UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2000
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from __________________ to ___________
Commission File Number 0-25131
INFOSPACE, INC.
(Exact name of registrant as specified in its charter)
Delaware 91-1718107
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
601 108/th/ Avenue NE, Suite 1200 98004
Bellevue, Washington (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (425) 201-6100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No___.
-
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class January 31, 2001
----- ----------------
Common Stock, Par Value $.0001 322,720,197
EXPLANATORY NOTE
This Quarterly Report on Form 10-Q/A (Amendment No. 1) includes historical
InfoSpace financial statements for the three and nine months ended September 30,
2000 and 1999 and the restated supplemental pro forma combined consolidated
financial statements for the three and nine months ended September 30, 2000 and
1999 to reflect the subsequent merger with Go2Net on a pooled basis. To the
extent this amended filing is inconsistent with our original Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 2000, the original filing
is hereby superseded and amended. To the extent that the original filing is
unaffected by this amendment of our consolidated financial statements and
supplemental pro forma combined consolidated financial statements for the three
and nine months ended September 30, 2000 and 1999, the original filing has not
been updated to reflect events subsequent to the periods covered or the date of
the original filing.
2
INFOSPACE, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I - Financial Information
Item 1. -- Financial Statements
Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999.................................................... 4
Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2000 and 1999.................................... 5
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999.......................................... 6
Notes to Consolidated Financial Statements.............................. 7
Supplemental Pro Forma Combined Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999............................. 14
Supplemental Pro Forma Combined Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 2000 and 1999...... 15
Supplemental Pro Forma Combined Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2000 and 1999................ 16
Notes to Supplemental Pro Forma Combined Consolidated Financial
Statements........................................................... 17
Item 2. -- Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview................................................................ 19
Results of Operations................................................... 22
Balance Sheet Commentary................................................ 24
Liquidity and Capital Resources......................................... 25
Acquisitions............................................................ 26
Factors Affecting InfoSpace's Operating Results, Business Prospects
and Market Price of Stock............................................ 27
Item 3. -- Quantitative and Qualitative Disclosures About Market Risk... 33
PART II - Other Information
Item 1. -- Legal Proceedings.............................................. 34
Item 2. -- Changes in Securities and Use of Proceeds...................... 35
Item 3 is not applicable with respect to the current reporting period.
Item 4. -- Submission of Matters to a Vote of Security Holders............ 36
Item 5 is not applicable with respect to the current reporting period
Item 6. -- Exhibits and Reports on Form 8-K............................... 36
Signatures................................................................ 38
3
PART I
- ------
Item 1. - Financial Statements
INFOSPACE, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2000 1999
(unaudited)
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 39,581,633 $ 37,985,250
Short-term investments .................................................... 97,982,837 124,720,142
Accounts receivable, net of allowance for doubtful accounts ............... 13,636,539 6,663,497
Notes and other receivables ............................................... 22,005,900 14,914,638
Prepaid expenses and other current assets ................................. 13,150,512 10,304,244
--------------- ---------------
Total current assets ................................................. 186,357,421 194,587,771
Property and equipment, net .................................................. 33,842,598 7,998,957
Long-term investments ........................................................ 14,437,184 71,416,776
Other investments ............................................................ 64,143,926 17,038,508
Intangible assets, net ....................................................... 545,132,656 73,842,557
Other long-term assets ....................................................... 3,129,356 702,641
--------------- ---------------
Total ........................................................................ $ 847,043,141 $ 365,587,210
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 4,745,352 $ 2,810,141
Accrued expenses and other current liabilities .......................... 11,922,372 19,543,490
Deferred revenues ....................................................... 10,157,705 2,672,531
--------------- ---------------
Total current liabilities ............................................ 26,825,429 25,026,162
Long-term liabilities and minority interest:
Long-term debt and other long-term liabilities .......................... -- 685,762
Deferred revenue ........................................................ 1,336,271 --
Minority interest ....................................................... 22,901,939 --
--------------- ---------------
Total long-term liabilities and minority interest .................... 24,238,210 685,762
Stockholders' equity
Preferred stock, par value $.0001- authorized, 15,000,000 shares;
issued and outstanding, 1 and 1 share ................................. -- --
Common stock, par value $.0001- authorized, 900,000,000 shares;
issued and outstanding, 238,705,843 and 211,826,168 shares ............ 23,871 21,183
Additional paid-in capital .............................................. 1,049,833,051 440,878,393
Accumulated deficit ..................................................... (253,533,790) (98,512,435)
Accumulated other comprehensive income .................................. 3,534,557 1,317,448
Deferred expense-warrants ............................................... (1,699,382) (2,311,159)
Unearned compensation-stock options ..................................... (2,178,805) (1,518,144)
--------------- ---------------
Total stockholders' equity ........................................... 795,979,502 339,875,286
--------------- ---------------
Total ........................................................................ $ 847,043,141 $ 365,587,210
=============== ===============
See accompanying notes to consolidated financial statements.
4
INFOSPACE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Months Ended September 30, 2000 and 1999
(unaudited)
Three Months Ended Nine Months Ended
--------------------------- ------------------------------
2000 1999 2000 1999
----------- ------------- ------------- -------------
Revenues......................................................... $ 31,030,239 $ 10,464,191 $ 76,029,114 $ 22,704,295
Cost of revenues................................................. 6,298,667 2,026,675 13,896,063 4,980,876
------------ ------------- ------------- -------------
Gross profit................................... 24,731,572 8,437,516 62,133,051 17,723,419
Operating expenses:
Product development..................................... 6,774,902 2,640,241 18,321,183 7,564,807
Sales, general and administrative....................... 22,988,170 12,258,626 58,464,464 30,960,464
Amortization of intangibles............................. 26,110,418 1,014,539 53,538,883 1,618,479
Acquisition and other related charges................... 7,336,011 926,841 93,935,420 5,896,206
Other - non-recurring charges........................... -- 650,000 2,887,609 859,500
------------ ------------- ------------- -------------
Total operating expenses....................... 63,209,501 17,490,247 227,147,559 46,899,456
------------ ------------- ------------- -------------
Loss from operations........................... (38,477,929) (9,052,731) (165,014,508) (29,176,037)
Other income, net................................................ 2,694,145 3,327,552 8,740,391 7,953,260
Gain (loss) on investments....................................... (6,677,149) -- 8,473,206 --
Restructuring charges............................................ -- -- (2,171,462) --
Minority interest................................................ 2,154,087 -- (4,243,945) --
------------ ------------- ------------- -------------
Loss from operations before income tax expense and cumulative
effect of change in accounting principle....................... (40,306,846) (5,725,179) (154,216,318) (21,222,777)
Income tax expense............................................... 61,703 -- 85,821 --
------------ ------------- ------------- -------------
Loss from operations before cumulative effect of change
in accounting principle........................................ (40,368,549) (5,725,179) (154,302,139) (21,222,777)
Cumulative effect of change in accounting principle.............. -- -- (719,216) --
------------ ------------- ------------- -------------
Net loss......................................................... $(40,368,549) $ (5,725,179) $(155,021,355) $ (21,222,777)
============ ============= ============= =============
Comprehensive loss............................................... $(36,833,992) $ (5,734,032) $(152,804,244) $ (21,190,812)
============ ============= ============= =============
Basic and diluted net loss per share............................. $ (0.17) $ (0.03) $ (0.68) $ (0.11)
============ ============= ============= =============
Shares used in computing basic and diluted net loss per share.... 235,264,123 200,749,578 227,660,403 193,016,540
============ ============= ============= =============
See accompanying notes to consolidated financial statements.
5
INFOSPACE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2000 and 1999
(unaudited)
-------------------------------------
2000 1999
----------------- ---------------
Operating activities
Net loss................................................................................... $ (155,021,355) $ (21,222,777)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Depreciation and other amortization.................................................... 58,901,037 4,704,928
Compensation expense-stock options..................................................... 690,118 1,301,371
Warrants expense....................................................................... 3,499,386 611,776
Performance warrant revenue............................................................ (9,233,002) (341,275)
Noncash services exchanged............................................................. 110,000 --
Bad debt expense....................................................................... 3,080,441 295,123
(Income) loss from joint venture....................................................... (64,207) 100,941
Gain on sale of intangibles............................................................ -- (7,830)
Loss on disposal of fixed assets....................................................... 340,317 21,019
Gain on investments.................................................................... (8,473,206) --
Cumulative translation adjustment...................................................... (264,242) 34,653
Minority interest in venture fund...................................................... 4,243,945 --
Business acquisition costs............................................................. 13,835,420 --
In-process research and development.................................................... 80,100,000 3,900,000
Cumulative effect of change in accounting principle.................................... 494,597 --
Cash provided (used) by changes in operating assets and liabilities:
Accounts and other receivable..................................................... (12,617,106) (3,146,398)
Prepaid expenses and other assets................................................. (828,929) (5,749,141)
Accounts payable and accrued expenses............................................. (15,128,952) (1,036,105)
Deferred revenue.................................................................. 8,326,848 1,319,383
--------------- --------------
Net cash provided (used) by operating activities....................................... (28,039,890) (19,214,332)
Investing activities
Purchase of property and equipment..................................................... (22,948,806) (3,987,475)
Notes receivable, net.................................................................. (8,412,096) (6,576,961)
Business acquisitions, net of cash acquired............................................ (12,876,924) (18,083,054)
Proceeds from sale of domain name...................................................... -- 10,000
Investment in domain name.............................................................. -- (120,000)
Minority interest contribution in venture fund......................................... 16,365,000 --
Purchase of other investments.......................................................... (27,250,944) (7,235,708)
Short-term and long-term investments, net.............................................. 84,072,201 (112,136,047)
--------------- --------------
Net cash provided (used) by investing activities....................................... 28,948,431 (148,129,245)
Financing activities:
Proceeds from issuance of ESPP shares.................................................. 343,126 --
Proceeds from issuance of common stock................................................. -- 187,758,517
Proceeds from exercise of warrants..................................................... 6,890,580 --
Proceeds from exercise of stock options................................................ 16,300,027 909,712
Short-term and long-term debt, net..................................................... (22,876,890) (109,964)
--------------- --------------
Net cash provided by financing activities.............................................. 656,843 188,558,265
--------------- --------------
Net increase (decrease) in cash and cash equivalents....................................... 1,596,383 21,214,688
Cash and cash equivalents:
Beginning of period.................................................................... 37,985,250 39,986,609
--------------- --------------
End of period.......................................................................... $ 39,581,633 $ 61,201,297
=============== --------------
Supplemental disclosure of noncash activities
Warrants received in exchange for services............................................. 9,233,002 341,275
Common stock issued in exchange transaction............................................ 110,000 --
See accompanying notes to consolidated financial statements.
6
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company and Basis of Presentation
InfoSpace, Inc. (the Company or InfoSpace), previously known as InfoSpace.com,
Inc., a Delaware corporation, was founded in March 1996. The Company is a
provider of cross-platform merchant and consumer infrastructure services on
wireless, broadband and narrowband platforms.
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. During the first quarter of 2000, the Company acquired the outstanding
stock of Prio, Inc. (Prio). This acquisition was accounted for using the
pooling-of-interests method of accounting. Accordingly, the Company's historical
consolidated financial statements have been recast to include the financial
results of Prio as if it were a wholly owned subsidiary since inception. Certain
information and note disclosures normally included in financial statements,
prepared in accordance with generally accepted accounting principles, have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. Results of operations for the three and nine-month periods
ended September 30, 2000 are not necessarily indicative of future financial
results.
Investors should read these interim statements in conjunction with the audited
financial statements and notes thereto included in our annual report (Commission
File Number 0-25131) filed on Form 10-K for the fiscal year ended December 31,
1999. Prior period balances have been reclassified to conform to current period
presentation.
Stock split: A two-for-one stock split of the Company's common stock was
effected on April 7, 2000. All references in the financial statements to shares,
share prices and per share amounts have been adjusted retroactively for this
stock split.
Other non-recurring charges: Other non-recurring charges in the nine months
ended September 30, 2000 represent an expense recorded for the fair market value
of warrants issued by Prio, Inc. Prio had previously issued warrants for
services provided. These warrants were accounted for under variable accounting.
Subsequent to the acquisition of Prio, which was accounted for as a
pooling-of-interests, the agreement associated with these warrants was
terminated and the remaining unvested warrants accelerated to full vesting.
Restructuring charges: Restructuring charges of $2.2 million for the nine months
ended September 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. The Company acquired this facility
in the acquisition of Saraide, Inc. in March 2000.
Cumulative effect of change in accounting principle: On January 1, 2000, the
Company adopted SAB 101, Revenue Recognition in Financial Statements, which
established certain criteria for net
7
versus gross recording of sales transactions. Prior to January 1, 2000, the
Company recorded revenues from customers for development fees, implementation
fees and/or integration fees when the service was completed. If this revenue was
recognized on a straight-lined basis over the term of the related service
agreements, in accordance with SAB 101, the Company would have deferred $719,216
as of January 1, 2000. In accordance with SAB 101, the Company recorded a
cumulative effect of change in accounting principle of $719,216. The Company
recorded $509,378 in revenue in the nine months ended September 30, 2000 related
to this deferred revenue. The remaining amount will be recognized from October
2000 through November 2001.
2. Acquisitions
iJapan Corporation: On September 13, 2000, the Company acquired intellectual
property that translates between cHTML and other major wireless markup languages
from iJapan for purchase consideration of $2 million in cash. The entire
purchase price was recorded in intangible assets.
TDLI.com Limited: On August 31, 2000, the Company acquired TDLI.com Limited, a
privately held company based in Hampshire, England that in turn holds
approximately fifty percent of TDL InfoSpace (Europe) Limited, a joint venture
originally formed by InfoSpace and Thomson Directories Limited in July 1998 to
replicate InfoSpace's services in Europe. The Company acquired TDLI.com for
purchase consideration of 3,420,308 shares of the Company's common stock and
acquisition expenses of $2,063,414. The Company recorded $131,936,922 in
intangible assets. The Company now has 100% ownership and control of TDL
InfoSpace. The acquisition was accounted for as a purchase in accordance with
Accounting Principles Board Opinion ("APB") No. 16. Results of operations for
TDLI.com 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 and liabilities assumed based on
their estimated fair market values as follows:
Tangible assets acquired $ 7,660,457
Liabilities assumed (7,411,062)
-------------
Book value of net assets acquired 249,395
Purchase price:
Fair value of net assets acquired 129,624,113
Acquisition costs 2,063,414
-------------
Excess of purchase price over net assets acquired, allocated to goodwill $ 131,936,922
=============
Pro Forma information -TDLI.com acquisition:
Nine months ended September 30, 2000 1999
- --------------------------------------------------------------------------------------------
Revenues:
InfoSpace $ 76,029,014 $ 22,704,295
TDLI.com 1,029,884 555,994
------------- -------------
$ 77,058,898 $ 23,260,289
============= =============
8
Net Loss:
InfoSpace $(155,021,355) $ (21,222,777)
TDLI.com (68,577) (144,621)
Elimination of joint venture (income) loss (64,207) 100,941
------------- -------------
$(155,154,139) $ (21,266,457)
============= =============
Orchest, Inc.: On August 4, 2000, the Company acquired all of the common stock
of Orchest, Inc. for purchase consideration of 255,288 shares of the Company's
common stock and acquisition expenses of $72,060. The Company recorded
$8,890,306 for intangible assets. Orchest was a privately held provider of
financial services technology that enables users to access a consolidated view
of their personal financial information from multiple institutions. The
acquisition was accounted for as a purchase in accordance with APB No. 16.
Results of operations for Orchest 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 and liabilities assumed based on
their estimated fair market values as follows:
Tangible assets acquired $ 3,169
Liabilities assumed (393,695)
-----------
Book value of net liabilities acquired 390,526
Purchase price:
Fair value of net assets acquired 8,427,720
Acquisition costs 72,060
-----------
Excess of purchase price over net assets acquired, allocated to goodwill $ 8,890,306
===========
IQorder.com, Inc.: On July 3, 2000, the Company acquired all of the common stock
of IQorder.com for purchase consideration of 989,959 shares of the Company's
common stock and acquisition expenses of $189,265. The Company recorded a
non-recurring charge of $6.0 million for in-process research and development and
$63,094,723 for intangible assets. IQorder was a privately-held company that
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. The acquisition was accounted for as a purchase in
accordance with APB No. 16. Results of operations for IQorder 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 and liabilities assumed based on
their estimated fair market values as follows:
Tangible assets acquired $ 1,710,407
Liabilities assumed (211,119)
------------
Book value of net assets acquired 1,499,288
Fair value adjustments:
Fair value of purchased technology, including in-process research
and development 6,000,000
Fair value of assembled workforce 150,000
9
Fair value of core technology 2,600,000
------------
Fair value of net assets acquired 10,249,288
Purchase price:
Fair value of net assets acquired 70,404,746
Acquisition costs 189,265
------------
Excess of purchase price over net assets acquired, allocated to goodwill $ 60,344,723
============
Millet Software, Inc.: 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. The
Company recorded a non-recurring charge of $2.4 million for in-process research
and development and $27.6 million for intangible assets. 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 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.
Saraide Inc.: On March 10, 2000, the Company acquired eighty percent of the
common stock of Saraide Inc. (formerly saraide.com, inc.), a privately held
provider of wireless Internet services in Europe, Japan and Canada, for purchase
consideration of 9,233,672 shares of the Company's common stock and acquisition
expenses of $340,489. The Company recorded a non-recurring charge of $71.7
million for in-process research and development and $291.8 million in intangible
assets. 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.
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
September 30, 2000 and December 31, 1999 and the consolidated statement of
operations for the three and nine months ended September 30, 2000 and 1999 are
presented as if Prio was a wholly owned subsidiary since inception.
3. Venture Capital Fund
On January 1, 2000, the Company established the InfoSpace Venture Capital Fund
2000, LLC. The fund invests in privately held early-stage companies primarily,
but not exclusively, engaged in technology-related industries on the Internet.
Investors in this fund are the Company and certain of its employees. The Company
will contribute a total of $30,000,000 to this fund,
10
$26,450,000 of which had been contributed as of September 30, 2000. Employees
meeting the accredited investor criteria contributed $16,365,000 to the fund.
The Company contributed $3,000,000 of its total investment on behalf of the
employees of the Company employed as of March 31, 2000. The employee
contribution vests on March 31, 2003. The Company recognizes this expense on a
straight-line basis over the three year vesting term. Amounts forfeited during
the vesting term will revert to the Company.
The fund's investments are selected and managed by an investment committee that
includes members of the Company's management. As of September 30, 2000, the
Company owned 59.8% of the fund.
All investments held in the fund are recorded at their fair market value and
unrealized gains and losses on the investments are recorded as gains or losses
in the statement of operations of the fund. As of September 30, 2000, the fund
had $13,553,544 in cash and $39,137,660 in investments. The investment balance
is reflected at fair market value and includes $9,687,660 of realized and
unrealized gains and losses that were recorded in Other income on the Company's
Consolidated Statement of Operations for the nine months ended September 30,
2000. The Company has recorded minority interest on the Balance Sheet and
Statements of Operations for the employee-owned portion of the fund.
4. Notes Receivable and Other Receivable
On December 1, 1999, the Company loaned The boxLot Company $2.5 million. This
short-term note was due by August 1, 2000, and accrues interest at 12% per
annum. On January 19, 2000 and February 18, 2000, the Company loaned The boxLot
Company an additional $1.5 million and $1.0 million, respectively. These two
notes were due by September 1, 2000 and accrue interest at 12% per annum. The
Company closed an asset purchase with boxLot in December, 2000. These loans were
offset against the purchase price of the assets. Interest was accrued on these
notes through closing. At September 30, 2000, accrued interest on the notes was
$250,000.
From December 21, 1999 to February 29, 2000, the Company loaned a former officer
of the Company $10.0 million. The promissory note is due in December 2001 and
accrues interest at the prime rate. At September 30, 2000, accrued interest on
this note was $649,603.
The Company has $3.0 million of Interest Receivable recorded at September 30,
2000, which is comprised of interest earned on the Company's short, and
long-term investments and interest due on the above noted notes receivable.
5. Restructuring Charges
The Company recorded a restructuring charge of $2,171,462 in the nine months
ended September 30, 2000 for the closure of its Dallas, Texas facility. The
restructuring charges are broken down as follows:
- ------------------------------------------------------------------------------------------------------
Type of charge Cash / Non-cash Restructuring charge Reserve balance
- ------------------------------------------------------------------------------------------------------
Severance and related costs Cash $ 913,108 $419,128
- ------------------------------------------------------------------------------------------------------
11
Lease termination penalties Cash 456,192 --
- ------------------------------------------------------------------------------------------------------
Leasehold improvements Non-cash 802,162 --
---------- --------
- ------------------------------------------------------------------------------------------------------
$2,171,462 $419,128
========== ========
- ------------------------------------------------------------------------------------------------------
6. Subsequent Events
On October 12, 2000, the Company completed its merger with Go2Net, Inc.
(Go2Net), a publicly held provider of applications and technology infrastructure
for narrowband and broadband. Under the terms of the merger, which was accounted
for as a pooling-of-interests, the Company exchanged 74,145,348 shares of the
Company's common stock for all of the preferred and common shares of Go2Net.
On December 7, 2000, the Company closed an asset purchase with The boxLot
Company, a developer of online interactive auction and variable pricing
technology. The Company exchanged $1,879,845 and 501,527 shares of the Company's
common stock in this transaction.
On January 1, 2001, the Company acquired Montreal, Canada-based Locus Dialogue,
Inc., a developer of speech recognition-enabled applications. Under terms of the
acquisition, accounted for as a purchase, the Company exchanged 5,169,150 shares
of its common stock for all of Locus Dialogue's outstanding shares, warrants and
options.
12
UNAUDITED SUPPLEMENTAL PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS
In October 2000, the Company acquired all of the outstanding stock of Go2Net,
Inc. (Go2Net). This acquisition was accounted for using the pooling-of-interests
method of accounting. Accordingly, the following supplemental pro forma
financial information has been recast to include the financial results of Go2Net
as if it were a wholly owned subsidiary since inception.
The financial statements for the three and nine month periods ended September
30, 1999 and 2000, have been restated to give effect to an adjustment made to
Go2Net's previously issued financial information. This adjustment relates to the
fair value originally assigned to warrants received in connection with a service
agreement in August 1999. The total value of the warrants received is being
recognized in revenue on a straight-line basis over the three-year life of the
service agreement.
Additionally, the results for the three and nine month periods ended September
30, 2000 and balance sheet as of September 30, 2000, have been adjusted to
properly record revenues related to certain service agreements originated in
2000, to record payroll tax expense associated with option exercises and to
record adjustments to the deferred tax asset, goodwill and related amortization
and deferred tax liability to give proper effect to the merger with Go2Net. The
results for the three and nine months ended September 30, 1999 and balance sheet
as of December 31, 1999 have adjustments to the deferred tax asset, goodwill and
related amortization and deferred tax liability to give proper effect to the
merger with Go2Net.
These adjustments resulted in an increase in assets of $7.1 million, deferred
revenue of $6.4 million and retained earnings of $479,350, as of December 31,
1999 and an increase in assets of $10.9 million, accrued expenses of $1.5
million, deferred revenue of $7.8 million and retained earnings of $3.7 million,
as of September 30, 2000. Additionally, revenue increased by $429,759 and
$450,613 for the three and nine-month periods ended September 30, 1999,
respectively. Income tax and other adjustments increased the loss by $1.0
million for both the three and nine months ended September 30, 1999. Net loss
increased $614,679 and $575,296 for the three and nine months ended September
30, 1999, respectively. Revenue increased $1.9 million and $6.1 million for the
three and nine months ended September 30, 2000, respectively. Income tax and
other adjustments increased the loss by $1.4 million and $2.0 million for the
three and nine months ended September 30, 2000, respectively. Net loss decreased
$565,070 and $4,131,209 for the three and nine months ended September 30, 2000,
respectively.
13
INFOSPACE, INC. AND GO2NET, INC.
SUPPLEMENTAL PRO FORMA COMBINED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2000 1999
(unaudited) (unaudited)
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 55,819,433 $ 104,349,564
Short-term investments............................................... 306,848,738 295,311,142
Accounts receivable, net of allowance for doubtful accounts.......... 27,527,202 13,551,478
Notes and other receivables.......................................... 25,238,171 18,523,758
Deferred tax asset................................................... 6,322,713 --
Prepaid expenses and other current assets............................ 17,586,424 10,970,372
-------------- -------------
Total current assets........................................ 439,342,681 442,706,315
Property and equipment, net................................................... 47,569,408 11,878,406
Long-term investments......................................................... 63,095,728 116,076,568
Other investments............................................................. 155,605,206 117,588,539
Intangible assets, net........................................................ 695,308,573 276,210,232
Other long-term assets........................................................ 4,540,664 2,046,405
-------------- -------------
Total......................................................................... $1,405,462,260 $ 966,506,466
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 7,391,749 $ 3,688,750
Accrued expenses and other current liabilities....................... 18,670,320 23,471,343
Deferred revenues.................................................... 34,402,861 12,121,137
-------------- -------------
Total current liabilities................................... 60,464,930 39,281,230
Long-term liabilities and minority interest:
Long-term debt and other long-term liabilities....................... -- 685,762
Deferred revenue..................................................... 8,701,517 4,947,241
Deferred tax liability............................................... 12,774,609 16,540,663
Minority interest.................................................... 22,901,939 --
-------------- -------------
Total long-term liabilities and minority interest........... 44,378,065 22,173,666
Stockholders' equity
Preferred stock, par value $.0001- authorized, 15,000,000 shares;
issued and outstanding, 1 and 0 share.............................. -- --
Common stock, par value $.0001- authorized, 900,000,000 shares;
issued and outstanding, 312,901,450 and 283,411,552 shares......... 31,290 28,341
Additional paid-in capital........................................... 1,600,821,234 959,491,801
Accumulated deficit.................................................. (308,557,973) (126,106,301)
Accumulated other comprehensive income............................... 12,202,901 75,467,032
Deferred expense-warrants............................................ (1,699,382) (2,311,159)
Unearned compensation-stock options.................................. (2,178,805) (1,518,144)
-------------- -------------
Total stockholders' equity.................................. 1,300,619,265 905,051,570
-------------- -------------
Total......................................................................... $1,405,462,260 $ 966,506,466
============== =============
See accompanying notes to consolidated financial statements.
14
INFOSPACE, INC. AND GO2NET, INC.
SUPPLEMENTAL PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Months Ended September 30, 2000 and 1999
(unaudited)
Three Months Ended Nine Months Ended
------------------------------ --------------------------------
2000 1999 2000 1999
-------------- ------------- --------------- -------------
Revenues.................................................. $ 59,636,837 $ 20,376,124 $ 148,901,174 $ 42,638,981
Cost of revenues.......................................... 10,292,910 3,795,302 24,534,966 8,842,886
-------------- ------------- --------------- -------------
Gross profit............................ 49,343,927 16,580,822 124,366,208 33,796,095
Operating expenses:
Product development.............................. 10,154,663 3,891,712 26,612,370 10,462,985
Sales, general and administrative................ 34,786,361 17,314,288 88,615,972 41,747,231
Amortization of intangibles....................... 47,467,030 18,044,710 116,112,775 21,389,413
Acquisition and other related charges............. 7,608,779 959,889 94,208,188 6,119,043
Other - non-recurring charges..................... -- 650,000 2,887,609 859,500
-------------- ------------- --------------- -------------
Total operating expenses................. 100,016,837 40,880,599 328,436,914 80,578,172
-------------- ------------- --------------- -------------
Loss from operations..................... (50,672,910) (24,279,777) (204,070,706) (46,782,077)
Other income, net.......................................... 7,123,907 7,014,579 21,830,634 14,675,245
Gain (loss) on investments................................. (6,677,149) -- 8,473,206 --
Restructuring charges...................................... -- -- (2,171,462) --
Minority interest.......................................... 2,154,087 -- (4,243,945) --
-------------- ------------- --------------- -------------
Loss from operations before income tax
expense and cumulative effect of change
in accounting principle.................................. (48,072,065) (17,265,198) (180,182,273) (32,106,832)
Income tax expense......................................... 61,703 -- 85,821 --
-------------- ------------- --------------- -------------
Loss from operations before cumulative
effect of change in accounting principle................. (48,133,768) (17,265,198) (180,268,094) (32,106,832)
Cumulative effect of change in accounting principle........ -- -- (2,055,537) --
-------------- ------------- --------------- -------------
Net loss................................................... $ (48,133,768) $ (17,265,198) $ (182,323,631) $ (32,106,832)
============== ============= =============== =============
Preferred stock dividend................................... -- -- -- 159,930,733
Net loss applicable to common stockholders................. $ (48,133,768) $ (17,265,198) $ (182,323,631) $(192,037,565)
============== ============= =============== =============
Comprehensive loss......................................... $ (72,750,137) $ (13,792,843) $ (245,587,760) $(189,505,263)
============= ============= =============== =============
Basic and diluted net loss per share....................... $ (0.16) $ (0.06) $ (0.61) $ (0.76)
Shares used in computing basic and ============= ============= =============== =============
diluted net loss per share............................ 308,996,430 270,146,065 300,846,739 251,308,119
============= ============= =============== =============
See accompanying notes to consolidated financial statements.
15
INFOSPACE, INC. AND GO2NET, INC.
SUPPLEMENTAL PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2000 and 1999
(unaudited)
---------------- ----------------
2000 1999
---------------- ----------------
Operating activities
Net loss.................................................................................. $ (182,323,631) $ (192,037,565)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Depreciation and other amortization.............................................. 123,872,765 25,258,070
Preferred stock dividend......................................................... -- 159,930,733
Compensation expense-stock options............................................... 692,456 2,004,008
Warrants expense................................................................. 3,499,386 611,776
Performance warrant revenue...................................................... (16,437,259) (856,298)
Noncash services exchanged....................................................... 110,000 --
Bad debt expense................................................................. 5,737,195 859,243
(Income) loss from joint venture................................................. (64,207) 100,941
Gain on sale of intangibles...................................................... -- (7,830)
Deferred taxes................................................................... 2,144,787 259,549
Loss on disposal of fixed assets................................................. 322,840 21,019
Gain on investments.............................................................. (8,473,206) --
Cumulative translation adjustment................................................ (264,242) 34,653
Minority interest in venture fund................................................ 4,243,945 --
Business acquisition costs....................................................... 14,108,188 --
In-process research and development.............................................. 80,100,000 3,900,000
Income tax benefit............................................................... -- 2,838,873
Cumulative effect of change in accounting principle.............................. 1,830,918 --
Cash provided (used) by changes in operating assets and liabilities:
Accounts and other receivable........................................... (21,900,693) (10,324,503)
Prepaid expenses and other assets....................................... (4,882,425) (7,328,699)
Accounts payable and accrued expenses................................... (10,556,741) 3,067,362
Deferred revenue........................................................ 19,736,680 3,056,002
---------------- ----------------
Net cash provided (used) by operating activities................................. 11,496,756 (8,612,666)
Investing activities
Purchase of property and equipment............................................... (34,950,903) (6,385,805)
Notes receivable, net............................................................ (8,412,096) (6,576,961)
Business acquisitions, net of cash acquired...................................... (13,499,278) (45,469,262)
Proceeds from sale of domain name................................................ -- 10,000
Investment in domain name........................................................ -- (120,000)
Minority interest contribution in venture fund................................... 16,365,000 --
Purchase of other investments.................................................... (27,250,944) (7,235,708)
Short-term and long-term investments, net........................................ (5,280,464) (328,953,339)
---------------- ----------------
Net cash used by investing activities............................................ (73,028,685) (394,731,075)
Financing activities:
Proceeds from issuance of ESPP shares............................................ 587,030 --
Proceeds from issuance of common stock........................................... (24,359) 478,755,294
Proceeds from exercise of warrants............................................... 6,890,580 --
Proceeds from exercise of stock options.......................................... 28,364,436 11,270,927
Short-term and long-term debt, net............................................... (22,876,890) (162,308)
---------------- ----------------
Net cash provided by financing activities........................................ 12,940,797 489,863,913
---------------- ----------------
Net increase (decrease) in cash and cash equivalents...................................... (48,530,131) 86,820,172
Cash and cash equivalents:
Beginning of period.............................................................. 104,349,564 41,167,638
---------------- ----------------
End of period.................................................................... $ 55,819,433 $ 127,987,810
================ ================
Supplemental disclosure of noncash activities
Dividend to preferred shareholder................................................ -- 159,930,733
Warrants received in exchange for services....................................... 16,437,259 856,298
Common stock issued in exchange transaction...................................... 110,000 --
See accompanying notes to consolidated financial statements.
16
INFOSPACE, INC. AND GO2NET, INC.
SUPPLEMENTAL PRO FORMA NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
1. Pro Forma Basis of Presentation
The pro forma adjustments made in connection with the development of the
pro forma information have been made solely for purposes of developing such pro
forma information as necessary to comply with the disclosure requirements of the
Securities Exchange Commission. The Unaudited Pro Forma Combined Consolidated
Financial Statements do not purport to be indicative of the combined financial
position or results of operations of future periods or indicative of the results
of operations of future periods or indicative of the results that actually would
have been realized had the entities been a single entity during these periods.
The Unaudited Supplemental Pro Forma Combined Consolidated Statement of
Operations for the three and nine month ended September 30, 2000 and 1999 and
the Supplemental Combined Consolidated Balance Sheet as of September 30, 2000
and December 31, 1999 are presented herein. InfoSpace issued 1.82 shares of
InfoSpace Common Stock for each share of Go2Net Common Stock. The pro forma
adjustments reflect the additional shares that would be used in computing basic
and diluted earnings per share as if the Merger had occurred at the beginning of
the period.
2. Pro Forma Earnings Per Share
The Unaudited Supplemental Pro Forma Combined Consolidated Financial
Statements for InfoSpace, Inc. have been prepared as if the merger was completed
at the beginning of the periods presented. The pro forma basic net loss per
share is based on the combined weighted average number of shares of InfoSpace,
Inc. Common Stock outstanding during the period and the number of InfoSpace,
Inc. Common Stock to be issued in exchange as discussed in Note 1.
The Pro Forma diluted loss per share is computed using the weighted average
number of InfoSpace, Inc. Common Stock and dilutive common equivalent shares
outstanding during the period and the number of shares of InfoSpace, Inc. Common
Stock to be issued in exchange. Common equivalent shares consist of the
incremental common shares issuable upon conversion of the exercise of stock
options and warrants using the treasury stock method. Common equivalent shares
are excluded from the computation if their effect is antidilutive. The combined
Company had a pro forma net loss for all periods presented herein; therefore,
none of the options and warrants outstanding during each of the periods
presented were included in the computation of pro forma dilutive earnings per
share as they were antidilutive.
17
3. Pro Forma Statements of Operations Adjustments
The objective of the pro forma information is to show what the significant
effects on the historical financial information might have been had the
Companies been merged for the periods presented.
Pro Forma Adjustment represents the issuance of 1.82 shares of InfoSpace,
Inc. Common Stock in exchange for one share of Go2Net, Inc. including shares
issued and outstanding, vested warrants and vested stock options. The pro forma
adjustments reflect the additional shares that would be used in computing basic
and diluted earnings per share as if the Merger had occurred at the beginning of
each period.
All intercompany transactions between InfoSpace, Inc. and Go2Net, Inc. have
been eliminated for all periods presented.
18
Item 2. -- Management's Discussion and Analysis of Financial Condition and
Results of Operations for InfoSpace historical consolidated financial
statements.
You should read the following discussion and analysis in conjunction with our
Consolidated Financial Statements and Notes to Consolidated Financial Statements
thereto included elsewhere in this report. In addition to historical
information, the following discussion contains certain forward-looking
statements that involve known and unknown risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. You should
read the cautionary statements made in this report as being applicable to all
related forward-looking statements wherever they appear in this report. Our
actual results could differ materially from those discussed in the forward-
looking statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below and in the section
entitled "Factors Affecting Our Operating Results, Business Prospects and Market
Price of Stock" and in our reports filed with the Securities and Exchange
Commission including our annual report on Form 10-K for the year ended December
31, 1999 (the "Form 10-K"). You should not rely on these forward-looking
statements, which reflect only our opinion as of the date of this report. We do
not assume any obligation to revise forward-looking statements.
Overview
InfoSpace, Inc. is a leading global provider of cross-platform merchant and
consumer infrastructure services on wireless, broadband and narrowband
platforms. We provide commerce, information, and communication infrastructure
services to wireless devices, merchants, and Web sites. We have offices in the
United States, Canada, Australia, Brazil, the United Kingdom and throughout
Europe. We began operations in March 1996. As of October 31, 2000 and including
Go2Net, we had 1,074 employees. The following provides greater detail on each of
our service offerings:
Wireless Services: InfoSpace's wireless Internet services are device-independent
and provide a platform which enables carriers to support a variety of protocols
such as WAP, PQA's for Palm VII and VXML, in addition to HDML, SMTP and SMS. Our
services are compatible with a variety of wireless gateway technologies
including Nokia, Phone.com, CMG and Ericsson.
Our integrated platform of services provides 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. We currently work with
more than 20 wireless carriers worldwide, including Verizon Wireless, AT&T
Wireless, Cingular Wireless, VoiceStream, Austria One, Vodafone Australia,
ALLTEL, Virgin Mobile and Powertel, and equipment manufacturers such as Nokia,
Nortel and Ericsson. We also have a strategic alliance with Nortel Networks to
jointly offer our wireless services and platform and Nortel Network's network
infrastructure products to carriers worldwide and to collaborate on the
development of new 3G wireless Internet technology services.
19
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
subscription fees, per subscriber/per month fees in the U.S., Brazil and
Australia and per query/per message fees in Europe. In addition, we receive
licensing fees and commerce revenue for the transactions delivered on the
wireless devices.
Consumer Services: We provide information of broad appeal to users of wireless
devices and PCs including directories, sports, news and entertainment,
multiplayer games, financial data and traffic reports. Our consumer services
include metasearch services, which simultaneously query a variety of search
engines and directory services and transaction services that enable users to
find merchants, comparison shop among both online and offline retailers and
service companies, receive electronic promotions and make purchases with a
single click. We also offer an integrated platform of personal information
management 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. InfoSpace's affiliates encompass a global
network of wireless, PC, and non-PC devices, including cellular phones, pagers,
screen telephones, television set-top boxes, online kiosks and personal digital
assistants. Including Go2Net, our affiliate network consists of more than 3,200
affiliate partners or Web sites, reaching more than 92% of all Internet users
and more than 20 wireless carriers worldwide.
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. These services are available to merchants across
multiple channels through our broad distribution network. We have extensive
reseller agreements with RBOCs, including BellSouth, SBC, Verizon and Qwest,
merchant banks, such as Bank of America and American Express, and other local
media networks such as Knight Ridder, newspapers, television stations and radio
stations that provide our services to millions of local merchants worldwide.
Our merchant services consist of a comprehensive platform of technology that
enables us to deliver unique services such as:
. the online delivery of promotions to any device that can be used online and
offline;
. buying from anyWeb site directly from a wireless device with a single click;
. Page Express which enables local merchants to create a Web presence;
. StoreBuilder which enables merchants to build on-line stores;
. ActivePromotionTM which enables merchants to create targeted product
promotions and distribute them across our network;
. ActiveShopperTM which provides an open marketplace where consumers can find,
research and purchase products from our merchant network; and
20
. payment authorization for online businesses.
In addition, we recently added full back-end payment processing to our existing
commerce services, allowing us to offer a merchant the ability to conduct the
entire lifecycle of a transaction.
Revenues from our merchant services are primarily generated from subscriber
fees, including per store/per month or per promotion/per month fees and commerce
revenue for the transactions conducted using our services.
Acquisitions: 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 and Canada. Also in March 2000,
we acquired Millet Software, Inc. (Privacybank.com). Millet developed secure
technology that provides an automated process for filling in payment forms. In
July 2000, we acquired IQorder.com Inc., which developed technology to allow
consumer 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. In
August 2000, we acquired Orchest, Inc., a provider of financial services that
enables users to access a consolidated view of their personal financials
information from multiple institutions. Also in August, we acquired TDLI.com
Limited which in turn holds approximately fifty percent of TDL InfoSpace
(Europe) Limited, a joint venture originally formed by the Company and Thomson
Directories Limited. The Company now has 100% ownership and control of TDL
InfoSpace. In October 2000, we merged with Go2Net, Inc., a publicly-held
provider of applications and technology infrastructure for narrowband and
broadband.
We have incurred losses since our inception and, as of September 30, 2000, we
had an accumulated deficit of approximately $253.5 million. For the three months
ended September 30, 2000, our net loss totaled $40.4 million, including $26.1
million in amortization of intangibles and $7.3 million in acquisition and
related charges associated with the acquisitions of IQorder, Orchest, the
remaining TDL InfoSpace interest and Go2Net. $6 million of the acquisition
charges is for non-cash charges for in-process research and development
associated with the acquisitions. For the nine months ended September 30, 2000,
our net loss totaled $155.0 million, including amortization of intangibles of
$53.5 million, $93.9 million in acquisition and related charges associated with
the acquisitions of Prio, Saraide, Millet Software, IQorder, Orchest, the
remaining TDL InfoSpace interest and Go2Net and $2.9 million in other
non-recurring charges related to a one-time warrant expense that resulted from
the acquisition of Prio. $74.1 million of the acquisition charges is for
non-cash charges for in-process research and development associated with the
acquisitions.
We believe that our future success will depend largely on our ability to
continue to offer wireless, consumer and merchant 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:
21
. develop and upgrade our technology;
. expand our wireless services and up-sell and cross-sell to our existing
carrier partners a unified private label solution that will work across
all their networks, including wireless, broadband DSL and narrowband
ISP;
. expand internationally;
. increase capital equipment expenditures to meet service level agreement
requirements and build-out infrastructure in Europe, South America and
Asia;
. expand our merchant services, up-sell and cross-sell to our existing
merchants and merchant aggregator partners and grow our network of
merchants; and
. expand our affiliate network, which may require us to pay additional
carriage fees to certain affiliates.
After giving effect to our recent acquisitions and continued global expansion,
we expect to incur significant operating losses on a quarterly basis in the
future. In light of the rapidly evolving nature of our business and limited
operating history, we believe that period-to-period comparisons of our revenues
and operating results are not necessarily meaningful, and you should not rely
upon them as indications of future performance. Although we have experienced
sequential quarterly growth in revenues over the past seventeen quarters, we do
not believe that our historical growth rates are necessarily sustainable or
indicative of future growth.
Results of Operations
Revenues. Revenues increased $20.6 million, or 187%, to $31.0 million in the
three-month period ended September 30, 2000 from the comparable period of 1999.
Revenues increased $53.3 million, or 235%, to $76.0 million in the nine months
ended September 30, 2000 from the comparable period in 1999. The increases for
both the three and nine month periods are primarily due to significant growth in
our consumer, merchant and wireless services. This growth is a result of the
expansion of our affiliate network and increased use of our consumer, merchant
and wireless services, as well as larger and longer term agreements with
wireless carriers, advertisers, affiliates and distribution partners. These
increases are also the result of an increase in subscription revenues, license
fees and e-commerce transaction fees.
Cost of Revenues. Cost of revenues consists of expenses associated with the
enhancement, maintenance and support of our consumer, merchant and wireless
services, including direct personnel expenses, consultant costs, communication
costs such as high-speed Internet access, server equipment depreciation,
royalties and content license fees. Cost of revenues were $6.3 million, or 20%
of revenues, for the three-month period ended September 30, 2000 compared to
$2.0 million, or 19% of revenues, for the three-month period ended September 30,
1999. For the nine-month period ended September 30, 2000, cost of revenues was
$13.9 million, or 18% of revenues. This compares to $5.0 million, or 22% of
revenues, for the nine months ended September 30, 1999. The absolute dollar
increases are primarily attributable to costs incurred in order to support
greatly increased delivery of consumer, merchant and wireless solutions,
including personnel expenses, communication lines, data licenses and equipment.
We expect the absolute dollars spent on personnel, enhanced content and expanded
communications will continue to increase in future periods.
22
Product Development Expenses. Product development expenses consist principally
of engineering personnel costs for research, design and development of the
proprietary technology we use to integrate and distribute our consumer, merchant
and wireless services. Product development expenses increased $4.1 million, or
157%, to $6.8 million in the three-month period ended September 30, 2000, from
$2.6 million for the comparable period in 1999. For the nine months ended
September 30, 2000, product development expenses increased $10.8 million, or
142% to $13.9 million from the comparable period in 1999. The increase in
absolute dollars is primarily attributable to increases in engineering personnel
needed for continued development and enhancement of our products and service
offerings. We believe that significant investments in technology are necessary
to remain competitive. Accordingly, we expect product development expenses to
continue to increase in absolute dollars as we hire additional engineering
personnel who will develop and enhance our proprietary technology.
Sales, 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, travel
expenses and other general corporate purposes. Sales, general and administrative
expenses were $23.0 million or 74% of revenues in the three months ended
September 30, 2000 compared to $12.3 million or 117% of revenues for the
comparable period in 1999. Sales, general and administrative expenses were $58.5
million or 80% of revenues for the nine months ended September 30, 2000 compared
to $31.0 million or 136% of revenues for the comparable period in 1999. The
absolute dollar increase is primarily due to increased personnel costs,
occupancy costs, professional service fees, carriage fees paid to certain
affiliates to include our content services on their Web sites and travel
expenses.
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 $26.1 million in the
three months ended September 30, 2000, compared to $1.0 million in the three
months ended September 30, 1999. Amortization of intangibles was $53.5 million
in the nine months ended September 30, 2000, compared to $1.6 million in the
nine months ended September 30, 1999. The increases are a result of amortization
of intangibles recorded primarily from the acquisitions of TDL InfoSpace and
Orchest in August 2000, IQorder in July 2000, Millet Software and Saraide in
March 2000, Zephyr Software and eComLive in December of 1999 and Union-Street in
October 1999. Intangibles for acquisitions are being amortized over three or
five years. In the event that we complete additional acquisitions, which we
expect to do, expenses relating to the amortization of intangibles could
increase in the future.
Acquisition and Related Charges. Acquisition and other related charges consist
of in-process research and development and other one-time charges related
directly to acquisitions, such as legal and accounting fees. The acquisition and
related charges in the nine months ended September 30, 2000 were one-time
in-process research and development charges and costs incurred in the purchase
acquisitions of IQorder.com, Orchest, TDLI.com Limited, Saraide and Millet
Software and costs incurred in the acquisitions of Go2Net and Prio, which were
accounted for as pooling-of-interests transactions. Total in-process research
and development charges in the nine months ended September 30, 2000 were $80.1
million.
23
Other Non-Recurring Charges. Other non-recurring charges in the nine months
ended September 30, 2000 represent an expense recorded for the fair market value
of warrants issued by Prio. Prio had previously issued warrants for services
provided. These warrants were accounted for under variable plan accounting.
Subsequent to the acquisition of Prio, the agreement pursuant to which these
warrants were granted was terminated and the remaining unvested warrants
accelerated to full vesting.
Gain (Loss) on Investments Held: Gain (loss) on investments held represents the
unrealized and realized gains and losses on the investments in the InfoSpace
Venture Capital Fund 2000 and realized gains and losses on investments held by
InfoSpace. In accordance with Accounting for Investment Companies, the
investments are recorded at their market value and the unrealized gains and
losses are reflected in the income statement in the Fund, which is fully
consolidated. The $6.7 million loss on investments held in the three months
ended September 30, 2000 includes gains of $2.6 million and losses of $9.3
million. The $8.5 million gain on investments held in the nine months ended
September 30, 2000 includes gains of $17.8 million and losses of $9.3 million.
Minority Interest in Venture Capital Fund: As the majority interest holder in
the InfoSpace Venture Capital Fund 2000, we have recorded 100% of the balance
sheet and statement of operations in our consolidated financial statements. The
non-InfoSpace portion of the net income in the fund has been reflected as
minority interest. At September 30, 2000, InfoSpace owned 59.8% of the fund and
our employees owned the remaining 40.2% of the fund.
Restructuring Charges: Restructuring charges of $2.2 million for the nine months
ended September 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 2000. 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 $2.7 million in the three months ended September 30,
2000, compared to $3.3 million from the three months ended September 30, 1999.
The decrease from the prior year is primarily due to reinvestment of funds to
equity securities from fixed income securities. For the nine months ended
September 30, 2000, other income was $8.7 million compared to $8.0 million in
the nine months ended September 30, 1999. This increase from the prior year is
primarily due to interest earned on higher average cash balances resulting from
the net proceeds from our follow-on offering, which closed in April 1999.
Balance Sheet Commentary
Accounts Receivable. As our revenues have grown, our current receivable balance
has increased as we are invoicing larger dollar amounts at the end of each
month. We are also issuing single invoices for larger dollar amounts. In
addition, 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 to allow for the customer's internal
approval and
24
payment processing systems. In the quarter ended September 30, 2000, our day's
sales outstanding (DSO) was 50 days. We expect DSO's in the future to be in the
range of 50-60 days.
Allowance for Doubtful Accounts. We specifically reserve all accounts sixty days
or more past due. In addition, we reserve an amount based on revenues and the
accounts receivable balance for accounts not specifically identified.
We have a stringent credit review process and require payment in advance from
those customers that do not qualify under our trade credit guidelines.
Notes and Other Receivable: Notes and other receivables is primarily comprised
of interest receivable, advances to employees, a fully secured note to a former
officer of the company and a loan to a company that we have signed a definitive
agreement to acquire.
Liquidity and Capital Resources
At September 30, 2000, our principal source of liquidity was $137.6 million in
cash, cash equivalents and short-term investments. In addition, we have $14.4
million in long-term investments and $64.1 million in other investments in
public and privately-held equity securities. 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.
Net cash used by operating activities was $28.0 million in the nine months ended
September 30, 2000. This primarily consisted of net operating losses offset by
non-cash charges for depreciation and amortization and in-process research and
development. Net cash used by operating activities was $19.2 million during the
nine months ended September 30, 1999. This consisted primarily of net operating
losses and changes in receivables and prepaid and other assets and is offset by
non-cash charges for depreciation and amortization and in-process research and
development and changes in deferred revenue and accrued expenses.
Net cash provided by investing activities was $28.9 million in the nine months
ended September 30, 2000. This was primarily comprised of acquisition costs,
purchases of equipment and tenant improvements, additions to other investments,
proceeds from the sale of short-term investments, and the minority interest
contribution to the Venture Fund. Net cash used by investing activities during
the nine months ended September 30, 1999 was $148.1 million. This was primarily
a result of investing cash in short and long-term investments and acquisition
costs.
Net cash provided by financing activities in the nine months ended September 30,
2000 of $657,000 was primarily comprised of proceeds from the exercise of stock
options and warrants and payments of debt assumed in the acquisition of Saraide.
Cash provided by financing activities in the nine months ended September 30,
1999 of $188.6 was primarily comprised of proceeds from the issuance of common
stock from our follow-on offering in April.
We plan to use our cash for investments in internally developed technology,
global expansion of our services and continued build-out of infrastructure in
Europe, Asia and South America.
25
We believe that existing cash balances, cash equivalents and cash generated from
operations will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. However, the
underlying assumed levels of revenues and expenses may not prove to be accurate.
We may seek additional funding through public or private financings or other
arrangements prior to such time. Adequate funds may not be available when needed
or may not be available on favorable terms. If we raise additional funds by
issuing equity securities, dilution to existing stockholders will result. If
funding is insufficient at any time in the future, we may be unable to develop
or enhance our products or services, take advantage of business opportunities or
respond to competitive pressures, any of which could harm our business. See
"Factors Affecting Our Operating Results, Business Prospects and Market Price of
Stock."
Acquisitions
Go2Net, Inc.: On October 12, 2000, we completed the merger with Go2Net, Inc., a
publicly held provider of applications and technology infrastructure for
narrowband and broadband. Under the terms of the acquisition, which was
accounted for as a pooling-of-interests, the Company exchanged 74,145,348 shares
of the Company's common stock for all of the preferred and common shares of
Go2Net.
iJapan Corporation: On September 13, 2000, we acquired intellectual property
that translates between cHTML and other major wireless markup languages from
iJapan for purchase consideration of $2 million. We recorded $2 million of
intangible assets.
TDL InfoSpace: On August 31, 2000, we acquired TDLI.com Limited, a privately
held company based in Hampshire, England that in turn holds approximately fifty
percent of TDL InfoSpace (Europe) Limited, a joint venture originally formed by
InfoSpace and Thomson Directories Limited in July 1998 to replicate InfoSpace's
services in Europe. The Company acquired TDLI.com for purchase consideration of
3,420,308 shares of our common stock and acquisition expenses of $2,063,414. We
recorded $131,936,922 in intangible assets. We now have 100% ownership and
control of TDLI.com.
Orchest, Inc.: On August 4, 2000, we acquired all of the common stock of
Orchest, Inc. for purchase consideration of 255,288 shares of the our common
stock and acquisition expenses of $72,060. We recorded $8,890,306 for intangible
assets. Orchest was a privately held provider of financial services that enables
users to access a consolidated view of their personal financials information
from multiple institutions.
IQorder.com, Inc.: On July 3, 2000, we 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. We issued 989,959
shares of our common stock for all of IQorder's outstanding shares, warrants and
options. We recorded a one-time in-process research and development charge of
$6.0 million and recorded $63,094,723 in intangible assets. Acquisition expenses
were $189,265.
26
Millet Software, Inc.: 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. We
recorded a one-time in-process research and development charge of $2.4 million
and recorded $27.6 million in intangible assets.
Saraide Inc.: On March 10, 2000, we acquired eighty percent of the common stock
of Saraide, a privately held company, for purchase consideration of 9,233,672
shares and acquisition expenses of $340,489. We recorded a one-time in-process
research and development charge of $71.7 million and recorded $291.8 million in
intangible assets.
Prio, Inc.: On February 14, 2000, we consummated the acquisition 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. The consolidated balance
sheet as of September 30, 2000 and December 31, 1999 and the consolidated
statement of operations for the three and nine months ended September 30, 2000
and 1999 are presented as if Prio was a wholly owned subsidiary since inception.
Factors Affecting Our Operating Results, Business Prospects and Market Price of
Stock
In addition to other information in this report, investors evaluating us and our
business should carefully consider the following risk factors. These risks may
impair our operating results and business prospects and the market price of our
stock.
This report contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements include, but are not limited to,
statements regarding our business and growth strategy, the expected demand for
and benefits of our Internet information infrastructure services for our
affiliates, advertisers and content providers, anticipated benefits from the
business and technologies we have acquired or intend to acquire, future carriage
fees, increased advertising and public relations expenditures, increased
operating expenses and the reasons for such increases, expected operating
losses, increased product development expenditures, increased costs of revenues,
increased product development expenses, increased sales and marketing expenses,
increased general and administrative expenses, anticipated capital equipment
expenditures and anticipated cash needs.
We use words such as "anticipates," "believes," "plans," "expects," "future,"
"intends," "may," "will," "should," "estimates," "predicts," "potential,"
"continue," and similar expressions to identify such forward-looking statements.
Forward-looking statements are subject to known and unknown risks, uncertainties
and other factors that may cause our and the strategic Internet services
industry's actual results, levels of activity, performance, achievements and
prospects to be materially different from those expressed or implied by such
forward-looking statements. The risks set forth below and elsewhere in this
report could cause actual results to differ materially from those projected.
27
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 September 30, 2000. At September 30, 2000, we had an accumulated
deficit of approximately $253.5 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 wireless, merchant,
consumer and broadband services;
. expand our sales and marketing efforts, including relationships with
third parties to sell our merchant services;
. maintain and increase our affiliate, distribution and advertiser base;
. successfully expand into international markets;
. retain and motivate qualified personnel; and
. successfully respond to competitive developments.
Our Financial Results Are Likely to Fluctuate
Our financial results have varied on a quarterly basis and are likely to
fluctuate substantially in the future. These fluctuations may be caused by
several factors, many of which are beyond our control. These factors include:
. the addition or loss of affiliates;
. variable demand for our wireless, merchant, consumer and broadband
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 wireless, merchant,
consumer and broadband services;
28
. our ability to attract and retain advertisers, content providers,
affiliates and distribution partners;
. 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 us, 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 is unfavorable to us or changes
in an adverse way, our business could suffer.
In addition, because InfoSpace only began operations in March 1996, and because
the market for Internet infrastructure services 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. Our expenses, which are partially based on our expectations regarding
future revenues and estimated expenses from our acquisitions, 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.
29
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 or delays in assimilating the operations, products,
technology, information systems and personnel of the acquired company;
. diverting management's attention from other business concerns;
. impairing relationships with our employees, affiliates, advertisers,
content providers and distribution partners;
. incurring expenses that we did not anticipate;
. being unable to maintain uniform standards, controls, procedures and
policies;
. entering markets in which we have no direct prior experience;
. losing key employees or customers of the acquired company;
. failing to achieve the anticipated benefits of the acquisition in a
timely and efficient manner or in a manner that meets expectations of
investors or financial and industry analysts; and
. failing to qualify for pooling-of-interests accounting treatment in
acquisitions where we seek such treatment.
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 less than
100 at January 1, 1998 to 1,074 at October 31, 2000. We now have development,
operations and administrative facilities in Bellevue and Seattle, Washington;
San Mateo and Mountain View, California; Provo, Utah; Ottawa, Canada;
Papendrecht, Netherlands; Sydney, Australia; Rio de Janeiro, Brazil and London,
United Kingdom. We also have sales offices in San Francisco, California; New
York,
30
New York; Dallas, Texas; and Chicago, Illinois. 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. With the
Go2Net merger, we have reorganized and identified key managerial, technical and
operations personnel. We also plan to continue to increase our employee base.
These additional personnel may further strain our management resources.
The rapid growth of our business has strained our ability to meet customer
demands and manage the growing number of customer relationships. In addition,
our relationships are also growing in their size and complexity of services. As
a result of the growth in the size, number, and complexity of our relationships
we may be unable to meet the demands of our customer relationships, which could
result in the loss of customers, subject us to penalties under our affiliate
agreements and harm our business reputation.
To manage the expected growth of our operations and personnel, we must continue
maintaining and improving or replacing existing operational, accounting and
information systems, procedures and controls. Further, we must manage
effectively our relationships with various Internet content providers,
distribution partners, wireless carriers, advertisers, affiliates and other
third parties necessary to our business. If we are unable to manage growth
effectively, our business could suffer.
We Rely on Advertising and Transaction Revenues
We derive a significant amount of our revenues from the sale of national and
local advertisements and promotions, and from transaction fees from our
affiliates who use our consumer services, and we expect this to continue into
the fourth quarter of 2000. Our ability to increase and diversify our revenues
will depend upon a number of factors, including the following:
. the ability of our business development and sales personnel to
effectively sell our broad suite of wireless, merchant, consumer and
broadband 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.
31
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 and customers may have difficulty raising sufficient capital to
support their long-term operations. As a result, these affiliates and customers
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 66% of our revenues in the third quarter of
2000. Three customers accounted for 35% of the revenues in the third quarter of
2000. If we lose any of these customers or if any of these customers are unable
or unwilling to pay us amounts that they owe us, our financial results will
suffer.
We May Require Additional Funding
Although we believe that our cash reserves and cash flows from operations will
be adequate to fund our operations for at least the next 12 months, such sources
may be inadequate. Consequently, we may require additional funds during or after
such period. Additional financing may not be available on favorable terms or at
all. If we raise additional funds by selling stock, the percentage ownership of
our then current stockholders will be reduced. If we cannot raise adequate funds
to satisfy our capital requirements, we may have to limit our operations
significantly. Our future capital requirements depend upon many factors,
including, but not limited to:
. the rate at which we expand our sales and marketing operations;
. the amount and timing of fees paid to affiliates to include our
wireless, merchant, consumer and broadband 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;
32
. the rate at which we expand internationally; and
. the response of competitors to our service offerings.
Item 3. -- Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risks, including changes in interest rates
and equity price fluctuations.
Interest Rate Risk: We invest our excess cash in high-quality corporate issuers,
and in debt instruments of the U.S. Government and its agencies. By policy, we
limit our credit exposure to any one issuer. We do not have any derivative
instruments in our investment portfolio. We protect and preserve invested funds
by limiting default, market and reinvestment risk. Investments in both fixed
rate and floating rate interest earning instruments carries a degree of interest
rate risk. Fixed rate securities may have their fair market value adversely
impacted due to a rise in interest rates, while floating rate securities may
produce less income than expected if interest rates fall. Due in part to these
factors, the Company's future investment income may fall short of expectations
due to changes in interest rates or the Company may suffer losses in principal
if forced to sell securities which have declined in market value due to changes
in interest rates.
Equity Investment Risk: The Company invests in equity instruments of public and
privately held, technology companies for business and strategic purposes. These
investments are recorded as long-term assets and are classified as
available-for-sale. For the privately-held investments, our policy is to
regularly review the assumptions underlying the operating performance and cash
flow forecasts in assessing the carrying value. For our publicly-held
investments, we are subject to significant fluctuations in fair market value due
to the volatility of the stock market. Changes in fair market value are recorded
as a component of other comprehensive income and do not effect net income until
the securities are sold and a realized gain or loss is incurred.
33
PART II -- OTHER INFORMATION
Item 1. - 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 former employee filed a complaint against us 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. The case has been transferred to the United States District Court for
the Western District of Washington. By order dated September 14, 2000, the Court
dismissed with prejudice the former employee's claims for breach of the covenant
of good faith and fair dealing, fraud, negligent misrepresentation, and
promissory estoppel. The Court heard oral argument on the parties' cross-motions
for summary judgment on the remaining contract claim on November 8, 2000, and
trial is scheduled to begin on January 30, 2001. We believe we have meritorious
defenses to such claim. Nevertheless, litigation is uncertain and we may not
prevail in this suit.
On December 23, 1998, we initiated litigation against Internet Yellow Pages,
Inc. ("IYP") by filing suit in United States District Court for the Western
District of Washington. On February 3, 1999, we served a first amended complaint
on IYP and Greg Crane, an agent of IYP, in which we asserted claims for (a)
account stated, (b) breach of contract, and (c) fraud. On 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 sought
relief consisting of approximately $1,500,000 and other unquantified money
damages, treble damages under the CPA, and attorneys' fees. The case was settled
in October 2000, with no monetary or other recovery by either side.
Authorize.Net Corporation, a subsidiary recently acquired through our merger
with Go2Net, has been named as a defendant in a suit filed in June 2000 which
purports to be a class action brought on behalf of persons who leased "virtual
terminals" to Authorize.Net among a myriad of other non-Authorize.Net products
in connection with actual or proposed internet businesses. The leases were
allegedly financed by a third-party unaffiliated leasing company in connection
with sales efforts by a third-party unaffiliated reseller. The suit, insofar as
it relates to Authorize.Net, alleges that the leases of the products at issue
were actually sales and that they were financed by the leasing company at
usurious rates. The suit further alleges that the reseller was acting as an
agent of Authorize.Net in these activities. We believe that Authorize.Net has
meritorious defenses to this claim against it. Nevertheless, litigation is
inherently uncertain, and Authorize.Net may not prevail in this suit.
34
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.
Item 2. - Changes in Securities and Use of Proceeds
c) The following issuances of equity securities during the quarter ended
September 30, 2000 were not registered under the Securities Act:
(i) On August 31, 2000, the Company acquired TDLI.com Limited, a
privately held company based in Hampshire, England that in turn
holds approximately fifty percent of TDL InfoSpace (Europe) Limited,
a joint venture originally formed by InfoSpace and Thomson
Directories Limited in July 1998 to replicate InfoSpace's services
in Europe. The Company acquired TDLI.com for purchase consideration
of 3,420,308 shares of the Company's common stock and acquisition
expenses of $2,063,414. The Company recorded $131,936,922 in
intangible assets. The Company now has 100% ownership and control of
TDL InfoSpace. The issuance of the shares was exempt from
registration pursuant to Rule 506 and Regulation S.
(ii) On August 4, 2000, the Company acquired all of the common stock of
Orchest, Inc. for purchase consideration of 255,288 shares of the
Company's common stock and acquisition expenses of $72,060. The
Company recorded $8,890,306 million for intangible assets. Orchest
was a privately held provider of financial services that enables
users to access a consolidated view of their personal financials
information from multiple institutions. The issuance of the shares
was exempt from registration pursuant to Rule 506.
(iii) On July 3, 2000, the Company acquired all of the common stock of
IQorder.com for purchase consideration of 989,959 shares of the
Company's common stock and acquisition expenses of $189,265. The
Company recorded a non-recurring charge of $6.0 million for
in-process research and development and $63,094,723 million for
intangible assets. IQorder was a privately held company that
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. The issuance
of the shares was exempt from registration pursuant to Section
3(a)(10).
Item 3. - Defaults Upon Senior Securities
Not applicable with respect to the current reporting period.
35
Item 4. - Submission of Matters to a Vote of Security Holders
At the special meeting of stockholders held on October 12, 2000, the following
proposals were adopted by the margin indicated:
1. To issue shares of InfoSpace common stock in connection with the
proposed merger of Go2Net, Inc. with a wholly-owned subsidiary of
InfoSpace:
Shares Voting:
--------------
For 145,806,855
Against 873,165
Abstain 1,470,159
2. To authorize the proxies to vote upon such other business as may
properly come before the meeting:
Shares Voting:
--------------
For 116,094,503
Against 12,485,397
Abstain 19,570,278
Item 5. - Other Information
Not applicable with respect to the current reporting period.
Item 6. - Exhibits and Reports on Form 8-K:
a. Exhibits
10.1 Pier 70 Lease Agreement dated July 20, 1999 (2)
10.2 Go2net, Inc. 2000 Stock Option Plan (1)
10.3 Go2net, Inc. 1996 Stock Option Plan (1)
10.4 Silicon Investor, Inc. 1996 Stock Plan (1)
10.5 Web21 Stock Option Plan (1)
10.6 Authorize.Net Corp. 1999 Stock Incentive Plan (1)
27.1 Financial Data Schedule
-------------------
(1) Incorporated by reference to Exhibits 4.1, 4.2, 4.3, 4.4 and
----------------------------------------------------------------
4.5, respectively, to the Registration Statement on Form S-8
------------------------------------------------------------
(Registration No. 333-47874) of InfoSpace, Inc., as filed with
--------------------------------------------------------------
the SEC on October 13, 2000.
----------------------------
(2) Incorporated by reference to the Form 10-Q of Infospace as
--------------------------------------------------------------
filed with the SEC on November 14, 2000.
----------------------------------------
b. Reports on Form 8-K
Form 8-K filed with the SEC on September 15, 2000, dated August
31, 2000, with respect to the acquisition of TDLI.com Limited,
reported pursuant to Item 2.
Form 8-K/A filed with the SEC on September 14, 2000, dated July
5, 2000, amending the Form 8-K previously filed with respect to
the acquisition of IQorder.com.
Form 8-K filed with the SEC on August 15, 2000, dated July 5,
2000, with respect to the acquisition of IQorder.com, Inc.,
reported pursuant to Item 5.
36
Form 8-K filed with the SEC on August 2, 2000, dated July 22, 2000,
with respect to the Agreement and Plan of Reorganization between
InfoSpace, Inc., Giants Acquisition Corporation and Go2Net, Inc.,
reported pursuant to Item 5.
Form 8-K filed with the SEC on July 25, 2000, dated as of such date,
which included the financial statements of InfoSpace Inc., as recast
due to the acquisition of Prio, Inc., which was accounted for as a
pooling of interests, reported pursuant to Item 5.
Form 8-K/A filed with the SEC on July 10, 2000, dated March 10,
2000, amending the Form 8-K previously filed with respect to the
acquisition of Saraide Inc., pursuant to Item 2.
Form 8-K/A filed with the SEC on July 10, 2000, dated December 16,
1999, amending the Form 8-K previously filed with respect to the
acquisition of eComLive.com, Inc., reported pursuant to Item 2.
Form 8-K/A filed with the SEC on July 10, 2000, dated February 25,
2000, amending the Form 8-K previously filed with respect to the
acquisition of Prio, Inc., reported pursuant to Item 2.
37
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INFOSPACE, INC.
By: /s/ Tammy D. Halstead
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Tammy D. Halstead
Chief Financial Officer
Dated: February 13, 2001
38