UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2001
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 108th 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 July 31, 2001
----- -------------
Common Stock, Par Value $.0001 325,259,314
INFOSPACE, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I - Financial Information
Item 1. -- Financial Statements
Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000.......... 3
Consolidated Statements of Operations and Comprehensive Loss for the Three and
Six Months Ended June 30, 2001 and 2000................................... 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2001 and 2000..................................................... 5
Notes to Consolidated Financial Statements..................................... 6
Item 2. -- Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview....................................................................... 15
Results of Operations.......................................................... 18
Liquidity and Capital Resources................................................ 23
Factors Affecting InfoSpace's Operating Results, Business Prospects and
Market Price of Stock...................................................... 25
Item 3. -- Quantitative and Qualitative Disclosures About Market Risk............ 31
Part II - Other Information
Item 1. -- Legal Proceedings........................................................ 33
Item 2. -- Changes in Securities and Use of Proceeds................................ 35
Items 3 through 5 are not applicable with respect to the current reporting period.
Item 6. -- Exhibits and Reports on Form 8-K......................................... 35
Signature........................................................................... 37
2
Item 1. - Financial Statements
INFOSPACE, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2001 December 31,
(unaudited) 2000
----------------- -----------------
(Amounts in thousands,
ASSETS except share data)
Current assets:
Cash and cash equivalents.................................................. $ 182,295 $ 153,913
Short-term investments, available-for-sale................................. 85,866 216,235
Accounts receivable, net................................................... 17,414 33,881
Payroll tax receivable..................................................... 13,214 620
Notes and other receivables................................................ 23,004 21,701
Prepaid expenses and other current assets.................................. 14,582 14,491
---------- ----------
Total current assets.................................................... 336,375 440,841
Property and equipment, net.................................................. 52,946 51,137
Long-term investments, available-for-sale.................................... 75,445 32,451
Other investments............................................................ 88,949 121,574
Intangible assets, net....................................................... 615,501 621,032
Other long term 3,300 5,075
assets...................................................................... ---------- ----------
Total........................................................................ $1,172,516 $1,272,110
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $ 5,891 $ 4,537
Accrued expenses and other current liabilities............................. 35,103 37,999
Deferred revenue........................................................... 21,426 31,430
---------- ----------
Total current liabilities............................................... 62,420 73,966
Long-term deferred revenue................................................. 3,477 7,973
Minority interest.......................................................... -- 21,599
---------- ----------
Total liabilities....................................................... 65,897 103,538
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, par value $.0001- Authorized, 15,000,000 shares, issued
and outstanding, 2 and 1 share............................................ -- --
Common stock, par value $.0001- Authorized, 900,000,000 shares; issued and
outstanding, 325,244,717 and 316,669,408 shares........................... 33 32
Additional paid-in capital................................................. 1,717,399 1,596,213
Accumulated deficit........................................................ (603,945) (408,646)
Deferred expense--warrants................................................. (1,088) (1,495)
Unearned stock-based compensation.......................................... (1,710) (1,500)
Accumulated other comprehensive loss....................................... (4,070) (16,032)
---------- ----------
Total stockholders' equity.............................................. 1,106,619 1,168,572
---------- ----------
Total liabilities and stockholders' equity................................... $1,172,516 $1,272,110
========== ==========
See accompanying notes to consolidated financial statements.
3
INFOSPACE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
Three and Six Months Ended June 30, 2001 and 2000
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2001 2000 2001 2000
-------- -------- --------- ---------
(Amounts in thousands, except per share data)
Revenues............................................ $ 50,942 $ 50,486 $ 97,507 $ 89,264
Cost of revenues.................................... 10,614 8,109 22,335 14,243
-------- -------- --------- ---------
Gross profit................................... 40,328 42,377 75,172 75,021
Operating expenses:
Product development............................... 10,569 9,507 22,356 16,458
Sales, general and administrative................. 31,580 30,827 66,601 53,810
Amortization of intangibles....................... 59,107 40,636 123,004 68,646
Acquisition and other related charges............. 111 202 1,000 86,599
Other non-recurring charges....................... 288 -- 1,344 2,888
Restructuring charges............................. (62) 2,171 1,655 2,171
-------- -------- --------- ---------
Total operating expenses....................... 101,593 83,343 215,960 230,572
-------- -------- --------- ---------
Loss from operations........................... (61,265) (40,966) (140,788) (155,551)
Gain (loss) on investments.......................... (14,099) (8,447) (61,715) 15,151
Other income, net................................... 4,580 7,123 10,563 14,707
-------- -------- --------- ---------
Loss before income tax expense, minority interest
and cumulative effect of change in accounting
principle.......................................... (70,784) (42,290) (191,940) (125,693)
Minority interest................................... -- 3,445 -- (6,398)
Income tax expense.................................. (137) (6) (187) (24)
-------- -------- --------- ---------
Loss before cumulative effect of change in
accounting principle............................... (70,921) (38,851) (192,127) (132,115)
Cumulative effect of change in accounting principle. - - (3,171) (2,055)
-------- -------- --------- ---------
Net loss............................................ $(70,921) $(38,851) $(195,298) $(134,170)
======== ======== ========= =========
Basic and diluted net loss per share................ $(0.22) $(0.13) $(0.60) $(0.45)
======== ======== ========= =========
Shares used in basic and diluted per share
calculation........................................ 325,027 303,992 324,167 296,726
======== ======== ========= =========
Net loss............................................ $(70,921) $(38,851) $(195,298) $(134,170)
Foreign currency translation adjustment........... (80) (292) (318) (350)
Unrealized gain (loss) on investments............. 2,207 (46,440) 12,280 (42,396)
-------- -------- --------- ---------
Comprehensive loss.................................. $(68,794) $(85,583) $(183,336) $(176,916)
======== ======== ========= =========
See accompanying notes to consolidated financial statements.
4
INFOSPACE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2001 and 2000
(unaudited)
June 30,
----------------------
2001 2000
--------- ---------
(Amounts in thousands)
Operating activities
Net loss....................................................................................... $(195,298) $(134,170)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Depreciation and other amortization......................................................... 132,005 72,824
Warrant and stock related revenue........................................................... (11,003) (9,978)
Warrants expense............................................................................ 407 3,296
Stock based compensation expense............................................................ 2,147 512
Bad debt expense............................................................................ 4,230 2,266
Loss (gain) on investments.................................................................. 61,715 (15,150)
Other non-recurring charges................................................................. 258 --
Minority interest........................................................................... 17 6,334
Loss on disposal of assets.................................................................. 304 360
In-process research and development......................................................... 600 74,100
Business acquisition costs.................................................................. 400 12,499
Cumulative translation adjustment........................................................... (318) (295)
Cumulative effect of change in accounting principle......................................... 3,171 1,687
Non cash service exchanged.................................................................. -- 110
Cash provided (used) by changes in operating assets and liabilities:
Accounts receivable....................................................................... 13,758 (13,734)
Other receivables......................................................................... (16,646) (3,769)
Prepaid expenses and other current assets................................................. (2,292) (473)
Other long-term assets.................................................................... 2,021 (773)
Accounts payable.......................................................................... 465 2,446
Accrued expenses and other current liabilities............................................ (1,873) (14,616)
Deferred taxes............................................................................ -- 2,145
Deferred revenue.......................................................................... (15,776) 24,608
--------- ---------
Net cash provided (used) by operating activities............................................ (21,708) 10,229
Investing activities
Business acquisitions....................................................................... (5,827) (9,933)
Contribution (purchase) of minority interest ownership in VC Fund........................... (16,335) 19,365
Notes receivable............................................................................ (275) (15,802)
Other investments........................................................................... (12,000) (27,500)
Purchase of fixed assets.................................................................... (9,244) (23,792)
Proceeds from sale of fixed assets.......................................................... 50 --
Short-term investments, net................................................................. 130,369 17,298
Long-term investments, net.................................................................. (42,281) (27,439)
--------- ---------
Net cash provided (used) by investing activities............................................ 44,457 (67,803)
Financing activities:
Proceeds from issuance of ESPP shares....................................................... 1,117 587
Proceeds from issuance of stock............................................................. -- (40)
Proceeds from exercise of options and warrants.............................................. 7,591 27,566
Debt payments............................................................................... (3,075) (22,730)
--------- ---------
Net cash provided by financing activities................................................... 5,633 5,383
--------- ---------
Net increase (decrease) in cash and cash equivalents........................................... 28,382 (52,191)
Cash and cash equivalents:
Beginning of period......................................................................... 153,913 104,349
--------- ---------
End of period............................................................................... $ 182,295 $ 52,158
========= =========
Supplemental disclosure of noncash activities
Stock issued in exchange transaction........................................................ $ -- $ 110
Acquisitions from purchase transactions:
Stock issued.............................................................................. 88,772 5,000
Net assets acquired....................................................................... (2,379) 5,000
See accompanying notes to consolidated financial statements.
5
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company and Basis of Presentation
InfoSpace, Inc.(InfoSpace, or the Company), a Delaware corporation, was founded
in March 1996. The Company is an international provider of commerce and
consumer infrastructure services to merchants and consumers on wireless,
wireline and broadband platforms. InfoSpace provides its services across
multiple platforms simultaneously, including PC's and non-PC devices, such as
screen telephones, television set-top boxes and online kiosks, which use ground
wire Internet connections (wireline devices) and wireless devices such as cell
phones, pagers and personal digital assistants.
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. Certain information and note disclosures normally included in
financial statements, prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP) have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. Results of operations for the six-month period ended June 30, 2001
are not necessarily indicative of future financial results. The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual amounts may differ from estimates.
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 year ended December 31, 2000.
Certain prior period balances have been reclassified to conform to current
period presentation.
Other non-recurring charges: Other non-recurring charges consist of one-time
costs and/or charges that are not directly associated with other operating
expense classifications. Other non-recurring charges for the quarter ended June
30, 2001 includes an allowance for an employee loan in the amount of $71,000, an
allowance of $82,000 for a notes receivable and $135,000 for settlement charges
on litigation matters (Note 7). For the six months ended June 30, 2001 other
non-recurring charges consist of an allowance for an employee loan in the amount
of $1.1 million, an allowance of $1.1 million for a note receivable, $1.1
million for settlement charges on litigation matters (Note 7), and a $2.0
million decrease to the estimated liability for past overtime worked.
Restructuring charges: Restructuring charges of approximately $1.7 million for
the six months ended June 30, 2001 reflect severance costs of approximately $1.4
million associated with the reduction in work force during the quarter ended
March 31, 2001 and $255,000 for a lease termination fee related to the
Company's closure of its Dallas office. This expense is partially offset by a
$62,000 credit for areduction in the estimated costs related to the Company's
Ottawa office closure in 2000.
6
Gain (loss) on investments: Gain (loss) on investments consists of realized
losses on investments sold, losses recorded from writedowns of investments to
fair value for other-than-temporary declines in fair value, changes in fair
value for investments held in the InfoSpace Venture Capital Fund 2000 LLC until
its liquidation on March 31, 2001 and changes in fair value for derivative
instruments held, which consist of warrants to purchase equity securities of
public and private companies.
The Company determined that the decline in value of the Company's investments
was other than temporary for three investments in the quarter ended June 30,
2001 and for seven investments in the six months ended June 30, 2001. The
Company recognized non-cash losses totaling $14.1 million for the three months
ended June 30, 2001 and $55.7 million for the six months ended June 30, 2001, to
record these investments at their fair values as of June 30, 2001. This amount
is included in gain (loss) on investments in the Company's statements of
operations. The Company periodically evaluates whether the declines in fair
value of its investments are other than temporary. This evaluation consists of
a review by members of senior management in finance and treasury. For
investments in companies with publicly quoted market prices, the Company
compares the market price to the Company's carrying value and, if the quoted
market price is less than the Company's accounting basis for an extended period
of time, the Company then considers additional factors to determine whether the
decline in fair value is other than temporary. These include the financial
condition, results of operations and operating trends for each of the companies,
as well as publicly available information regarding the investee companies,
including reports from investment analysts. The Company also considers its
ability and intent to hold the investment for a period of time sufficient to
allow for any anticipated recovery in fair value, specific adverse conditions
causing a decline in fair value of a particular investment; conditions in an
industry or geographic area, seasonal factors, downgrading of a debt security by
a rating agency, and, if applicable, whether dividends have been reduced or
eliminated, or scheduled interest payments on debt securities have not been
made. For investments in private companies with no quoted market price, the
Company considers similar qualitative factors and also considers the implied
value from any recent rounds of financing completed by the investee as well as
market prices of comparable public companies. The Company requires the private
company investees to deliver annual and quarterly financial statements to assist
the Company in reviewing relevant financial data and to assist the Company in
determining whether such data may indicate other-than temporary declines in fair
value below the Company's carrying value.
Cumulative effect of change in accounting principle: On January 1, 2001, the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts. All
derivatives, whether designated in hedging relationships or not, are required to
be recorded on the balance sheet at fair value and changes in fair value are
recognized in earnings unless certain hedge criteria are met. As a result of
adopting SFAS No. 133, the Company recorded an expense of $3.2 million to record
warrants held to purchase stock in other companies at their vair value as of
January 1, 2001. This amount was recorded as a cumulative effect of change in
accounting principle. As of December 31, 2000, warrants to purchase stock in
public
7
companies were held at fair value, with unrealized gains and losses included in
accumulated other comprehensive loss, and warrants to purchase stock in private
companies were held at cost.
Recent accounting pronouncements: In July 2001, the Financial Accounting
Standards Board issued SFAS No. 141, Business Combinations and SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. Recorded goodwill and intangibles will
be evaluated against these new criteria and may result in certain intangibles
being classified into goodwill, or alternatively, amounts initially recorded as
goodwill may be separately identified and recognized apart from goodwill. SFAS
No. 142 requires the use of a non-amortization approach to account for purchased
goodwill and certain intangibles. Under a non-amortization approach, goodwill
and certain intangibles will not be amortized into results of operations, but
instead would be reviewed for impairment and written down and charged to results
of operations only in the periods in which the recorded value of goodwill and
certain intangibles is more than its fair value. The provisions of each
statement which apply to goodwill and intangible assets acquired prior to June
30, 2001 will be adopted by the Company on January 1, 2002. We expect our
amortization of goodwill and intangibles to be significantly reduced upon the
adoption of these accounting standards commencing January 1, 2002; however, it
is possible that significant impairment charges may be incurred upon adoption or
in periods subsequent to adoption.
2. Acquisitions
Locus Dialogue, Inc. On January 1, 2001, the Company acquired all of the common
stock of Locus Dialogue, Inc. (Locus) a developer of speech recognition-enabled
applications, for purchase consideration of 5,114,233 shares, which included
253,175 restricted shares and 1,173,216 replacement stock options, of the
Company's common stock and acquisition expenses of $556,000. The valuation of
shares issued of $23.46 per share was based on the stock price average for the
period from three days before the date of announcement of November 6, 2000, the
date of announcement, and the three days after the date of announcement. The
acquisition was accounted for as a purchase in accordance with Accounting
Principles Board Opinion (APB) No. 16.
The purchase price was allocated to the assets and liabilities assumed based on
their estimated fair values as follows:
(in thousands)
Tangible assets acquired $ 4,682
Liabilities assumed (7,010)
--------
Book value of net liabilities acquired (2,328)
Fair value adjustments:
Purchased technology, including in-process research and development 5,900
Distribution agreements 2,400
Assembled workforce 2,800
--------
Fair value of net assets acquired $ 8,772
========
Purchase price:
Fair value of shares issued $ 88,772
Fair value of options assumed 23,589
Fair value of net assets acquired (8,772)
Fair value of restricted stock recorded as unearned compensation (2,239)
Acquisition costs 556
--------
Excess of purchase price over net assets acquired, allocated to goodwill $101,906
========
8
The $5.9 million value of purchased technology includes purchased in-process
research and development. GAAP requires purchased in-process research and
development with no alternative future use to be recorded and charged to expense
in the period acquired. Accordingly, the results of operations for the six
months ended June 30, 2001, include the write-off of $600,000 of purchased in-
process research and development for in-process research and development that
had not yet reached technological feasibility and had no alternative future
use. The remaining $5.3 million represents the purchase of core technology and
existing products, which are being amortized over an estimated useful life of
five years. The Company is amortizing the goodwill, assembled workforce and
distribution agreements over an estimated life of five years.
The Company also recorded $3.9 million of unearned compensation in conjunction
with the acquisition of Locus. $1.7 million of the unearned compensation
relates to the intrinsic value of Locus stock options replaced by the Company at
the converted share value and share price. $2.2 million relates to the value of
253,175 restricted shares held by four Locus employees. The restricted stock
vests after the employee completes one year of employment with the Company and
is recorded as compensation expense over the vesting period.
Among the factors the Company considered in determining the amount of the
allocation of the purchase price to in-process research and development were
various factors such as estimating the stage of development of each component of
the technology, including the complexity and technical obstacles to overcome,
estimating the amount of core technology leveraged into the in-process projects,
estimating the expected life of each component, estimating cash flows resulting
from the expected revenues, margins and operating expenses generated from each
component, and discounting to present value the cash flows associated with the
in-process technologies. The Company utilized a rate of return of 35% to
discount to present value the cash flows associated with the in-process
technologies. The discount rate was selected based on evaluation of the
Company's weighted average cost of capital, the weighted average return on
assets, the internal rate of return implied from this transaction, and
management's assessment of the risk inherent in the future performance estimates
utilized in the valuation.
Within the Locus technology there are two main product lines, Liaison and
SpeechPortal, both of which run on the SoftDialogue platform (core speech
engine). Liaison addresses the needs of enterprises which require speech-
enabled communication solutions. SpeechPortal enables businesses and consumers
to use the Internet via telephone or voice, without requiring an Internet
enabled device. The Company plans to offer a co-branded version of SpeechPortal
to the Company's wireless carriers and device manufacturer customers. As of the
date of acquisition, the Company estimated that Liaison was 80% complete. The
percentage completed pre-acquisition was based primarily on the evaluation of
three major factors: time-based data, cost-based data, and complexity-based
data.
9
The expected life of the modules being developed was assumed to be five years,
after which substantial modification and enhancement would be required for the
technology to remain competitive.
The Company's revenue assumptions were based on the estimated growth potential
of the industry and estimated market acceptance of the Locus Dialogue
technology. The Company's expense assumptions included cost of revenue of 20%
of revenue, sales, general and administrative expense of 35% of revenue, and
product development expense of 2% of revenue. However, cost of revenues, sales,
general and administrative expenses and product development expenses may vary,
both in absolute dollars and as a percentage of revenues.
While the Company believes that the assumptions discussed above were made in
good faith and were reasonable when made, the assumptions the Company made may
prove to be inaccurate, and there can be no assurance that the Company will
realize the revenue, gross profit, growth rates, expense levels or other
variables set forth in such assumptions.
The following summary, prepared on an unaudited pro forma basis, reflects the
consolidated results of operations for the three and six months ended June 30,
2000 assuming Locus Dialogue had been acquired at the beginning of the period.
Three months ended Six months ended
June 30, 2000 June 30, 2000
(in thousands) (in thousands)
-----------------------------------------
Revenue $ 51,552 $ 90,938
Net loss before cumulative effect of change in
accounting principle (41,069) (136,367)
Net loss (41,069) (138,422)
Basic and diluted loss per share (0.14) (0.47)
3. Venture Capital Fund
On January 26, 2001 the Company's Board of Directors approved the liquidation of
the Venture Capital Fund (the Fund). In the quarter ended March 31, 2001, the
Company disbursed $16.4 million to the accredited investors for their original
investment amount, representing 100% of the accredited investor ownership. The
Board of Directors also approved the acceleration of the vesting of the
Company's contribution on behalf of its employees. The contribution was paid
out in conjunction with the dissolution of the fund, resulting in compensation
expense of $1.0 million in 2001.
Prior to dissolution, the Fund's investments were adjusted to fair value as of
March 31, 2001. $2.3 million of recognized losses and $17.1 million of
impairment on an investment were recognized in the quarter ending March 31, 2001
(Note 4). As of March 31, 2001, the Venture Capital Fund was dissolved and the
investments that were held by the Fund transferred to the Company at their fair
value. Future changes in the fair value of publicly held investments will be
recorded through accumulated other comprehensive income.
10
4. Gain (Loss) on Investments
Gain (loss) on investments for the six months ended June 30, 2001 and 2000
consists of the following (in thousands):
Three months ended June 30, Six months ended June 30,
2001 2000 2001 2000
-------- ------- -------- -------
InfoSpace Inc.:
Net loss on investments $ 2 $ -- $ (3,305) $ --
Write-off of investment (2) -- (405) --
Other-than-temporary
impairment writedowns (14,099) (--) (38,579) --
-------- ------- -------- -------
(14,099) -- (42,289) --
Venture Capital Fund:
Net gain (loss) on investments -- (8,447) (2,306) 15,151
Other-than-temporary
impairment writedowns -- -- (17,120) --
-------- ------- -------- -------
-- (8,447) (19,426) 15,151
-------- ------- -------- -------
Net gain (loss) on investments $(14,099) $(8,447) $(61,715) $15,151
======== ======= ======== =======
5. Stockholders' Equity
In February 2001, the Company implemented the 2001 Stock Option Plan, under
which nonqualified stock options to purchase common stock may be granted to
employees. Under the 2001 Stock Option Plan, 25 million options are available
for grant. Options under this stock option plan expire ten years from the date
of the grant. Options under the 2001 Plan vest over two years, with 2.08%
vesting on a monthly basis for the first 24 months and the 50% balance vesting
at the end of the two-year period.
6. Payroll Tax Receivable
As of June 30, 2001, the Company has $13.2 million recorded as a tax receivable
due from the federal government. In October of 2000, an employee of the Company
deemed to be an affiliate under pooling of interests exercised non-qualified
stock options and remitted $12.6 million for federal income tax based on the
market price of the stock on the day of exercise and the Company remitted the
employer payroll tax of $620,000. Due to the affiliate lock-up period from the
Go2Net merger, the affiliate did not have the ability to sell the stock until
February 2001. Internal Revenue Code Section 83(a) states that the excess of
the fair market value over the amount paid shall be included in the taxpayer's
gross income when the property acquired is not subject to a substantial risk of
forfeiture. A substantial risk of forfeiture was deemed to exist until the
reporting conditions of Accounting Series Releases (ASR's) 130 and 135 had been
met. The Company returned the federal income tax withholding to the employee
during the first quarter of 2001 and has filed an amendment to the Company's
payroll tax return to request the tax refund.
11
7. Commitments and Contingencies
Litigation:
On July 10, 2001, a purported shareholder derivative complaint entitled
Marlowe v. Belsheim, et al. was filed in the Superior Court of Washington for
King County. The complaint names as defendants current and former officers and
directors of the Company; InfoSpace is named as a "nominal defendant." The
complaint alleges that certain defendants breached their fiduciary duties to the
Company and were unjustly enriched by engaging in insider trading, and that all
of the defendants breached their fiduciary duties in connection therewith.
Various equitable remedies are requested in the complaint, including
disgorgement, restitution, accounting and imposition of a constructive trust,
and the complaint also seeks monetary damages. As stated, the complaint is
derivative in nature and does not seek monetary damages from, or the imposition
of equitable remedies on, InfoSpace. The Company has entered into
indemnification agreements in the ordinary course of business with defendant
officers and directors and may be obligated throughout the pendency of this
action to advance payment of legal fees and costs incurred by those individuals
pursuant to the Company's obligations under the indemnification agreements and
applicable Delaware law.
On June 19, 2001, a putative securities class action complaint entitled
Horton v. InfoSpace, Inc., et al. was filed in the United States District Court
for the Western District of Washington. The complaint alleges that InfoSpace and
its chief executive officer made false and misleading statements about
InfoSpace's business and prospects during the period between January 26, 2000
and January 30, 2001. The complaint alleges violations of the federal securities
laws and does not specify the amount of damages sought. The Company is currently
investigating and assessing the claims at issue and is preparing the Company's
response. Other, similar complaints subsequently were filed. The Horton matter
and the subsequent complaints will be consolidated into one matter. The Company
believes the Company it has meritorious defenses to these claims but litigation
is inherently uncertain and the Company may not prevail in this matter.
On March 19, 2001, a purported shareholder derivative complaint entitled
Youtz v. Jain, et al. was filed in the Superior Court of Washington for King
County. The complaint has been amended twice thus far. The complaint names as
defendants current and former officers and directors of the Company and entities
related to a few of the individual defendants; InfoSpace is named as a "nominal
defendant." The complaint alleges that certain defendants breached their
fiduciary duties to the Company and were unjustly enriched by engaging in
insider trading, and also alleges that certain defendants breached their
fiduciary duties in connection with the Go2Net and Prio mergers and that one
defendant converted the Company's assets to his personal use. Various equitable
remedies are requested in the complaint, including disgorgement, restitution,
accounting and imposition of a constructive trust, and the complaint also seeks
monetary damages. As stated, the complaint is derivative in nature and does not
seek monetary damages from, or the imposition of equitable remedies on,
InfoSpace. The Company has entered into indemnification agreements in the
ordinary course of business with defendant officers and directors and may be
obligated throughout the pendency of this action to advance payment of legal
fees and costs incurred by those individuals pursuant to the Company's
obligations under the indemnification agreements and applicable Delaware law.
12
On December 18, 2000, an employee filed a complaint against the Company in
federal court in Washington alleging claims for breach of contract, breach of
the covenant of good faith and fair dealing, and fraudulent and negligent
misrepresentation. The employee contends that he agreed to work for the Company
on the basis of an oral representation that he would be granted more stock
options than any other employee and that he would always have more stock options
than any other employee. The employee also contends that he was falsely promised
certain levels of authority and support in his position. The employee seeks
unspecified compensatory damages from the Company as well as equitable relief
requiring the Company to award him the largest number of stock options of any
employee in the future. Additionally, on the basis of a claim against Naveen
Jain for violations of the Racketeer Influenced Corrupt Organizations Act, the
employee also seeks trebling of any award of compensatory damages and recovery
of his attorneys' fees and costs. No trial date has been set. The Company
believes it has meritorious defenses to these claims. Nevertheless, litigation
is uncertain and the Company may not prevail in this suit.
Two of nine founding shareholders of Authorize.Net Corporation, a
subsidiary acquired through the Company's merger with Go2Net, filed a lawsuit on
May 2, 2000 in Utah State Court in Provo, Utah. This action was brought to
reallocate amongst the founding shareholders the consideration received in the
acquisition of Authorize.Net by Go2Net. The plaintiffs allege that the corporate
officers of Authorize.Net fraudulently obtained a percentage of Authorize.Net
shares greater than what was anticipated by the founding shareholders, and are
making claims under the Utah Uniform Securities Act as well as claims of fraud,
negligent misrepresentation, breach of fiduciary duty, conflict of interest,
breach of contract and related claims. Plaintiffs seek compensatory and punitive
damages in the amount of $200 million, rescission of certain transactions in
Authorize.Net securities, and declaratory and injunctive relief. The plaintiffs
subsequently amended the claim to name Authorize.Net as a defendant with regard
to the claims under the Utah Uniform Securities Act. The case is currently in
the discovery phase, which is expected to end on August 31, 2001. The Company
has filed a motion for summary judgment on behalf of Authorize.Net. The Company
believes the Company has meritorious defenses to these claims. Nevertheless,
litigation is uncertain and the Company may not prevail in this suit.
One of the shareholders of INEX Corporation filed a complaint with the
Ontario Superior Court of Justice in Canada on September 22, 1999 alleging that
the original shareholders of INEX and INEX itself were bound by a shareholders
agreement that entitled the shareholder to pre-emptive rights and rights of
first refusal. The complaint alleges that INEX improperly made private
placements, issued employee options and permitted share transfers after February
1997. The plaintiff alleges it should have acquired rights in approximately 88%
of the INEX share capital, which would be less than one percent of the Company's
common stock after conversion. The plaintiff also alleges other breaches of
contract, breach of fiduciary duty, corporate oppression, unlawful interference
with economic relations and conspiracy. The complaint was amended on December
20, 1999 to allege that the Company assumed the obligations of INEX under the
alleged shareholders agreement as a result of the Company's acquisition of INEX
on October 14, 1999. The plaintiff seeks damages against the Company and the
former INEX shareholders named in the suit for the difference between the issue
or sale price of INEX shares issued or transferred after February 1997 and
before the acquisition, and the highest trading value of the shares of the
Company's common stock received or receivable in the exchange prior to the date
of trial. In the alternative, the plaintiff seeks special damages of $50 million
Canadian. The
13
plaintiff also seeks $500,000 Canadian in punitive damages and other remedies
with regard to the disputed shares of stock. The Company has filed its response
with the court, and discovery has yet to take place. The Company believes it has
meritorious defenses to such claims but litigation is uncertain and the Company
may not prevail in this suit.
Settlement of Litigation:
In May 2001, the Company reached a settlement agreement with a former
employee of Go2Net from a complaint that was originally filed against Go2Net in
October 1999. Under terms of the settlement, net of insurance coverage proceeds
the Company paid the former employee $950,000. The Company also settled two
other litigation matters in the amount of $135,000 during the quarter ended June
30, 2001.
Contingencies:
The Company was audited by the Department of Labor in February 2001. The
Department of Labor determined that numerous employees, primarily former
employees of Go2Net, were improperly classified as exempt that should have been
classified as non-exempt. As a result, the Company recorded in the quarter ended
December 31, 2000, an estimated accrual in the amount of $3.0 million for the
past wages that were estimated to be due for overtime worked. Based on the
overtime questionnaires received from the applicable employees through July 31,
2001 and a revision in the methodology used to calculate overtime pay approved
by the Department of Labor, the Company revised the estimate for this liability
to $1.0 million. $491,000 of this liability has been paid through July 31, 2001.
During and subsequent to the end of the second quarter of 2001, the
Internal Revenue Service has been auditing the Company's payroll tax returns for
the year 2000. The Company expects this audit to be concluded in 2001. No
amounts have been accrued in the financial statements as of June 30, 2001 for
any liability that may result.
8. Related Party Transactions
During the quarter ended June 30, 2001, the Company made investments in
four private companies for business and strategic purposes. In the normal course
of business, the Company also entered into short-term agreements to provide
various promotional services for these companies. The Company recognized related
party revenue of $11.3 million for the quarter ended June 30, 2001,
substantially all of which was derived from these short-term agreements. For the
quarter-ended June 30, 2000, related party revenue was $3.2 million. For the six
months ended June 30, 2001, related party revenue was $12.9 million. For the six
months ended June 30, 2000, related party revenue was $6.4 million.
As the securities purchased by the Company in the investment transactions
executed during the quarter ended June 30, 2001 were in private companies, the
Company determined the fair value of the securities by reference to prices
negotiated and paid by other independent investors who invested in these
companies at the same time or through independent valuations performed by third
party valuation specialists. These investments are included in Other Investments
in the accompanying balance sheet as of June 30, 2001.
9. Subsequent Events
On July 1, 2001, the Company sold certain operating assets and other rights
relating to the Liaison enterprise solution business for $2.75 million. The
Liaison enterprise solution business was acquired by the Company as part of its
acquisition of Locus Dialog in January 2001. The operating assets included
certain distribution contracts, the assembled Liaison workforce, the Locus
Dialog trademarks, the enterprise solution inventory and certain fixed assets.
In addition, the parties entered into a license agreement pursuant to which the
buyer is licensing the Liaison and SoftDialogue software from the Company.
14
Item 2. -- Management's Discussion and Analysis of Financial Condition and
Results of Operations.
You should read the following discussion and analysis in conjunction with our
Consolidated Financial Statements and Notes to Consolidated Financial Statements
thereto included elsewhere in this report. In addition to historical
information, the following discussion contains certain forward-looking
statements that involve known and unknown risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. You should
read the cautionary statements made in this report as being applicable to all
related forward-looking statements wherever they appear in this report. Our
actual results could differ materially from those discussed in the forward-
looking statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below and in the section
entitled "Factors Affecting Our Operating Results, Business Prospects and Market
Price of Stock" and in our reports filed with the Securities and Exchange
Commission including our annual report on Form 10-K for the year ended December
31, 2000 (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 an international provider of commerce and consumer
infrastructure services to merchants and consumers on wireless, wireline and
broadband platforms. We provide our services across multiple platforms
simultaneously, including PCs and non-PC devices, such as screen telephones,
television set-top boxes and online kiosks, which use ground wire Internet
connections (wireline devices) and wireless devices such as cell phones, pagers
and personal digital assistants. Our customers include AT&T Wireless, Cingular
Wireless, Intel, Virgin Mobile, Verizon Wireless, Hasbro, National Discount
Brokers and Bloomberg, among others. Our affiliate network is comprised of more
than 3,200 Web sites, including America Online, Microsoft', Lycos, Lucent,
Charles Schwab and Nortel.
Naveen Jain, our Chief Executive Officer and Chairman, founded InfoSpace in
March 1996. During the period from our inception through December 31, 1996, we
had insignificant revenues and were primarily engaged in the development of
technology for the aggregation, integration and distribution of Internet content
and the hiring of employees. In 1997, we expanded our operations, adding
business development and sales personnel in order to capitalize on the
opportunity to generate Internet advertising revenues. We began generating
material revenues in 1997 with our wireline consumer services. Revenues in 1998
were also primarily generated through our wireline consumer services and we also
started distributing our services on wireless platforms. Throughout 1999, 2000
and the first six months of 2001, we expanded and enhanced our infrastructure
services through both internal development and acquisitions and focused on
developing and deploying our infrastructure services to merchants and on
wireless platforms. We have offices in the United States, Canada, Australia,
Brazil, the United Kingdom and the Netherlands. As of July 31, 2001, we had 918
employees worldwide.
Our Infrastructure Services
The following provides greater detail on our consumer and commerce products
and services:
15
Consumer Products and Services: The consumer products and services we offer
include unified communication services, including device-independent e-mail and
instant messaging; information services, such as integrated directory, news, and
lifestyle information; and community services, including the "sticky" services
such as online address books and calendars.
We deliver our consumer products and services through our wireline,
wireless and broadband distribution channels. Our affiliates encompass an
international network of wireless, PC and non-PC devices, including cellular
phones, pagers, screen telephones, television set-top boxes, online kiosks and
personal digital assistants.
Commerce Products and Services: Our commerce products and services enable
merchants to leverage the Internet to promote their businesses and to conduct
commerce through exposure to participating consumers throughout our
international network, whether on wireless devices or on PCs.
Our commerce products and services include the online delivery of
promotions to wireless devices and PCs for online and offline use, shopping that
includes e-wallet and price comparison features, and our Authorize.Net payment
authorization service for businesses.
Our Distribution Channels
We currently focus on distributing our consumer and commerce products and
services to merchant aggregators, regional Bell operating companies (RBOCs) and
other merchant networks as well as to our wireline, wireless and broadband
partners. These distribution channels comprise our four areas of business focus.
The following provides detail on each of our business areas.
Wireline: Through our wireline business unit, we distribute our consumer
products and services such as portable instant messaging (PIM), instant
messaging and search to our affiliates that include Web sites (including
portals) and businesses. Our affiliate network now consists of over 3,200
portals and affinity sites that include America Online, Microsoft and Lycos.
Wireless: Our wireless services include data and transaction services that
users can access from varying locations, on a variety of devices, over different
protocols or standards. Our wireless services platform serves as the underlying
infrastructure for wireless carriers and device and equipment manufacturers to
offer their customers the ability to conduct commerce, access information,
communicate and manage their lives.
We currently have relationships with more than 18 domestic and
international wireless carriers, including Verizon Wireless, AT&T Wireless,
Cingular Wireless, VoiceStream, ALLTEL and Virgin Mobile, and equipment
manufacturers such as Nortel and Lucent. Our consumer and commerce products and
services are private-labeled for each carrier, preserving the brand of the
carrier and their relationship with their customer.
Merchant: Our commerce services enable merchants to create, promote, sell
and distribute their products and services across multiple channels through our
distribution network to the end users of our services. We have reseller
agreements with RBOCs, merchant banks and major
16
merchant aggregators such as Bank of America and American Express, and local
media networks such as newspapers and television and radio stations. Currently,
over two million merchants use one or more of our commerce products and
services.
Broadband: Building on our existing infrastructure technology, we are
currently developing new application interfaces and page templates to support
our broadband TV and PC services. Broadband, or high-speed connections to the
Internet include DSL, cable modem, 2.5 and 3G wireless standards, and satellite.
We expect our broadband services to first be available during the second half of
2001. We are currently targeting high-speed access providers, including cable
networks, satellite providers and DSL providers, for the license of our
broadband platform.
All of our services are built on our core technology platform and use the
same operational infrastructure. We do not allocate development or operating
costs to any of these services.
We have incurred losses since our inception and, as of June 30, 2001, we
had an accumulated deficit of approximately $603.9 million. For the quarter
ended June 30, 2001, our net loss was $70.9 million, including amortization of
intangibles of $59.1 million and $14.1 million loss on investments. For the six
months ended June 30, 2001, our net loss totaled $195.3 million, including
amortization of intangibles of $123.0 million and $61.7 million loss on
investments. For the quarter ended June 30, 2000, our net loss was $38.9
million, including $40.6 million in amortization of intangibles and $8.4 million
loss on investments. For the six months ended June 30, 2000, our net loss
totaled $134.2 million, including amortization of intangibles of $68.6 million,
a $15.2 million gain on investments and $86.6 million in acquisition and other
related charges associated with the acquisitions of Saraide and Millet, of which
$74.1 million was a non-cash charge for in-process research and development.
We believe that our future success will depend largely on our ability to
continue to offer consumer and commerce products and services to merchants and
on wireline, wireless and broadband platforms that are attractive to our
existing and potential future merchants and distribution partners. Accordingly,
we plan to increase our operating expenses in order to, among other things:
. develop and continually enhance our technology and products and
services;
. expand our services and 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; and
. expand our commerce services and sell additional services to our
existing merchants and merchant aggregator partners and grow our network
of merchants.
After giving effect to our acquisitions and associated amortization of
intangibles, we expect
17
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. We do not believe that our historical
growth rates are necessarily sustainable or indicative of future growth. Our
future operating results may fall below the expectations of securities analysts
or investors, which would likely cause the trading price of our common stock to
decline.
Results of Operations for the Three and Six Months Ended June 30, 2001
Revenues. Our revenues are derived from our consumer and commerce products
and services, which are distributed to users and subscribers on wireline,
wireless and broadband platforms and to merchants via merchant aggregators
including merchant banks and local media networks. We tailor agreements to fit
the needs of our wireless carriers, merchant aggregators, affiliates and
distribution partners; and, under any one agreement we may earn revenue from a
combination of our consumer and commerce products and services. We identify
revenues by our four distribution channels, which are merchant, wireline,
wireless and broadband.
Revenues were $50.9 million in the quarter ended June 30, 2001 compared to
$50.5 million for the quarter ended June 30, 2000. Revenues were $97.5 million
for the six months ended June 30, 2001 compared to $89.3 million for the six
months ended June 30, 2000. Revenue growth in the quarter ended June 30, 2001
was impacted by the U.S. macroeconomic slowdown which has in turn caused a
reduction in advertising spending via the Internet and a slowdown in technology
investment decisions in the short term. The change in revenues for the six
months ended 2001 compared to 2000 was primarily due to growth in our
international operations, increased use of our wireless data services and the
increased volume of transactions processed on our commerce platform.
Also included in revenue are barter revenues generated from non-cash
transactions as defined by Emerging Issues Task Force (EITF) Issue No. 99-17,
Accounting for Advertising Barter Transactions. Revenue is recognized when we
complete all of our obligations under the agreement. For non-cash agreements, we
record a receivable or liability at the end of the reporting period for the
difference in the fair value of the services provided or received. We recognized
revenue of $8.0 million for the three months ended June 30, 2001 and $1.4
million for the quarter ended June 30, 2000 from these non-cash agreements. We
recognized $10.4 million of revenue for the six months ended June 30, 2001
compared to $2.2 million for the six months ended June 30, 2000. Non-cash
transactions are common in our industry. Generally, these transactions consist
of the right to place Internet advertisements. For the quarter ended June 30,
2001, barter expense was $3.7 million. For the six months ended June 30, 2001,
barter expense was $6.1 million.
We hold warrants and stock in public and privately held companies for
business and strategic purposes. Some of these warrants were received in
conjunction with equity investments. Additionally, some warrants and stock were
issued in connection with a business agreement whereby we provide our products
and services to the issuer. Certain of these stock and warrants contain
provisions that require us to meet specific performance criteria under the
business agreement in order for the stock or warrants to vest. When we meet our
performance obligations
18
we record revenue equal to the fair value of the stock or warrant. If no future
performance is required, we recognize the revenue on a straight-lined basis over
the contract term. We recorded revenue in the amount of $1.5 million for vesting
in stocks and warrants for the quarter ended June 30, 2001 compared to $9.5
million for the quarter ended June 30, 2000. For the six months ended June 30,
2001 we recorded $11.0 million for vesting in stocks and warrants compared to
$15.7 million for the six months ended June 30, 2000. Revenue recognized from
stocks and warrants attached to a business agreement is based upon the valuation
of the business issuing the stock or warrant.
INSP MD&A Disclosure
Revenues earned from companies in which we have investments are considered
related party revenue. During the quarter ended June 30, 2001, we made
investments in four private companies for business and strategic purposes. In
the normal course of business, we also entered into short-term agreements to
provide various promotional services for these companies. We recognized related
party revenue of $11.3 million for the quarter ended June 30, 2001,
substantially all of which was derived from these short-term agreements. For the
quarter-ended June 30, 2000, related party revenue was $3.2 million. For the six
months ended June 30, 2000, related party revenue was $6.4 million. We
anticipate that related party revenue will decline substantially in the quarter
ended September 30, 2001 as we focus on business areas which have longer-term
contracts with recurring monthly revenue streams.
Cost of Revenues. Cost of revenues consists of expenses associated with
the delivery, maintenance and support of our consumer and commerce products and
services, including direct personnel expenses, communication costs such as high-
speed Internet access, server equipment depreciation, and content license fees.
Cost of revenues were $10.6 million, or 20.8% of revenue for the quarter ended
June 30, 2001 compared to $8.1 million, or 16.1% of revenue for the quarter
ended June 30, 2000. Cost of revenues were $22.3 million, or 22.9% of revenue
for the six months ended June 30, 2001, compared to $14.2 million, or 16.0% of
revenue, for the period ended June 30, 2000. Approximately 83% of cost of
revenue in the quarter ended June 30, 2001 was comprised of personnel costs and
other costs that support our consumer and commerce solutions, including data
licenses, depreciation, and equipment. Approximately 78% of cost of revenue for
the six months ended June 30, 2001 was personnel costs, data licenses and
depreciation and equipment costs. In addition, approximately two percent of the
expense recorded in the six months ended June 30, 2001 is attributable to one-
time payments to certain employees for retention obligations from acquisitions
and to the employees for accelerated vesting of our contribution to the Venture
Fund on their behalf. Approximately 94% of the absolute dollar increase of cost
of revenue from the six months ended June 30, 2001 compared to the six months
ended June 30, 2000 was attributable to increases in personnel costs, data
licenses, communication costs and depreciation and equipment. The increase in
our personnel costs is primarily a result of personnel added through our
acquisitions of Prio, Saraide and Locus and personnel added to support our
expanded service offerings. The increase in our server and depreciation cost is
primarily a result of our data center build-out at our Bellevue headquarters and
the data centers acquired in Mountain View and the Netherlands from our
acquisitions of Prio and Saraide. The increase in our data licenses and
communication costs is a result of expanding and enhancing our content and
delivery.
Product Development Expenses. Product development expenses consist
principally of personnel costs for research, design, maintenance and ongoing
enhancement of the proprietary technology we use to integrate and distribute our
consumer and commerce services to merchants and consumers on wireline, wireless
and broadband platforms. Product development expenses were $10.6 million, or
20.7% of revenue, for the quarter ended June 30, 2001 compared with $9.5
million, or 18.8% of revenue, for the quarter ended June 30, 2000. For the six
months ended June 30, 2001 product development costs were $22.4 million, or
22.9% of revenue,
19
compared to $16.5 million, or 18.4% of revenue, for the six months ended June
30, 2001. Approximately 89% of product development costs in the quarter ended
June 30, 2001 was for personnel costs. Approximately 88% of product development
costs in the six months ended June 30, 2001 was for personnel costs. Increases
in personnel costs accounted for the increase in product development costs in
2001 from the comparable six-month period in 2000. In addition, approximately
nine percent of total expenses for the six months ended June 30, 2001 is
attributable to one-time payments to certain employees for retention obligations
from acquisitions and to the employees for accelerated vesting of our
contribution to the Venture Fund on their behalf. Generally, product development
costs are not consistent with changes in revenue and they represent key
infrastructure costs to develop and enhance service offerings and are not
directly associated with current period revenue. We believe that significant
investments in technology are necessary to remain competitive. Accordingly, we
expect product development expenses to continue to increase in absolute dollars
as we hire additional personnel who will continue to develop and enhance our
proprietary technology.
Sales, General and Administrative Expenses. Sales, general and
administrative (SGA) expenses consist primarily of salaries and related benefits
for sales, general and administrative personnel, carriage fees, professional
service fees, occupancy and general office expenses, business development and
management travel expenses and advertising and promotion expenses. SGA expenses
were $31.6 million, or 62.0% of revenues, for the quarter ended June 30, 2001
compared to $30.8 million, or 61.1% of revenues, for the quarter ended June 30,
2000. For the six months ended June 30, 2001 SGA expenses were $66.6 million, or
68.3% of revenues, compared to $53.8 million, or 60% of revenues for the six
months ended June 30, 2000. Approximately 79% of SGA in the three and six months
ended June 30, 2001 was comprised of personnel costs, advertising and marketing
costs, professional services, carriage fees, occupancy costs and bad debt
expense. Approximately three percent of SGA expenses in the six months ended
June 30, 2001 was for one-time payments to certain employees for accelerated
vesting of our contribution to the Venture Fund on their behalf. Approximately
86% of the increase in SGA for the six months ended June 30, 2001 was
attributable to the increase is salaries and benefits, occupancy expense and
carriage fees.
Amortization of Intangibles. Amortization of intangibles includes
amortization of goodwill, core technology, purchased domain names, trademarks,
contract lists and assembled workforce. Amortization of intangibles was $59.1
million in the quarter ended June 30, 2001, compared to $40.6 million in the
quarter ended June 30, 2001. For the six months ended June 30, 2001 amortization
of intangibles was $123.0 million compared with $68.6 for the six months ended
June 30, 2000. The increases are a result of amortization of intangibles
recorded from the acquisitions of Locus Dialogue, Inc. in January 2001, assets
of the boxLot Company in December 2000, the iJapan technology in September 2000,
TDLI.com and Orchest in August 2000, IQorder in July 2000 and Saraide and Millet
Software in March 2000. The intangibles consist of goodwill, core technology,
contract list and acquired workforce for each acquisition.
In June 2001, Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 142 Goodwill and Other Intangible
Assets, which requires use of a non-amortization approach to account for
purchased goodwill and certain intangibles, effective January 1, 2002. Under
this non-amortization approach, goodwill and certain intangibles will not be
amortized into results of operations, but instead will be reviewed for
20
impairment and written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles is more
than its fair value. We expect the adoption of this accounting standard will
have the impact of significantly reducing our amortization of goodwill and
intangibles commencing January 1, 2002; however, it is possible that significant
impairment charges may be incurred upon adoption or in periods subsequent to
adoption.
Acquisition and Other Related Charges. Acquisition and other related
charges consist of in-process research and development and other charges related
directly to acquisitions, such as professional fees for transactions accounted
for as pooling-of-interests. For the three months ended June 30, 2001,
acquisition and other related charges were $111,000 which is comprised of legal,
accounting and other fees related to acquisitions. Acquisition and related
charges for the six months ending June 30, 2001 of $1.0 million included
$600,000 of in-process research and development charges in the purchase
acquisition of Locus Dialogue, $200,000 of severance pay to the former chief
executive officer of Locus and legal, accounting and other fees related to
acquisitions. For the three months ended June 30, 2000 acquisition and other
related charges of $202,000 consisted of legal, accounting, and other fees.
Acquisition and related charges for the six months ended June 30, 2000 of $86.6
million included $74.1 million of in-process research and development charges in
the purchase acquisitions of Saraide and Millet Software. Also included were
costs incurred in the acquisition of Prio, which was accounted for as a pooling-
of-interests.
Other Non-Recurring Charges. Other non-recurring charges consist of costs
and/or charges that are not directly associated with other expense
classifications or ongoing operations. For the quarter ended June 30, 2001 other
non-recurring charges of $288,000 consisted of an allowance on a note receivable
and legal settlement charges. Other non-recurring charges for the six months
ended June 30, 2001 of $1.3 million included an allowance recorded on an
employee loan of $1.1 million, $1.1 for settlements on litigation matters, an
allowance of $1.1 million for a note receivable, and a $2.0 million decrease to
the estimated liability of past overtime worked.
We were audited by the Department of Labor in February 2001. The Department
of Labor determined that numerous employees, primarily former employees of
Go2Net, were improperly classified as exempt that should have been classified as
non-exempt. As a result, for the quarter ended December 31, 2000, we recorded an
estimated accrual in the amount of $3.0 million for the past wages that are due
for overtime worked. Based on the overtime questionnaires we have received from
the applicable employees through July 31, 2001 and a revision in the methodology
used to calculate overtime pay approved by the Department of Labor, we have
revised our estimate for this liability to be $1.0 million. $491,000 of this
liability has been paid through July 31, 2001.
Restructuring Charges. Restructuring charges of approximately $1.7 million
for the six months ended June 30, 2001 reflect $1.4 million of severance costs
associated with the reduction in work force during the first quarter of 2001. A
charge of $255,000, also included in the six months ended June 30, 2001, is for
a lease termination fee related to the closure of the our Dallas office.
Gain (Loss) on Investments. Gain (loss) on investments consists of
recognized gains and losses on investments in accordance with SFAS No. 133,
recognized gains and losses on investments marked to fair value in the Venture
Capital Fund, realized gains and losses on investments and impairment on
investments.
21
Unrealized gain and losses in accordance with SFAS No. 133: Effective
January 1, 2001, we adopted SFAS No. 133 which requires us to adjust our
derivative instruments to fair value and recognize the change in the fair value
in earnings. We hold warrants to purchase stock in other companies which
qualify as derivatives. For the three months ended June 30, 2001 we recognized
a $2.6 million gain on these warrants. For the six months ended June 30, 2001,
we recognized a $3.9 million loss on these warrants.
Dissolution of Venture Capital Fund: On January 26, 2001, our Board of
Directors approved the liquidation of the Venture Capital Fund. In the first
quarter of 2001, we disbursed $16.4 million to the accredited investors,
representing 100% of the accredited investor ownership. The Board of Directors
also approved the acceleration of vesting of the contribution we made on behalf
of our employees. The contribution was paid out in conjunction with the
dissolution of the fund, resulting in compensation expense of $1.0 million in
the first quarter of 2001. We recorded $517,000 of compensation expense in the
year ended December 31, 2000 related to the contribution.
Prior to dissolution of the fund, the fund's investments were adjusted to
their fair value, resulting in recognizing $2.3 million of unrealized losses and
$17.1 million of impairment on an investment in the quarter ended March 31,
2001. As of March 31, 2001, the Venture Fund was dissolved and the investments
that were held by the Venture Fund were transferred to InfoSpace.
Realized loss on investments: Realized losses on the sale of an investment
and the write-off an investment during the quarter ended June 30, 2001 were $2.7
million. Realized losses on the sale of an investment and the write-off two
investments during the six months ended June 30, 2001 were $3.1 million.
Impairment on investments: Our management regularly reviews our investments
for other than temporary declines in fair value. For the three months ending
June 30, 2001 we recorded impairment charges of $14.1 million. During the six
months ended June 30, 2001, we recorded impairment charges of $38.6 million for
investments held by InfoSpace and $17.1 million for investments held by the
Venture Fund, prior to dissolution of the fund.
Other Income, Net. Other income, consisting primarily of interest income,
was $4.6 million in the quarter ended June 30, 2001 and $7.1 million in the
comparable quarter in the prior year. For the six months ended June 30, 2001
other income was $10.6 million compared to $14.7 million for the six months
ended June 30, 2000. The decrease is primarily due to reinvestment of funds to
equity securities from interest bearing fixed income securities and from cash
used for operating activities and acquisitions in the final three quarters of
2000 and first quarter of 2001.
We have reinvested and may in the future reinvest part of our fixed income
securities in non-interest bearing equity instruments and investments. We
anticipate that our investments in internally developed technology and our
expansion plans may require greater cash uses in the remainder of 2001. With
these two factors, we anticipate that our interest income from our fixed
securities will decrease in 2001 compared with 2000.
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Cumulative Effect of Change in Accounting Principle. On January 1, 2001,
we adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 established accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts. All derivatives, whether designated in hedging relationships or
not, are required to be recorded on the balance sheet at fair value and changes
in fair value are recognized in earnings unless certain hedge criteria are met.
As a result of adopting SFAS No. 133, we recorded an expense of $3.2 million to
record warrants held to purchase stock in other companies at their fair value as
of January 1, 2001 as a cumulative effect of change in accounting principle. As
of December 31, 2000 warrants to purchase stock in public companies were held at
fair value, with unrealized gains and losses included in accumulated other
comprehensive loss, and warrants to purchase stock in private companies were
held at cost.
On January 1, 2000, we adopted Staff Accounting Bulletin (SAB) 101, Revenue
Recognition in Financial Statements. Prior to January 1, 2000, we recorded
revenues from customers for development fees, implementation fees and/or
integration fees when the service was completed. If this revenue were recognized
on a straight-lined basis over the term of the related service agreements, in
accordance with SAB 101, we would have deferred revenue of $2.1 million as of
January 1, 2000 originally recorded in prior years. In accordance with SAB 101,
we recorded a cumulative effect of change in accounting principle of $2.1
million.
Income Tax Expense. We have recorded tax expense of approximately $137,000
for the quarter ended June 30, 2001 and $187,000 for the six months ended June
30, 2001, for our operations in Europe. We expect to continue to record a tax
provision for our international operations and do not anticipate recording a
U.S. federal tax provision for the remainder of 2001.
Balance Sheet Commentary
Payroll Tax Receivable.
As of June 30, 2001, our balance sheet had $13.2 million recorded as a tax
receivable due from the Federal government. In October 2000, one of our
executives exercised non-qualified stock options and remitted $12.6 million for
federal income tax based on the market price of the stock on the day of exercise
and we remitted the employer payroll tax of $620,000. Due to the affiliate lock-
up period from the Go2Net merger, the executive did not have the ability to sell
the stock until February 2001. A tax ruling states, however, that the tax
valuation and remittance is not required until the affiliate has the ability to
sell the stock. We, therefore, returned the federal income tax withholding and
filed an amendment to our payroll tax return to request the tax refund.
Liquidity and Capital Resources
From our inception in March 1996 through May 1998, we funded operations
with approximately $1.5 million in equity financing and, to a lesser extent,
from revenues generated for services performed. In April 1997, Go2Net completed
its initial public offering which yielded net proceeds of approximately $12.8
million. In May 1998, we completed a $5.1 million private placement of our
common stock, and in July and August 1998, we completed an additional private
placement of our common stock for $8.2 million. Sales of our common stock to
23
employees pursuant to our 1998 Stock Purchase Rights Plan also raised $1.7
million in July 1998. Our initial public offering in December 1998 yielded net
proce eds of $77.8 million and a follow-on public offering in April 1999 yielded
net proceeds of $185.0 million. As of June 30, 2001, we had cash, cash
equivalents and short-term investments of $268.2 million, long-term investments
of $75.4 million and a payroll tax receivable due from the Federal government of
$13.2 million.
Net cash used by operating activities was $21.7 million for the six months
ended June 30, 2001. This use of cash included a cash outlay of $12.6 for a
payroll tax receivable due from the Federal government, $1.4 million of one-time
severance pay for the reduction of workforce, $1.5 million of one-time payouts
to the employees for the accelerated vesting of our contribution to the Venture
Fund for the employees, $1.8 million of one-time payments to certain employees
for retention obligations from acquisitions and $500,000 of payments associated
with the closure of our Ottawa office. Net cash provided by operating activities
was $10.2 million for the six month ended June 30, 2000.
Net cash provided by investing activities was $44.5 million in the six
months ended June 30, 2001. Cash provided by investing activities was primarily
a result of reinvesting short-term investments in commercial paper with a term
of 90 days or less. Offsetting the $130.4 million of short-term investment
maturities was $42.3 million invested in long-term investments, $12.0 million in
equity investments, $9.2 million in purchases of fixed assets, $5.8 million in
business acquisition costs and $16.3 million for the buyout of the minority
interest ownership in the Venture Fund. Net cash used by investing activities
was $67.8 million in the six months ended June 30, 2000. During this period,
cash used in investing activities was primarily comprised of costs associated
with the acquisition of Prio, notes receivable additions, purchase of fixed
assets and equity investments. The cash used in investing activities was
partially offset by cash received from the minority interest of the Venture
Capital Fund and maturities of debt investments.
Net cash provided by financing activities in the six months ended June 30,
2001 was $5.6 million. $8.7 million was comprised of proceeds from the exercise
of stock options and warrants and from share purchases from the employee stock
purchase plan. Cash used in financing activities of $3.1 million was used to
payoff the acquired debt of Locus Dialogue. Net cash provided by financing
activities for the six months ended June 30, 2000 of $5.3 million was primarily
comprised of proceeds from the exercise of stock options and warrants, offset by
payments of debt acquired in the Prio and Saraide acquisitions.
We plan to use our cash for strategic investments and acquisitions,
investments in internally developed technology, global expansion of our services
and continued build-out of infrastructure in Europe, Asia and South America and,
as necessary, to fund current operations.
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
24
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.
Acquisitions & Dispositions
Locus Dialogue, Inc. On January 1, 2001, we acquired all of the stock of
Locus Dialogue, Inc., a developer of speech recognition-enabled applications.
The acquisition was accounted for as a purchase. We issued 5,114,233 shares of
our common stock (1) directly to those Locus Dialogue shareholders who elected
to receive our common stock in exchange for their Locus Dialogue shares at the
closing of the acquisition, (2) upon the exchange or redemption of the
exchangeable shares of Locus Holdings Inc., an indirect subsidiary of ours,
which exchangeable shares were issued to those Locus Dialogue shareholders who
elected to receive exchangeable shares, or who did not make an election to
receive shares of our common stock at the closing, and (3) upon the exercise of
options granted to replace options of Locus Dialogue held at the closing. We
issued shares with a fair value of $88.8 million, acquired $8.8 million of net
assets and incurred $556,000 in acquisition costs. Included in the calculation
of goodwill is $23.6 million for the fair value of 1,173,216 options we assumed.
We also recorded $3.9 million in unearned compensation for the intrinsic value
of the options assumed and for the valuation of 253,175 shares of restricted
stock that vest after a one year service period with certain former Locus
employees.
On July 1, 2001, we sold certain operating assets and other rights relating
to the Liaison enterprise solution business for $2.75 million. We acquired the
Liaison enterprise solution business as part of the acquisition of Locus Dialog
in January 2001. The operating assets included certain distribution contracts,
the assembled Liaison workforce, the Locus Dialog trademarks, the enterprise
solution inventory and certain fixed assets. In addition, we entered into a
License Agreement pursuant to which the buyer is licensing to the Liaison and
SoftDialogue software from us.
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. If any of the
following risks actually occur, our business, financial condition or operating
results could be materially harmed. This could cause the trading price of our
common stock to decline, and you may lose all or part of your investment.
We have a history of losses and expect to continue to incur significant
operating losses, and we may never be profitable.
We have incurred net losses from our inception through June 30, 2001. As of
June 30, 2001, we had an accumulated deficit of approximately $603.9 million. We
have not achieved profitability and we expect to continue to incur operating
losses in the future. These losses may be significantly higher than our current
losses. Many of our operating expenses are relatively fixed in nature,
particularly in the short term, and we expect to continue to incur significant
25
operating expenses in connection with increased funding for research and
development and expansion of our sales and marketing efforts. We also expect to
incur large noncash charges relating to amortization of intangibles related to
past acquisitions. We must therefore generate revenues sufficient to offset
these increased expenses in order for us to become profitable. We cannot assure
you that we will successfully generate sufficient revenues or that we will ever
achieve profitability. If we do achieve profitability, we may not be able to
sustain it.
We have a relatively limited operating history and our business model is new and
unproven, which makes it difficult to evaluate our future prospects.
We were incorporated in March 1996 and accordingly, we have a relatively
short operating history and limited financial data upon which you may evaluate
our business and prospects. In addition, our business model to provide consumer
and commerce services is new and unproven and is likely to continue to evolve.
As a result, our potential for future profitability must be considered in light
of the risks, uncertainties, expenses and difficulties frequently encountered by
companies in their early stages of development, particularly companies in new
and rapidly evolving markets such as ours. For example, we expect to derive a
significant portion of our revenue from products and services that we have only
recently introduced. Some of these risks relate to our potential inability to:
. develop and integrate new features with our existing services;
. expand our services to new and existing merchants, merchant aggregators
and wireless carriers;
. manage our growth, control expenditures and align costs with revenues;
. expand successfully into international markets;
. attract, retain and motivate qualified personnel; and
. respond to competitive developments.
If we do not effectively address the risks we face, our business model may
become unworkable and we may not achieve or sustain profitability.
Our financial results are likely to continue to fluctuate which could cause our
stock price to be volatile or decline.
Our financial results have varied on a quarterly basis and are likely to
fluctuate substantially in the future. These fluctuations could cause our stock
price to be volatile or decline. Several factors many of which are beyond our
control, that could cause our quarterly results to fluctuate materially,
including:
. variable demand for our products and services;
. our ability to attract and retain advertisers, content providers,
affiliates and distribution partners;
26
. the amount and timing of fees we pay to affiliates to include our
information services on their Web sites;
. expenditures for expansion of our operations;
. effects of acquisitions and other business combinations;
. the introduction of new or enhanced services by us, our affiliates or
distribution partners, or other companies that compete with us or our
partners; and
. the inability of our customers and content providers to pay us or to
fulfill their contractual obligations to us due to difficulty in raising
sufficient capital to support their long-term operations.
For these reasons, you should not rely on period-to-period comparisons of
our financial results to forecast our future performance. Furthermore, our
fluctuating operating results may fall below the expectations of securities
analysts or investors, which would cause the trading price of our stock to
decline.
Our stock price has been and is likely to continue to be volatile.
The trading price of our common stock historically has been highly volatile
and has declined significantly in recent months. Since we began trading on
December 15, 1998, our stock price has ranged from $1.563 to $138.50 (as
adjusted for stock splits). On July 31, 2001, the closing price of our common
stock was $2.09. Our stock price could continue to decline or to be subject to
wide fluctuations in response to factors such as the following:
. actual or anticipated variations in quarterly results of operations;
. announcements of technological innovations, new products or services by
us or our competitors;
. changes in financial estimates or recommendations by securities
analysts;
. conditions or trends in the Internet and online commerce industries;
. announcements of significant acquisitions, strategic partnerships, joint
ventures or capital commitments by us, our customers or our competitors;
and
. additions or departures of key personnel.
In addition, the stock market in general, and the Nasdaq National Market
and the market for Internet and technology stocks in particular, have
experienced extreme price and volume fluctuations. These broad market and
industry factors and general economic conditions may materially and adversely
affect our stock price.
We have historically been, and currently remain, reliant upon revenues from our
wireline services. Our operating results would be harmed by a decline in sales
of our wireline services or our failure to collect fees for these services.
Historically, we have derived a majority of our revenues from our wireline
consumer services, including licensing and per query fees from affiliates and
advertising revenue from our customers. We anticipate that our wireline consumer
services will generate over 50% of our
27
revenues in 2001. Based upon our r eliance on revenues from wireline consumer
services, revenues may decline if growth rates for use of our wireline consumer
services do not meet our expectations.
As a result of unfavorable market or economic conditions, some of our
wireline consumer services affiliates and customers are having difficulty
raising sufficient capital to support their long-term operations or are
otherwise experiencing adverse business conditions. 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 or may not be able to enter into new
agreements. If we are unable to collect these fees or enter into new agreements,
our operating results will be harmed.
If we are unable to diversify our revenue base, a significant portion of our
revenues will continue to be derived from wireline consumer services, which
could weaken our financial position.
For 2001, we expect more of our revenues to come from distribution of our
consumer and commerce services on wireless platforms, and from distribution of
our commerce services both on our wireline platform and to our merchant
aggregators. Our ability to increase the distribution of these new services, and
thus diversify our revenues, could be hindered by numerous risks, including:
. our ability to effectively develop, market and sell consumer and
commerce products and services to new and existing affiliates and
customers;
. the continued development of electronic commerce on the Internet;
. the adoption of our commerce and consumer products and services by
wireless carriers and device manufacturers;
. the adoption of our services for delivery over broadband wireline
platforms (DSL and cable) and broadband wireless standards (2.5G and
3G); and
. the use of our commerce and consumer products and services by
subscribers on their wireless devices.
Our financial and operating results will suffer if we are unsuccessful at
integrating acquired businesses.
We have acquired a large number of complementary technologies and
businesses in the past, and may do so in the future. Acquisitions typically
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. Past and future
acquisitions involve numerous risks which could adversely affect our results of
operations or stock price, including:
. assimilating the operations, products, technology, information systems
and personnel of acquired companies;
. diverting managements' attention from other business concerns;
28
. impairing relationships with our employees, affiliates, content
providers and distribution partners;
. losing key employees of acquired companies; and
. failing to achieve the anticipated benefits of these acquisitions in a
timely manner.
The success of the operations of companies and technologies which we have
acquired will often depend on the continued efforts of the management of those
acquired companies. Accordingly, we have typically attempted to retain key
employees and members of existing management of acquired companies under the
overall supervision of our senior management. We have, however, not always been
successful in these attempts at retention.
Our future earnings could be negatively affected by significant charges
resulting from the impairment in the value of acquired assets.
For acquisitions which we have accounted for using the purchase method, we
regularly evaluate the recorded amount of long-lived assets, consisting
primarily of goodwill, assembled workforce, acquired contracts and core
technology, to determine whether there has been any impairment of the value of
the assets and the appropriateness of their estimated remaining life. We
evaluate impairment whenever events or changed circumstances indicate that the
carrying amount of the long-lived assets might not be recoverable. We will
continue to regularly evaluate the recorded amount of our long-lived assets and
test for impairment. In the event we determine that any long-lived asset has
been impaired, we will record additional impairment charges in future quarters.
Our revenues are attributable to a small number of customers, the loss of any
one of which could harm our financial results.
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 41% of our revenues for the six months ended June 30,
2001, 32% of our revenues for fiscal year 2000 and 30% of our revenues for
fiscal year 1999. If we lose any of these customers, or if any of these
customers are unable or unwilling to pay us amounts that they owe us, our
financial results will suffer.
Revenues derived from our consumer and commerce services are dependent on our
relationships with affiliates and distribution partners.
We will be not able to continue generating revenues from advertising,
transaction fees and promotions unless we can secure and maintain distribution
for our consumer and commerce services on acceptable commercial terms through a
wide range of affiliates and distribution partners. In particular, we expect
that a limited number of our affiliates, including America Online, Inc., its
CompuServe and Digital City divisions, and Microsoft Network, LLC will account
for a substantial portion of our affiliate traffic. We also rely on our
relationships with regional Bell operating companies and merchant aggregators,
including Bank of America and American Express, for distribution of our commerce
services. Our distribution arrangements
29
with our affiliates and distribution partners typically are for limited
durations of between six months and two years and automatically renew for
successive terms thereafter, subject to termination on short notice. We cannot
assure you that such arrangements will not be terminated or that such
arrangements will be renewed upon expiration of their terms. Additionally, we
cannot assure you that these relationships will be profitable or result in
benefits to us that outweigh the cost of the relationships. We generally share
with each affiliate a portion of the revenues generated by advertising on the
Web pages that deliver our services. We also pay carriage fees to some of our
affiliates, including AOL. In addition, if we lose a major affiliate, we may be
unable to timely or effectively replace the affil iate with other affiliates
with comparable traffic patterns and user demographics. The loss of any major
affiliate is likely to harm our business.
We depend on third parties for content, and the loss of access to this content
could cause us to reduce our product offerings to customers.
We typically do not create our own content. Rather, we acquire rights to
information from numerous third-party content providers, and our future success
is highly dependent upon our ability to maintain relationships with these
content providers and enter into new relationships with other content providers.
We typically license content under short-term arrangements that do not
require us to pay royalties or other fees for the use of the content. However,
we do enter into revenue-sharing arrangements with certain content providers,
and we pay certain content providers a one-time fee, a periodic fee or a fee for
each query from Web users. In the future, we expect that some of our content
providers will likely demand a greater portion of advertising revenues or
increase the fees that they charge us for their content thus having a negative
impact on our net earning. If we fail to enter into and maintain satisfactory
arrangements with content providers our ability to provide a variety of products
and services to our customers would be severely limited thus harming our
business reputation and operating results.
Due to unfavorable economic conditions some of our affiliates may be unable to
pay us or otherwise satisfy their obligations to us, thus harming our financial
results and potentially our provision of services to other customers.
As a result of generally unfavorable economic conditions including
difficulties with raising necessary equity and debt financing, some of our
affiliates may lack sufficient capital to support their long-term operations. As
a result, these affiliates may not be able to pay us some or all of the fees
they are required to pay us under their existing agreements. These conditions
may also prevent potential affiliates from entering into contractual
relationships or other strategic business relationships with us.
Bad debt expense was 4.1% and 4.3% of all revenues for the three and six
months ended June 30, 2001 respectively, 3.4% of all revenues for fiscal year
2000 and 1.8% of all revenues for fiscal year 1999. Management regularly reviews
all receivables for collectability. We generally create reserves for all
accounts sixty days or more past due and also reserve an amount based on
revenues and the accounts receivable balance for accounts not specifically
identified. We have a credit review process and, when circumstances warrant,
require payment in advance from
30
customers. As a result, we may have to forego business from customers who do not
agree to our payment terms.
Our operating results have been, and may continue to be, negatively impacted by
our recognition of losses on investments in other companies.
We hold a number of investments in third parties. The majority of the
companies we have invested in are engaged in Internet, networking, e-commerce,
telecommunications and wireless technologies. These investments involve a high
level of risk for a number of reasons, including:
. some of our investments are in businesses based on new technologies or
products that may not be widely adopted in the evolving Internet and
wireless technology industries;
. the companies in which we have invested are generally development-stage
companies which are likely to continue to generate losses in the
foreseeable future and may not be profitable for a long time, if at all;
. in recent months, companies in the Internet and e-commerce industries
have experienced difficulties in raising capital to fund expansion of
continue operations; and
. most of our investments are in privately held companies, and if public
markets for their securities do not develop, it may be difficult to sell
those securities.
We regularly review all of our investments in public and private companies
for other than temporary declines in fair value. When we determine that the
decline in fair value of an investment below our accounting basis is other than
temporary, we reduce the carrying value of the securities we hold and record a
loss in the amount of any such decline. During the three and six months ended
June 30, 2001, we determined that the declines in value of four and eight of our
investments, respectively, were other than temporary, and we recognized
impairment losses totaling $14.1 million and $55.7 million respectively to
record these investments at their current fair values as of June 30, 2001.
If we conclude in future quarters that the fair values of any of our
investments have experienced more than temporary decline, we will record
additional investment losses, which would adversely affect our financial
condition and results of operations.
Item 3. -- Quantitative and Qualitative Disclosures About Market Risk
Equity Investment Risk We invest in equity instruments of public and
privately-held, technology companies for business and strategic purposes. These
investments are recorded as long-term assets. 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. Changes in fair market value of investments held by the Venture
Fund, prior to dissolution as of March 31, 2001, and for warrants that qualify
as derivatives are recorded through the statement of operations and had material
effects on net loss in the six months ended June 30, 2001. The closure of the
Venture
31
Fund during the first quarter of 2001 affects the accounting for these
investments as the investments reverted back to InfoSpace and unrealized gains
and losses on these investmen ts are now therefore recorded as a component of
other comprehensive income, as opposed to through the statement of operations.
32
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 July 10, 2001, a purported shareholder derivative complaint entitled
Marlowe v. Belsheim, et al. was filed in the Superior Court of Washington for
King County. The complaint names as defendants current and former officers and
directors of ours; InfoSpace is named as a "nominal defendant." The complaint
alleges that certain defendants breached their fiduciary duties to us and were
unjustly enriched by engaging in insider trading, and that all of the defendants
breached their fiduciary duties in connection therewith. Various equitable
remedies are requested in the complaint, including disgorgement, restitution,
accounting and imposition of a constructive trust, and the complaint also seeks
monetary damages. As stated, the complaint is derivative in nature and does not
seek monetary damages from, or the imposition of equitable remedies on,
InfoSpace. We have entered into indemnification agreements in the ordinary
course of business with defendant officers and directors and may be obligated
throughout the pendency of this action to advance payment of legal fees and
costs incurred by those individuals pursuant to our obligations under the
indemnification agreements and applicable Delaware law.
On June 19, 2001, a putative securities class action complaint entitled
Horton v. InfoSpace, Inc., et al. was filed in the United States District Court
for the Western District of Washington. The complaint alleges that InfoSpace and
its chief executive officer made false and misleading statements about
InfoSpace's business and prospects during the period between January 26, 2000
and January 30, 2001. The complaint alleges violations of the federal securities
laws and does not specify the amount of damages sought. We are currently
investigating and assessing the claims at issue and are preparing our response.
Other, similar complaints subsequently were filed. The Horton matter and the
subsequent complaints will be consolidated into one matter. We believe we have
meritorious defenses to these claims but litigation is inherently uncertain and
we may not prevail in this matter.
On March 19, 2001, a purported shareholder derivative complaint entitled
Youtz v. Jain, et al. was filed in the Superior Court of Washington for King
County. The complaint has been amended twice thus far. The complaint names as
defendants current and former officers and directors of ours and entities
related to a few of the individual defendants; InfoSpace is named as a "nominal
defendant." The complaint alleges that certain defendants breached their
fiduciary duties to us and were unjustly enriched by engaging in insider
trading, and also alleges that certain defendants breached their fiduciary
duties in connection with the Go2Net and Prio mergers and that one defendant
converted our assets to his personal use. Various equitable remedies are
requested in the complaint, including disgorgement, restitution, accounting and
imposition of a constructive trust, and the complaint also seeks monetary
damages. As stated, the complaint is derivative in nature and does not seek
monetary damages from, or the imposition of equitable remedies on, InfoSpace. We
have entered into indemnification agreements in the ordinary course of business
with defendant officers and directors and may be obligated
33
throughout the pendency of this action to advance payment of legal fees and
costs incurred by those individuals pursuant to our obligations under the
indemnification agreements and applicable Delaware law.
On December 18, 2000, an employee filed a complaint against us in federal
court in Washington alleging claims for breach of contract, breach of the
covenant of good faith and fair dealing, and fraudulent and negligent
misrepresentation. The employee contends that he agreed to work for us on the
basis of an oral representation that he would be granted more stock options than
any other employee and that he would always have more stock options than any
other employee. The employee also contends that he was falsely promised certain
levels of authority and support in his position. The employee seeks unspecified
compensatory damages from us as well as equitable relief requiring us to award
him the largest number of stock options of any employee in the future.
Additionally, on the basis of a claim against Naveen Jain for violations of the
Racketeer Influenced Corrupt Organizations Act, the employee also seeks trebling
of any award of compensatory damages and recovery of his attorneys' fees and
costs. No trial date has been set. We believe we have meritorious defenses to
these claims. Nevertheless, litigation is uncertain and we may not prevail in
this suit.
Two of nine founding shareholders of Authorize.Net Corporation, a
subsidiary recently acquired through our merger with Go2Net, filed a lawsuit on
May 2, 2000 in Utah State Court in Provo, Utah. This action was brought to
reallocate amongst the founding shareholders the consideration received in the
acquisition of Authorize.Net by Go2Net. The plaintiffs allege that the corporate
officers of Authorize.Net fraudulently obtained a percentage of Authorize.Net
shares greater than what was anticipated by the founding shareholders, and are
making claims under the Utah Uniform Securities Act as well as claims of fraud,
negligent misrepresentation, breach of fiduciary duty, conflict of interest,
breach of contract and related claims. Plaintiffs seek compensatory and punitive
damages in the amount of $200 million, rescission of certain transactions in
Authorize.Net securities, and declaratory and injunctive relief. The plaintiffs
subsequently amended the claim to name Authorize.Net as a defendant with regard
to the claims under the Utah Uniform Securities Act. The case is currently in
the discovery phase, which is expected to end on August 31, 2001. We have filed
a motion for summary judgment on behalf of Authorize.Net. We believe we have
meritorious defenses to these claims. Nevertheless, litigation is uncertain and
we may not prevail in this suit.
One of the shareholders of INEX Corporation filed a complaint with the
Ontario Superior Court of Justice in Canada on September 22, 1999 alleging that
the original shareholders of INEX and INEX itself were bound by a shareholders
agreement that entitled the shareholder to pre-emptive rights and rights of
first refusal. The complaint alleges that INEX improperly made private
placements, issued employee options and permitted share transfers after February
1997. The plaintiff alleges it should have acquired rights in approximately 88%
of the INEX share capital, which would be less than one percent of our common
stock after conversion. The plaintiff also alleges other breaches of contract,
breach of fiduciary duty, corporate oppression, unlawful interference with
economic relations and conspiracy. The complaint was amended on December 20,
1999 to allege that we assumed the obligations of INEX under the alleged
shareholders agreement as a result of our acquisition of INEX on October 14,
1999. The plaintiff seeks damages against us and the former INEX shareholders
named in the suit for the difference between the issue or sale price of INEX
shares issued or transferred after February 1997 and
34
before the acquisition, and the highest trading value of the shares of our
common stock received or recei vable in the exchange prior to the date of trial.
In the alternative, the plaintiff seeks special damages of $50 million Canadian.
The plaintiff also seeks $500,000 Canadian in punitive damages and other
remedies with regard to the disputed shares of stock. We have filed our response
with the court, and discovery has yet to take place. We believe we have
meritorious defenses to such claims but litigation is uncertain and we may not
prevail in this suit.
Item 2. - Changes in Securities and Use of Proceeds
Not applicable with respect to the current reporting period.
Item 3. - Defaults Upon Senior Securities
Not applicable with respect to the current reporting period.
Item 4. - Submission of Matters to a Vote of Security Holders
At the annual stockholders' meeting held on May 21, 2001, the following
proposals were adopted by the margin indicated:
1. To elect Class II directors to the Board of Directors to hold office
until their successors are duly elected and qualified:
Nominee Shares Voted For Votes Withheld
--------------------------------------------------------------------
Rufus W. Lumry, III 272,098,457 2,442,343
William D. Savoy 271,476,536 3,064,264
2. To ratify the appointment of Deloitte & Touche LLP as independent
auditors of the Company for the fiscal year ending December 31, 2001:
Shares Voted
----------------------
For 272,953,788
Against 1,078,753
Abstain 508,259
Item 6. - Exhibits and Reports on Form 8-K:
a. Exhibits
None.
b. Reports on Form 8-K
None.
35
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INFOSPACE, INC.
By: /s/ Tammy D. Halstead
-------------------------------------
Tammy D. Halstead
Chief Financial Officer
Dated: August 10, 2001
36