence of such attribution will not be material to any module's success. The
amount that we can charge the wireless carriers and device manufacturers for
access and use of these modules will be greatly influenced by market forces and
by our competitor's pricing of their own packaged and integrated offerings.
Prio, Inc. On February 14, 2000, we consummated the acquisition, pursuant to
an Agreement and Plan of Acquisition and Amalgamation, of Prio, a privately
held company. The combination was accounted for as a pooling of interests. We
issued 9,322,418 shares of our common stock in exchange for all the outstanding
common and preferred stock of Prio.
Prio provides commerce solutions specializing in the development of strategic
partnerships, technologies and programs that drive commerce in both traditional
and online shopping environments and Internet commerce applications that
deliver solutions designed for small and medium-sized merchants to build,
manage and promote online storefronts. We have added these service offerings to
our merchant services. The consolidated financial statements and the
accompanying notes reflect our financial position and the results of operations
as if Prio was our wholly-owned subsidiary since inception.
30
Zephyr Software Inc.: On December 29, 1999, we acquired all of the common
stock of Zephyr Software Inc., a privately held company, and its wholly owned
subsidiary Zephyr Software (India) Private Limited for a purchase consideration
of 651,392 shares of our common stock and acquisition expenses of $539,512. The
acquisition was accounted for as a purchase in accordance with Accounting
Principles Board ("APB") No. 16. Results of operations for Zephyr have been
included with our results of operations for the period subsequent to the date
of acquisition.
In this transaction, we assumed net liabilities of $20,690, issued shares
with a fair value of $8,643,105 and incurred acquisition costs of $539,512.
This acquisition resulted in our recording $9,203,307 of goodwill.
eComLive.com, Inc.: On December 16, 1999, we 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.
In this transaction, we assumed net assets of $5,439,075. This includes
$5,300,000 in purchased technology which includes in-process research and
development, $140,000 of acquired workforce and $925 in net liabilities. We
issued shares with a fair value of $31,995,220 and incurred acquisition costs
of $582,246. This acquisition resulted in our recording $27,138,391 of
goodwill.
We recorded a non-recurring charge of $2.0 million for in-process research
and development that had not yet reached technological feasibility and had no
alternative future use.
The eComLive technology is built on client-server architecture. There are
three main applications, Interactive eComLive for the Consumer to Consumer
(C2C) market, Business eComLive targeted to the Business to Business (B2B)
market and Consumer eComLive for the Business to Consumer (B2C) market. We have
the ability to integrate the C2C eComLive technology into the InfoSpace Web
site and launch this technology with our consumer services. We also plan to
offer a co-branded version to our affiliates as part of our suite of co-branded
service offerings. The expected life of the modules being developed was assumed
to be five years, after which substantial modification and enhancement would be
required for the modules to remain competitive.
Union-Street: On October 14, 1999 we acquired all of the common stock of
Union-Street, 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.
In this transaction, we assumed net assets of $5,352,781. This includes
$5,300,000 in purchased technology which includes in-process research and
development, $160,000 of acquired workforce and $107,219 in net liabilities. We
issued shares with a fair value of $20,487,518 and incurred acquisition costs
of $395,656. This acquisition resulted in our recording $15,530,393 of
goodwill.
We recorded a non-recurring charge of $3.3 million for in-processs research
and development that had not yet reached technological feasibility and had no
alternative future use.
The Union-Street technology called Traction Series 3.0 is comprised of six
modules that promote inter-activity on the customer's Web site. Businesses can
integrate individual modules onto their sites or integrate all of the modules
to form a comprehensive community solution. The modules include (1) Web Site
Creator, (2) Event Manager, (3) Relationship Manager, (4) Forums, (5) Chat and
(6) Email. We have integrated most of the Union-Street technology into the
InfoSpace Web site and have launched the technology with our consumer services.
We also plan to offer a co-branded version to our affiliates as part of our
suite of co-branded service offerings. The expected life of the modules being
developed was assumed to be five years, after which substantial modification
and enhancement would be required for the modules to remain competitive.
INEX Corporation: On October 14, 1999, we consummated an Agreement and Plan
of Acquisition and Amalgamation with INEX Corporation, a privately held
company. The combination was accounted for as
31
a pooling of interests. We issued 3,600,000 shares of our common stock (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 ours, 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 we assumed and which will become exercisable
for shares of our common stock.
INEX developed and marketed Internet commerce applications that deliver
solutions designed for small and medium-sized merchants to build, manage and
promote online storefronts. We have added these products to our merchant
services. The consolidated financial statements for the three years ended
December 31, 1999 and the accompanying notes reflect our financial position and
the results of operations as if INEX were our wholly-owned subsidiary since
inception.
MyAgent(TM) Technology: On June 30, 1999, we acquired the MyAgent technology
and related assets from Active Voice Corporation for a cash payment of $18
million dollars. In addition, we hired six employees who comprised the MyAgent
development team at Active Voice. The acquisition was accounted for as a
purchase in accordance with the provisions of APB No. 16. Other than the
MyAgent technology modules, no other assets or liabilities were assumed as part
of this acquisition.
The total purchase price of the acquisition of the MyAgent technology was
$18.1 million including direct acquisition expenses of $83,054. In this
transaction, we assumed net assets of $4,380,000. This includes $4,300,000 in
purchased technology, which includes in-process research and development, and
$80,000 of acquired workforce. This acquisition resulted in our recording
$13,703,054 of goodwill.
We recorded a non-recurring charge of $3.9 million for in-process research
and development that had not yet reached technological feasibility and had no
alternative future use. Separately, we recorded a one-time charge of $1.0
million for expenses related to bonus payments made to the Active Voice MyAgent
team employees who accepted employment with us on the date of the MyAgent
technology acquisition, but who have no obligation to continue their employment
with us.
Within the MyAgent technology there are three main modules, the Client,
Server Intelligence, and Web Interface. We integrated the MyAgent technology
into the InfoSpace Web site and launched the technology with our desktop
portal. We also plan to offer a co-branded version to our affiliates as part of
our suite of co-branded service offerings. The Client and Server Intelligence
and Web interface were released in the fourth quarter of 1999.
Technology from Outpost: In June 1998, we acquired Outpost, which included
the acquisition of the Outpost technology and the hiring of approximately ten
employees. In the second quarter of 1998, we wrote off approximately $2.8
million of in-process research and development in connection with the Outpost
acquisition.
Within the acquired Outpost technology (smart-shopping services) there are
four main modules:
. integrated content that provides users with product pricing and merchant
information;
. transaction proxy that allows us to track sales transactions from
beginning to end and to receive confirmation reports from the retailers;
. branding that allows users to travel to affiliate Web sites without
leaving the InfoSpace.com Web site; and
. universal shopping cart that allows users to make multiple purchases at
different retailers in one execution.
32
These modules have been integrated into our full suite of Internet service
offerings. The integrated content module was completed and integrated into our
Web site in the third quarter of 1998. Relevant portions of the transaction
proxy, branding and shopping cart modules were completed and integrated into
our ActiveShopper(TM) electronic commerce private label solution that was
launched in 1999.
Quarterly Results of Operations
The following table sets forth certain consolidated statements of operations
data for our ten most recent quarters, as well as such data expressed as a
percentage of revenues. We have derived this information from our unaudited
consolidated financial statements. In management's opinion, we have prepared
this unaudited information on the same basis as the audited annual consolidated
financial statements, and this information includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation for the
quarters presented. You should read this information in conjunction with our
Consolidated Financial Statements and Notes thereto included elsewhere in this
prospectus. The operating results for any quarter are not necessarily
indicative of results for any future period.
33
March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31, March 31,
1998 1998 1998 1998 1999 1999 1999 1999 2000
--------- -------- ------------- ------------ --------- -------- ------------- ------------ ---------
(in thousands)
Revenues......... $ 1,028 $ 1,881 $ 2,613 $ 4,110 $ 5,259 $ 6,980 $10,465 $ 14,686 $ 19,006
Cost of
revenues........ 213 378 632 1,108 1,309 1,644 2,027 2,287 3,119
------- ------- ------- -------- ------- ------- ------- -------- --------
Gross profit.... 815 1,503 1,981 3,002 3,950 5,336 8,438 12,399 15,887
Operating
expenses:
Product
development.... 1,044 1,629 2,207 2,688 2,487 2,439 2,647 3,743 4,777
Sales, general
and
administrative.. -- 4,168 4,757 6,770 8,067 10,633 11,421 12,364 14,530
Amortization of
intangibles.... 14 107 293 296 299 305 1,014 1,605 7,491
Acquisition and
related
charges........ -- 2,800 -- -- -- 4,970 926 7,455 86,397
Other--non-
recurring
charges........ -- 240 -- 4,260 -- 210 1,487 27,315 2,888
------- ------- ------- -------- ------- ------- ------- -------- --------
Total operating
expenses...... 3,524 8,944 7,257 14,014 10,853 18,557 17,495 52,482 116,083
------- ------- ------- -------- ------- ------- ------- -------- --------
Loss from
operations...... (2,709) (7,441) (5,276) (11,012) (6,903) (13,221) (9,057) (40,083) (100,196)
Other income,
net............. 123 31 448 267 266 3,361 3,327 3,738 3,463
Unrealized gain
(loss) on
investments..... -- -- -- -- -- -- -- -- 23,598
Restructuring
charges......... -- -- -- -- -- -- -- -- --
Minority
interest........ -- -- -- -- -- -- -- -- (9,843)
Income tax
expense......... -- -- -- -- -- -- -- -- (18)
Cumulative effect
of change in
accounting
principle....... -- -- -- -- -- -- -- -- (719)
------- ------- ------- -------- ------- ------- ------- -------- --------
Net income
(loss).......... $(2,586) $(7,410) $(5,228) $(10,745) $(5,637) $(9,860) $(5,730) $(36,345) $(83,715)
======= ======= ======= ======== ======= ======= ======= ======== ========
March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31, March 31,
1998 1998 1998 1998 1999 1999 1999 1999 2000
--------- -------- ------------- ------------ --------- -------- ------------- ------------ ---------
(as a percentage of revenues)
Revenues......... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of
revenues........ 20.7 20.1 24.2 27.0 24.9 23.6 19.4 15.6 16.4
------- ------- ------- -------- ------- ------- ------- -------- --------
Gross profit.... 79.3 79.9 75.8 73.0 75.1 76.4 80.6 84.4 83.6
Operating
expenses:
Product
development.... 101.6 86.6 84.5 65.4 47.3 34.9 25.3 25.5 25.1
Sales, general
and
administrative.. 142.1 121.6 182.1 164.8 153.4 152.3 109.1 84.2 76.5
Amortization of
intangibles.... 1.4 5.7 11.2 7.2 5.7 4.4 9.7 10.9 39.4
Acquisition and
related
charges........ -- 148.9 -- -- -- 71.2 8.8 50.8 454.6
Other--non-
recurring
charges........ -- 12.8 -- 103.6 -- 3.0 14.2 186.0 15.2
------- ------- ------- -------- ------- ------- ------- -------- --------
Total operating
expenses...... 342.8 475.5 277.7 341.0 206.4 265.9 167.2 357.4 610.8
------- ------- ------- -------- ------- ------- ------- -------- --------
Loss from
operations...... (263.5) (395.6) (201.9) (267.9) (131.3) (189.4) (86.5) (272.9) (527.2)
Other income,
net............. 12.0 1.6 1.8 6.5 24.1 48.1 31.8 24.3 18.2
Unrealized gain
(loss) on
investments..... -- -- -- -- -- -- -- -- 124.2
Restructuring
charges......... -- -- -- -- -- -- -- -- (51.8)
Minority
interest........ -- -- -- -- -- -- -- -- --
Income tax
expense......... -- -- -- -- -- -- -- -- 0.0
Cumulative effect
of change in
accounting
principle....... -- -- -- -- -- -- -- -- 0.4
------- ------- ------- -------- ------- ------- ------- -------- --------
Net income
(loss).......... (251.6)% (393.9)% (200.1)% (261.4)% (107.2)% (141.3)% (54.8)% (247.5)% (436.6)%
======= ======= ======= ======== ======= ======= ======= ======== ========
June 30,
2000
----------
Revenues......... $ 24,572
Cost of
revenues........ 4,478
----------
Gross profit.... 20,094
Operating
expenses:
Product
development.... 5,649
Sales, general
and
administrative.. 20,938
Amortization of
intangibles.... 19,938
Acquisition and
related
charges........ 202
Other--non-
recurring
charges........ --
----------
Total operating
expenses...... 46,727
----------
Loss from
operations...... (26,633)
Other income,
net............. 2,583
Unrealized gain
(loss) on
investments..... (8,447)
Restructuring
charges......... (2,171)
Minority
interest........ 3,445
Income tax
expense......... (6)
Cumulative effect
of change in
accounting
principle....... --
----------
Net income
(loss).......... $(31,229)
==========
June 30,
2000
----------
Revenues......... 100.0 %
Cost of
revenues........ 18.2
----------
Gross profit.... 81.8
Operating
expenses:
Product
development.... 23.0
Sales, general
and
administrative.. 85.2
Amortization of
intangibles.... 81.1
Acquisition and
related
charges........ 0.8
Other--non-
recurring
charges........ --
----------
Total operating
expenses...... 190.1
----------
Loss from
operations...... (108.3)
Other income,
net............. 10.5
Unrealized gain
(loss) on
investments..... (34.3)
Restructuring
charges......... 14.0
Minority
interest........ (8.9)
Income tax
expense......... 0.0
Cumulative effect
of change in
accounting
principle....... --
----------
Net income
(loss).......... (127.0)%
==========
34
Our quarterly and annual revenue, expenses and operating results have
fluctuated in the past and are likely to fluctuate significantly in the future
due to a variety of factors, many of which are beyond our control. Because of
these fluctuations, we believe that period-to-period comparisons are not a good
indication of our future financial performance. We may not be able to sustain
or increase our level of revenue or our rate of revenue growth on a quarterly
or annual basis. Our quarterly or annual operating results may not meet the
expectations of investors. If this happens, the price of our stock could
decline. See "Risk Factors--Our Financial Results Are Likely to Fluctuate" and
"--Our Stock Price Has Been and May Continue to Be Volatile."
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements. We
adopted SAB 101 on January 1, 2000. Prior to January 1, 2000 and implementation
of the SAB, we recorded gross revenues from customers for development fees,
implementation fees and/or integration fees when the service was completed. If
this revenue were recognized on a straight-line basis, in accordance with SAB
101, we would have deferred $719,216 of revenue and recognized in 2000 and
2001. In accordance with SAB 101, the Company recorded a cumulative effect of
change in accounting principle of $719,216 and recorded $213,473 in revenue in
the first quarter of 2000 related to previously recognized 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.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risks, including changes in interest rates
and equity price fluctuations.
Interest Rate Risk. We invest our excess cash in high-quality corporate
issuers, and in debt instruments of the U.S. Government and its agencies. By
policy, we limit our credit exposure to any one issuer. We do not have any
derivative instruments in our investment portfolio. We protect and preserve
invested funds by limiting default, market and reinvestment risk. Investments
in both fixed rate and floating rate interest earning instruments carries a
degree of interest rate risk. Fixed rate securities may have their fair market
value adversely impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest rates fall. Due in
part to these factors, the Company's future investment income may fall short of
expectations due to changes in interest rates or the Company may suffer losses
in principal if forced to sell securities which have declined in market value
due to changes in interest rates.
Equity Investment Risk. The Company invests in equity instruments of public
and privately-held, technology companies for business and strategic purposes.
These investments are recorded as long-term assets and are classified as
available-for-sale. For the privately-held investments, our policy is to
regularly review the assumptions underlying the operating performance and cash
flow forecasts in assessing the carrying value. For our publicly-held
investments, we are subject to significant fluctuations in fair market value
due to the volatility of the stock market. Changes in fair market value are
recorded as a component of other comprehensive income and do not effect net
income until the securities are sold and a realized gain or loss is incurred.
35
BUSINESS
Overview
InfoSpace is an international information infrastructure services company.
InfoSpace provides commerce, information and communication infrastructure
services for wireless devices, merchants and Web sites. Our affiliates utilize
and distribute these services through a network of wireless and other non-PC
devices including PCs, cellular phones, pagers, screen telephones, television
set-top boxes, online kiosks, and personal digital assistants as well as PC-
based Web sites. We have relationships with AT&T Wireless, Verizon Wireless,
Vodafone AirTouch, ALLTELL, SBC, VoiceStream, Qwest, Intel, Ericsson, Nokia,
Mitsui and Acer America. InfoSpace's affiliate network also consists of more
than 3,100 Web sites that include America Online, Microsoft, Disney's GO
Network, NBC's Snap, Lycos, Go2Net Inc., and ABC LocalNet, among others.
Our Infrastructure Services
We have developed a scalable, flexible technology platform that enables us to
deliver a broad, integrated suite of services to Web sites, merchants and
wireless carriers. All of our consumer, merchant and wireless services utilize
the same core technology platform within the same operational infrastructure.
Our consumer services are designed for the end user and are distributed through
wireless devices and Web sites. These services include four main components:
(1) unified communication services, including device-independent email and
instant messaging; (2) information services, such as integrated directory,
news, and lifestyle information; (3) community services, including the "sticky"
services such as online address books and calendars; and (4) the ability to
offer collaboration services, including real-time document sharing. We target
merchant services to local merchants (including service-based merchants such as
restaurants and dry cleaners) and distribute these services through our
relationships with the regional bell operating companies (RBOCs), merchant
banks and other financial institutions and other local media networks,
including newspapers and television and radio stations. These services include
commerce services such as online storebuilding and technology that promotes
merchant services. We target wireless services to mobile users, whether on a
cellular phone, personal digital assistant (or PDA), pager or other non-PC
device, and distribute these services through our relationships with wireless
carriers and device manufacturers. These services include the ability to
conduct secure commerce using single-click buying, integrated information
services such as real-time stock quotes and traffic reports, and services that
manage users' lives, including online address books and calendars.
We design our infrastructure services to be highly flexible and customizable,
enabling affiliates to select from among our broad range of consumer, merchant
and wireless services. One of our principal strengths is our internally
developed technology, which enables us to easily and rapidly add new affiliates
and distribution partners by employing a distributed, scalable architecture
adapted specifically to our Internet-based infrastructure services. We help our
affiliates and distribution partners build and maintain their brands by
delivering our consumer, merchant and wireless services with the look and feel
and navigation features specific to each affiliate's delivery platform and
format, including the growing number of emerging wireless devices.
We have built a large distribution network through our direct sales force and
through reseller channels. Our reseller channels are based on distribution
agreements with online advertising networks, such as DoubleClick and Flycast,
who offer both our consumer and merchant services to their network of thousands
of Web sites; reseller agreements with RBOCs, including BellSouth, SBC, Bell
Atlantic and Qwest; merchant banks such as American Express and Bank of
America; and other local media networks who provide our services to local
merchants.
A key component of our strategy is expanding our operations into
international markets. Through a joint venture we began providing content
services in the United Kingdom in the third quarter of 1998. In March 1999 we
began providing infrastructure services to Canadian affiliates through a
Canadian subsidiary. In
36
addition, with our acquisition of Saraide, we have begun to expand our wireless
services into Europe, Japan and Canada. We expect to launch our subsidiary in
India to provide comprehensive, localized consumer, merchant and wireless
services to the India market. We have also entered into agreements to expand
our services into Brazil, China and Australia and are currently investigating
other international opportunities.
Consumer Services
Information Services
We provide information of broad appeal to users of wireless devices and PCs,
including maps, directories, financial data, traffic reports, sports, news and
entertainment. In most cases, we receive regular data feeds from our content
providers and store the content on our Web servers in order to maintain its
reliability and increase its accessibility. In other cases, our proprietary
technology allows Web users to transparently access content that is stored
directly on the content provider's system. In either case, our technology
enables us to integrate heterogeneous content from multiple sources and make it
appear as if it comes from one source, which is then delivered to our
affiliates. Our technology pulls the information dynamically into a Web page or
device output display that maintains the look and feel and navigation features
of each affiliate's Web site or wireless device.
We have acquired rights to third-party content pursuant to more than 85
license agreements, typically having terms of one to five years. The license
agreements require the content provider to update content on a regular basis,
the frequency of which varies depending on the type of content. In certain
arrangements, the content provider pays us a carriage fee for syndication of
its content to our network of affiliates. In other instances, we share with the
content provider advertising revenues attributable to end-user access of the
provider's content. For certain of our content, including our core directory
and map content, we pay a one-time or periodic fee or fee per content query to
the content provider. We typically enter into nonexclusive arrangements with
our content providers. However, in certain instances we have entered into
exclusive relationships, which may limit our ability to enter into additional
content agreements.
For our directory services, we integrate our yellow pages and white pages
information with each other and utilize yellow pages category headings in
combination with a natural word search feature to provide a user-friendly
interface and navigation vehicle within our directory services. We also
typically include maps and directions for addresses included in our directory
services. We further enhance the relevance and accuracy of responses to user
queries by employing a radial search feature to our directory services, which
allows users to specify the geographic scope within a radial distance of a
specific address, rather than more conventional methods of searching by zip
code or city and county.
In addition to our directory services, we distribute other valuable
information of broad appeal with everyday significance, such as classifieds,
news, travel and city guide information, real-time stock quotes and financial
information, Web directories and entertainment.
Our future success will depend on our ability to continue to integrate and
distribute information services of broad appeal. Our ability to maintain our
relationships with content providers and to build new relationships with
additional content providers is critical to the success of our business.
Community and Communications Services
We offer an extensive and integrated platform of consumer services that
includes community services and communication services.
Community-building services that we offer our affiliates include the "sticky"
services that are designed to keep a user on an affiliates' site. These include
personalized Web-based address books and calendars, personal home pages, online
chat and message boards.
37
We also offer unified communication services including device-independent
email and instant messaging. We integrate these services into the community-
building services we offer, making it easy for users to send email and instant
messages directly from their address book from any device and also view "buddy
lists" on any device.
Our Affiliate Network
We offer our infrastructure services to wireless device manufacturers such as
Nokia and Ericcson, wireless carriers such as AT&T Wireless, Verizon Wireless,
Voicestream and Qwest and wireless service providers such as AvantGo. Our PC-
based affiliate network now consists of over 3,100 portals and affinity sites,
including 4 of the top 5 most trafficked sites, according to Media Metrix. In
addition, we believe our affiliate network now reaches over 90% of all Internet
users based on data as of March 31, 2000, provided by Media Metrix.
Our consumer services revenue is derived from advertising, licensing fees and
guaranteed transaction fees in lieu of revenue share.
Merchant Services
Our merchant services give merchants the ability to create, promote, sell and
distribute their products and services across multiple channels through our
broad distribution network. We have reseller agreements with RBOCs, including
BellSouth, SBC, Bell Atlantic and Qwest, merchant banks and other local media
networks, such as newspapers, who provide our services to local merchants
worldwide.
Based on a broad platform of technology, we can deliver a broad array of
merchant services such as:
. the online delivery to any device of promotions that can be used online
and offline;
. single-click buying from any Web site directly from a wireless device;
. Page Express, which enables local merchants to create a Web presence;
. StoreBuilder, which enables merchants to build online stores;
. ActivePromotion, which enables merchants to create targeted product
promotions and distribute them across our network; and
. ActiveShopper, which provides an open marketplace where consumers can
find, research and purchase products from our merchant network.
Due to a recent acquisition, we can now integrate online promotion
technologies with an offline merchant's existing credit card processing
infrastructure, bridging the gap between the online and offline worlds. Our
enhanced commerce infrastructure will be designed to target and deliver online
promotions to consumers on their wireless devices or while they are looking for
goods and services on Web sites. To take advantage of the promotion, the user
can purchase the goods online, through a catalog or at a physical retail store.
Through our acquisition of Millet Software (PrivacyBank.com), we believe we
will be able to provide a server-based technology that enables wireless
Internet devices to become commerce-enabled devices by giving mobile users the
ability to press one key to make on-the-spot purchases from virtually any Web
site. This is possible through a patent-pending secure technology that provides
an automated process for completing payment forms, eliminating the need to
continually enter in payment or shipping information, register at sites or
enter any specific passwords.
Buyers can also purchase multiple products from multiple merchants, using our
shopping cart that provides the convenience of single-click purchasing.
38
Currently, over 600,000 merchants use our merchant service offerings.
Wireless Services
Our wireless services are comprised of an integrated suite of wireless portal
services that provide mobile users with relevant information services, such as
real-time stock quotes and traffic reports, the ability to conduct secure
commerce transactions from a wireless device, including single-click buying,
communication services such as device-independent instant messaging and email,
personalization capabilities and location-based services that enable users to
search for location-based information, such as the restaurant closest to the
mobile user's current location.
As a result of our acquisition of Saraide, we have begun to expand our
wireless services into Europe, Japan and Canada.
Our wireless services are distributed through the following wireless
carriers, device manufacturers and software providers.
Wireless Carriers AT&T Wireless, Verizon Wireless, Vodafone AirTouch,
ALLTELL, SBC, VoiceStream, Qwest
Wireless Software
Application Developers AvantGo, JP Systems, WolfeTech, Phone.com
Wireless Device
Manufacturers Nokia and Ericcson
Pagers Motorola
Web Appliances Intel
Our platform of wireless services includes:
. Form-filling instant buying technology, which allows mobile users to
press a single key to conduct transactions from virtually any Web site.
. Promotions technology, which allows mobile users to find and receive
real-time promotions on wireless devices from retailers and service-based
merchants, such as dry cleaners and restaurants, that can be used online
and offline. To take advantage of the promotion, the user can either
purchase the goods online, go to the retail store or simply utilize the
service. Promotions are seamlessly matched and automatically credited to
the user's credit card statement through secure back-end transaction
processing.
. Location-based directory services, that enable mobile users to search for
information, such as finding an Italian restaurant closest to where they
are when they conduct the search.
. Secure wireless commerce through a collaboration with VeriSign to deliver
a broad range of services aimed at facilitating trusted and secure
commerce applications across the wired and wireless Internet. By
incorporating VeriSign's strengths in Internet authentication, validation
and payment services, we will be able to offer a broad range of secure
services tailored to the wireless market.
Our wireless Internet services are device-independent and provide a platform
which enables our wireless carriers to support HDML and SMTP and a variety of
emerging protocols such as WAP, VXML and PQA's for Palm VII. Our services are
compatible with a variety of gateway technologies including WAP gateways from
Nokia, Phone.com and Ericsson.
Our wireless services are private-labeled for each carrier, preserving the
brand of the carrier and their relationship with their customer and helping to
create a barrier to switch. Revenues are primarily generated from the carrier
and include licensing fees, per subscriber/per month fees in the United States
and per query/per message fees in Europe. In addition, we receive commerce
revenue for the transactions completed on the wireless devices.
39
International Expansion
We intend to capitalize on what we perceive to be a significant opportunity
for our services in international markets. We currently maintain offices in the
United States, Canada, the Netherlands, France, the United Kingdom, Australia
and Brazil. Our wholly-owned subsidiary, InfoSpaceCanada.com, was formed in
early 1999 and has affiliate relationships with canada.com, a leading Canadian
Web site and search engine, as well as AOL Canada, MSN Canada and Sprint
Canada. InfoSpace.com India was formed as a result of our December 1999
acquisition of privately-held Zephyr Software and its wholly-owned subsidiary,
Zephyr Software (India) Private Limited.
In 1998, we entered into a joint venture with TDLI.com Limited, a subsidiary
of Thomson Directories Limited to form TDL InfoSpace to replicate our
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 our license agreement with TDL InfoSpace,
we license our technology and provide hosting services to TDL InfoSpace. On
August 31, 2000, we acquired all of the issued and outstanding capital stock of
TDLI.com Limited. This acquisition gave us 100% control of TDL InfoSpace.
With our acquisition of Saraide Inc. in March 2000, we have begun to expand
our wireless services into Europe, Japan and Canada. We have also entered into
agreements to expand our services into Brazil, China and Australia and are
currently investigating additional international opportunities. The expansion
into international markets involves a number of risks. See "Risk Factors--Our
International Expansion Plans Involve Risks" for a description of these risks.
Revenue Sources
We have derived substantially all of our revenues for our consumer, merchant,
and wireless services from national and local advertising, licensing fees,
commerce transaction fees, and guaranteed transaction fees in lieu of revenue
share.
Advertising
National Advertising
Throughout our consumer services, we sell banner advertisements based on
costs per thousand impressions (CPMs) and other CPM-based national advertising.
Our national advertising agreements generally have terms of less than six
months and guarantee a minimum number of impressions. Actual CPMs depend on a
variety of factors, including, without limitation, the degree of targeting, the
duration of the advertising contract and the number of impressions purchased,
and are often negotiated on a case-by-case basis. Because of these factors,
actual CPMs may fluctuate. Our guarantee of minimum levels of impressions
exposes us to potentially significant financial risks, including the risk that
we may fail to deliver required minimum levels of user impressions, in which
case we typically continue to provide advertising without compensation until
such levels are met.
Local Internet Yellow Pages Advertising
We generate a basic Internet yellow pages listing free of charge for all U.S.
local business listings. Similar to traditional yellow pages industry
practices, we generate revenues by selling enhancements to this
basic listing. Internet yellow pages advertising agreements provide for terms
of one year with costs to the local advertisers ranging from $50 to $300 or
greater per year, depending on the types of enhancements selected.
40
Subscription Fees
We receive subscription fees from some of our consumer, merchant and wireless
services. Subscription fees are derived from the distribution of our consumer
services to many of the affiliates in our network. Subscription fees from
merchant services are derived through our reseller relationships with wireless
carriers, device manufacturers, RBOCs, merchant banks and other local media
networks, and include per store/per month fees and per service/per month fees.
Subscription fee agreements for our consumer and merchant services generally
range from one to three years in duration.
Commerce Fees
We generate commerce fees from links and completed transactions through our
merchant services delivered on wireless devices and the PC. Under our merchant
services arrangements, merchants agree to pay us a commission-based transaction
fee when a user clicks through to their site and purchases a product. These
commissions typically range from 5 to 25 percent of the purchase amount. These
fees are generally paid to us monthly or quarterly, after the merchant has
collected its payment from the user.
Guaranteed Transaction Fees
We have agreements with some affiliates and merchants under which they agree
to pay us guaranteed transaction fees. These arrangements are individually
negotiated and have a range of specially adapted features involving various
compensation structures. These are often based on the range and extent of
customization rather than on CPMs. These arrangements vary in terms and
duration, but generally have longer terms than arrangements for our CPM-based
advertising. In some of these arrangements, we may also receive transaction
revenues when transactions exceed the guaranteed minimum payments. If the
merchant offers a commerce opportunity in its promotion, we may derive
transaction revenues based on the number of transactions made through the
promotion.
We also have arrangements with wireless carriers, device manufacturers and
software providers whereby we receive guaranteed transaction fees as well as
transaction revenues on a per-subscriber and per-query basis on existing
devices, such as pagers, in excess of the guaranteed minimum payments.
We generate a significant amount of our revenues from advertising and
guaranteed transaction fees from our affiliates who use our consumer services,
which involves a number of risks. For additional information about these risks,
see "Risk Factors--We Rely on Advertising and Transaction Revenues."
Technology and Infrastructure
One of our principal strengths is our internally developed technology, which
we have designed specifically for our Internet-based consumer, merchant and
wireless services. Our technology architecture features specially adapted
capabilities to enhance performance, reliability and scalability, consisting of
multiple proprietary software modules that support the core functions of our
operations. Our technology includes Web Server Technology, Database Technology,
a Web Scraping Engine, Gateway Technology and database network infrastructure.
Web Server Technology
We designed our Web Server Technology to enable rapid development and
deployment of information over multiple platforms and formats. It incorporates
an automated publishing engine that dynamically builds a page to conform to the
look and feel and navigation features of each affiliate. Our wireless Internet
services are device-independent and provide a platform which enables our
wireless carriers to support HDML and SMTP and a variety of emerging protocols
such as WAP, VXML and PQA's for Palm VII. Our
41
services are compatible with a variety of gateway technologies including WAP
gateways from Nokia, Phone.com and Ericsson.
Our Web Server Technology includes other features designed to optimize the
performance of our information infrastructure services, including:
. an HTML compressor that enables modifications of file content to reduce
size, thereby reducing download time for users;
. an "Adaptive Keep-Alive" feature that maximizes the time during which
client server connections are kept open, based on current server load,
thereby increasing user navigation and Web site traversal speed; and
. a Proxy Server that provides the capability for real-time integration and
branding of content that resides remotely with third-party content
providers.
Database Technology
We have developed proprietary database technology to address the specific
requirements of our business strategy and information infrastructure services.
We designed our Co-operative Database Architecture to function with a high
degree of efficiency within the unique operating parameters of the Internet, as
opposed to commonly used database systems that were developed prior to the
widespread acceptance of the Internet. The architecture is tightly integrated
with our Web Server Technology and incorporates the following features:
Our Heterogeneous Database Clustering allows disparate data sources to be
combined and accessed through a single uniform interface, regardless of data
structure or content. These clusters facilitate database bridging, which allows
a single database query to produce a single result set containing data
extracted from multiple databases, a vital component of our ability to
aggregate content from multiple sources. Database clustering in this manner
reduces dependence on single data sources, facilitates easy data updates and
reduces integration efforts. In addition, our pre-search and post-search
processing capabilities enable users to modify search parameters in real time
before and after querying a database.
Our Dynamic Parallel Index Traversal mechanism utilizes the search parameters
supplied by the user to determine the appropriate database index (from among
multiple indices) to efficiently locate the data requested. Further, an index
compression mechanism allows us to achieve an efficient balance between disk
space and compression/decompression when storing or accessing data.
In a response to a database query, conventional databases access previously
displayed results in order to display successive results to a given query, thus
increasing response time by performing redundant operations. Our Automatic
Query State Recovery mechanism decreases response time by maintaining the state
of a query to allow the prompt access of successive results. This feature is
particularly important, for example, when an end-user query retrieves a large
number of results.
We incorporate a natural word search interpreter, which successfully utilizes
familiar category and topic headings traditional to print directory media to
generate relevant and related results to information queries. By incorporating
a familiar navigation feature into our services, we believe we provide end
users with a more intuitive mechanism to search for and locate information.
For our merchant services we have developed a comprehensive enterprise-wide
data warehouse. This data warehouse contains information relating to merchants,
products, services, users, customers, profiles, storefronts, purchases, site
traffic and metrics. The aggregation of this information in one place allows us
to leverage our development efforts and reduce redundant information.
42
Web Scraping Engine
We have developed our Web Scraping Engine to allow data from a variety of
sources on the Internet to be retrieved, parsed and presented as a single
virtual database result, either in real-time or at predetermined intervals. Our
State Machine-Based Profiling system catalogs the data on each source site,
which is later accessed by our Web Scraping Engine for real-time retrieval.
Data results can be internally cached to reduce network traffic and deliver the
fastest possible results to the end user.
The Web Scraping Engine has numerous applications, one of which is collecting
real-time information from multiple sources in a manner that eliminates the
need for a data provider to perform any local modifications. This technology is
currently being applied in the price comparison feature of our ActiveShopper
merchant service. Various other potential uses of the technology have been
identified, including the collection and real-time updating of event data such
as concert information, performing arts schedules and sporting events, and the
aggregation of classified listings, such as employment listings from corporate
Web sites.
Gateway Technology
Our Gateway Technology allows us to take content from one source protocol and
forward it to a device destination that does not include any of the hardware or
software necessary for establishing an Internet connection. The content can be
sent directly or may have some processing performed before transmission to the
destination. This can be used for a single message, or multiple messages sent
on a timed basis such as weather, stock quotes, news and horoscopes. Messages
may be sent to a single user or group of users.
Data Network Infrastructure
We maintain a carrier-class data network center designed to ensure high-level
performance and reliability of our information services. We connect directly to
the Internet from our facilities in Bellevue and, until the transition of our
data center is complete, Redmond, Washington through redundant, dedicated DS-3
communication lines provided by multiple telecommunication service providers.
Our hardware resides in a secure climate-controlled room. As we expand our
operations, we expect to locate server facilities at various strategic
geographic locations.
With the acquisitions of Prio and Saraide, we have data centers in Mountain
View, California serving the promotions technology and Papendrecht, Netherlands
serving wireless customers in Europe.
Product Development
We believe that our technology platform is essential to successfully
implement our strategy of expanding our affiliate network, acquiring value-
added content to add to our consumer, merchant and wireless services, expanding
internationally and into other services and maintaining the attractiveness and
competitiveness of our private label solutions. We have invested significant
time and resources in creating our proprietary technology. Product development
expenses were $10.4 million for the six months ended June 30, 2000,
$11.3 million for the year ended December 31, 1999, $7.6 million for the year
ended December 31, 1998 and $4.6 million for the year ended December 31, 1997.
Rapidly changing technology, evolving industry standards, evolving customer
demands and frequent new product and service introductions characterize our
market. See "Risk Factors--Rapid Technological Change Affects Our Business" for
a discussion of certain risks in this regard.
Intellectual Property
Our success depends significantly upon our proprietary technology. To protect
our proprietary rights, we rely on a combination of copyright and trademark
laws, patents, trade secrets, confidentiality agreements
43
with employees and third parties and protective contractual provisions. All of
our employees have executed confidentiality and nonuse agreements that transfer
any rights they may have in copyrightable works or patentable technologies to
us. In addition, prior to entering into discussions with potential content
providers and affiliates regarding our business and technologies, we generally
require that such parties enter into nondisclosure agreements with us. If these
discussions result in a license or other business relationship, we also
generally require that the agreement setting forth the parties' respective
rights and obligations include provisions for the protection of our
intellectual property rights. For example, our standard affiliate agreement
provides that we retain ownership of all patents and copyrights in our
technology and requires our customers to display our copyright and trademark
notices.
"InfoSpace" and "ActiveShopper" are registered trademarks of ours. We also
have applied for registration of certain other service marks and trademarks,
including "ActivePromotion" and the "InfoSpace" logo in the United States and
in other countries, and will seek to register additional service marks and
trademarks, as appropriate. We may not be successful in obtaining the service
marks and trademarks for which we have applied. We have been issued one U.S.
patent and have filed 35 U.S. patent applications relating to various aspects
of our technology for querying and developing databases, for developing and
constructing web pages, for electronic commerce for on-line directory services
and for web scraping. Our issued patent covers private-label commerce solutions
and tracking the purchase of products, services and information on the Internet
and on wireless devices. We are preparing additional patent applications on
other features of our technology. We have instituted a formal patent program
and anticipate on-going patent application activity in the future. Patents with
respect to our technology may not be granted, and, if granted, patents may be
challenged or invalidated. In addition, issued patents may not provide us with
any competitive advantages and may be challenged by third parties.
Despite our efforts to protect our proprietary rights, unauthorized parties
may copy aspects of our products or services or obtain and use information that
we regard as proprietary. The laws of some foreign countries do not protect
proprietary rights to as great an extent as do the laws of the United States.
In addition, others could possibly independently develop substantially
equivalent intellectual property. If we do not effectively protect our
intellectual property, our business could suffer.
Companies in the Internet services industry have frequently resorted to
litigation regarding intellectual property rights. We may have to litigate to
enforce our intellectual property rights, to protect our trade secrets or to
determine the validity and scope of other parties' proprietary rights. From
time to time, we have received, and may receive in the future, notice of claims
of infringement of other parties' proprietary rights. Any such claims could be
time-consuming, result in costly litigation, divert management's attention,
cause product or service release delays, require us to redesign our products or
services or require us to enter into royalty or licensing agreements. These
royalty or licensing agreements, if required, may not be available on
acceptable terms or at all. If a successful claim of infringement were made
against us and we could not develop non-infringing technology or license the
infringed or similar technology on a timely and cost-effective basis, our
business could suffer. See "--Legal Proceedings."
Competition
We operate in the Internet information infrastructure services market, which
is extremely competitive and is rapidly changing. Our current and prospective
competitors include many large companies that have substantially greater
resources than we have. We believe that the primary competitive factors in the
market for Internet information infrastructure services are:
. the ability to provide information of broad appeal, which is likely to
result in increased user traffic and increase the brand name value of the
Web sites and wireless devices to which the services are provided;
. the ability to meet the specific information and service demands of a
particular Web site or wireless device;
44
. the cost-effectiveness and reliability of the consumer, merchant or
wireless information services;
. the ability to provide consumer, merchant or wireless information
services that are attractive to advertisers and end users;
. the ability to achieve comprehensive coverage of a particular category of
information or services; and
. the ability to integrate related information to increase the utility of
the consumer, merchant or wireless information services offered.
We compete, directly or indirectly, in the following ways, among others:
. our directory services compete with AnyWho? (a division of AT&T), GTE
SuperPages, Switchboard, ZIP2 (which was acquired by Compaq), various
RBOCs' directory services, infoUSA's Lookup USA, City Search's Sidewalk
and Yahoo! Yellow Pages and White Pages;
. other information services we provide, such as classifieds, horoscopes
and real-time stock quotes, compete with specialized content providers;
. our U.K. operations compete with British Telecom's YELL service and Scoot
(UK) Limited in directory services; Inktomi and Autonomy in
infrastructure services, Excite, Yahoo! and MSN in syndication;
Shopguide, Shopsmart and Yahoo! shopping for merchant services and
various specialized content providers for information services;
. our community and communication services compete with services offered by
Internet portals such as AOL, Yahoo!, and Excite, as well as specialized
content service providers such as Hotmail;
. our merchant services compete with e-tailers such as Amazon.com, portals
such as AOL, Yahoo! and MSN, merchant aggregators such as Big Step and
Microsoft's Bcentral and infrastructure providers such as Inktomi; and
. our wireless services compete with portals such as AOL, Yahoo!, MSN and
Lycos, with specialized content providers and with software companies
like Phone.com (which recently agreed to merge with Software.com).
We expect that in the future we will experience competition from other
Internet services companies and providers of Internet software, including
Microsoft, Yahoo!, AOL, Excite, Disney, Lycos and NBC's Snap. Some of these
companies are currently customers of ours, the loss of which could harm our
business. We may also face increased competition from traditional media
companies expanding onto the Internet.
Many of our current customers have established relationships with certain of
our current and potential future competitors. If our competitors develop
information infrastructure services that are superior to ours or that achieve
greater market acceptance than ours, our business will suffer.
Governmental Regulation
Because of the increasing use of the Internet, U.S. and foreign governments
have adopted or may in the future adopt laws and regulations relating to the
Internet, addressing issues such as user privacy, pricing, content, taxation,
copyrights, distribution and product and services quality.
Recent concerns regarding Internet user privacy has led to the introduction
of U.S. federal and state legislation to protect Internet user privacy.
Existing laws regarding user privacy that we may be subject to include the
Children's Online Privacy Protection Act, which regulates the online collection
of personal information from children under 13, and the Gramm-Leach-Bliley Act,
which regulates the collection and processing of personal financial
information. In addition, the Federal Trade Commission has initiated
investigations and hearings regarding Internet user privacy which could result
in rules or regulations that could adversely affect our business. As a result,
we could become subject to new laws and regulations that could limit our
ability to conduct targeted advertising, or to distribute or collect user
information.
45
European legislation to protect Internet user privacy has not heretofore
greatly impacted us. In October 1998, the European Union adopted a directive
that may limit our collection and use of information regarding Internet users
in Europe. European countries may pass new laws in accordance with the
directive, or may seek to more strictly enforce existing legislation, which may
prevent us from offering some or all of our services in some European
countries.
We may be subject to provisions of the Federal Trade Commission Act that
regulate advertising in all media, including the Internet, and require
advertisers to substantiate advertising claims before disseminating
advertising. The Federal Trade Commission has the power to enforce this Act. It
has recently brought several actions charging deceptive advertising via the
Internet and is actively seeking new cases involving advertising via the
Internet.
We may also be subject to the provisions of the recently enacted
Communications Decency Act. This Act imposes substantial monetary fines and/or
criminal penalties on anyone who distributes or displays certain prohibited
material over the Internet. Also recently enacted was the Children's Online
Protection Act, which restricts the distribution of certain materials deemed
harmful to children. Although some court decisions have cast doubt on the
constitutionality of these Acts, they could subject us to substantial
liability.
These or any other laws or regulations that may be enacted in the future
could have several adverse effects on our business. These effects include:
. we may be subject to substantial liability, including fines and criminal
penalties;
. we may incur substantial expense in order to comply with such laws and
regulations;
. we could be prevented from offering certain products or services; and
. the growth in Internet usage could be substantially limited.
There is substantial uncertainty as to how existing laws and regulations,
including those relating to privacy, taxation and intellectual property, apply
to activities conducted on the Internet. Also, due to the global nature of the
Internet, it is possible that governments of states or countries in which we
did not knowingly conduct business may attempt to regulate our activities of
prosecute us for violations of their laws. To the extent that there is
uncertainty in the application of existing laws, or that new laws are enacted
in the future, we cannot predict the impact these laws may have on our
business.
Employees
As of June 30, 2000, we had 502 employees. None of our employees is
represented by a labor union, and we consider our employee relations to be
good. Competition for qualified personnel in our industry is intense,
particularly for software development and other technical staff and for
personnel with experience in wireless services. We believe that our future
success will depend in part on our continued ability to attract, hire and
retain qualified personnel. See "Risk Factors--We Need to Manage Our Growth and
Maintain Procedures and Controls" and "--We Depend on Key Personnel" and "--We
Need to Hire Additional Personnel."
Facilities
In June 2000 we relocated to significantly larger facilities under a lease
for a new principal administrative, engineering, marketing and sales facility
located in Bellevue, Washington totaling approximately 131,118 square feet.
Under the five-year lease , we 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.
Previously, our principal administrative, engineering, marketing and sales
facilities totaled approximately 16,864 square feet and were located in
Redmond, Washington. Under that lease, which commenced on
46
July 13, 1998, and expires on August 31, 2003, we pay a monthly base rent of
$19,775 through August 2001 and $22,030 during the final two years of the
lease. Subsequent to our move to Bellevue, we continue to maintain our data
center in Redmond and have sublet the remaining space to third parties.
We maintain a sales office housed in an approximately 2,271-square-foot space
in San Francisco, California under a lease that expires on November 30, 2001
with a monthly base rent of $5,299. We also maintain a sales office in New York
City for 1,900 square feet with a monthly base rent of $3,667, under a lease
that expires April 2004. We do not own any real estate.
With the acquisitions of Saraide and Prio, we now have facilities in Mountain
View and San Mateo, California; Ottawa, Canada; Papendrecht, Netherlands; and
London, United Kingdom. Also, we recently established offices in Australia and
Brazil.
We are currently transitioning our computer and communications hardware from
our facilities in Redmond, Washington to our new headquarters in Bellevue,
Washington. We intend to install additional hardware and high-speed Internet
connections at a location outside the West Coast as well as in the United
Kingdom.
Our systems and operations at these locations are vulnerable to damage or
interruption from fire, flood, power loss, telecommunications failure, break-
ins, earthquake and similar events. See "Risk Factors--Our Business Relies on
the Performance of Our Systems."
Legal Proceedings
From time to time we have been, and expect to continue to be, subject to
legal proceedings and claims in the ordinary course of our business, including
claims of alleged infringement of third-party trademarks and other intellectual
property rights by us. These claims, even if not meritorious, could require the
expenditure of significant financial and managerial resources.
On December 15, 1999, a complaint was filed against us 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 us that entitles him to an option to purchase
300,000 shares of our common stock, and that he was terminated without cause.
The former employee seeks (1) the right to purchase 300,000 shares of our
common stock, (2) unspecified compensatory and punitive damages, and (3)
litigation costs and attorney's fees. On January 31, 2000, we answered the
complaint, denying the claims. Discovery is complete. The case has been
transferred to the United States District Court for the Western District of
Washington, and trial has not yet been set. We are currently investigating the
claims at issue and believe we have meritorious defenses to such claims.
Nevertheless, litigation is uncertain and we may not prevail in this suit.
On February 18, 1999, a former consultant filed a complaint in the Superior
Court for Santa Clara County, California alleging, among other things, that he
had the right in connection with his consulting to the Company to purchase
56,924 shares of our common stock. We settled this lawsuit in September 1999.
Under the settlement, the former consultant was permitted to purchase 33,012
shares of our common stock at a price of $.05 per share.
On January 26, 1999, Civix-DDI, LLC filed a complaint in the U.S. District
Court in Colorado against us and 19 other defendants for infringement of two
patents relating to electronic mapping systems. In July 1999 we settled this
litigation by entering into a license agreement for these patents, pursuant to
which we made a single lump sum royalty payment.
On December 23, 1998, we initiated litigation against Internet Yellow Pages,
Inc. ("IYP") by filing suit in United States District Court for the Western
District of Washington. On February 3, 1999, we served a
47
first amended complaint on IYP and Greg Crane, an agent of IYP, in which we
asserted claims for (a) account stated, (b) breach of contract, and (c) fraud.
On March 5, 1999, IYP answered our complaint in the Washington action, and
asserted claims for breach of contract, fraud, extortion and Consumer
Protection Act violations. IYP seeks relief consisting of approximately
$1,500,000 and other unquantified money damages, treble damages under the CPA,
and attorneys' fees. Discovery is complete. We are currently investigating the
claims at issue and believe we have meritorious defenses to such claims.
Nevertheless, litigation is uncertain and we may not prevail in these suits.
The case is scheduled for a streamlined mini-trial before a federal magistrate
on July 31, 2000.
On December 7, 1998, a complaint was filed against us on behalf of an alleged
former employee in Superior Court for Suffolk County in the Commonwealth of
Massachusetts alleging that he was terminated without cause and that he entered
into an agreement with us that entitles him to an option to purchase 4,000,000
shares of our common stock or 10% of our equity. We settled this lawsuit in
February 2000. Under the settlement, we made a cash payment of $10.5 million.
On April 16, 1998, one of our former employees filed a complaint in the
Superior Court for Santa Clara County, California alleging, among other things,
that he had the right in connection with his employment to purchase shares of
our common stock representing up to 5% of our equity as of an unspecified date.
We settled this lawsuit in February 1999. Under the settlement, we made a cash
payment of $4.5 million.
We had discussions with a number of individuals in the past regarding
employment by us and also hired and subsequently terminated a number of
individuals as employees or consultants. Furthermore, primarily during our
early stage of development, our procedures with respect to the manner of
granting options to new employees were not clearly documented. As a result of
these factors, and in light of the receipt of the above claims, we have in the
past received, and may in the future receive, similar claims from one or more
individuals asserting rights to acquire shares of our stock or to receive cash
compensation. We cannot predict whether such future claims will be made or the
ultimate resolution of any currently outstanding or future claim.
48
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information as of August 30, 2000 with
respect to our executive officers and directors:
Name Age Position
---- --- --------
Naveen Jain......................... 40 Chairman of the Board
Arun Sarin.......................... 45 Vice Chairman, Chief Executive
Officer and President, Wireless
Services
Ashok Narasimhan.................... 52 Chief Operating Officer, President,
Merchant Services and Director
Rand L. Rosenberg................... 47 Chief Financial Officer and Senior
Vice President, Finance and
Corporate Development
Ellen B. Alben...................... 37 Senior Vice President, Legal and
Business Affairs and Secretary
Rasipuram ("Russ") V. Arun.......... 42 Chief Technology Officer
Tammy D. Halstead................... 37 Senior Vice President and Chief
Accounting Officer
Joanne R. Harrell................... 46 Senior Vice President, Human
Resources and Facilities
Arif Janjua......................... 44 Senior Vice President, Corporate
Development and Content
Chris Nabinger...................... 43 Senior Vice President, Worldwide
Operations
John E. Cunningham, IV(1)........... 43 Director
Peter L.S. Currie(1)(2)............. 44 Director
David C. House(2)................... 50 Director
Rufus W. Lumry, III................. 53 Director
Carl Stork(2)....................... 40 Director
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Naveen Jain founded InfoSpace in March 1996. Mr. Jain has served as our Chief
Executive Officer from inception to April 2000, as its President from inception
to November 1998 and as its sole director from its inception to June 1998, when
he was appointed Chairman of the Board upon the Board's expansion to five
directors. From June 1989 to March 1996, Mr. Jain held various positions at
Microsoft Corporation, including Group Manager for MSN, Microsoft's online
service. From 1987 to 1989, Mr. Jain served as Software Development Manager for
Tandon Computer Corporation, a PC manufacturing company. From 1985 to 1987, Mr.
Jain served as Software Manager for UniLogic, Inc., a PC manufacturing company
and from 1982 to 1985, he served as Product Manager and Software Engineer at
Unisys Corporation/Convergent Technologies, a computer manufacturing company.
Mr. Jain holds a B.S. from the University of Roorkee and a M.B.A. from St.
Xavier's School of Management.
Arun Sarin joined InfoSpace in April 2000 as Chief Executive Officer and
President, Wireless Services. He was appointed a director in April 2000 and was
appointed Vice Chairman in May 2000. He served as Chief Executive Officer of
the USA/Asia Pacific Region for Vodafone AirTouch, Plc from June 1999 to April
2000. From February 1997 to June 1999, Mr. Sarin was the President and Chief
Operating Officer of AirTouch Communications, Inc., a wireless
telecommunications services company (which was merged with Vodafone Group Plc
to form Vodafone AirTouch, Plc in June 1999). He served as President and Chief
Executive Officer of AirTouch International from April 1994 to February 1997.
After joining Pacific Telesis Group in 1984 (from which AirTouch was spun off
in 1994), Sarin held a variety of positions, including Vice President and
General Manager--Bay and Regional Markets, Vice President--Chief Financial
Officer, Controller and Strategy at Pacific Bell; and Vice President of
Corporate Strategy for Pacific Telesis Group. Mr. Sarin currently serves on the
Boards of Directors of Vodafone AirTouch, Plc, Charles Schwab
49
Corporation and Cisco Systems, Inc. Mr. Sarin holds an M.B.A. and an M.S.
degree from the University of California at Berkeley and a B.S. in engineering
from the Indian Institute of Technology.
Ashok Narasimhan joined InfoSpace in February 2000 as President, Merchant
Services and was appointed Chief Operating Officer and a director in April
2000. He founded Prio, Inc. in March 1996, and served as Chairman and Chief
Executive Officer. We acquired Prio in February 2000. During the seven years
prior to forming Prio, he was part of the core management team at VeriFone,
where he served as Vice President of Product Development. Prior to VeriFone, he
was the founding Chief Executive Officer of the computer businesses of Wipro,
the largest computer, software and information technology company in India. He
holds a B.S. and an M.B.A. from the Indian Institute of Management, associated
with the Sloan School of Management at MIT.
Rand L. Rosenberg joined InfoSpace in June 2000 as Chief Financial Officer
and Senior Vice President, Finance and Corporate Development. He was a Senior
Managing Director in the media and telecommunications group at Bank of America
Securities (formerly Montgomery Securities) from February 1996 to January 2000.
From February 1994 to February 1996, Mr. Rosenberg was a Managing Director at
Salomon Brothers (now Salomon Smith Barney), where he was head of the global
telecommunications group. Prior to joining Salomon Brothers, Mr. Rosenberg was
a Vice President in the telecommunications and media group at Goldman Sachs,
and served as Executive Director, Corporate Development of Pacific Telesis
Group. Mr. Rosenberg has a B.A. from Whitman College and an M.B.A. from the
University of Chicago.
Ellen B. Alben joined InfoSpace in May 1998 as Vice President, Legal and
Business Affairs and Secretary, and became a Senior Vice President in September
1999. From April 1997 to May 1998, she was a senior attorney with Perkins Coie
LLP. From September 1996 to April 1997, Ms. Alben served as a consultant to
Paragon Trade Brands, Inc., a private-label diaper manufacturer, and as special
securities counsel to companies raising private financing. From September 1995
through June 1996, she served as Vice President, General Counsel and Secretary
of Paragon Trade Brands. Paragon Trade Brands filed for bankruptcy protection
under Chapter 11 of the Bankruptcy Code in January 1997. From July 1994 to
September 1995, she served as Senior Associate Counsel of The Hillhaven
Corporation, a nursing home provider, and from June 1993 to July 1994 she
served as Associate Counsel of Hillhaven. Prior to joining Hillhaven, Ms. Alben
was in private practice, specializing in corporate securities, finance, and
mergers and acquisitions. She holds a B.A. from Duke University and a J.D. from
Stanford Law School.
Rasipuram ("Russ") V. Arun joined InfoSpace in May 2000 as Chief Technology
Officer. From 1992 to May 2000, he worked for Microsoft where he served in
various capacities including Product Unit Manager, responsible for development
and strategy of products for handheld devices, Win95 Base Program Manager,
Windows 98 Team Group Manager and Java Group Performance Manager. Prior to
joining Microsoft, Mr. Arun had ten years of experience working for SunSoft,
Inc., Multisolutions, Inc. and Zenith Data Systems. Mr. Arun holds a B.S. from
the Indian Institute of Technology, an M.S. from Syracuse University and an
M.B.A. from the University of California at Los Angeles.
Tammy D. Halstead joined InfoSpace in July 1998 as Corporate Controller. In
December 1998, she was appointed Vice President and Chief Accounting Officer,
and from November 1999 to June 2000 she served as Acting Chief Financial
Officer. In June 1999, she became a Senior Vice President. From March 1997 to
June 1998, she worked at the Seattle office of USWeb Corporation, an Internet
professional services firm, where she served as Director of Finance and
Administration and later as Vice President, Finance and Administration. From
April 1996 to March 1997, she was the Director of Finance and Administration at
Cosmix, Inc., which was acquired by USWeb Corporation in March 1997. From
December 1993 to February 1996, she served as Controller of ConnectSoft, Inc.,
a software development company. Prior to joining ConnectSoft, Inc., she spent
eight years in private industry with a division of Gearbulk Ltd., an
international shipping company, and in public accounting with Ernst & Whinney
(now Ernst & Young LLP). She holds a B.A. in Business Administration from Idaho
State University and is a licensed CPA.
50
Joanne R. Harrell joined InfoSpace in May 2000 as Senior Vice President,
Human Resources and Facilities. She was President and Chief Executive Officer
for United Way of King County from July 1997 to May 2000. Prior to joining
United Way, Ms. Harrell worked at USWest for 19 years. Most recently, she
headed Nebraska Operations for USWest from July 1995 until July 1997, and
served as Vice President and General Manager for USWest Public Services from
June 1990 to June 1995. Ms. Harrell holds a B.A and an M.B.A. from the
University of Washington.
Arif Janjua joined InfoSpace in December 1999 as President, Consumer Services
and was named Senior Vice President, Corporate Development and Content in May
2000. From February 1999 to November 1999, he was General Manager of North
American operations at Saraide. Prior to Saraide, from 1995 to 1999, he was a
Vice President at A.T. Kearney, a global management consulting firm, where he
led the firm's high technology practice. Prior to that, Mr. Janjua was Director
of Business Operations at a graphics semiconductor firm, S3, where he had
marketing responsibility for all desktop products. From 1991 to 1994, Mr.
Janjua was a senior manager with Gemini Consulting, specializing in the
communications and computer industry. From 1985 to 1989, Mr. Janjua was
Director of Marketing at the Imaging and Graphics Division of Gould
Electronics. From 1981 to 1985, Mr. Janjua was Product Marketing Manager at
International Imaging Systems. He holds a B.S and M.S. in Electrical
Engineering from University of Windsor, Canada and an M.B.A. from University of
California, Berkeley.
Chris Nabinger joined InfoSpace as Senior Vice President, Worldwide
Operations, in February 2000. He was with Prio, Inc. from October 1998 until
its acquisition by Infospace where he served as the Executive Vice President of
Engineering and Operations and oversaw the development and delivery of a
complete suite of online promotional and back-office systems that make up and
support the Prio "e-nabled" commerce product. From March 1996 to October 1998,
Mr. Nabinger served as Vice President, Information Technology at ICG Netcom, an
internet service provider, and from February 1996 to September 1999, he served
as Chief Information Officer for Mobile Telecommunications Technologies
Corporation and GTE Airfone. From September 1994 to February 1996, Mr. Nabinger
was Vice President--Information Services of Mobile Telecommunications
Technologies Corporation. Mr. Nabinger holds a B.S. in Industrial Technology
from Binghamton University and an M.S. in Management, Computing and Systems
from Houston Baptist University.
John E. Cunningham, IV has served as a director of InfoSpace since July 1998.
Since April 1995 he has served as President of Kellett Investment Corporation,
an investment fund for early-stage, high-growth private companies. He is on the
Board of Directors of Petra Capital, LLC, Meals.com, digiMine.com and Gear.com.
Mr. Cunningham also serves as an advisor to Array.com and Virtual Bank.com.
During 1997, Mr. Cunningham was interim Chief Executive Officer of Real Time
Data. From December 1994 to August 1996, he was President of Pulson
Communications, Inc. From February 1991 to November 1994, he served as Chairman
and Chief Executive Officer of RealCom Office Communications, a privately held
telecommunications company that merged with MFS Communications Company, Inc.,
and was subsequently acquired by WorldCom, Inc. Mr. Cunningham holds a B.A.
from Santa Clara University and an M.B.A. from the University of Virginia.
Peter L. S. Currie has served as a director of InfoSpace since July 1998. Mr.
Currie is Executive Vice President and Chief Administrative Officer of Netscape
Communications Corporation, where he has held various management positions
since April 1995. From April 1989 to April 1995, Mr. Currie held various
management positions at McCaw Cellular Communications, Inc., including
Executive Vice President and Chief Financial Officer and Executive Vice
President of Corporate Development. Before joining McCaw Cellular, he was a
Principal at Morgan Stanley & Co., Incorporated. Mr. Currie currently serves on
the Board of Directors of Corsair Communications, Inc. Mr. Currie holds a B.A.
from Williams College and an M.B.A. from Stanford University.
David C. House has served as a director of InfoSpace since January 2000. In
June 2000, Mr. House was named Group President, Global Establishment Services
and Travelers Cheque Group of American Express
51
Company. From October 1995 to June 2000, he served as President, Establishment
Services Worldwide of American Express Travel Related Services Company, Inc.
From January 1993 to October 1995, he served as Senior Vice President of Sales
and Field Marketing for the United States Establishment Services Group of
American Express. In addition, Mr. House served as a director of Prio, Inc.
prior to its acquisition by the Company in March 2000. Mr. House holds a B.S.
from the University of Minnesota and completed the Program for Management
Development at the Harvard Graduate School of Business Administration.
Rufus W. Lumry, III has served as a director of InfoSpace since December
1998. Since 1992, Mr. Lumry has served as President of Acorn Ventures, Inc., a
venture capital firm he founded. Prior to founding Acorn Ventures, Mr. Lumry
served as a director and Chief Financial Officer of McCaw Cellular
Communications. Mr. Lumry was one of the founders of McCaw in 1982, and retired
from McCaw in 1990 as Executive Vice President and Chief Financial Officer. Mr.
Lumry holds an A.B. from Harvard University and an M.B.A. from the Harvard
Graduate School of Business Administration.
Carl Stork has served as a director of InfoSpace since September 1998. Since
April 1998, Mr. Stork has been General Manager, Hardware Strategy and Business
Development, at Microsoft Corporation. Mr. Stork has held various other
management positions at Microsoft since 1981. Mr. Stork holds a B.A. from
Harvard College and an M.B.A. from the University of Washington.
Board of Directors
Our Restated Certificate of Incorporation and Restated Bylaws provide that
the Board of Directors shall be composed of not less than five or more than
nine directors, with the specific number to be set by resolution of the Board.
We currently have eight directors.
Our Board of Directors is divided into three classes, with each class to be
as equal in number as possible. Each Class 2 director will serve until our next
annual meeting of stockholders, each Class 3 director will serve until the
following annual meeting of stockholders, and each Class 1 director will serve
until the third ensuing annual meeting of stockholders. Thereafter, each newly
elected director will serve for a term ending at the third annual meeting of
stockholders following such election. Messrs. Cunningham, Narasimhan and Sarin
serve as Class 1 directors; Messrs. House, Lumry and Stork serve as Class 2
directors; and Messrs. Jain and Currie serve as Class 3 directors. Directors
may be removed by stockholders only for cause.
Committees of the Board of Directors
The Compensation Committee consists of Messrs. Cunningham and Currie. The
Compensation Committee reviews and approves the compensation and benefits for
our executive officers, administers our Stock Incentive Plan and makes
recommendations to the Board of Directors regarding such matters.
The Audit Committee consists of Messrs. Currie, House and Stork. Among other
functions, the Audit Committee makes recommendations to the Board of Directors
regarding the selection of independent auditors, reviews the results and scope
of the audit and other services provided by our independent auditors, reviews
our balance sheet, statement of operations and cash flows and reviews and
evaluates our internal control functions.
Compensation Committee Interlocks and Insider Participation
No member of the Board of Directors or of the Compensation Committee serves
as a member of the board of directors or compensation committee of any entity
that has one or more executive officers serving as a member of our Board of
Directors or Compensation Committee.
52
Director Compensation
We pay directors $750 for each Board of Directors meeting attended in person,
$500 for each Board of Directors meeting attended by telephone and $500 for
each committee meeting attended. We also reimburse directors for travel
expenses incurred to attend meetings of the Board of Directors or committee
meetings. Directors are eligible to participate in the Stock Incentive Plan.
See "--Benefit Plans--Stock Option Program for Nonemployee Directors."
Limitation of Liability and Indemnification Matters
Our Restated Certificate of Incorporation limits the liability of directors
to the full extent permitted by Delaware law. Delaware law provides that a
corporation's certificate of incorporation may contain a provision eliminating
or limiting the personal liability of directors for monetary damages for breach
of their fiduciary duties as directors, except for liability:
. for any breach of their duty of loyalty to the corporation or its
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
. for any transaction from which the director derived an improper personal
benefit.
Our Restated Bylaws provide that we shall indemnify our directors and
officers and may indemnify its employees and agents to the full extent
permitted by law. We believe that indemnification under our Restated Bylaws
covers at least negligence and gross negligence on the part of indemnified
parties. We have entered into agreements to indemnify our directors and
executive officers. These agreements, among other things, indemnify our
directors and officers for certain expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by them in any action or
proceeding arising out of their services as a director or officer. We believe
that these agreements are necessary to attract and retain qualified directors
and officers.
On December 11, 1998, InfoSpace, all of our directors and Naveen Jain, our
Chief Executive Officer at the time, entered into an Indemnification Agreement
whereby Mr. Jain placed 8,000,000 shares of our common stock beneficially owned
by him in an escrow account to indemnify us and our directors for certain known
and unknown liabilities that may have arisen prior to September 30, 1998. See
"Business--Legal Proceedings."
53
Compensation of Executive Officers
The following table sets forth information concerning the compensation we
paid to Naveen Jain, our chief executive officer, and the three other executive
officers of InfoSpace as of December 31, 1999 who earned compensation in excess
of $100,000 during 1999 (collectively, the "Named Executive Officers").
Summary Compensation Table
Long-Term
Compensation
------------
Awards
------------
Annual
Compensation Securities
Fiscal ------------ Underlying All Other
Name and Principal Position Year Salary Options(#) Compensation
- --------------------------- ------ ------------ ------------ ------------
Naveen Jain...................... 1999 $231,571 1,400,000 $500(1)
Chief Executive Officer 1998 62,500 -- --
Bernee D. L. Strom(2)............ 1999 270,795 -- --
President and Chief Operating
Officer
Ellen B. Alben................... 1999 130,625 40,000 --
Senior Vice President, Legal and
Business Affairs and Secretary
Michael D. Kantor(3)............. 1999 541,126(4) 40,000 --
Senior Vice President,
Advertising
- --------
(1) Consists of an award to Mr. Jain in connection with patent filings.
(2) Ms. Strom served as our President and Chief Operating Officer until
December 31, 1999. From January 1, 2000 to June 30, 2000, Ms. Strom served
as President of InfoSpace Venture Capital Fund 2000, LLC.
(3) Mr. Kantor resigned his position with InfoSpace effective June 30, 2000.
(4) Consists of $90,792 in base salary and sales commissions of $450,334 paid
to Mr. Kantor for advertising revenue attributable to Mr. Kantor.
Option Grants in Last Fiscal Year
The following table sets forth certain information regarding stock options
granted by InfoSpace to the Named Executive Officers during 1999.
Individual Grants
-----------------------------------------------------
Potential Realizable Value
Number of at Assumed Annual Rates of
Securities Percent of Total Stock Price Appreciation for
Underlying Options Granted Option Term(3)
Options to Employees in Exercise Expiration ----------------------------
Name Granted(#) Fiscal Year(1) Price($/Sh)(2) Date 5%($) 10%($)
- ---- ---------- ---------------- -------------- ---------- ------------- --------------
Naveen Jain............. 1,400,000 16.3% $ 5.813 2/22/09 $5,117,630 $12,969,079
Bernee D. L. Strom...... -- -- -- -- -- --
Ellen B. Alben.......... 40,000 0.5% 11.844 10/25/09 297,940 755,039
Michael D. Kantor....... 40,000 0.5% 11.516 8/31/09 289,686 734,122
- --------
(1) Based on a total of 8,605,180 option shares granted to employees during
1999.
(2) Options were granted at an exercise price equal to the fair market value
of our common stock at the time of the grant.
(3) The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates required by applicable regulations of the SEC and are
therefore not intended to forecast possible future
54
appreciation, if any, of the price of our common stock. Assumes all options
are exercised at the end of their respective 10-year terms. Actual gains,
if any, on stock option exercises depend on the future performance of the
common stock and overall stock market conditions, as well as the option
holders' continued employment through the vesting period. The amounts
reflected in this table may not be achieved.
Aggregate Option Exercises in 1999 and Year-End Option Values
The following table shows certain information concerning stock options
exercised by the Named Executive Officers during 1999, including the aggregate
value of any gains realized on such exercise. The table also shows information
regarding the number and value of unexercised in-the-money options held by the
Named Executive Officers on December 31, 1999.
Number of
Securities Underlying Value of Unexercised
Shares Unexercised Options at In the Money Options at
Acquired Fiscal Year-End(1) Fiscal Year- End ($)(2)
on Value ------------------------- -------------------------
Name Exercise(#) Realized($)(1) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------------- ----------- ------------- ----------- -------------
Naveen Jain............. -- -- 50,000 1,350,000 $ 2,384,375 $ 64,378,125
Bernee D. L. Strom...... 333,324 $10,436,540 1,250,008 4,416,668 64,531,663 228,010,486
Ellen B. Alben.......... 167,012 2,143,797 62,160 490,828 3,236,923 25,239,306
Michael D. Kantor....... 177,464 1,623,586 195,167 123,369 10,316,395 6,017,673
- --------
(1) Represents the aggregate fair market value on the respective dates of
exercise of the shares of common stock received on exercise of the
options, less the aggregate exercise price of the options.
(2) These values represent the number of shares subject to in-the-money
options multiplied by the difference between the closing price of our
common stock on December 31, 1999 ($53.50 per share) and the exercise
price of the options.
Employment Agreement
We entered into an employment agreement dated as of December 16, 1999 with
Bernee D.L. Strom, pursuant to which Ms. Strom served as InfoSpace's President
and Chief Operating Officer through December 31, 1999, and as President of our
venture capital division from January 1, 2000 through June 30, 2000. This
employment agreement superseded a prior employment agreement with Ms. Strom
entered into in December 1998. Among other things, the employment agreement
provided that we would continue to provide Ms. Strom with salary and benefits
equal to those granted under her prior employment agreement, including an
annual salary of $250,000 and insurance and other employee benefits, and
option grants previously made to Ms. Strom pursuant to her prior employment
agreement, through June 30, 2000. In addition, the employment agreement
provided for a severance payment of $250,000 to Ms. Strom on June 30, 2000
and, under certain circumstances, reimbursement of certain expenses incurred
by Ms. Strom in connection with her relocation to the Seattle, Washington
area.
In connection with this employment agreement, we loaned Ms. Strom $10
million for her exercise of stock options and payment of federal taxes
thereon. The loan is due and payable on December 16, 2001, and accrues
interest at the prime rate.
Benefit Plans
The following is a brief summary of plans in effect during 1999 under which
our executive officers and directors received benefits:
Restated 1996 Flexible Stock Incentive Plan
The purpose of the Stock Incentive Plan is to provide an opportunity for our
employees, officers, directors, independent contractors and consultants to
acquire our common stock. The Stock Incentive Plan
55
provides for grants of stock options, stock appreciation rights, or SARs, and
stock awards. We have authorized an aggregate of 45,967,866 shares of common
stock for issuance under the Stock Incentive Plan. As of June 30, 2000, options
to purchase 25,510,699 shares of common stock were outstanding under the Stock
Incentive Plan at a weighted average exercise price of $29.0398 per share, and
options to purchase 11,334,009 shares were available for future grant.
Stock Option Program for Nonemployee Directors
Under the Stock Incentive Plan, we grant a nonqualified stock option to
purchase 20,000 shares of common stock to each nonemployee director on the date
the director is first appointed or elected to our Board of Directors.
Nonemployee directors serving at the time of the adoption of the program each
received an option to purchase 5,000 shares of common stock. On November 19,
1998, each nonemployee director received a supplemental option to purchase
80,000 shares of common stock. We grant to each nonemployee director an
additional nonqualified stock option to purchase 15,000 shares of common stock
immediately following each Annual Meeting of Stockholders, except for those
nonemployee directors who were newly elected to the Board of Directors at such
Annual Meeting of Stockholders or within the three-month period prior to such
Annual Meeting of Stockholders. All options granted under the program for
nonemployee directors fully vest on the first anniversary of the date of such
grant.
1998 Employee Stock Purchase Plan
We adopted the 1998 Employee Stock Purchase Plan in August 1998. The Purchase
Plan is intended to qualify under Section 423 of the Code and permits eligible
employees to purchase our common stock through payroll deductions of up to 15%
of their compensation. Under the Purchase Plan, no employee may purchase stock
worth more than $25,000 in any calendar year, valued as of the first day of
each offering period. We have authorized an aggregate of 3,600,000 shares of
common stock for issuance under the Purchase Plan.
The Purchase Plan is implemented with six-month offering periods. Offering
periods begin on each February 1 and August 1. Participants purchase common
stock under the Purchase Plan at a price equal to the lesser of 85% of their
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. As of June 30, 2000,
189,278 shares of common stock have been issued under the Purchase Plan.
InfoSpace, Inc. and Saraide Inc. 2000 Stock Plan
InfoSpace, Inc. and Saraide each adopted the 2000 Stock Plan effective April
17, 2000. The purpose of the 2000 Stock Plan is to attract, retain and provide
incentives to employees, directors and consultants of Saraide. The 2000 Stock
Plan provides for grants of both Saraide options and InfoSpace options;
optionees will have the right to exercise either set of options as they vest.
When an optionee exercises a number of Saraide options, this will automatically
cancel a proportional number of the optionee's InfoSpace options, and
similarly, when an optionee exercises a number of InfoSpace options, this will
automatically cancel a proportional number of the optionee's Saraide options.
InfoSpace has authorized an aggregate of 10,000,000 shares of InfoSpace common
stock for issuance under the 2000 Stock Plan, and Saraide has authorized an
aggregate of 10,000,000 shares of Saraide common stock for issuance under the
2000 Stock Plan.
As of June 30, 2000, options to purchase 6,528,700 shares of our common stock
were outstanding under the 2000 Stock Plan at a weighted average exercise price
of $45.4375 per share, and options to purchase 3,471,300 shares of InfoSpace
common stock were available for future grant.
56
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Acorn Ventures-IS, LLC and John E. and Carolyn Cunningham are entitled to
certain registration rights with respect to the shares of common stock and the
common stock issuable upon exercise of the warrants purchased in private
placements completed in 1998. Rufus W. Lumry, III, one of our directors, is the
principal stockholder, sole director and president of Acorn Ventures, Inc., the
sole member of Acorn Ventures-IS, LLC. John E. Cunningham is also one of our
directors.
On May 21, 1998, we entered into Consulting Agreements with Acorn Ventures
and John E. Cunningham, IV, pursuant to which we are required to pay reasonable
out-of-pocket expenses incurred by them in connection with their services as
consultants. In addition, we have entered into agreements to indemnify Acorn
Ventures-IS, LLC and John E. Cunningham, IV against expenses (including
attorneys' fees), judgments, fines and settlement amounts incurred by them in
any action or proceeding in which they are parties or participants arising out
of their services as consultants. These consulting services include assistance
in defining our business strategy, identifying and meeting with sources of
financing and assisting us in structuring and negotiation such financings. The
Consulting Agreements have terms of five years and are terminable by either
party upon breach of the Consulting Agreement by the other party or on 30 days'
notice. Other than the reimbursement of out-of-pocket expenses, there is no
cash compensation under the Consulting Agreements. We anticipate that the
Consulting Agreements will be terminated in the third quarter of 2000.
In July 1998, we entered into a joint venture agreement with TDLI.com
Limited, a subsidiary of Thomson Directories Limited to form TDL InfoSpace to
replicate our infrastructure services in Europe. TDL InfoSpace has been
providing content services in the United Kingdom since the third quarter of
1998. Under the Web site services agreement, Thomson provides its directory
information to TDL InfoSpace and sells Internet yellow pages advertising for
the joint venture through its local sales forces. We also license our
technology and provide hosting services to TDL InfoSpace. Thomson and InfoSpace
each purchased a 50% interest in TDL InfoSpace and are required to provide
reasonable working capital to TDL InfoSpace. As of December 31, 1999, we had
contributed $496,000 to the joint venture. Gary C. List, formerly one of our
directors, is Chairman of Thomson Directories Limited and Chief Executive of
its parent company, TDL Group Limited. On July 26, 2000, we entered into a
definitive agreement to acquire all of the issued and outstanding stock of
TDLI.com Limited. This will give us complete control of TDL InfoSpace.
In January 2000, we entered into contracts to provide content and promotional
services to ImageX.com, Inc., pursuant to which we may earn up to $1.2 million
in fees over a one-year period. Rufus W. Lumry, III, one of our directors, is
President of Acorn Ventures, Inc., which directly and through affiliated
entities beneficially owns over 12% of the common stock of ImageX.com, Inc. as
of February 29, 2000 (based on information filed with the SEC by ImageX.com,
Inc.).
During 1999, we entered into a technology license and development agreement
for the development of online shopping cart technology with TEOCO Corporation.
Under the terms of the agreement, we paid a development fee to TEOCO
Corporation of $400,000. We own all rights to the technology and have granted a
perpetual license to TEOCO Corporation to use the developed technology for
certain limited uses. Atul Jain, the President and majority shareholder of
TEOCO Corporation, is the brother of Naveen Jain, our Chairman.
We believe that all the transactions set forth above were made on terms no
less favorable to us than could have been obtained from unaffiliated third
parties. Any future transactions, including loans, between us and our officers,
directors and principal stockholders and their affiliates will be approved by a
majority of the Board of Directors, including a majority of the independent and
disinterested directors, and will be on terms no less favorable to us than
could be obtained from unaffiliated third parties.
We have entered into indemnification agreements with each of our executive
officers and directors.
57
On December 11, 1998, we, all of our current and future directors and Naveen
Jain entered into an Indemnification Agreement whereby Mr. Jain placed
8,000,000 shares of our common stock beneficially owned by him into an escrow
account to indemnify us and our directors for a period of five years for
certain known and unknown liabilities that may have arisen prior to September
30, 1998. The indemnification agreement, however, did not provide for
indemnification for certain matters known by the Board prior to September 30,
1998 or losses less than $100,000. On February 10, 2000, in exchange for the
release of such shares, Mr. Jain entered in a Noncompetition Agreement with us.
In addition to noncompetition, nondisclosure and invention release provisions
which apply for the duration of his employment, the Noncompetition Agreement
also provides that Mr. Jain will not engage in activities which compete with
our business of for a period of two years after termination of his employment
with us for any reason.
In connection with our Employment Agreement dated as of December 16, 1999
with Bernee D.L. Strom, we agreed to extend a loan to Ms. Strom in the amount
of $10 million for the purpose of exercising stock options and paying federal
taxes thereon. The loan will be due and payable two years from the date of the
Employment Agreement, and bears interest at the prime rate. The largest amount
outstanding since the date of the Employment Agreement was $10.0 million, which
was the outstanding balance of the loan as of June 30, 2000. For a further
description of the Employment Agreement, see "Management--Employment
Agreement."
58
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of July 31, 2000 and as adjusted to reflect
the issuance of our common stock offered by this prospectus as to (i) each
person who is known by us to own beneficially more than 5% of the outstanding
shares of common stock, (ii) each of our directors (iii) each of the executive
officers named in the Summary Compensation Table in "Management--Compensation
of Executive Officers," and (iv) all directors and executive officers as a
group.
Shares Shares Beneficially
Beneficially Owned Owned After
Prior to Offering(1) Offering
------------------------ Number of -----------------------
Number Percent Shares Offered Number Percent
------------- ---------- -------------- ------------ ----------
Principal Stockholders,
Directors and
Executive Officers
Naveen Jain(2).......... 52,370,614 22.2% -- 52,370,614 22.2%
c/o InfoSpace, Inc.
601 108th Avenue NE
Suite 1200
Bellevue, WA 98004
Acorn Ventures-IS,
LLC(3)................. 19,585,191 7.9% -- 19,585,191 7.9%
1309 114th Avenue S.E.
Suite 200
Bellevue, WA 98004
Pilgrim Baxter &
Associates(4).......... 14,528,000 6.2% -- 14,528,000 6.2%
825 Duportail Road
Wayne, PA 19087
Putnam Investments,
Inc.(5)................ 13,827,412 5.9% -- 13,827,412 5.9%
One Post Office Square
Boston, MA 02109
Ellen B. Alben(6)....... 281,870 * -- 281,870 *
John E. Cunningham,
IV(7).................. 902,263 * 902,263 *
Peter L. S. Currie(8)... 146,910 * -- 146,910 *
David C. House.......... 530 * -- 530 *
Michael D. Kantor(9).... 329,216 * -- 329,216 *
Rufus W. Lumry,
III(10)................ 19,585,191 7.9% -- 19,585,191 7.9%
Ashok Narasimhan(11).... 646,414 * -- 646,414 *
Arun Sarin(12).......... 2,300,875 * -- 2,300,875 *
Carl Stork(13).......... 430,000 * -- 430,000 *
Bernee D. L. Strom(14).. 1,874,810 * -- 1,874,810 *
All directors and
executive officers as a
group (15 persons)(15).. 77,229,309 30.5% -- 77,229,309 30.4%
59
- --------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
SEC. In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares of common stock subject
to options or warrants held by that person that are currently exercisable
or will become exercisable within 60 days are deemed outstanding, while
such shares are not deemed outstanding for purposes of computing the
percentage ownership of any other person. Unless otherwise indicated in
the footnotes below, the persons and entities named in the table have
sole voting and investment power with respect to all shares beneficially
owned, subject to community property laws where applicable.
(2) Represents 37,849,228 shares of common stock held in the name of Naveen
and Anuradha Jain, 3,999,302 shares of common stock held by the Jain
Family Irrevocable Trust, 3,971,042 shares of common stock held by Naveen
Jain GRAT No. 1, 3,971,042 shares of common stock held by Anuradha Jain
GRAT No. 1, 525,000 shares subject to options exercisable by Naveen Jain
within 60 days of July 31, 2000, and 2,055,000 shares subject to options
exercisable by Anuradha Jain within 60 days of July 31, 2000. Anuradha
Jain is Mr. Jain's spouse.
(3) Includes 13,750,208 shares of common stock issuable upon exercise of
warrants currently exercisable, 30,173 shares of common stock held by
Rufus W. Lumry, III, and 100,000 shares of common stock held by Mr. Lumry
subject to options exercisable within 60 days of July 31, 2000. Mr. Lumry
is the principal stockholder, sole director and President of Acorn
Ventures, Inc., the sole member of Acorn Ventures-IS, LLC.
(4) As of December 31, 1999, based on a Schedule 13G/A filed with the SEC on
January 7, 2000, and adjusted to give effect to two-for-one stock splits
effected by InfoSpace on January 4, 2000 and April 6, 2000.
(5) As of December 31, 1999, based on a Schedule 13G filed with the SEC on
February 17, 2000, and adjusted to give effect to two-for-one stock
splits effected by InfoSpace on January 4, 2000 and April 6, 2000.
Consists of 13,377,412 shares beneficially owned with shared dispositive
power by Putnam Investment Management, Inc. and 450,000 shares
beneficially owned with shared dispositive power by The Putnam Advisory
Company, Inc. (with shared voting power over 86,600 of these shares),
which are registered investment advisors and wholly owned by Putnam
Investments, Inc. Putnam Investments, Inc. is a wholly owned subsidiary
of Marsh & McLennan Companies, Inc.
(6) Includes 81,196 shares of common stock subject to options exercisable
within 60 days of July 31, 2000.
(7) Includes 110,000 shares of common stock subject to options exercisable
within 60 days of July 31, 2000, and 92,806 shares of common stock held
by Clear Fir Partners LP. Mr. Cunningham is the President of Clear Fir
Partners, LP.
(8) Includes 110,000 shares of common stock subject to options exercisable
within 60 days of July 31, 2000.
(9) Includes 4,992 shares of common stock subject to options exercisable
within 60 days of July 31, 2000.
(10) Includes 100,000 shares of common stock subject to options exercisable
within 60 days of July 31, 2000, and shares held by Acorn Ventures-IS,
LLC. See note (3) above.
(11) Includes 58,393 shares of common stock subject to options and warrants
exercisable within 60 days of July 31, 2000. Represents 504,837 shares of
common stock held directly by Ashok Narasimhan, 16,028 shares of common
stock held by the Akshay Narasimhan Trust, 29,746 shares of common stock
held by the Amrita Narasimhan Trust, and 37,410 shares of common stock
held by the Anisha Narasimhan Trust.
60
(12) Includes 2,296,875 shares of common stock subject to options exercisable
within 60 days of July 31, 2000. Should Mr. Sarin leave InfoSpace within
twelve months of his hire date, a ratable portion of the vested options
would be returned to InfoSpace.
(13) Includes 20,000 shares of common stock subject to options exercisable
within 60 days of July 31, 2000.
(14) Includes 674,818 shares of common stock subject to options exercisable
within 60 days of July 31, 2000.
(15) Includes 19,166,104 shares of common stock subject to options and
warrants exercisable within 60 days of July 31, 2000.
61
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 900,000,000 shares of common stock,
$0.0001 par value per share, and 15,000,000 shares of preferred stock, $0.0001
par value per share. The following summary of certain provisions of our common
stock and preferred stock does not purport to be complete and is subject to,
and qualified in its entirety by reference to, the provisions of our
Certificate of Incorporation, which is included as an exhibit to the
registration statement of which this prospectus is a part, and by the
provisions of applicable law.
Common Stock
As of August 28, 2000, there were 233,598,517 shares of common stock
outstanding held by approximately 813 holders of record.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. There are no
cumulative voting rights. Subject to preferences that may be applicable to any
outstanding shares of preferred stock, the holders of common stock are entitled
to receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available for the payment of dividends. In the
event of a liquidation, dissolution or winding up of InfoSpace, the holders of
common stock are entitled to share ratably in all assets remaining after
payment of liabilities and liquidation preferences of any outstanding shares of
preferred stock. Holders of common stock have no preemptive rights or rights to
convert their common stock into any other securities. There are no redemption
or sinking fund provisions applicable to the common stock. All outstanding
shares of common stock are fully paid and nonassessable, and the shares of
common stock to be issued upon completion of this offering will be fully paid
and nonassessable. See "Risk Factors--Management Owns a Large Percentage of Our
Stock" and "Dividend Policy."
Preferred Stock
One share of preferred stock is outstanding, the voting rights of which are
described below. Pursuant to our Certificate of Incorporation, the Board of
Directors has the authority, without further action by the stockholders, to
issue up to 15,000,000 shares of preferred stock in one or more series and to
fix the designations, powers, preferences, privileges and relative,
participating, optional or special rights and the qualifications, limitations
or restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption and liquidation preferences, any or all of which
may be greater than the rights of the common stock. The Board of Directors,
without stockholder approval, can issue preferred stock with voting, conversion
or other rights that could adversely affect the voting power and other rights
of the holders of common stock. Preferred stock could thus be issued quickly
with terms calculated to delay or prevent a change of control or make removal
of management more difficult. Additionally, the issuance of preferred stock may
have the effect of decreasing the market price of the common stock, and may
adversely affect the voting and other rights of the holders of common stock.
Voting Share
A single share of series A preferred stock, the voting share, was issued in
connection with the INEX Corporation acquisition and the voting and exchange
trust agreement entered into by and among InfoSpace, InfoSpace.com Canada
Holdings and Montreal Trust Company of Canada. The voting share was issued to
Montreal Trust Company of Canada, as trustee, to hold for the benefit of the
holders of exchangeable shares that were issued by an indirect subsidiary of
InfoSpace to complete this transaction. The trustee is entitled to the number
of votes equal to the number of votes the holders of the outstanding
exchangeable shares, not held directly or indirectly by InfoSpace or its
subsidiaries, would be entitled to if the exchangeable shares were exchanged
for shares of InfoSpace's common stock. As of August 31, 2000,
62
there were 795,369 outstanding exchangeable shares not held by InfoSpace or its
subsidiaries, which gives the trustee 795,369 votes to exercise on behalf of
the exchangeable shareholders.
The holders of the exchangeable shares have the right to require
InfoSpace.com Canada Holdings to redeem any or all of their exchangeable shares
for an amount per share equal to the current market price of one share of
InfoSpace common stock, which shall be paid in full by delivering one share of
InfoSpace common stock for each exchangeable share presented to be redeemed.
The certificate of the powers, designation, preferences and rights of the
series A preferred stock provide that the voting share and the common stock
shall vote together as a single class.
The voting share will not entitle the trustee to receive dividends. In the
event of our dissolution, liquidation or the winding up of our affairs, the
trustee will receive an amount equal to $1.00, together with payment to any
class of stock ranking equally with the series A preferred and before payment
shall be made to holders of stock ranking junior. This amount will be adjusted
to reflect the effect of any stock split, stock dividend, combination or
similar change on the voting share. When there are no longer any outstanding
exchangeable shares other than those exchangeable shares which are held by us
or our subsidiaries, the voting share will cease to have any rights. In such
event, we will redeem the voting share for an amount equal to the par value of
the voting share and it will automatically return to being an authorized but
unissued share of our preferred stock. There are no sinking fund provisions or
preemptive rights applicable to the voting share.
Warrants
As of August 31, 2000, there were outstanding warrants to purchase 18,866,056
shares of common stock. Two investors hold warrants to purchase an aggregate of
13,673,584 and 242,880 shares of common stock, which expire on May 21, 2008 and
August 6, 2008, respectively, at a weighted average exercise price of $0.73 per
share. On August 24, 1998, in connection with the agreement relating to our
white pages directory services, we issued to AOL warrants to purchase up to
7,919,328 shares of common stock, which warrants vest in 16 equal quarterly
installments over four years, based on the delivery by AOL of a minimum number
of searches on our white pages directory service. As of August 31, 2000, AOL
had 4,949,592 outstanding warrants. The warrants have an exercise price of
$1.50 per share.
In connection with our combination with INEX, we assumed warrants that are
exercisable for approximately 288,808 shares of our common stock as of August
31, 2000.
Antitakeover Effects of Certain Provisions of Certificate of Incorporation and
Washington and Delaware Law; Right of First Negotiation
As noted above, our Board of Directors, without stockholder approval, has the
authority under our Certificate of Incorporation to issue preferred stock with
rights superior to the rights of the holders of common stock. As a result,
preferred stock could be issued quickly and easily, could adversely affect the
rights of holders of common stock and could be issued with terms calculated to
delay or prevent a change of control or make removal of management more
difficult.
Election and Removal of Directors. Effective with the first annual meeting of
stockholders following this offering, our Bylaws provide for the division of
our Board of Directors into three classes, as nearly equal in number as
possible, with the directors in each class serving for a three-year term, and
one class being elected each year by our stockholders. See "Management--Board
of Directors." Directors may be removed only for cause. This system of electing
and removing directors may tend to discourage a third party from making a
tender offer or otherwise attempting to obtain control of InfoSpace and may
maintain the incumbency of the Board of Directors, as it generally makes it
more difficult for stockholders to replace a majority of directors.
63
Approval for Certain Business Combinations. Our Certificate of Incorporation
requires that certain business combinations (including a merger, share exchange
and the sale, lease, exchange, mortgage, pledge, transfer or other disposition
or encumbrance of a substantial part of our assets other than in the usual and
regular course of business) be approved by the holders of not less than two-
thirds of the outstanding shares, unless such business combination has been
approved by a majority of the Board of Directors, in which case the affirmative
vote required shall be a majority of the outstanding shares.
Stockholder Meetings. Under our Certificate of Incorporation and Bylaws, the
stockholders may call a special meeting only upon the request of holders of at
least 30% of the outstanding shares. Additionally, the Board of Directors, the
Chairman of the Board and the President may call special meetings of
stockholders.
Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our Bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the Board of
Directors or a committee thereof.
Washington Statute. The laws of Washington, where our principal executive
offices are located, impose restrictions on certain transactions between
certain foreign corporations and significant stockholders. Chapter 23B.19 of
the Washington Business Corporation Act, or the WBCA, prohibits a "Target
Corporation," with certain exceptions, from engaging in certain "Significant
Business Transactions" with a person or group of persons which beneficially
owns 10% or more of the voting securities of the Target Corporation (an
"Acquiring Person") for a period of five years after such acquisition, unless
the transaction or acquisition of shares is approved by a majority of the
members of the Target Corporation's board of directors prior to the time of
acquisition. Such prohibited transactions include, among other things, a merger
or consolidation with, disposition of assets to, or issuance or redemption of
stock to or from, the Acquiring Person, termination of 5% or more of the
employees of the Target Corporation as a result of the Acquiring Person's
acquisition of 10% or more of the shares or allowing the Acquiring Person to
receive any disproportionate benefit as a stockholder. After the five-year
period, a Significant Business Transaction may take place as long as it
complies with certain fair price provisions of the statute or is approved at an
annual or special meeting of stockholders.
A Target Corporation includes a foreign corporation if:
. the corporation has a class of voting stock registered pursuant to
Section 12 or 15 of the Securities Exchange Act of 1934;
. the corporation's principal executive office is located in Washington;
. any of:
. more than 10% of the corporation's stockholders of record are
Washington residents;
. more than 10% of its shares of record are owned by Washington
residents; or
. 1,000 or more of its stockholders of record are Washington residents;
. a majority of the corporation's employees are Washington residents or
more than 1,000 Washington residents are employees of the corporation;
and
. a majority of the corporation's tangible assets are located in
Washington or the corporation has more than $50 million of tangible
assets located in Washington.
A corporation may not "opt out" of this statute. If we meet the definition of
a Target Corporation, Chapter 23B.19 of the WBCA may have the effect of
delaying, deferring or preventing a change of control of the Company.
Delaware Statute. We are subject to Section 203 of the Delaware General
Corporation law, which prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an
64
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless:
. prior to such date, the board of directors of the corporation approves
either the business combination or the transaction that resulted in the
stockholder's becoming an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owns at
least 85% of the outstanding voting stock, excluding shares held by
directors, officers and certain employee stock plans; or
. on or after the consummation date the business combination is approved
by the board of directors and by the affirmative vote at an annual or
special meeting of stockholders of at least 66 2/3% of the outstanding
voting stock that is not owned by the interested stockholder.
For purposes of Section 203, a "business combination" includes, among other
things, a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an "interested stockholder" is
generally a person who, together with affiliates and associates of such person:
. owns 15% or more of the corporation's voting stock; or
. is an affiliate or associate of the corporation and was the owner of 15%
or more of the outstanding voting stock of the corporation at any time
within the prior three years.
AOL Agreement. Pursuant to certain agreements with AOL, if we receive an
unsolicited proposal, or we determine to solicit proposals or otherwise enter
into discussions that would result in a sale of a controlling interest in
InfoSpace or other merger, asset sale or other disposition that effectively
results in a change of control (a "Disposition"), then we are required to give
written notice to AOL, and AOL has seven days to provide notice to us of its
desire to negotiate in good faith with us regarding a Disposition involving
AOL. In the event that AOL timely delivers such a notice, then we will
negotiate exclusively and in good faith with AOL regarding a Disposition for a
period of 30 days from the date of delivery of our initial notice to AOL, after
which we will be free to negotiate a Disposition with other third parties if we
and AOL cannot in good faith come to terms. If such a Disposition is not
consummated within five months from the date of delivery of our initial notice
to AOL, the process described above will again apply. AOL's right of first
negotiation could have the effect of delaying, deterring or preventing a change
of control.
These charter provisions, provisions of Washington and Delaware law and AOL's
right of first negotiation may have the effect of delaying, deterring or
preventing a change of control.
Registration Rights
Pursuant to certain Investor Rights Agreements dated as of May 21, 1998,
three investors holding an aggregate of 8,916,712 shares of common stock and
warrants to purchase 14,373,792 shares of common stock (the "Holders") are
entitled to certain rights with respect to the registration of such shares
under the Securities Act of 1933. If we propose to register any of our
securities under the Securities Act, either for our own account or for the
account of other security holders, the Holders are entitled to notice of such
registration and to include shares of common stock in such registration at our
expense. Additionally, the Holders are entitled to certain demand registration
rights pursuant to which they may require us to file a registration statement
under the Securities Act at our expense with respect to their shares of common
stock, and we are required to use our commercially reasonable efforts to effect
such registration. Further, the Holders may require us to file up to three
additional registration statements on Form S-3 (and no more than two in any
calendar year), and we will bear the expense for up to one such registration in
any calendar year. All of these registration rights are subject to certain
conditions and limitations, among them the right of the underwriters of an
offering to limit the number of shares included in such registration.
Pursuant to a Stockholder Rights Agreement dated as of August 6, 1998, six
investors holding an aggregate of 3,700,000 shares of common stock are entitled
to notice of registration if we propose to register
65
any of our securities under the Securities Act, either for our own account or
for the account of other security holders, and are entitled to include shares
of common stock in such registration at our expense. These registration rights
are subject to certain conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares included in such
registration.
In connection with the acquisition of all the outstanding membership units of
YPI, the former members of YPI holding an aggregate of 680,000 shares of common
stock may require us to file additional registration statements on Form S-3 at
the expense of those stockholders requesting such registration.
AOL, which holds a warrant to purchase 7,919,328 shares of common stock, is
entitled to notice of registration if we propose to register any of our
securities under the Securities Act, either for our own account or for the
account of other security holders, and is entitled to include shares of common
stock issuable upon the exercise of such warrant in such registration at our
expense. Further, AOL may require us to file up to four additional registration
statements on Form S-3, and we will bear the expense for such registrations.
These registration rights are subject to certain conditions and limitations,
among them the right of the underwriters of an offering to limit the number of
shares included in such registration.
Transfer Agent And Registrar
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, Seattle, Washington.
Nasdaq National Market Listing
Our common stock is listed on the Nasdaq National Market under the symbol
"INSP."
66
PLAN OF DISTRIBUTION
You should consult your own tax advisors with respect to the United States,
Canadian and other tax consequences of exchanging your exchangeable shares for
shares of our common stock as described below. For more information, see
"Income Tax Considerations."
Your Exchangeable Shares
On September 13, 1999, the shareholders of INEX voted to approve a plan of
arrangement pursuant to Section 182 of the Business Corporations Act (Ontario).
In accordance with the plan of arrangement, INEX shareholders received either
exchangeable shares issued by InfoSpace.com Canada Holdings or our common
shares. Additionally, we assumed all obligations under INEX's warrants and upon
exercise thereof shares of our common stock will be issued. The exchangeable
shares and our common shares were issued at a ratio of .20405 shares for each
INEX share.
We have filed with the SEC a registration statement on Form S-1 with respect
to our common stock being offered under this prospectus. This prospectus forms
a part of the registration statement. We have agreed to use our reasonable best
efforts to keep the registration statement effective until there are no
exchangeable shares outstanding. We have not engaged a broker, dealer or
underwriter in connection with the offering of our common stock described in
this prospectus.
You may obtain our common stock in exchange for your exchangeable shares in
the following ways:
. you may require InfoSpace.com Canada Holdings to exchange your
exchangeable shares for an equivalent number of shares of our common
stock. For more information, see "--Retraction of Exchangeable Shares."
. InfoSpace.com Canada Holdings will automatically redeem your exchangeable
shares for shares of our common stock at September 15, 2010 or upon the
occurrence of certain events. For more information, see "--Redemption of
Exchangeable Shares" and "--Early Redemption."
. upon our liquidation or the liquidation of InfoSpace.com Canada Holdings,
you may be required to, or may choose to, exchange your exchangeable
shares for shares of our common stock. For more information, see "--
Liquidation Rights with Respect to InfoSpace.com Canada Holdings" and "--
Liquidation Rights with Respect to InfoSpace."
We will bear all of the expenses of this distribution. We estimate that these
expenses will total approximately $125,000.
How You May Retract Or Redeem Your Exchangeable Shares
Retraction of Exchangeable Shares
Holders of the exchangeable shares will be entitled at any time following the
combination to retract (i.e. require InfoSpace.com Canada Holdings to redeem)
any or all of the exchangeable shares held by such holder for a retraction
price per share equal to the market price of our common stock on the last
business day prior to the date you request redemption plus, on the designated
payment date therefor, all declared but unpaid dividends. Holders of the
exchangeable shares may effect such retraction by presenting a certificate or
certificates to InfoSpace.com Canada Holdings or the Trustee representing the
number of exchangeable shares the holder desires to retract together with a
duly executed retraction request indicating the number of exchangeable shares
the holder desires to retract and the date upon which the holder desires to
receive the InfoSpace.com common shares, and such other documents as may be
required to effect the retraction.
When a holder requests InfoSpace.com Canada Holdings to redeem exchangeable
shares, InfoSpace.com Nova Scotia Company will have an overriding right to
purchase all but not less than all of the
67
retracted shares, at a purchase price per share equal to the market price of
our common stock on the last business day prior to the date you request
redemption plus, on the designated payment date therefor, to the extent it is
not paid by InfoSpace.com Canada Holdings, all declared but unpaid dividends.
Upon receipt of a request for retraction, InfoSpace.com Canada Holdings will
immediately notify InfoSpace.com Nova Scotia Company. InfoSpace.com Nova Scotia
Company must then advise InfoSpace.com Canada Holdings within five business
days as to whether it will exercise its retraction right. If InfoSpace.com Nova
Scotia Company does not so advise InfoSpace.com Canada Holdings, InfoSpace.com
Canada Holdings will notify the holder as soon as possible thereafter that
InfoSpace.com Nova Scotia Company will not exercise the right. If InfoSpace.com
Nova Scotia Company advises InfoSpace.com Canada Holdings that InfoSpace.com
Nova Scotia Company will exercise the right within such five business day
period, then provided the request is not revoked by the holder as described
below, the retraction request shall thereupon be considered only to be an offer
by the holder to sell the shares to InfoSpace.com Nova Scotia Company in
accordance with its right.
A holder may revoke its request for retraction, in writing, at any time prior
to the close of business on the business day preceding the retraction date, in
which case the shares will neither be purchased by InfoSpace.com Nova Scotia
Company nor be redeemed by InfoSpace.com Canada Holdings. If the holder does
not revoke its retraction request on the retraction date, the shares will be
purchased by InfoSpace.com Nova Scotia Company or redeemed by InfoSpace.com
Canada Holdings, as the case may be, in each case as set out above.
InfoSpace.com Canada Holdings or InfoSpace.com Nova Scotia Company, as the case
may be, will deliver the aggregate of the price per share equal to the market
price of our common stock on the last business day prior to the date of
retraction request plus, on the designated payment date therefor, all declared
but unpaid dividends to the holder recorded in the securities register for the
exchangeable shares or at the address specified in the holder's retraction
request or, if so requested in the retraction request, will hold the same for
pick up by the holder at the registered office of InfoSpace.com Canada Holdings
or the office of the transfer agent as specified by InfoSpace.com Canada
Holdings, in each case, less any amounts required to be deducted and withheld
therefrom on account of tax.
If, as a result of solvency requirements or applicable law, InfoSpace.com
Canada Holdings is not permitted to redeem all retracted shares tendered by a
retracting holder, InfoSpace.com Canada Holdings will redeem only those shares
tendered by the holder (rounded down to a whole number of shares) as would not
be contrary to such provisions of applicable law. The Trustee, on behalf of the
holder of any retracted shares not so redeemed by InfoSpace.com Canada
Holdings, will require InfoSpace.com to purchase the shares not redeemed on the
retraction date pursuant to the exchange right.
Redemption of Exchangeable Shares
Subject to applicable law and the overriding right of InfoSpace.com Nova
Scotia Company to purchase all of the exchangeable shares from all of the
holders of exchangeable shares (other than us and our affiliates) on a certain
date in exchange for our common shares, on an established date no earlier than
September 15, 2010 InfoSpace.com Canada Holdings will redeem all of the then
outstanding exchangeable shares for a redemption price per share equal to the
market price of our common stock on the last business day prior to the date we
request redemption plus, on the designated payment date therefor, all declared
but unpaid dividends. InfoSpace.com Canada Holdings will, at least 60 days
prior to the relevant date, or such number of days as the board of directors of
InfoSpace.com Canada Holdings may determine to be reasonably practicable under
the circumstances in respect of a redemption date arising in connection with
certain events, provide the registered holders of the exchangeable shares with
written notice of the proposed redemption of the exchangeable shares by
InfoSpace.com Canada Holdings or the purchase of the exchangeable shares by
InfoSpace.com Nova Scotia Company pursuant to the redemption call right
described below.
On or after the redemption date, upon the holder's presentation and surrender
of the certificates representing the exchangeable shares and such other
documents as may be required at the office of the transfer agent or the
registered office of InfoSpace.com Canada Holdings, InfoSpace.com Canada
Holdings
68
will deliver the price per share equal to the market price of our common stock
on the last business day prior to the date of redemption request plus, on the
designated payment date therefor, all declared but unpaid dividends as at such
date to the holder by mailing the same to the holder at the address of the
holder recorded in the securities register for the exchangeable shares or by
holding the same for pick up by the holder at the registered office of
InfoSpace.com Canada Holdings or the office of the transfer agent as specified
in the written notice of redemption in each case less any amounts required to
be deducted and withheld therefrom on account of tax.
InfoSpace.com Nova Scotia Company will have an overriding right to purchase
on the redemption date all of the exchangeable shares then outstanding (other
than exchangeable shares held by us and our affiliates) for a purchase price
per share equal to the market price of our common stock on the last business
day prior to the date you request redemption plus, on the designated payment
date therefor, to the extent it is not paid by InfoSpace.com Canada Holdings,
all declared but unpaid dividends. Upon the exercise of this right, holders
will be obligated to sell their exchangeable shares to InfoSpace.com Nova
Scotia Company. If InfoSpace.com Nova Scotia Company exercises this right,
InfoSpace.com Canada Holdings's right and obligation to redeem the exchangeable
shares on such redemption date will terminate.
Early Redemption
In certain circumstances, InfoSpace.com Canada Holdings has the right to
require a redemption of the exchangeable shares prior to September 15, 2010. An
early redemption may occur upon (i) there being fewer than 57,000 exchangeable
shares outstanding (other than exchangeable shares held by us and our
affiliates); (ii) the occurrence of a merger, amalgamation, tender offer,
material sale of shares or rights or interests therein or thereto or similar
transactions involving us, or any proposal to do so; (iii) a proposal for
certain matters in respect of which holders of exchangeable shares are entitled
to vote as shareholders of InfoSpace.com Canada Holdings; or (iv) the failure
to approve or disapprove, as applicable, certain matters in respect of which
holders of exchangeable shares are entitled to vote as shareholders of
InfoSpace.com Canada Holdings regarding changes required to maintain the
equivalence of exchangeable shares and our common shares.
If, prior to September 15, 2010, we are involved in any merger, amalgamation,
tender offer, material sale of shares or rights or interests therein or thereto
or similar transactions, or any proposal to do so, provided that the board of
directors of InfoSpace.com Canada Holdings determines, in good faith and in its
sole discretion, that it is not reasonably practicable to substantially
replicate the terms and conditions of the exchangeable shares in connection
with such a transaction and that the redemption of all but not less than all of
the outstanding exchangeable shares is necessary to enable the completion of
such transaction in accordance with its terms, the board of directors of
InfoSpace.com Canada Holdings may accelerate the redemption date discussed
above to such date prior to September 15, 2010 as it may determine, upon such
number of days prior written notice to the registered holders of the
exchangeable shares as the board of directors of InfoSpace.com Canada Holdings
may determine to be reasonably practicable in such circumstances.
An example of an event referred to above at (iii) is one to approve an
amalgamation involving InfoSpace.com Canada Holdings where the amalgamation
proposes changes to the exchangeable shares that, if contained in a proposed
amendment to InfoSpace.com Canada Holdings's articles, would entitle the
holders thereof to a vote under applicable corporate law or a sale of all or
substantially all of the assets of InfoSpace.com Canada Holdings where the
exchangeable shares would be affected differently from any other class of
shares of InfoSpace.com Canada Holdings. Such an event excludes that described
at (iv) above, and, for greater certainty, excludes any matter in respect of
which holders of exchangeable shares are entitled to vote (or instruct the
Trustee to vote) in their capacity as Beneficiaries under (and as that term is
defined in) the Voting and Exchange Trust Agreement. If, prior to September 15,
2010, such an event is proposed, provided that the board of directors of
InfoSpace.com Canada Holdings has determined, in good faith and in its sole
discretion, that it is not reasonably practicable to accomplish the business
purpose
69
intended by the event, which business purpose must be bona fide and not for the
primary purpose of causing the occurrence of a redemption date, in any other
commercially reasonable manner that does not result in such an event, the
redemption date shall be the business day prior to the record date for any
meeting or vote of the holders of the exchangeable shares to consider the event
and the board of directors of InfoSpace.com Canada Holdings shall give such
number of days prior written notice of such redemption to the registered
holders of the exchangeable shares as the board of directors of InfoSpace.com
Canada Holdings may determine to be reasonably practicable in such
circumstances.
An event described at (iv) above means any matter in respect of which holders
of exchangeable shares are entitled to vote as shareholders of InfoSpace.com
Canada Holdings in order to approve or disapprove, as applicable, any change
to, or in the rights of the holders of, the exchangeable shares, where the
approval or disapproval, as applicable, of such change would be required to
maintain the equivalence of the exchangeable shares and the InfoSpace common
shares. If, prior to September 15, 2010, such an event is proposed and the
holders of the exchangeable shares fail to take the necessary action at a
meeting or other vote of holders of exchangeable shares, to approve or
disapprove, as applicable, the event, the redemption date shall be the business
day following the day on which the holders of the exchangeable shares failed to
take such action and the board of directors of InfoSpace.com Canada Holdings
shall give such number of days prior written notice of such redemption to the
registered holders of the exchangeable shares as the board of directors of
InfoSpace.com Canada Holdings may determine to be reasonably practicable in
such circumstances.
See "Income Tax Considerations--Canadian Federal Income Tax Considerations."
Liquidation Rights with Respect to InfoSpace.com Canada Holdings
In the event of the liquidation, dissolution or winding-up of InfoSpace.com
Canada Holdings or any other proposed distribution of the assets of
InfoSpace.com Canada Holdings among its shareholders for the purpose of
winding-up its affairs, holders of the exchangeable shares will have, subject
to applicable law, preferential rights to receive from InfoSpace.com Canada
Holdings, for each exchangeable share held, an amount equal to the market price
of our common stock on the last business day prior to the liquidation. Upon the
occurrence of such liquidation, dissolution or winding-up, InfoSpace.com Nova
Scotia Company will have an overriding right to purchase all of the outstanding
exchangeable shares (other than exchangeable shares held by us and our
affiliates) from the holders thereof on the effective date of such liquidation,
dissolution or winding-up for a purchase price per share equal to the market
price of our common stock on the last business day prior to the liquidation,
plus, to the extent it is not paid by InfoSpace.com Canada Holdings, the full
amount of all prior dividends, if any, declared and unpaid on exchangeable
shares.
Upon, and during the continuance of, insolvency of InfoSpace.com Canada
Holdings, a holder of exchangeable shares will be entitled to instruct the
Trustee to exercise the exchange right with respect to any or all of the
exchangeable shares held by such holder, thereby requiring us to purchase such
exchangeable shares from the holder. As soon as practicable following the
occurrence of such an insolvency of InfoSpace.com Canada Holdings or any event
which may, with the passage of time and/or the giving of notice, lead to
insolvency of InfoSpace.com Canada Holdings, we and InfoSpace.com Canada
Holdings will give written notice thereof to the Trustee. As soon as
practicable thereafter, the Trustee will then notify each holder of
exchangeable shares of such event or potential event and will advise the holder
of its rights with respect to the exchange right. The purchase price payable by
us for each exchangeable share purchased under this right will be satisfied by
the issuance of one share of our common stock plus, to the extent not paid by
InfoSpace.com Canada Holdings, the full amount of all prior dividends, if any,
declared and unpaid on exchangeable shares.
Liquidation Rights with Respect to InfoSpace
In order for the holders of the exchangeable shares to participate on a pro
rata basis with the holders of our common stock in the event of our
liquidation, on the fifth business day prior to the effective date of such
70
an event, each exchangeable share will automatically be exchanged for an
equivalent number of shares of our common stock, plus, to the extent not paid
by InfoSpace.com Canada Holdings, the full amount of all prior dividends, if
any, declared and unpaid on exchangeable shares. Upon a holder's request and
surrender of exchangeable share certificates, duly endorsed in blank and
accompanied by such instruments of transfer as we may reasonably require, we
will deliver to such holder certificates representing an equivalent number of
shares of our common stock plus, to the extent not paid by InfoSpace.com Canada
Holdings, the full amount of all prior dividends, if any, declared and unpaid
on exchangeable shares for each exchangeable share exchanged pursuant to this
automatic exchange right. For a description of certain of our obligations with
respect to the dividend and liquidation rights of the holders of exchangeable
shares, see "InfoSpace Support Obligation" below.
Certain Rights and Restrictions of Exchangeable Shares
Dividend Rights
Holders of exchangeable shares will be entitled to receive, subject to
applicable law, dividends (i) in the case of a cash dividend declared on our
common stock, in an amount in cash for each exchangeable share corresponding to
the cash dividend declared on each of our common shares, (ii) in the case of a
stock dividend declared on our common stock to be paid in shares of our common
stock, in such number of exchangeable shares for each exchangeable share as is
equal to the number of our common shares to be paid on each share of our common
stock, or (iii) in the case of a dividend declared on our common stock in
property other than cash or our common shares, in such type and amount of
property as is the same as, or economically equivalent to, the type and amount
of property declared as a dividend on each of our common shares. Cash dividends
on the exchangeable shares are payable in U.S. dollars or the Canadian dollar
equivalent thereof, at the option of InfoSpace.com Canada Holdings. The
declaration date, record date and payment date for dividends on the
exchangeable shares will be the same as the relevant date for the corresponding
dividends on the shares of our common stock.
Ranking
The exchangeable shares will be entitled to a preference over the common
shares and the preferred shares of InfoSpace.com Canada Holdings and any other
shares ranking junior to the exchangeable shares with respect to the payment of
dividends and the distribution of assets in the event of a liquidation,
dissolution or winding-up of InfoSpace.com Canada Holdings, whether voluntary
or involuntary, or any other distribution of the assets of InfoSpace.com Canada
Holdings, among its shareholders for the purpose of winding-up its affairs.
Certain Restrictions
InfoSpace.com Canada Holdings will not, without the approval of the holders
of the exchangeable shares, as set forth below under "Amendment and Approval":
(a) pay any dividends on the common shares or the preferred shares of
InfoSpace.com Canada Holdings, or any other shares ranking junior to
the exchangeable shares, other than stock dividends payable in common
shares or preferred shares of InfoSpace.com Canada Holdings, or any
such other shares ranking junior to the exchangeable shares, as the
case may be;
(b) redeem, purchase or make any capital distribution in respect of common
shares or preferred shares of InfoSpace.com Canada Holdings, or any
other shares ranking junior to the exchangeable shares;
(c) redeem or purchase any other shares of InfoSpace.com Canada Holdings
ranking equally with the exchangeable shares with respect to the
payment of dividends or on any liquidation distribution; or
(d) issue any exchangeable shares or any other shares of InfoSpace.com
Canada Holdings ranking equally with, or superior to, the exchangeable
shares other than by way of stock dividends to the holders of such
exchangeable shares.
71
The restrictions in clauses (a), (b), (c) and (d) above will not apply at any
time when the dividends on the outstanding exchangeable shares corresponding to
dividends declared and paid on our common stock have been declared and paid in
full.
Amendment and Approval
The rights, privileges, restrictions and conditions attaching to the
exchangeable shares may be added to, changed or removed only with the approval
of the holders thereof. Any such approval or any other approval or consent to
be given by the holders of the exchangeable shares will be deemed to have been
sufficiently given if given in accordance with applicable law subject to a
minimum requirement that such approval or consent be evidenced by a special
resolution passed by not less than two-thirds of the votes cast on such
resolution at a meeting of the holders of exchangeable shares duly called and
held at which holders of at least fifty percent (50%) of the then outstanding
exchangeable shares are present or represented by proxy. In the event that no
such quorum is present at such meeting within one-half hour after the time
appointed therefor, then the meeting will be adjourned to such place and time
(not less than five days later) as may be designated by the Chairman of such
meeting. At such adjourned meeting, the holders of exchangeable shares present
or represented by proxy may transact the business for which the meeting was
originally called and a special resolution passed thereat by the affirmative
vote of not less than two-thirds of the votes cast on such resolution will
constitute the approval or consent of the holders of the exchangeable shares.
Our Support Obligation
Pursuant to an Exchangeable Share Support Agreement, we will make the
following covenants for so long as any exchangeable shares (other than
exchangeable shares owned by us or our affiliates) remain outstanding: (i) we
will not declare or pay dividends on our common stock unless InfoSpace.com
Canada Holdings is able to declare and pay and simultaneously declares or pays,
as the case may be, an equivalent dividend on the exchangeable shares; (ii) we
will advise InfoSpace.com Canada Holdings in advance of the declaration of any
dividend on our common stock and ensure that the declaration date, record date
and payment date for dividends on the exchangeable shares are the same as that
for the corresponding dividend on our common stock; (iii) we will ensure that
the record date for any dividend declared on our common stock is not less than
ten business days after the declaration date of such dividend; (iv) we will
take all actions and do all things reasonably necessary or desirable to enable
and permit InfoSpace.com Canada Holdings, in accordance with applicable law, to
pay to the holders of the exchangeable shares the applicable InfoSpace.com
Canada Holdings amounts described above in the event of a liquidation,
dissolution or winding-up of InfoSpace.com Canada Holdings, a retraction
request by a holder of exchangeable shares or a redemption of exchangeable
shares by InfoSpace.com Canada Holdings; and (v) we will take all actions and
do all things reasonably necessary or desirable to enable and permit
InfoSpace.com Nova Scotia Company, in accordance with applicable law, to
perform its obligations arising upon the exercise by it of its rights,
including the delivery of our common stock in accordance with the provisions of
the applicable right.
The Exchangeable Share Support Agreement and the provisions of the
exchangeable shares provide that, without the prior approval of InfoSpace.com
Canada Holdings and the holders of the exchangeable shares as set forth above
under "Amendment and Approval," we will not issue or distribute additional
shares of our common stock, securities exchangeable for or convertible into or
carrying rights to acquire our common stock or rights to subscribe therefor or
other assets to all or substantially all holders of shares of our common stock,
nor change our common stock, unless the same or an economically equivalent
distribution on or change to the exchangeable shares (or in the rights of the
holders thereof) is made simultaneously. The InfoSpace.com Canada Holdings
board of directors is conclusively empowered to determine in good faith and in
its sole discretion whether any corresponding distribution on or change to the
exchangeable shares is the same as or economically equivalent to any proposed
distribution on or change to our common stock. In the event of any proposed
tender offer, share exchange offer, issuer bid, take-over bid or similar
transaction with respect to our common stock which is recommended by our board
of directors and in connection with which the exchangeable shares are not
redeemed by InfoSpace.com
72
Canada Holdings or purchased by InfoSpace.com Nova Scotia Company pursuant to
the redemption call right, we will use reasonable efforts to enable holders of
exchangeable shares to participate in such transaction to the same extent and
on an economically equivalent basis as the holders of shares of our common
stock.
InfoSpace.com Canada Holdings is required to notify us and InfoSpace.com Nova
Scotia Company of the occurrence of certain events, such as the liquidation,
dissolution or winding-up of InfoSpace.com Canada Holdings, and of its receipt
of a retraction request from a holder of exchangeable shares.
Under the Exchangeable Share Support Agreement, we have agreed not to
exercise any voting rights attached to the exchangeable shares owned by us or
any of our affiliates on any matter considered at meetings of holders of
exchangeable shares.
With the exception of administrative changes for the purpose of adding
covenants for the protection of the holders of the exchangeable shares, making
certain necessary amendments or curing ambiguities or clerical errors (in each
case provided that our board of directors and the board of directors of each of
InfoSpace.com Canada Holdings and InfoSpace.com Nova Scotia Company are of the
opinion that such amendments are not prejudicial to the interests of the
holders of the exchangeable shares), the Exchangeable Share Support Agreement
may not be amended without the approval of the holders of the exchangeable
shares as set forth above under "Amendment and Approval."
INEX Warrants
On October 14, 1999, there were outstanding INEX common share purchase
warrants which, when vested, would be exercisable to acquire a total of 353,844
INEX common shares at prices per share of between Cdn.$3.75 to Cdn.$8.00 with
various expiry dates to 2002.
Upon the closing of the combination on October 14, 1999, we assumed INEX's
obligations under all of the above INEX warrants. Each warrant was exchanged
for a warrant to purchase a number of shares of our common stock equal to the
product obtained by multiplying .20405 by the number of INEX common shares
subject to such warrant (rounded down to a whole number of shares). The warrant
provides for an exercise price per share of our common stock equal to the
exercise price per INEX common share of such INEX warrant immediately prior to
the consummation of the combination divided by .20405. The term to expiry,
conditions to and the manner of exercising, vesting schedule, and all other
terms and conditions of such warrant are otherwise unchanged, and any document
or agreement previously evidencing an INEX warrant evidences and is deemed to
evidence the assumed warrant.
As of August 31, 2000, such warrants are exercisable for approximately
288,808 shares of our common stock.
Resale of Exchangeable Shares and Our Common Shares Received in the Transaction
The exchangeable shares and our common shares issuable to the INEX
shareholders upon the closing of our combination with INEX were not registered
under the Securities Act of 1933, as amended (the "Securities Act"). Such
shares were instead issued in reliance upon the exemption provided by Section
3(a)(10) of the Securities Act. Section 3(a)(10) exempts from registration
securities issued in exchange for one or more outstanding securities where the
terms and conditions of the issuance and exchange of such securities have been
approved by any court of competent jurisdiction, after a hearing upon the
fairness of the terms and conditions of the issuance and exchange at which all
persons to whom such securities will be issued have the right to appear. The
Court is authorized to conduct a hearing to determine the fairness of the terms
and conditions of the Arrangement, including the proposed issuance of
securities in exchange for other outstanding securities. The Court entered an
Interim Order on August 20, 1999, the Arrangement was approved by the INEX
shareholders on September 13, 1999, and a hearing on the fairness of the
Arrangement was held on October 4, 1999 by the Court. The Court entered a Final
Order on the fairness of
73
the Arrangement on October 13, 1999. The registration statement of which this
prospectus forms a part is intended to register our common shares to be issued
upon exchange of the exchangeable shares and exercise of the warrants assumed.
The exchangeable shares and our common shares received in exchange for INEX
shares in the combination are freely transferable under U.S. Federal securities
laws, except for exchangeable shares held by persons who are deemed to be
"affiliates" (as such term is defined under the Securities Act) of INEX prior
to the transaction which may be resold by them only in transactions permitted
by the resale provisions of Rule 145(d)(1), (2), or (3) promulgated under the
Securities Act or as otherwise permitted under the Securities Act. Rule
145(d)(1) generally provides that "affiliates" of either INEX or us may not
resell the exchangeable shares and our common shares unless such sale is
effected pursuant to an effective registration statement or pursuant to the
volume, current public information, manner of sale and timing limitations of
Rule 144 promulgated under the Securities Act. These limitations generally
require that any sales made by an affiliate in any three-month period shall not
exceed the greater of one percent of the outstanding shares of the securities
being sold or the average weekly trading volume over the four calendar weeks
preceding the placement of the sell order and that such sales be made in
unsolicited, open market "brokers transactions." Rules 145(d)(2) and (3)
generally provide that the foregoing limitations lapse for our non-affiliates
after a period of one or two years, respectively, depending upon whether
certain of our currently available information continues to be available.
Persons who may be deemed to be affiliates of an issuer generally include
individuals or entities that control, are controlled by, or are under common
control with, such issuer and may include certain officers and directors of
such issuer as well as principal shareholders of such issuer. In the event that
this registration statement is declared effective, our common shares issuable
upon exchange of the exchangeable shares and upon exercise of the warrants that
we assumed from INEX will be transferable in the manner and under the
circumstances described in the foregoing paragraph.
In the event that this registration statement is not declared effective, our
common shares issuable upon exchange of the exchangeable shares and upon
exercise of the warrants that we assumed from INEX will be "restricted"
securities within the meaning of and as under the Securities Act and may not be
offered or sold except in accordance with Regulation S under the Securities
Act, pursuant to registration under the Securities Act or pursuant to an
available exemption from registration under the Securities Act. Accordingly, we
agreed, in the event that this registration statement was not declared
effective, to file a registration statement under the Securities Act with the
Securities and Exchange Commission prior to the closing of the combination in
order to register the resale of our common shares issuable upon exchange of the
exchangeable shares and exercise of the warrants that we assume from INEX. We
agreed to use our best efforts to cause that registration statement to become
effective and to remain effective until the date on which all shares of our
common stock have been issued. Under the terms of the combination, we may
suspend the use of such registration statement for such time as may be
necessary to update or amend it to correct any misstatement or omission of a
material fact. In addition, we may delay the filing if any such amendment or
supplement to such registration statement, for a period not to exceed ninety
days, if we in good faith determine the such amendment or supplement would
require us to disclose a material development or potential material development
and such disclosure would have a material adverse effect on us.
In the event that this registration statement is not declared effective,
holders of exchangeable shares who acquire our common shares pursuant to the
exchange of exchangeable shares or the exercise of the warrants which we
assumed from INEX after the fourth anniversary of the effective date of the
registration statement pertaining to the resale of our common stock may not
offer or sell our common stock except in compliance with an available exemption
from registration under the Securities Act.
We have registered under the Securities Act on Form S-8 the shares of our
common stock issuable upon exercise of employee options issued in exchange for
INEX employee options. Our common shares issuable upon exercise of those
options may be resold without restriction in the United States by persons
74
who are not our affiliates. Optionholders who are our affiliates must comply
with the volume, current public information and manner of sale limitations of
Rule 144 under the Securities Act.
Prior to the closing of the combination each of the INEX affiliates entered
into agreements restricting them in connection with the requirements for
pooling-of-interests accounting treatment and restricting the sale, pledge or
other disposal of exchangeable shares, our common shares and INEX shares.
Future Issuances of Shares
The articles of InfoSpace.com Canada Holdings authorize the issuance of an
unlimited number of exchangeable shares. The exchangeable shares that are
authorized may be issued, without approval of holders of exchangeable shares,
at such time or times, to such persons and for such consideration as
InfoSpace.com Canada Holdings may determine, except as may otherwise be
required by applicable laws and subject to all dividends on the outstanding
exchangeable shares corresponding to dividends declared and paid on the
outstanding shares of our common stock having been declared and paid at the
relevant times.
75
INCOME TAX CONSIDERATIONS
Canadian Federal Income Tax Considerations
You should consider the following discussion of Canadian federal income taxes
before you acquire exchangeable shares or exchange exchangeable shares for
common stock. The following summarizes the principal Canadian federal income
tax considerations that generally apply to you if, under Canadian federal
income tax law, you are considered to
. hold as capital property
. your exchangeable shares,
. the voting rights relating to those shares, and
. the other ancillary rights relating to those shares;
. deal at arm's length with us, INEX, InfoSpace.com Canada Holdings, and
InfoSpace.com Nova Scotia Company.
If we are or will be a foreign affiliate of you under the Canadian federal
income tax laws, this summary will not apply to you. This summary does not
address the tax consequences of the transactions, including the arrangement, in
which you acquire the exchangeable shares, or the exercise of the warrants
which we assumed from INEX, or the sale of the shares obtainable upon exercise
of those warrants.
Under Canadian federal income tax laws, your exchangeable shares will
generally be considered to be capital property to you unless you are considered
to hold your exchangeable shares
. in the course of carrying on a business, or
. in an adventure in the nature of trade.
If you are resident in Canada but your shares might not otherwise qualify as
capital property, you may be entitled to make an irrevocable election to
qualify those shares as capital property. If you do not hold your exchangeable
shares as capital property, you should consult your own advisers regarding your
particular circumstances. If you are a "financial institution" under the
Canadian federal income tax laws applicable to securities held by financial
institutions, the summary does not apply to you; instead, you should consult
your own advisers regarding the application to you of the "mark-to-market"
rules.
The current provisions of the Income Tax Act (Canada) and regulations, the
current provisions of the income tax treaty between Canada and the United
States and counsel's understanding of the current administrative practices of
Revenue Canada form the basis of this summary. This summary takes into account
the proposed amendments to the Income Tax Act (Canada) and regulations that the
Minister of Finance has publicly announced prior to the date of this prospectus
and assumes that those proposed amendments will be enacted in their present
form. Counsel can give no assurances, however, that the proposed amendments
will be enacted in the form proposed, or at all.
Except for the proposed amendments, this summary does not take into account
or anticipate any changes in law, whether by legislative, administrative or
judicial decision or action, nor does it take into account provincial,
territorial or foreign income tax legislation or considerations, which may
differ from the Canadian federal income tax considerations described herein. We
have neither sought nor obtained an advance tax ruling from Revenue Canada to
confirm the tax consequences of any of the transactions we describe.
WHILE THIS SUMMARY ADDRESSES THE MATERIAL CANADIAN FEDERAL INCOME TAX
CONSIDERATIONS GENERALLY APPLICABLE TO YOU, IT IS NOT INTENDED TO BE, NOR
SHOULD IT BE CONSTRUED TO BE, LEGAL, BUSINESS OR TAX ADVICE TO YOU.
FURTHERMORE, AS REQUIRED BY THE "PLAIN ENGLISH" REQUIREMENTS OF THE SEC,
76
THIS SUMMARY MAKES MINIMAL USE OF DEFINED TERMS. YOU SHOULD KNOW THAT MANY OF
THE WORDS AND PHRASES USED IN THIS SUMMARY HAVE VERY SPECIFIC MEANINGS UNDER
CANADIAN INCOME TAX LAW.
THEREFORE, YOU SHOULD CONSULT YOUR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES APPLICABLE TO YOU IN YOUR PARTICULAR CIRCUMSTANCES.
For Canadian tax purposes, you must express all amounts, including dividends,
adjusted cost base and proceeds of disposition, in Canadian dollars, and you
must convert amounts denominated in United States dollars into Canadian dollars
based on the United States dollar exchange rate generally prevailing when those
amounts arise.
Shareholders Resident In Canada
If you are resident or deemed to be resident in Canada under Canadian federal
income tax laws, the following portion of the summary applies to you.
Dividends on Exchangeable Shares. If you are an individual, the dividends
that you receive or are deemed to receive on your exchangeable shares will be
included in computing your income. Generally, they will be subject to the
gross-up and dividend tax credit rules that normally apply to taxable dividends
received from taxable Canadian corporations. If you are a corporation, the
dividends that you receive or are deemed to receive on your exchangeable shares
will be included in computing your income.
If you are a corporation, you must include dividends that you receive or are
deemed to receive on the exchangeable shares in your income and these dividends
will normally be deductible in computing your taxable income unless you are a
specified financial institution, in which case the deduction is generally
denied.
If you are a private corporation or any other corporation resident in Canada
controlled or deemed to be controlled by or for the benefit of an individual
(other than a trust) or a related group of individuals (other than trusts), you
may be liable to pay a refundable tax of 33 1/3 percent on dividends that you
receive or are deemed to receive on the exchangeable shares that are deductible
in computing your taxable income. If you are a "Canadian-controlled private
corporation," you may be liable to pay an additional refundable tax of 6
2/3 percent on dividends you receive or are deemed to receive that are not
deductible in computing your taxable income.
Under Canadian federal income tax laws, the exchangeable shares will be
taxable preferred shares and short-term preferred shares and term preferred
shares. Accordingly, InfoSpace.com Canada Holdings will be subject to a 66
2/3 percent tax on dividends (other than excluded dividends) that it pays or is
deemed to pay on the exchangeable shares. In certain circumstances,
InfoSpace.com Canada Holdings may be entitled to deductions that will
substantially offset the impact of this tax. If you are a corporation,
dividends that you receive or are deemed to receive on the exchangeable shares
will not be subject to the 10 percent tax under Part IV.1 of the Income Tax Act
(Canada).
If the Company or any person with whom the Company does not deal at arm's
length for purposes of the Income Tax Act (Canada) is a "specified financial
institution" at the time a dividend is paid on an exchangeable share and you
are a corporation, then, subject to the exemption described below, the
dividends that you receive or are deemed to receive will not be deductible in
computing your taxable income. Accordingly, as discussed above, those dividends
will be fully includible in computing your income. Generally, we will be a
specified financial institution for these purposes if
. we are, or are related to, an entity or corporation that is a bank, a
trust company, a credit union, or an insurance corporation, or
. our principal business, or the principal business of an entity or
corporation to which we are related, is (a) the lending of money to
persons with whom we deal at arm's length, (b) the purchasing of debt
obligations issued by persons with whom we deal at arm's length, or (c) a
combination of both (a) and (b).
77
The same rules will apply to determine whether a person with whom we do not
deal at arm's length is a specified financial institution for these purposes.
Nonetheless, if you are a corporation, you will not be denied the dividend
deduction if at the time you receive a dividend or are deemed to receive a
dividend
. the exchangeable shares are listed on a prescribed stock exchange in
Canada,
. we control InfoSpace.com Canada Holdings, and
. you (together with any person with whom you do not deal at arm's length,
with any partnership of which you or that person is a member, and with
any trust of which you or that person is a beneficiary) do not receive
dividends on more than 10 percent of the issued and outstanding
exchangeable shares.
Redemption Or Exchange Of Exchangeable Shares
If InfoSpace.com Canada Holdings redeems (or you retract) your exchangeable
shares, you will generally be deemed to have received a dividend equal to the
amount, if any, by which the fair market value of the consideration you receive
as part of the redemption or retraction exceeds the aggregate of the paid-up
capital (as determined under Canadian federal income tax laws) of your
exchangeable shares at the time InfoSpace.com Canada Holdings redeems or you
retract your exchangeable shares.
The amount of any deemed dividend will generally be subject to the tax
treatment described above under "Dividends." On the redemption of your
exchangeable shares, you will also be considered to have disposed of your
exchangeable shares for proceeds of disposition equal to the paid-up capital of
your exchangeable shares redeemed or retracted. In general, you will realize a
capital gain (or a capital loss) equal to the amount by which the proceeds of
disposition of the exchangeable shares, net of reasonable costs of disposition
exceed (or are less than) the adjusted cost base of such shares (see "--
Taxation of Capital Gain or Capital Loss" below). If you are a corporation, in
some circumstances, the amount of any dividend you are deemed to have received
may be treated as proceeds of disposition and not as a dividend.
If you exchange exchangeable shares with InfoSpace.com Nova Scotia Company
for shares of common stock, other than on the redemption or retraction of
exchangeable shares, in general, you will realize a capital gain (or a capital
loss) to the extent the proceeds of disposition of the exchangeable shares, net
of any reasonable costs of disposition, exceed (or are less than) the adjusted
cost base of such shares to you. For these purposes, the proceeds of
disposition will be the aggregate fair market value, at the time of the
exchange, of the consideration you receive (see "--Taxation of Capital Gain or
Capital Loss" below).
Because of the rights relating to the exchangeable shares, you cannot control
whether you will receive shares of common stock upon the redemption of your
exchangeable shares or upon InfoSpace.com Nova Scotia Company's purchase of
your exchangeable shares. As described above, the tax consequences to you of a
redemption by InfoSpace.com Canada Holdings differ from those of an exchange
with InfoSpace.com Nova Scotia Company.
Taxation Of Capital Gain Or Capital Loss
You must include in your income for the year of disposition the taxable
portion of any capital gain you realize. The taxable portion of any capital
gain you realize (the "taxable capital gain") will be three-quarters of that
amount. You must deduct against such taxable capital gains for the year of
disposition three-quarters of any capital loss you realize in that year. If
three-quarters of any capital loss you realize in a taxation year exceeds your
taxable capital gains in that year, you may carry back the excess up to three
taxation years or forward indefinitely and deduct those excess amounts against
net taxable capital gains in those other years, subject to certain limitations
and in certain circumstances.
78
If you are an individual or trust, other than certain trusts, capital gains
that you realize may give rise to alternative minimum tax. If you are a
Canadian-controlled private corporation, you may be liable to pay an additional
refundable tax of 6 2/3 percent on taxable capital gains. If you are a
corporation, subject to certain limitations and under certain circumstances,
you may be required to reduce the amount of any capital loss arising when you
dispose or are deemed to dispose of any exchangeable shares by the amount of
dividends you received or are deemed to have received on those shares. Similar
rules may apply to you if you are:
. a corporation that is a member of a partnership that owns exchangeable
shares;
. a corporation that is a beneficiary of a trust that owns exchangeable
shares;
. a member of a partnership that is a member of another partnership that
owns exchangeable shares;
. a member of a partnership that is a beneficiary of a trust that owns
exchangeable shares;
. a beneficiary of a trust that is a member of a partnership that owns
exchangeable shares; or
. a beneficiary of a trust that is the beneficiary of another trust that
owns exchangeable shares.
Taxation of Our Common Stock
Acquisition And Disposition Of Shares Of Our Common Stock. The cost amount of
shares of common stock that you receive on the retraction, redemption or
exchange of exchangeable shares will in general be equal to the fair market
value of those shares at that time.
If you dispose or are deemed to have disposed of shares of common stock,
generally, you will have a capital gain (or capital loss) to the extent that
the proceeds of disposition, net of any reasonable costs of disposition, exceed
(or are less than) the adjusted cost base to you of such shares immediately
before the disposition. In computing the adjusted cost base of a share of our
common stock, you must average the cost of the share with the adjusted cost
base of any other shares of our common stock that you hold as capital property
at that time.
Dividends On Shares Of Common Stock. In computing your income, you must
include dividends that you receive or are deemed to receive on shares of common
stock. If you are an individual, these dividends will not be subject to the
gross-up and the dividend tax credit rules that normally apply to taxable
dividends received from taxable Canadian corporations. If you are a
corporation, these dividends will not be deductible in computing your taxable
income. In certain circumstances, you may be entitled to a foreign tax credit
in respect of any U.S. withholding tax payable in connection with these
dividends. If you are a Canadian-controlled private corporation, you may be
liable to pay an additional refundable tax of 6 2/3 percent on such dividends.
Foreign Property Information Reporting. If you are a "specified Canadian
entity" for a taxation year or a fiscal period and your total cost amounts of
"specified foreign property," including the shares of common stock, at any time
in the year or fiscal period exceed Cdn. $100,000, you must file an information
return for the year or period disclosing prescribed information, including
. your cost amount,
. any dividends you received in the year, and
. any gains or losses you realized in the year,
in respect of that property.
With some exceptions, generally, if you are a taxpayer resident in Canada in
the year, you will be a specified Canadian entity. You should consult your own
advisors about whether you must comply with these rules.
79
Shareholders Not Resident In Canada
The following portion of the summary is applicable to shareholders who, for
purposes of the Canadian Tax Act, have not been and will not be resident or
deemed to be resident in Canada at any time while they have held INEX common
shares or will hold exchangeable shares or shares of common stock.
Dividends On Exchangeable Shares. Dividends received or deemed to have been
received by a non-resident holder of exchangeable shares will be subject to
Canadian non-resident withholding tax at a rate of 25 percent, unless the rate
is reduced under the provisions of an applicable tax treaty.
Redemption Or Exchange Of Exchangeable Shares. Refer to the discussion above
for a description of the manner in which dividends will be deemed to have been
received by a shareholder and proceeds of disposition will be computed on the
redemption or exchange of exchangeable shares. Dividend withholding tax, as
described above, will apply to dividends deemed to have been received by a non-
resident holder on the redemption of an exchangeable share by InfoSpace.com
Canada Holdings.
Unless the exchangeable shares are listed on a prescribed stock exchange at
the time they are disposed of, they will be taxable Canadian property of a non-
resident holder. As a result, you will be subject to tax under the Canadian Tax
Act on gains realized on the exchange of exchangeable shares for shares of
common stock unless an applicable bilateral income tax convention between
Canada and the jurisdiction in which you reside exempts such gains from
Canadian tax.
You will be required to comply with certain notification requirements imposed
by section 116 of the Canadian Tax Act. Specifically, you must notify Revenue
Canada of your intention to dispose of the exchangeable shares prior to such
disposition or within ten days after such disposition. Revenue Canada will
issue a certificate in respect of such proposed disposition or disposition
provided you have complied with the requirements imposed by the Canadian Tax
Act, which may in some circumstances include payment of an amount equal to 33
1/3 percent of the amount by which the proceeds of disposition exceed your
adjusted cost base of the exchangeable shares, or the provision of acceptable
security in respect of the disposition. Evidence of that adjusted cost base
acceptable to Revenue Canada may have to be provided. Unless InfoSpace.com
Canada Holdings or InfoSpace.com Nova Scotia Company, as the case may be, is in
receipt of a copy of such certificate on or prior to the date of the redemption
or exchange, it will withhold 33 1/3 percent of the payment otherwise due to
the shareholder. If InfoSpace.com Canada Holdings or InfoSpace.com Nova Scotia
Company, as the case may be, has not received such certificate within 30 days
of the end of the month in which the redemption or exchange occurs, it will be
required to remit such withheld amount in cash to the Receiver General, as tax
on your behalf and will take all such action necessary to convert on your
behalf the 33 1/3 percent of the payment withheld to cash proceeds for the
remittance to the Receiver General.
The relevant notification form is Revenue Canada form T2062. A copy of the
form will be sent to INEX shareholders who indicate that they are not resident
in Canada.
United States Federal Income Tax Considerations
You should consider the following discussion of United States federal income
taxes before you acquire exchangeable shares or exchange exchangeable shares
for common stock. This discussion does not address all the federal income tax
considerations that may be relevant to you. In addition, this discussion does
not address the tax consequences of transactions in which you acquire your
exchangeable shares, including the arrangement, or the exercise of the warrants
which we will assumed from INEX. Furthermore, this discussion does not address
any foreign, state, or local tax considerations.
WE STRONGLY URGE YOU TO CONSULT YOUR OWN TAX ADVISORS REGARDING THE SPECIFIC
TAX CONSIDERATIONS THAT APPLY TO YOU.
80
The laws, regulations, court decisions, and IRS rulings and regulations
effective on the date of this prospectus form the basis of this discussion.
This discussion is for general information only. No law, court decision, or
ruling or regulation directly addresses certain of the tax consequences of the
ownership of instruments and rights comparable to the exchangeable shares and
the rights attached to those shares.
Consequently, some aspects of the tax treatment of the arrangement, including
the exchange of exchangeable shares for shares of common stock, are uncertain.
We have neither sought nor obtained any advance income tax ruling regarding the
tax consequences of any of the transactions we describe.
Tax Considerations That Apply To U.S. Holders
If you are:
. an individual citizen or resident of the United States,
. a corporation or partnership created in the United States or under the
laws of the United States or of any state, or
. a United States estate or trust,
and you hold your exchangeable shares as capital assets, the following tax
considerations will generally apply to you.
Exchange Of Exchangeable Shares. Except as we describe below, when you
exchange your exchangeable shares for shares of common stock, you will
generally recognize gain or loss. Your gain or loss will equal the difference
between (a) the fair market value of the shares of common stock at the time you
exchange your exchangeable shares and (b) your tax basis in the exchangeable
shares you exchange. Your gain or loss will generally be a capital gain or
loss. You may, however, recognize ordinary income with respect to any declared
but unpaid dividends on the exchangeable shares. A capital gain or loss will be
long-term capital gain or loss if your holding period for the exchangeable
shares is more than one year. Your tax basis in the shares of common stock will
be their fair market value at the time of the exchange. Your holding period for
the shares of common stock that you receive will begin on the day after the
exchange.
In view of the likelihood that you will recognize gain or loss when you
exchange the exchangeable shares for shares of common stock, you may wish to
consider delaying the exchange until either
. you intend to dispose of the shares of common stock that you receive in
exchange for your exchangeable shares, or
. the exchange may be characterized as tax-free.
The gain or loss you realize when you exchange your exchangeable shares for
shares of common stock generally will be treated as United States source gain
or loss. Under the terms of the United States-Canada income tax treaty,
however, your gain may be treated as sourced in Canada. Subject to certain
limitations, you may be entitled to credit your United States taxes for any
Canadian tax imposed on the exchange. If you are ineligible for a credit for
any Canadian tax that you pay, you may be entitled to deduct that tax in
computing your United States taxable income.
Distributions On The Exchangeable Shares. If any distributions are paid to
you as a holder of exchangeable shares, we and InfoSpace.com Canada Holdings
intend to treat those distributions as distributions from InfoSpace.com Canada
Holdings, rather than from us. We and InfoSpace.com Canada Holdings can not
assure you, however, that the IRS or a court would agree that our intended
treatment is correct. Assuming that treatment is proper, these distributions
will be treated as dividends and will be taxable to you as ordinary income if
InfoSpace.com Canada Holdings has earnings and profits. Those dividends
generally will be treated as foreign source passive income for foreign tax
credit limitation purposes. Under the U.S.-Canada Tax Treaty, such dispositions
generally will be subject to a Canadian
81
withholding tax at a rate of 15 percent. Subject to certain limitations, you
should generally be entitled to either credit your United States income tax
liability with, or deduct in computing your United States taxable income, any
Canadian income taxes withheld from these distributions.
Tax Considerations That Apply To Non-U.S. Holders
If you are not
. an individual citizen or resident of the United States,
. a corporation or partnership created in the United States or under the
laws of the United States or of any state, or
. a United States estate or trust,
the following summary applies to you.
Exchange Of Exchangeable Shares. Generally, you will not be subject to United
States federal income tax when you exchange your exchangeable shares for shares
of our common stock, unless your exchangeable shares were an asset of your
United States trade or business.
Distributions On The Exchangeable Shares. You should not be subject to United
States tax on dividends that you receive on the exchangeable shares. Therefore,
we and InfoSpace.com Canada Holdings do not intend to withhold any United
States taxes from those dividends. The IRS, however, may assert that dividends
paid to you on the exchangeable shares are subject to tax. As a result, you
could be subject to tax at a rate of 30 percent. An applicable treaty in effect
between the United States and your country of residence may reduce the rate. If
you are a resident of Canada, a maximum rate of 15 percent applies to dividends
paid to you.
Distributions On Shares Of Common Stock. Dividends that you receive on the
common stock generally will be subject to tax at a rate of 30 percent. An
applicable income tax treaty may reduce that rate. If you are a resident of
Canada, a maximum rate of 15 percent applies to dividends paid to you.
Gain On Sale Or Exchange Of Common Stock. Generally, you will not be subject
to tax when you sell or exchange your shares of common stock unless either
. your common stock was an asset of your United States trade or business
or, if a tax treaty applies, is attributable to your United States
permanent establishment; or
. you are an individual, you are present in the United States for 183 days
or more, or you satisfy certain other conditions.
If at any time we are a United States real property holding corporation, you
may be subject to certain additional rules. These rules would require
withholding of tax on the gross proceeds of your sale of shares of common
stock. We believe that we are not a United States real property holding
corporation. Although we consider it unlikely that we will become a United
States real property holding corporation, we can provide no assurance as to
this issue.
Federal Estate Taxes. If you are an individual who is not a citizen or
resident (as defined for United States federal estate tax purposes) of the
United States at the time of death, shares of common stock that you own will be
includable in your gross estate for United States federal estate tax purposes
(unless an applicable estate tax treaty provides otherwise), and therefore may
be subject to United States federal estate tax.
Backup Withholding, Information Reporting and Other Reporting
Requirements. We must report annually to the Internal Revenue Service and to
each of you the amount of dividends paid to, and the tax
82
withheld with respect to, each of you. These reporting requirements apply
regardless of whether withholding was reduced or eliminated by an applicable
tax treaty. Copies of this information also may be made available under the
provisions of a specific treaty or agreement with the tax authorities of your
country.
Under currently effective United States Treasury regulations, United States
backup withholding tax (which generally is imposed at the rate of 31 percent on
certain payments to persons that fail to furnish the information required under
the United States information reporting requirements) and information reporting
requirements (other than those discussed above) generally will not apply to
dividends paid on common stock if you have an address outside the United
States. Backup withholding and information reporting generally will apply to
dividends paid on shares of common stock if you have an address in the United
States, or if you fail to establish an exemption or to provide certain other
information to us. Under United States Treasury regulations that are effective
for payments made after December 31, 2000, if you fail to certify your status
in accordance with these regulations, you may be subject to backup withholding
on payments of dividends.
The payment of proceeds from the disposition of common stock to or through a
United States office of a broker will be subject to information reporting and
backup withholding unless you, under penalties of perjury, certify, among other
things, your status as a non-U.S. Holder or otherwise establish an exemption.
In general, backup withholding and information reporting will not apply to the
payment of the proceeds of a sale of common stock by or through a foreign
office of a broker. If, however, such broker is, for United States federal tax
purposes, a United States person, a "controlled foreign corporation" for U.S.
federal income tax purposes or a foreign person 50 percent or more of whose
gross income from certain periods is effectively connected with a United States
trade or business or has as partners one or more United States persons that, in
the aggregate, hold more than 50 percent of the income or capital interests in
the partnership, such payments will be subject to information reporting, but
not backup withholding, unless such broker has documentary evidence in its
records that you are a non-U.S. holder and certain other conditions are met or
you otherwise establish an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from a payment to you will be refunded or credited
against your United States federal income tax liability, if any, provided that
the required information is furnished to the Internal Revenue Service.
83
LEGAL MATTERS
Certain legal matters relating to the validity of the securities offered
hereby will be passed upon for us by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Kirkland, Washington.
EXPERTS
The financial statements of InfoSpace, Inc. as of December 31, 1999, 1998 and
1997, and for each of the two years ended December 31, 1999, included in this
prospectus, and for the period from April 9, 1996 (date of incorporation) to
December 31, 1997, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing elsewhere herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The financial statements of Prio, Inc. as of December 31, 1998, and for each
of the years in the two-year period ended December 31, 1998, have been audited
by KPMG LLP, independent auditors, as stated in their report, which is included
herein, and has so been included herein in reliance upon the authority of said
firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 in connection with this offering. While the information
contained in this prospectus is materially complete, this prospectus does not
contain all the information set forth in the registration statement and its
exhibits and schedules. For further information with respect to us and our
common stock please refer to the registration statement and to its exhibits and
schedules. A copy of the registration statement and its exhibits and schedules
may be inspected without charge at the public reference facilities maintained
by the SEC in Room 1024, 450 Fifth Street, N.W. Washington, D.C. 20549, and at
the SEC's regional offices located at the Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048, and copies of all or any part of
the registration statement may be obtained from such offices upon payment of
the fees prescribed by the SEC. The SEC maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC. The address of the site is
http://www.sec.gov.
Statements contained in this prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete, and in
each instance reference is made to the copy of such contract, agreement or
other document filed as an exhibit to the registration statement, each such
statement being qualified in all respects by such reference.
84
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
Saraide, Inc.:
Independent Auditors' Report............................................. F-33
Consolidated Balance Sheets.............................................. F-34
Consolidated Statements of Operations.................................... F-35
Consolidated Statements of Stockholders' Equity.......................... F-36
Consolidated Statements of Cash Flows.................................... F-37
Notes to Consolidated Financial Statements............................... F-38
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, June 30,
1999 1998 2000
------------ ------------ -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents......... $ 37,985,250 $ 39,986,609 $ 35,992,483
Short-term investments, held-to-
maturity (fair market value
$124,656,361, $74,315,294 and
$110,330,936).................... 124,720,142 74,301,803 107,422,059
Accounts receivable, net of
allowance for doubtful accounts
of $702,960, $603,278 and
$1,689,023....................... 6,663,497 3,470,364 14,148,316
Interest receivable............... 3,333,772 9,874 2,663,181
Notes receivable, net of allowance
of $12,075, $0 and $9,975........ 11,580,866 35,061 32,277,484
Prepaid expenses and other assets
................................. 10,304,244 3,899,715 10,496,287
------------ ------------ -------------
Total current assets............ 194,587,771 121,703,426 202,999,810
Long-term investments, held-to-
maturity (fair market value
$70,971,645, $1,252,051 and
$13,848,271)....................... 71,416,776 1,252,438 13,805,271
Property and equipment, net ........ 7,998,957 4,126,312 27,402,689
Other long-term assets ............. 702,641 639,106 3,935,928
Other investments .................. 17,038,508 644,391 62,725,876
Intangible assets, net.............. 73,842,557 5,304,256 365,805,073
------------ ------------ -------------
Total assets........................ $365,587,210 $133,669,929 $ 676,674,647
============ ============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................. $ 2,810,141 $ 3,834,505 $ 3,132,721
Accrued expenses.................. 18,501,053 6,656,497 11,588,877
Deferred revenues................. 2,672,531 1,401,865 15,983,279
Other current liabilities and
short-term debt.................. 1,042,437 1,057,560 99,881
------------ ------------ -------------
Total current liabilities....... 25,026,162 12,950,427 30,804,758
Long-term liabilities............... 685,762 989,431 416,346
Minority interest................... -- -- 25,310,803
------------ ------------ -------------
Total liabilities............... 25,711,924 13,939,858 25,727,149
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
231,915,485 shares............... 21,185 17,896 23,192
Additional paid-in capital........ 440,878,391 164,490,626 838,466,993
Accumulated deficit............... (98,512,435) (40,940,646) (213,456,817)
Deferred expense--warrants........ (2,311,159) (3,126,862) (1,903,308)
Unearned compensation--stock
options.......................... (1,518,144) (668,595) (1,008,107)
Accumulated other comprehensive
income........................... 1,317,448 (42,348) (1,979,213)
------------ ------------ -------------
Total stockholders' equity...... 339,875,286 119,730,071 620,142,740
------------ ------------ -------------
Total liabilities and stockholders'
equity............................. $365,587,210 $133,669,929 $ 676,674,647
============ ============ =============
See notes to consolidated financial statements.
F-4
INFOSPACE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, Six Months Ended June 30,
--------------------------------------- ---------------------------
1999 1998 1997 2000 1999
------------ ------------ ----------- ------------- ------------
(unaudited)
Revenues................ $ 37,390,303 $ 9,631,927 $ 1,816,542 $ 43,577,835 $ 12,240,104
Cost of revenues ....... 7,267,447 2,330,685 492,809 7,596,373 2,954,201
------------ ------------ ----------- ------------- ------------
Gross profit......... 30,122,856 7,301,242 1,323,733 35,981,462 9,285,903
Operating expenses:
Product development.... 11,316,073 7,567,202 4,560,136 10,426,568 4,924,566
Sales, general and
administrative........ 60,137,292 18,161,340 6,545,714 35,467,566 18,701,842
Amortization of
intangibles........... 3,223,031 709,923 64,056 27,428,465 603,940
Acquisition and
related charges....... 13,350,700 2,800,000 0 86,599,409 4,969,365
Other--non-recurring
charges............... 11,359,500 4,500,000 137,000 2,887,609 209,500
------------ ------------ ----------- ------------- ------------
Total operating
expense............. 99,386,596 33,738,465 11,306,906 162,809,617 29,409,213
------------ ------------ ----------- ------------- ------------
Loss from
operations.......... (69,263,740) (26,437,223) (9,983,173) (126,828,155) (20,123,310)
Other income, net....... 11,703,468 593,348 39,258 6,046,246 4,625,712
Unrealized gain (loss)
on investments......... (11,517) (124,976) -- 15,150,355 --
Restructuring charges... -- -- -- (2,171,462) --
Minority interest....... -- -- -- (6,398,032) --
------------ ------------ ----------- ------------- ------------
Loss from operations
before income tax
expense and cumulative
effect of change in
accounting principle... (57,571,789) (25,968,851) (9,943,915) (114,201,048) (15,497,598)
Income tax expense...... -- -- -- 24,118 --
------------ ------------ ----------- ------------- ------------
Loss from operations
before cumulative
effect of change in
accounting principle... (57,571,789) (25,968,851) (9,943,915) (114,225,166) (15,497,598)
Cumulative effect of
change in accounting
principle.............. -- -- -- (719,216) --
------------ ------------ ----------- ------------- ------------
Net loss................ $(57,571,789) $(25,968,851) $(9,943,915) $(114,944,382) $(15,497,598)
============ ============ =========== ============= ============
Basic and diluted net
loss per share......... $ (0.29) $ (0.23) $ (0.11) $ (0.51) $ (0.08)
============ ============ =========== ============= ============
Shares used in computing
basic net loss per
share.................. 196,222,147 114,519,323 91,469,901 223,707,864 189,085,936
============ ============ =========== ============= ============
Shares used in computing
diluted net loss per
share.................. 196,222,147 114,519,323 91,696,568 223,707,864 189,085,936
============ ============ =========== ============= ============
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, June 30,
---------------------------------------- -------------
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 --
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 10,689,470
Common stock issued in
exchange
transactions......... 1,414,000 224,726 109,720 110,000
Common stock issued
for warrants and
preferred shares..... 5,315,541 2,356,412 988,957 6,890,580
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 -- 2,887,609
------------ ------------ ------------ -------------
Balance, end of year.... 440,899,576 164,508,522 26,247,955 838,490,185
------------ ------------ ------------ -------------
Balance attributed to
common stock........... 21,185 17,896 9,323 23,192
Balance attributed to
additional paid in
capital................ 440,878,391 164,490,626 26,238,632 838,466,993
------------ ------------ ------------ -------------
Balance, common stock
and additional paid in
capital................ 440,899,576 164,508,522 26,247,955 838,490,185
------------ ------------ ------------ -------------
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) (114,944,382)
------------ ------------ ------------ -------------
Balance, end of year.... (98,512,435) (40,940,646) (14,971,795) (213,456,817)
------------ ------------ ------------ -------------
Deferred expense--
warrants:
Balance, beginning of
year................... (3,126,862) -- -- (2,311,159)
Deferred expense--
warrants............. -- (3,262,813) -- (2,887,609)
Warrant expense....... 815,703 135,951 -- 3,295,460
------------ ------------ ------------ -------------
Balance, end of year.... (2,311,159) (3,126,862) -- (1,903,308)
------------ ------------ ------------ -------------
Unearned compensation--
stock options:
Balance, beginning of
year................... (668,595) (189,955) (71,437) (1,518,144)
Unearned
compensation--stock
options.............. (3,175,984) (1,728,772) (262,440) --
Cancelled options for
deferred services.... 167,000 -- -- --
Compensation expense--
stock options........ 2,159,435 1,250,132 143,922 510,037
------------ ------------ ------------ -------------
Balance, end of year.... (1,518,144) (668,595) (189,955) (1,008,107)
------------ ------------ ------------ -------------
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 -- -- (2,946,803)
Foreign currency
translation
adjustment........... 35,495 (16,568) (20,599) (349,858)
------------ ------------ ------------ -------------
Balance, end of year.... 1,317,448 (42,348) (25,780) (1,979,213)
------------ ------------ ------------ -------------
$339,875,286 $119,730,071 $ 11,060,425 $ 620,142,740
============ ============ ============ =============
See notes to consolidated financial statements.
F-6
INFOSPACE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
Years Ended December 31, June 30,
---------------------------------------- ---------------------------
1999 1998 1997 2000 1999
------------- ------------ ----------- ------------- ------------
(unaudited)
Net loss................ $ (57,571,789) $(25,968,851) $(9,943,915) $(114,944,382) $(15,497,598)
Adjustments to
reconcile net loss to
net cash provided
(used) by operating
activities............. -- -- -- -- --
Trademark
amortization.......... 1,500,000 1,500,000 -- -- 1,500,000
Depreciation and other
amortization.......... 5.545,201 1,578,543 590,325 30,205,019 1,591,856
Write-off of in-
process research and
development........... 9,200,000 2,800,000 -- 74,100,000 3,900,000
Write-down of
inventory to net
realizable value...... -- -- 783,000 -- --
Compensation expense--
stock options......... 19,811,694 1,273,132 859,922 510,037 402,567
Currency translation... 42,520 (28,308) (29,830) -- --
Warrants expense....... 815,703 135,951 -- 3,295,460 407,851
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 1,085,700 245,783
(Equity) loss from
joint venture......... 25,759 56,976 -- (64,207) 76,459
Gain on disposal of
interest in
investee.............. -- (35,000) -- -- --
Gain on sale of
intangibles........... (7,830) -- -- -- (7,830)
Loss (gain) on
disposal of fixed
assets................ 21,019 111,229 225,743 360,086 10,583
Performance warrant
revenue............... (1,295,325) -- -- (5,919,609) --
Unrealized gain in
investments........... -- -- -- (15,150,355) --
Cumulative translation
adjustment............ -- -- -- (294,758) 41,887
Minority interest in
venture fund.......... -- -- -- 6,398,032 --
Business acquisition
costs................. -- -- -- 12,499,409 --
Cumulative effect of
change in accounting
principle ............ -- -- -- 351,332 --
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) (9,627,316) (1,271,897)
Notes receivable...... (11,314,171) -- -- -- --
Interest receivable... (3,312,082) -- -- -- (658,775)
Prepaid expenses and
other assets......... (8,055,947) (2,506,941) (286,253) 520,466 (1,809,836)
Other long-term
assets............... (90,716) (337,500) -- (772,804) (173,676)
Other tangible
assets............... -- (66,865) -- -- --
Accounts payable...... (1,024,359) 4,332,060 583,374 (607,053) (2,301,544)
Accrued expenses...... 11,365,894 4,845,658 199,648 (16,088,251) (188,671)
Other long-term
liabilities.......... (57,000) 128,440 -- -- --
Deferred revenue...... 1,273,928 1,337,716 58,261 12,959,416 188,324
------------- ------------ ----------- ------------- ------------
Net cash used by
operating activities... (34,895,510) (13,552,390) (7,284,995) (21,073,778) (13,544,527)
Investing Activities:
Business acquisitions
net of cash required... (19,514,794) (311,951) (14,000) (9,591,595) (18,083,054)
Other investments....... (13,800,250) (150,000) -- (27,500,000) (5,488,265)
Purchase of domain
name................... (120,000) -- -- -- (100,000)
Proceeds from sale of
domain name............ 10,000 -- -- -- 10,000
Purchase of trademark... -- (3,290,000) -- -- --
Internally developed
software............... (340,498) -- -- -- --
Purchase of property
and equipment.......... (5,369,792) (3,938,162) (914,666) (14,849,336) (2,363,778)
Investments in joint
venture................ -- (495,767) -- -- --
Notes receivable, net... -- -- -- (18,446,134) (5,955,065)
Minority interest
contribution in
venture fund........... -- -- -- 19,365,000 --
Proceeds from sales of
fixed assets........... -- 4,997 -- -- --
Purchase of other
assets................. -- -- -- -- --
Short-term investments,
net.................... (50,418,339) (74,301,803) -- 17,298,083 (2,879,544)
Long-term investments,
net.................... (70,164,338) (1,252,438) -- 57,611,500 (69,637,745)
Other................... -- -- (29,087) -- --
------------- ------------ ----------- ------------- ------------
Net cash provided
(used) by investing
activities............. (159,718,011) (83,735,124) (957,753) 23,887,574 (104,497,451)
Financing Activities:
Proceeds from issuance
of common stock....... 66,000 46,153,871 14,348,010 -- 186,990,573
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) (141,234) -- --
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 -- 6,890,580 --
Proceeds from exercise
of stock options...... 2,313,210 1,016,210 -- 10,689,470 353,062
Short-term and long-
term investments...... -- -- -- (22,729,739) 460,367
------------- ------------ ----------- ------------- ------------
Net cash provided
(used) by financing
activities............ 192,611,866 125,312,773 17,079,302 (4,806,563) 187,804,002
------------- ------------ ----------- ------------- ------------
Net increase (decrease)
in cash and cash
equivalents............ (2,001,655) 28,025,259 8,836,554 (1,992,737) 69,762,024
F-7
INFOSPACE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Six Months Ended
Years Ended December 31, June 30,
------------------------------------- ------------------------
1999 1998 1997 2000 1999
----------- ----------- ----------- ----------- ------------
(unaudited)
Cash and cash
equivalents, beginning
of period.............. $39,986,905 $11,961,646 $ 3,125,092 $37,985,250 $ 39,986,609
----------- ----------- ----------- ----------- ------------
Cash and cash
equivalents, end of
period................. 37,985,250 39,986,905 11,961,646 35,992,483 109,748,633
----------- ----------- ----------- ----------- ------------
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
Six Months Ended June 30, 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.
Unaudited information: The accompanying unaudited consolidated financial
statements include all adjustments, consisting of normal recurring adjustments
that, in the opinion of management, are necessary to present fairly the
financial information set forth therein. Prior period financial statements have
been recast to give effect to mergers accounted for as a pooling of interests.
Results of operations for the three and six-month periods ended June 30, 2000
are not necessarily indicative of future financial results.
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
F-9
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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
F-10
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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
F-11
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 as of January 2000. In accordance with SAB 101, the Company recorded a
cumulative effect of change in accounting principle of $719,216. The Company
recorded $367,896 in revenue in the six months ended June 30, 2000 (unaudited)
related to this deferred revenue. The remaining balance will be recognized from
July 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 ...................................... 18,024,394 53.28
Cancelled .................................... (4,661,960) 5.52
Exercised .................................... (6,059,936) 1.12
----------
Outstanding, June 30, 2000...................... 33,376,685 31.40
==========
Options exercisable, June 30, 2000.............. 7,761,471 13.01
==========
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 $510,037 for the six
months ended June 30, 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 six months ended June 30, 2000
would have been adjusted to the following pro forma amounts:
Year ended Six months
--------------------------------------- ended
1999 1998 1997 June 30, 2000
------------ ------------ ----------- -------------
Net loss as reported.... $(57,571,793) $(25,968,851) $(9,943,915) $(114,944,382)
Net loss, pro forma..... (73,024,084) (26,384,715) (9,995,405) (251,667,303)
Basic net loss per
share, pro forma....... $ (0.38) $ (0.23) $ (0.11) $ (1.13)
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
in the six months ended June 30, 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 and 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 August 4, 2000 the Company acquired all of the outstanding capital of
Orchest, Inc., a privately held company based in Cupertino, California, for a
purchase consideration of 255,288 shares of our common stock. Orchest is an
online provider of financial services that enables users to access a
consolidated view of their personal financial information from multiple
institutions. The acquisition was accounted for as a purchase.
On July 26, 2000, the Company signed a definitive agreement to acquire
Seattle, Washington-based Go2Net, Inc., a provider of applications and
technology infrastructure for narrowband and broadband. Under terms of the
acquisition, which is intended to be accounted for as a pooling of interests,
the Company will exchange 1.82 shares of its common stock for each of Go2Net's
shares and options. The Company expects to complete this acquisition in the
third or fourth quarter of 2000, subject to satisfaction of customary closing
conditions, including shareholder approval.
On August 31, 2000, the Company acquired Thomson Directories Limited's
investment in TDL InfoSpace. The acquisition of this investment gave the
Company control of TDL InfoSpace. Approximately $131 million in shares of
common stock of the Company was exchanged for all of the outstanding shares and
options of TDLI.com. The acquisition was accounted for as a purchase.
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 June 27, 2000, the Company signed a definitive agreement for an asset
purchase with The boxLot Company. The asset purchase is valued at approximately
$21.5 million. The Company expects this purchase to be completed in the third
or fourth quarter of 2000.
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
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and shareholders of
Saraide, Inc. and Subsidiaries
San Mateo, California
We have audited the accompanying consolidated balance sheets of Saraide, Inc.
and subsidiaries (collectively, the "Company") as of December 31, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year ended December 31, 1999, and the period from
inception (June 30, 1998) to December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
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 provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 1999 and 1998, and the results of its operations and its cash
flows for the year ended December 31, 1999, and the period from inception
(June 30, 1998) to December 31, 1998, in conformity with accounting principles
generally accepted in the United States of America.
The Company was in the development stage at December 31, 1998; during the
year ended December 31, 1999, the Company completed its development activities
and commenced its planned principal operations.
DELOITTE & TOUCHE LLP
San Jose, California
May 10, 2000
F-33
SARAIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------
1999 1998
------------ -----------
ASSETS
Current Assets:
Cash and cash equivalents........................... $ 4,768,833 $ 2,319,678
Accounts receivable, net of allowance for doubtful
accounts of $18,203................................ 619,560 --
Other receivables................................... 291,713 37,220
Prepaid expenses and other current assets........... 814,762 46,623
------------ -----------
Total current assets.............................. 6,494,868 2,403,521
Intangible Assets, Net................................ 13,031,596 1,800,000
Property and Equipment, Net........................... 7,694,196 672,933
Other Long-term Assets................................ 1,042,590 290,657
------------ -----------
Total................................................. $ 28,263,250 $ 5,167,111
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities............ $ 4,443,038 $ 1,871,711
Notes payable....................................... 18,950,332 --
Current portion of capital lease obligations........ 311,560 --
Deferred revenue.................................... 799,909 --
------------ -----------
Total current liabilities......................... 24,504,839 1,871,711
Capital Lease Obligations, net of current portion..... 909,957 --
------------ -----------
Total liabilities................................. 25,414,796 1,871,711
Commitments and Contingencies (Note 9)
Stockholders' equity;
Series A convertible preferred stock, par value
$0.01; 1999 and 1998, 25,000,000 shares and
20,000,000 shares authorized, respectively; 1999
and 1998, 19,061,478 shares and 6,751,078 shares
issued and outstanding, respectively (liquidation
preference of $19,061,478)............................ 190,615 67,511
Series B convertible preferred stock, par value
$0.01; 1999, 2,166,667 shares authorized, 1,666,667
shares issued and outstanding, none in 1998
(liquidation preference of $7,500,000)................ 16,667 --
Common stock, par value $0.01; 1999 and 1998,
43,833,333 and 20,010,000 shares authorized,
respectively; 1999, 2,468,434 shares issued and
outstanding, none in 1998.......................... 24,684 --
Additional paid-in capital.......................... 37,637,463 6,683,567
Accumulated deficit................................. (31,247,278) (3,411,379)
Unearned compensation--stock options................ (3,719,960) --
Accumulated other comprehensive loss................ (53,737) (44,299)
------------ -----------
Total stockholders' equity........................ 2,848,454 3,295,400
------------ -----------
Total................................................. $ 28,263,250 $ 5,167,111
============ ===========
See notes to consolidated financial statements.
F-34
SARAIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 1999 and Period from
Inception (June 30, 1998) Through December 31, 1998
1999 1998
----------- ----------
Revenues:
Service revenue...................................... $ 1,662,066 $ --
Consulting revenue................................... 150,000 --
----------- ----------
Total revenues..................................... 1,812,066 --
Cost of revenues....................................... 8,482,412 --
----------- ----------
Gross loss............................................. 6,670,346 --
Operating expenses:
Product development.................................. 2,098,887 1,335,430
Selling, general and administrative.................. 10,279,438 2,161,603
Amortization of intangible assets.................... 1,953,520 --
In-process research and development.................. 3,460,000 --
Stock compensation expense........................... 2,438,551 --
----------- ----------
Total operating expenses........................... 20,230,396 3,497,033
----------- ----------
Operating loss......................................... 26,900,742 3,497,033
Other expense (income):
Interest income...................................... (348,763) (85,654)
Interest expense..................................... 1,189,147 --
Other................................................ 94,773 --
----------- ----------
Total other expense (income)....................... 935,157 (85,654)
----------- ----------
Net loss............................................... 27,835,899 3,411,379
Currency translation adjustment........................ 9,438 44,299
----------- ----------
Comprehensive loss..................................... $27,845,337 $3,455,678
=========== ==========
See notes to consolidated financial statements.
F-35
SARAIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year Ended December 31, 1999 and Period from
Inception (June 30, 1998) Through December 31, 1998
Series A Preferred
Shares Series B Preferred Shares Common Stock
-------------------- ---------------------------------------------
Shares Amount Shares Amount Shares Amount
----------- -------- -------------- ---------------------- -------
Preferred stock issued
to founders for cash in
July 1998.............. 4,751,078 $ 47,511 -- $ -- -- $ --
Preferred stock issued
to Northern Telecom
Ltd. in July 1998 for
developed technology... 2,000,000 20,000 -- -- -- --
Net loss................ -- -- -- -- -- --
Currency translation
adjustment............. -- -- -- -- -- --
----------- -------- -------------- ----------- ---------- -------
Balance, December 31,
1998................... 6,751,078 67,511 -- -- -- --
Exercise of stock
options.............. -- -- -- -- 1,554,199 15,542
Common stock issued to
employees............ -- -- -- -- 914,235 9,142
Warrants issued for
technology........... -- -- -- -- -- --
Warrants issued for
loan facility........ -- -- -- -- -- --
Preferred stock and
warrants issued for
acquisition.......... -- -- 1,666,667 16,667 -- --
Preferred stock issued
to investors......... 12,310,400 123,104 -- -- -- --
Unearned
compensation--stock
options.............. -- -- -- -- -- --
Compensation expense--
stock options........ -- -- -- -- -- --
Net loss.............. -- -- -- -- -- --
Currency translation
adjustment........... -- -- -- -- -- --
----------- -------- -------------- ----------- ---------- -------
Balance, December 31,
1999................... 19,061,478 $190,615 1,666,667 $ 16,667 2,468,434 $24,684
=========== ======== ============== =========== ========== =======
Accumulated
Additional Other Total
Paid-in Accumulated Unearned Comprehensive Stockholders'
Capital Deficit Compensation Loss Equity
----------- ------------ ------------ ------------- -------------
Preferred stock issued
to founders for cash in
July 1998.............. $ 4,703,567 $ -- $ -- $ -- $ 4,751,078
Preferred stock issued
to Northern Telecom
Ltd. in July 1998 for
developed technology... 1,980,000 -- -- -- 2,000,000
Net loss................ -- (3,411,379) -- -- (3,411,379)
Currency translation
adjustment............. -- -- -- (44,299) (44,299)
----------- ------------ ----------- -------- ------------
Balance, December 31,
1998................... 6,683,567 (3,411,379) -- (44,299) 3,295,400
Exercise of stock
options.............. 279,622 -- -- -- 295,164
Common stock issued to
employees............ 212,634 -- -- -- 221,776
Warrants issued for
technology........... 62,500 -- -- -- 62,500
Warrants issued for
loan facility........ 2,795,000 -- -- -- 2,795,000
Preferred stock and
warrants issued for
acquisition.......... 9,258,333 -- -- -- 9,275,000
Preferred stock issued
to investors......... 12,187,296 -- -- -- 12,310,400
Unearned
compensation--stock
options.............. 6,158,511 -- (6,158,511) -- --
Compensation expense--
stock options........ -- -- 2,438,551 -- 2,438,551
Net loss.............. -- (27,835,899) -- -- (27,835,899)
Currency translation
adjustment........... -- -- -- (9,438) (9,438)
----------- ------------ ----------- -------- ------------
Balance, December 31,
1999................... $37,637,463 $(31,247,278) $(3,719,960) $(53,737) $ 2,848,454
=========== ============ =========== ======== ============
See notes to consolidated financial statements.
F-36
SARAIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1999 and Period from
Inception (June 30, 1998) Through December 31, 1998
1999 1998
------------ -----------
Cash Flows From Operating Activities:
Net loss........................................... $(27,835,899) $(3,411,379)
Reconciliation to net cash used in operating
activities:
Depreciation of property and equipment............ 1,095,591 38,283
Amortization expense.............................. 1,953,520 200,000
In-process research and development............... 3,460,000 --
Non-cash compensation expense--stock options...... 2,438,551 --
Non-cash interest expense--warrants............... 745,332 --
Changes in operating assets and liabilities:
Accounts receivable.............................. (1,452,925) (37,220)
Other non-current assets......................... (751,933) --
Prepaid expenses................................. (1,059,446) (46,623)
Accounts payable and accrued liabilities......... 514,532 1,871,711
Deferred revenue................................. 799,909 --
Other current liabilities........................ 3,115,099 --
------------ -----------
Net cash used in operating activities........... (16,977,669) (1,385,228)
Cash Flows From Investing Activities:
Capital expenditures............................... (6,958,460) (711,216)
Internally developed software...................... (1,345,661) --
Cash balances of acquired business--GSM Network.... 50,384 --
Acquisition of GSM Information Network (Note 3).... (2,358,858)
Deposits........................................... (290,657)
------------ -----------
Net cash used in investing activities........... (10,612,595) (1,001,873)
Cash Flows From Financing Activities:
Notes payable to related parties................... 16,000,000 --
Proceeds from issuance of common stock............. 516,940 --
Net proceeds from capital leases................... 1,221,517 --
Proceeds from issuance of preferred stock.......... 12,310,400 4,751,078
------------ -----------
Net cash provided by financing activities....... 30,048,857 4,751,078
Impact of Changes in Current Exchange Rates......... (9,438) (44,299)
------------ -----------
Net Increase in Cash and Cash Equivalents........... 2,449,155 2,319,678
Cash and Cash Equivalents:
Beginning of year.................................. 2,319,678 --
------------ -----------
End of year........................................ $ 4,768,833 $ 2,319,678
============ ===========
Supplemental Disclosure of Cash Flow Information:
Warrant for loan facility.......................... $ 2,795,000 $ --
============ ===========
Preferred stock and warrants issued for GSM
Information Network acquisition................... $ 9,275,000 $ --
============ ===========
Warrants issued for technology..................... $ 62,500 $ --
============ ===========
Cash paid during the year for interest............. $ 58,308 $ --
============ ===========
Preferred stock issued for developed technology.... $ -- $ 2,000,000
============ ===========
See notes to consolidated financial statements.
F-37
SARAIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 1999 and Period from
Inception (June 30, 1998) Through December 31, 1998
Note 1: Nature of Business and Subsequent Event
Business--Saraide, Inc. (a Delaware corporation) and its subsidiaries
(collectively, the "Company") develops processing and transmission engines and
establishes relationships with data or information providers for the purposes
of developing, improving and distributing services that enable wireless
carriers and internet content providers to create and deliver wireless internet
services via both Short Message Service ("SMS") and Wireless Application
Protocol ("WAP") technologies.
During the period from its inception (June 30, 1998) to December 31, 1998,
the Company devoted substantially all of its efforts to recruiting personnel to
conduct research, product development, and sales and marketing and did not
generate revenues from services. During the year ended December 31, 1999, the
Company completed its development activities and commenced its planned
principal operations.
Subsequent Events--On March 10, 2000, the Company was acquired by InfoSpace,
Inc. (formerly InfoSpace.com, Inc.), a global Internet information
infrastructure services company. Under the terms of the Reorganization
Agreement, InfoSpace's wireless services were merged with and into the Company,
and InfoSpace issued 9,590,864 shares (or options to purchase shares), as
adjusted for a subsequent 2:1 stock split, of its common stock in exchange for
eighty-percent (80%) of the then outstanding shares of the Company's common and
preferred stock, and options to purchase shares of common stock.
Note 2: Summary of Significant Accounting Policies
Basis of Presentation--The consolidated financial statements include the
accounts of Saraide, Inc. and its wholly-owned subsidiaries Saraide.com Ltd.
(Canada), GSM Information Network, b.v. (GIN) and Saraide Sarl (France). All
intercompany balances and transactions have been eliminated.
Business combinations--The acquisition of GIN (Note 3) was accounted for
under the purchase method of accounting in accordance with the provisions of
Accounting Principles Board Opinion ("APB") No. 16, "Business Combinations",
and the consolidated financial statements include the results of operations of
GIN from the date of acquisition. Net assets of GIN were recorded at their fair
value at the date of acquisition with the excess of the purchase price over
such fair values allocated to goodwill.
Use of Estimates in Preparation of Financial Statements--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 disclosures of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents--The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. Cash and cash equivalents include amounts held in bank demand
accounts and highly liquid money market funds. The carrying amount of money
market funds approximates fair value due to the short maturity of these
instruments. The Company's policy is to place its cash and cash equivalents
with high credit quality financial institutions, government agencies and
corporate entities.
Property and Equipment--Property and equipment are recorded at cost and
depreciated using the straight-line method over their estimated useful lives.
Computer equipment, computer software, computer licenses and other property,
plant and equipment are depreciated over periods ranging from 3 to 5 years.
F-38
SARAIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Leasehold improvements are amortized over the shorter of their estimated lives,
being 3 years, or the lease term, including option periods, as appropriate.
Intangible Assets--Intangible assets, consisting of the rights and title to
Northern Telecom Ltd.'s DNSP developed software, goodwill and other intangible
assets associated with the acquisition of GIN (Note 3), are amortized using the
straight-line basis over their estimated useful lives of five years.
Accumulated amortization was $2,153,000 and $200,000 at December 31, 1999 and
1998, respectively.
Long-Lived Assets--In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", the Company reviews for the
impairment of long-lived assets and certain identifiable intangibles whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Under SFAS 121, an impairment loss would be
recognized when estimated future cash flows expected to result from the use of
the asset and its eventual disposition is less than its carrying amount. No
such impairment losses were identified by the Company for the years ended
December 31, 1999 and in the period from inception to December 31, 1998.
Revenue Recognition--Revenue recognition policies for each revenue source are
as follows:
. Services--Service revenues are comprised of amounts earned for the
delivery of messaging services to wireless carriers. Revenue for these
services is recognized as incurred and billed. Fees billed to mobile
phone carriers for the set-up and integration of service agreements are
deferred and recognized ratably over the contract period.
. Consulting--Consulting revenues are recognized upon delivery of services
to end users.
Research and Development--Research and development expenses are charged to
operations as incurred.
Foreign Currency--The functional currencies of the foreign subsidiaries are
the local currencies. Assets and liabilities denominated in foreign currencies
are translated at the exchange rate at the balance sheet date. Translation
adjustments resulting from this process are charged or credited to Other
Comprehensive Income (Loss). 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 Expense (Income).
Comprehensive Income (Loss)--At December 31, 1999 and 1998, accumulated other
comprehensive loss consisted of unrealized exchange rate losses.
Concentration of credit risk--Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of cash
equivalents and trade receivables. These instruments are generally unsecured
and uninsured. Accounts receivables are typically unsecured and are derived
from revenues earned from wireless carriers located primarily in the
Netherlands. The Company performs ongoing credit evaluations of its customers
and maintains reserves for potential credit losses. For the years ended
December 31, 1999, four customers accounted for approximately 33%, 17%, 13% and
10% of revenues. At December 31, 1999, three customers accounted for
approximately 20%, 18% and 16% of account receivables.
Stock-Based Compensation--As permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation", the Company has elected to account for stock-based
awards to employees using the intrinsic value method in accordance with
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees." Options granted to non-employees are accounted for using
the minimum value method prescribed by SFAS 123.
F-39
SARAIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unearned compensation--Unearned compensation represents the unamortized
difference between the option exercise price and the fair 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 7). Amortization
of unearned compensation is charged to operations over the vesting period of
the options.
Income Taxes--The Company accounts for income taxes using the asset and
liability approach for financial reporting purposes. Under SFAS No. 109
"Accounting for Income Taxes", 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 has fully provided for its net operating loss carry forwards as
realization is not assured.
Recent Accounting Pronouncements--In June 1998, the FASB issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether
a derivative is designated as part of a hedge transaction and, if it is, the
type of hedge transaction. The Company is required to adopt SFAS No. 133 for
its fiscal year ending December 31, 2001. Management anticipates the adoption
of SFAS No. 133 will not have a significant effect, if any, on the Company's
financial position or results of operations.
Effective January 1, 1999, the Company adopted Statement of Position No. 98-1
("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." Accordingly, in 1999 the Company capitalized direct
payroll costs totaling $1,345,661. No depreciation of such costs was recorded
in fiscal 1999 as the projects were in progress at year-end. Prior to adoption
of SOP 98-1, such software development costs were expensed as incurred.
Note 3: Purchase Business Combinations
On May 25, 1999, the Company acquired all of the common stock of GIN, a
privately held company, for a purchase consideration of $16,775,000, consisting
of $7,500,000 in cash ($2,500,000 paid in September 1999 and $5,000,000 to be
paid in May 2000); and $9,275,000 representing 1,666,667 shares of Series B
Preferred Stock at $4.50 per share, and warrants to purchase a total of 500,000
shares of Series B Preferred Stock, at $1.00 per share.
The purchase price was allocated to the assets acquired and liabilities
assumed based on their estimated fair values as follows:
Goodwill........................................................ $ 7,972,617
Developed technology............................................ 3,800,000
In-process research and development............................. 3,460,000
Customer list................................................... 1,200,000
Assembled workforce............................................. 150,000
Other net assets................................................ 192,383
-----------
Fair value of net assets acquired............................. $16,775,000
===========
Accounting principles generally accepted in the United States of America
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 $3,460,000 of purchased in-process research and
development.
F-40
SARAIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The operating results of GIN have been included in the consolidated
statements of operations from the date of acquisition. Unaudited pro forma
results of operations, assuming the acquisition had taken place at January 1,
1999, would be as follows:
1999
------------
Revenue........................................................ $ 2,939,000
============
Operating loss................................................. (28,012,000)
============
Net loss....................................................... (28,947,000)
============
Note 4: Property and Equipment
Property and equipment at December 31 consists of:
1999 1998
----------- --------
Computer hardware..................................... $ 2,795,099 $484,650
Computer software..................................... 4,027,459 143,907
Office equipment...................................... 543,396 82,659
Leasehold improvements................................ 1,459,244 --
Other................................................. 4,374 --
----------- --------
8,829,572 711,216
Accumulated depreciation and amortization............. (1,135,376) (38,283)
----------- --------
$ 7,694,196 $672,933
=========== ========
Note 5: Accrued Liabilities
Accounts payable and accrued liabilities at December 31 consist of:
1999 1998
---------- ----------
Accounts payable...................................... $2,908,523 $1,076,625
Accrued payroll and related benefits.................. 526,958 489,712
Accrued interest...................................... 385,507 --
Accrued rent.......................................... 320,270 303,822
Taxes payable......................................... 181,412 --
Other accrued liabilities............................. 120,368 1,552
---------- ----------
$4,443,038 $1,871,711
========== ==========
Note 6: Notes Payable
Notes Payable at December 31, 1999 consists of:
Bridge loan from shareholders................................... $16,000,000
Discount on bridge loan......................................... (2,049,668)
Note payable for the GIN Acquisition (Note 3)................... 5,000,000
-----------
$18,950,332
===========
On September 1, 1999 and November 9, 1999, the Company entered into bridge
loan agreements with its shareholders by issuing convertible promissory notes
(Promissory Notes), bearing interest at prime (8.50% at December 31, 1999) in
exchange for $10 million and $6 million in cash, respectively. Principal and
any accrued but unpaid interest were due and payable on December 31, 2000.
F-41
SARAIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the first bridge loan, the Company granted the
shareholders warrants ("Warrants") expiring December 31, 2004 or on the
occurrence of a liquidity event, as defined, and exercisable for shares of
Series A at a rate of 50,000 shares per $1 million of principal amount of the
applicable Promissory Note, at a purchase price of either (i) $10.00 per share
if the Next Financing were not to have occurred on or prior to December 31,
1999 or (ii) the price per share of the Company's most senior equity securities
issued and sold at the Next Financing if this event were to have occurred on or
prior to December 31, 1999. No beneficial conversion feature was attributed to
the warrants as the $10 per share represent management's best estimate of the
fair value of the Next Financing. The estimated value of the warrants was
$2,795,000 when issued. Such amount was recognized as an addition to
shareholders equity with an offsetting discount against the $10,000,000 face
amount of the first bridge loan. The discount is being amortized to interest
expense over the term of the loan agreements. Such amortization totaled
approximately $745,000 for the year ended December 31, 1999.
On December 13, 1999, the Company entered into an Election and Termination
Agreement in which the shareholders elected not to convert the Promissory Notes
into equity and to terminate the Warrants in exchange for the Company's promise
to repay the bridge loans as soon as practicable following the closing of the
transactions contemplated by the Reorganization Agreement (Note 1). As a
result, the bridge loans were repaid immediately following the acquisition of
the Company by InfoSpace, Inc., on March 10, 2000.
Note 7: Shareholders' Equity
Significant terms of the Series A and B preferred shares, which are not
redeemable, are as follows:
Conversion Rights--Each share of Series A and B is convertible (1) at the
option of the holder into a number of common shares determined by dividing the
Conversion Price, as defined, by the $1.00 and $4.50 Issue Prices,
respectively, and (2) will automatically convert into shares of common stock
upon the closing of a firmly underwritten public offering by the Company
resulting in gross proceeds to the Company of not less than $25,000,000 at a
price per share equal to at least $10.00, as adjusted for dilution, provided
that the valuation of the Company prior to such offering is not less than
$75,000,000 ("Qualified Public Offering"). The Conversion Price is subject to
adjustments for certain dilutive issuances, splits and combinations, as
defined.
Liquidation Preferences--Upon any dissolution, liquidation or winding up of
the Company, whether voluntary or involuntary, Series A and B holders are
entitled to receive a distribution in the amount per share equal to the Issue
Price as adjusted for stock splits, combinations, recapitalizations or
Preferred Dividends, prior and in preference to any payments to common
stockholders. After payment of these preferences, any remaining assets shall be
distributed ratably to common stock holders.
Dividend Rights--No dividends or other distributions on common stock unless
the Series A and B holders simultaneously receive a distribution at least equal
to the per share amount to be declared, paid or set aside for the common stock,
multiplied by the number of shares of common stock into which such Series A and
B shares is then convertible.
Voting Rights--The Series A and B holders have the number of votes equal to
the number of shares of common stock into which such Series A and B shares are
then convertible, and vote together with the common stock holders as a single
class.
Stock Option Plans
In December 1998, the Board of Directors approved the 1998 Equity Incentive
Plan (the Plan). The Plan provides employees (including officers and directors
who are employees) of the Company an
F-42
SARAIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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). Not more than 4,185,000 shares of stock shall be
available for the grant of options 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 options have not been
exercised shall continue to be available under the Plan. The Plan is
administered by a committee appointed by the Board of Directors. This committee
has the authority to determine the employees, officers, independent contractors
and consultants (excluding member(s) of the committee) to whom awards will be
made, the amount of the awards, and the other terms and conditions of the
awards. Options granted under the Plan typically vest over four years, ratably
on a quarterly basis.
If the continuous service of a participant in the Plan terminates due to an
involuntary termination without cause or due to a constructive termination, as
defined, within one month before, or eighteen months after a Change of Control,
as defined, the vesting and exercisability of all stock option awards of the
participant are accelerated in full. The transaction with InfoSpace described
in Note 1 resulted in a Change in Control.
The following transactions have occurred in the Plan from its adoption
through December 31, 1999:
Weighted
Average
Number of Exercise
Options Price
---------- --------
Granted (fair value of $0.24 per share)............... 612,235 $0.24
Exercised............................................. -- --
Canceled.............................................. -- --
----------
Outstanding, December 31, 1998 (612,235 options
exercisable)......................................... 612,235 0.24
Granted (fair value of $1.27 per share)............... 2,281,650 0.19
Exercised............................................. (1,554,199) 0.19
Canceled.............................................. (198,343) 0.13
----------
Outstanding, December 31, 1999 (1,141,343 options
exercisable)......................................... 1,141,343 0.22
==========
At December 31, 1999, a total of 1,489,458 shares were available for future
grants under the Plan.
The following table summarizes information as of December 31, 1999 concerning
options outstanding:
Options Outstanding
----------------------------
Weighted Average
Ranges of Remaining
Exercise Number Contractual
Prices Outstanding Life (Yrs.)
--------- ----------- ----------------
$0.10........................................ 753,931 7.95
$0.45........................................ 387,412 9.71
--------- ----
$0.10-0.45................................... 1,141,343 8.53
========= ====
Additional Stock Plan Information
As discussed in Note 1, the Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
"Accounting for Stock Issued to Employees," and its related
F-43
SARAIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
interpretations. Accordingly, no compensation expense has been recognized in
the financial statements for employee stock awards granted at fair market
value.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income as if the Company had adopted the fair value
method. Under SFAS No. 123, the fair value of stock-based awards to employees
is calculated through the use of the minimum value method, which requires
subjective assumptions, including the expected time to exercise, which affect
the calculated values. The Company's calculations were made using the minimum
value method with the following weighted average assumptions for 1999 and 1998,
respectively: no dividends during the expected term; risk-free interest rates
ranging from 4.80% to 5.82%, and expected life of five years. The Company's
calculations are based on a multiple option valuation approach and forfeitures
are recognized as they occur. If the computed fair value of the employee awards
had been amortized to expense over the vesting period of the employee awards,
pro forma net loss would have been $28,566,000 for the fiscal year ended
December 31, 1999 and would not have been materially different from the net
loss for the period from inception through December 31, 1998.
Note 8: Income Taxes
Deferred tax assets (liabilities) are comprised of the following at December
31:
1999 1998
----------- -----------
Net operating loss carryforwards--US............... $ 5,758,000 $ 1,284,000
Net operating loss carryforwards--Foreign.......... 3,007,000 --
Depreciation and amortization...................... 183,000 263,000
Stock compensation................................. 449,000 --
Deferred revenue................................... 259,000 --
Other.............................................. 329,000 66,000
----------- -----------
Total gross deferred tax assets.................. 9,985,000 1,613,000
Valuation allowance................................ (9,985,000) (1,613,000)
----------- -----------
Net deferred tax assets............................ $ -- $ --
=========== ===========
At December 31, 1999, the Company has available federal and California state
net operating loss carryforwards of approximately $16,934,000 and $2,625,000,
respectively, to offset future taxable income through 2019 and 2003,
respectively. The Company also has net operating loss carryforwards for
Canadian tax purposes of approximately $6,834,000 which will begin to expire in
2005. In addition, the Company has Canadian investment tax credits of
approximately $170,000 available to be carried forward. The investment tax
credits will expire beginning in 2008. At December 31, 1999, the deferred tax
assets have been fully reserved due to the uncertainty surrounding the
realization of such benefits.
Current tax laws impose substantial restrictions on the utilization of net
operating loss and credit carryforwards in the event of an "ownership change,"
as defined by the Internal Revenue Code. The events described under Note 1 may
limit the Company's ability to utilize its carryforwards.
Note 9: Commitments and Contingencies
Leases and Third Party Service Agreements--The Company's offices are leased
under various noncancelable operating lease arrangements. The agreements expire
at various dates through May 2004, and certain of the leases contain renewal
options. The Company also leases certain equipment under various
F-44
SARAIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
capital and operating lease agreements. Future minimum lease payments under
capital and operating leases were as follows at December 31, 1999:
Capital Operating
Leases Leases
---------- ----------
Fiscal year ending:
2000................................................ $ 515,287 $1,823,361
2001................................................ 507,735 1,296,366
2002................................................ 320,661 749,870
2003................................................ -- 369,150
2004................................................ -- 153,813
---------- ----------
Total minimum lease payments.......................... 1,343,683 $4,392,560
==========
Amount representing interest.......................... 122,166
----------
Present value of minimum lease payments............... 1,221,517
Current portion....................................... 311,560
----------
Long-term obligations................................. $ 909,957
==========
Capital lease obligations are collateralized by equipment with a cost of
$1,572,982 (net book value of $1,482,587) at December 31, 1999.
Rent expense related to operating leases was $1,672,538 in fiscal 1999.
Note 10: Employee Benefit Plan
During 1999, the Company adopted a 401(k) Profit Sharing Plan. Qualified
employees as defined under the Plan are eligible to participate and may make
voluntary contributions subject to the limitation set forth by the Plan or
applicable tax laws. Employee salary contributions are fully vested. The
Company may make discretionary contributions as determined by the Company's
management. There were no contributions made during 1999.
Note 11: Subsequent Event (unaudited)
The Company recorded a restructuring charge of $2,171,462 in the second
quarter of 2000 for the closure of its Dallas, Texas facility. The
restructuring charges consist of the following items:
Restructuring Reserve
Type of charge Cash/Non-cash charge balance
----------------------------------------------------------------------------
Severance and related costs Cash $957,000 $957,000
----------------------------------------------------------------------------
Lease termination penalties Cash 412,300 --
----------------------------------------------------------------------------
Leasehold improvements Cash 802,162 --
----------------------------------------------------------------------------
$2,171,462 $957,000
* * * * * *
F-45
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses payable by the
registrant in connection with the sale of the Common Stock being registered
hereby. All amounts shown are estimates, except the Securities and Exchange
Commission registration fee, and the Nasdaq National Market listing fee.
Securities and Exchange Commission registration fee................ $ 9,221
Nasdaq National Market listing fee................................. 17,500
Printing and engraving expenses.................................... 5,000
Legal fees and expenses............................................ 50,000
Accounting fees and expenses....................................... 25,000
Miscellaneous expenses............................................. 18,279
--------
Total............................................................ $125,000
========
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers, as well as other
employees and individuals, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation--a
"derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of such actions, and the statute requires court approval
before there can be any indemnification where the person seeking
indemnification has been found liable to the corporation. The statute provides
that it is not exclusive of other indemnification that may be granted by a
corporation's charter, bylaws, disinterested director vote, stockholder vote,
agreement or otherwise.
Section 10 of the registrant's Restated Bylaws (Exhibit 3.2 hereto) requires
indemnification to the full extent permitted under the DGCL as it now exists or
may hereafter be amended. Subject to any restrictions imposed by the DGCL, the
Restated Bylaws provide an unconditional right to indemnification for all
expense, liability and loss (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid in settlement) actually and
reasonably incurred or suffered by any person in connection with any actual or
threatened action, suit or proceeding, whether civil, criminal, administrative
or investigative by reason of the fact that such person is or was serving as a
director or officer of the registrant or that, being or having been a director
or officer of the registrant, such person is or was serving at the request of
the registrant as a director, officer, employee or agent of another
corporation, or of a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan. The Restated Bylaws
also provide that the registrant may, by action of its Board of Directors,
provide indemnification to its employees and agents with the same scope and
effect as the foregoing indemnification of directors and officers; provided,
however, that an undertaking shall be made by an employee or agent only if
required by the Board of Directors.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability for (i) any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) acts or omissions not in good faith or which involve
II-1
intentional misconduct or a knowing violation of law, (iii) payments of
unlawful dividends or unlawful stock repurchases or redemptions, or (iv) any
transaction from which the director derived an improper personal benefit.
Article 10 of the registrant's Restated Certificate of Incorporation (Exhibit
3.1 hereto) provides that to the full extent that the DGCL, as it now exists or
may hereafter be amended, permits the limitation or elimination of the
liability of directors, a director of the registrant shall not be liable to the
registrant or its stockholders for monetary damages for breach of fiduciary
duty as a director. Any amendment to or repeal of such Article 10 shall not
adversely affect any right or protection of a director of the registrant for or
with respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
The registrant has entered into certain indemnification agreements with its
officers and directors, the form of which is attached as Exhibit 10.1 to this
Registration Statement and incorporated herein by reference. The
indemnification agreements provide the registrant's officers and directors with
indemnification to the maximum extent permitted by the DGCL. Reference is made
to the Underwriting Agreement (Exhibit 1.1 hereto), in which the Underwriters
have agreed to indemnify the officers and directors of the registrant against
certain liabilities.
Item 15. Recent Sales of Unregistered Securities
For the prior three years, the registrant has issued and sold unregistered
securities as follows:
(1) An aggregate of 8,000,000 shares of common stock was issued on May 6,
1997, in connection with the registrant's acquisition of all the issued and
outstanding membership interests in Yellow Pages on the Internet, LLC
("YPI"). Such shares were placed in an escrow account upon issuance pending
finalization of the purchase price of YPI. Prior to December 31, 1997, the
purchase price was finalized and on January 2, 1998 an aggregate of 680,000
shares of common stock was issued to the former members of YPI. The
remaining shares held in the escrow account were released to the registrant
and canceled.
(2) An aggregate of 220,000 shares of common stock was issued in a
private placement on February 4, 1998 to one investor. The aggregate
consideration received for such shares was $110,000 or $0.50 per share.
(3) An aggregate of 100,000 shares of common stock was issued on April
20, 1998 to a former employee of the registrant in connection with the
settlement of a dispute involving compensation.
(4) An aggregate of 60,000 shares of common stock was issued in a private
placement on May 4, 1998 to the law firm of Garvey Schubert & Barer in
consideration for legal services rendered.
(5) An aggregate of 1,000,000 shares of common stock was issued in a
private placement on May 21, 1998 to two investors. The aggregate
consideration was $500,000 or $0.50 per share.
(6) An aggregate of 9,160,000 shares of common stock and warrants for the
purchase of 16,228,184 shares of common stock at a weighted average
exercise price of $0.74 per share were issued in a private placement on May
21, 1998 to five investors pursuant to common stock and common stock
Warrant Purchase Agreements. The aggregate consideration received for such
shares was $4,580,000 and the aggregate consideration received for such
warrants was $40,570.38.
(7) An aggregate of 11,999,904 shares of common stock was issued on June
2, 1998, in exchange for the entire issued share capital of Outpost
Network, Inc. The form of the transaction was a merger, whereby a wholly-
owned subsidiary of the registrant was merged with and into Outpost. The
recipients of the common stock were the former shareholders of Outpost.
(8) An aggregate of 40,000 shares of common stock was issued on June 30,
1998 to a consultant in exchange for services.
II-2
(9) An aggregate of 1,786,008 shares of common stock was issued on July
6, 1998 to nineteen investors pursuant to the registrant's 1998 Stock
Purchase Rights Plan, adopted June 26, 1998. The aggregate consideration
received for such shares was $1,674,393.75 or $0.94 per share.
(10) A warrant for the purchase of 3,823,736 shares of common stock with
an exercise price of $0.0025 per share was issued on July 14, 1998, to a
former consultant to the registrant in connection with the Outpost merger
described at (7).
(11) An aggregate of 8,160,000 shares of common stock was issued in a
private placement completed in July and August 1998 to 26 investors. The
aggregate consideration received for such shares was $8,160,000 or $1.00
per share.
(12) An aggregate of 159,160 shares of common stock and warrants to
purchase 282,504 shares of common stock with a weighted average exercise
price of $0.74 per share were issued on August 6, 1998 to five investors in
connection with the May 1998 stock purchase described at (6).
(13) Warrants to purchase up to 7,919,328 shares of common stock at an
exercise price of $1.50 per share were issued on August 24, 1998 to a
strategic partner.
(14) An option to purchase 2,000,000 shares of common stock at an
exercise price of $1.75 per share was exercised by a former consultant on
October 28, 1998.
(15) On March 22, 1999, the registrant issued 1,729,816 shares of common
stock upon the net exercise of warrants by an investor at a weighted
average exercise price of $0.74 per share. The warrants were issued on May
21,1998 and August 6, 1998 in connection with the May 1998 stock purchase
described at (6).
(16) From April 1996 through June 30, 1999, the registrant granted stock
options to purchase an aggregate of 25,416,624 shares of common stock to
employees, consultants and directors with exercise prices ranging from
$0.0025-$16.86 per share pursuant to the registrant's Restated 1996
Flexible Stock Incentive Plan in consideration for services. From April 10,
1996 to December 31, 1998, the registrant also granted stock options
outside of the plan to purchase 4,036,840 shares of common stock, with a
weighted average exercise price of $0.25 per share, to employees,
consultants and directors.
(17) In connection with our acquisition of INEX Corporation, on October
14, 1999, we issued 185,226 shares of our common stock to some of the
former shareholders of INEX in exchange for their shares of capital stock
in INEX. InfoSpace.com Canada Holdings Inc., our wholly owned indirect
subsidiary, issued 540,001 Exchangeable Shares to some of the former
shareholders of INEX in exchange for their shares of capital stock of INEX.
The Exchangeable Shares are exchangeable on a one-to-one basis into shares
of our common stock.
(18) In connection with our acquisition of Union-Street.com, Inc., on
October 14, 1999, we issued 873,294 shares of our common stock to the
former shareholders of Union-Street.com, Inc. in exchange for all of the
outstanding capital stock of Union-Street.com.
(19) In connection with our acquisition of eComLive, Inc., on December
16, 1999, we issued 711,248 shares of our common stock to the former
stockholders of eComLive in exchange for all outstanding shares and options
to purchase shares of eComLive, Inc.
(20) In connection with our acquisition of Zephyr Software Inc., on
December 29, 1999, we issued 333,912 shares of our common stock to the
former stockholders of Zephyr Software in exchange for all of the
outstanding shares of capital stock of Zephyr Software.
(21) In connection with our acquisition of Prio, Inc., on February 14,
2000, we issued 9,322,418 shares of our common stock to the former
stockholders of Prio in exchange for all of the outstanding shares of
capital stock of Prio.
(22) In connection with our acquisition of eighty percent of the common
stock of Saraide, on March 10, 2000, we issued 9,233,672 shares of our
common stock to the stockholders of Saraide.
II-3
(23) In connection with our acquisition of Millet Software, Inc., on
March 31, 2000, we issued 488,224 shares of our common stock to the former
stockholders of Millet Software in exchange for all of the outstanding
shares of capital stock of Millet Software.
(24) In connection with our acquisition of IQorder.com, Inc. on July 3,
2000, we issued 989,959 shares of our common stock to the former
stockholders and holders of options and warrants of IQorder.com in exchange
for all of the outstanding shares, options and warrants of IQorder.com.
(25) In connection with our acquisition of TDLI.com Limited on August 31,
2000, we issued 3,425,530 shares of our common stock to the former
stockholders and optionholders of TDLI.com in exchange for all of the
outstanding shares and options TDLI.com.
(26) In connection with our acquisition of Orchest, Inc. on August 4,
2000, we issued 255,288 shares of our common stock to the former
stockholders of Orchest in exchange for all of the outstanding capital
stock of Orchest.
No underwriters were used in connection with these sales and issuances. The
sales and issuances of these securities were exempt from registration under the
Securities Act of 1933, as amended, pursuant to:
. with respect to issuances described in (3), (8)-(10), (14) and (16),
Rule 701 promulgated thereunder on the basis that these options were
offered and sold either pursuant to a written compensatory benefit plan
or pursuant to written contracts relating to consideration, as provided
by Rule 701;
. with respect to issuances described in (17) and (21)-(23), Section
3(a)(10) thereof following a fairness hearing for the issuance of the
securities; and
. with respect to issuances described in (1), (2), (4)-(7), (11)-(13),
(15), (18)-(20) and (24)-(26), Section 4(2) thereof on the basis that
the transactions did not involve a public offering.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
Number Description
------ -----------
2.1(1) Agreement and Plan of Reorganization, dated as of July 26, 2000, by
and among Infospace, Inc., Go2Net, Inc. and Giants Acquisition Corp.
2.2* Agreement and Plan of Acquisition and Arrangement, dated August 13,
1999, by and between the registrant and INEX Corporation.
3.1(2) Restated certificate of incorporation of the registrant.
3.2(3) Certificate of amendment to restated certificate of incorporation.
3.3(2) Restated bylaws of the registrant.
4.1* Form of Certificate of the Powers, Designations, Preferences and
Rights of Series A Preferred Stock.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, P.C. as to the legality
of the shares.
10.1(2) Form of Indemnification Agreement between the registrant and each of
its Directors and Executive Officers.
10.2(4) Restated 1996 Flexible Stock Incentive Plan and Terms of Stock Option
Grant Program for Nonemployee Directors under the Restated 1996
Flexible Stock Incentive Plan.
10.3(2) 1998 Employee Stock Purchase Plan.
10.4(2) Lease, dated May 14, 1998, between the registrant and TIAA Realty,
Inc.
II-4
Number Description
------ -----------
10.5(2) Registration Rights Agreement, dated May 1, 1997, among the
registrant, John E. Richards, Peter S. Richards, John Enger and
Alexander Hutton Capital L.L.C., as subsequently amended by Agreement
dated as of January 2, 1998, among the registrant, John E. Richards,
Peter S. Richards, John Enger and Alexander Hutton Capital L.L.C.
10.6(2) Agreement, dated January 2, 1998, among the registrant, John E.
Richards, Peter S. Richards, John Enger and Alexander Hutton Capital,
L.L.C.
10.7(2) Form of Common Stock and Common Stock Warrant Purchase Agreements,
dated May 21, 1998, between the registrant and each of Acorn
Ventures-IS, LLC, Kellett Partners, LLP and John and Carolyn
Cunningham.
10.8(2) Form of Investor Rights Agreements, dated as of May 21, 1998, between
the registrant and each of Acorn Ventures-IS, LLC, Kellett Partners,
LLP and John and Carolyn Cunningham.
10.9(2) Form of Co-Sale Agreements, dated as of May 21, 1998, among the
registrant, Naveen Jain and each of Acorn Ventures-IS, LLC, Kellett
Partners, LLP and John and Carolyn Cunningham.
10.10(2) Form of Common Stock Warrant, dated May 21, 1998, between the
registrant and each of Acorn Ventures-IS, LLC, Kellett Partners, LLP
and John and Carolyn Cunningham.
10.11(2) Common Stock Purchase Agreement, dated as of August 6, 1998, by and
among the registrant and the investors named therein.
10.12(2) Stockholder Rights Agreement, dated as of August 6, 1998, by and
among the registrant and the investors named therein.
10.13(2) Form of Amendment to Common Stock and Common Stock Warrant Purchase
Agreements, dated August 6, 1998, between the Registrant and each of
Acorn Ventures-IS, LLC, Kellett Partners, LLP and John and Carolyn
Cunningham.
10.14(2) License Agreement, dated July 28, 1998, between the registrant and
American Business Information, Inc. (now known as infoUSA, Inc.).
10.15(2) Amended and Restated Content Provider Agreement, made as of August
24, 1998, effective as of April 25, 1998, between the registrant and
800-U.S. Search.
10.16(2) Letter Agreement with Bernee D. L. Strom, dated November 22, 1998.
10.17(5) Lease, dated February 2000, between the registrant and Three Bellevue
Center, LLC.
10.18(5) Letter Agreement with Bernee D. L. Strom, dated December 16, 1999.
10.19(5) Letter Agreement with Naveen Jain, dated February 10, 2000.
10.20(3) Employment Agreement between InfoSpace, Inc., Saraide Inc. and Arun
Sarin.
10.21(6) InfoSpace, Inc. and Saraide Inc. 2000 Stock Plan.
21.1* Subsidiaries of the registrant.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors (relating to
the financial statements of InfoSpace, Inc.).
23.2 Consent of Deloitte & Touche LLP, Independent Auditors (relating to
the financial statements of Saraide Inc.).
23.3 Consent of KPMG LLP, Independent Auditors (relating to the financial
statements of Prio, Inc.).
23.4* Consent of Wilson Sonsini Goodrich & Rosati, P.C. (contained in the
opinion filed as Exhibit 5.1).
24.1* Power of Attorney.
II-5
Number Description
------ -----------
99.1* Form of Plan of Arrangement under Section 182 of the Business
Corporations Act (Ontario) of INEX Corporation.
99.2* Form of Voting and Exchange Trust Agreement among the Company,
InfoSpace.com Canada Holdings Inc., and Montreal Trust Company of
Canada, as trustee.
99.3* Form of Exchangeable Share Support Agreement among the Company,
Infospace.com Nova Scotia Company, InfoSpace.com Canada Holdings Inc.
and Montreal Trust Company of Canada, as trustee.
- --------
* Previously filed.
(1) Incorporated by reference to the Registration Statement on Form S-4 (No.
333-43994) filed by the registrant on August 17, 2000.
(2) Incorporated by reference to the Registration Statement on Form S-1 (No.
333-62323) filed by the registrant on August 27, 1998, as amended.
(3) Incorporated by reference to the Quarterly Report on Form 10-Q filed by
the registrant for the quarter ended March 31, 2000.
(4) Incorporated by reference to the Registration Statement on Form S-8 (No.
333-81593) filed by the registrant on June 25, 1999.
(5) Incorporated by reference to the Annual Report on form 10-K filed by the
registrant for the year ended December 31, 1999.
(6) Incorporated by reference to the Registration Statement on Form S-3 (No.
333-93167) filed by the Registrant on December 21, 1999, as amended.
(b) Financial Statement Schedules
All schedules are omitted because they are inapplicable or the requested
information is shown in the consolidated financial statements of the registrant
or related notes thereto.
Item 17. Undertakings
The undersigned registrant hereby undertakes;
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) ((S)230.424(b) of this
chapter) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
II-6
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Post-Effective Amendment No. 3 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Bellevue, State of Washington, on the 13th day
of September, 2000.
InfoSpace, Inc.
/s/ Ellen B. Alben
By: _________________________________
Ellen B. Alben,
Senior Vice President, Legal and
Business Affairs
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Post-Effective Amendment No. 3 to the Registration Statement has been signed by
the following persons in the capacities indicated below on the 13th day of
September, 2000.
Signature Title
--------- -----
/s/ Arun Sarin Chief Executive Officer and Vice Chairman
___________________________________________ (Principal Executive Officer)
Arun Sarin
/s/ Rand L. Rosenberg Chief Financial Officer and Senior Vice
___________________________________________ President, Corporate Finance and
Rand L. Rosenberg Development (Principal Financial Officer)
/s/ Tammy D. Halstead Senior Vice President and Chief Accounting
___________________________________________ Officer (Principal Accounting Officer)
Tammy D. Halstead
* Chairman of the Board
___________________________________________
Naveen Jain
* Director
___________________________________________
John E. Cunningham, IV
* Director
___________________________________________
Peter L. S. Currie
* Director
___________________________________________
Rufus W. Lumry, III
* Director
___________________________________________
Carl Stork
/s/ Ellen B. Alben
*By: ______________________________________
Ellen B. Alben
Attorney-in-Fact
II-8
EXHIBIT INDEX
Number Description
------ -----------
2.1(1) Agreement and Plan of Reorganization, dated as of July 26, 2000, by
and among Infospace, Inc., Go2Net, Inc. and Giants Acquisition Corp.
2.2* Agreement and Plan of Acqusition and Arrangement, dated August 13,
1999, by and between the registrant and INEX Corporation.
3.1(2) Restated certificate of incorporation of the registrant.
3.2(3) Certificate of amendment to restated certificate of incorporation.
3.3(2) Restated bylaws of the registrant.
4.1* Form of Certificate of the Powers, Desingations, Preferences and
Rights of Series A Preferred Stock.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, P.C. as to the legality
of the shares.
10.1(2) Form of Indemnification Agreement between the registrant and each of
its Directors and Executive Officers.
10.2(4) Restated 1996 Flexible Stock Incentive Plan and Terms of Stock Option
Grant Program for Nonemployee Directors under the Restated 1996
Flexible Stock Incentive Plan.
10.3(2) 1998 Employee Stock Purchase Plan.
10.4(2) Lease, dated May 14, 1998, between the registrant and TIAA Realty,
Inc.
10.5(2) Registration Rights Agreement, dated May 1, 1997, among the
registrant, John E. Richards, Peter S. Richards, John Enger and
Alexander Hutton Capital L.L.C., as subsequently amended by Agreement
dated as of January 2, 1998, among the registrant, John E. Richards,
Peter S. Richards, John Enger and Alexander Hutton Capital L.L.C.
10.6(2) Agreement, dated January 2, 1998, among the registrant, John E.
Richards, Peter S. Richards, John Enger and Alexander Hutton Capital,
L.L.C.
10.7(2) Form of Common Stock and Common Stock Warrant Purchase Agreements,
dated May 21, 1998, between the registrant and each of Acorn
Ventures-IS, LLC, Kellett Partners, LLP and John and Carolyn
Cunningham.
10.8(2) Form of Investor Rights Agreements, dated as of May 21, 1998, between
the registrant and each of Acorn Ventures-IS, LLC, Kellett Partners,
LLP and John and Carolyn Cunningham.
10.9(2) Form of Co-Sale Agreements, dated as of May 21, 1998, among the
registrant, Naveen Jain and each of Acorn Ventures-IS, LLC, Kellett
Partners, LLP and John and Carolyn Cunningham.
10.10(2) Form of Common Stock Warrant, dated May 21, 1998, between the
registrant and each of Acorn Ventures-IS, LLC, Kellett Partners, LLP
and John and Carolyn Cunningham.
10.11(2) Common Stock Purchase Agreement, dated as of August 6, 1998, by and
among the registrant and the investors named therein.
10.12(2) Stockholder Rights Agreement, dated as of August 6, 1998, by and
among the registrant and the investors named therein.
10.13(2) Form of Amendment to Common Stock and Common Stock Warrant Purchase
Agreements, dated August 6, 1998, between the Registrant and each of
Acorn Ventures-IS, LLC, Kellett Partners, LLP and John and Carolyn
Cunningham.
10.14(2) License Agreement, dated July 28, 1998, between the registrant and
American Business Information, Inc. (now known as infoUSA, Inc.).
Number Description
------ -----------
10.15(2) Amended and Restated Content Provider Agreement, made as of August
24, 1998, effective as of April 25, 1998, between the registrant and
800-U.S. Search.
10.16(2) Letter Agreement with Bernee D. L. Strom, dated November 22, 1998.
10.17(5) Lease, dated February 2000, between the registrant and Three Bellevue
Center, LLC.
10.18(5) Letter Agreement with Bernee D. L. Strom, dated December 16, 1999.
10.19(5) Letter Agreement with Naveen Jain, dated February 10, 2000.
10.20(3) Employment Agreement between InfoSpace, Inc., Saraide Inc. and Arun
Sarin.
10.21(6) InfoSpace, Inc. and Saraide Inc. 2000 Stock Plan.
21.1* Subsidiaries of the registrant.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors (relating to
the financial statements of InfoSpace, Inc.).
23.2 Consent of Deloitte & Touche LLP, Independent Auditors (relating to
the financial statements of Saraide Inc.).
23.3 Consent of KPMG LLP, Independent Auditors (relating to the financial
statements of Prio, Inc.).
23.4* Consent of Wilson Sonsini Goodrich & Rosati, P.C. (contained in the
opinion filed as Exhibit 5.1).
24.1* Power of Attorney.
99.1* Form of Plan of Arrangement under Section 182 of the Business
Corporations Act (Ontario) of INEX Corporation.
99.2* Form of Voting and Exchange Trust Agreement among the Company,
InfoSpace.com Canada Holdings Inc., and Montreal Trust Company of
Canada, as trustee.
99.3* Form of Exchangeable Share Support Agreement among the Company,
Infospace.com Nova Scotia Company, InfoSpace.com Canada Holdings Inc.
and Montreal Trust Company of Canada, as trustee.
- --------
* Previously filed.
(1) Incorporated by reference to the Registration Statement on Form S-4 (No.
333-43994) filed by the registrant on August 17, 2000.
(2) Incorporated by reference to the Registration Statement on Form S-1 (No.
333-62323) filed by the registrant on August 27, 1998, as amended.
(3) Incorporated by reference to the Quarterly Report on Form 10-Q filed by
the registrant for the quarter ended March 31, 2000.
(4) Incorporated by reference to the Registration Statement on Form S-8 (No.
333-81593) filed by the registrant on June 25, 1999.
(5) Incorporated by reference to the Annual Report on form 10-K filed by the
registrant for the year ended December 31, 1999.
(6) Incorporated by reference to the Registration on Form S-3 (No. 333-93167)
filed by the Registrant on December 21, 1999, as amended.