As filed with the Securities and Exchange Commission on November 14, 2001
Registration No. 333-86313
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Post-Effective
AMENDMENT NO. 4
ON FORM S-3
TO
REGISTRATION STATEMENT
ON FORM S-1
UNDER
THE SECURITIES ACT OF 1933
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INFOSPACE, INC.
(Exact name of Registrant as specified in its charter)
Delaware 91-1718107
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
601 108th Avenue N.E., Suite 1200
Bellevue, Washington 98004
(425) 201-6100
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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JOHN M. HALL, ESQ.
Senior Vice President and General Counsel
InfoSpace, Inc.
601 108th Avenue N.E., Suite 1200
Bellevue, Washington 98004
(425) 201-6100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
PATRICK J. SCHULTHEIS, ESQ.
RICHARD C. SOHN, ESQ.
DREW G. MARKHAM, ESQ.
Wilson Sonsini Goodrich & Rosati
Professional Corporation
5300 Carillon Point
Kirkland, Washington 98033
(425) 576-5800
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
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The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus in not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 14, 2001
PROSPECTUS
744,339 Shares
[LOGO OF INFOSPACE]
Common Stock
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InfoSpace is offering 744,339 shares of common stock to the holders of
exchangeable shares of InfoSpace.com Canada Holdings Inc., an Ontario
corporation. InfoSpace.com Canada Holdings issued the exchangeable shares in
exchange for outstanding shares of the common stock of INEX Corporation, an
Ontario corporation, in connection with our acquisition of INEX. Holders of
exchangeable shares may exchange one exchangeable share for one share of our
common stock, and in some cases we may redeem each exchangeable share for one
share of our common stock. We describe the process by which exchangeable shares
may be exchanged for our common stock on page 17 of this prospectus under the
heading "Plan of Distribution."
Since completion of our acquisition of INEX on October 14, 1999, holders of
exchangeable shares may exchange their exchangeable shares for shares of our
common stock at any time. We are offering the shares of our common stock on a
continuous basis pursuant to Rule 415 under the Securities Act of 1933 only
during the period when the registration statement relating to this prospectus
is effective. We will bear the registration costs incurred in connection with
this offering.
Our common stock is traded on the Nasdaq National Market under the symbol
"INSP." On November 9, 2001, the last reported sale price for our common stock
on the Nasdaq National Market was $1.64 per share.
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Investing in the common stock involves a high degree of risk.
See "Risk Factors" beginning on page 6.
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The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is , 2001
TABLE OF CONTENTS
Page
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Where to Find Additional Information About InfoSpace....................... i
Information Incorporated by Reference...................................... i
Forward-Looking Statements................................................. ii
Prospectus Summary......................................................... 3
Recent Acquisitions........................................................ 4
Risk Factors............................................................... 6
Use of Proceeds............................................................ 16
Plan of Distribution....................................................... 17
Legal Matters.............................................................. 32
Experts.................................................................... 32
Index to Financial Statements.............................................. F-1
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You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
WHERE TO FIND ADDITIONAL INFORMATION ABOUT INFOSPACE
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, as amended, in connection with this offering. While the
information contained in this prospectus is materially complete, this
prospectus does not contain all the information set forth in the registration
statement and its exhibits and schedules. For further information with respect
to us and our common stock please refer to the registration statement and its
exhibits. We have also filed reports, proxy statements and other information
with the SEC. A copy of the registration statement and its exhibits, and copies
of our reports, proxy statements and other information, may be inspected
without charge at the public reference facilities maintained by the SEC in Room
1024, 450 Fifth Street, N.W. Washington, D.C. 20549, and at the SEC's regional
office located at the Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. You may obtain information on the operation of the
public reference facilities by calling the SEC at 1-800-SEC-0330. Copies of all
or any part of these documents may be obtained from such offices upon payment
of the fees prescribed by the SEC. The SEC maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC. The address of the site is
http://www.sec.gov.
INFORMATION INCORPORATED BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file with
it, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be part of this prospectus, and later information that we file with the SEC
will automatically update and supersede the information contained in this
prospectus, including the information incorporated by reference in this
prospectus. We incorporate by reference the documents listed below and any
future filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934 prior to the termination of this offering.
The documents we incorporate by reference are:
(1) Our Annual Report on Form 10-K for the year ended December 31, 2000,
with Item 8 Financial Statements and Supplementary Data of Form 10-K
being superseded by the financial statements included elsewhere in this
prospectus;
(2) Our Quarterly Reports on Form 10-Q for the quarters ended March 31,
2001, June 30, 2001, and September 30, 2001;
i
(3) Our Current Reports on Form 8-K filed on January 23, 2001, and
September 11, 2001; and
(4) The description of our common stock contained in our registration
statement on Form 8-A dated December 3, 1998, including any amendments
or reports filed for the purpose of updating such description.
Each of these filings is available from the SEC as described above. You may
request, and we will provide to you at no cost, a copy of these filings,
including any exhibits to such filings, by writing or telephoning us at the
following address:
Attn: Secretary
InfoSpace, Inc.
601 108th Avenue N.E., Suite 1200
Bellevue, WA 98004
(425) 201-6100
FORWARD-LOOKING STATEMENTS
You should not rely on forward-looking statements in this prospectus. This
prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends," "may," "will," "should," "estimates,"
"predicts," "potential," "continue" and similar expressions to identify such
forward-looking statements. These forward-looking statements include, but are
not limited to:
. statements regarding new and future products and services, including our
plans to deliver broadband services;
. statements regarding our business and growth strategy;
. the expected demand for and benefits of our consumer and commerce
infrastructure services for our affiliates and distribution partners;
. anticipated benefits from the businesses and technologies we have
acquired or intend to acquire;
. future carriage fees;
. increased operating expenses and the reasons for such increases;
. expected operating losses;
. increased costs of revenues;
. increased product development expenses;
. increased sales and marketing expenses;
. increased general and administrative expenses;
. anticipated capital equipment expenditures; and
. anticipated cash needs.
This prospectus also contains forward-looking statements attributed to third
parties relating to their estimates regarding the growth of certain markets.
Forward-looking statements are subject to known and unknown risks,
uncertainties and other factors that may cause our and the strategic Internet
services industry's actual results, levels of activity, performance,
achievements and prospects to be materially different from those expressed or
implied by such forward-looking statements. These risks, uncertainties and
other factors include, among others, those identified under "Risk Factors" in
this prospectus.
ii
PROSPECTUS SUMMARY
InfoSpace, Inc. is a provider of wireless and Internet software and
application services. We provide an integrated platform of software
technologies and applications that enables companies to offer network-based
services under their own brands. Our products include consumer services, such
as communication, entertainment, gaming and speech applications, as well as
commerce services, including shopping and payment authorization. We distribute
our products and services on multiple platforms, including PCs and non-PC
devices which use ground wire Internet connections (or wireline devices) and
cell phones, pagers and personal digital assistants (or wireless devices), to
our affiliate network of Web sites and through our distribution partners,
including wireless carriers and device manufacturers and merchant banks and
aggregators. We generate revenues through fees paid to us by these affiliates
and distribution partners who then offer our products and services to their
customers and end-users.
Our integrated technology platform serves as the basis for all of our
consumer and commerce products and services and enables us to offer our
products and services across multiple platforms simultaneously through the
following four distribution channels:
. Wireline, including web portals and destination sites;
. Wireless, including wireless carriers and manufacturers of wireless
devices and equipment;
. Merchant, including regional Bell operating companies, merchant banks
and aggregators, and local media networks; and
. Broadband, including cable companies, DSL providers, high speed wireless
(2.5G and 3G), and satellite television.
Our Infrastructure Services
Our scalable, flexible technology platform enables us to deliver a broad,
integrated suite of consumer and commerce services to Web sites, merchants and
wireless carriers. All of our services use the same core technology platform
within the same operational infrastructure. We design our infrastructure
services to be highly flexible and customizable, enabling our customers to
select from among our broad range of consumer and commerce products and
services.
Consumer Products and Services: The consumer products and services we offer
include:
. personal information management (PIM), including address book, calendar
and to-do lists;
. communications such as e-mail and instant messaging;
. information of broad appeal to users of wireless devices and PCs
including directories, sports, news and entertainment, financial data
and traffic reports;
. search and reference products including metasearch services, which
simultaneously query a variety of search engines and directory services;
. entertainment services such as multi-player gaming; and
. a shopping product that includes comparison shopping and an "e-wallet,"
which holds the end-user's billing and credit card information.
Commerce Products and Services: Our commerce products and services include:
. the ability to purchase products and services from a Web site directly
from a wireless device;
. shopping that includes e-wallet and price comparison features in
addition to finding products using UPC or other product codes;
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. yellow page listings and enhanced listings; and
. our Authorize.Net payment authorization service for businesses.
Our Distribution Channels and Customers
We currently provide our products and services across multiple platforms
simultaneously, including PCs and non-PC devices, using both wireline and
wireless devices. We recently entered the market for infrastructure services
which take greater advantage of high-speed (known as broadband) wireline and
wireless Internet connections, but we do not anticipate generating material
revenues for these services until 2002.
We distribute our products and services through our four distribution
channels: wireline, wireless, merchant and broadband. More specifically, we
distribute our infrastructure services through our customers in our affiliate
network, which is comprised of wireline Web portals and destination sites, and
our other distribution partners. Our distribution partners generally consist of
parties who distribute our products and services to the end-user, including
wireless carriers, wireless device manufacturers, merchant banks and merchant
aggregators. Our affiliate network is comprised of Web sites, such as America
Online, Microsoft, Lycos and Walt Disney Internet Group sites. Our distribution
partners include AT&T Wireless, ALLTEL, Cingular Wireless, Intel, Virgin
Mobile, Verizon Wireless, National Discount Brokers, Lucent, Charles Schwab,
Nortel and Overture (formerly GoTo), among others.
Our Revenues
All of our revenues are derived from the delivery of our consumer and
commerce products and services to our customers. We track revenues by our four
business areas or distribution channels, specifically our wireline, wireless,
merchant and broadband areas. Historically, our wireline business area has
generated more than fifty percent of our total revenues.
In our wireline business area, we charge licensing and advertising fees from
the portal and affinity sites in our affiliate network. In our wireless
business area, our revenues are generated from our distribution partners, which
include wireless carriers and device manufacturers, based on licensing fees and
on a per subscriber per month basis. In our merchant business area, we charge
our resellers licensing and commerce transaction fees. In our broadband
business area, we have not yet begun generating material revenues.
Our History
Naveen Jain, our Chairman and Chief Executive Officer, founded InfoSpace in
March 1996. Initially, we were engaged in the development of our technology,
building our operations and hiring employees. We began generating material
revenues from our wireline consumer services in 1997, and started distributing
our services on wireless platforms in 1998. In 1999 and 2000, we expanded our
services through internal development and acquisitions, and in 2001, we have
intensified our focus on developing and deploying our infrastructure services
on wireless platforms and to merchants in the United States and
internationally.
Our executive offices are located at 601 108th Avenue N.E., Suite 1200,
Bellevue, Washington 98004, and our telephone number is (425) 201-6100. We
maintain a World Wide Web site at www.infospace.com. Information contained on
our Web site does not constitute part of this prospectus.
Recent Acquisitions
Locus Dialogue Inc. On January 1, 2001, we acquired Locus Dialogue Inc., a
privately held company based in Montreal, Quebec, for 5,114,233 shares of our
stock, including options for 1,173,216 shares of our common stock. Locus
Dialogue (now called InfoSpace Speech Solutions) develops speech recognition
technologies and speech-enabled applications. We intend to use this technology
to speech-enable a variety of our existing offerings, and to develop other
unique mobile applications. The acquisition was accounted for as a purchase.
4
The Offering
The 744,339 shares of common stock being registered by this prospectus are
being offered by InfoSpace to the holders of exchangeable shares of
InfoSpace.com Canada Holdings Inc., an Ontario corporation.
The exchangeable shares were issued to the common shareholders of INEX
Corporation, an Ontario corporation, in connection with our acquisition of INEX
on October 14, 1999. Holders of exchangeable shares may exchange one
exchangeable share for one share of our common stock at any time, and in some
cases we may redeem each exchangeable share for one share of our common stock.
5
RISK FACTORS
You should carefully consider the risks and uncertainties described below
and all of the information contained in this prospectus before making an
investment decision. If any of the following risks actually occur, our
business, financial condition or operating results could be materially harmed.
This could cause the trading price of our common stock to decline, and you may
lose all or part of your investment.
Financial Risks Related to Our Business
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 September 30, 2001.
As of September 30, 2001, we had an accumulated deficit of approximately $808.7
million. We have not achieved profitability and we expect to continue to incur
significant 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 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 operate in new and rapidly
evolving markets, which makes it difficult to evaluate our future prospects.
We were incorporated in March 1996 and accordingly, we have a relatively
short operating history upon which you may evaluate our business and prospects
compared to many companies in more established industries. Since inception, our
business model has evolved and is likely to continue to evolve as we expand our
product offerings and enter new markets. As a result, our potential for future
profitability must be considered in light of the risks, uncertainties, expenses
and difficulties frequently encountered by companies that are in new and/or
rapidly evolving markets and continuing to innovate with new and unproven
technologies. 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, including rapid technological
change, changes in customer requirements and new products introduced
into our markets by our competitors.
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 could cause our quarterly
results to fluctuate materially, including:
. variable demand for our products and services;
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. our ability to attract and retain advertisers, content providers,
affiliates and distribution partners;
. 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;
. our ability to meet service level agreements with our carrier partners;
. 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 highly volatile.
The trading price of our common stock has historically been highly volatile.
Since we began trading on December 15, 1998, our stock price has ranged from
$1.06 to $138.50 (as adjusted for stock splits). On November 9, 2001, the
closing price of our common stock was $1.64. 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 companies 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. Based upon our reliance 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
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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 increase our wireless and merchant 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 our distribution of
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 increase 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 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. At
December 31, 2000, we determined that intangible assets from two purchase
acquisitions had been impaired. Accordingly, we recorded an impairment charge
of $9.0 million in the year ended December 31, 2000. In the quarter ended
September 30, 2001, we determined that intangible assets from eight purchase
acquisitions had partial or full impairment. Accordingly, we recorded an
impairment charge of $99.2 million in the period. 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.
In addition, recent changes in generally accepted accounting principles
(GAAP) will require us to stop amortizing purchased goodwill and certain
intangibles. We will adopt these changes effective January 1, 2002. Under this
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.
Accordingly, we may incur significant impairment charges upon adoption of these
accounting standards and in subsequent periods.
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 management's attention from other business concerns;
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. 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 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 concentration will continue in the foreseeable
future. Our top ten customers represented 39% of our revenues for the nine
months ended September 30, 2001, 32% of our revenues for fiscal year 2000 and
30% of our revenues for fiscal year 1999. No single customer accounted for more
than 10% of our revenues in fiscal year 2000. If we lose any of these
customers, or if any of these customers are unable or unwilling to pay us
amounts that they owe us, our financial results will suffer.
Revenues derived from our consumer and commerce services are dependent on our
relationships with affiliates and distribution partners.
We will not be 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 other partners,
including American Express, for distribution of our commerce services. Our
distribution arrangements 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 costs 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
affiliate 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 earnings. 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.
9
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 3.1% of revenues for the nine months ended September
30, 2001, 3.4% of revenues for fiscal year 2000 and 1.8% of revenues for fiscal
year 1999. Management regularly reviews all receivables for collectibility. 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 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 or
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 nine months ended September
30, 2001, we determined that the declines in value of twelve of our investments
were other than temporary and we recognized losses totaling $75.6 million,
which represented 18.9% of the net loss for the period, to record these
investments at their current fair values as of September 30, 2001. $22.5
million of this impairment was recorded in the third quarter of 2001. With the
current economic environment, it is difficult to accurately predict the amount
of exposure to future investment impairment. As of September 30, 2001, our
other investments were carried at $61.6 million.
If we conclude in future quarters that the fair values of any of our
investments have experienced more than a temporary decline, we will record
additional investment losses, which would adversely affect our financial
condition and results of operations.
10
Operational Risks Related to Our Business
Unless we are able to hire, retain and motivate highly qualified employees, we
will be unable to execute our business strategy.
Our future success depends on our ability to identify, attract, hire, train,
retain and motivate highly skilled technical, managerial, sales and marketing
and business development personnel. Our services and the industries to which we
provide our services are relatively new, particularly with respect to our
commerce services and our provision of services to the wireless industry.
Qualified personnel with experience relevant to our business are scarce and
competition to recruit them is intense. If we fail to successfully attract,
assimilate and retain a sufficient number of highly qualified technical,
managerial, sales and marketing, business development and administrative
personnel, our business could suffer. In February and October of 2001, we
announced realignments of resources to concentrate on development of our
wireless, merchant and broadband services. These realignments include a
reduction in our workforce of up to 450 employees. These, or other future
operational decisions, could create an unstable work environment and may have a
negative effect on our ability to retain and motivate employees.
If the market price of our stock continues to decline, the value of stock
options granted to employees may cease to provide sufficient incentive to our
employees.
Stock options, which typically vest over a two- or four-year period, are an
important means by which we compensate employees. We face a significant
challenge in retaining our employees if the value of these stock options is
either not substantial enough or so substantial that the employees leave after
their stock options have vested. If our stock price does not increase
significantly above the prices of our options, we may in the future need to
issue new options or other equity incentives to motivate and retain our
employees.
If we are unable to retain our executive officers, we may not be able to
successfully manage our business.
Our business and operations are substantially dependent on the performance
of our key employees, all of whom are employed on an at-will basis. If we lose
the services of one or more of our executive officers or key employees,
particularly within our commerce services or wireless business, we may not be
able to successfully manage our business or achieve our business objectives.
The only person on whom we maintain key person life insurance is Naveen Jain,
our Chairman and Chief Executive Officer. Although our executive officers have
signed agreements which limit their ability to compete with us for one year
after their employment with us ends, our business could be harmed if subsequent
to the non-compete period one or more of them joined a competitor or otherwise
decided to compete with us. Naveen Jain has signed a two-year non-competition
agreement.
If our new management team does not perform well, we may not be able to achieve
our business objectives.
Due to our rapid growth, our anticipated expansion into new markets and our
recent acquisitions, several members of our management team are new to
InfoSpace or to their executive positions. Only two of our current executive
officers were employed by us at the end of fiscal year 1999. Our current
executive officers may have only limited experience managing a rapidly growing
public company. Our business objectives may be adversely affected if our new
executive officers are not effective.
Our historical and future expansion in personnel and facilities will continue
to significantly strain our management, operational and financial resources.
We have rapidly and significantly expanded our operations and anticipate
further significant expansion to accommodate expected growth in our customer
base and market opportunities. We have increased the number of employees from
less than 100 at January 1, 1998 to 788 at October 31, 2001. We have also
expanded our
11
facilities and now have development, operations and administrative facilities
in Bellevue and Seattle, Washington; Provo, Utah; Montreal, Canada;
Papendrecht, Netherlands; London, United Kingdom; Sydney, Australia; and Rio de
Janeiro, Brazil. We also have sales offices in San Francisco, California; New
York, New York; and Chicago, Illinois. This expansion has placed, and is
expected to continue to place, a significant strain on our management and
operational resources. To manage the expected growth of our operations and
personnel, we must continue maintaining and improving or replacing existing
operational, accounting and information systems, procedures and controls.
We have limited experience managing multiple offices with multiple
facilities and personnel in disparate locations. As a result, we may not be
able to effectively coordinate our efforts, supervise our personnel or
otherwise successfully manage our resources.
If we are unable to effectively manage the growth in our relationships with
customers and other third parties, our business and reputation could be harmed.
The rapid growth of our business has strained our ability to meet customer
demands and manage the growing number of customer relationships. In addition,
our customer relationships are growing in their size and complexity of
services. As a result of the growth in the size, number, and complexity of our
relationships we may be unable to meet the demands of our customer
relationships, which could result in the loss of customers, subject us to
penalties under our agreements and harm our business and reputation.
We must also effectively manage our relationships with various Internet
content providers, distribution partners, wireless carriers, advertisers,
affiliates and other third parties necessary to our business. If we are unable
to effectively manage the growth of these relationships, our ability to provide
our services through multiple distribution channels to a wide audience of end
users could suffer.
Our expansion into international markets may not be successful and may expose
us to risks that could harm our business.
We began providing consumer services in the United Kingdom in the third
quarter of 1998. With our acquisition of Saraide in March 2000, we now have a
development and operations facility in the Netherlands serving European
wireless carriers. In March 1999, we began providing infrastructure services to
Canadian affiliates through a Canadian subsidiary and subsequently began to
expand our wireless services into Canada. We also have entered into agreements
to expand our services into Brazil, China and Australia and are currently
investigating other international opportunities.
We have limited experience in developing and syndicating localized versions
of our consumer and commerce services internationally, and we may not be able
to successfully execute our business model in these markets. In addition, most
international markets experience lower levels of Internet usage and Internet
advertising than the United States. For example, we rely on our business
partner in Europe for U.K. directory information and local sales forces and may
enter into similar relationships if we expand into other international markets.
Our success in these markets will be directly linked to the success of our
business partners in such activities. If our business partners fail to
successfully establish operations and sales and marketing efforts in these
markets our business could suffer.
We face a number of risks inherent in doing business in international
markets, including:
. lower levels of adoption or use of the Internet and other technologies
used in our business, and the lack of appropriate infrastructure to
support widespread Internet usage;
. export controls relating to encryption technology;
. tariffs and other trade barriers;
12
. potentially adverse tax consequences;
. limitations on the repatriation of funds;
. difficulties in staffing and managing foreign operations;
. changing local or regional economic and political conditions;
. exposure to different legal jurisdictions and standards;
. different accounting practices and payment cycles; and
. fluctuations in currency exchange rates.
As the international markets for consumer and commerce services on wireline,
wireless and broadband platforms markets continue to grow, competition in these
markets will likely intensify. Local companies may have a substantial
competitive advantage because of their greater understanding of and focus on
the local markets. If we do not effectively manage risks related to our
expansion internationally, our business is likely to be harmed.
Insiders own a large percentage of our stock, which could delay or prevent a
change in control and may negatively affect your investment.
As of October 31, 2001, our officers, directors and affiliated persons
beneficially owned approximately 28.3% of our voting securities. Naveen Jain,
our Chairman and Chief Executive Officer, beneficially owned approximately
21.1% of our voting securities as of that date. These stockholders will be able
to exercise significant influence over all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions, which could have the effect of delaying or preventing a
third party from acquiring control over us and could affect the market price of
our common stock. In addition, some of our executive officers have stock option
grants which provide for accelerated vesting if their employment is actually or
constructively terminated after a change of control. The interests of those
holding this concentrated ownership may not always coincide with our interests
or the interests of other stockholders, and, accordingly, they could cause us
to enter into transactions or agreements that we would not otherwise consider
or could prevent us from entering into transactions or agreements that we may
consider beneficial to our business.
We have implemented anti-takeover provisions that could make it more difficult
to acquire us.
Our certificate of incorporation, our bylaws and Delaware law contain
provisions that could make it more difficult for a third party to acquire us
without the consent of our board of directors, even if the transaction would be
beneficial to our stockholders. These provisions include:
. the classification of our board of directors into three groups so that
directors serve staggered three-year terms, which may make it difficult
for a potential acquirer to gain control of our board of directors;
. authorizing the issuance of shares of undesignated preferred stock
without a vote of stockholders;
. a prohibition on stockholder action by written consent; and
. limitations on stockholders' ability to call special stockholder
meetings.
In addition, we have an agreement with America Online that provides them the
right of first negotiation in the event that we receive an unsolicited proposal
from a third party regarding a sale, merger or other disposition of our assets
that would result in a change of control. If we receive this type of proposal,
America Online will have the first opportunity to negotiate with us regarding a
disposition. This agreement could make us less attractive to a potential
acquiror.
13
Technological Risks Related to Our Business
Our systems could fail or become unavailable, which would harm our reputation,
result in a loss of current and potential customers and could cause us to
breach existing agreements.
Our success depends, in part, on the performance, reliability and
availability of our services. We have data centers in Bellevue, Washington and
Papendrecht, Netherlands. None of our data centers are currently redundant. Our
systems and operations could be damaged or interrupted by fire, flood, power
loss, telecommunications failure, Internet breakdown, break-in, earthquake and
similar events. We would face significant damage as a result of these events
because we do not have a formal disaster recovery plan, and we do not carry
business interruption insurance that is adequate to compensate us for all the
losses that may occur. In addition, our systems use sophisticated software
which may contain bugs that could interrupt service. For these reasons we may
be unable to develop or successfully manage the infrastructure necessary to
meet current or future demands for reliability and scalability of our systems.
If the volume of traffic on our Web sites or our affiliates' Web sites
increases substantially, we must respond in a timely fashion by expanding and
upgrading our technology, transaction-processing systems and network
infrastructure. Due to the recent expansion in the number of our customers and
the products and services that we offer, we could experience periodic capacity
constraints which may cause temporary unanticipated system disruptions, slower
response times and lower levels of customer service. Our business could be
harmed if we are unable to accurately project the rate or timing of increases,
if any, in the use of our consumer and commerce services or expand and upgrade
our systems and infrastructure to accommodate these increases in a timely
manner.
Furthermore, we have entered into service level agreements with certain
merchant services distributors, including merchant banks, and most of our
wireless customers. These agreements call for system up times and 24/7 support,
and include penalties for non-performance. We may be unable to fulfill these
commitments, which could subject us to penalties under our agreements, harm our
reputation and result in the loss of customers and distributors.
We rely heavily on our proprietary technology, but we may be unable to
adequately protect or enforce our intellectual property rights thus weakening
our competitive position and negatively impacting our financial results.
Our success significantly depends upon our proprietary technology. In
particular, we believe that our core technology platform, which is proprietary
to us, provides us with a significant competitive advantage because it is
protocol and device agnostic, enabling us to provide our services through a
variety of platforms, formats and devices. We have achieved and are able to
maintain our current competitive position due to the unique nature of our
technology.
To protect our proprietary rights, we rely on a combination of copyright and
trademark laws, patents, trade secrets, confidentiality agreements with
employees and third parties and protective contractual provisions. Despite our
efforts to protect our proprietary rights, unauthorized parties may copy
aspects of our products or services or obtain and use information that we
regard as proprietary. In addition, it is possible that others could
independently develop substantially equivalent intellectual property. If we do
not effectively protect our intellectual property we could lose our competitive
position.
Our intellectual property may be subject to even greater risk in foreign
jurisdictions, as the laws of many countries do not protect proprietary rights
to the same extent as the laws of the United States. If we cannot adequately
protect our intellectual property our competitive position in markets abroad
may suffer.
14
Risks Related to Our Industry
Intense competition in the wireline, wireless and broadband markets could
prevent us from entering those markets or cause us to lose market share.
Our current business model depends on distribution of our consumer and
commerce services to merchants and into the wireline, wireless and broadband
markets, all of which are extremely competitive and rapidly changing. Our
current and prospective competitors have substantially greater financial,
technical and marketing resources, larger customer bases, longer operating
histories, more developed infrastructures, greater name recognition and more
established relationships in the industry than we have. Many of our competitors
may be able to develop and expand their service offerings more rapidly, adapt
to new or emerging technologies and changes in customer requirements more
quickly, take advantage of acquisitions and other opportunities more readily,
achieve greater economies of scale, devote greater resources to the marketing
and sale of their services and adopt more aggressive pricing policies than we
can. Because of these competitive factors and due to our relatively small size
and financial resources we may be unable to compete successfully.
Some of the companies we compete with are currently customers of ours, the
loss of which could harm our business. Many of our current customers have
established relationships with some of our current and potential future
competitors. If our competitors develop Internet information infrastructure
services that compete with ours, we could lose market share and our revenues
would decrease.
We rely on the Internet infrastructure, and its continued commercial viability,
over which we have no control and the failure of which could substantially
undermine our business strategy.
Our success depends, in large part, on other companies maintaining the
Internet system infrastructure. In particular, we rely on other companies to
maintain a reliable network backbone that provides adequate speed, data
capacity and security and to develop products that enable reliable Internet
access and services. If the Internet continues to experience significant growth
in the number of users, frequency of use and amount of data transmitted, the
Internet system infrastructure may be unable to support the demands placed on
it, and the Internet's performance or reliability may suffer as a result of
this continued growth.
In addition, the Internet could lose its commercial viability as a form of
media due to delays in the development or adoption of new standards and
protocols to process increased levels of Internet activity. Any such
degradation of Internet performance or reliability could cause advertisers to
reduce their Internet expenditures; in recent months, in fact, advertisers have
begun to attribute less value to advertising on the Internet. Furthermore, any
loss in the commercial viability of the Internet would have a significant
negative impact on our merchant services. If other companies do not develop the
infrastructure or complementary products and services necessary to establish
and maintain the Internet as a viable commercial medium, or if the Internet
does not become a viable commercial medium or platform for advertising,
promotions and electronic commerce our business could suffer.
Underdeveloped telecommunications and Internet infrastructure may limit the
growth of the Internet overseas thereby limiting the growth of our business.
Access to the Internet requires advanced telecommunications infrastructure.
The telecommunications infrastructure in many parts in Europe, the Asia-Pacific
region and Latin America is not as well developed as in the United States and
is partly owned and operated by current or former national monopoly
telecommunications carriers or may be subject to a restrictive regulatory
environment. The quality and continued development of telecommunications
infrastructure in Europe, the Asia-Pacific region and Latin America will have a
significant impact on our ability to deliver our services and on the market use
and acceptance of the Internet in general.
In addition, the recent growth in the use of the Internet has caused
frequent periods of performance degradation, requiring the upgrade of routers
and switches, telecommunications links and other components
15
forming the infrastructure of the Internet by Internet service providers and
other organizations with links to the Internet. Any perceived degradation in
the performance of the Internet as a whole could undermine the benefits of our
services. The quality of our services is ultimately limited by and reliant upon
the speed and reliability of Internet-related networks operated by third
parties. Consequently, the emergence and growth of the market for our services
is dependent on improvements being made to the entire Internet infrastructure
in Europe, the Asia-Pacific region and Latin America.
We could be subject to liability due to security risks both to users of our
commerce services and to the uninterrupted operation of our systems.
Security and privacy concerns of users of online commerce services such as
ours may inhibit the growth of the Internet and other online services,
especially as a means of conducting commercial transactions. We rely on secure
socket layer technology, public key cryptography and digital certificate
technology to provide the security and authentication necessary for secure
transmission of confidential information. Various regulatory and export
restrictions may prohibit us from using the strongest and most secure
cryptographic protection available and thereby expose us to a risk of data
interception. Because some of our activities involve the storage and
transmission of confidential personal or proprietary information, such as
credit card numbers, security breaches could damage our reputation and expose
us to a risk of loss or litigation and possible liability.
Additionally, our wireless and wireline networks may be vulnerable to
unauthorized access by hackers or others, computer viruses and other disruptive
problems. Someone who is able to circumvent security measures could
misappropriate our proprietary information or cause interruptions in our
operations. We may need to expend significant capital or other resources
protecting against the threat of security breaches or alleviating problems
caused by breaches. Although we intend to continue to implement industry-
standard security measures, persons may be able to circumvent the measures that
we implement in the future. Eliminating computer viruses and alleviating other
security problems may require interruptions, delays or cessation of service to
users accessing Web pages that deliver our services, any of which could harm
our business.
Consolidation in our industry could lead to increased competition and loss of
customers.
The Internet industry has experienced substantial consolidation. For
example, AOL, which previously acquired Netscape, has merged with Time Warner,
@Home has acquired Excite, and Compaq has acquired ZIP2. We expect this
consolidation to continue. These acquisitions could adversely affect our
business and results of operations in a number of ways, including:
. companies from whom we acquire content could acquire or be acquired by
one of our competitors and stop licensing content to us;
. our customers or distribution partners could acquire or be acquired by
one of our competitors and terminate their relationship with us; and
. our customers could merge with other customers, which could reduce the
size of our customer base.
USE OF PROCEEDS
All of the 744,339 shares of our common stock offered in this prospectus
will be issued upon exchange or redemption of the exchangeable shares; we will
receive no net cash proceeds upon the issuance of such shares.
16
PLAN OF DISTRIBUTION
You should consult your own tax advisors with respect to the United States,
Canadian and other tax consequences of exchanging your exchangeable shares for
shares of our common stock as described below. For more information, see
"Income Tax Considerations."
Your Exchangeable Shares
On September 13, 1999, the shareholders of INEX Corporation voted to approve
a plan of arrangement pursuant to Section 182 of the Business Corporations Act
(Ontario). In accordance with the plan of arrangement, INEX shareholders
received either exchangeable shares issued by InfoSpace.com Canada Holdings or
our common shares. Additionally, we assumed all obligations under INEX's
warrants and upon exercise thereof shares of our common stock will be issued.
The exchangeable shares and our common shares were issued at a ratio of .20405
shares for each INEX share.
We have filed with the SEC a registration statement on Form S-1, as amended,
with respect to our common stock being offered under this prospectus. This
prospectus forms a part of the registration statement. We have agreed to use
our reasonable best efforts to keep the registration statement effective until
there are no exchangeable shares outstanding. We have not engaged a broker,
dealer or underwriter in connection with the offering of our common stock
described in this prospectus.
You may obtain our common stock in exchange for your exchangeable shares in
the following ways:
. you may require InfoSpace.com Canada Holdings to exchange your
exchangeable shares for an equivalent number of shares of our common
stock. For more information, see "--Retraction of Exchangeable Shares."
. InfoSpace.com Canada Holdings will automatically redeem your
exchangeable shares for shares of our common stock at September 15, 2010
or upon the occurrence of certain events. For more information, see "--
Redemption of Exchangeable Shares" and "--Early Redemption."
. upon our liquidation or the liquidation of InfoSpace.com Canada
Holdings, you may be required to, or may choose to, exchange your
exchangeable shares for shares of our common stock. For more
information, see "--Liquidation Rights with Respect to InfoSpace.com
Canada Holdings" and "--Liquidation Rights with Respect to InfoSpace."
We will bear all of the expenses of this distribution. We estimate that
these expenses will total approximately $125,000.
How You May Retract Or Redeem Your Exchangeable Shares
Retraction of Exchangeable Shares
Holders of the exchangeable shares will be entitled at any time following
the combination to retract (i.e. require InfoSpace.com Canada Holdings to
redeem) any or all of the exchangeable shares held by such holder for a
retraction price per share equal to the market price of our common stock on the
last business day prior to the date you request redemption plus, on the
designated payment date therefor, all declared but unpaid dividends. Holders of
the exchangeable shares may effect such retraction by presenting a certificate
or certificates to InfoSpace.com Canada Holdings or the Trustee representing
the number of exchangeable shares the holder desires to retract together with a
duly executed retraction request indicating the number of exchangeable shares
the holder desires to retract and the date upon which the holder desires to
receive the InfoSpace.com common shares, and such other documents as may be
required to effect the retraction.
When a holder requests InfoSpace.com Canada Holdings to redeem exchangeable
shares, InfoSpace.com Nova Scotia Company will have an overriding right to
purchase all but not less than all of the retracted shares, at a purchase price
per share equal to the market price of our common stock on the last
17
business day prior to the date you request redemption plus, on the designated
payment date therefor, to the extent it is not paid by InfoSpace.com Canada
Holdings, all declared but unpaid dividends. Upon receipt of a request for
retraction, InfoSpace.com Canada Holdings will immediately notify InfoSpace.com
Nova Scotia Company. InfoSpace.com Nova Scotia Company must then advise
InfoSpace.com Canada Holdings within five business days as to whether it will
exercise its retraction right. If InfoSpace.com Nova Scotia Company does not so
advise InfoSpace.com Canada Holdings, InfoSpace.com Canada Holdings will notify
the holder as soon as possible thereafter that InfoSpace.com Nova Scotia
Company will not exercise the right. If InfoSpace.com Nova Scotia Company
advises InfoSpace.com Canada Holdings that InfoSpace.com Nova Scotia Company
will exercise the right within such five business day period, then provided the
request is not revoked by the holder as described below, the retraction request
shall thereupon be considered only to be an offer by the holder to sell the
shares to InfoSpace.com Nova Scotia Company in accordance with its right.
A holder may revoke its request for retraction, in writing, at any time
prior to the close of business on the business day preceding the retraction
date, in which case the shares will neither be purchased by InfoSpace.com Nova
Scotia Company nor be redeemed by InfoSpace.com Canada Holdings. If the holder
does not revoke its retraction request on the retraction date, the shares will
be purchased by InfoSpace.com Nova Scotia Company or redeemed by InfoSpace.com
Canada Holdings, as the case may be, in each case as set out above.
InfoSpace.com Canada Holdings or InfoSpace.com Nova Scotia Company, as the case
may be, will deliver the aggregate of the price per share equal to the market
price of our common stock on the last business day prior to the date of
retraction request plus, on the designated payment date therefor, all declared
but unpaid dividends to the holder recorded in the securities register for the
exchangeable shares or at the address specified in the holder's retraction
request or, if so requested in the retraction request, will hold the same for
pick up by the holder at the registered office of InfoSpace.com Canada Holdings
or the office of the transfer agent as specified by InfoSpace.com Canada
Holdings, in each case, less any amounts required to be deducted and withheld
therefrom on account of tax.
If, as a result of solvency requirements or applicable law, InfoSpace.com
Canada Holdings is not permitted to redeem all retracted shares tendered by a
retracting holder, InfoSpace.com Canada Holdings will redeem only those shares
tendered by the holder (rounded down to a whole number of shares) as would not
be contrary to such provisions of applicable law. The Trustee, on behalf of the
holder of any retracted shares not so redeemed by InfoSpace.com Canada
Holdings, will require InfoSpace.com to purchase the shares not redeemed on the
retraction date pursuant to the exchange right.
Redemption of Exchangeable Shares
Subject to applicable law and the overriding right of InfoSpace.com Nova
Scotia Company to purchase all of the exchangeable shares from all of the
holders of exchangeable shares (other than us and our affiliates) on a certain
date in exchange for our common shares, on an established date no earlier than
September 15, 2010 InfoSpace.com Canada Holdings will redeem all of the then
outstanding exchangeable shares for a redemption price per share equal to the
market price of our common stock on the last business day prior to the date we
request redemption plus, on the designated payment date therefor, all declared
but unpaid dividends. InfoSpace.com Canada Holdings will, at least 60 days
prior to the relevant date, or such number of days as the board of directors of
InfoSpace.com Canada Holdings may determine to be reasonably practicable under
the circumstances in respect of a redemption date arising in connection with
certain events, provide the registered holders of the exchangeable shares with
written notice of the proposed redemption of the exchangeable shares by
InfoSpace.com Canada Holdings or the purchase of the exchangeable shares by
InfoSpace.com Nova Scotia Company pursuant to the redemption call right
described below.
On or after the redemption date, upon the holder's presentation and
surrender of the certificates representing the exchangeable shares and such
other documents as may be required at the office of the transfer agent or the
registered office of InfoSpace.com Canada Holdings, InfoSpace.com Canada
Holdings will deliver the price per share equal to the market price of our
common stock on the last business day prior to the date of redemption request
plus, on the designated payment date therefor, all declared but unpaid
dividends as at such
18
date to the holder by mailing the same to the holder at the address of the
holder recorded in the securities register for the exchangeable shares or by
holding the same for pick up by the holder at the registered office of
InfoSpace.com Canada Holdings or the office of the transfer agent as specified
in the written notice of redemption in each case less any amounts required to
be deducted and withheld therefrom on account of tax.
InfoSpace.com Nova Scotia Company will have an overriding right to purchase
on the redemption date all of the exchangeable shares then outstanding (other
than exchangeable shares held by us and our affiliates) for a purchase price
per share equal to the market price of our common stock on the last business
day prior to the date you request redemption plus, on the designated payment
date therefor, to the extent it is not paid by InfoSpace.com Canada Holdings,
all declared but unpaid dividends. Upon the exercise of this right, holders
will be obligated to sell their exchangeable shares to InfoSpace.com Nova
Scotia Company. If InfoSpace.com Nova Scotia Company exercises this right,
InfoSpace.com Canada Holdings's right and obligation to redeem the exchangeable
shares on such redemption date will terminate.
Early Redemption
In certain circumstances, InfoSpace.com Canada Holdings has the right to
require a redemption of the exchangeable shares prior to September 15, 2010. An
early redemption may occur upon (i) there being fewer than 57,000 exchangeable
shares outstanding (other than exchangeable shares held by us and our
affiliates); (ii) the occurrence of a merger, amalgamation, tender offer,
material sale of shares or rights or interests therein or thereto or similar
transactions involving us, or any proposal to do so; (iii) a proposal for
certain matters in respect of which holders of exchangeable shares are entitled
to vote as shareholders of InfoSpace.com Canada Holdings; or (iv) the failure
to approve or disapprove, as applicable, certain matters in respect of which
holders of exchangeable shares are entitled to vote as shareholders of
InfoSpace.com Canada Holdings regarding changes required to maintain the
equivalence of exchangeable shares and our common shares.
If, prior to September 15, 2010, we are involved in any merger,
amalgamation, tender offer, material sale of shares or rights or interests
therein or thereto or similar transactions, or any proposal to do so, provided
that the board of directors of InfoSpace.com Canada Holdings determines, in
good faith and in its sole discretion, that it is not reasonably practicable to
substantially replicate the terms and conditions of the exchangeable shares in
connection with such a transaction and that the redemption of all but not less
than all of the outstanding exchangeable shares is necessary to enable the
completion of such transaction in accordance with its terms, the board of
directors of InfoSpace.com Canada Holdings may accelerate the redemption date
discussed above to such date prior to September 15, 2010 as it may determine,
upon such number of days prior written notice to the registered holders of the
exchangeable shares as the board of directors of InfoSpace.com Canada Holdings
may determine to be reasonably practicable in such circumstances.
An example of an event referred to above at (iii) is one to approve an
amalgamation involving InfoSpace.com Canada Holdings where the amalgamation
proposes changes to the exchangeable shares that, if contained in a proposed
amendment to InfoSpace.com Canada Holdings's articles, would entitle the
holders thereof to a vote under applicable corporate law or a sale of all or
substantially all of the assets of InfoSpace.com Canada Holdings where the
exchangeable shares would be affected differently from any other class of
shares of InfoSpace.com Canada Holdings. Such an event excludes that described
at (iv) above, and, for greater certainty, excludes any matter in respect of
which holders of exchangeable shares are entitled to vote (or instruct the
Trustee to vote) in their capacity as Beneficiaries under (and as that term is
defined in) the Voting and Exchange Trust Agreement. If, prior to September 15,
2010, such an event is proposed, provided that the board of directors of
InfoSpace.com Canada Holdings has determined, in good faith and in its sole
discretion, that it is not reasonably practicable to accomplish the business
purpose intended by the event, which business purpose must be bona fide and not
for the primary purpose of causing the occurrence of a redemption date, in any
other commercially reasonable manner that does not result in such an event, the
redemption date shall be the business day prior to the record date for any
meeting or vote of the holders of the exchangeable shares to consider the event
and the board of directors of InfoSpace.com Canada Holdings shall give such
number of days prior written notice of such redemption to the registered
holders of the exchangeable shares as
19
the board of directors of InfoSpace.com Canada Holdings may determine to be
reasonably practicable in such circumstances.
An event described at (iv) above means any matter in respect of which
holders of exchangeable shares are entitled to vote as shareholders of
InfoSpace.com Canada Holdings in order to approve or disapprove, as applicable,
any change to, or in the rights of the holders of, the exchangeable shares,
where the approval or disapproval, as applicable, of such change would be
required to maintain the equivalence of the exchangeable shares and the
InfoSpace common shares. If, prior to September 15, 2010, such an event is
proposed and the holders of the exchangeable shares fail to take the necessary
action at a meeting or other vote of holders of exchangeable shares, to approve
or disapprove, as applicable, the event, the redemption date shall be the
business day following the day on which the holders of the exchangeable shares
failed to take such action and the board of directors of InfoSpace.com Canada
Holdings shall give such number of days prior written notice of such redemption
to the registered holders of the exchangeable shares as the board of directors
of InfoSpace.com Canada Holdings may determine to be reasonably practicable in
such circumstances.
See "Income Tax Considerations--Canadian Federal Income Tax Considerations."
Liquidation Rights with Respect to InfoSpace.com Canada Holdings
In the event of the liquidation, dissolution or winding-up of InfoSpace.com
Canada Holdings or any other proposed distribution of the assets of
InfoSpace.com Canada Holdings among its shareholders for the purpose of
winding-up its affairs, holders of the exchangeable shares will have, subject
to applicable law, preferential rights to receive from InfoSpace.com Canada
Holdings, for each exchangeable share held, an amount equal to the market price
of our common stock on the last business day prior to the liquidation. Upon the
occurrence of such liquidation, dissolution or winding-up, InfoSpace.com Nova
Scotia Company will have an overriding right to purchase all of the outstanding
exchangeable shares (other than exchangeable shares held by us and our
affiliates) from the holders thereof on the effective date of such liquidation,
dissolution or winding-up for a purchase price per share equal to the market
price of our common stock on the last business day prior to the liquidation,
plus, to the extent it is not paid by InfoSpace.com Canada Holdings, the full
amount of all prior dividends, if any, declared and unpaid on exchangeable
shares.
Upon, and during the continuance of, insolvency of InfoSpace.com Canada
Holdings, a holder of exchangeable shares will be entitled to instruct the
Trustee to exercise the exchange right with respect to any or all of the
exchangeable shares held by such holder, thereby requiring us to purchase such
exchangeable shares from the holder. As soon as practicable following the
occurrence of such an insolvency of InfoSpace.com Canada Holdings or any event
which may, with the passage of time and/or the giving of notice, lead to
insolvency of InfoSpace.com Canada Holdings, we and InfoSpace.com Canada
Holdings will give written notice thereof to the Trustee. As soon as
practicable thereafter, the Trustee will then notify each holder of
exchangeable shares of such event or potential event and will advise the holder
of its rights with respect to the exchange right. The purchase price payable by
us for each exchangeable share purchased under this right will be satisfied by
the issuance of one share of our common stock plus, to the extent not paid by
InfoSpace.com Canada Holdings, the full amount of all prior dividends, if any,
declared and unpaid on exchangeable shares.
Liquidation Rights with Respect to InfoSpace
In order for the holders of the exchangeable shares to participate on a pro
rata basis with the holders of our common stock in the event of our
liquidation, on the fifth business day prior to the effective date of such an
event, each exchangeable share will automatically be exchanged for an
equivalent number of shares of our common stock, plus, to the extent not paid
by InfoSpace.com Canada Holdings, the full amount of all prior dividends, if
any, declared and unpaid on exchangeable shares. Upon a holder's request and
surrender of exchangeable share certificates, duly endorsed in blank and
accompanied by such instruments of transfer as we may reasonably require, we
will deliver to such holder certificates representing an equivalent number of
shares of our common stock plus, to the extent not paid by InfoSpace.com Canada
Holdings, the full amount of all
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prior dividends, if any, declared and unpaid on exchangeable shares for each
exchangeable share exchanged pursuant to this automatic exchange right. For a
description of certain of our obligations with respect to the dividend and
liquidation rights of the holders of exchangeable shares, see "InfoSpace
Support Obligation" below.
Certain Rights and Restrictions of Exchangeable Shares
Dividend Rights
Holders of exchangeable shares will be entitled to receive, subject to
applicable law, dividends (i) in the case of a cash dividend declared on our
common stock, in an amount in cash for each exchangeable share corresponding to
the cash dividend declared on each of our common shares, (ii) in the case of a
stock dividend declared on our common stock to be paid in shares of our common
stock, in such number of exchangeable shares for each exchangeable share as is
equal to the number of our common shares to be paid on each share of our common
stock, or (iii) in the case of a dividend declared on our common stock in
property other than cash or our common shares, in such type and amount of
property as is the same as, or economically equivalent to, the type and amount
of property declared as a dividend on each of our common shares. Cash dividends
on the exchangeable shares are payable in U.S. dollars or the Canadian dollar
equivalent thereof, at the option of InfoSpace.com Canada Holdings. The
declaration date, record date and payment date for dividends on the
exchangeable shares will be the same as the relevant date for the corresponding
dividends on the shares of our common stock.
Ranking
The exchangeable shares will be entitled to a preference over the common
shares and the preferred shares of InfoSpace.com Canada Holdings and any other
shares ranking junior to the exchangeable shares with respect to the payment of
dividends and the distribution of assets in the event of a liquidation,
dissolution or winding-up of InfoSpace.com Canada Holdings, whether voluntary
or involuntary, or any other distribution of the assets of InfoSpace.com Canada
Holdings, among its shareholders for the purpose of winding-up its affairs.
Certain Restrictions
InfoSpace.com Canada Holdings will not, without the approval of the holders
of the exchangeable shares, as set forth below under "Amendment and Approval":
(a) pay any dividends on the common shares or the preferred shares of
InfoSpace.com Canada Holdings, or any other shares ranking junior to
the exchangeable shares, other than stock dividends payable in common
shares or preferred shares of InfoSpace.com Canada Holdings, or any
such other shares ranking junior to the exchangeable shares, as the
case may be;
(b) redeem, purchase or make any capital distribution in respect of common
shares or preferred shares of InfoSpace.com Canada Holdings, or any
other shares ranking junior to the exchangeable shares;
(c) redeem or purchase any other shares of InfoSpace.com Canada Holdings
ranking equally with the exchangeable shares with respect to the
payment of dividends or on any liquidation distribution; or
(d) issue any exchangeable shares or any other shares of InfoSpace.com
Canada Holdings ranking equally with, or superior to, the exchangeable
shares other than by way of stock dividends to the holders of such
exchangeable shares.
The restrictions in clauses (a), (b), (c) and (d) above will not apply at
any time when the dividends on the outstanding exchangeable shares
corresponding to dividends declared and paid on our common stock have been
declared and paid in full.
Amendment and Approval
The rights, privileges, restrictions and conditions attaching to the
exchangeable shares may be added to, changed or removed only with the approval
of the holders thereof. Any such approval or any other approval or
21
consent to be given by the holders of the exchangeable shares will be deemed to
have been sufficiently given if given in accordance with applicable law subject
to a minimum requirement that such approval or consent be evidenced by a
special resolution passed by not less than two-thirds of the votes cast on such
resolution at a meeting of the holders of exchangeable shares duly called and
held at which holders of at least fifty percent (50%) of the then outstanding
exchangeable shares are present or represented by proxy. In the event that no
such quorum is present at such meeting within one-half hour after the time
appointed therefor, then the meeting will be adjourned to such place and time
(not less than five days later) as may be designated by the Chairman of such
meeting. At such adjourned meeting, the holders of exchangeable shares present
or represented by proxy may transact the business for which the meeting was
originally called and a special resolution passed thereat by the affirmative
vote of not less than two-thirds of the votes cast on such resolution will
constitute the approval or consent of the holders of the exchangeable shares.
Our Support Obligation
Pursuant to an Exchangeable Share Support Agreement, we will make the
following covenants for so long as any exchangeable shares (other than
exchangeable shares owned by us or our affiliates) remain outstanding: (i) we
will not declare or pay dividends on our common stock unless InfoSpace.com
Canada Holdings is able to declare and pay and simultaneously declares or pays,
as the case may be, an equivalent dividend on the exchangeable shares; (ii) we
will advise InfoSpace.com Canada Holdings in advance of the declaration of any
dividend on our common stock and ensure that the declaration date, record date
and payment date for dividends on the exchangeable shares are the same as that
for the corresponding dividend on our common stock; (iii) we will ensure that
the record date for any dividend declared on our common stock is not less than
ten business days after the declaration date of such dividend; (iv) we will
take all actions and do all things reasonably necessary or desirable to enable
and permit InfoSpace.com Canada Holdings, in accordance with applicable law, to
pay to the holders of the exchangeable shares the applicable InfoSpace.com
Canada Holdings amounts described above in the event of a liquidation,
dissolution or winding-up of InfoSpace.com Canada Holdings, a retraction
request by a holder of exchangeable shares or a redemption of exchangeable
shares by InfoSpace.com Canada Holdings; and (v) we will take all actions and
do all things reasonably necessary or desirable to enable and permit
InfoSpace.com Nova Scotia Company, in accordance with applicable law, to
perform its obligations arising upon the exercise by it of its rights,
including the delivery of our common stock in accordance with the provisions of
the applicable right.
The Exchangeable Share Support Agreement and the provisions of the
exchangeable shares provide that, without the prior approval of InfoSpace.com
Canada Holdings and the holders of the exchangeable shares as set forth above
under "Amendment and Approval," we will not issue or distribute additional
shares of our common stock, securities exchangeable for or convertible into or
carrying rights to acquire our common stock or rights to subscribe therefor or
other assets to all or substantially all holders of shares of our common stock,
nor change our common stock, unless the same or an economically equivalent
distribution on or change to the exchangeable shares (or in the rights of the
holders thereof) is made simultaneously. The InfoSpace.com Canada Holdings
board of directors is conclusively empowered to determine in good faith and in
its sole discretion whether any corresponding distribution on or change to the
exchangeable shares is the same as or economically equivalent to any proposed
distribution on or change to our common stock. In the event of any proposed
tender offer, share exchange offer, issuer bid, take-over bid or similar
transaction with respect to our common stock which is recommended by our board
of directors and in connection with which the exchangeable shares are not
redeemed by InfoSpace.com Canada Holdings or purchased by InfoSpace.com Nova
Scotia Company pursuant to the redemption call right, we will use reasonable
efforts to enable holders of exchangeable shares to participate in such
transaction to the same extent and on an economically equivalent basis as the
holders of shares of our common stock.
InfoSpace.com Canada Holdings is required to notify us and InfoSpace.com
Nova Scotia Company of the occurrence of certain events, such as the
liquidation, dissolution or winding-up of InfoSpace.com Canada Holdings, and of
its receipt of a retraction request from a holder of exchangeable shares.
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Under the Exchangeable Share Support Agreement, we have agreed not to
exercise any voting rights attached to the exchangeable shares owned by us or
any of our affiliates on any matter considered at meetings of holders of
exchangeable shares.
With the exception of administrative changes for the purpose of adding
covenants for the protection of the holders of the exchangeable shares, making
certain necessary amendments or curing ambiguities or clerical errors (in each
case provided that our board of directors and the board of directors of each of
InfoSpace.com Canada Holdings and InfoSpace.com Nova Scotia Company are of the
opinion that such amendments are not prejudicial to the interests of the
holders of the exchangeable shares), the Exchangeable Share Support Agreement
may not be amended without the approval of the holders of the exchangeable
shares as set forth above under "Amendment and Approval."
INEX Warrants
On October 14, 1999, there were outstanding INEX common share purchase
warrants which, when vested, would be exercisable to acquire a total of 353,844
INEX common shares at prices per share of between Cdn.$3.75 to Cdn.$8.00 with
various expiry dates to 2002.
Upon the closing of the combination on October 14, 1999, we assumed INEX's
obligations under all of the above INEX warrants. As of September 30, 2001, all
such warrants have been exercised for shares of our common stock.
Resale of Exchangeable Shares and Our Common Shares Received in the Transaction
The exchangeable shares and our common shares issuable to the INEX
shareholders upon the closing of our combination with INEX were not registered
under the Securities Act of 1933, as amended. Such shares were instead issued
in reliance upon the exemption provided by Section 3(a)(10) of the Securities
Act. Section 3(a)(10) exempts from registration securities issued in exchange
for one or more outstanding securities where the terms and conditions of the
issuance and exchange of such securities have been approved by any court of
competent jurisdiction, after a hearing upon the fairness of the terms and
conditions of the issuance and exchange at which all persons to whom such
securities will be issued have the right to appear. The court is authorized to
conduct a hearing to determine the fairness of the terms and conditions of the
arrangement, including the proposed issuance of securities in exchange for
other outstanding securities. The court entered an Interim Order on August 20,
1999, the arrangement was approved by the INEX shareholders on September 13,
1999, and a hearing on the fairness of the arrangement was held on October 4,
1999 by the court. The court entered a Final Order on the fairness of the
arrangement on October 13, 1999. The registration statement of which this
prospectus forms a part is intended to register our common shares to be issued
upon exchange of the exchangeable shares and exercise of the warrants assumed.
The exchangeable shares and our common shares received in exchange for INEX
shares in the combination are freely transferable under U.S. Federal securities
laws, except for exchangeable shares held by persons who are deemed to be
"affiliates" (as such term is defined under the Securities Act) of INEX prior
to the transaction which may be resold by them only in transactions permitted
by the resale provisions of Rule 145(d)(1), (2), or (3) promulgated under the
Securities Act or as otherwise permitted under the Securities Act. Rule
145(d)(1) generally provides that "affiliates" of either INEX or us may not
resell the exchangeable shares and our common shares unless such sale is
effected pursuant to an effective registration statement or pursuant to the
volume, current public information, manner of sale and timing limitations of
Rule 144 promulgated under the Securities Act. These limitations generally
require that any sales made by an affiliate in any three-month period shall not
exceed the greater of one percent of the outstanding shares of the securities
being sold or the average weekly trading volume over the four calendar weeks
preceding the placement of the sell order and that such sales be made in
unsolicited, open market "brokers transactions." Rules 145(d)(2) and (3)
generally provide that the foregoing limitations lapse for our non-affiliates
after a period of one or two years, respectively, depending upon whether
certain of our currently available information continues to be available.
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Persons who may be deemed to be affiliates of an issuer generally include
individuals or entities that control, are controlled by, or are under common
control with, such issuer and may include certain officers and directors of
such issuer as well as principal shareholders of such issuer. In the event that
this registration statement is declared effective, our common shares issuable
upon exchange of the exchangeable shares and upon exercise of the warrants that
we assumed from INEX will be transferable in the manner and under the
circumstances described in the foregoing paragraph.
In the event that this registration statement is not declared effective, our
common shares issuable upon exchange of the exchangeable shares and upon
exercise of the warrants that we assumed from INEX will be "restricted"
securities within the meaning of and as under the Securities Act and may not be
offered or sold except in accordance with Regulation S under the Securities
Act, pursuant to registration under the Securities Act or pursuant to an
available exemption from registration under the Securities Act. Accordingly, we
agreed, in the event that this registration statement was not declared
effective, to file a registration statement under the Securities Act with the
Securities and Exchange Commission prior to the closing of the combination in
order to register the resale of our common shares issuable upon exchange of the
exchangeable shares and exercise of the warrants that we assume from INEX. We
agreed to use our best efforts to cause that registration statement to become
effective and to remain effective until the date on which all shares of our
common stock have been issued. Under the terms of the combination, we may
suspend the use of such registration statement for such time as may be
necessary to update or amend it to correct any misstatement or omission of a
material fact. In addition, we may delay the filing if any such amendment or
supplement to such registration statement, for a period not to exceed ninety
days, if we in good faith determine the such amendment or supplement would
require us to disclose a material development or potential material development
and such disclosure would have a material adverse effect on us.
In the event that this registration statement is not declared effective,
holders of exchangeable shares who acquire our common shares pursuant to the
exchange of exchangeable shares or the exercise of the warrants which we
assumed from INEX after the fourth anniversary of the effective date of the
registration statement pertaining to the resale of our common stock may not
offer or sell our common stock except in compliance with an available exemption
from registration under the Securities Act.
We have registered under the Securities Act on Form S-8 the shares of our
common stock issuable upon exercise of employee options issued in exchange for
INEX employee options. Our common shares issuable upon exercise of those
options may be resold without restriction in the United States by persons who
are not our affiliates. Optionholders who are our affiliates must comply with
the volume, current public information and manner of sale limitations of Rule
144 under the Securities Act.
Prior to the closing of the combination each of the INEX affiliates entered
into agreements restricting them in connection with the requirements for
pooling-of-interests accounting treatment and restricting the sale, pledge or
other disposal of exchangeable shares, our common shares and INEX shares.
Future Issuances of Shares
The articles of InfoSpace.com Canada Holdings authorize the issuance of an
unlimited number of exchangeable shares. The exchangeable shares that are
authorized may be issued, without approval of holders of exchangeable shares,
at such time or times, to such persons and for such consideration as
InfoSpace.com Canada Holdings may determine, except as may otherwise be
required by applicable laws and subject to all dividends on the outstanding
exchangeable shares corresponding to dividends declared and paid on the
outstanding shares of our common stock having been declared and paid at the
relevant times.
24
INCOME TAX CONSIDERATIONS
Canadian Federal Income Tax Considerations
You should consider the following discussion of Canadian federal income
taxes before you acquire exchangeable shares or exchange exchangeable shares
for common stock. The following summarizes the principal Canadian federal
income tax considerations that generally apply to you if, under Canadian
federal income tax law, you are considered to
. hold as capital property
. your exchangeable shares,
. the voting rights relating to those shares, and
. the other ancillary rights relating to those shares;
. deal at arm's length with us, INEX, InfoSpace.com Canada Holdings, and
InfoSpace.com Nova Scotia Company.
If we are or will be a foreign affiliate of you under the Canadian federal
income tax laws, this summary will not apply to you. This summary does not
address the tax consequences of the transactions, including the arrangement, in
which you acquire the exchangeable shares, or the exercise of the warrants
which we assumed from INEX, or the sale of the shares obtainable upon exercise
of those warrants.
Under Canadian federal income tax laws, your exchangeable shares will
generally be considered to be capital property to you unless you are considered
to hold your exchangeable shares
. in the course of carrying on a business, or
. in an adventure in the nature of trade.
If you are resident in Canada but your shares might not otherwise qualify as
capital property, you may be entitled to make an irrevocable election to
qualify those shares as capital property. If you do not hold your exchangeable
shares as capital property, you should consult your own advisers regarding your
particular circumstances. If you are a "financial institution" under the
Canadian federal income tax laws applicable to securities held by financial
institutions, the summary does not apply to you; instead, you should consult
your own advisers regarding the application to you of the "mark-to-market"
rules.
The current provisions of the Income Tax Act (Canada) and regulations, the
current provisions of the income tax treaty between Canada and the United
States and counsel's understanding of the current administrative practices of
Revenue Canada form the basis of this summary. This summary takes into account
the proposed amendments to the Income Tax Act (Canada) and regulations that the
Minister of Finance has publicly announced prior to the date of this prospectus
and assumes that those proposed amendments will be enacted in their present
form. Counsel can give no assurances, however, that the proposed amendments
will be enacted in the form proposed, or at all.
Except for the proposed amendments, this summary does not take into account
or anticipate any changes in law, whether by legislative, administrative or
judicial decision or action, nor does it take into account provincial,
territorial or foreign income tax legislation or considerations, which may
differ from the Canadian federal income tax considerations described herein. We
have neither sought nor obtained an advance tax ruling from Revenue Canada to
confirm the tax consequences of any of the transactions we describe.
WHILE THIS SUMMARY ADDRESSES THE MATERIAL CANADIAN FEDERAL INCOME TAX
CONSIDERATIONS GENERALLY APPLICABLE TO YOU, IT IS NOT INTENDED TO BE, NOR
SHOULD IT BE CONSTRUED TO BE, LEGAL, BUSINESS OR TAX ADVICE TO YOU.
FURTHERMORE, AS REQUIRED BY THE "PLAIN ENGLISH" REQUIREMENTS OF THE SEC, THIS
SUMMARY MAKES MINIMAL USE OF DEFINED TERMS. YOU SHOULD KNOW THAT MANY OF
25
THE WORDS AND PHRASES USED IN THIS SUMMARY HAVE VERY SPECIFIC MEANINGS UNDER
CANADIAN INCOME TAX LAW.
THEREFORE, YOU SHOULD CONSULT YOUR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES APPLICABLE TO YOU IN YOUR PARTICULAR CIRCUMSTANCES.
For Canadian tax purposes, you must express all amounts, including
dividends, adjusted cost base and proceeds of disposition, in Canadian dollars,
and you must convert amounts denominated in United States dollars into Canadian
dollars based on the United States dollar exchange rate generally prevailing
when those amounts arise.
Shareholders Resident In Canada
If you are resident or deemed to be resident in Canada under Canadian
federal income tax laws, the following portion of the summary applies to you.
Dividends on Exchangeable Shares. If you are an individual, the dividends
that you receive or are deemed to receive on your exchangeable shares will be
included in computing your income. Generally, they will be subject to the
gross-up and dividend tax credit rules that normally apply to taxable dividends
received from taxable Canadian corporations. If you are a corporation, the
dividends that you receive or are deemed to receive on your exchangeable shares
will be included in computing your income.
If you are a corporation, you must include dividends that you receive or are
deemed to receive on the exchangeable shares in your income and these dividends
will normally be deductible in computing your taxable income unless you are a
specified financial institution, in which case the deduction is generally
denied.
If you are a private corporation or any other corporation resident in Canada
controlled or deemed to be controlled by or for the benefit of an individual
(other than a trust) or a related group of individuals (other than trusts), you
may be liable to pay a refundable tax of 33 1/3 percent on dividends that you
receive or are deemed to receive on the exchangeable shares that are deductible
in computing your taxable income. If you are a "Canadian-controlled private
corporation," you may be liable to pay an additional refundable tax of 6
2/3 percent on dividends you receive or are deemed to receive that are not
deductible in computing your taxable income.
Under Canadian federal income tax laws, the exchangeable shares will be
taxable preferred shares and short-term preferred shares and term preferred
shares. Accordingly, InfoSpace.com Canada Holdings will be subject to a 66
2/3 percent tax on dividends (other than excluded dividends) that it pays or is
deemed to pay on the exchangeable shares. In certain circumstances,
InfoSpace.com Canada Holdings may be entitled to deductions that will
substantially offset the impact of this tax. If you are a corporation,
dividends that you receive or are deemed to receive on the exchangeable shares
will not be subject to the 10 percent tax under Part IV.1 of the Income Tax Act
(Canada).
If the Company or any person with whom the Company does not deal at arm's
length for purposes of the Income Tax Act (Canada) is a "specified financial
institution" at the time a dividend is paid on an exchangeable share and you
are a corporation, then, subject to the exemption described below, the
dividends that you receive or are deemed to receive will not be deductible in
computing your taxable income. Accordingly, as discussed above, those dividends
will be fully includible in computing your income. Generally, we will be a
specified financial institution for these purposes if
. we are, or are related to, an entity or corporation that is a bank, a
trust company, a credit union, or an insurance corporation, or
. our principal business, or the principal business of an entity or
corporation to which we are related, is (a) the lending of money to
persons with whom we deal at arm's length, (b) the purchasing of debt
obligations issued by persons with whom we deal at arm's length, or (c) a
combination of both (a) and (b).
26
The same rules will apply to determine whether a person with whom we do not
deal at arm's length is a specified financial institution for these purposes.
Nonetheless, if you are a corporation, you will not be denied the dividend
deduction if at the time you receive a dividend or are deemed to receive a
dividend
. the exchangeable shares are listed on a prescribed stock exchange in
Canada,
. we control InfoSpace.com Canada Holdings, and
. you (together with any person with whom you do not deal at arm's length,
with any partnership of which you or that person is a member, and with
any trust of which you or that person is a beneficiary) do not receive
dividends on more than 10 percent of the issued and outstanding
exchangeable shares.
Redemption Or Exchange Of Exchangeable Shares
If InfoSpace.com Canada Holdings redeems (or you retract) your exchangeable
shares, you will generally be deemed to have received a dividend equal to the
amount, if any, by which the fair market value of the consideration you receive
as part of the redemption or retraction exceeds the aggregate of the paid-up
capital (as determined under Canadian federal income tax laws) of your
exchangeable shares at the time InfoSpace.com Canada Holdings redeems or you
retract your exchangeable shares.
The amount of any deemed dividend will generally be subject to the tax
treatment described above under "Dividends." On the redemption of your
exchangeable shares, you will also be considered to have disposed of your
exchangeable shares for proceeds of disposition equal to the paid-up capital of
your exchangeable shares redeemed or retracted. In general, you will realize a
capital gain (or a capital loss) equal to the amount by which the proceeds of
disposition of the exchangeable shares, net of reasonable costs of disposition
exceed (or are less than) the adjusted cost base of such shares (see "--
Taxation of Capital Gain or Capital Loss" below). If you are a corporation, in
some circumstances, the amount of any dividend you are deemed to have received
may be treated as proceeds of disposition and not as a dividend.
If you exchange exchangeable shares with InfoSpace.com Nova Scotia Company
for shares of common stock, other than on the redemption or retraction of
exchangeable shares, in general, you will realize a capital gain (or a capital
loss) to the extent the proceeds of disposition of the exchangeable shares, net
of any reasonable costs of disposition, exceed (or are less than) the adjusted
cost base of such shares to you. For these purposes, the proceeds of
disposition will be the aggregate fair market value, at the time of the
exchange, of the consideration you receive (see "--Taxation of Capital Gain or
Capital Loss" below).
Because of the rights relating to the exchangeable shares, you cannot
control whether you will receive shares of common stock upon the redemption of
your exchangeable shares or upon InfoSpace.com Nova Scotia Company's purchase
of your exchangeable shares. As described above, the tax consequences to you of
a redemption by InfoSpace.com Canada Holdings differ from those of an exchange
with InfoSpace.com Nova Scotia Company.
Taxation Of Capital Gain Or Capital Loss
You must include in your income for the year of disposition the taxable
portion of any capital gain you realize. The taxable portion of any capital
gain you realize (the "taxable capital gain") will be three-quarters of that
amount. You must deduct against such taxable capital gains for the year of
disposition three-quarters of any capital loss you realize in that year. If
three-quarters of any capital loss you realize in a taxation year exceeds your
taxable capital gains in that year, you may carry back the excess up to three
taxation years or forward indefinitely and deduct those excess amounts against
net taxable capital gains in those other years, subject to certain limitations
and in certain circumstances.
27
If you are an individual or trust, other than certain trusts, capital gains
that you realize may give rise to alternative minimum tax. If you are a
Canadian-controlled private corporation, you may be liable to pay an additional
refundable tax of 6 2/3 percent on taxable capital gains. If you are a
corporation, subject to certain limitations and under certain circumstances,
you may be required to reduce the amount of any capital loss arising when you
dispose or are deemed to dispose of any exchangeable shares by the amount of
dividends you received or are deemed to have received on those shares. Similar
rules may apply to you if you are:
. a corporation that is a member of a partnership that owns exchangeable
shares;
. a corporation that is a beneficiary of a trust that owns exchangeable
shares;
. a member of a partnership that is a member of another partnership that
owns exchangeable shares;
. a member of a partnership that is a beneficiary of a trust that owns
exchangeable shares;
. a beneficiary of a trust that is a member of a partnership that owns
exchangeable shares; or
. a beneficiary of a trust that is the beneficiary of another trust that
owns exchangeable shares.
Taxation of Our Common Stock
Acquisition And Disposition Of Shares Of Our Common Stock. The cost amount
of shares of common stock that you receive on the retraction, redemption or
exchange of exchangeable shares will in general be equal to the fair market
value of those shares at that time.
If you dispose or are deemed to have disposed of shares of common stock,
generally, you will have a capital gain (or capital loss) to the extent that
the proceeds of disposition, net of any reasonable costs of disposition, exceed
(or are less than) the adjusted cost base to you of such shares immediately
before the disposition. In computing the adjusted cost base of a share of our
common stock, you must average the cost of the share with the adjusted cost
base of any other shares of our common stock that you hold as capital property
at that time.
Dividends On Shares Of Common Stock. In computing your income, you must
include dividends that you receive or are deemed to receive on shares of common
stock. If you are an individual, these dividends will not be subject to the
gross-up and the dividend tax credit rules that normally apply to taxable
dividends received from taxable Canadian corporations. If you are a
corporation, these dividends will not be deductible in computing your taxable
income. In certain circumstances, you may be entitled to a foreign tax credit
in respect of any U.S. withholding tax payable in connection with these
dividends. If you are a Canadian-controlled private corporation, you may be
liable to pay an additional refundable tax of 6 2/3 percent on such dividends.
Foreign Property Information Reporting. If you are a "specified Canadian
entity" for a taxation year or a fiscal period and your total cost amounts of
"specified foreign property," including the shares of common stock, at any time
in the year or fiscal period exceed Cdn. $100,000, you must file an information
return for the year or period disclosing prescribed information, including
. your cost amount,
. any dividends you received in the year, and
. any gains or losses you realized in the year,
in respect of that property.
With some exceptions, generally, if you are a taxpayer resident in Canada in
the year, you will be a specified Canadian entity. You should consult your own
advisors about whether you must comply with these rules.
28
Shareholders Not Resident In Canada
The following portion of the summary is applicable to shareholders who, for
purposes of the Canadian Tax Act, have not been and will not be resident or
deemed to be resident in Canada at any time while they have held INEX common
shares or will hold exchangeable shares or shares of common stock.
Dividends On Exchangeable Shares. Dividends received or deemed to have been
received by a non-resident holder of exchangeable shares will be subject to
Canadian non-resident withholding tax at a rate of 25 percent, unless the rate
is reduced under the provisions of an applicable tax treaty.
Redemption Or Exchange Of Exchangeable Shares. Refer to the discussion above
for a description of the manner in which dividends will be deemed to have been
received by a shareholder and proceeds of disposition will be computed on the
redemption or exchange of exchangeable shares. Dividend withholding tax, as
described above, will apply to dividends deemed to have been received by a non-
resident holder on the redemption of an exchangeable share by InfoSpace.com
Canada Holdings.
Unless the exchangeable shares are listed on a prescribed stock exchange at
the time they are disposed of, they will be taxable Canadian property of a non-
resident holder. As a result, you will be subject to tax under the Canadian Tax
Act on gains realized on the exchange of exchangeable shares for shares of
common stock unless an applicable bilateral income tax convention between
Canada and the jurisdiction in which you reside exempts such gains from
Canadian tax.
You will be required to comply with certain notification requirements
imposed by section 116 of the Canadian Tax Act. Specifically, you must notify
Revenue Canada of your intention to dispose of the exchangeable shares prior to
such disposition or within ten days after such disposition. Revenue Canada will
issue a certificate in respect of such proposed disposition or disposition
provided you have complied with the requirements imposed by the Canadian Tax
Act, which may in some circumstances include payment of an amount equal to 33
1/3 percent of the amount by which the proceeds of disposition exceed your
adjusted cost base of the exchangeable shares, or the provision of acceptable
security in respect of the disposition. Evidence of that adjusted cost base
acceptable to Revenue Canada may have to be provided. Unless InfoSpace.com
Canada Holdings or InfoSpace.com Nova Scotia Company, as the case may be, is in
receipt of a copy of such certificate on or prior to the date of the redemption
or exchange, it will withhold 33 1/3 percent of the payment otherwise due to
the shareholder. If InfoSpace.com Canada Holdings or InfoSpace.com Nova Scotia
Company, as the case may be, has not received such certificate within 30 days
of the end of the month in which the redemption or exchange occurs, it will be
required to remit such withheld amount in cash to the Receiver General, as tax
on your behalf and will take all such action necessary to convert on your
behalf the 33 1/3 percent of the payment withheld to cash proceeds for the
remittance to the Receiver General.
The relevant notification form is Revenue Canada form T2062. A copy of the
form will be sent to INEX shareholders who indicate that they are not resident
in Canada.
United States Federal Income Tax Considerations
You should consider the following discussion of United States federal income
taxes before you acquire exchangeable shares or exchange exchangeable shares
for common stock. This discussion does not address all the federal income tax
considerations that may be relevant to you. In addition, this discussion does
not address the tax consequences of transactions in which you acquire your
exchangeable shares, including the arrangement, or the exercise of the warrants
which we will assumed from INEX. Furthermore, this discussion does not address
any foreign, state, or local tax considerations.
WE STRONGLY URGE YOU TO CONSULT YOUR OWN TAX ADVISORS REGARDING THE SPECIFIC
TAX CONSIDERATIONS THAT APPLY TO YOU.
29
The laws, regulations, court decisions, and IRS rulings and regulations
effective on the date of this prospectus form the basis of this discussion.
This discussion is for general information only. No law, court decision, or
ruling or regulation directly addresses certain of the tax consequences of the
ownership of instruments and rights comparable to the exchangeable shares and
the rights attached to those shares.
Consequently, some aspects of the tax treatment of the arrangement,
including the exchange of exchangeable shares for shares of common stock, are
uncertain. We have neither sought nor obtained any advance income tax ruling
regarding the tax consequences of any of the transactions we describe.
Tax Considerations That Apply To U.S. Holders
If you are:
. an individual citizen or resident of the United States,
. a corporation or partnership created in the United States or under the
laws of the United States or of any state, or
. a United States estate or trust,
and you hold your exchangeable shares as capital assets, the following tax
considerations will generally apply to you.
Exchange Of Exchangeable Shares. Except as we describe below, when you
exchange your exchangeable shares for shares of common stock, you will
generally recognize gain or loss. Your gain or loss will equal the difference
between (a) the fair market value of the shares of common stock at the time you
exchange your exchangeable shares and (b) your tax basis in the exchangeable
shares you exchange. Your gain or loss will generally be a capital gain or
loss. You may, however, recognize ordinary income with respect to any declared
but unpaid dividends on the exchangeable shares. A capital gain or loss will be
long-term capital gain or loss if your holding period for the exchangeable
shares is more than one year. Your tax basis in the shares of common stock will
be their fair market value at the time of the exchange. Your holding period for
the shares of common stock that you receive will begin on the day after the
exchange.
In view of the likelihood that you will recognize gain or loss when you
exchange the exchangeable shares for shares of common stock, you may wish to
consider delaying the exchange until either
. you intend to dispose of the shares of common stock that you receive in
exchange for your exchangeable shares, or
. the exchange may be characterized as tax-free.
The gain or loss you realize when you exchange your exchangeable shares for
shares of common stock generally will be treated as United States source gain
or loss. Under the terms of the United States-Canada income tax treaty,
however, your gain may be treated as sourced in Canada. Subject to certain
limitations, you may be entitled to credit your United States taxes for any
Canadian tax imposed on the exchange. If you are ineligible for a credit for
any Canadian tax that you pay, you may be entitled to deduct that tax in
computing your United States taxable income.
Distributions On The Exchangeable Shares. If any distributions are paid to
you as a holder of exchangeable shares, we and InfoSpace.com Canada Holdings
intend to treat those distributions as distributions from InfoSpace.com Canada
Holdings, rather than from us. We and InfoSpace.com Canada Holdings can not
assure you, however, that the IRS or a court would agree that our intended
treatment is correct. Assuming that treatment is proper, these distributions
will be treated as dividends and will be taxable to you as ordinary income if
InfoSpace.com Canada Holdings has earnings and profits. Those dividends
generally will be treated as foreign source passive income for foreign tax
credit limitation purposes. Under the U.S.-Canada Tax Treaty, such dispositions
generally will be subject to a Canadian withholding tax at a rate of 15
percent. Subject to certain limitations, you should generally be entitled to
either credit your United States income tax liability with,
30
or deduct in computing your United States taxable income, any Canadian income
taxes withheld from these distributions.
Tax Considerations That Apply To Non-U.S. Holders
If you are not
. an individual citizen or resident of the United States,
. a corporation or partnership created in the United States or under the
laws of the United States or of any state, or
. a United States estate or trust,
the following summary applies to you.
Exchange Of Exchangeable Shares. Generally, you will not be subject to
United States federal income tax when you exchange your exchangeable shares for
shares of our common stock, unless your exchangeable shares were an asset of
your United States trade or business.
Distributions On The Exchangeable Shares. You should not be subject to
United States tax on dividends that you receive on the exchangeable shares.
Therefore, we and InfoSpace.com Canada Holdings do not intend to withhold any
United States taxes from those dividends. The IRS, however, may assert that
dividends paid to you on the exchangeable shares are subject to tax. As a
result, you could be subject to tax at a rate of 30 percent. An applicable
treaty in effect between the United States and your country of residence may
reduce the rate. If you are a resident of Canada, a maximum rate of 15 percent
applies to dividends paid to you.
Distributions On Shares Of Common Stock. Dividends that you receive on the
common stock generally will be subject to tax at a rate of 30 percent. An
applicable income tax treaty may reduce that rate. If you are a resident of
Canada, a maximum rate of 15 percent applies to dividends paid to you.
Gain On Sale Or Exchange Of Common Stock. Generally, you will not be subject
to tax when you sell or exchange your shares of common stock unless either
. your common stock was an asset of your United States trade or business
or, if a tax treaty applies, is attributable to your United States
permanent establishment; or
. you are an individual, you are present in the United States for 183 days
or more, or you satisfy certain other conditions.
If at any time we are a United States real property holding corporation, you
may be subject to certain additional rules. These rules would require
withholding of tax on the gross proceeds of your sale of shares of common
stock. We believe that we are not a United States real property holding
corporation. Although we consider it unlikely that we will become a United
States real property holding corporation, we can provide no assurance as to
this issue.
Federal Estate Taxes. If you are an individual who is not a citizen or
resident (as defined for United States federal estate tax purposes) of the
United States at the time of death, shares of common stock that you own will be
includable in your gross estate for United States federal estate tax purposes
(unless an applicable estate tax treaty provides otherwise), and therefore may
be subject to United States federal estate tax.
Backup Withholding, Information Reporting and Other Reporting
Requirements. We must report annually to the Internal Revenue Service and to
each of you the amount of dividends paid to, and the tax withheld with respect
to, each of you. These reporting requirements apply regardless of whether
withholding was reduced or eliminated by an applicable tax treaty. Copies of
this information also may be made available under the provisions of a specific
treaty or agreement with the tax authorities of your country.
31
Under currently effective United States Treasury regulations, United States
backup withholding tax (which generally is imposed at the rate of 31 percent on
certain payments to persons that fail to furnish the information required under
the United States information reporting requirements) and information reporting
requirements (other than those discussed above) generally will not apply to
dividends paid on common stock if you have an address outside the United
States. Backup withholding and information reporting generally will apply to
dividends paid on shares of common stock if you have an address in the United
States, or if you fail to establish an exemption or to provide certain other
information to us. Under United States Treasury regulations that are effective
for payments made after December 31, 2000, if you fail to certify your status
in accordance with these regulations, you may be subject to backup withholding
on payments of dividends.
The payment of proceeds from the disposition of common stock to or through a
United States office of a broker will be subject to information reporting and
backup withholding unless you, under penalties of perjury, certify, among other
things, your status as a non-U.S. Holder or otherwise establish an exemption.
In general, backup withholding and information reporting will not apply to the
payment of the proceeds of a sale of common stock by or through a foreign
office of a broker. If, however, such broker is, for United States federal tax
purposes, a United States person, a "controlled foreign corporation" for U.S.
federal income tax purposes or a foreign person 50 percent or more of whose
gross income from certain periods is effectively connected with a United States
trade or business or has as partners one or more United States persons that, in
the aggregate, hold more than 50 percent of the income or capital interests in
the partnership, such payments will be subject to information reporting, but
not backup withholding, unless such broker has documentary evidence in its
records that you are a non-U.S. holder and certain other conditions are met or
you otherwise establish an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from a payment to you will be refunded or credited
against your United States federal income tax liability, if any, provided that
the required information is furnished to the Internal Revenue Service.
LEGAL MATTERS
Certain legal matters relating to the validity of the securities offered
hereby will be passed upon for us by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Kirkland, Washington.
EXPERTS
The financial statements of InfoSpace, Inc. as of December 31, 2000 and
1999, and for each of the three years in the period ended December 31, 2000,
included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report (which expresses an unqualified
opinion and includes an explanatory paragraph referring to the cumulative
effect of a change in accounting principle) appearing herein, and have been so
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
32
INFOSPACE, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
INFOSPACE, INC.:
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations and Comprehensive Income............. F-4
Consolidated Statements of Changes in Stockholders' Equity................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of InfoSpace, Inc.
Bellevue, Washington
We have audited the accompanying consolidated balance sheets of InfoSpace,
Inc. and its subsidiaries (the Company) as of December 31, 2000 and 1999, and
the related consolidated statements of operations and comprehensive income,
changes in stockholders' equity, and cash flows for the years ended December
31, 2000, 1999 and 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion such consolidated financial statements present fairly, in all
material respects, the financial position of InfoSpace, Inc. and its
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for the years ended December 31, 2000, 1999 and
1998, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 in the consolidated financial statements, in the year
2000, the Company adopted SAB No. 101, Revenue Recognition in Financial
Statements.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Seattle, Washington
March 2, 2001
(March 23, 2001 as to Note 9)
F-2
INFOSPACE, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
December 31,
---------------------
2000 1999
---------- ---------
ASSETS
------
Current assets:
Cash and cash equivalents............................. $ 153,913 $ 104,350
Short-term investments, fair value $216,235 and
$310,247 ............................................ 216,235 310,311
Accounts receivable, net of allowance for doubtful
accounts of $4,898 and $1,325........................ 33,881 13,551
Payroll tax receivable................................ -- --
Notes and other receivables, net of allowance of
$3,624 and $12 ...................................... 22,321 18,524
Prepaid expenses and other assets..................... 14,491 10,828
---------- ---------
Total current assets................................ 440,841 457,564
Long-term investments, fair value $32,451 and $100,631.. 32,451 101,077
Property and equipment, net............................. 51,137 11,878
Other long-term assets.................................. 5,075 2,046
Other investments....................................... 121,574 121,684
Intangible assets, net.................................. 621,032 259,670
---------- ---------
Total assets............................................ $1,272,110 $ 953,919
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable...................................... $ 4,537 $ 3,689
Accrued expenses and other current liabilities........ 37,999 23,457
Deferred revenues..................................... 31,430 12,121
---------- ---------
Total current liabilities........................... 73,966 39,267
Long-term debt.......................................... -- 686
Long-term deferred revenue.............................. 7,973 4,946
Minority interest....................................... 21,599 --
---------- ---------
Total liabilities................................... 103,538 44,899
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, par value $.0001--Authorized,
15,000,000 shares; issued and outstanding, 1 and 1
share................................................ -- --
Common stock, par value $.0001--Authorized,
900,000,000 shares, issued and outstanding,
316,669,408 and 283,411,552 shares................... 32 28
Additional paid-in capital............................ 1,596,213 959,492
Accumulated deficit................................... (408,646) (126,234)
Deferred expense--warrants............................ (1,495) (2,311)
Unearned stock-based compensation..................... (1,500) (1,518)
Accumulated other comprehensive income (loss)......... (16,032) 79,563
---------- ---------
Total stockholders' equity.......................... 1,168,572 909,020
---------- ---------
Total liabilities and stockholders' equity.............. $1,272,110 $ 953,919
========== =========
See notes to consolidated financial statements.
F-3
INFOSPACE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Amounts in thousands, except per share data)
Years Ended December 31,
------------------------------
2000 1999 1998
--------- --------- --------
Revenues (includes related party revenues of
$32,095, $2,921 and $19) ..................... $ 214,530 $ 71,980 $ 18,490
Cost of revenues............................... 35,627 13,472 4,919
--------- --------- --------
Gross profit................................ 178,903 58,508 13,571
Operating expenses:
Product development (includes related party
expenses of $400, $0 and $0)................ 40,624 15,580 9,005
Sales, general and administrative (includes
related party expenses of $39, $4
and $0)..................................... 127,980 77,777 23,893
Amortization of intangibles.................. 171,336 42,761 710
Acquisition and related charges.............. 123,998 13,574 4,486
Impairment and other charges................. 26,595 11,360 4,898
Restructuring charges........................ 2,322 -- --
--------- --------- --------
Total operating expenses.................... 492,855 161,052 42,992
--------- --------- --------
Loss from operations........................ (313,952) (102,544) (29,421)
Other income, net.............................. 27,682 22,342 946
Gain (loss) on investments, net................ 9,222 -- --
--------- --------- --------
Loss from operations before income tax expense,
minority interest, cumulative effect
of change in accounting principle and
preferred stock dividend...................... (277,048) (80,202) (28,475)
Income tax expense............................. (137) -- (64)
Minority interest.............................. (3,171) -- --
--------- --------- --------
Loss from operations before cumulative effect
of change in accounting principle and
preferred stock dividend...................... (280,356) (80,202) (28,539)
Cumulative effect of change in accounting
principle..................................... (2,056) -- --
--------- --------- --------
Net loss....................................... (282,412) (80,202) (28,539)
========= ========= ========
Preferred stock dividend....................... -- (159,931) --
--------- --------- --------
Net loss applicable to common stockholders..... $(282,412) $(240,133) $(28,539)
========= ========= ========
Basic and diluted net loss per share
Loss per share before accounting change...... $ (0.92) $ (0.93) $ (0.19)
Accounting change............................ (0.01) -- --
--------- --------- --------
Loss per share............................... $ (0.93) $ (0.93) $ (0.19)
========= ========= ========
Shares used in computing basic net loss per
share......................................... 304,480 257,752 152,655
========= ========= ========
Shares used in computing diluted net loss per
share......................................... 304,480 257,752 152,655
========= ========= ========
Other comprehensive income:
Net loss applicable to common stockholders..... $(282,412) $(240,133) $(28,539)
Foreign currency translation adjustment...... (316) 36 (17)
Unrealized gain (loss) on equity
investments................................. (95,279) 79,570 --
--------- --------- --------
Comprehensive income........................... $(378,007) $(160,527) $(28,555)
========= ========= ========
See notes to consolidated financial statements.
F-4
INFOSPACE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2000, 1999 and 1998
(Amounts in thousands, except share data)
Accumulated
Common Stock other
------------------ Paid-in Accumulated Deferred Unearned comprehensive
Shares Amount capital deficit expense compensation income Total
----------- ------ ---------- ----------- -------- ------------ ------------- ----------
Balance, January 1,
1998.................... 126,007,749 $ 13 $ 41,038 $ (17,493) $ -- $ (474) $ (26) $ 23,058
Common stock issued.... 95,559,609 10 121,777 -- -- -- -- 121,787
Common stock issued for
acquisitions........... 2,445,679 -- 7,957 -- -- -- -- 7,957
Common stock issued for
stock options.......... 426,361 -- 1,836 -- -- -- -- 1,836
Common stock issued for
warrants, exchange and
preferred shares....... 471,235 -- 2,581 -- -- -- -- 2,581
Unearned compensation--
stock options.......... -- -- 1,729 -- -- (1,729) -- --
Compensation expense-
stock options.......... -- -- -- -- -- 1,534 -- 1,534
Cancelled options for
deferred services...... -- -- -- -- -- -- -- --
Deferred expense--
warrants............... -- -- 3,263 -- (3,263) -- -- --
Warrant expense........ -- -- -- -- 136 -- -- 136
Unrealized gain (loss)
on equity investments.. -- -- -- -- -- -- -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- (17) (17)
Net loss............... -- -- -- (28,539) -- -- -- (28,539)
----------- ---- ---------- --------- ------- ------- -------- ----------
Balance, December 31,
1998.................... 224,910,633 $ 23 $ 180,181 $ (46,032) $(3,127) $ (669) $ (43) $ 130,333
Common stock issued.... 18,426,518 2 185,103 -- -- -- -- 185,105
Common stock issued for
acquisitions........... 8,373,279 1 253,137 -- -- -- -- 253,138
Common stock issued for
stock options.......... 14,041,290 1 16,946 -- -- -- -- 16,947
Common stock issued for
warrants, exchange and
preferred shares....... 17,418,376 1 297,669 -- -- -- -- 297,670
Common stock for
conversion of special
shares and debentures.. 85,304 -- 170 -- -- -- -- 170
Common stock issued for
employee stock purchase
plan................... 156,152 -- 394 -- -- -- -- 394
Unearned compensation--
stock options.......... -- -- 3,881 -- -- (3,881) -- --
Compensation stock-
stock options.......... -- -- -- -- -- 2,865 -- 2,865
Cancelled options for
deferred services...... -- -- (167) -- -- 167 -- --
Non-qualified stock
option tax benefit..... -- -- 4,526 -- -- -- -- 4,526
Deferred expense--
warrants............... -- -- 17,652 -- (17,652) -- -- --
Warrant expense........ -- -- -- -- 18,468 -- -- 18,468
Unrealized gain (loss)
on equity investments.. -- -- -- -- -- -- 79,570 79,570
Foreign currency
translation
adjustment............. -- -- -- -- -- -- 36 36
Net loss............... -- -- -- (80,202) -- -- -- (80,202)
----------- ---- ---------- --------- ------- ------- -------- ----------
Balance, December 31,
1999.................... 283,411,552 $ 28 $ 959,492 $(126,234) $(2,311) $(1,518) $ 79,563 $ 909,020
Common stock issued.... 19,958 -- 9,912 -- -- -- -- 9,912
Common stock issued for
acquisitions........... 14,851,150 2 573,017 -- -- -- -- 573,018
Common stock issued for
stock options.......... 14,057,032 1 27,769 -- -- -- -- 27,770
Common stock issued for
warrants, exchange and
preferred shares....... 4,266,085 1 9,840 -- -- -- -- 9,841
Common stock issued for
employee stock purchase
plan................... 63,631 -- 1,512 -- -- -- -- 1,512
Unearned compensation--
stock options.......... -- -- 1,695 -- -- (1,695) -- --
Compensation stock-
stock options.......... -- -- -- -- -- 1,713 -- 1,713
Non-qualified stock
option tax benefit..... -- -- 10,089 -- -- -- -- 10,089
Deferred expense--
warrants............... -- -- 2,887 -- (2,887) -- -- --
Warrant expense........ -- -- -- -- 3,703 -- -- 3,703
Unrealized gain (loss)
on equity investments.. -- -- -- -- -- -- (95,279) (95,279)
Foreign currency
translation
adjustment............. -- -- -- -- -- -- (316) (316)
Net loss............... -- -- -- (282,412) -- -- -- (282,412)
----------- ---- ---------- --------- ------- ------- -------- ----------
Balance, December 31,
2000.................... 316,669,408 $ 32 $1,596,213 $(408,646) $(1,495) $(1,500) $(16,032) $1,168,572
=========== ==== ========== ========= ======= ======= ======== ==========
See notes to consolidated financial statements.
F-5
INFOSPACE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Years Ended December 31,
------------------------------
2000 1999 1998
--------- --------- --------
Net loss applicable to common stockholders.... $(282,412) $(240,133) $(28,539)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities
Depreciation and amortization................ 183,526 47,707 4,413
Performance warrant revenue.................. (22,075) (3,168) --
Preferred stock dividend..................... -- 159,931 --
Warrants expense............................. 3,703 18,468 136
Stock-based compensation expense............. 1,713 2,865 1,534
Minority interest in venture fund............ 3,171 -- --
Loss on disposal of fixed assets............. 324 13 111
Noncash services exchanged................... -- 1,414 281
(Gain) loss on investments................... (14,830) 26 22
Bad debt expense............................. 7,376 1,326 1,082
Deferred taxes............................... -- -- (256)
Tax benefit from stock options............... -- 4,525 --
Write-off of in-process research and
development................................. 80,100 9,200 2,800
Impairment of assets......................... 19,032 -- --
Net (gain) loss on sale/write-off of
investments held by the Company............. (2,392) -- --
Net loss on write-off of investments held by
the Venture Fund............................ 8,000 -- --
Business acquisition costs................... 43,898 4,374 1,686
Cumulative translation adjustment............ (260) 43 (5)
Cash provided (used) by changes in operating
assets and liabilities, net of assets
acquired in business combinations:
Accounts receivable.......................... (28,762) (12,053) (5,579)
Other receivables............................ 7,832 (14,626) --
Prepaid expenses and other current assets.... 261 (9,267) (2,645)
Other long-term assets....................... (782) (91) (404)
Accounts payable............................. 2,495 860 4,332
Accrued expenses and other liabilities....... (14,312) 10,092 6,151
Deferred taxes............................... -- -- --
Deferred revenue............................. 21,172 6,683 2,278
--------- --------- --------
Net cash provided (used) by operating
activities................................ 16,778 (11,811) (12,602)
INVESTING ACTIVITIES:
Business acquisitions, net of cash acquired.. (45,680) (52,577) (1,998)
Minority interest contribution (purchase) in
venture fund................................ 16,365 -- --
Purchase of intangible asset................. -- (110) (3,290)
Notes receivable issued...................... (27,920) -- --
Notes receivable payments.................... 7,070 -- --
Purchase of other investments................ (41,270) (13,202) (646)
Purchase of property and equipment........... (44,370) (9,079) (4,985)
Proceeds from sale of fixed assets........... -- -- --
Short and long-term investments, net......... 130,244 (348,299) (83,541)
--------- --------- --------
Net cash used by investing activities...... (5,561) (423,267) (94,460)
FINANCING ACTIVITIES:
Proceeds from stock options and warrants..... 37,471 22,289 1,436
Proceeds from issuance of ESPP shares........ 1,512 394 --
Proceeds (payments) from issuance of common
stock, net.................................. (24) 476,042 124,040
Debt borrowings (payments)................... (613) (460) 115
--------- --------- --------
Net cash provided by financing activities.. 38,346 498,360 125,591
--------- --------- --------
Net increase in cash and cash equivalents..... 49,563 63,182 18,529
Cash and cash equivalents, beginning of
period....................................... 104,350 41,168 22,639
--------- --------- --------
Cash and cash equivalents, end of period...... $ 153,913 $ 104,350 $ 41,168
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
AND INVESTING ACTIVITIES:
Acquisitions from purchase transactions:
Stock issued................................. $ 572,938 $ 253,137 $ 7,987
Net assets acquired.......................... (21,877) (150) (191)
Property and equipment acquired under
equipment financing and capital lease
obligations................................. -- 308 198
Issuance of warrants and options for deferred
services and abandoned financing............ -- 2,665 216
Conversion of note payable as consideration
for interest in previously consolidated
subsidiary.................................. -- -- 250
Compensation expense for Prio warrants....... 2,888 17,652 --
Stock issued in exchange transaction......... -- 169 335
Stock issued for retirement of debentures.... -- 170 --
Preferred stock dividend..................... -- 159,931 --
Interest paid................................ -- 132 125
See notes to consolidated financial statements.
F-6
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2000, 1999 and 1998
Note 1: Summary of Significant Accounting Policies
Description of business: InfoSpace, Inc., (the Company or InfoSpace),
previously known as InfoSpace.com, Inc., a Delaware corporation, was founded in
March 1996. The Company is an international provider of cross-platform commerce
and consumer infrastructure services on wireless, broadband and wireline
platforms. InfoSpace provides commerce, information and communication
infrastructure services for wireless devices, merchants and Web sites.
Principles of consolidation: The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Basis of Presentation: During the year ended December 31, 2000, the Company
acquired the outstanding stock of Go2Net, Inc. (Go2Net) and Prio, Inc. (Prio)
These acquisitions were accounted for using the pooling-of-interests method of
accounting. Accordingly, the Company's historical consolidated financial
statements have been recast to include the financial results of Go2Net and Prio
as if both companies were wholly owned subsidiaries since inception.
Because the fiscal periods of the Company and Go2Net were not the same, all
fiscal year end periods for Go2Net have been adjusted to conform with the
InfoSpace December 31 year-end. Because Go2Net's fiscal year end was September
30, accumulated deficit at December 31, 1997 includes Go2Net's net loss for the
three months ended December 31, 1997 of $416,000. All references to shares in
Go2Net acquisitions reflect the merger exchange ratio.
The financial statements for the year ended December 31, 1999 have also been
restated to give effect to an adjustment made to Go2Net's previously issued
financial information. This adjustment resulted in an increase in assets of
$8.4 million, deferred revenue of $7.2 million and retained earnings of $1.2
million as of December 31, 1999. Additionally, revenue increased and net loss
decreased by $1.1 million for the year ended December 31, 1999. The adjustment
was related to the fair value originally assigned to warrants received in
conjunction with a service agreement in July 1999 between Go2Net and CommTouch
Software, Inc. (CommTouch). Go2Net and CommTouch entered into three agreements:
a stock purchase agreement, an e-mail service agreement and a warrant
agreement. The service and warrant agreements were contemporaneously negotiated
and executed. The stock purchase agreement called for Go2Net to purchase
896,057 shares of CommTouch's common stock concurrent with CommTouch's initial
public offering. The price for each share of CommTouch's common stock shares
was $14.88 per share, resulting in a total investment of $13,333,333. Go2Net
also entered into a customized e-mail service agreement with CommTouch.
Pursuant to the agreement, CommTouch agreed to offer Go2Net's end users with a
private label email service, including email, calendaring and other services.
The agreement requires the sharing of certain revenues at varying percentages
over an initial term of three years. Go2Net had the option to extend the
agreement in one-year increments, and could terminate the agreement after one
year. As an inducement to enter into this service agreement, Go2Net received
from CommTouch a warrant to purchase 1,136,000 shares of CommTouch's common
stock at a per share purchase price of $12.80. The warrant was immediately
fully vested, exercisable, non-forfeitable, and non-transferable. The
contractual life of the warrant was five years. Go2Net originally allocated the
cash consideration of $13,333,333 between (a) the investment in warrants and
(b) the investment in common stock based on their relative fair values. Go2Net
determined the fair value for the warrants using the Black-Scholes model: a
stock price of $16, an exercise price of $12.80, volatility of 11%, an expected
term of 0.8 years, and a 4.5% discount rate. A warrant premium was recorded as
the difference between the fair value of the warrants and the intrinsic value
of the warrants multiplied by the number of warrants. The same amount was
recorded as deferred revenue and amortized over a three-year period. As part of
the merger, the Company recalculated the
F-7
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
fair value of the warrants as of July 16, 1999 using the following variables
and the Black-Scholes model: a stock price of $14.88 (the same price as the
common stock purchase), contractual life of 5 years, and an annualized
volatility of 56%. The total value of the warrants received is being recognized
as revenue on a straight-line basis over the three year life of the service
agreement.
The InfoSpace Venture Capital Fund 2000 started on January 1, 2000. The
fund's financial statements are consolidated in the Company's financial
statements, as the Company holds the majority interest in the fund. In
accordance with Venture Fund accounting, the Company accounts for the
investments in the fund at fair value, which is carried forward in
consolidation.
Business combinations: Business combinations accounted for under the
purchase method of accounting include the results of operations of the acquired
business from the date of acquisition. Net assets of the companies acquired are
recorded at their fair value at the date of acquisition. Amounts allocated to
in-process research and development are expensed in the period of acquisition.
The valuation of the shares issued is based on a seven-day stock price average
using the measurement date and three days prior to and after this date. If the
Company issued a public announcement of the acquisition, the measurement date
is the date of such announcement. If the purchase consideration is based on a
formula, the measurement date is based on the requirements in Emerging Issues
Task Force (EITF) Issue No. 99-12. If no public announcement was made and a
formula is not used in determining the purchase consideration, then the
measurement date is the date of purchase.
Business combinations accounted for under the pooling-of-interests method of
accounting include the financial position and results of operations as if the
acquired company had been a wholly-owned subsidiary since inception. In such
cases, the assets, liabilities and stockholders' equity of the acquired
entities were combined with the Company's respective amounts at their recorded
values. The equity of the acquired entity is reflected on an as-if-converted
basis to InfoSpace equity at the time of issuance. Prior period financial
statements have been recast to give effect to the merger. Certain
reclassifications have been made to the financial statements of the pooled
entities to conform with the Company's presentation.
Cash and cash equivalents: The Company considers all highly liquid debt
instruments with an original maturity of 90 days or less to be cash
equivalents. Cash and cash equivalents are carried at cost, which approximates
market.
Short-term and long-term investments: The Company principally invests its
available cash in equity and investment grade debt instrument of corporate
issuers, and in debt instruments of the U.S. Government and its agencies. All
debt instruments with original maturities greater than three months up to one
year from the balance sheet date are considered short-term investments.
Investments maturing after twelve months from the balance sheet date are
considered long-term. The Company accounts for investments in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." As of December 31, 2000,
the Company's short-term and long-term investments are classified as available-
for-sale and are reported at their fair market value. During 2000, all held-to-
maturity investments were reclassified to available-for-sale based on the
Company's re-evaluation of its investment strategy. As of December 31, 1999.
the Company's short-term and long-term investments were classified as of
combination of held-to-maturity and available-for-sale and are reported at
their fair market value. The unrealized gain (loss) on available-for-sale
securities are recorded net of any tax effect as a component of accumulated
other comprehensive income. The Company specifically identifies its investments
to determine the realized gain or loss from sales.
F-8
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
Property and equipment: Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the following
estimated useful lives:
Computer equipment and software...... 3 years
Internally developed software........ 5 years
Office equipment..................... 5 years
Office furniture..................... 7 years
Leasehold improvements............... Shorter of lease term or economic life
On January 1, 1999, the Company adopted Statement of Position 98-1,
Accounting for the Costs of Computer Software developed or Obtained for
Internal Use. This requires capitalization of certain costs incurred in
connection with developing or obtaining internal use software and amortization
of these costs over future periods, which prior to the adoption of SOP 98-1,
were expensed. For the years ended December 31, 2000 and 1999, the Company has
capitalized $278,522 and $478,304, respectively, of costs associated with
internally developed software. These costs are included in property and
equipment on the accompanying balance sheet and are generally amortized over
five years.
Intangible assets: Goodwill, purchased technology and other intangibles are
amortized on a straight-line basis over their estimated useful lives. Goodwill
and purchased technology are generally amortized over three to five years.
Other intangibles, primarily consisting of purchased trademarks and domain name
licenses, are amortized over an estimated useful life of three years.
Other investments: The Company and the InfoSpace Venture Fund 2000 LLC
(Venture Fund) invest in equity investments of public and privately-held
technology companies for business and strategic purposes. These investments are
included in long-term assets. Investments held by the Company whose securities
are not publicly traded are recorded at cost. Investments in companies, whose
securities are publicly traded, are recorded at fair value. The Company
regularly reviews all investments in public and private companies for other
than temporary declines in fair value in accordance with Staff Accounting
Bulletin No. 59 "Accounting for Noncurrent Marketable Equity Securities and
SFAS 115." An impairment loss on Other investments held by the Company of $9.8
million was recognized in the year ended December 31, 2000 (Note 4). Unrealized
gains or losses on the investments held by the Company are recorded within
accumulated other comprehensive income in the Company's stockholders' equity.
Realized gains or losses are recorded based on the identified specific cost of
the investment sold. Investments held by the Venture Fund are recorded at their
fair value. Realized and unrealized gains or losses on the investments held by
the Venture Fund are recorded as gains or losses in the statement of
operations.
Valuation of long-lived assets: Management periodically evaluates long-lived
assets, consisting primarily of purchased technology, goodwill, property and
equipment, to determine whether there has been any impairment of the value of
these assets and the appropriateness of their estimated remaining life. The
Company evaluates impairment whenever events or changes in circumstances
indicate that the carrying amount of the Company's assets might not be
recoverable. An impairment loss on intangible assets of $8.97 million was
recognized in the year ended December 31, 2000 (Note 5). No impairment losses
were recognized in the years ended December 31, 1999 and 1998.
Unearned compensation: Unearned compensation represents the unamortized
difference between the option exercise price and the fair market value of the
Company's common stock for shares subject to grant at the grant date, for
options issued under the Company's stock incentive plans (Note 7). The
amortization of unearned compensation is charged to operations and is amortized
over the vesting period of the options. For the
F-9
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
year ended December 31, 2000, the Company recorded $1.7 million in additional
unearned compensation as a result of acquisitions.
Deferred expense-warrants: Deferred expense-warrants represents the fair
value of the warrants that were issued and is expensed ratably over the four
year vesting period. The amortization of deferred warrant expense is charged to
sales, general and administrative expense.
Revenue recognition: The Company's revenues are derived from its consumer
and commerce products and services, which are distributed to users and
subscribers on wireline, wireless and broadband platforms to merchants via
merchant aggregators including merchant banks and local media networks. The
Company derives revenue by its four business areas of merchant, wireline,
wireless and broadband. Multi-element revenue agreements are recognized based
on the evidence of fair value of individual components or as one element if no
evidence exists.
Subscriber fees: Wireless agreements generate revenue from per subscriber
and per query fees that are charged to the wireless carriers. Merchant
agreements generate subscriber fees from local and national merchants on a per
service per month basis. Minimum usage fees are straight-lined over the
contract period. Subscriber fees above the minimum usage fees are recognized in
the period where usage occurs.
Commerce transaction fees: Transaction fees are generated as a percentage of
the completed transaction from the Company's shopping, online rewards and
payment authorization services. Transaction fees are recognized in the period
the transaction occurred.
Licensing fees: Licensing fees are generated from the access and utilization
of our infrastructure services. Because our customers do not have the
contractual right to take possession of our software, these contracts are
considered service agreements pursuant to EITF Issue No. 00-3 and license fee
revenue is recognized ratably over the term of the license agreement.
Development and integration fees: Development fees are charged for the
development of private-labeled sites for customers. Integration fees are
charged for the integration of the Company's content and platform of products
into these private-labeled sites. Although these fees are generally paid to the
Company at the commencement of the agreement, they are recognized ratably over
the term of the agreement.
Advertising: Revenues from contracts based on the number of impressions
displayed or click throughs provided are recognized as services are rendered.
In some cases, the Company shares revenues that it earns from banner
advertising with content providers and affiliates having co-branded Web pages.
Many of the Company's arrangements provide for an equal sharing of revenue from
advertising sold by an affiliate after deducting selling costs. In cases where
the affiliate is responsible for the sale of advertising under a revenue
sharing arrangement and the Company receives only a net amount from the
affiliate, the Company records the net amount received as revenue. In cases
where the Company acts as a principal and is responsible for the sale of
advertising, it records the gross amount earned as revenue.
Also included in revenues are revenues generated from non-cash transactions.
Non-cash revenues are recorded based on comparable cash transactions. Revenue
is recognized when the Company completes all of its obligations under the
agreement. In accordance with EITF 99-17 for barter agreements, which generally
relate to the exchange of advertising, the Company records a receivable or
liability at the end of the reporting period for the difference in the fair
value of the services provided or received. The Company recognized $9.8
million, $948,000 and $852,000 as revenue from barter agreements for the years
ended December 31, 2000, 1999 and 1998, respectively. The Company also
recognizes revenue associated with providing services in exchange for
F-10
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
warrants. For warrants that vest based on the Company's future performance, the
amount recorded in revenue is based on the fair value of the warrant. For
warrants that are fully vested upon execution of a contract, the fair value of
the warrant is determined on the date of the contract execution and the revenue
is recognized on a straight-line basis over the life of the contract. The
Company measures the fair value of the equity instruments using the stock price
and other measurement assumptions including a review of current financial
information and recent rounds of financing, on the earlier of (i) the date the
terms of the warrant compensation arrangement and a commitment for performance
is reached or (ii) the date at which the Company's performance to earn the
warrants is complete (vesting date). The Company's agreements rarely include
performance commitments pursuant to which performance is assured because of
sufficiently large disincentives for non-performance. Accordingly, most of the
Company's arrangements are valued on the vesting date. The Company recorded
revenue in the amount of $22.1 million for vesting in performance warrants for
the year ended December 31, 2000 and $3.2 million for the year ended December
31, 1999. No performance warrant revenue was recognized in the year ended
December 31, 1998. At December 31, 2000, deferred revenue included $9.6 million
from the unamortized portion of fully vested warrants.
Cost of revenues: Cost of revenues consists of expenses associated with the
delivery, maintenance and support of our consumer and commerce services,
including direct personnel expenses, communication costs such as high-speed
Internet access, server equipment depreciation, and content license fees.
Product development expenses: Product development expenses consist
principally of personnel costs for research, design, maintenance and on-going
enhancements of the proprietary technology.
Sales, general and administrative expense: Sales, general and administrative
expenses consist primarily of salaries and related benefits for sales, general
and administrative personnel, advertising and promotion expenses, carriage
fees, professional service fees, occupancy and general office expenses and
travel expenses for sales and management personnel.
Advertising costs: Costs for print advertising are recorded as expense when
the advertisement appears. Advertising costs related to electronic impressions
are recorded as expense as impressions are provided. Cash advertising expense
totaled approximately $5.8 million, $5.1 million and $840,000 for the years
ended December 31, 2000, 1999 and 1998, respectively. In addition, the Company
recorded approximately $8.7 million, $878,000 and $646,000 in non-cash
advertising expense relating to barter arrangements for the years ended
December 31, 2000, 1999 and 1998, respectively.
Acquisition and other related charges: Acquisition and other related charges
consist of in-process research and development and other one-time charges
related directly to the acquisitions, such as investment banking, legal and
accounting fees.
Impairments and other charges: Impairment and other charges consist of one-
time costs and/or charges that are not directly associated with other operating
expense classifications. Impairment and other charges for the year ended
December 31, 2000, includes settlement charges on two litigation matters of
$1.73 million (Note 9), impairment of intangible assets of $8.97 million (Note
5), impairment of investments of $9.81 million (Note 4), allowance for an
employee loan in the amount of $3.1 million (Note 3) and $3.0 million for
estimated liability for past overtime worked (Note 9). Impairment and other
charges for the year ended December 31, 1999 consist of charges associated with
litigation settlements. Impairment and other charges for the year ended
December 31, 1998 consist of $4.5 million for charges associated with a
litigation settlement and $398,000 associated with impairment write-off of
technology Go2Net acquired from the Playsite company acquisition.
F-11
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
During the year ended December 31, 2000, the Company determined that the
decline in value from the Company's accounting basis for two of the Company's
other investments were other than temporary. The Company recognized non-cash
losses totaling $9.8 million to record these investments at their current fair
values as of December 31, 2000. Both investments were in publicly traded
companies. This amount is included in gain (loss) on investments in the
Company's statements of operations. The Company periodically evaluates whether
the decline in fair value of these investments are other than temporary. This
evaluation consists of a review by members of senior management in finance and
treasury. For investments with publicly quoted market prices, the Company
compares the market price to the Company's accounting basis 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, such as the financial
conditions, results of operations and operating trends for the company. The
Company also reviews publicly available information regarding the investee
companies, including reports from investment analysts. The Company also
evaluates whether: 1) The Company has both the intent and ability to hold the
investment for a period of time sufficient to allow for any anticipated
recovery in fair value; 2) the decline in fair value is attributable to
specific adverse conditions affecting a particular investment; 3) the decline
is attributable to more general conditions in an industry or geographic area;
4) the decline in fair value is attributable to seasonal factors; 5) a debt
security has been downgraded by a rating agency; 6) the financial condition of
the issuer has deteriorated; and 7) if applicable, 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 consider 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
Company's private 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 accounting basis.
Restructuring charges: Restructuring charges for the year ended December 31,
2000 reflect actual and estimated costs associated with the closures of our
Dallas, Texas facility and our Ottawa, Canada facility. These costs are
primarily comprised of the write-off of leasehold improvements, early lease
termination penalties and personnel costs. The Company acquired both of these
facilities in the acquisition of Saraide, Inc. in March 2000 (Note 11). The
determination to close the Dallas, Texas facility was made in the second
quarter of 2000. The determination to close the Ottawa, Canada facility was
made in the fourth quarter of 2000.
Minority interest: The minority interest reflected on the balance sheet as
of December 31, 2000 and the statement of operations for the year ended
December 31, 2000 consists of the employee-owned portion of the InfoSpace
Venture Fund 2000, LLC (Note 4).
Cumulative effect of change in accounting principle: On January 1, 2000, the
Company adopted SAB 101, Revenue Recognition in Financial Statements. Prior to
January 1, 2000, the Company recorded revenues from customers for development
fees, implementation fees and/or integration fees when the service was
completed. If this revenue were recognized on a straight-lined basis over the
term of the related service agreements, in accordance with SAB 101, the Company
would have deferred revenue of $2.1 million as of January 1, 2000 originally
recorded in prior years. In accordance with SAB 101, the Company recorded a
cumulative effect of change in accounting principle of $2.1 million. The
Company recognized $2.0 million in revenue in the year ended December 31, 2000
related to this deferred revenue. The remaining amount will be recognized from
January 2001 through November 2001.
F-12
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
Pro forma amounts assuming SAB 101 is applied retroactively (amounts in
thousands, except per share data):
Year ended December 31,
------------------------------
2000 1999 1998
--------- --------- --------
Net loss applicable to common
shareholders............................. ($280,356) ($242,187) ($28,539)
Net loss per share........................ ($0.92) ($0.94) ($0.19)
Foreign currencies: Assets and liabilities denominated in foreign currencies
are translated at the exchange rate on the balance sheet date. Translation
adjustments resulting from this process are charged or credited to other
comprehensive income. Revenue and expenses are translated at average rates of
exchange prevailing during the period. Realized gains and losses on foreign
currency transactions are included in Other income, net.
Concentration of credit risk: Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of cash
equivalents, short-term and long-term investments and trade receivables. These
instruments are generally unsecured and uninsured. The Company also has notes
receivable that subject the Company to concentration of credit risk (Note 3).
The Company places its cash equivalents and investments with major financial
institutions. The Company operates in one business segment and sells consumer
and commerce services to various companies across several industries. Accounts
receivable are typically unsecured and are derived from revenues earned from
customers primarily located in the United States operating in a wide variety of
industries and geographic areas. The Company performs ongoing credit
evaluations of its customers and maintains reserves for potential credit
losses. For the years ended December 31, 2000 no one customer accounted for
more than 10% of revenues. For the years ended December 31, 1999 and 1998, one
customer accounted for approximately 11% of revenues. At December 31, 2000, one
customer accounted for approximately 18% of accounts receivable and another
customer accounted for approximately 15% of accounts receivable. Both these
balances have been collected subsequent to year-end. At December 31, 1999, no
one customer accounted for more than 10% of accounts receivable.
Fair value of financial instruments: Financial instruments consist primarily
of cash and cash equivalents, investments, trade and notes receivables, prepaid
expenses and other assets, accounts payable, accrued expenses and other current
liabilities, deferred revenues and warrants in other entities. Except for the
fair values of investments disclosed in Notes 2 and 4, the Notes and other
receivables disclosed in Note 3 and the warrants disclosed later in Note 1, the
carrying value of financial instruments approximate fair value due to their
short maturities.
Income taxes: The Company has adopted Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes. Under SFAS No. 109,
deferred tax assets, including net operating loss carryforwards, and
liabilities are determined based on temporary differences between the book and
tax basis of assets and liabilities. The Company believes sufficient
uncertainty exists regarding the realizability of the deferred tax assets such
that a full valuation allowance is required.
Reclassification: Certain reclassifications have been made to the 1999 and
1998 balances to conform with the 2000 presentation.
Stock splits: A two-for-one stock split of the Company's common stock was
effected in May 1999. A second two-for-one stock split of the Company's common
stock was effected in January 2000. A third two-for-one stock split of the
Company's common stock was effected in April 2000. All references in the
financial statements to shares, share prices, per share amounts and stock plans
have been adjusted retroactively for these stock splits.
F-13
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
Use of estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America (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.
Recent accounting pronouncements: SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, was effective for the Company for the
fiscal year beginning January 1, 2001. SFAS 133 as amended and interpreted,
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. All derivatives, whether designated in hedging
relationships or not, were required to be recorded on the balance sheet at fair
value. If the derivative was designated in a cash-flow hedge, changes in fair
value of the derivative and the hedged item were recorded in other
comprehensive income (OCI) and were recognized on the income statement when the
hedged item affects earnings. SFAS 133 defines new requirements for designation
and documentation of hedging relationships as well as ongoing effectiveness
assessments in order to use hedge accounting. For a derivative that does not
qualify as a hedge, changes in fair value were recognized in earnings.
The Company's management has determined that certain warrants held to
purchase stock in other companies will be derivative instruments under SFAS
133. The Company recorded a cumulative effect of change in accounting principle
in net income of $3.2 million on January 1, 2001 to record these warrants on
the balance sheet at fair value.
Recent accounting pronouncements (unaudited): 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. The Company expects 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.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement establishes accounting standards for recognition
and measurement of a liability for an asset retirement obligation and the
associated asset retirement cost. This statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. The Company
does not expect the adoption of SFAS No. 143 to have a material effect on its
financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Assets to Be
Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and
F-14
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business (as previously defined in that
Opinion). SFAS No. 144 establishes a single accounting model, based on the
framework established in SFAS No. 121, for long-lived assets to be disposed of
by sale. It retains the fundamental provisions of SFAS No. 121 for (a)
recognition and measurement of the impairment of long-lived assets to be held
and used and (b) measurement of long-lived assets to be disposed of by sale.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001,
with earlier application encouraged. The Company has not yet determined the
impact of adopting SFAS No. 144 on its financial position or results of
operations.
Note 2: Balance Sheet Components
Short-term and long-term investments classified as available-for-sale at
December 31, 2000 consist of the following, stated at fair market value:
Fair Value
------------
Corporate notes and bonds.................................. $120,371,938
U.S. Government securities................................. 39,609,418
Commercial paper........................................... 6,154,783
Taxable municipal bonds.................................... 80,800,000
Certificate of deposit..................................... 1,750,000
------------
$248,686,139
============
Maturity information is as follows:
Unrealized Unrealized Fair
Gain Loss Value
---------- ---------- ------------
Within one year............................. $ 15,263 $(61,938) $216,234,797
1 year through 5 years...................... 303,836 -- 32,451,342
-------- -------- ------------
$319,099 $(61,938) $248,686,139
======== ======== ============
Short-term and long-term investments classified as held-to-maturity at
December 31, 1999 consist of the following:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
------------ ---------- ---------- ------------
Corporate notes and bonds..... $100,604,357 $ 61,109 $(530,513) $100,134,953
U.S. Government securities.... 52,920,693 14,198 (249,720) 52,685,171
Commercial paper.............. 27,362,325 147,997 -- 27,510,322
Certificates of deposit....... 15,249,543 79,125 (31,108) 15,297,560
------------ -------- --------- ------------
$196,136,918 $302,429 $(811,341) $195,628,006
============ ======== ========= ============
Maturity information is as follows:
Amortized Fair
Cost Value
------------ ------------
Within one year................................. $124,720,142 $124,656,361
1 year through 5 years.......................... 71,416,776 70,971,645
------------ ------------
$196,136,918 $195,628,006
============ ============
F-15
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
Short-term and long-term investments classified as available-for-sale at
December 31,1999 consist of the following, stated at fair market value:
Fair
Value
------------
Corporate notes and bonds.................................... $ 64,300,792
Taxable municipal bonds...................................... 145,950,000
Certificates of deposit...................................... 5,000,000
------------
$215,250,792
============
Maturity information is as follows:
Unrealized Unrealized Fair
Gain Loss Value
---------- ---------- ------------
Within one year............................ $ -- $(114,938) $185,591,000
1 year through 5 years..................... -- (535,802) 29,659,792
------ --------- ------------
$ -- $(650,740) $215,250,792
====== ========= ============
December 31, December 31,
2000 1999
------------- ------------
Property and equipment:
Fixed assets in progress......................... $ 3,398,900 $ --
Computer equipment and data center............... 32,420,529 11,277,684
Purchased software............................... 10,678,274 3,587,170
Internally developed software.................... 756,826 478,304
Office equipment................................. 989,377 403,977
Office furniture................................. 4,669,486 667,749
Leasehold improvements........................... 15,609,657 993,190
------------- ------------
68,523,049 17,408,074
Accumulated depreciation......................... (17,385,666) (5,529,668)
------------- ------------
$ 51,137,383 $ 11,878,406
============= ============
Intangible assets:
Goodwill......................................... $ 712,116,537 $228,883,077
Core technology.................................. 69,755,610 38,642,277
Customer value/list.............................. 33,758,000 18,282,338
Trade names...................................... 15,395,590 15,395,590
Assembled workforce.............................. 3,517,166 1,201,499
Other............................................ 866,773 937,981
------------- ------------
835,409,676 303,342,762
Accumulated amortization......................... (214,378,127) (43,673,193)
------------- ------------
$ 621,031,549 $259,669,569
============= ============
F-16
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
December December
31, 31,
2000 1999
----------- -----------
Accrued expenses and other current liabilities:
Salaries and related expenses........................ $ 9,374,088 $ 4,052,304
Accrued legal and accounting fees.................... 2,524,743 755,932
Accrued revenue share................................ 1,673,190 1,606,949
Accrued carriage fees................................ 201,982 907,503
Accrued acquisition costs............................ 15,284,324 --
Accrued settlement costs............................. 1,975,000 10,500,000
Other................................................ 6,965,670 5,634,332
----------- -----------
$37,998,997 $23,457,020
=========== ===========
Note 3: Notes Receivable and Other Receivables
On June 30, 1999, the Company loaned an unrelated third party $6.0 million
at 12% interest per annum. The short-term note and accrued interest was repaid
on February 7, 2000.
On December 1, 1999, the Company loaned The boxLot Company $2.5 million.
This short-term note was due by August 1, 2000, and accrues interest at 12% per
annum. On January 19, 2000 and February 18, 2000, the Company loaned The boxLot
Company an additional $1.5 million and $1.0 million, respectively. These
two notes were due by September 1, 2000 and accrued interest at 12% per annum.
The Company closed an asset purchase with boxLot in December 2000. These loans
were paid in full at close of the acquisition (Note 8). Interest was accrued on
these notes through closing.
From December 21, 1999 to February 29, 2000, the Company loaned a former
officer of the Company $10.0 million. At December 31, 1999, the loan balance
was $1.9 million. The promissory note is due in December 2001 and accrues
interest at the prime rate. The note is secured by a pledge of the officer's
shares of the Company's common stock. The pledged shares are valued at $1.6
million at December 31, 2000. The note has full recourse against the former
officer. At December 31, 2000 and 1999, accrued interest on this note was
$889,055 and $4,405, respectively.
In October 2000, the Company loaned an officer of the Company $4.0 million.
The non-recourse promissory note matures on December 31, 2001. The non-recourse
note is secured by a pledge of 200,000 shares of the Company's common stock,
valued at $1.8 million on December 31, 2000. If on the maturity date, the fair
market value of the pledged shares is insufficient to repay the principle and
accrued interest on the note, the Company will forgive the difference between
the fair market value of the collateral and the principal plus accrued interest
and will make a cash distribution to the officer sufficient to cover his
resulting tax liability from the forgiveness of the debt. A valuation allowance
was recorded in the amount of $3.1 million at December 31, 2000, which included
potential payroll tax expense of approximately $870,000 associated with the
difference between the fair market value of the stock on December 31, 2000 and
the outstanding note balance. The expense was recorded in Impairment and other
charges on the Statement of Operations.
On November 14, 2000, the Company loaned an unrelated third party $1.0
million. This long-term note is due by November 14, 2002 and accrues interest
at 10% per annum. The note is secured by all the proprietary technology of the
borrower and is considered fully collectible. At December 31, 2000, accrued
interest on this note was $12,500.
F-17
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
On December 22, 2000, the Company loaned a former officer of the Company
$1.4 million. The loan is not secured. The Company has taken legal action to
ensure the full repayment of this loan. No valuation allowance has been
recorded at December 31, 2000, as the amount is considered fully collectible.
At December 31, 2000, the Company also had approximately $4.7 million in
interest receivable, $2.5 million in other receivables, $1.0 million in a note
receivable with a customer and $470,000 in short-term loans to employees and
unrelated parties at various interest rates. At December 31, 1999, the Company
had approximately $6.9 million in interest receivable, $1.1 million in short-
term loans to employees and unrelated parties at various interest rates.
Note 4: Other Investments and InfoSpace Venture Capital Fund
Other investments held by the Company:
The Company invests in equity instruments of public and privately-held
technology companies for business and strategic purposes. The Company does not
exercise significant influence over the operating or financial policies of any
of these companies. These investments are recorded as long-term assets. As of
December 31, 2000, the Company's publicly-held and privately-held investments
were $20.8 million and $67.4 million, respectively. As of December 31, 1999,
the Company's publicly-held and privately-held investments were $109.0 and
$12.7 million respectively.
The Company also holds warrants in public and privately-held technology
companies for business and strategic purposes. Some of these warrant agreements
were issued in conjunction with equity investments. Additionally, some were
issued in conjunction with a business agreement and contain certain provisions
that require the Company to meet specific performance criteria under the
agreement in order for the warrants to vest. When the Company meets its
performance obligations it records revenue equal to the fair value of the
warrants. The fair value of each warrant is calculated using the Black-Scholes
options pricing model using a risk free interest rate applicable to the date of
the warrant valuation, a zero percent dividend yield, the volatility in stock
price of the company issuing the warrant, if available, or a peer group
volatility if not available, and the life of the warrant. The Company recorded
revenue in the amount of $22.1 million and $3.2 million for vesting in
performance warrants and stock for the year ended December 31, 2000 and
December 31, 1999, respectively. No warrant revenue was recognized in the year
ended December 31, 1998. At December 31, 2000, the Company held warrants
exercisable for approximately 11.9 million shares in sixteen companies, seven
of which were public companies and the remainder were privately held entities.
As of December 31, 2000 and 1999, total warrant investments were $18.5 million
and $56.6 million, respectively. The Company recorded a realized gain on the
sale of investments of $4.9 million and a realized loss on investments of $2.5
million for the year ended December 31, 2000. The following summarizes the
other investments held by the Company at December 31, 2000 and December 31,
1999.
Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ----------- ------------ ------------
As of December 31, 2000.... $104,186,405 $ 5,447,117 $(21,413,839) $ 88,219,683
As of December 31, 1999.... $ 41,464,119 $80,220,228 $ -- $121,684,347
In accordance with Staff Accounting Bulletin No. 59 and SFAS 115, the
Company evaluated all its Other investments and recorded an other than
temporary impairment of $9.8 million on two investments in publicly-held
entities held by the Company at December 31, 2000 for which the Company
determined there was an other than temporary decline in value.
F-18
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
Investments held by the InfoSpace Venture Fund 2000 LLC:
On January 1, 2000, the Company established the InfoSpace Venture Fund 2000,
LLC. The fund invests in privately held early-stage companies primarily, but
not exclusively, engaged in technology-related industries on the Internet.
Investors in this fund are the Company and certain of its employees. The
Company will contribute a total of $30.0 million to this fund, $27.9 million of
which had been contributed as of December 31, 2000. Employees meeting the
accredited investor criteria contributed $16.4 million to the fund. The Company
contributed $3.0 million of its total investment on behalf of the employees of
the Company employed as of March 31, 2000. The employer contribution to the
employee vests on March 31, 2003. The Company recognizes this expense on a
straight-line basis over the three year vesting term, $517,500 of which was
recognized in the year ended December 31, 2000. Amounts forfeited during the
vesting term will revert to the Company.
The fund's investments are selected and managed by an investment committee
that includes members of the Company's management. As of December 31, 2000, the
Company owned 60.25% of the fund.
All investments held in the fund are recorded at their fair market value and
unrealized gains and losses on the investments are recorded as gains or losses
in the statement of operations of the fund. As of December 31, 2000, the fund
had $13.6 million in cash and $33.4 million in investments. The investment
balance is reflected at fair market value. The Company has recognized $22.8
million of net realized and unrealized gains and losses that were recorded in
Gain (loss) on investments on the Company's Consolidated Statement of
Operations for the year ended December 31, 2000. This includes a write-off of
an investment of $8.0 million which related to privately-held entities. The
Company has recorded minority interest on the Balance Sheet and Statements of
Operations for the employee-owned portion of the fund. The following summarizes
the investment values held by the Venture Fund at December 31, 2000. (Note 15)
Unrealized Gains Unrealized Losses
Recorded Through Recorded Through
the Statement of the Statement of Fair
Cost Operations Operations Value
----------- ---------------- ----------------- -----------
As of December 31,
2000................... $18,524,012 $15,876,764 $(1,046,977) $33,353,799
Other investments of the Company and InfoSpace Venture Fund 2000 LLC combined:
InfoSpace Venture Fund Combined
------------ ------------ ------------
Fair value as of December 31, 2000.... $ 88,219,683 $33,353,799 $121,573,482
============ =========== ============
Fair value as of December 31, 1999.... $121,684,347 $ -- $121,684,347
============ =========== ============
Gain (loss) on investments:
Realized gain on sale of
investment......................... $ 4,940,000 $ -- $ 4,940,000
Realized loss on write-off of
investment(s)...................... (2,548,125) (8,000,000) (10,548,125)
Unrealized gain recorded in the
statement of operations............ -- 15,876,764 15,876,764
Unrealized losses recorded in the
statement of operations............ -- (1,046,977) (1,046,977)
------------ ----------- ------------
$ 2,391,875 $ 6,829,787 $ 9,221,662
============ =========== ============
F-19
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
Note 5: Intangible Impairment
In accordance with FAS No. 121, the Company evaluated its long-lived assets
and recorded a permanent impairment loss on intangible assets at December 31,
2000, of approximately $8.97 million. The impairment includes the write-off of
goodwill of $6.1 million from the acquisition of Zephyr. The primary assets
acquired from Zephyr were technology, knowledge of the Indian market by the two
co-founders, access to scarce programming talent and the development center
located in India. The technology acquired from Zephyr has been abandoned as it
has no future use or value to the Company and the Company has postponed
indefinitely plans to launch its services in India. The impairment also
includes goodwill, core technology and assembled workforce of $2.6 million from
the acquisition of Outpost. The technology acquired from Outpost has been
replaced with technology acquired in other acquisitions in 2000 and is no
longer in use. Additionally, transaction revenue and customer value of $226,000
from the acquisition of Haggle and an assembled workforce of $45,000 from the
acquisition of Dogpile were determined to be impaired. No future cash flows
from the Haggle transaction and customer value are expected and the Company
received no transaction revenue in the year ended December 31, 2000. The two
employees that joined the Company from Dogpile are no longer employed with the
Company.
Note 6: Long-Term Debt
The Company's long-term debt as of December 31 consists of:
2000 1999
------- ----------
Demand note payable.................................... $ -- $ 250,000
Equipment lease line................................... -- 1,219,331
Loan related to joint venture.......................... -- --
Current portion........................................ -- (783,569)
------- ----------
Long-term portion...................................... $ -- $ 685,762
======= ==========
In January 1996, Prio executed a demand note with a commercial entity in the
amount of $250,000. The note bore interest at LIBOR (5.82% as of December 31,
1999) plus 1% per annum, and the full principal amount plus interest was due on
demand. The note could have been converted into shares of the Company's
preferred stock at the then prevailing conversion or market price, until the
note is paid in full. In January 2000, the Company exercised its right to repay
the demand note in accordance with the terms of the note payable, by sending a
check for full amount of principal and accrued interest. The lender rejected
the repayment on the grounds that it had attempted to convert the note in early
1998. The Company settled with the lender and paid an additional $357,195,
which was accrued in 2000. This debt was assumed in the pooling transaction
with Prio, Inc.
In June 1997, the Company entered into a loan and security agreement with
Phoenix Leasing Incorporated. The notes bear interest at effective rates
ranging from 15.0% to 16.4% per annum. This note was paid in full in 2000. This
debt was assumed in the pooling transaction with Prio, Inc.
Note 7: Stockholders' Equity
Authorized shares: On May 1, 1998, the Company's Certificate of
Incorporation was amended to increase the authorized number of shares of all
classes of Company stock to 55,000,000 shares, consisting of 40,000,000 shares
of common stock with a par value of $.0001 per share and 15,000,000 shares of
preferred stock with a par value of $.0001 per share.
F-20
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
On August 25, 1998, the Board of Directors approved and the Company effected
a one-for-two reverse stock split of the Company's common stock.
Also, on August 25, 1998, the Company filed a Restated Certificate of
Incorporation. The effect was to change the authorized number of all classes of
Company stock to 65,000,000 shares, consisting of 50,000,000 shares of common
stock with a par value of $.0001 per share and 15,000,000 shares of preferred
stock with a par value of $.0001 per share after giving effect to the one-for-
two reverse stock split.
In April 1999, the Company closed a follow-on offering. The Company sold
17,360,000 shares and raised approximately $185 million, net of expenses.
Certain shareholders sold 12,080,000 shares.
On April 6, 1999, the Board of Directors approved a two-for-one stock split
of the Company's common stock. The stock split was effected on May 5, 1999.
On May 24, 1999, the stockholders of the Company approved an amendment to
the Company's Certificate of Incorporation to increase the authorized number of
shares of the Company's common stock to 200,000,000 shares.
On November 29, 1999, the Board of Directors approved a two-for-one stock
split of the Company's common stock. The stock split was effected on January 5,
2000.
On January 21, 2000, the Board of Directors approved a two-for-one stock
split of the Company's common stock. The stock split was effected on April 6,
2000. On April 3, 2000, the stockholders of the Company approved an amendment
to the Company's Certificate of Incorporation to increase the number of
authorized common stock to 900,000,000 shares.
Restated 1996 Flexible Stock Incentive Plan: On June 3, 1998, the Board of
Directors approved the Restated 1996 Flexible Stock Incentive Plan (the Plan).
The Plan provides employees (including officers and directors who are
employees) of the Company an opportunity to purchase shares of stock pursuant
to options which may qualify as incentive stock options under Section 422 of
the Internal Revenue Code of 1986, as amended (the Code), and employees,
officers, directors, independent contractors and consultants of the Company an
opportunity to purchase shares of stock pursuant to options which are not
described in Section 422 of the Code (nonqualified stock options). The Plan
also provides for the sale or bonus of stock to eligible individuals in
connection with the performance of service for the Company. Finally, the Plan
authorizes the grant of stock appreciation rights, either separately or in
tandem with stock options, which entitle holders to cash compensation measured
by appreciation in the value of the stock. Not more than 3,000,000 shares of
stock shall be available for the grant of options or the issuance of stock
under the Plan. If an option is surrendered or for any other reason ceases to
be exercisable in whole or in part, the shares which were subject to option but
on which the option has not been exercised shall continue to be available under
the Plan. The Plan is administered by the Board of Directors. Options granted
under the Plan typically vest over four years, 25% one year from the date of
grant and ratably thereafter on a monthly basis and expire ten years from the
date of grant. Additional options have been granted to retain certain existing
employees, which options vest monthly over four years.
On June 3, 1998, the Board of Directors approved the Option Exchange Program
and the Option Replacement Program, allowing employees of the Company to
exchange their nonqualified stock options for incentive stock options.
Nonqualified stock options to purchase a total of 2,900,424 shares were
exchanged for incentive stock options to purchase the equivalent number of
shares with an exercise price equal to the fair market value at the date of
exchange.
F-21
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
On May 24, 1999, the stockholders approved an amendment to the Plan to
annually increase the number of shares reserved for issuance on the first day
of the Company's fiscal year beginning January 1, 2000 by an amount equal to
the lesser of (A) 8,000,000 shares, (B) three percent of the Company's
outstanding shares at the end of the Company's preceding fiscal year, and (C) a
lesser amount determined by the Board of Directors.
On May 24, 1999, the stockholders approved an amendment to the Plan to limit
the number of shares of Common Stock that may be granted to any one individual
pursuant to stock options in any fiscal year of the Company to 8,000,000
shares, plus an additional 8,000,000 shares in connection with his or her
initial employment with the Company, which grant shall not count against the
limit.
Activity and price information regarding the 1996 Plan options are
summarized as follows:
Weighted Average
Options Exercise Price
----------- ----------------
Outstanding, January 1, 1998...................... 8,419,000 $ 0.04
Granted......................................... 14,704,408 1.39
Cancelled....................................... (2,203,000) 0.45
Exercised....................................... (39,832) 0.40
-----------
Outstanding, December 31, 1998.................... 20,880,576 0.94
Granted......................................... 8,006,152 14.29
Cancelled....................................... (698,586) 3.08
Exercised....................................... (3,678,472) 0.46
-----------
Outstanding, December 31, 1999.................... 24,509,670 5.31
Granted......................................... 26,841,953 37.22
Cancelled....................................... (10,048,226) 26.14
Exercised....................................... (9,229,563) 1.12
-----------
Outstanding, December 31, 2000.................... 32,073,834 26.70
===========
Options exercisable, December 31, 2000............ 7,513,644 $16.00
===========
At December 31, 2000, 1,117,360 shares were available for future grants
under the 1996 Plan.
Go2Net, Stock Option Plans: In connection with the acquisition of Go2Net,
Inc. which was accounted for as a pooling of interests, the Company assumed two
Go2Net Stock Option Plans under which incentive options and nonqualified stock
options to purchase common stock may be granted to officers, advisors and
employees. Options under both Go2Net stock option plans expire six years from
the date of the grant. Options under the original Go2Net plan generally vest
annually over a three to four year period. Options under the 2000 Go2Net plan
vest over four years, 25% one year from date of grant and ratably thereafter on
a quarterly basis. The total weighted average contractual life for the options
outstanding at December 31, 2000 was approximately 3.89 years for the original
Go2Net plan and 5.5 years for the 2000 Go2Net plan. No options remain available
for grant at December 31, 2000.
F-22
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
Activity and price information regarding the original Go2Net Plan options
are summarized as follows:
Weighted Average
Options Exercise Price
---------- ----------------
Outstanding, January 1, 1998....................... 6,022,372 $ 1.12
Granted.......................................... 12,721,779 2.79
Cancelled........................................ (179,568) 1.16
Exercised........................................ (409,376) 1.11
----------
Outstanding, December 31, 1998..................... 18,155,207 2.29
Granted.......................................... 10,097,379 32.31
Cancelled........................................ (2,198,099) 6.57
Exercised........................................ (4,058,363) 3.44
----------
Outstanding, December 31, 1999..................... 21,996,124 15.4
Granted.......................................... 3,809,244 31.9
Cancelled........................................ (3,467,863) 25.39
Exercised........................................ (2,836,771) 4.61
----------
Outstanding, December 31, 2000..................... 19,500,734 18.45
==========
Options exercisable, December 31, 2000............. 7,556,606 $ 9.62
==========
Activity and price information regarding the 2000 Go2Net Plan options are
summarized as follows:
Weighted Average
Options Exercise Price
---------- ----------------
Outstanding, January 1, 2000....................... --
Granted.......................................... 10,103,686 $27.97
Cancelled........................................ (395,653) 29.57
Exercised........................................
----------
Outstanding, December 31, 2000 .................... 9,708,033 27.91
==========
Options exercisable, December 31, 2000............. 54,599 $26.78
==========
Tandem Option Plan and Saraide Stock Option Plan: On April 17, 2000, the
Company initiated the InfoSpace, Inc. and Saraide Inc. 2000 Stock Plan, a
tandem plan under which incentive options and nonqualified stock options to
purchase common stock may be granted to employees of Saraide, Inc. Under the
Tandem plan Saraide employees receiving the grant received an option to
purchase Saraide stock or stock of the Company. At the time of exercise, the
employee chooses the option to exercise the Saraide option or the InfoSpace
option. Upon exercise of one option, rights in the option of the other company
are cancelled. Under the Tandem Plan, options to purchase 10,000,000 shares of
the Company's common stock were reserved for grants. Options under the Tandem
Plan expire ten years from the date of the grant. Options under this plan
generally vest over four years, 25% one year from date of grant and ratably
thereafter on a monthly basis. The total weighted average contractual life for
the options outstanding at December 31, 2000 was approximately 9.29 years.
4,117,500 options remain available for grant at December 31, 2000.
F-23
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
Activity and price information regarding the Tandem Option Plan options are
summarized as follows:
Weighted Average
Options Exercise Price
--------- ----------------
Outstanding, January 1, 2000........................ --
Granted........................................... 6,558,700 $45.44
Cancelled......................................... (676,200) 45.44
Exercised.........................................
---------
Outstanding, December 31, 2000...................... 5,882,500 45.44
=========
Options exercisable, December 31, 2000.............. 1,875,000 $45.44
=========
In connection with the acquisition of Saraide, Inc., the Company assumed the
Saraide Stock Option Plan under which incentive options and nonqualified stock
options to purchase common stock may be granted to officers, advisors and
employees. Under the Saraide Stock Option Plan, options to purchase 357,121
shares of the Company's common stock were assumed at acquisition. Options under
this stock option plan expire four years from the date of the grant. Options
under the Saraide plan vest over four years on a quarterly basis. The total
weighted average contractual life for the options outstanding at December 31,
2000 was approximately 2.85 years. No options remain available for grant at
December 31, 2000.
Activity and price information regarding the Saraide Stock Option Plan
options are summarized as follows:
Weighted Average
Options Exercise Price
-------- ----------------
Outstanding at acquisition........................... 357,121 $0.48
Cancelled.......................................... (8,056) 0.72
Exercised.......................................... (255,241) 0.51
--------
Outstanding, December 31, 2000....................... 93,824 0.36
========
Options exercisable, December 31, 2000............... 77,939 $0.36
========
Prio Stock Option Plan: In connection with the acquisition of Prio, Inc.
which was accounted for as a pooling of interests, the Company assumed the Prio
Stock Option Plan, under which incentive options and nonqualified stock options
to purchase common stock may be granted to officers, advisors and employees.
Options under this stock option plan expire ten years from the date of the
grant. Options under the Prio plan vest over four years, 25% one year from date
of grant and ratably thereafter on a monthly basis. The total weighted average
contractual life for the options outstanding at December 31, 2000 was
approximately 7.65 years. No options remain available for grant at December 31,
2000.
F-24
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
Activity and price information regarding the Prio Stock Option Plan options
are summarized as follows:
Weighted Average
Options Exercise Price
--------- ----------------
Outstanding January 1, 1998......................... 528,821 $ 1.37
Granted........................................... 834,448 2.73
Cancelled......................................... (382,972) 1.81
Exercised......................................... (81,132) 0.38
---------
Outstanding, December 31, 1998...................... 899,165 2.53
Granted........................................... 430,756 8.82
Cancelled......................................... (79,830) 3.52
Exercised......................................... (74,318) 8.29
---------
Outstanding, December 31, 1999...................... 1,175,773 4.40
Granted........................................... 105,230 75.16
Cancelled......................................... (189,125) 34.19
Exercised......................................... (642,077) 3.16
---------
Outstanding, December 31, 2000...................... 449,801 10.21
=========
Options exercisable, December 31, 2000.............. 232,349 $ 6.29
=========
INEX Stock Option Plan: In connection with the acquisition of INEX
Corporation which was accounted for as a pooling of interests, the Company
assumed the INEX Stock Option Plan under which incentive options and
nonqualified stock options to purchase common stock may be granted to
officers, advisors and employees. Options under this stock option plan expire
five years from the date of the grant and vest one-third annually. The total
weighted average contractual life for the options outstanding at December 31,
2000 was approximately 2.92 years. No options remain available for grant at
December 31, 2000.
Activity and price information regarding the INEX Stock Option Plan options
are summarized as follows:
Weighted Average
Options Exercise Price
-------- ----------------
Outstanding, January 1, 1998......................... 114,500 $0.35
Granted............................................ 60,656 4.72
Cancelled.......................................... --
Exercised.......................................... (30,032) 0.12
--------
Outstanding, December 31, 1998....................... 145,124 2.25
Granted............................................ 288,272 6.53
Cancelled.......................................... --
Exercised.......................................... (161,100) 3.49
--------
Outstanding, December 31, 1999....................... 272,296 6.05
Granted............................................ --
Cancelled.......................................... (18,788) 6.23
Exercised.......................................... (235,668) 6.06
--------
Outstanding, December 31, 2000....................... 17,840 5.73
========
Options exercisable, December 31, 2000............... 12,384 $5.56
========
Authorize.Net Stock Option Plan: In connection with the acquisition of
Authorize.Net, Inc., the Company assumed the Authorize.Net Stock Option Plan
under which incentive options and nonqualified stock options to
F-25
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
purchase common stock may be granted to officers, advisors and employees.
Under the Authorize.Net Stock Option Plan, options to purchase 185,317 shares
of the Company's common stock were reserved for grants. Options under this
stock option plan expire six years from the date of the grant. The total
weighted average contractual life for the options outstanding at December 31,
2000 was approximately 4.5 years. No options remain available for grant at
December 31, 2000.
Activity and price information regarding the Authorize.Net Stock Option
Plan options are summarized as follows:
Weighted Average
Options Exercise Price
------- ----------------
Outstanding at acquisition............................ 185,317 $0.43
Cancelled........................................... --
Exercised........................................... (55,635) 0.43
-------
Outstanding, December 31, 1999........................ 129,682 0.43
Granted............................................. --
Cancelled........................................... --
Exercised........................................... (69,690) 0.43
-------
Outstanding, December 31, 2000........................ 59,992 0.43
=======
Options exercisable, December 31, 2000................ 59,992 $0.43
=======
IQC Stock Option Plan: In connection with the acquisition of IQC, the
Company assumed the IQC Stock Option Plan under which incentive options and
nonqualified stock options to purchase common stock may be granted to
officers, advisors and employees. Under the IQC Stock Option Plan, options to
purchase 128,449 shares of the Company's common stock were reserved for
grants. Options under this stock option plan expire ten years from the date of
the grant. The total weighted average contractual life for the options
outstanding at December 31, 2000 was approximately 4.36 years. No options
remain available for grant at December 31, 2000.
Activity and price information regarding the IQC Stock Option Plan options
are summarized as follows:
Weighted Average
Options Exercise Price
-------- ----------------
Outstanding at acquisition........................... 128,449 $1.71
Cancelled..........................................
Exercised.......................................... (117,031) 1.72
--------
Outstanding, December 31, 1999....................... 11,418 1.69
Granted............................................ --
Cancelled.......................................... --
Exercised.......................................... (1,820) 1.69
--------
Outstanding, December 31, 2000....................... 9,598 1.69
========
Options exercisable, December 31, 2000............... 9,598 $1.69
========
Web21 Stock Option Plan: In connection with the acquisition of Web21 which
was accounted for as a pooling of interests, the Company assumed the Web 21
Stock Option Plan under which incentive options and nonqualified stock options
to purchase common stock may be granted to officers, advisors and employees.
Options under this stock option plan expire ten years from the date of the
grant. Options under the Web 21 plan
F-26
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
vest over a four year period from the date of grant. The total weighted average
contractual life for the options outstanding at December 31, 2000 was
approximately 2.0 years. No options remain available for grant at December 31,
2000.
Activity and price information regarding the Web 21 Stock Option Plan
options are summarized as follows:
Weighted Average
Options Exercise Price
-------- ----------------
Outstanding, January 1, 1998......................... 152,438 $1.27
Granted............................................ 204,378 4.04
Cancelled.......................................... --
Exercised.......................................... --
--------
Outstanding, December 31, 1998....................... 356,816 2.86
Granted............................................ --
Cancelled.......................................... (111,855) 4.45
Exercised.......................................... (218,675) 2.00
--------
Outstanding, December 31, 1999....................... 26,286 3.21
Granted............................................ --
Cancelled.......................................... (9,263) 5.69
Exercised.......................................... (9,888) .02
--------
Outstanding, December 31, 2000....................... 7,135 4.41
========
Options exercisable, December 31, 2000............... 911 $5.02
========
Silicon Investor Stock Option Plan: In connection with the acquisition of
Silicon Investor which was accounted for as a pooling of interests, the Company
assumed the Silicon Investor Stock Option Plan under which incentive options
and nonqualified stock options to purchase common stock may be granted to
officers, advisors and employees. Options under this stock option plan expire
ten years from the date of the grant. The total weighted average contractual
life for the options outstanding at December 31, 2000 was approximately 3.75
years. No options remain available for grant at December 31, 2000.
Activity and price information regarding the Silicon Investor Stock Option
Plan options are summarized as follows:
Weighted Average
Options Exercise Price
------- ----------------
Outstanding, January 1, 1998.......................... --
Granted............................................. 87,045 $0.35
Cancelled Exercised................................. (40,039) 0.06
-------
Outstanding, December 31, 1998........................ 47,006 0.59
Granted............................................. --
Cancelled........................................... --
Exercised........................................... (35,574) 0.06
-------
Outstanding, December 31, 1999........................ 11,432 2.23
Granted............................................. --
Cancelled........................................... --
Exercised........................................... (9,608) 2.28
-------
Outstanding, December 31, 2000........................ 1,824 1.98
=======
Options exercisable, December 31, 2000................ 1,824 $1.98
=======
F-27
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
Other Options: The Company granted nonqualified stock options outside of the
1996 Plan to purchase common stock to certain employees of the Company. These
options under this stock option plan expire ten years from the date of the
grant and vest over four years, 25% one year from date of grant and ratably
thereafter on a monthly basis. The total weighted average contractual life for
the options outstanding at December 31, 2000 was approximately 5.99 years.
Activity and price information regarding the options are summarized as
follows:
Weighted Average
Options Exercise Price
---------- ----------------
Outstanding, January 1, 1998....................... 2,844,840 $0.3566
Granted.......................................... 1,192,000 .0025
Cancelled........................................ (1,552,000) .0025
Exercised........................................ (2,167,488) .4616
----------
Outstanding, December 31, 1998..................... 317,352 .0418
Granted.......................................... --
Cancelled........................................ (58,336) .0025
Exercised........................................ (141,312) .0481
----------
Outstanding, December 31, 1999..................... 117,704 .0537
Granted.......................................... --
Cancelled........................................ --
Exercised........................................ (5,000) .0025
----------
Outstanding, December 31, 2000..................... 112,704 .0559
==========
Options exercisable, December 31, 2000............. 97,704 $ .0559
==========
Information regarding stock option grants for all plans during the years
ended December 31, 2000, 1999 and 1998 is summarized as follows:
Year Ended Year Ended Year Ended
December 31, 2000 December 31, 1999 December 31, 1998
------------------------------ ------------------------------ ------------------------------
Weighted Weighted Weighted
Average Weighted Average Weighted Average Weighted
Exercise Average Exercise Average Exercise Average
Shares Price Fair Value Shares Price Fair Value Shares Price Fair Value
---------- -------- ---------- ---------- -------- ---------- ---------- -------- ----------
Exercise price exceeds
market price........... -- -- -- 66,248 $24.15 $ 6.92 1,004,908 $3.17 --
Exercise price equals
market price........... 46,910,416 $36.31 $29.65 17,994,531 $24.46 $22.60 23,074,750 $1.88 $0.78
Exercise price is less
than market price...... 865,518 $ 7.37 $30.97 1,075,662 $ 4.53 $17.62 5,725,056 $2.23 $1.43
The Company has elected to follow the measurement provisions of Accounting
Principles Board Opinion No. 25, under which no recognition of expense is
required in accounting for stock options granted to employees for which the
exercise price equals or exceeds the fair market value of the stock at the
grant date. In those cases where options have been granted when the option
price is below fair market value, the Company recognizes compensation expense
over the vesting period using the aggregated percentage of compensation accrued
method as prescribed by Financial Standards Accounting Board Interpretation No.
28. Compensation expense of $1,712,859, $2,864,761 and $1,533,920 was
recognized during the years ended December 31, 2000, 1999 and 1998,
respectively.
F-28
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
To estimate compensation expense which would be recognized under SFAS No.
123, Accounting for Stock-based Compensation, the Company uses the modified
Black-Scholes option-pricing model with the following weighted-average
assumptions for options granted: risk-free interest rate of 6.0% for the 1998
grants, 6.56% for the 1999 grants and 5.71% for the 2000 grants, expected
dividend yield of 0-% for all periods; volatility of zero to 73% for the 1998
grants, 121% to 313% for the 1999 grants and 134% to 289% for the 2000 grants;
and an expected life of six years for the 1998 grants and five years for the
1999 and 2000 grants.
Had compensation expense for the Plan been determined based on the fair
value of the options at the grant dates for awards under the Plan consistent
with SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net
losses for the years ended December 31, 2000, 1999 and 1998 would have been as
follows (amounts in thousands, except per share data):
Year Ended
------------------------------
2000 1999 1998
--------- --------- --------
Net loss available to common shareholders as
reported..................................... $(282,412) $(240,133) $(28,539)
Net loss available to common shareholders, pro
forma........................................ $(817,113) $(359,431) $(34,910)
Basic and diluted net loss per share, pro
forma........................................ $ (2.68) $ (1.39) $ (0.23)
Additional information regarding options outstanding as of December 31,
2000, is as follows:
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (yrs.) Price Exercisable Price
--------------- ----------- ----------- -------- ----------- --------
$ 0.0025 - 0.43 1,297,226 5.71 $ 0.08 1,152,579 $ 0.07
$ 0.50 - 1.21 4,241,702 2.82 1.03 3,013,586 1.08
$ 1.31 - 1.88 1,508,465 7.63 1.79 625,218 1.82
$ 2.063 - 3.03 4,737,599 3.68 2.38 2,755,273 2.33
$ 3.17 - 5.89 2,618,732 6.45 4.97 872,137 5.28
$ 6.19 - 10.84 1,734,586 7.62 8.68 552,455 8.80
$10.94 - 12.97 4,892,734 9.19 11.45 862,703 11.82
$13.04 - 18.81 9,020,998 9.49 18.25 2,875,572 18.70
$19.78 1,850,817 5.36 19.78 10,560 19.78
$20.38 - 26.51 3,197,749 7.04 24.30 137,925 24.74
$26.78 - 29.94 5,889,468 6.15 27.10 179,038 27.99
$30.01 - 33.82 5,087,841 5.28 31.52 730,382 32.45
$34.35 - 44.71 6,261,432 6.79 37.81 753,360 38.31
$45.05 - 45.94 10,102,782 9.09 45.44 2,661,605 45.43
$46.11 - 63.25 3,740,688 8.03 53.67 310,157 51.35
$67.50 - 126.75 1,735,000 9.15 93.92 --
---------- ----------
67,917,819 7.14 $25.93 17,492,550 $16.14
========== ==========
Consultant Warrants: In connection with the May and August 1998 private
placement offering, the Company issued warrants to purchase 16,510,688 shares
of common stock to five third-party participants for consulting services
performed in identifying, structuring and negotiating future financings. These
warrants can
F-29
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
be exercised at any time up until their expirations which are between May 21,
2008 and August 6, 2008. The activity and additional information are as
follows:
Outstanding, January 1, 1999................. 16,510,688
Exercised.................................... (1,870,872)
----------
Outstanding, December 31, 1999............... 14,639,816
Exercised.................................... (723,352)
----------
Outstanding, December 31, 2000............... 13,916,464
==========
Number
Range of Exercise prices Outstanding
------------------------ -----------
$0.25 - 0.50................................ 7,460,904
$0.625 - 0.75................................ 3,247,176
$1.25........................................ 3,208,384
In July 1998, the Company issued warrants to purchase 3,823,736 shares of
common stock at an exercise price of $.0025 to a former consultant in
conjunction with the acquisition of Outpost. All of these warrants were
exercised in 1999.
AOL Warrants: On August 24, 1998, the Company entered into agreements with
America Online, Inc. (AOL) to provide white pages directory and classifieds
information services to AOL. Pursuant to the white pages directory services
agreement, the Company has agreed to provide to AOL white pages listings and
directory service. The Company is required to pay to AOL a quarterly carriage
fee, the retention of which is conditioned on the quarterly achievement of a
minimum number of searches on the AOL white pages site. The quarterly carriage
fee is paid in advance at the beginning of the quarter in which the searches
are expected to occur and is recorded as a prepaid expense in the quarter it is
paid. The fee is refundable if the minimum number of searches on the AOL white
pages site for such quarter is not achieved. In addition, AOL has guaranteed to
the Company a minimum number of searches over the term of the agreement. In the
event that AOL does not deliver the guaranteed minimum number of searches over
the term of the agreement, AOL has agreed to pay to the Company a cash penalty
payment. The Company will share with AOL revenues generated by advertising on
the Company's white pages directory services delivered to AOL. The Company is
entitled to a greater percentage of advertising revenues than is AOL if the
amount of such revenues received by the Company is less than the carriage fees
paid to AOL.
The Company has agreed to provide white pages directory services to AOL for
a three-year term beginning on November 19, 1998, which term may be extended
for four additional one-year terms at AOL's discretion. The agreement may be
terminated by AOL for any reason after 18 months or at any time upon the
acquisition by AOL of a competing white pages directory services business. In
the event of any such termination, AOL is required to pay a termination fee to
the Company. In addition, without the payment of a termination fee, AOL has the
right to terminate the agreement in the event of a change of control of the
Company.
The Company agreed to provide classifieds information services to AOL for a
two-year term, with up to three one-year extensions at AOL's discretion. AOL
has agreed to pay to the Company a quarterly fee and will share with the
Company revenues generated from payments by individuals and commercial listing
services for listings on the AOL classifieds service.
F-30
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
Pursuant to the terms of these agreements, the Company has granted AOL the
right to negotiate with the Company exclusively and in good faith for a period
of 30 days with respect to proposals or discussions that would result in a sale
of a controlling interest of the Company or other merger, asset sale or other
disposition that effectively results in a change of control of the Company.
In connection with the agreements, the Company issued to AOL warrants to
purchase up to 7,919,328 shares of common stock, which warrants vest in 16
equal quarterly installments over four years, conditioned on the delivery by
AOL of a minimum number of searches each quarter on the Company's white pages
directory service. The warrants have an exercise price of $1.50 per share. The
warrants were valued using the fair value method, as required under SFAS No.
123. The fair value of the warrants was approximately $3,300,000 at the date of
grant, and is being amortized ratably over the four-year vesting period. The
underlying assumptions used to determine the value of the warrants are an
expected life of six years and a 5.5% risk-free interest rate. AOL exercised
3,464,696 warrants in 2000.
INEX Warrants: The Company assumed warrants to purchase 144,404 shares of
the Company's common stock as a result of the acquisition of INEX Corporation
(Note 8). These warrants were issued to seven third-party INEX investors. Two
of the third party investors exercised 24,486 of the warrants in December 1999.
The remaining warrants were exercised during 2000.
Prio Warrants: The Company assumed warrants to purchase 447,203 shares of
the Company's stock as a result of the acquisition of Prio, Inc. with an
exercise price of $9.97 per share. The warrants were issued to a third-party
investor in December 1998 in connection with a marketing agreement and are
exercisable over a maximum of a 48 month period, based on achievement of
performance milestones and other criteria as defined in the marketing
agreement. In 1999, Prio recorded warrant expense for all the warrants issued
of $17.7 million based on the fair value of these warrants using the Black-
Scholes option pricing model with the following assumptions: dividend yield of
0%; expected volatility of 75%; contractual life of nine years; and risk-free
interest rate of 6.37%. The compensation cost for the unvested warrants was
remeasured when vesting occurred and additional warrant expense of $2.9 million
was recognized in the year ended December 31, 2000. Because the warrant expense
for 2000 resulted from the termination of the marketing agreement upon Prio's
acquisition by the Company and was not related to performance nor to another
operating expense, the one-time charge was recorded in Impairment and other
charges on the Statement of Operations. All of these warrants were exercised in
2000.
Stock purchase rights plan: On June 26, 1998, the Board of Directors
approved the InfoSpace Stock Purchase Rights Plan. The plan was offered to
employees of the Company and its subsidiaries. The purpose of the plan was to
provide an opportunity for employees to invest in the Company and increase
their incentive to remain with the Company. A maximum of 4,000,000 shares of
common stock were available for issuance under the plan. During July 1998, the
Company offered shares to employees under the plan, resulting in the sale of
1,786,008 shares at $.94 per share. The plan was terminated on August 24, 1998.
1998 Employee stock purchase plan: The Company adopted the 1998 Employee
Stock Purchase Plan (the ESPP) in August 1998. The ESPP was implemented upon
the effectiveness of the initial public offering. The ESPP is intended to
qualify under Section 423 of the Code, and permits eligible employees of the
Company and its subsidiaries to purchase common stock through payroll
deductions of up to 15% of their compensation. Under the ESPP, no employee may
purchase common stock worth more than $25,000 in any calendar year, valued as
of the first day of each offering period. In addition, owners of 5% or more of
the Company or subsidiary's common stock and the Company's executives may not
participate in the ESPP. An aggregate of 3,600,000 shares of common stock are
authorized for issuance under the ESPP.
F-31
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
The ESPP was implemented with six-month offering periods, with the first
such period commencing upon the effectiveness of the initial public offering
and ending July 31, 1999. Thereafter, offering periods will begin on each
February 1 and August 1. The price of common stock purchased under the ESPP
will be the lesser of 85% of the fair market value on the first day of an
offering period and 85% of the fair market value on the last day of an offering
period, except that the purchase price for the first offering period was equal
to the lesser of 100% of the initial public offering price of the common stock
offered hereby and 85% of the fair market value on July 31, 1999. The ESPP does
not have a fixed expiration date, but may be terminated by the Company's Board
of Directors at any time. There were 152,580 shares issued for the ESPP
offering period which ended on July 31, 1999 and 55,092 shares for ESPP periods
that ended in 2000.
Preferred stock dividend: On March 15, 1999, Go2Net entered into a Stock
Purchase Agreement under which Go2Net agreed to issue and sell to Vulcan
Ventures Incorporated ("Vulcan") 546,000 (all shares and share prices include
the exchange ratio of 1.82 used in the Company's acquisition of Go2Net) shares
of Go2Net's Series A Convertible Preferred Stock, par value $.01 per share, for
a purchase price of $549.05 per share, in two separate issuances of 304,863
(the "First Issuance") and 241,137 shares (the "Second Issuance"). The Series A
Convertible Preferred Stock was initially convertible at a conversion price of
$18.1648 per share into 16,517,923 shares of common stock and had a liquidation
preference of $549.05 per share. The First Issuance was consummated
concurrently with the execution of the Stock Purchase Agreement on March 15,
1999. The Second Issuance was consummated June 17, 1999. The total proceeds to
the Company for both issuances was $291.0 million.
On the dates of the First Issuance and Second Issuance, the price of
Go2Net's Series A Convertible Preferred Stock was at a discount to the price of
the common stock into which the preferred stock was then convertible. The
common stock price on March 12, 1999 was $23.901 and on June 17, 1999 was
$32.8296. The discount of $159,930,733 was recognized as a dividend to Vulcan.
Note 8: Business Combinations
Fiscal 2001
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
seven day stock price average from November 6, 2000, the date of announcement,
and the three days before and after the date of announcement. The acquisition
was accounted for as a purchase in accordance with Accounting Principles Board
Opinion (APB) No. 16.
F-32
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
The purchase price was allocated to the assets and liabilities assumed based
on their estimated fair values as follows:
(in thousands)
Tangible assets acquired....................................... $ 5,491
Liabilities assumed............................................ (7,010)
--------
Book value of net liabilities acquired....................... (1,519)
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.............................. $ 9,581
========
Purchase price:
Fair value of shares issued.................................. $ 88,772
Fair value of options assumed................................ 23,589
Fair value of net assets acquired............................ (9,581)
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...................................................... $101,097
========
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
quarter ended March 31, 2001, include the write off of $600,000 of purchased
in-process research and development. 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.
The Company recorded a non-recurring charge of $600,000 for in-process
research and development that had not yet reached technological feasibility and
had no alternative future use.
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
F-33
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
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.
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 of 35% of revenue, and product
development of 2% of revenue. However, cost of revenues, sales, general and
administrative 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 months ended March 31,
2000 assuming Locus Dialogue had been acquired at the beginning of the period.
Quarter ended
March 31, 2000
(in thousands)
--------------
Revenue........................................................ $ 39,386
Net loss before cumulative effect of change in accounting
principle..................................................... $(95,298)
Net loss....................................................... $(97,353)
Basic and diluted loss per share............................... $ (0.33)
Fiscal 2000
The boxLot Company: On December 7, 2000, the Company closed an asset
purchase with The boxLot Company. The Company acquired certain assets including
interactive on-line variable pricing and dynamic pricing engine technology,
equipment and domain names. The Company exchanged $2.6 million of cash and
501,527 shares of the Company's common stock in this transaction for a total
purchase price of $8.9 million and recorded goodwill of $9.2 million which is
being amortized over three years. The valuation of the shares issued of $12.47
per share was based on the seven day stock price average from the date of
acquisition and the three days before and after the date of acquisition. The
Company incurred acquisition costs of $227,427.
Go2Net, Inc.: On October 12, 2000, the Company completed the merger with
Go2Net, Inc., a publicly-held provider of applications and technology
infrastructure for narrowband and broadband. Under the terms of
F-34
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
the merger, which was accounted for as a pooling-of-interests, the Company
exchanged 74,154,448 shares of the Company's common stock for all of the
preferred and common shares of Go2Net. The consolidated balance sheet as of
December 31, 2000 and 1999 and the consolidated statements of operations,
statements of cash flow and statements of stockholder's equity for the years
ended December 31, 2000, 1999 and 1998 are presented as if Go2Net was a wholly
owned subsidiary since inception. The revenue of the Company and Go2Net for the
nine months ended September 30, 2000 was $76.0 million and $72.9 million,
respectively. The net loss for the Company and Go2Net for the nine months ended
September 30, 2000 was $155.0 million and $27.3 million, respectively.
iJapan Corporation: On September 13, 2000, the Company acquired intellectual
property that translates between cHTML and other major wireless markup
languages from iJapan for purchase consideration of $2 million in cash. The
entire purchase price was recorded in intangible assets and is being amortized
over three years.
TDLI.com Limited: On August 31, 2000, the Company acquired TDLI.com Limited,
a privately held company based in Hampshire, England that in turn holds
approximately fifty percent of TDL InfoSpace (Europe) Limited, a joint venture
originally formed by InfoSpace and Thomson Directories Limited in July 1998 to
replicate InfoSpace's services in Europe. The Company acquired TDLI.com for
purchase consideration of 3,420,308 shares of the Company's common stock and
acquisition expenses of $2.1 million. The Company recorded $118.5 million in
intangible assets. The Company now has 100% ownership and control of TDL
InfoSpace. The acquisition was accounted for as a purchase in accordance with
Accounting Principles Board Opinion ("APB") No. 16. Prior to the acquisition of
100% ownership, the Company's investment in TDLI was accounted for under the
equity method.
The purchase price was allocated to the assets and liabilities assumed based
on their estimated fair market values as follows:
Tangible assets acquired................................... $ 8,186,943
Liabilities assumed........................................ (7,430,408)
------------
Book value of net assets acquired........................ $ 756,535
============
Purchase price:
Fair value of net assets acquired........................ $116,504,241
Elimination of joint venture investment and receivable... 597,692
Book value of net assets acquired........................ (756,535)
Acquisition costs........................................ 2,105,304
------------
Excess of purchase price over net assets acquired,
allocated to goodwill..................................... $118,450,702
============
Due to the variable exchange ratio, the valuation of the shares issued of
$34.06 was based on the four day stock price average, using the date of
acquisition and the prior three days.
Orchest, Inc.: On August 4, 2000, the Company acquired all of the common
stock of Orchest, Inc. for purchase consideration of 255,288 shares of the
Company's common stock and acquisition expenses of $72,060. The Company
recorded $8,359,418 for intangible assets. The valuation of the shares issued
of $30.93 per share was based on the seven day stock price average from the
date of acquisition and the three days before and after the date of
acquisition. Orchest was a privately held provider of financial services
technology that enables users to access a consolidated view of their personal
financial information from multiple institutions. The acquisition was accounted
for as a purchase in accordance with APB No. 16.
F-35
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
The purchase price was allocated to the assets and liabilities assumed based
on their estimated fair market values as follows:
Tangible assets acquired..................................... $ 3,169
Liabilities assumed.......................................... (393,695)
----------
Book value of net liabilities acquired..................... $ (390,526)
==========
Purchase price:
Fair value of net assets acquired.......................... $7,896,832
Book value of net liabilities acquired..................... 390,526
Acquisition costs.......................................... 72,060
----------
Excess of purchase price over net assets acquired, allocated
to goodwill................................................. $8,359,418
==========
IQorder.com, Inc.: On July 3, 2000, the Company acquired all of the common
stock of IQorder.com for purchase consideration of 989,959 shares of the
Company's common stock and acquisition expenses of $132,088. The valuation of
the shares issued of $55.82 per share was based on the seven day stock price
average from the date of acquisition and the three days before and after the
date of acquisition. The Company recorded a non-recurring charge of $6.0
million for in-process research and development. IQorder was a privately-held
company that developed technology that allows consumers to enter in a model
number, UPC code, part number, barcode or ISBN in order to locate a product,
compare prices and make an instant purchase. The acquisition was accounted for
as a purchase in accordance with APB No. 16.
The Company assumed 233,872 stock options, valued at $11.1 million. The
Company values these options using the modified Black-Scholes option-pricing
model with the following weighted average assumptions: risk-free interest rate
of 6.375%, expected dividend rate of 0%, volatility of 128% and a term of one
year after vesting.
The purchase price was allocated to the assets and liabilities assumed based
on their estimated fair market values as follows:
Tangible assets acquired.......................................... $ 1,714,903
Liabilities assumed............................................... (4,319,475)
-----------
Book value of net liabilities acquired.......................... (2,604,572)
Fair value adjustments:
Fair value of purchased technology, including in-process
research and development....................................... $ 8,600,000
Fair value of assembled workforce............................... 150,000
-----------
Fair value of net assets acquired............................... $ 6,145,428
===========
Purchase price:
Fair value of shares issued..................................... $54,682,557
Fair value of options assumed................................... 11,092,051
Fair value of net liabilities acquired.......................... (6,145,428)
Acquisition costs............................................... 132,088
-----------
Excess of purchase price over net assets acquired, allocated to
goodwill......................................................... $59,761,268
===========
Millet Software, Inc.: On March 31, 2000, the Company acquired all of the
common stock of Millet Software for purchase consideration of 488,224 shares of
the Company's common stock and acquisition expenses of $254,531. The valuation
of the shares issued of $49.90 per share was based on the seven day stock
F-36
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
price average from January 4, 2000, the date the acquisition was announced, and
the three days before and after the date of announcement. The Company recorded
a charge of $2.4 million for in-process research and development. Millet was a
privately held company that developed secure technology that provides an
automated process for filling in payment forms. The acquisition was accounted
for as a purchase in accordance with APB No. 16.
The Company assumed 53,434 stock options, valued at $5.3 million, which was
recorded as an addition to the purchase price. The Company values these options
using the modified Black-Scholes option-pricing model with the following
weighted average assumptions: risk-free interest rate of 6.56%, expected
dividend rate of 0%, volatility of 121% and a term of one year after vesting.
Tangible assets acquired.......................................... $ 100,354
Liabilities assumed............................................... (204,374)
-----------
Book value of net liabilities acquired.......................... (104,020)
Fair value adjustments:
Fair value of purchased technology, including in-process
research and Development....................................... $ 6,000,000
Fair value of assembled workforce............................... 170,000
-----------
Fair value of net assets acquired................................. $ 6,065,980
===========
Purchase price:
Fair value of shares issued..................................... $24,361,071
Fair value of options assumed................................... 5,286,548
Fair value of net assets acquired............................... (6,065,980)
Acquisition costs............................................... 254,531
-----------
Excess of purchase price over net assets acquired, allocated to
goodwill......................................................... $23,836,170
===========
The $6,000,000 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
year ended December 31, 2000, include the write-off of $2,400,000 of purchased
in-process research and development. The remaining $3,600,000 represents the
purchase of core technology and existing products which are being amortized
over an estimated useful life of five years. The Company is amortizing the
goodwill and assembled workforce over an estimated life of five years.
Saraide Inc.: On March 10, 2000 the Company acquired eighty percent of the
common stock of Saraide, Inc. (formerly saraide.com, inc.), a privately held
provider of wireless Internet services in Europe, Japan and Canada, for
purchase consideration of 9,233,672 shares of the Company's common stock and
acquisition expenses of $373,831. The valuation of shares issued of $36.21 per
share was based on the seven-day stock price average from December 6, 1999, the
date the acquisition was announced, and three days before and after the date of
announcement. The acquisition was accounted for as a purchase in accordance
with APB No. 16.
The Company assumed 357,121 stock options, valued at $12.7 million, which
was recorded as an addition to the purchase price. The Company values these
options using the modified Black-Scholes option-pricing model with the
following weighted average assumptions: risk-free interest rate of 6.56%,
expected dividend rate of 0%, volatility of 121% and a term of two years after
vesting.
F-37
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
The purchase price was allocated to the assets acquired and liabilities
assumed based on their estimated fair values as follows:
Tangible assets acquired......................................... $ 13,550,326
Liabilities assumed.............................................. (30,902,846)
------------
Book value of net liabilities acquired......................... (17,352,520)
Fair value adjustments:
Fair value of purchased technology, including in-process
research and development...................................... $ 97,000,000
Fair value of contract in place................................ 16,000,000
Fair value of assembled workforce.............................. 2,100,000
------------
Fair value of net assets acquired................................ $ 97,747,480
============
Purchase price:
Fair value of shares issued.................................... $334,308,458
Fair value of options assumed.................................. 12,713,748
Fair value of net assets acquired.............................. (97,747,480)
Acquisition costs.............................................. 373,831
------------
Excess of purchase price over net assets acquired, allocated to
goodwill........................................................ $249,648,557
============
The $97,000,000 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
year ended December 31, 2000, include the write-off of $71,700,000 of purchased
in-process research and development. The remaining $25,300,000 represents the
purchase of core technology and existing products which are being amortized
over an estimated useful life of five years. The Company is amortizing the
goodwill, assembled workforce and contract list over an estimated life of five
years.
Minority Interest:
Net liabilities and losses applicable to the minority interest in Saraide
exceed the minority interest equity capital in Saraide. The minority interest
portion of the net liabilities and further losses are charged against the
Company, the majority interest, since the minority interest is not obligated to
fund these net liabilities and further losses. If Saraide has future earnings,
the Company will recognize income to the extent of such losses previously
absorbed.
Prio, Inc.: On February 15, 2000, the Company completed the merger with
Prio, Inc., a privately held provider of commerce solutions specializing in the
development of strategic partnerships, technologies and programs that drive
commerce in both traditional and online shopping environments. Under the terms
of the merger, which was accounted for as a pooling-of-interests, the Company
exchanged 9,322,418 shares of the Company's common stock for all of the
preferred and common shares of Prio. The consolidated balance sheets as of
December 31, 2000 and December 31, 1999 and the consolidated statements of
operations, statements of cash flow and statements of stockholder's equity for
the years ended December 31, 2000, 1999 and 1998 are presented as if Prio was a
wholly owned subsidiary since inception.
F-38
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
Unaudited pro forma information--significant acquisitions in 2000:
The following unaudited pro forma information shows the results of the
Company for the year ended December 31, 2000 as if the acquisitions of
TDLI.com, IQorder.com and Saraide occurred on January 1, 2000. The unaudited
pro forma results of operations have been prepared for comparative purposes
only and do not purport to indicate the results of operations which would
actually have occurred had the combination been in effect on the dates
indicated or which may occur in the future.
Year ended December 31
----------------------------
2000 1999
------------- -------------
Revenues:
InfoSpace...................................... $ 214,529,824 $ 71,979,579
TDLI.com, IQorder.com and Saraide.............. 1,742,505 5,557,851
------------- -------------
$ 216,272,329 $ 77,537,430
============= =============
Net Loss:
InfoSpace...................................... $(282,412,396) $(240,131,104)
TDLI.com, IQorder.com and Saraide.............. (19,042,851) (28,983,946)
Elimination of TDLI joint venture income....... (64,207) (16,311)
------------- -------------
$(301,519,454) $(269,131,361)
============= =============
Loss per share................................... $ (0.99) $ (1.04)
============= =============
Pooling transactions in 2000:
The following presents previously reported revenues and net loss for
acquisitions accounted for as pooling-of-interests in 2000.
Year ended December 31,
---------------------------
1999 1998
------------- ------------
Revenue:
InfoSpace.................................. $ 36,907,171 $ 9,623,360
Prio....................................... 483,132 8,567
Go2Net..................................... 34,949,187 8,883,465
Elimination of intercompany with Go2Net.... (359,911) (25,257)
------------- ------------
$ 71,979,579 $ 18,490,135
============= ============
Net loss applicable to common shareholders:
InfoSpace.................................. $ (21,693,775) $(11,818,703)
Prio....................................... (35,878,014) (14,150,148)
Go2Net..................................... (182,406,968) (2,592,418)
Elimination of intercompany with Go2Net.... (152,347) 23,154
------------- ------------
$(240,131,104) $(28,538,115)
============= ============
F-39
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
The following presents previously reported revenues and net loss for the
Company and Go2Net for the nine months ended September 30, 2000.
Revenue:
InfoSpace................................................. $ 31,030,239
Go2Net.................................................... 28,606,598
------------
$ 59,636,837
============
Net loss applicable to common shareholders:
InfoSpace................................................. $(40,368,549)
Go2Net.................................................... (7,786,052)
Elimination of intercompany with Go2Net................... 20,833
------------
$(48,133,768)
============
Fiscal 1999
Zephyr Software Inc: On December 29, 1999, the Company acquired all of the
common stock of Zephyr Software Inc., a privately held company, and its wholly
owned subsidiary Zephyr Software (India) Private Limited ("Zephyr") for a
purchase consideration of 651,392 shares of the Company's common stock and
acquisition expenses of $539,512. The valuation of shares issued of $13.27 per
share was based on the seven-day stock price average from October 28, 1999, the
date of the acquisition announcement, and the three days before and after the
date of announcement. The Company assumed 16,444 options in this acquisition.
The acquisition was accounted for as a purchase in accordance with Accounting
Principles Board Opinion ("APB") No. 16. The Company recorded $9.2 million of
goodwill and acquired net liabilities of $20,690. The goodwill was written off
for impairment at December 31, 2000 (Note 5).
eComLive.com, Inc.: On December 16, 1999, the Company acquired all of the
common stock of eComLive.com, Inc., a privately held company, for a purchase
consideration of 1,372,712 shares and acquisition expenses of $582,246. The
valuation of shares issued of $23.31 per share was based on the seven-day stock
price average from November 22, 1999, the date of the acquisition announcement,
and the three days before and after the date of announcement. The Company
assumed 12,446 options in this acquisition. The acquisition was accounted for
as a purchase in accordance with the provisions of APB No. 16. The Company
recorded $27.1 million in goodwill, $5.3 million for purchased technology which
includes a $2.0 million charge for in-process research and development,
$140,000 of assembled workforce and acquired net liabilities of $925. The $3.3
million of capitalized technology represents the purchase of core technology
and existing products which are being amortized over an estimated useful life
of five years. The Company is amortizing the goodwill over an estimated life of
five years.
Free Yellow: On October 22, 1999, Go2Net acquired all of the stock of Free
Yellow, a privately held company, for purchase considerations of 608,173 shares
and approximately $1.0 million in cash. The total transaction was valued at
$20.0 million and was recorded as a purchase transaction. The valuation of
shares issued was based on the Go2Net seven-day stock price average from
October 22, 1999, the date of the acquisition, and the three days before and
after this date. The Go2Net valuation price was $56.61 per share. Based on the
stock conversion ratio in the pooling-of-interests merger with Go2Net, the
converted InfoSpace valuation price is $31.10 per share.
Union-Street.com: On October 14, 1999, the Company acquired all of the
common stock of Union-Street.com, a privately held company, for a purchase
consideration of 1,746,588 shares and acquisition expenses of $395,656. The
valuation of shares issued of $11.75 per share was based on the seven-day stock
F-40
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
price average from October 14, 1999, the date of the acquisition, and the three
days before and after the date of acquisition. The Company assumed 49,724
options in this acquisition. The acquisition was accounted for as a purchase in
accordance with the provisions of APB No. 16. The Company recorded $15.5
million of goodwill, $5.3 million for purchased technology which includes $3.3
million of in-process research and development, $160,000 of assembled workforce
and acquired net liabilities of $107,219. The $2.0 million of capitalized
technology represents the purchase of core technology and existing products
which are being amortized over an estimated useful life of five years. The
Company is amortizing the goodwill over an estimated useful life of five years.
INEX Corporation: On October 14, 1999, the Company completed the merger with
INEX Corporation, a privately held company that developed and marketed Internet
commerce applications to deliver solutions designed for small and medium-sized
merchants to build, manage and promote online storefronts. Under the terms of
the merger, which was accounted for as a pooling-of-interests, the Company
exchanged 3,600,000 shares of common stock for (1) directly to those INEX
shareholders who elected to receive our common stock in exchange for their INEX
shares at the closing of the combination, (2) upon the exchange or redemption
of the exchangeable shares of InfoSpace.com Canada Holdings Inc., an indirect
subsidiary of the Company, which exchangeable shares were issued to those INEX
shareholders who elected to receive exchangeable shares, or who did not make an
election to receive shares of our common stock at the closing, and (3) upon the
exercise of outstanding warrants and options to purchase INEX common shares,
which the Company assumed and which will become exercisable for shares of
InfoSpace common stock. The consolidated balance sheet as of December 31, 1999
and the consolidated statements of operations, statements of cash flow and
statements of stockholder's equity for the years ended December 31, 1999 and
1998 are presented as if INEX was a wholly owned subsidiary since inception.
Dogpile, LLC: On August 4, 1999, Go2Net acquired Dogpile, LLC in exchange
for 1,241,524 shares of common stock and $15 million in cash. Total
consideration was valued at approximately $52 million. The acquisition was
accounted for as a purchase. The purchase agreement also provided for
additional payments of up to $15 million over the eighteen months following the
transaction close contingent on future revenue of Dogpile. The additional
payments, if any, will be accounted for as additional goodwill. $10.0 million
in stock was paid out in 2000. The valuation of shares issued was based on the
Go2Net seven-day stock price average from August 4, 1999, the date of the
acquisition, and the three days before and after this date. The Go2Net
valuation price was $54.31 per share. Based on the stock conversion ratio in
the pooling-of-interests merger with Go2Net, the converted InfoSpace valuation
price is $29.84 per share. An impairment of $45,000 for workforce related to
this acquisition was recorded in the year ended December 31, 2000 (Note 5).
Authorize.Net: On July 1, 1999, Go2Net acquired Authorize.Net in exchange
for 1,645,076 shares of common stock and $13.5 million in cash. Total
consideration was valued at approximately $98.6 million. The purchase price
also included the value of outstanding stock options that were converted to
options to purchase 185,317 of common stock. The valuation of shares issued was
based on the Go2Net seven-day stock price average from July 1, 1999, the date
of the acquisition, and the three days before and after this date. The Go2Net
valuation price was $84.56 per share. Based on the stock conversion ratio in
the pooling-of-interests merger with Go2Net, the converted InfoSpace valuation
price is $46.46 per share. The purchase agreement also provided for additional
payments to Authorize.Net of up to $55 million in stock over the two years
following the transaction close contingent on future revenues and operating
income of Authorize.Net. The additional payment, if any, will be accounted for
as additional goodwill.
My Agent(TM) technology: On June 30, 1999 the Company acquired the MyAgent
technology and related assets from Active Voice Corporation for $18 million
dollars and incurred $83,054 in acquisition costs. The
F-41
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
acquisition was accounted for as a purchase in accordance with the provisions
of APB No. 16. The Company recorded $13.7 million of goodwill, $4.3 million of
purchased technology and $80,000 of assembled workforce. Included in purchased
technology is $3.9 million of in-process research and development. These
intangibles will be amortized over their useful life, which the Company has
estimated to be five years. Separately, the Company also recorded a one-time
charge of approximately $1.0 million for expenses related to bonus payments
made to certain Active Voice MyAgent team employees who accepted employment
with InfoSpace but who are under no agreement to continue their employment with
InfoSpace.
IQC Corporation: On May 13, 1999, Go2Net acquired IQC Corporation in
exchange for 412,459 shares of common stock and 128,449 options valued at
approximately $19.4 million. The valuation of shares issued was based on the
Go2Net seven-day stock price average from May 13, 1999, the date of the
acquisition, and the three days before and after this date. The Go2Net
valuation price was $65.25 per share. Based on the stock conversion ratio in
the pooling-of-interests merger with Go2Net, the converted InfoSpace valuation
price is $35.85 per share.
Virtual Avenue: On April 28, 1999, Go2Net acquired Virtual Avenue and
USAOnline in exchange for 546,000 shares of common stock valued at
approximately $24.7 million. The valuation of shares issued was based on the
Go2Net seven-day stock price average from April 28, 1999, the date of
acquisition, and the three days before and after this date. The Go2Net
valuation price was $82.38 per share. Based on the stock conversion ratio in
the pooling-of-interests merger with Go2Net, the converted InfoSpace valuation
price is $45.26 per share.
Haggle Online: On April 16, 1999, Go2Net acquired Haggle Online in exchange
for 149,356 shares of common stock valued at approximately $6.8 million. The
valuation of shares issued was based on the Go2Net seven-day stock price
average from April 15, 1999, the date of the acquisition, and the three days
before and after this date. The Go2Net valuation price was $82.67 per share.
Based on the stock conversion ratio in the pooling-of-interests merger with
Go2Net, the converted InfoSpace valuation price is $45.42 per share.
Fiscal 1998 and Prior
Web21: On December 31, 1998, Go2Net merged with Web21 and exchanged all of
the issued and outstanding capital stock of Web21 for 2,445,679 shares of the
Company's common stock. The acquisition was accounted for as a pooling of
interests.
Hypermart: On August 3, 1998, Go2Net acquired all of the issued and
outstanding capital stock of Hypermart, in exchange for 1,146,592 shares of
common stock. This acquisition was accounted for as a pooling of interests, and
accordingly, the financial statements for periods prior to the combination have
been restated to include the accounts and results of operations of Hypermart.
Outpost Network, Inc.: On June 2, 1998, the Company acquired all of the
common stock of Outpost, a privately held company, for a purchase consideration
of 11,999,904 shares of the Company's common stock, cash of $35,000, assumed
liabilities of $264,000, and acquisition expenses of $1,957,000. The valuation
of shares issued of $4.00 per share was based on the seven-day stock price
average from June 2, 1998, the date of the acquisition announcement, and the
three days before and after the date of announcement. In conjunction with the
acquisition, the Company was required to issue warrants valued at $1,902,000 to
a former consultant, which are included in acquisition costs. The transaction
was accounted for as a purchase.
Of the purchase price of $7,992,000, $2,800,000 was allocated to in-process
research and development, $800,000 was allocated to core technology and
existing products and $4,543,000 was recorded as goodwill.
F-42
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
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 year ended December 31, 1998,
include the write-off of the purchased in-process research and development. The
goodwill, assembled workforce and core technology was written off for
impairment at December 31, 2000 (Note 5).
Silicon Investor: On June 23, 1998 Go2Net acquired all of the issued and
outstanding capital stock of Silicon Investor, Inc., which began operations in
April 1995, in exchange for 9,012,953 shares of common stock. In addition,
Go2Net assumed 87,047 options. This acquisition was accounted for as a pooling
of interests, and accordingly, the financial statements for periods prior to
the combination have been restated to include the accounts and results of
operations of Silicon Investor.
YPI: On May 16, 1997, the Company acquired all outstanding Membership
Interest Units of YPI, a limited liability company, in a transaction accounted
for as a purchase. YPI operations began to be included in the Company's
financial statements on the effective date of the acquisition, May 1, 1997. In
conjunction with the acquisition, the Company acquired certain advertising
agreements and assumed a note payable for $90,000. The purchase price of
$306,000 was allocated to advertising agreements of $85,417, note payable of
$90,000 and goodwill of $310,383. The aggregate number of shares of the stock
issued was derived from revenues generated by the business during the specified
measurement period. Before December 31, 1997, the number of shares to be issued
was finalized and a total of 680,000 shares were issued to the sellers on
January 2, 1998.
Note 9: Commitments and Contingencies
The Company has noncancellable operating leases for its corporate
facilities. The leases expire through 2005. Rent expense under operating leases
totaled approximately $6.7 million, 2.0 million and 1.4 million for the years
ended December 31, 2000, 1999 and 1998, respectively.
Future minimum rental payments required under noncancellable operating
leases are as follows for the years ending December 31:
2001........................................................... $11,040,000
2002........................................................... 10,908,000
2003........................................................... 10,112,000
2004........................................................... 9,117,000
2005........................................................... 5,071,000
-----------
$46,248,000
===========
The Company also has noncancellable carriage fee agreements with certain
affiliates. Future payments required under noncancellable affiliate carriage
fee agreements for the year ending December 31, 2001 and 2002 are $3.2 million
and $500,000, respectively.
Litigation:
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
F-43
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
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.
The case is currently in the discovery phase and a trial is set to commence on
April 8, 2002. The Company's management believes the Company has meritorious
defenses to such claims. Nevertheless, litigation is uncertain and the Company
may not prevail in this suit.
One of the shareholders of INEX Corporation filed a complaint 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 plaintiff also
seeks $500,000 Canadian in punitive damages and other remedies with regard to
the disputed shares of stock. The Company has filed a response with the court,
and discovery has yet to take place. The Company believes that it has
meritorious defenses to such claims but litigation is uncertain and the Company
may not prevail in this suit.
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 and has been renamed
Dreiling V. Jain, et al. The complaint names as defendants current and former
Company officers and directors and certain entities related to the individual
defendants. The complaint names the Company 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. The
complaint also alleges that certain defendants breached their fiduciary duties
in connection with the Go2Net and Prio mergers and that one defendant converted
Company assets to his personal use. The complaint requests various equitable
remedies including disgorgement, restitution, accounting and imposition of a
constructive trust, and seeks monetary damages. As noted above, the complaint
is derivative in nature and does not seek monetary damages from, or the
imposition of equitable remedies on, the Company. The Company had entered into
indemnification agreements in the ordinary course of business with the
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. Proceedings in the case are currently
stayed pending the investigation of the Special Litigation Committee of the
Company's Board of Directors.
Two of nine founding shareholders and three other 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
F-44
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
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 and have asserted related
claims against Go2Net. The case is currently in the discovery phase, which is
to end on November 23, 2001. The Company has filed a motion for summary
judgment on behalf of Authorize.Net and has asserted counterclaims against the
plaintiffs. The Company believes it has meritorious defenses to the plaintiff's
claims. Nevertheless, litigation is uncertain and the Company may not prevail
in this suit.
In addition, from time to time the Company is subject to various other legal
proceedings that arise in the ordinary course of our business. Although the
Company cannot predict the outcomes of these proceedings with certainty, the
Company's management does not believe that the disposition of these matters
will have a material adverse effect on the Company's financial position,
results of operations or cash flows.
Settlement of litigation: In January 2001, the Company reached a settlement
with an alleged former employee from a complaint that was originally filed on
December 15, 1999. Under the terms of the settlement, the alleged former
employee received a cash payment of $1.375 million. As this subsequent event
relates to alleged services provided in prior periods, the expense has been
recorded in the fourth quarter of 2000 in Impairment and other charges expense.
Authorize.Net Corporation, a subsidiary recently acquired through the
Company's merger with Go2Net, was named as a defendant in a suit filed in June
2000 which purports to be a class action brought on behalf of persons who
leased "virtual terminals" to Authorize.Net among a myriad of other non-
Authorize.Net products in connection with actual or proposed internet
businesses. The leases were allegedly financed by a third-party unaffiliated
leasing company in connection with sales efforts by a third-party unaffiliated
reseller. The suit, insofar as it relates to Authorize.Net, alleges that the
leases of the products at issue were actually sales and that they were financed
by the leasing company at usurious rates. The suit further alleges that the
reseller was acting as an agent of Authorize.Net in these activities.
Authorize.Net was dismissed without prejudice as a defendant from this suit in
December 2000, and no additional claims were made against Authorize.Net prior
to the deadline to amend the complaint on in February 2001.
In February 2000, the Company reached a settlement with an alleged former
employee. Under the terms of the settlement, the alleged former employee
received a cash payment of $10.5 million. As this subsequent event relates to
alleged services provided in prior periods, the expense has been recorded in
the fourth quarter of 1999 in Impairment and other charges expense.
In February 1999, the Company reached a settlement with a former employee.
Under the terms of the settlement the former employee received a cash payment
of $4.5 million. As this subsequent event related to services provided in prior
periods, the expense was recorded in the fourth quarter of 1998 in Impairment
and other charges expense.
Contingencies: The Company was audited by the Department of Labor in
February 2001. The audit identified numerous employees, primarily former
employees of Go2Net, that were improperly classified as exempt that should have
been classified as non-exempt. As a result of this audit, the Company estimates
this liability to be in the range of $3 million to $5 million and has recorded
an accrual for $3.0 million for the past wages that are due for overtime
worked. This expense is classified in Impairment and other charges on the
Statement of Operations. The Company anticipates that this matter will be
resolved in 2001. See Note 15--Subsequent Events.
F-45
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
Note 10: Income Taxes
The provision for income taxes consists of the following components (in
thousands):
2000 1999 1998
------- ------- ------
Current.......................................... $ (137) $ -- $ (64)
Deferred......................................... -- -- --
------- ------- ------
$ (137) $ -- $ (64)
------- ------- ------
The current income tax expense for the year ended December 31, 2000 is
related to the Company's international operations in Europe.
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate to income before taxes as follows (in
thousands):
2000 1999 1998
------- ------- ------
Income tax (provision) / benefit at federal
statutory rate of 35%.............................. $99,728 $28,070 $9,966
Nondeductible goodwill.............................. (46,706) (8,237) (186)
Nondeductible acquisition costs..................... (5,079) (1,099) (488)
Nondeductible charges for purchased research and
development........................................ (28,035) (3,220) --
Change in valuation allowance resulting from items
other than those attributable to paid-in capital
and acquisition adjustments........................ (16,949) (14,305) (7,284)
Other............................................... (3,096) (1,209) (2,072)
------- ------- ------
Net tax (provision) / benefit....................... $ (137) $ 0 $ (64)
------- ------- ------
The tax effects of temporary differences and net operating loss
carryforwards that give rise to the Company's deferred tax assets and
liabilities are as follows (in thousands):
2000 1999 1998
--------- -------- --------
Deferred Tax Assets:
Current
Deferred revenue............................. $ 5,366 $ 367 $ 473
Compensation expense--stock options.......... -- 2,002 59
Other, net................................... 4,175 5,156 2,535
--------- -------- --------
Total current................................. 9,541 7,525 3,067
Non-current
Net operating loss carryforward.............. 375,240 51,327 4,262
Tax credit carryforward...................... 8,645 1,643 513
Deductible acquisition costs, net............ 5,140 -- --
Unrealized investment losses................. 5,501 -- --
Depreciation & amortization.................. 10,595 2,292 233
Other, net................................... 7,747 17,964 8,214
--------- -------- --------
Total non-current............................. 412,868 73,226 13,222
--------- -------- --------
Total gross deferred tax assets................. 422,409 80,751 16,289
--------- -------- --------
Deferred Tax Liabilities:
Non-current
Other unrealized income...................... 6,924 -- --
Identifiable intangibles..................... 26,127 16,541 252
--------- -------- --------
Total non-current............................. 33,051 16,541 252
--------- -------- --------
Total gross deferred tax liabilities............ 33,051 16,541 252
--------- -------- --------
Net deferred tax asset / (liability)............ 389,358 64,210 16,037
--------- -------- --------
Valuation allowance............................. (389,358) (64,210) (16,037)
--------- -------- --------
Net deferred tax asset / (liability) balance.... $ -- $ -- $ --
========= ======== ========
F-46
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
At December 31, 2000, 1999 and 1998, the Company fully reserved its deferred
tax assets. The Company believes sufficient uncertainty exists regarding the
realizability of the deferred tax assets such that a full valuation allowance
is required. The net change in the valuation allowance during the years ended
December 31, 2000, 1999 and 1998, was $325.1 million, $48.2 million, and $10.7
million, respectively.
As of December 31, 2000, the Company's U.S. federal net operating loss
carryforward for income tax purposes was approximately $1.07 billion. If not
utilized, the federal net operating loss carryforwards will expire between 2011
and 2020. Changes in ownership, as defined by Section 382 of the Code, may
limit the amount of net operating loss carryforwards used in any one year. The
Company's federal research tax credit carryforwards for income tax purposes are
approximately $8.6 million. If not utilized, the federal tax credit
carryforwards will expire between 2011 and 2020.
Federal net operating losses of approximately $1.02 billion as of December
31, 2000 are the result of the exercise of certain employee stock options and
warrants. When recognized, the tax benefit of these loss carryforwards are
accounted for as a credit to additional paid-in capital rather than a reduction
of the income tax provision.
Note 11: Restructuring Charges
The Company recorded a restructuring charge of $2.3 million in the year
ended December 31, 2000 for the closures of its Dallas, Texas and Ottawa,
Canada facilities. The restructuring charges are broken down as follows:
Restructuring
Charge for the Reserve Balance
Year Ended as of
Type of Charge Cash / Non-Cash December 31, 2000 December 31, 2000
-------------- --------------- ----------------- -----------------
Severance and related
costs.................. Cash $ 781,503 $297,133
Lease termination
penalties.............. Cash 583,145 --
Leasehold improvements
and other asset
disposal costs......... Non-cash 957,686 253,883
---------- --------
$2,322,334 $551,016
========== ========
Note 12: Net Loss Per Share
The Company has adopted SFAS No. 128, Earnings per Share. Basic earnings per
share is computed using the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed using the
weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares consist of the incremental common
shares issuable upon conversion of the exercise of stock options and warrants
(using the treasury stock method). Common equivalent shares are excluded from
the computation if their effect is antidilutive. The Company had a net loss for
all periods presented herein; therefore, none of the options and warrants
outstanding during each of the periods presented, as discussed in Note 7, were
included in the computation of diluted loss per share as they were
antidilutive. Options and warrants to purchase a total of 86,288,915,
71,497,417 and 69,054,998 shares of common stock were excluded from the
calculations of diluted loss per share for the years ended December 31, 2000,
1999 and 1998, respectively.
F-47
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
Note 13: Information on Products and Services
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, SFAS No. 131 establishes standards for the way that companies
report information about operating segments in annual financial statements. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS 131 did not have a
material effect on the Company's primary consolidated financial statements but
did affect the Company's disclosures.
The Company generates substantially all of its revenues through integrated
technology and services delivered through a common physical infrastructure, and
therefore the Company has only one reportable segment. Substantially all of the
Company's long-lived assets are physically located within the United States.
Total operating expenses are controlled centrally based on established
budgets by operating department. Operating departments include product
development, sales and marketing, project management and customer service, and
finance and administration. Assets, technology, and personnel resources of the
Company are shared and utilized for all of the Company's service offerings.
These resources are allocated based on contractual requirements, the
identification of enhancements to the current service offerings, and other non-
financial criteria. The Company does not prepare operating statements by
revenue source. The Company does not account for, and does not report to
management, its assets or capital expenditures by revenue source.
Revenue Information
In the years ended December 31, 2000, 1999 and 1998, the Company's revenues
were derived from its consumer and commerce products and services distributed
to merchants and on wireline and wireless platforms. These products and
services generated revenues from subscriptions, licensing, advertising and
transaction fees. Contracts with customers often utilize both consumer and
commerce products and services and include revenue from more than one revenue
source and more than one type of revenue.
Year Ended December 31,
------------------------------------
2000 1999 1998
------------ ----------- -----------
Wireline revenues.......................... $156,877,136 $56,139,487 $17,004,521
Merchant revenues.......................... 36,881,896 15,176,792 1,485,614
Wireless revenues.......................... 20,770,792 663,300 --
------------ ----------- -----------
Total revenues............................. $214,529,824 $71,979,579 $18,490,135
============ =========== ===========
Geographic revenue information:
December 31,
------------------------------------
2000 1999 1998
------------ ----------- -----------
United States.............................. $194,912,029 $71,603,660 $18,281,225
International.............................. 19,617,795 375,919 208,910
------------ ----------- -----------
$214,529,824 $71,979,579 $18,490,135
============ =========== ===========
Note 14: Related-Party Transactions:
The Company has entered into certain agreements with related parties as
described below. The Company recognizes revenue from its advertising,
licensing, distribution and marketing agreements with related parties on the
same basis as it recognizes revenue from similar agreements with unrelated
parties.
The Company entered into an agreement with a company whose majority owner is
related to the Company's Chief Executive Officer. Under the terms of the
agreement the Company paid a development fee of $400,000 in 1999 which was
recognized as product development expense in 1999. This agreement includes
F-48
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
performance warrants. The Company recognized $7.3 million of revenue in 2000,
$2.8 million of which was warrant revenue. The valuation of the warrant revenue
was based on the fair value of the warrant during the period it was earned. The
fair value was determined using the Black-Scholes valuation method.
During 2000 and 1999, Go2Net recognized revenues of approximately $580,000
and $610,000, respectively, under advertising and licensing agreements with
DirectWeb, Inc, the CEO of which was a member of the Go2Net Board of Directors.
Go2Net also recognized revenues of approximately $173,000 and $53,000 in 2000
and 1999, respectively, under an advertising agreement with Mercata, Inc.
Vulcan Ventures is a minority shareholder in the Company and was the majority
shareholder in Mercata, Inc.
On August 7, 2000, Go2Net acquired 670,167 shares of Common Stock of
TheStreet.com and received an option to buy 7.45% of the outstanding common
stock. The stock and option were valued at $4.1 million. The investment
valuation was equal to the ten-day average trading price of TheStreet.com
shares immediately prior to the closing date. In conjunction with the equity
investment, Go2Net entered into an advertising, marketing and distribution
agreement with TheStreet.com. Go2Net recognized revenues of $1.3 million for
the year ended December 31, 2000 under this agreement. Vulcan Ventures is a
minority shareholder of TheStreet.com.
On August 2, 2000, Go2Net acquired 10,000 shares of Preferred Stock of
HealthAnswers, Inc. valued at $10.0 million. The investment valuation price was
determined by prices paid by other independent investors who invested in
HealthAnswers in the same round of financing as Go2Net. Go2Net entered into a
separate distribution and marketing agreement with HealthAnswers, Inc., prior
to the equity investment, on February 17, 2000. Go2Net recognized revenues of
$3.6 million for the year ended December 31, 2000 under this agreement. Vulcan
Ventures is a minority shareholder of HealthAnswers, Inc.
On June 29, 2000, Go2Net acquired 1,623,377 shares of Preferred Stock of
Sandbox.com valued at $10.0 million. The investment valuation price was
determined by prices paid by other independent investors in the round of
financing completed just prior to the Go2Net investment. In conjunction with
the equity investment Go2Net entered into a strategic alliance agreement with
Sandbox.com to distribute and market certain content. Go2Net recognized
revenues of $2.7 million for the year ended December 31, 2000 under this
agreement. Vulcan Ventures is a minority shareholder of Sandbox.com.
On June 13, 2000, Go2Net acquired 1,624,959 shares of Preferred Stock of
iMandi Corporation valued at $5.0 million. The investment valuation price was
determined by prices paid by other independent investors who invested in iMandi
in the same financing round as Go2Net. In conjunction with the equity
investment Go2Net entered into an advertising, marketing and distribution
agreement with iMandi Corporation. Go2Net recognized revenues of $1.0 million
for the year ended December 31, 2000 under this agreement. Vulcan Ventures is a
minority shareholder of iMandi Corporation.
On February 29, 2000, Go2Net acquired 3,086,095 shares of Preferred Stock of
AskMe.com and received warrants to acquire an additional 202,000 shares of
Common Stock. The stock and warrants were valued at $10.1 million. The stock
investment valuation was determined by prices paid by other independent
investors who invested in AskMe.com in the same round of financing as Go2Net.
The warrant valuation was determined using the Black-Scholes valuation method
on the date the warrants were received, as these were fully vested. Revenue
associated with these warrants is recognized on a straight-lined basis over the
life of the contract. In conjunction with the equity investment Go2Net entered
into a marketing and distribution agreement with AskMe.com, Inc. Go2Net
recognized revenues of $2.1 million for the year ended December 31, 2000 under
this agreement. Vulcan Ventures is a minority shareholder of AskMe.com.
F-49
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
On February 7, 2000, Go2Net acquired 130,000 shares of Common Stock of
National Discount Brokers and received warrants to acquire an additional
130,000 shares of Common Stock. The warrants have been exercised and all the
shares of common stock have been sold as of December 31, 2000. The stock and
exercised warrants were valued at $7.8 million which was based on the value on
the purchase date. In conjunction with the equity investment Go2Net entered
into an advertising, marketing, distribution and license agreement with
National Discount Brokers. Go2Net recognized revenues of $6.5 million for the
year ended December 31, 2000 under this agreement. Vulcan Ventures is a
minority shareholder of National Discount Brokers. Go2Net's former CEO is a
board member of National Discount Brokers.
In July 1999, Go2Net acquired 896,057 shares of common stock of CommTouch
Software, LTD. (CommTouch) and received warrants to acquire an additional
1,136,000 shares of common stock. The stock and warrants were valued at $22.3
million. The investment valuation was based on the market price for this
publicly-traded stock. In conjunction with the equity investment, Go2Net
received one seat on the CommTouch Board of Directors and entered into a
distribution and marketing agreement with CommTouch. Vulcan Ventures is a
minority shareholder of CommTouch. Go2Net recognized $3.2 million and $1.1
million of revenue associated with the warrants in 2000 and 1999, respectively.
In July 1999, Go2Net acquired 428,571 shares of common stock of Click2Learn,
Inc. (Click2Learn) and received warrants to acquire an additional 428,571
shares of common stock. The stock and warrants were valued at $3.2 million. The
investment valuation was based on the market price for this publicly-traded
stock. In conjunction with the equity investment, Go2Net entered into a three-
year marketing, distribution, licensing and co-branding partnership with
Click2Learn. Vulcan Ventures is a majority shareholder of Click2Learn. Go2Net
recognized $2.7 million and $577,000 of revenue associated with the warrants in
2000 and 1999, respectively.
During the years ended December 31, 1999 and 1998, the Company sold
advertising resulting in revenues of $580,912 and $19,269, respectively to
other entities in which the Company's chief executive officer had equity
interests.
In 1999 and 1998, Prio advanced to its affiliate $325,000 and $175,000,
respectively. Payments which are due in 13 installments, as defined in the
advance agreement, through December 2001, are applied against amounts due
affiliate for consulting services provided by the affiliate to Prio. The total
expense for such consulting services amounted to $100,000 and $270,000 for the
years ended December 31, 1999 and 1998, respectively. The outstanding current
portion of the advance is $0 and $187,000 as of December 31, 2000 and 1999,
respectively. The long-term portion of $50,000 as of December 31, 1999 is
included in Other Assets.
Note 15: Subsequent Events
Business Combinations and Asset Sales:
On January 1, 2001, the Company acquired Montreal, Canada-based Locus
Dialogue, Inc., a developer of speech recognition-enabled applications. Under
terms of the acquisition, accounted for as a purchase, the Company exchanged
5,114,233 shares of its stock, which included 253,175 restricted shares and
1,173,216 replacement options, for all of Locus Dialogue's outstanding shares,
warrants and options valued at $112.9 million.
On July 1, 2001, the Company sold certain operating assets and other rights
relating to the Liaison enterprise solution business for $2.75 million
(unaudited). The Liaison enterprise solution business was acquired by the
Company as part of its acquisition of Locus Dialogue in January 2001. The
operating assets
F-50
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
included certain distribution contracts, the assembled Liaison workforce, the
Locus Dialogue 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.
Stockholder's 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, 25,000,000 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, 2.08% vest on a
monthly basis for the first 24 months and the 50% balance vests at the end of
the two year period.
On September 10, 2001 (unaudited), the Company repurchased approximately
21.7 million of its shares from Vulcan Ventures Inc. at a discounted purchase
price of $1.05 per share in a privately negotiated block transaction. The
ending market value of the stock on the date of purchase was $1.40. The Company
plans to retire the repurchased shares.
On October 29, 2001 (unaudited), the Company filed a Schedule TO (tender
offer statement under the Securities Exchange Act of 1934) with the SEC
relating to the Company's offer to exchange certain outstanding stock options
held by eligible employees for shares of restricted stock (the "Offer to
Exchange"). Pursuant to the terms of the Offer to Exchange, participating
eligible employees will receive one share of restricted stock for every four
shares underlying eligible options surrendered. In order to participate,
eligible employees must also tender other outstanding unexercised options with
exercise prices equal to or greater than $3.00 per share, but will not receive
additional shares of restricted stock in exchange for such shares. The exchange
offer period is scheduled to expire November 26, 2001 unless extended by the
Company. The Company reserves the right to reject the exchange offer unless
option holders tender options to purchase at least 46,755,234 shares of common
stock. If the exchange offer is accepted by the Company, the restricted shares
would vest quarterly over a two-year period. InfoSpace will record an amount on
the date of grant based on the restricted stock's value, which will be expensed
as the restricted stock vests. Eligible options that are not exchanged in this
offer may be treated as variable awards for accounting purposes.
Other Investments: On January 26, 2001, the Company's Board of Directors
approved the liquidation of the InfoSpace Venture Capital Fund 2000, LLC. In
the first quarter of 2001, the Company disbursed $16.4 million (unaudited) to
the accredited investors. 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 (unaudited) in the first
quarter of 2001. The Company recorded $517,000 of compensation expense in the
year ended December 31, 2000 related to this contribution. All investments held
by the fund reverted to investments held by the Company subsequent to the end
of the first quarter of 2001.
Settlement of Litigation (unaudited): In May 2001, the Company reached a
settlement agreement with a former employee of Go2Net from a complaint that was
originally filed in October 1999. Under terms of the settlement, net of
insurance coverage proceeds, the Company will pay the former employee $950,000.
The Company also settled four other litigation matters in the nine months ended
September 30, 2001, with settlement payments net of insurance coverage proceeds
totalling $1.2 million.
Department of Labor Audit (unaudited): The Company was audited by the
Department of Labor in February 2001. The Department of Labor determined that
numerous employees, primarily former employees of
F-51
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2000, 1999 and 1998
Go2Net, were improperly classified as exempt that should have been classified
as non-exempt. As a result, the Company recorded an estimated accrual in the
amount of $3.0 million for the past wages that are due for overtime worked in
the quarter ended December 31, 2000. Based on the overtime questionnaires
received from the applicable employees and the methodology used to calculate
overtime pay approved by the Department of Labor, the Company revised the
estimate for this liability to be $1.0 million, of which $491,000 has been paid
through October 31, 2001.
Contingencies (unaudited): The Internal Revenue Service is 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 September 30, 2001 for any liability that may result, as the
amount, if any, the Company will be required to pay related to this matter is
not determinable.
Litigation (unaudited):
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 the Company
and its chief executive officer made false and misleading statements about the
Company'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. Subsequently, other
similar complaints were filed. The Horton matter and the subsequent complaints
have been consolidated into one matter. The court has appointed lead plaintiffs
and counsel, and a consolidated complaint is due to be filed in December 2001.
The Company believes it has meritorious defenses to these claims but litigation
is inherently uncertain and it may not prevail in this matter.
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 August 29, 2001, the plaintiffs filed for voluntary
dismissal. On September 10, 2001, the court granted that motion and dismissed
the case without prejudice.
F-52
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses payable by the
registrant in connection with the sale of the common stock being registered
hereby. All amounts shown are estimates, except the Securities and Exchange
Commission registration fee.
Securities and Exchange Commission registration fee................ $ 9,221
Nasdaq National Market listing fee................................. 17,500
Printing and engraving expenses.................................... 5,000
Legal fees and expenses............................................ 50,000
Accounting fees and expenses....................................... 25,000
Miscellaneous expenses............................................. 18,279
--------
Total.............................................................. $125,000
========
Item 15. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers, as well as other
employees and individuals, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation--a
"derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of such actions, and the statute requires court approval
before there can be any indemnification where the person seeking
indemnification has been found liable to the corporation. The statute provides
that it is not exclusive of other indemnification that may be granted by a
corporation's charter, bylaws, disinterested director vote, stockholder vote,
agreement or otherwise.
Section 10 of the registrant's restated bylaws requires indemnification to
the full extent permitted under the DGCL as it now exists or may hereafter be
amended. Subject to any restrictions imposed by the DGCL, the restated bylaws
provide an unconditional right to indemnification for all expense, liability
and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid in settlement) actually and reasonably incurred or
suffered by any person in connection with any actual or threatened action, suit
or proceeding, whether civil, criminal, administrative or investigative by
reason of the fact that such person is or was serving as a director or officer
of the registrant or that, being or having been a director or officer of the
registrant, such person is or was serving at the request of the registrant as a
director, officer, employee or agent of another corporation, or of a
partnership, joint venture, trust or other enterprise, including service with
respect to an employee benefit plan. The restated bylaws also provide that the
registrant may, by action of its Board of Directors, provide indemnification to
its employees and agents with the same scope and effect as the foregoing
indemnification of directors and officers; provided, however, that an
undertaking shall be made by an employee or agent only if required by the Board
of Directors.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability for (i) any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) payments of
unlawful dividends or unlawful stock
II-1
repurchases or redemptions, or (iv) any transaction from which the director
derived an improper personal benefit.
Article 10 of the registrant's restated certificate of incorporation
provides that to the full extent that the DGCL, as it now exists or may
hereafter be amended, permits the limitation or elimination of the liability of
directors, a director of the registrant shall not be liable to the registrant
or its stockholders for monetary damages for breach of fiduciary duty as a
director. Any amendment to or repeal of such Article 10 shall not adversely
affect any right or protection of a director of the registrant for or with
respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
The registrant has entered into certain indemnification agreements with its
officers and directors. The indemnification agreements provide the registrant's
officers and directors with indemnification to the maximum extent permitted by
the DGCL.
Item 16. Exhibits
Number Description
------- -----------
2.1* Agreement and Plan of Acquisition and Arrangement, dated August 13,
1999, by and between the registrant and INEX Corporation.
4.1* Form of Certificate of the Powers, Designations, Preferences and
Rights of Series A Preferred Stock.
4.2(1) Certificate of the Powers, Designations, Preferences and Rights of
Series B Preferred Stock.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, P.C. as to the legality
of the shares.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors (relating to
the financial statements of InfoSpace, Inc.).
23.2* Consent of Wilson Sonsini Goodrich & Rosati, P.C. (contained in the
opinion filed as Exhibit 5.1).
24.1 Power of Attorney.
99.1* Form of Plan of Arrangement under Section 182 of the Business
Corporations Act (Ontario) of INEX Corporation.
99.2* Form of Voting and Exchange Trust Agreement among the registrant,
InfoSpace.com Canada Holdings Inc., and Montreal Trust Company of
Canada, as trustee.
99.3* Form of Exchangeable Share Support Agreement among the registrant,
Infospace.com Nova Scotia Company, InfoSpace.com Canada Holdings Inc.
and Montreal Trust Company of Canada, as trustee.
- --------
* Previously filed.
(1) Incorporated by reference to the Registration Statement on Form S-1 (No.
333-58048) filed by the registrant on March 30, 2001, as amended.
II-2
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement. To include any
material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change
to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirement of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
caused to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Bellevue, State of Washington, on the 13th day
of November, 2001.
InfoSpace, Inc.
/s/ Tammy D. Halstead
By: _________________________________
Tammy D. Halstead
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated below on the 13th day of November, 2001.
Signature Title
--------- -----
* Chairman and Chief Executive Officer
__________________________ (Principal Executive Officer)
Naveen Jain
/s/ Tammy D. Halstead Chief Financial Officer (Principal
__________________________ Financial and Accounting Officer)
Tammy D. Halstead
* President, Chief Operating Officer and
__________________________ Director
Edmund O. Belsheim, Jr.
* Director
__________________________
John E. Cunningham, IV
Director
__________________________
Peter L. S. Currie
* Director
__________________________
Richard D. Hearney
* Director
__________________________
Rufus W. Lumry, III
* Director
__________________________
William D. Savoy
* Director
__________________________
Lewis M. Taffer
*By: /s/ Tammy D. Halstead Chief Financial Officer
_______________________
Tammy D. Halstead
Attorney-in-Fact
II-4
EXHIBIT INDEX
Number Description
------- -----------
2.1* Agreement and Plan of Acquisition and Arrangement, dated August 13,
1999, by and between the registrant and INEX Corporation.
4.1* Form of Certificate of the Powers, Designations, Preferences and
Rights of Series A Preferred Stock.
4.2(1) Certificate of the Powers, Designations, Preferences and Rights of
Series B Preferred Stock.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, P.C. as to the legality
of the shares.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors (relating to
the financial statements of InfoSpace, Inc.).
23.2* Consent of Wilson Sonsini Goodrich & Rosati, P.C. (contained in the
opinion filed as Exhibit 5.1).
24.1 Power of Attorney.
99.1* Form of Plan of Arrangement under Section 182 of the Business
Corporations Act (Ontario) of INEX Corporation.
99.2* Form of Voting and Exchange Trust Agreement among the registrant,
InfoSpace.com Canada Holdings Inc., and Montreal Trust Company of
Canada, as trustee.
99.3* Form of Exchangeable Share Support Agreement among the registrant,
InfoSpace.com Nova Scotia Company, InfoSpace.com Canada Holdings Inc.
and Montreal Trust Company of Canada, as trustee.
- --------
* Previously filed.
(1) Incorporated by reference to the Registration Statement on Form S-1 (No.
333-58048) filed by the registrant on March 30, 2001.