UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the three months period ended March 31, 2002
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________________ to _________________
Commission File Number 0-25131
INFOSPACE, INC.
(Exact name of registrant as specified in its charter)
Delaware 91-1718107
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
601 108/th/ Avenue NE, Suite 1200 98004
Bellevue, Washington (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (425) 201-6100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___.
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class April 30, 2002
----- --------------
Common Stock, Par Value $.0001 309,120,082
INFOSPACE, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I - Financial Information
Item 1. -- Financial Statements
Consolidated Balance Sheets as of March 31, 2002 and
December 31, 2001..................................................... 3
Consolidated Statements of Operations and Comprehensive Loss for the Three
Months Ended March 31, 2002 and 2001.................................. 4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2002 and 2001............................................... 5
Notes to Consolidated Financial Statements ................................... 6
Item 2. -- Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview...................................................................... 16
Results of Operations......................................................... 21
Liquidity and Capital Resources............................................... 26
Factors Affecting Our Operating Results, Business Prospects and
Market Price of Stock...................................................... 27
Part II - Other Information
Item 1. - Legal Proceedings............................................................ 35
Items 2 through 4 are not applicable with respect to the current reporting period.
Item 5. - Other Information............................................................ 38
Item 6. - Exhibits and Reports on Form 8-K............................................. 38
Signature.............................................................................. 39
2
Item 1. - Financial Statements
INFOSPACE, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2002 2001
ASSETS (unaudited)
----------- ------------
(Amounts in thousands,
except share data)
Current assets:
Cash and cash equivalents .................................................. $ 96,150 $ 118,561
Short-term investments, available-for-sale ................................. 113,475 80,319
Accounts receivable, net ................................................... 21,983 16,305
Notes and other receivables, net ........................................... 26,013 27,197
Prepaid expenses and other current assets .................................. 9,600 8,239
----------- -----------
Total current assets ................................................... 267,221 250,621
Long-term investments, available-for-sale ....................................... 65,702 94,891
Property and equipment, net ..................................................... 38,742 39,443
Other long term assets .......................................................... 1,160 1,403
Other investments ............................................................... 30,934 47,087
Goodwill, net ................................................................... 153,948 356,476
Other intangible assets, net .................................................... 41,744 47,084
----------- -----------
Total assets ................................................................ $ 599,451 $ 837,005
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................... $ 7,076 $ 9,139
Accrued expenses and other current liabilities ............................. 26,273 25,791
Deferred revenue ........................................................... 13,458 15,794
----------- -----------
Total current liabilities .............................................. 46,807 50,724
Long-term deferred revenue ................................................. 2,997 3,693
----------- -----------
Total liabilities ...................................................... 49,804 54,417
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, par value $.0001- Authorized, 15,000,000 shares; issued
and outstanding, 2 shares .................................................. -- --
Common stock, par value $.0001- Authorized, 900,000,000 shares; issued and
outstanding, 309,117,356 and 307,789,299 shares ............................ 31 31
Additional paid-in capital ................................................. 1,704,797 1,702,522
Accumulated deficit ........................................................ (1,151,227) (910,725)
Deferred expense--warrants ................................................. (476) (680)
Unearned compensation ...................................................... (4,122) (7,881)
Accumulated other comprehensive income (loss) .............................. 644 (679)
----------- -----------
Total stockholders' equity ............................................. 549,647 782,588
----------- -----------
Total liabilities and stockholders' equity .................................. $ 599,451 $ 837,005
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
3
INFOSPACE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
Three Months Ended March 31, 2002 and 2001
(unaudited)
Three Months Ended
March 31,
----------------------
2002 2001
--------- ---------
(Amounts in thousands,
except per share data)
Revenues (including related party revenues of $813 and $8,406) ............... $ 33,144 $ 46,565
Cost of revenues ............................................................. 9,663 11,721
--------- ---------
Gross profit ........................................................ 23,481 34,844
Operating expenses:
Product development ..................................................... 9,427 11,787
Sales, general and administrative ....................................... 27,096 36,127
Amortization of goodwill ................................................ -- 58,749
Amortization of other intangible assets ................................. 5,914 5,148
Acquisition and other related charges ................................... -- 889
Other charges ........................................................... (50) (50)
Restructuring charges ................................................... -- 1,717
--------- ---------
Total operating expenses ............................................ 42,387 114,367
--------- ---------
Loss from operations ................................................ (18,906) (79,523)
Loss on investments .......................................................... (16,911) (47,599)
Other income, net ............................................................ 2,078 5,983
--------- ---------
Loss before income tax expense, minority interest and cumulative effect
of changes in accounting principle ........................................... (33,739) (121,139)
Minority interest ............................................................ -- 17
Income tax expense ........................................................... 144 50
--------- ---------
Loss before cumulative effect of changes in accounting principle ............. (33,883) (121,206)
Cumulative effect of changes in accounting principle ......................... (206,619) (3,171)
--------- ---------
Net loss ..................................................................... $(240,502) $(124,377)
========= =========
Basic and diluted net loss per share:
Prior to cumulative effect of changes in accounting principle .............. $ (0.11) $ (0.37)
Cumulative effect of change in accounting principle ........................ (0.67) (0.01)
--------- ---------
Basic and diluted net loss per share ......................................... $ (0.78) $ (0.38)
========= =========
Shares used in basic and diluted net loss per share calculation .............. 308,600 323,299
========= =========
Net loss ..................................................................... $(240,502) $(124,377)
Foreign currency translation adjustment .................................... 1,622 238
Unrealized loss on investments ............................................. (299) (10,073)
--------- ---------
Comprehensive loss ........................................................... $(239,719) $(134,212)
========= =========
See accompanying notes to unaudited consolidated financial statements
4
INFOSPACE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2002 and 2001
(unaudited)
Three Months Ended
March 31,
----------------------
2002 2001
--------- ---------
(Amounts in thousands)
Operating activities:
Net loss .................................................................. $(240,502) $(124,377)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and other amortization ................................... 10,744 68,187
Warrant and stock related revenue ..................................... (752) (9,517)
Warrant expense ....................................................... 204 203
Stock-based compensation expense ...................................... 3,543 672
Bad debt expense (recovery) ........................................... (237) 2,094
Non-cash loss on investments .......................................... 16,911 47,616
Other charges ......................................................... (50) (50)
Minority interest ..................................................... -- 17
Loss on disposal of assets ............................................ 157 --
In-process research and development ................................... -- 600
Business acquisition costs ............................................ -- 289
Cumulative effect of changes in accounting principle .................. 206,619 3,171
Cash provided (used) by changes in operating assets and liabilities:
Accounts receivable ............................................... (5,441) 10,206
Other receivables ................................................. 1,184 (15,282)
Prepaid expenses and other current assets ......................... (1,464) 3,112
Other long-term assets ............................................ 243 1,314
Accounts payable .................................................. (2,063) (670)
Accrued expenses and other current liabilities .................... 201 (2,218)
Deferred revenue .................................................. (2,263) (5,742)
--------- ---------
Net cash used by operating activities ................................. (12,966) (20,375)
Investing activities:
Business acquisitions ................................................. (2,512) (537)
Purchase of minority interest in Venture Fund ......................... -- (16,335)
Purchase of intangible assets ......................................... (100) --
Purchase of property and equipment .................................... (2,389) (5,407)
Short-term investments, net ........................................... (33,156) 114,438
Long-term investments, net ............................................ 28,116 (49,320)
--------- ---------
Net cash provided (used) by investing activities ...................... (10,041) 42,839
Financing activities:
Proceeds from issuance of ESPP shares ................................. 549 1,117
Proceeds from exercise of options and warrants ........................ 47 5,944
Payments of debt assumed from acquisitions ............................ -- (3,075)
--------- ---------
Net cash provided by financing activities ............................. 596 3,986
--------- ---------
Net increase (decrease) in cash and cash equivalents ...................... (22,411) 26,450
Cash and cash equivalents:
Beginning of period ................................................... 118,561 153,913
--------- ---------
End of period ......................................................... $ 96,150 $ 180,363
========= =========
Supplemental disclosure of noncash activities
Acquisitions from purchase transactions:
Stock issued ................................................... $ 1,895 $ 88,772
Net liabilities acquired ....................................... -- (1,569)
See accompanying notes to unaudited consolidated financial statements.
5
INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. The Company and Basis of Presentation
InfoSpace, Inc. (the Company or InfoSpace) is a provider of wireless and
Internet software and application services. The Company delivers a wireless and
Internet platform of software and application services that enable companies to
offer network-based services under their own brands. The Company provides its
services across multiple platforms simultaneously. The Company develops and
delivers its products and application services to a broad range of customers
that span each of its business areas of wireline, merchant and wireless.
The accompanying unaudited consolidated financial statements include all
adjustments, consisting of normal recurring adjustments that, in the opinion of
management, are necessary to present fairly the financial information set forth
therein. Certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America (GAAP) have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission. Results
of operations for the three-month period ended March 31, 2002 are not
necessarily indicative of future financial results. The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual amounts may differ from estimates.
2. Cumulative effect of change in accounting principle
Effective July 1, 2001, the Company adopted certain provisions of Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations, and
effective January 1, 2002, the Company adopted the full provisions of SFAS No.
141 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 apart from goodwill. In accordance with SFAS No. 142, the
Company evaluated the classification of its intangible assets using the criteria
of SFAS No. 141, which resulted in $1.0 million of intangible assets (comprised
entirely of assembled workforce intangibles) being classified into goodwill at
January 1, 2002.
SFAS No. 142 requires that purchased goodwill and indefinite-lived
intangibles no longer be amortized into results of operations, but instead be
tested for impairment at least annually. The Company evaluated its other
intangible assets, including core technology, customer lists, and other, and
determined that substantially all such assets have definite lives. As of March
31, 2002, the amount of intangible assets (comprised of domain name and
trademark intangibles) that have been determined to have indefinite lives, and
therefore not subject to amortization, is $313,000. This amount is included in
Goodwill, net on the Company's consolidated balance sheet as of March 31, 2002.
6
SFAS No. 142 prescribes a two-phase process for impairment testing of goodwill.
The first phase, required to be completed by June 30, 2002, screens for
impairment; while the second phase, required to be completed by December 31,
2002, measures the impairment. The Company completed both phases of impairment
analysis during the three months ended March 31, 2002 and determined that a
portion of the value of its recorded goodwill was impaired as of January 1,
2002. Accordingly, the Company recorded a non-cash charge for the cumulative
effect of change in accounting principle of $206.6 million as of January 1,
2002, as impairment of goodwill. This amount was determined based on independent
valuations of the Company's reporting units as of January 1, 2002 using a
combination of the Company's quoted stock price and projections of future
discounted cash flows for each reporting unit.
The following table provides information about activity in goodwill, net by
reporting unit for the period from December 31, 2001 to March 31, 2002 (in
thousands):
Wireline Merchant Wireless Total
- ------------------------------------------------------------------------------------------------------
Goodwill, net December 31, 2001 $ 66,404 $ 94,726 $ 195,346 $ 356,476
Assembled workforce reclassification 80 99 832 1,011
Domain name and trademark reclassifications 89 62 62 213
Cumulative effect of adopting SFAS No. 142 (66,484) -- (140,135) (206,619)
--------- -------- --------- ---------
Goodwill, net January 1, 2002 89 94,887 56,105 151,081
Goodwill associated with eCash acquisition 2,767 2,767
Purchase of indefinite lived intangible asset 100 -- -- 100
--------- -------- --------- ---------
Goodwill, net March 31, 2002 $ 189 $ 94,887 $ 58,872 $ 153,948
========= ======== ========= =========
In accordance with SFAS No. 142, the effect of this accounting change is
reflected prospectively. Supplemental comparative disclosure as if the change
had been retroactively applied to the prior year period is as follows (in
thousands, except per share amounts):
Three months ended,
Net loss: March 31, 2002 March 31, 2001
Reported net loss $ (240,502) $(124,377)
Cumulative effect of change in accounting principle 206,619 --
Goodwill amortization -- 58,749
---------- ---------
Adjusted net loss $ (33,883) $ (65,628)
========== =========
Basic and diluted loss per share
Reported loss per share $ (0.78) $ (0.38)
Cumulative effect of change in accounting principle 0.67
Goodwill amortization -- 0.18
---------- ---------
Adjusted basic and diluted loss per share $ (0.11) $ (0.20)
========== ---------
Other intangible assets consisted of the following (in thousands):
March 31, 2002 December 31, 2001
- ---------------------------------------------------------------------------------------------------------------------
Gross Accumulated Other Gross Accumulated Other
carrying amortization intangible carrying amortization intangible
amount assets, net amount assets, net
- ---------------------------------------------------------------------------------------------------------------------
Domain names and $ -- $ -- $ -- $ 600 (387) 213
trademarks
Assembled -- -- -- 1,887 (876) 1,011
workforce
Core technology 62,714 (36,968) 25,746 61,074 (32,828) 28,246
Customer lists 16,755 (6,591) 10,164 16,700 (5,753) 10,947
Other 6,667 (833) 5,834 6,667 -- 6,667
------- -------- -------- -------- --------- -------
Total $86,136 $ 44,392 $ 41,744 $ 86,928 $ (39,844) $47,084
======= ======== ======== ======== ========= =======
7
Other intangible assets are scheduled to be fully amortized by 2007 with
corresponding amortization expense estimated to be $12.7 million, $14.2 million
$10.6 million, $3.3 million, $845,000 and $55,000 for the remainder of fiscal
2002, fiscal years 2003, 2004, 2005, 2006 and 2007 respectively.
On January 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts. All derivatives, whether designated in
hedging relationships or not, are required to be recorded on the balance sheet
at fair value and changes in fair value are recognized in earnings unless
certain hedge criteria are met. As a result of adopting SFAS No. 133, the
Company recorded a charge of $3.2 million to record warrants held to purchase
stock in other companies at their fair value as of January 1, 2001. This amount
was recorded as a cumulative effect of change in accounting principle. As of
December 31, 2000, warrants to purchase stock in public companies were held at
fair value, with unrealized gains and losses included in accumulated other
comprehensive loss, and warrants to purchase stock in private companies were
held at cost.
3. Acquisition
eCash Technologies, Inc. On February 8, 2002, the Company acquired certain
assets of eCash Technologies, Inc. (eCash), a developer of electronic debit and
stored value technologies, for purchase consideration of $2.7 million and
1,064,815 shares of the Company's common stock.
The purchase price was allocated to the assets and liabilities assumed based on
their estimated fair values as follows:
(in thousands)
Tangible assets acquired $ 215
Fair value adjustments:
Purchased technology 1,640
Customer contracts 55
--------------
Fair value of net assets acquired $ 1,910
==============
Purchase price:
Cash consideration $ 2,700
Acquisition costs 82
Fair value of shares issued 1,895
Less fair value of net assets acquired (1,910)
--------------
Excess of purchase price over net assets acquired, allocated to goodwill $ 2,767
==============
8
The expected life of the core technology was assumed to be five years, after
which substantial modification and enhancement would be required for the
technology to remain competitive. The expected life of the customer contracts
was assumed to be three and a half years, which is consistent with the expected
cash flows from the customer contracts. The Company is amortizing the core
technology and customer list over an estimated life of five years and three and
a half years, respectively. In accordance with SFAS No. 142, no amortization of
the goodwill will be recorded, as it has an indefinite life. The goodwill will
be tested for impairment at least annually, with the Company's other
indefinite-lived intangibles.
As of the date of the acquisition, the technology acquired from eCash was
substantially complete and no material alterations or enhancements were under
development. eCash focused on providing payment solutions that enable secure
commerce on the Internet.
The Company's revenue assumptions were based on the stream of income that could
be attributed to the eCash customer base assuming renewals, and the prospective
customer base, assuming similar pricing.
The Company's expense assumptions included cost of revenues, which were
estimated to be 105.5% of revenues for 2002 and decreasing to 11.7%, as revenues
grow and costs of revenues are expected to remain relatively fixed. Research and
development costs were estimated to be 187.6% in 2002 and decreasing to 12.0%.
Sales and marketing combined with general and administrative expenses were
estimated to be 94.3% in 2002 and thereafter decreasing to 32.5% in line with
industry levels as customers adopt the technology, revenues grow and the Company
capitalizes on economies of scale. However, cost of revenues, research and
development and sales and marketing and general and administrative 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 may prove to be
inaccurate, and there can be no assurance that the Company will realize the
revenues, gross profit, growth rates, expense levels or other variables set
forth in the Company's assumptions.
The Company does not expect to have the ability to calculate revenues
specifically and exclusively attributable to the integrated eCash technology.
The amount that the Company can charge customers for the use of these products
and application services will be greatly influenced by market forces and
competitors' pricing of their own integrated offerings.
9
4. Loss on Investments
Loss on investments for the three months ended March 31, 2002 and 2001 consists
of the following (in thousands):
Quarter ended March 31,
2002 2001
Gain on Venture Fund investments $ -- $ 880
Other-than-temporary investment impairments (15,719) (41,984)
Decrease in fair value of warrants (1,192) (6,495)
-------- --------
$(16,911) $(47,599)
======== ========
From January 1, 2000 to March 31, 2001, the Company held a majority ownership in
the InfoSpace Venture Capital Fund 2000 LLC (Venture Fund). Investments held by
the Venture Fund were held at fair value, with changes in fair value reflected
as gains and losses in the Consolidated Statement of Operations, as required by
investment company accounting, which was carried forward in consolidation
pursuant to Emerging Issues Task Force (EITF) Issue No. 85-12, Retention of
Specialized Accounting for Investments in Consolidation. The Company has
recorded minority interest on the Balance Sheet and Statement of Operations for
the employee-owned portion of the fund during the period the Venture Fund was
active. On January 26, 2001 the Company's Board of Directors approved the
liquidation of the Venture Fund. In the three months ended March 31, 2001, the
Company disbursed $16.4 million to the accredited investors for their original
investment amount, representing 100% of the accredited investor ownership.
5. Stockholders' Equity
On January 15, 2002, the Company offered a limited non-compulsory exchange of
stock options to its employees. Under the exchange offer, eligible employees had
the opportunity to exchange eligible stock options for the promise to grant new
options in the future under the Company's1996 Restated Flexible Stock Incentive
Plan. Options eligible to be tendered were all options to purchase InfoSpace
common stock with an exercise price of $10.00 or more per share. The exchange
offer period expired on February 15, 2002, and the Company accepted for exchange
options covering 12,750,025 shares of common stock. The Company will grant to
each participating employee a new option to purchase one share of InfoSpace
common stock for every ten shares of common stock underlying the exchanged
options. In addition, each participating employee may also receive an additional
option grant, granted at the discretion of the Board of Directors, to purchase a
number of shares determined in accordance with the Company's compensation
policies and practices. The exercise price of the new options will be equal to
the fair market value of InfoSpace shares on the date the new options are
granted, which is expected to be on August 20, 2002. The new options will be 25%
vested on the date of grant and the remaining 75% will vest in equal monthly
installments over the three-year period following the grant date. The Company
expects to grant new options covering approximately 3.1 million shares of common
stock.
The Company had made an unrelated offer for exchange of stock options to its
employees in October 2001. The Company terminated that offer in November 2001
due to failure of certain conditions for completion of the exchange.
Accordingly, no options were cancelled, and no options or shares of restricted
stock will be issued in connection with the prior offer.
10
6. Payroll Tax Receivable
As of March 31, 2002, the Company has $13.2 million recorded as a tax receivable
due from the Federal government. In October 2000, one of the Company's employees
exercised non-qualified stock options and remitted $12.6 million for federal
income tax based on the market price of the stock on the day of exercise and the
Company remitted the employer payroll tax of $620,000. Due to the affiliate
lock-up period from the Go2Net merger, the employee was restricted from
transferring or selling the stock until February 2001. Treasury Regulations
provide that the valuation for purposes of determining taxable income is not
required until these restrictions have lapsed. The Company, therefore, returned
the federal income tax withholding to the employee and filed an amendment to its
payroll tax return to request the tax refund.
7. Restructuring Charges
At March 31, 2002, the accrued liability associated with restructuring was $5.2
million. As of December 31, 2001, the accrued liability associated with
restructuring charges was $5.9 million. All accrued restructuring charges are
expected to be paid in the year ended December 31, 2002.
The accrued charges consisted of the following (in thousands):
Severance and Asset disposal Estimated future
related costs costs lease losses
Reserve balance at December 31, 2001 $133 $ 65 $5,653
Payments during 2002 22 65 611
---- ---- ------
Reserve balance at March 31, 2002 $111 $ -- $5,042
==== ==== ======
The estimated future lease losses includes $4.4 million for a lease buyout
payment in connection with the lease of the Company's former Seattle facility.
This amount was paid in April 2002. The Seattle facility was the corporate
headquarters of Go2Net prior to the Company's merger in October 2000. This
buyout releases the Company of all future obligations under that lease.
8. Commitments and Contingencies
Litigation:
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, captioned In re InfoSpace, Inc.
Securities Litigation. The Court has appointed lead plaintiffs and counsel, and
a consolidated complaint was filed on January 22, 2002, which among other
things, added the Company's chief financial officer as a defendant. On April 8,
2002, defendants filed a motion to dismiss the complaint for failure to state a
claim. On April 11, 2002, plaintiffs filed a motion for leave of the Court to
amend the consolidated complaint to add Merrill Lynch & Co., Inc. and one of its
analysts as defendants, which was granted on April 30, 2002. The amended
complaint was filed on May 9, 2002. The Company's management believes the
Company has meritorious defenses to these claims but litigation is inherently
uncertain and the Company may not prevail in this matter.
11
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 officers and
directors of the Company and entities related to a few of the individual
defendants; the Company is named as a "nominal defendant." The complaint alleges
that certain defendants breached their fiduciary duties to the Company and were
unjustly enriched by engaging in insider trading, and also alleges that certain
defendants breached their fiduciary duties in connection with the Go2Net and
Prio mergers and that one defendant converted the Company's assets to his
personal use. Various equitable remedies are requested in the complaint,
including disgorgement, restitution, accounting and imposition of a constructive
trust, and the complaint also seeks monetary damages. As stated, the complaint
is derivative in nature and does not seek monetary damages from, or the
imposition of equitable remedies on, the Company. The Company has entered into
indemnification agreements in the ordinary course of business with officers and
directors and may be obligated throughout the pendency of this action to advance
payment of legal fees and costs incurred by the defendant officers and directors
pursuant to the Company's obligations under the indemnification agreements and
applicable Delaware law. The special litigation committee of the Company's Board
of Directors, with the assistance of independent legal counsel, has investigated
the complaint, and on March 22, 2002 filed a motion to terminate this derivative
action.
On December 18, 2000, an employee filed a complaint against the Company in the
United States District Court for the Western District of Washington alleging
claims for breach of contract, breach of the covenant of good faith and fair
dealing, and fraudulent and negligent misrepresentation. The suit also included
a claim against Naveen Jain, the Company's Chief Executive Officer, for
violations of the Racketeer Influenced Corrupt Organizations (RICO) Act. 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 (other than Mr. Jain). 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. On March 29, 2001, the court dismissed the plaintiff's claims for breach
of the covenant of good faith and fair dealing. On March 1, 2002, the court
dismissed the employee's claims for breach of contract, fraudulent and negligent
misrepresentation with respect to the alleged promise that the employee would
always have more stock options than any other InfoSpace employee, and violation
of the RICO Act, and also denied certain other motions by the plaintiff. The
only surviving claim is the plaintiff's allegation of fraudulent and negligent
misrepresentation based on the alleged representation that the stock options
received by the employee at the time he was hired were the most given to any
employee of the Company (other than Mr. Jain). The parties are scheduled for
trial on the surviving claim on June 24, 2002. The Company's management believes
the Company has meritorious defenses to this claim but litigation is inherently
uncertain and the Company may not prevail in this matter.
12
In September of 2000, Go2Net sued FreeYellow.com, Inc. a Florida corporation,
and John Molino, FreeYellow's sole shareholder, in the Superior Court of
Washington for King County seeking to rescind its acquisition of FreeYellow that
closed in October of 1999, and in the alternative, seeking damages. Molino
denied the allegations, and asserted a counterclaim for breach of the merger
agreement. In October 2000, Go2Net was acquired by and became a wholly owned
subsidiary of InfoSpace. On August 6, 2001, Go2Net amended the complaint to add
a claim against FreeYellow and Molino under the Securities Act of Washington
("WSA"). Both parties moved for summary judgment on the merits of their
respective claims, and those motions were denied. In February of 2002, Go2Net
moved for summary judgment to dismiss Molino's equitable defenses of waiver and
estoppel to Go2Net's WSA claim. Molino opposed that motion, and moved to dismiss
Go2Net's WSA claim. On March 8, 2002, the court granted Go2Net's summary
judgment motion and denied Molino's motion to dismiss. The case is scheduled to
go to trial on July 1, 2002. The Company's management believes the Company has
meritorious claims and defenses to the counter-claims but litigation is
inherently uncertain and the Company may not prevail in this matter.
Two of nine founding shareholders and three other shareholders of Authorize.Net
Corporation, a subsidiary acquired through the Company's merger with Go2Net,
filed a lawsuit on May 2, 2000 in Utah State Court in Provo, Utah. This action
was brought to reallocate amongst the founding shareholders the consideration
received in the acquisition of Authorize.Net by Go2Net. The plaintiffs allege
that the corporate officers of Authorize.Net fraudulently obtained a percentage
of Authorize.Net shares greater than what was anticipated by the founding
shareholders, and are making claims under the Utah Uniform Securities Act as
well as claims of fraud, negligent misrepresentation, breach of fiduciary duty,
conflict of interest, breach of contract and related claims. Plaintiffs seek
compensatory and punitive damages in the amount of $200 million, rescission of
certain transactions in Authorize.Net securities, and declaratory and injunctive
relief. The plaintiffs subsequently amended the claim to name Authorize.Net as a
defendant with regard to the claims under the Utah Uniform Securities Act and
have asserted related claims against Go2Net. All dispositive motions in this
case are due on May 24, 2002. The Company has filed a motion for summary
judgment on behalf of Authorize.Net and has asserted counterclaims against the
plaintiffs. The Company's management believes the Company has meritorious
defenses to these claims but litigation is inherently uncertain and the Company
may not prevail in this matter.
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 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 has agreed to dismiss the complaint with prejudice and release all
claims against defendants in exchange for the defendants' agreement to forego
collection of litigation costs assessed against the plaintiff to date in the
suit. The parties have completed the settlement and an order dismissing the
lawsuit was issued by the court on April 25, 2002.
13
On December 5, 2001, a complaint entitled The boxLot Company v. InfoSpace, Inc.,
et. al. was filed in the Superior Court of California for San Diego County. The
complaint names as defendants the Company and certain of the Company's current
and former directors, and alleges violations of state law in connection with the
asset purchase transaction between the Company and The boxLot Company in
December of 2000 and seeks monetary damages. Plaintiffs filed an amended
complaint on February 15, 2002. Plaintiffs subsequently dropped without
prejudice two of the defendants, who are current directors of InfoSpace, from
the action. The Company's management believes the Company has meritorious
defenses to these claims but litigation is inherently uncertain and the Company
may not prevail in this matter.
In addition, from time to time the Company is subject to various other legal
proceedings that arise in the ordinary course of 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 and the
matters discussed above will have a material adverse effect on the Company's
financial position, results of operations or cash flows.
Contingencies:
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 2002. No
amounts have been accrued in the financial statements 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.
The Company has pledged a portion of its cash and cash equivalents as collateral
for standby letters of credit, future monthly lease payments for certain of its
property leases and a bank guaranty. At March 31, 2002, the total amount of
collateral pledged under these agreements was approximately $4.9 million, which
consists of $4.0 million of standby letters of credit, $546,000 of lease
commitments and $342,000 of bank guaranty.
9. Related Party Transactions
Promotions and warrant revenues earned from companies in which the Company owns
stock are considered related party revenues, including independent agreements
entered into during the current year with companies the Company or Go2Net
invested in during prior years. During the three months ended March 31, 2002,
the Company made no new investments in private or public companies. From time to
time, in the normal course of business, the Company has entered into agreements
to provide various promotional services for companies in which the Company
previously made an investment. In addition, the Company has deferred revenue
from warrants that were earned from a company in which the Company has an
investment. For the three months ended March 31, 2002, related party revenue was
$813,000, compared to $8.4 million for the three months ended March 31, 2001.
14
10. Segment Information
During the first quarter of 2002, the Company began presenting information to
its chief operating decision maker in three reportable segments representing the
companies' three business units: wireline, merchant and wireless.
The Company measures the results of its reportable segments based on operating
income or loss before depreciation, restricted stock-based compensation expense,
amortization and impairment of intangibles, restructuring charges, non-recurring
charges, gains and losses on equity investments and the cumulative effect of
changes in accounting principle, referred to as Pro forma income (loss).
Included in the operating expenses for the wireless business unit for the three
months ended March 31, 2002, are $1.5 million of transition charges related to
the Giant Bear acquisition completed in December 2001.
Certain indirect expenses are allocated to the reportable segments based on
internal usage measurements. The Company does not allocate certain indirect
sales, general and administrative expenses, income taxes or interest income to
the reportable segments.
Information on reportable segments and a reconciliation to consolidated net loss
for the three months ended March 31, 2002 is presented below (in thousands). The
Company has not provided information on reportable segments for 2001, as it is
impracticable to do so.
Wireline Merchant Wireless Corporate Total
------------------------------------------------------------------
Revenues $14,439 $12,125 $ 6,580 $ -- $ 33,144
Operating expenses 8,322 8,762 10,061 10,031 (1) 37,176
Unallocated depreciation and non capitalized
property, plant and equipment expense -- -- -- 5,400 (2) 5,400
------- ------- -------- ---------- ----------
Pro forma income (loss) from operations 6,117 3,363 (3,481) (15,431) (9,432)
Income tax expense -- -- (144) (144)
Other income, net -- -- -- 2,078 2,078
------- ------- -------- ---------- ----------
Pro forma net income (loss) 6,117 3,363 (3,481) (13,497) (7,498)
Loss on equity investments -- -- -- (16,911) (16,911)
Amortization of intangibles -- -- -- (5,914) (5,914)
Other charges -- -- -- 50 50
Restricted stock compensation expense -- -- -- (3,610) (3,610)
Cumulative effect of change in accounting
principle -- -- -- (206,619) (206,619)
------- ------- -------- ---------- ----------
Net loss $ 6,117 $ 3,363 $ (3,481) $(246,501) $ (240,502)
======= ======= ======== ========= ==========
(1) Unallocated corporate expenses include approximately $4.2 million of
professional services (including $3.5 million of legal fees), $2.2 million
of facility expenses, $2.0 million of salaries and benefits and $1.8
million of corporate insurance expense.
(2) Depreciation and non-capitalized property, plant and equipment expenses may
be allocated to the reportable segments in future periods.
15
Item 2. -- Management's Discussion and Analysis of Financial Condition and
Results of Operations.
You should read the following discussion and analysis in conjunction with our
Consolidated Financial Statements and Notes to Consolidated Financial Statements
thereto included elsewhere in this report. In addition to historical
information, the following discussion contains certain forward-looking
statements that involve known and unknown risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. You should
read the cautionary statements made in this report as being applicable to all
related forward-looking statements wherever they appear in this report. Our
actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below and in the
section entitled "Factors Affecting Our Operating Results, Business Prospects
and Market Price of Stock" and in our reports filed with the Securities and
Exchange Commission including our annual report on Form 10-K for the year ended
December 31, 2001 (the "Form 10-K"). You should not rely on these
forward-looking statements, which reflect only our opinion as of the date of
this report.
Overview
InfoSpace, Inc. is a provider of wireless and Internet software and
application services. We have developed and deliver a wireless and Internet
platform of software and application services that enable companies to offer
network-based services under their own brands. Our customers, in turn, offer
these products and application services to their customers as their solutions.
We provide our services across multiple platforms simultaneously, including PCs
and non-PC devices.
We develop and deliver our products and application services to a broad
range of customers that span each of our business areas of wireline, merchant
and wireless. In our wireline business, we deliver our services to Web portals
such as America Online, destination sites such as Disney, and DSL providers such
as Verizon Online. In our merchant business, we deliver our products to regional
Bell operating companies such as Verizon Information Services, merchant banks
such as Union Bank of California and Wells Fargo, and financial institutions
such as American Express. In our wireless business, we deliver our products and
application services to wireless carriers such as Cingular, Verizon Wireless,
AT&T Wireless and Virgin Mobile, and other consumer service companies such as
Charles Schwab.
We have development, operations and administrative facilities in: Bellevue,
Washington; American Fork, Utah; Montreal, Canada; Papendrecht, The Netherlands;
Woking, United Kingdom; and Sydney, Australia. We have data centers in Bellevue,
Washington; Papendrecht, The Netherlands; and Rio de Janeiro, Brazil. We also
have sales offices in San Francisco, California and New York City, New York. As
of April 30, 2002, we had 735 employees worldwide.
Our services are predominately built on our core technology platform and
use the same operational infrastructure.
16
Our Business Areas
We develop and deliver our products and services to a broad range of
customers that span each of our business areas of wireline, merchant and
wireless. The following provides detail on each of our business areas:
Wireline
Through our wireline business area, we develop and deliver Internet
services that are designed for high-speed broadband and dial-up narrowband
websites. We enable our customers that include destination Web sites, businesses
and broadband service providers, including digital subscriber line (DSL)
companies, to offer their customers an array of private-labeled services. We
deliver our services to Web sites that include America Online, Microsoft's MSN,
NBCi, Lycos and Verizon Online, among others.
InfoSpace's product offerings can help businesses attract customers,
improve loyalty, create new revenue streams and monetize their customer base.
Further, InfoSpace's services are private-labeled and delivered with each
customer's logo, color scheme and navigation design, strengthening the value of
the customer's brand. This ensures that our customers own the value relationship
with their customer.
Our wireline business unit is focused on delivering three main categories
of products and application services: search, directory and broadband.
. Web Search products are meta-search engines in that they
simultaneously search many engines that we have integrated such as
Alta Vista, Overture, About, FindWhat and Looksmart, among others, at
the same time, producing fast, extensive results.
. Directory services are an extension of search and include Internet
products (white pages and classifieds) people use every day.
. Broadband services are designed to take advantage of higher bandwidth
networks and are targeted at the DSL and cable modem markets.
Merchant
Our merchant business area develops and delivers applications and services
that are designed to help merchants leverage Internet and wireless technologies
to help attract customers, reduce costs, grow sales and conduct business,
anywhere, anytime. These applications and services enable businesses to
establish an online presence, promote their products and services, and conduct
secure commerce using an Internet connected device. Our commerce services are
privately branded for leading merchant banks and other merchant service
providers who in turn offer these solutions to their business customers.
InfoSpace's merchant services are available through a broad merchant reseller
channel, including Verizon Information Services, one of the largest providers of
products and services for small to medium sized businesses in the U.S., and
major financial institutions such as American Express, Wells Fargo and Union
Bank of California.
17
Our merchant business area is focused on payments, shopping, promotions and
hosting.
. Payment Solutions that enable merchants to authorize, process, and
manage credit card and electronic check transactions on
Internet-enabled mobile devices and personal computers.
. Merchant promotions is primarily our yellow page services, and are
distributed through leading Web sites and wireless carriers offering
merchants expansive networks over which to promote their products and
services.
. Shopping services that offer a private-labeled, end-to-end solution
designed to help partners increase traffic, build customer loyalty and
drive additional revenue through offering a comparison-shopping
service to their customers under their own brand.
. Hosting solutions that provide merchants and Web developers with a
flexible and scalable solution for establishing and building secure
Web sites.
Wireless
Through our wireless business area, we develop, deliver and support
solutions enabling our carrier partners to deliver wireless data services to
their subscribers under their own brand over current and next generation
networks. With our wireless platform, wireless carriers can effectively manage
and seamlessly deliver our private-labeled applications and services, third
party applications and services and their own content and applications, to
create a unique mobile data experience for their subscribers. Through our
InfoSpace Speech Solutions group, we offer a multi-modal solution that leverages
speech for input and query, combined with other display modes to optimize the
wireless experience.
InfoSpace provides its wireless solutions to leading companies worldwide,
including wireless carriers such as Cingular Wireless, Verizon Wireless, AT&T
Wireless, ALLTEL, Virgin Mobile and Deutsche Telekom's VoiceStream and consumer
services companies such as Charles Schwab.
InfoSpace's end-to-end wireless data solutions fall into two general areas:
mobile data applications and application services.
InfoSpace mobile data applications include messaging, information and
productivity, and community and entertainment applications help wireless
carriers to differentiate their offering with a compelling array of information
and services people access every day - driving repeat usage. InfoSpace's
multi-modal approach to wireless data enables the provisioning and delivery of
services over a comprehensive range of network and device standards including
SMS, WAP, HTML, voice & client application downloads for next generation
wireless applications.
InfoSpace Application services provide wireless-centric functionality to
mobility applications. These services allow content providers and brands to
reliably deliver information to mobile subscribers. Additionally, these tools
create a framework for carriers to deploy seamless and integrated wireless data
offerings as well as maintain the flexibility and control necessary to package
and target them to unique segments of their subscriber base. At the same time,
InfoSpace application services provide end-users with the ability to personalize
the wireless data experience and make it their own.
18
Critical Accounting Policies and Estimates
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations," as well as disclosures included elsewhere in this Form
10-Q, are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingencies. On
an ongoing basis, we evaluate the estimates used, including those related to
impairment and useful lives of intangible assets, other-than-temporary
impairment of investments, and fair values used to record revenue related to
advertising barter transactions and related party revenue transactions. We base
our estimates on historical experience, current conditions and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources as
well as identifying and assessing our accounting treatment with respect to
commitments and contingencies. Actual results may differ from these estimates
under different assumptions or conditions. We believe the following critical
accounting policies involve the more significant judgments and estimates used in
the preparation of the consolidated financial statements.
Approximately 33% of our assets as of March 31, 2002 consist of goodwill
and other intangible assets, most of which have been acquired in business
combinations and were recorded based on the fair value of the common stock we
issued to effect those business combinations. We adopted SFAS No. 142 on January
1, 2002 and recorded a charge of $206.6 million to reduce the carrying value of
our intangible assets to their estimated fair value as of January 1, 2002.
Ongoing analyses of whether the fair value of recorded goodwill is impaired will
involve a substantial amount of judgment, as will establishing and monitoring
estimated lives of amortizable intangible assets. Future charges related to
intangible assets could be material depending on future developments and changes
in technology and our business.
We have invested in public and private companies for business and strategic
purposes. As of March 31, 2002, the carrying value of our publicly held and
privately held investments was $8.4 million and $22.5 million, respectively. The
determination as to whether a decline in the fair value of a publicly held
security is other-than-temporary requires a considerable amount of judgment.
However, determining whether other-than-temporary declines in the fair values of
investments in the equity securities of private companies have occurred requires
an even higher level of judgment due to the absence of an observable market
price for the investment. We regularly review the status of our private company
investees to determine whether such a decline has occurred. However, this
determination involves various assumptions about the investee companies'
business prospects in addition to an understanding of their capital structure
and financing developments. To the extent the companies in which we have
invested experience significant business difficulties in the future, we may
record additional impairment charges beyond those incurred during the three
months ended March 31, 2002.
19
We periodically evaluate whether the declines in fair value of our
investments are other-than-temporary. This evaluation consists of a review by
members of senior management in finance and treasury. For investments in
companies with publicly quoted market prices, we compare the market price to the
investment's carrying value and, if the quoted market price is less than the
investment's accounting basis for an extended period of time, generally six
months, we then consider additional factors to determine whether the decline in
fair value is other-than-temporary. These include the financial condition,
results of operations and operating trends for each of the companies, as well as
publicly available information regarding the investee companies, including
reports from investment analysts. We also consider our ability and intent to
hold the investment for a period of time sufficient to allow for any anticipated
recovery in fair value, specific adverse conditions causing a decline in fair
value of a particular investment, conditions in an industry or geographic area,
seasonal factors, downgrading of a debt security by a rating agency, and, if
applicable, whether dividends have been reduced or eliminated, or scheduled
interest payments on debt securities have not been made. For investments in
private companies with no quoted market price, we consider 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. We obtain periodic financial statements from the private company
investees to assist us in reviewing relevant financial data and to assist us in
determining whether such data may indicate other-than-temporary declines in fair
value below the investment's carrying value.
A portion of our revenue is earned from advertising barter transactions.
The determination of the fair value of consideration given and received requires
judgment. For advertising barter transactions, we identify comparable cash
transactions, as required by EITF Issue No. 99-17, to determine the amount of
revenue and expense to be recorded for the advertising we receive and surrender
in such transactions. We also record revenue from arrangements that contain
multiple revenue-generating activities. In such arrangements, we recognize
revenue for individual elements where evidence of the fair value of the
individual elements exists. Where no such evidence exists, revenue is recognized
for the individual components as one element.
Historical Results of Operations
We have incurred losses since our inception and, as of March 31, 2002, we
had an accumulated deficit of approximately $1.2 billion, which includes
impairment and amortization of intangibles of approximately $780.8 million. For
the three months ended March 31, 2002, our net loss was $240.5 million,
including $206.6 million for the cumulative effect of a change in accounting
principle, amortization of intangibles of $5.9 million and $16.9 million loss on
investments. For the three months ended March 31, 2001, our net loss was $124.4
million, including $63.9 million in amortization of intangibles and $47.6
million loss on investments.
We believe that our future success will depend largely on our ability to
continue to offer products and application services to merchants and on
wireline, wireless and broadband platforms that are attractive to our existing
and potential future customers. Accordingly, we will need to, among other
things:
. develop and continually enhance our technology and products and
services;
. continue to up-sell and retain our existing carrier partners;
. expand our base of international customers;
. increase capital equipment expenditures to meet service level
agreement requirements and build out redundant delivery infrastructure
in North America, Europe and Asia; and
. sell additional services to our existing merchants and merchant
aggregator partners and grow our network of merchants.
20
In light of the rapidly evolving nature of our business and limited
operating history, we believe that period-to-period comparisons of our revenues
and operating results are not necessarily meaningful, and you should not rely
upon them as indications of future performance. We do not believe that our
historical growth rates are necessarily sustainable or indicative of future
growth. Our future operating results may fall below the expectations of
securities analysts or investors, which would likely cause the trading price of
our common stock to decline.
Results of Operations for the Three Months Ended March 31, 2002 and 2001
Revenues. Our revenues are derived from our products and application
services, which are delivered to end-users on wireline, wireless and broadband
platforms and to merchants via merchant aggregators including merchant banks. We
tailor agreements to fit the needs of our customers, which include merchant
banks and aggregators, broadband providers, destination Web sites and wireless
carriers, among others. Under any one agreement we may earn revenue from a
combination of our products and application services.
Revenues were $33.1 million in the quarter ended March 31, 2002 compared to
$46.6 million for the three months ended March 31, 2001. The decline in total
revenue from 2001 to 2002 reflects several factors including our decision in the
first quarter of 2001 to de-emphasize direct-to-consumer properties including
certain destination sites acquired in the Go2Net merger, our decision to not
pursue agreements that are short term and comprised of non-recurring revenue
streams, such as barter agreements, beginning in the third quarter of 2001, and
declines in general economic conditions in the United States.
Revenues for wireline were $14.4 million in the three months ended March
31, 2002 compared to $27.8 million in the three months ended March 31, 2001. The
decline in total revenue reflects several factors including our decision in the
first quarter of 2001 to de-emphasize direct-to-consumer properties including
certain destination sites acquired in the Go2Net merger, our decision to not
pursue agreements that are short-term and comprised of non-recurring revenue
streams and declines in general economic conditions during the year.
Revenues for merchant were $12.1 million in the three months ended March
31, 2002 compared to $9.9 million in the three months ended March 31, 2001. The
growth is primarily due to the growth in the number of merchants using and
transactions being processed on our payment platform and new long-term
agreements for our merchant promotion services in the US and Canada. Verizon
Information Services accounted for more than 10% of our total revenues for the
three months ended March 31, 2002.
Revenues for wireless were $6.6 million in the three months ended March 31,
2002 compared to $8.8 million in the three months ended March 31, 2001. The
change reflects the slower than anticipated adoption of wireless data services
due to current limitations such as slow data speeds and usability and reduced
spending by wireless carriers due to declines in general economic conditions. In
the fourth quarter of 2001, we restructured our relationship in Brazil, whereby
our partner assumed the costs and risks for developing the market while we will
continue to provide them our platform and application services on a profit share
basis. In addition, during July 2001 we sold certain assets related to the
enterprise portion of our speech solutions business. We are currently in
negotiations to restructure our relationship with Verizon Wireless, and we do
not expect our relationship to continue in its current form.
21
Included in revenue are barter revenues generated from non-cash
transactions as defined by Emerging Issues Task Force (EITF) Issue No. 99-17,
Accounting for Advertising Barter Transactions. Revenue is recognized when we
complete all of our obligations under the agreement. For non-cash agreements, we
record a receivable or liability at the end of the reporting period for the
difference in the fair value of the services provided or received. We recognized
barter revenue of $123,000 for the three months ended March 31, 2002 and $2.1
million for the three months ended March 31, 2001 from these non-cash
agreements. Non-cash transactions are common in our industry. Generally, these
transactions consist of the right to place Internet advertisements. For the
three months ended March 31, 2002, barter advertising expense was $174,000
compared to $2.4 million in the three months ended March 31, 2001. We expect
barter revenue in 2002 will continue to decrease from the amount of barter
revenue recorded in 2001.
We hold warrants and stock in public and privately held companies for
business and strategic purposes. Some of these warrants were received in
conjunction with equity investments. Additionally, some warrants and stock were
received in connection with business agreements whereby we provide our products
and services to the issuers. Some of these agreements contain provisions that
require us to meet specific performance criteria in order for the stock or
warrants to vest. When we meet our performance obligations we record revenue
equal to the fair value of the stock or warrant. If no future performance is
required, we recognize the revenue on a straight-line basis over the contract
term. Fair values are determined through third party investors or independent
appraisal. We recorded revenue in the amount of $752,000 for recognition of
deferred revenue associated with stock and warrants for the three months ended
March 31, 2002. We recognized $9.5 million for vesting in warrants and
recognition of deferred revenue associated with stock and warrants for the three
months ended March 31, 2001. We expect warrant revenue in 2002 will continue to
decrease from the amount of warrant revenue recorded in 2001.
Promotions and warrant revenues earned from companies in which we own stock
are considered related party revenues, including independent agreements entered
into during the current year with companies that we or Go2Net invested in during
prior years. During the three months ended March 31, 2002, we made no new
investments in private or public companies. From time to time, in the normal
course of business, we have entered into agreements to provide various
promotional services for companies in which we previously made an investment. In
addition, we have deferred revenue from warrants that were earned from a company
in which we have an investment. For the three months ended March 31, 2002,
related party revenue was $813,000, including $514,000 of the $752,000 of stock
and warrant revenue discussed above, compared to $8.4 million for the three
months ended March 31, 2001.
22
Cost of Revenues. Cost of revenues consists of expenses associated with the
delivery, maintenance and support of our products and application services,
including direct personnel expenses, communication costs such as high-speed
Internet access, server equipment depreciation, and content license fees. Cost
of revenues were $9.7 million, or 29% of revenue for the three months ended
March 31, 2002, compared to $11.7 million, or 25% of revenue for the three
months ended March 31, 2001. Approximately 89% of cost of revenues in the
quarter ended March 31, 2002 was comprised of personnel costs and other costs
that support products and application services, including data licenses,
depreciation, and equipment.
The absolute dollar decrease of cost of revenues for the three months ended
March 31, 2002 was primarily attributable to a decrease in salaries and benefits
due to the reduction of workforce and a decrease in the use of professional
services. In the near term, the majority of our expenses in cost of revenue are
fixed. Accordingly, we would expect our cost of revenues as a percentage of
revenues to decrease as our revenues increase.
Product Development Expenses. Product development expenses consist
principally of personnel costs for research, development, support and ongoing
enhancements of the proprietary software, application services and solutions we
deliver to our customers across wireline, wireless and broadband networks.
Product development expenses were $9.4 million, or 28% of revenue, for the three
months ended March 31, 2002, compared with $11.8 million, or 25% of revenue, for
the three months ended March 31, 2001. Approximately 91% of product development
expenses in the quarter ended March 31, 2002 was comprised of personnel costs.
The absolute dollar decrease for the three months ended March 31, 2002 was
primarily attributable to a decrease in salaries and benefits due to the
reduction of workforce and a decrease in the use of professional services.
Generally, product development costs are not consistent with changes in revenue
as they represent key infrastructure costs to develop and enhance service
offerings and are not directly associated with current period revenue. We
believe that continued significant investments in technology are necessary to
remain competitive.
Sales, General and Administrative Expenses. Sales, general and
administrative expenses consist primarily of salaries and related benefits for
sales, general and administrative personnel, carriage fees, professional service
fees, occupancy and general office expenses, business development and management
travel expenses and advertising and promotion expenses. Sales, general and
administrative expenses were $27.1 million, or 82% of revenues, for the three
months ended March 31, 2002 compared to $36.1 million, or 78% of revenues, for
the three months ended March 31, 2001. Approximately 79% of sales, general and
administrative expenses in the three months ended March 31, 2002 were comprised
of personnel costs, professional services (including $3.5 million in legal
fees), carriage fees, occupancy costs, and depreciation. The absolute dollar
decrease for the three months ended March 31, 2002 is attributable to reduced
salaries and benefits from our realignments in the first and third quarters of
2001, reduced barter advertising expense and recovery of bad debts of $237,000
from receiving payment on a receivable that had been previously written off as
not collectible. We expect sales, general and administrative expenses to
continue to decline in absolute dollars in 2002 compared to 2001.
23
Amortization of Intangible Assets. Amortization of intangible assets in
2002 includes amortization of core technology contract lists and other
intangibles. For periods prior to 2002, amortization of intangibles included
amortization of goodwill, core technology, purchased domain names, trademarks,
contract lists and assembled workforce. Amortization of other intangible assets
was $5.9 million in the three months ended March 31, 2002, compared to $5.2
million in the three months ended March 31, 2001.
Effective January 1, 2002, goodwill and other specific intangible assets
are no longer subject to amortization (see Cumulative Effect of Change in
Accounting Principle). As a result, we did not record an expense for
amortization of goodwill in the quarter ended March 31, 2002. Amortization of
goodwill was $58.7 million for the three months ended March 31, 2001. Other
intangible assets are scheduled to be fully amortized by 2007 with corresponding
amortization expense estimated to be $12.7 million for the remainder of 2002,
$14.2 million for fiscal 2003, $10.6 million for fiscal 2004, $3.3 million for
fiscal 2005, $845,000 for fiscal 2006 and $55,000 for fiscal 2007.
Other charges. Other charges consist of one-time costs and/or charges that
are not directly associated with other operating expense classifications. Other
charges for the three months ended March 31, 2002, consists of a $50,000
reduction of an estimated liability for settlement of a litigation case. Other
charges for the three months ended March 31, 2001, consisted of expenses
associated with an additional $1.0 million allowance for a note receivable and
$950,000 for settlement charges on a litigation matter, offset by a $2.0 million
decrease to an estimated liability for past overtime worked.
Loss on Investments. Loss on investments consists of losses from declines
in the fair value of derivative instruments held, losses on investments marked
to fair value in the InfoSpace Venture Capital Fund 2000 LLC (the Venture Fund)
during the three months ended March 31, 2001 and realized gains and losses on
investments and impairment on investments.
Changes in fair values of derivative instruments held: Effective
January 1, 2001, we adopted SFAS No. 133 which requires us to adjust our
derivative instruments to fair value and recognize the change in the fair value
in earnings. We hold warrants to purchase stock in other companies, which
qualify as derivatives. For the three months ended March 31, 2002, we recognized
a $1.2 million loss from the net decrease in fair value of these warrants. For
the three months ended March 31, 2001, we recognized a $6.5 million loss from
the net decrease in the fair value of these warrants.
Impairment on investments: Our management determined that the decline
in value was other-than-temporary for ten investments in the quarter ended March
31, 2002. For the three months ended March 31, 2002, we recorded impairment
charges of $15.7 million. For the three months ended March 31, 2001, we recorded
impairment charges of $42.0 million.
Our management periodically evaluates whether the declines in fair value of
our investments are other-than-temporary. This evaluation consists of a review
by members of senior management in finance and treasury. For investments in
companies with publicly quoted market prices, we compare the market price to the
investment's carrying value and, if the quoted market price is less than the
investment's accounting basis for an extended period of time, we then consider
additional factors to determine whether the decline in fair value is
other-than-temporary. These include the financial condition, results of
operations and operating trends for each of the companies, as well as publicly
available information regarding the investee companies, including
24
reports from investment analysts. We also consider our ability and intent to
hold the investment for a period of time sufficient to allow for any anticipated
recovery in fair value, specific adverse conditions causing a decline in fair
value of a particular investment, conditions in an industry or geographic area,
seasonal factors, downgrading of a debt security by a rating agency, and, if
applicable, whether dividends have been reduced or eliminated, or scheduled
interest payments on debt securities have not been made. For investments in
private companies with no quoted market price, we consider 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. We obtain periodic financial statements from the private company
investees to assist us in reviewing relevant financial data and to assist us in
determining whether such data may indicate other-than-temporary declines in fair
value below the investment's carrying value.
Other Income, Net. Other income, consisting primarily of interest income,
was $2.1 million in the three months ended March 31, 2002 and was $6.0 million
in the three months ended March 31, 2001. The decrease is primarily due to
reduced cash and marketable investments as of March 31, 2002 as compared to
March 31, 2001, as well as lower interest rates. The average interest rate
earned from our cash, cash equivalents and marketable securities for the three
months ended March 31, 2002 was 3.90%, as compared to 5.85% for the three months
ended March 31, 2001.
We have reinvested and may in the future reinvest part of our fixed income
securities in non-interest bearing equity instruments and investments. We
anticipate that our investments in internally developed technology may require
greater cash uses in the future. With these factors, we anticipate that our
interest income from our fixed securities will decrease in the second quarter of
2002 compared to the first quarter of 2002. With the lower short-term rates, we
continue to expect lower yields on our cash, cash equivalents and marketable
investments and expect our interest income to be lower in 2002 compared to 2001.
Income Tax Expense. We have recorded income tax expense of approximately
$144,000 for the three months ended March 31, 2002 for our operations in Europe.
We expect to continue to record a tax provision for our international operations
and do not anticipate recording a U.S. federal tax provision for the remainder
of 2002.
Cumulative Effect of Change in Accounting Principle. Effective July 1,
2001, we adopted certain provisions of Statement of Financial Accounting
Standards (SFAS) No. 141, Business Combinations, and effective January 1, 2002,
we adopted the full provisions of SFAS No. 141 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 apart from goodwill.
In accordance with SFAS No. 142, we evaluated the classification of our
intangible assets using the criteria of SFAS No. 141, which resulted in $1.0
million of intangible assets (comprised entirely of assembled workforce
intangibles) being classified into goodwill at January 1, 2002.
25
SFAS No. 142 requires that purchased goodwill and certain indefinite-lived
intangibles no longer be amortized into results of operations, but instead be
tested for impairment at least annually. We evaluated our other intangible
assets, which include core technology, customer lists and other, and determined
that substantially all such assets have definite lives. As of March 31, 2002,
the amount of intangible assets (comprised of domain name and trademark
intangibles) that have been determined to have indefinite lives, and therefore
not subject to amortization, is $313,000. This amount is included in goodwill,
net on our consolidated balance sheet as of March 31, 2002.
SFAS No. 142 prescribes a two-phase process for impairment testing of
goodwill. The first phase, required to be completed by June 30, 2002, screens
for impairment; while the second phase, required to be completed by December 31,
2002, measures the impairment. We completed both phases of impairment analysis
during the three months ended March 31, 2002 and determined that the value of
our recorded goodwill was impaired as of January 1, 2002. Accordingly, we
recorded a non-cash charge for the cumulative effect of change in accounting
principle of $206.6 million as of January 1, 2002, as impairment of goodwill.
This amount was determined based on independent valuations of the our reporting
units as of January 1, 2002 using a combination of our quoted stock price and
projections of future discounted cash flows for each reporting unit.
On January 1, 2001, we adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts. All derivatives, whether designated in
hedging relationships or not, are required to be recorded on the balance sheet
at fair value and changes in fair value are recognized in earnings unless
certain hedge criteria are met. As a result of adopting SFAS No. 133, we
recorded a charge of $3.2 million to record warrants held to purchase stock in
other companies at their fair value as of January 1, 2001. This amount was
recorded as a cumulative effect of change in accounting principle. As of
December 31, 2000, warrants to purchase stock in public companies were held at
fair value, with unrealized gains and losses included in accumulated other
comprehensive loss, and warrants to purchase stock in private companies were
held at cost.
Liquidity and Capital Resources
We invest our excess cash in high quality marketable investments, which are
rated at least A-1, P-1. These investments are classified on the balance sheet
in three captions: cash and cash equivalents, short-term investments and long
term investments based on their relative maturity dates. As of March 31, 2002,
we had cash, cash equivalents and short-term investments available-for-sale of
$209.6 million and long-term investments available-for-sale of $65.7 million,
for a total of cash and marketable investments of $275.3 million.
We have pledged a portion of our cash and cash equivalents as collateral
for standby letters of credit, future monthly lease payments for certain of our
property leases and a bank guaranty. At March 31, 2002, the total amount of
collateral pledged under these agreements was approximately $4.9 million, which
consisted of $4.0 million of standby letters of credit, $546,000 of lease
commitments and $342,000 of bank guaranty.
Net cash used by operating activities was $13.0 million for the three
months ended March 31, 2002. The use of cash in operating activities for the
three months ended March 31, 2002 included a cash outlay of $3.6 million for the
prepayment of annual insurance premiums and $1.5 million of transition charges
related to the Giant Bear acquisition.
26
Net cash used by investing activities was $10.0 million for the three
months ended March 31, 2002. The key components of the net cash used for the
three months were $33.2 million invested in short-term investments with a
maturity of 365 days or less, $2.4 million in purchases of fixed assets and $2.5
million in business acquisition costs for the purchase of certain assets from
eCash Technologies. Offsetting these amounts was $28.1 million of long-term
investment maturities.
Net cash provided by financing activities in the three months ended March
31, 2002 was $596,000. Cash proceeds from financing activities resulted from the
exercise of stock options and from sales of shares through the employee stock
purchase plan.
We believe that existing cash balances, cash equivalents and cash
generated from operations will be sufficient to meet our anticipated cash needs
for working capital and capital expenditures for at least the next 12 months.
However, the underlying assumed levels of revenues and expenses may not prove to
be accurate. We may seek additional funding through public or private financings
or other arrangements prior to such time. Adequate funds may not be available
when needed or may not be available on favorable terms. If we raise additional
funds by issuing equity securities, dilution to existing stockholders will
result. If funding is insufficient at any time in the future, we may be unable
to develop or enhance our products or services, take advantage of business
opportunities or respond to competitive pressures, any of which could harm our
business.
Acquisitions
eCash Technologies, Inc. On February 8, 2002, we acquired certain assets of
eCash Technologies, Inc (eCash), a developer of electronic debit and stored
value technologies, for purchase consideration of $2.7 million and 1,064,815
shares of our common stock valued at $1.9 million.
Factors Affecting Our Operating Results, Business Prospects and Market Price of
Stock
You should carefully consider the financial risks and uncertainties described
below and all of the information contained in this report 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.
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 March 31, 2002. As
of March 31, 2002, we had an accumulated deficit of approximately $1.2 billion.
We have not achieved profitability under accounting principles generally
accepted in the United States of America (GAAP) and we expect to continue to
incur operating losses in the future. These losses may be higher than our
current losses from operations. Many of our operating expenses are relatively
fixed in nature, particularly in the short term. We must therefore generate
revenues sufficient to offset these expenses in order for us to become
profitable under GAAP. We cannot assure you that we will successfully generate
sufficient revenues or that we will ever achieve profitability under GAAP. If we
do achieve profitability, we may not be able to sustain it.
27
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 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 application services;
... our ability to attract and retain customers;
... the amount and timing of fees we pay to Web portals 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, or other companies that
compete with us or our customers; and
... the inability of our customers to pay us or to fulfill their contractual
obligations to us.
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.
We operate in new and rapidly evolving markets, and our business model continues
to evolve, which makes it difficult to evaluate our future prospects.
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 banks and
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.
28
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 $0.75 to $138.50 (as adjusted for stock splits). On May 13, 2002,
the closing price of our common stock was $0.79. 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 wireless communications, Internet and online
commerce industries;
... announcements of significant acquisitions, strategic partnerships, joint
ventures or capital commitments by us, our customers or our competitors;
... announcements relating to litigation and similar matters; 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.
In order to continue to be listed on the Nasdaq National Market, we must
meet specific quantitative standards, including a minimum bid price. If our
stock trades below $1.00 per share for 30 consecutive business days, we may
receive a notice from the Nasdaq National Market that we need to comply with the
requirements for continued listing within 90 calendar days from such
notification or be delisted. While we have not received any notice regarding
non-compliance or delisting from Nasdaq, a delisting of our common stock could
adversely affect the liquidity and trading price of our securities.
29
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
services, including licensing and advertising revenue from our customers. Based
upon our reliance on revenues from wireline services, total revenues may decline
if revenues from our wireline services do not meet our expectations.
As a result of unfavorable market or economic conditions, some of our
wireline customers are having difficulty raising sufficient capital to support
their long-term operations or are otherwise experiencing adverse business
conditions. These customers may not be able to pay us some or all of the fees
they are required to pay us under their existing agreements or may not be able
to enter into new agreements. If we are unable to collect these fees or enter
into new agreements, our operating results will be harmed.
If we are unable to continue the diversification of our revenues, a significant
portion of our revenues will continue to be derived from wireline products and
application services, which could weaken our financial position.
For 2002, we expect more of our total revenues to come from our merchant
and wireless business areas than in prior years. Our ability to diversify our
revenues could be hindered by numerous risks, including:
... our ability to effectively develop, market and sell our products and
application services to new and existing customers;
... the continued development of electronic commerce on the Internet;
... the adoption of our products and application 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 products and application services by subscribers on their
wireless devices.
30
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 56% of our revenues for the three
months ended March 31, 2002 and 38% of our revenues for the year ended December
31, 2001. No single customer accounted for more than 10% of our revenues in
fiscal year 2001. However, Overture and Verizon each accounted for more than 10%
of our revenues for the three months ended March 31, 2002. Verizon includes
Verizon Information Services, a customer using our merchant services, Verizon
Wireless, a customer using our wireless services and Verizon Online, a customer
using our broadband services. We are currently in negotiations to restructure
our relationship with Verizon Wireless, and we do not expect our relationship to
continue in its current form. The terms of any future contract are currently
uncertain. If we lose any of these customers, or if any of these customers are
unable or unwilling to pay us amounts that they owe us, our financial results
will suffer.
Our 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.
In addition, recent changes in GAAP require us to discontinue amortizing
goodwill and certain intangibles. We adopted these changes effective January 1,
2002. Under this approach, goodwill and certain intangibles will not be
amortized into results of operations, but instead will 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. On January 1, 2002, we recorded a non-cash, non-operating
charge in the amount of $206.6 million for the cumulative effect of adopting
this new standard.
We will continue to regularly evaluate the recorded amount of our
long-lived assets including acquired contracts and core technology 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.
Goodwill will be evaluated at least annually. We are unable to predict the
amount, if any, of potential future impairments.
Our revenues are dependent on our relationships with companies who distribute
our application services.
We will not be able to continue generating revenues from advertising,
commerce transaction fees and subscription fees unless we can secure and
maintain distribution for our products and application services on acceptable
commercial terms through a wide range of customers and resellers including Web
portals, merchant banks and other financial institutions, and wireless carriers
who provide access to our products and application services to their customers.
In particular, we expect that America Online, Inc. (AOL), its CompuServe and
Digital City
31
divisions and Microsoft Network, LLC (MSN), will account for a substantial
portion of our wireline traffic. We also rely on our relationships with regional
Bell operating companies and other merchant banks and financial institutions,
including American Express and Wells Fargo, for distribution of our merchant
services. Our agreements with these companies typically are for between one and
three 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 pay carriage fees to AOL and MSN. If we lose a major Web
portal or destination Web site, we may be unable to timely or effectively
replace the traffic with comparable traffic patterns and user demographics.
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 arrangements that require us to pay
usage (per query) or fixed monthly fees for the use of the content or require us
to pay under an advertising revenue-sharing arrangement. In the future, some of
our content providers may 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.
Due to unfavorable economic conditions some of our customers 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
customers may lack sufficient capital to support their long-term operations. As
a result, these customers 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 customers from entering into contractual relationships or
other strategic business relationships with us.
Bad debt expense was (0.9)% of revenues for the three months ended March
31, 2002 and 2.7% of revenues for the year ended December 31, 2001. Management
regularly reviews all receivables for collectibility. We generally provide
allowances for all accounts sixty days or more past due and also allow for 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.
32
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:
... 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;
... during the past twelve to eighteen months, companies in the Internet and
e-commerce industries have experienced difficulties in raising capital to
fund expansion or continue operations; and, if available at all, financing
is often on unfavorable terms which may impair the value of our
investments;
... 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; 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. We determined that the decline
in value of our investments was other-than-temporary for ten investments in the
quarter ended March 31, 2002. We recognized non-cash losses totaling $16.9
million for the three months ended March 31, 2002 to record these investments at
their fair values as of March 31, 2002. During the year ended December 31, 2001,
we determined that the declines in value of twenty-two of our investments were
other-than-temporary and we recognized losses totaling $100.9 million, which
represented 20% of the net loss for the period, to record these investments at
their current fair values as of December 31, 2001. With the current economic
environment, it is difficult to accurately predict the amount of exposure to
future investment impairment. As of March 31, 2002, our other investments were
recorded at $30.9 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.
33
An audit of our payroll tax returns could result in material liabilities that
could adversely affect our financial position and results of operations.
The Internal Revenue Service is auditing our payroll tax returns for the
year 2000. We expect this audit to be concluded in 2002. No amounts have been
accrued in our financial statements, as we are not able to determine the amount
of the liability that may result, if any, at this time. If the Internal Revenue
Service determines that we owe additional payroll taxes, and the amount we owe
is material to us, our financial position and results of operations will be
adversely affected.
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 write-offs and amortization expenses related to
certain 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;
... impairing relationships with our employees, customers, merchant banks and
aggregators and wireless carriers;
... 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.
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.
34
PART II -- OTHER INFORMATION
Item 1. - Legal Proceedings
From time to time we have been, and expect to continue to be, subject to
legal proceedings and claims in the ordinary course of our business, including
claims of alleged infringement of third-party trademarks and other intellectual
property rights by us. These claims, even if not meritorious, could require the
expenditure of significant financial and managerial resources.
On June 19, 2001, a putative securities class action complaint entitled
Horton v. InfoSpace, Inc., et al. was filed in the United States District Court
for the Western District of Washington. The complaint alleges that InfoSpace and
its chief executive officer made false and misleading statements about
InfoSpace's business and prospects during the period between January 26, 2000
and January 30, 2001. The complaint alleges violations of the federal securities
laws and does not specify the amount of damages sought. Subsequently, other
similar complaints were filed. The Horton matter and the subsequent complaints
have been consolidated into one matter, captioned In re InfoSpace, Inc.
Securities Litigation. The Court has appointed lead plaintiffs and counsel, and
a consolidated complaint was filed on January 22, 2002, which, among other
things, added our chief financial officer as a defendant. On April 8, 2002,
defendants filed a motion to dismiss the complaint for failure to state a claim.
On April 11, 2002, plaintiffs filed a motion for leave of the Court to amend the
consolidated complaint to add Merrill Lynch & Co., Inc. and one of its analysts
as defendants, which was granted on April 30, 2002. The amended complaint was
filed on May 9, 2002. We believe we have meritorious defenses to these claims
but litigation is inherently uncertain and we may not prevail in this matter.
On March 19, 2001, a purported shareholder derivative complaint entitled
Youtz v. Jain, et al. was filed in the Superior Court of Washington for King
County. The complaint has been amended twice thus far and has been renamed
Dreiling v. Jain, et al. The complaint names as defendants current and former
officers and directors of ours and entities related to a few of the individual
defendants; InfoSpace is named as a "nominal defendant." The complaint alleges
that certain defendants breached their fiduciary duties to us and were unjustly
enriched by engaging in insider trading, and also alleges that certain
defendants breached their fiduciary duties in connection with the Go2Net and
Prio mergers and that one defendant converted our assets to his personal use.
Various equitable remedies are requested in the complaint, including
disgorgement, restitution, accounting and imposition of a constructive trust,
and the complaint also seeks monetary damages. As stated, the complaint is
derivative in nature and does not seek monetary damages from, or the imposition
of equitable remedies on, InfoSpace. We have entered into indemnification
agreements in the ordinary course of business with officers and directors and
may be obligated throughout the pendency of this action to advance payment of
legal fees and costs incurred by the defendant officers and directors pursuant
to our obligations under the indemnification agreements and applicable Delaware
law. The special litigation committee of our Board of Directors, with the
assistance of independent legal counsel, has investigated the complaint, and on
March 22, 2002 filed a motion to terminate this derivative action.
35
On December 18, 2000, an employee filed a complaint against us in the
United States District Court for the Western District of Washington alleging
claims for breach of contract, breach of the covenant of good faith and fair
dealing, and fraudulent and negligent misrepresentation. The suit also included
a claim against Naveen Jain, our Chief Executive Officer, for violations of the
Racketeer Influenced Corrupt Organizations (RICO) Act. The employee contends
that he agreed to work for us on the basis of an oral representation that he
would be granted more stock options than any other employee and that he would
always have more stock options than any other employee (other than Mr. Jain).
The employee also contends that he was falsely promised certain levels of
authority and support in his position. The employee seeks unspecified
compensatory damages from us as well as equitable relief. On March 29, 2001 the
court dismissed the plaintiff's claims for breach of the covenant of good faith
and fair dealing. On March 1, 2002, the court dismissed the employee's claims
for breach of contract, fraudulent and negligent misrepresentation with respect
to the alleged promise that the employee would always have more stock options
than any other InfoSpace employee, and violation of the RICO Act, and also
denied certain other motions by the plaintiff. The only surviving claim is
plaintiff's allegation of fraudulent and negligent misrepresentation based on
the alleged representation that the stock options received by the employee at
the time he was hired were the most given to any InfoSpace employee (other than
Mr. Jain). The parties are scheduled for trial on the surviving claim on June
24, 2002. We believe we have meritorious defenses to this claim. Nevertheless,
litigation is uncertain and we may not prevail in this suit.
In September of 2000, Go2Net sued FreeYellow.com, Inc. a Florida
corporation, and John Molino, FreeYellow's sole shareholder, in the Superior
Court of Washington for King County seeking to rescind its acquisition of
FreeYellow that closed in October of 1999, and in the alternative, seeking
damages. Molino denied the allegations, and asserted a counterclaim for breach
of the merger agreement. In October 2000, Go2Net was acquired by and became a
wholly owned subsidiary of InfoSpace. On August 6, 2001, Go2Net amended the
complaint to add a claim against FreeYellow and Molino under the Securities Act
of Washington ("WSA"). Both parties moved for summary judgment on the merits of
their respective claims, and those motions were denied. In February of 2002,
Go2Net moved for summary judgment to dismiss Molino's equitable defenses of
waiver and estoppel to Go2Net's WSA claim. Molino opposed that motion, and moved
to dismiss Go2Net's WSA claim. On March 8, 2002, the court granted Go2Net's
summary judgment motion and denied Molino's motion to dismiss. The case is
scheduled to go to trial on July 1, 2002. We believe we have meritorious claims
and defenses to these counter-claims. Nevertheless, litigation is uncertain and
we may not prevail in this suit.
Two of nine founding shareholders and three other shareholders of
Authorize.Net Corporation, a subsidiary acquired through our merger with Go2Net,
filed a lawsuit on May 2, 2000 in Utah State Court in Provo, Utah. This action
was brought to reallocate amongst the founding shareholders the consideration
received in the acquisition of Authorize.Net by Go2Net. The plaintiffs allege
that the corporate officers of Authorize.Net fraudulently obtained a percentage
of Authorize.Net shares greater than what was anticipated by the founding
shareholders, and are making claims under the Utah Uniform Securities Act as
well as claims of fraud, negligent misrepresentation, breach of fiduciary duty,
conflict of interest, breach of contract and related claims. Plaintiffs seek
compensatory and punitive damages in the amount of $200 million, rescission of
certain transactions in Authorize.Net securities, and declaratory and injunctive
relief. The plaintiffs subsequently amended the claim to name Authorize.Net as a
defendant with regard to the claims under the Utah Uniform Securities Act and
have asserted related claims against Go2Net. All dispositive motions in this
case are due on May 24, 2002. We have filed a motion for summary judgment on
behalf of Authorize.Net and have assertedscounterclaims against the plaintiffs.
We believe we have meritorious defenses to these plaintiffs' claims.
Nevertheless, litigation is uncertain and we may not prevail in this suit.
36
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 was amended on December 20, 1999 to allege that we
assumed the obligations of INEX under the alleged shareholders agreement as a
result of our acquisition of INEX on October 14, 1999. The plaintiff has agreed
to dismiss the complaint with prejudice and release all claims against
defendants in exchange for the defendants' agreement to forego collection of
litigation costs assessed against the plaintiff to date in the suit. The parties
have completed the settlement and an order dismissing the lawsuit was issued by
the court on April 25, 2002.
On December 5, 2001, a complaint entitled The boxLot Company v. InfoSpace,
Inc., et. al. was filed in the Superior Court of California for San Diego
County. The complaint names as defendants InfoSpace and certain of our current
and former directors, and alleges violations of state law in connection with the
asset purchase transaction between InfoSpace, Inc. and The boxLot Company in
December of 2000 and seeks monetary damages. Plaintiffs filed an amended
complaint on February 15, 2002. Plaintiffs subsequently dropped without
prejudice two of the defendants, current directors of InfoSpace, from the
action. We believe we have meritorious defenses to these claims but litigation
is inherently uncertain and we may not prevail in this matter.
From time to time we have been, and expect to continue to be, subject to
legal proceedings and claims in the ordinary course of our business, including
claims of alleged infringement of third-party trademarks and other intellectual
property rights by us. These claims, even if not meritorious, could require the
expenditure of significant financial and managerial resources.
Item 2. - Changes in Securities and Use of Proceeds
Not applicable with respect to the current reporting period.
Item 3. - Defaults Upon Senior Securities
Not applicable with respect to the current reporting period.
Item 4. - Submission of Matters to a Vote of Security Holders
Not applicable with respect to the current reporting period.
37
Item 5. Other Information.
We have revised our company insider trading policies to allow our
directors, officers and other employees to establish written plans which permit
automatic trading of our stock. These plans must comply with Rule 10b5-1 under
the Securities Exchange Act of 1934, and must be established at a time when the
director, officer or employee is not aware of material, non-public information.
Because the purpose of a 10b5-1 plan is to limit decision-making authority
regarding sales by the executive, our 10b5-1 plans require a six-month waiting
period before any changes to the plan can be implemented. This means our
executives do not have ability under the plan to modify their sales in
accordance with short-term market fluctuations. The plans may be terminated
without a waiting period.
In December 2001, Naveen Jain, our Chairman and Chief Executive
Officer, entered into trading plans that provide for daily share sales from
February 1, 2002 through January 31, 2003. These sales accounted for less than
1% per month of his total InfoSpace stock holdings based on his current
holdings. Mr. Jain terminated his trading plans effective May 13, 2002. From the
date of termination, Mr. Jain must wait for at least six months before entering
into another 10b5-1 trading plan. In addition, certain of our executive officers
had entered into trading plans in connection with the vesting of their
restricted stock grants. These trading plans have also been terminated.
Item 6. -- Exhibits and Reports on Form 8-K:
a. Exhibits
None.
b. Reports on Form 8-K
None.
38
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INFOSPACE, INC.
By: /s/ Tammy D. Halstead
----------------------------
Tammy D. Halstead
Chief Financial Officer
Dated: May 15, 2002
39