UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended June 30, 1999
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.COM, 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.)
15375 N.E. 90th Street 98052
Redmond, Washington (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (425) 882-1602
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___.
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class July 31, 1999
----- -------------
Common Stock, Par Value $.0001 47,400,652
INFOSPACE.COM, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I - Financial Information
Item 1. -- Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31,
1998............................................................................ 3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 1999 and 1998.......................................................... 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1999 and 1998.......................................................... 5
Notes to Condensed Consolidated Financial Statements................................. 6
Item 2. -- Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations................................................................ 13
Liquidity and Capital Resources...................................................... 17
Factors Affecting InfoSpace.com's Operating Results, Business Prospects and
Market Price of Stock........................................................... 19
Item 3. -- Quantitative and Qualitative Disclosures About Market Risk.................... 25
Part II - Other Information
Item 1. Legal Proceedings................................................................ 26
Item 2. Change in Securities and Use of Proceeds......................................... 26
Item 3. Defaults Upon Senior Securities.................................................. 26
Item 4. Submission of Matters to a Vote of Security Holders.............................. 26
Item 5. Other Information................................................................ 27
Item 6. -- Exhibits and Reports on Form 8-K............................................... 28
Signatures................................................................................ 29
2
Item 1. - Financial Statements
INFOSPACE.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998
ASSETS (unaudited)
------------- ------------
Current assets:
Cash and cash equivalents.................................................. $ 108,686,020 $ 14,590,634
Short-term investments..................................................... 58,940,865 72,159,522
Accounts receivable, net of allowance for doubtful accounts of
$562,000 and $597,000..................................................... 4,383,098 3,409,672
Notes receivable........................................................... 6,000,000 -
Prepaid expenses and other assets.......................................... 4,591,830 3,630,476
------------- ------------
Total current assets.................................................. 182,601,813 93,790,304
Long-term investments........................................................... 70,890,183 1,252,438
Property and equipment, net..................................................... 1,987,114 1,161,936
Intangible assets, net.......................................................... 19,094,433 5,276,880
Other investments............................................................... 6,194,331 370,790
Other........................................................................... 374,937 405,906
------------- ------------
Total assets.................................................................... $ 281,142,811 $102,258,254
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... 606,337 $ 1,586,118
Accrued expenses........................................................... 4,139,413 5,032,450
Deferred revenues.......................................................... 1,964,932 1,391,849
------------- ------------
Total current liabilities 6,710,682 8,010,417
Stockholders' equity
Preferred stock, par value $.0001-Authorized, 15,000,000 shares:
issued and outstanding, no shares - -
Common stock, par value $.0001-Authorized, 200,000,000 and
50,000,000 shares; issued and outstanding, 47,359,177 and
42,283,604 shares......................................................... 4,736 4,228
Additional paid-in capital................................................. 292,949,083 107,546,932
Accumulated deficit........................................................ (15,587,566) (9,865,672)
Deferred expense-warrants.................................................. (2,719,011) (3,126,862)
Unearned compensation-stock options........................................ (215,113) (310,789)
------------- ------------
Total stockholders' equity............................................ 274,432,129 94,247,837
------------- ------------
Total liabilities and stockholders' equity $ 281,142,811 $102,258,254
============= ============
See accompanying notes to condensed consolidated financial statements.
3
INFOSPACE.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Six Months Ended June 30, 1999 and 1998
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
(unaudited) (unaudited) (unaudited)
----------- ----------- ----------- -----------
Revenues...................................... $ 6,732,430 $ 1,839,570 $11,874,788 $ 2,855,010
Cost of revenues.............................. 1,127,601 286,609 1,960,140 498,653
----------- ----------- ----------- -----------
Gross profit............................. 5,604,829 1,552,961 9,914,648 2,356,357
Operating expenses:
Product development........................ 341,788 98,952 537,484 148,509
Sales and marketing........................ 6,348,448 505,802 10,196,949 951,671
General and administrative................. 1,715,448 523,337 3,387,287 833,543
Amortization of intangibles................ 304,661 106,582 603,940 120,805
Acquisition and related charges............ 4,912,500 2,800,000 4,912,500 2,800,000
Other - non-recurring charges.............. 209,500 240,000 209,500 240,000
----------- ----------- ------------ -----------
Total operating expenses................. 13,832,345 4,274,673 19,847,660 5,094,528
----------- ----------- ------------ -----------
Loss from operations..................... (8,227,516) (2,721,712) (9,933,012) (2,738,171)
Other income, net............................. 3,216,354 38,454 4,287,577 43,206
Equity in loss from joint venture............. (6,192) - (76,459) -
----------- ----------- ------------ -----------
Net loss...................................... ($5,017,354) ($2,638,258) ($5,721,894) ($2,694,965)
=========== =========== ============ ===========
Basic and diluted net loss per share.......... ($0.11) ($0.11) ($0.13) ($0.12)
=========== =========== ============ ===========
Shares used in computing basic and diluted
net loss per share............................ 46,939,309 24,183,960 44,680,837 23,144,812
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
4
INFOSPACE.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1999 and 1998
Six Months Ended
June 30,
---------------------------
1999 1998
(unaudited)
------------ -----------
Operating Activities
Net loss........................................................................ $ (5,721,894) $(2,694,965)
Adjustments to reconcile net loss to net cash provided (used) by operating
activities:..................................................................
Trademark amortization........................................................ 1,500,000 -
Depreciation and other amortization........................................... 924,979 207,307
Compensation expense-stock options............................................ 95,676 98,799
Warrants expense.............................................................. 407,851 -
Write-off of in process research and development.............................. 3,900,000 2,800,000
Noncash services exchanged.................................................... - 25,873
Bad debt expense.............................................................. 245,783 255,813
Equity in loss from joint venture............................................. 76,459 -
Loss on disposal of fixed assets.............................................. 1,904 -
Gain on sale of intangible.................................................... (7,830) -
Cash provided (used) by changes in operating assets and liabilities:
Accounts receivable...................................................... (1,219,209) (687,792)
Prepaid expense and other current assets................................. (2,461,354) 3,140
Other long-term assets................................................... 30,969 -
Other intangibles........................................................ - (30,913)
Accounts payable......................................................... (979,781) 40,601
Accrued expenses......................................................... (893,037) 412,271
Deferred revenue......................................................... 173,083 166,387
------------ ----------
Net cash provided (used) by operating activities (3,926,401) 596,521
Investing Activities
Business acquisitions......................................................... (18,083,054) (311,951)
Issuance of note receivable................................................... (6,000,000) -
Other investments............................................................. (5,500,000) -
Purchase of domain name....................................................... (100,000) -
Capitalized internally developed software..................................... (142,712) -
Sale of domain name........................................................... 10,000 -
Purchase of property and equipment............................................ (1,146,018) (73,009)
Long-term investments......................................................... (69,637,746) -
Short-term investments........................................................ 13,218,658 -
------------ ----------
Net cash used by investing activities (87,380,872) (384,960)
Financing Activities:
Proceeds from follow-on offering, net of expenses............................. 185,105,061 -
Payments for initial public offering.......................................... (55,464) -
Proceeds from issuance of other common stock to investors..................... - 5,238,748
Proceeds from exercise of stock options....................................... 353,062 -
------------ ----------
Net cash provided by financing activities 185,402,659 5,238,748
------------ ----------
Net Increase in Cash and Cash Equivalents........................................ 94,095,386 5,450,309
Cash and Cash Equivalents:
Beginning of period........................................................... 14,590,634 324,415
------------ ----------
End of period................................................................. $108,686,020 $5,774,724
============ ==========
Supplemental Disclosure of Noncash Activities
Settlement of note payable for noncash services............................... - 30,000
See accompanying notes to condensed consolidated financial statements.
5
INFOSPACE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The Company and Basis of Presentation
InfoSpace.com, Inc. (the Company), a Delaware corporation, is a leading Internet
infrastructure company that provides private label solutions for content,
community and commerce to web sites and Internet appliances. The Company was
founded in March 1996. The Company conducts its business within one industry
segment.
The accompanying unaudited financial statements include all adjustments,
consisting only 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 generally accepted accounting
principles, have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. Results of operations for the three
and six month periods ended June 30, 1999 are not necessarily indicative of
future financial results.
Investors should read these interim statements in conjunction with the audited
financial statements and notes thereto included in our annual report (Commission
File Number 0-25131) filed on Form 10-K for the fiscal year ended December 31,
1998. Certain prior period balances have been reclassified to conform to current
period presentation.
2. Other Investments
The Company invests in equity instruments of privately-held, information
technology companies for business and strategic purposes. These investments are
included in other long-term assets and are accounted for under the cost method.
For these investments, the Company's policy is to regularly review the
assumptions underlying the operating performance and cash flow forecasts in
assessing the carrying values. The Company identifies and records impairment
losses on long-lived assets when events and circumstances indicate that such
assets might be impaired. To date, no such impairment has been recorded.
On January 1, 1999 the Company purchased 250,000 shares of Series D Convertible
Preferred Stock of a privately held online merchant company at $2.00 per share
in a private placement transaction. On June 30, 1999, the Company received
80,000 shares of Series F Convertible Preferred Stock of the same online
merchant company in lieu of cash payment for services to be performed by the
Company in the future. These shares were valued at $5.00 per share in a private
placement transaction. The revenue on this transaction has been deferred and
will be recognized when the services are performed.
On June 15, 1999, the Company purchased 611,996 shares of Series E Convertible
Preferred Shares of a privately held provider of content solutions on the
Internet at $8.17 per share in a private placement transaction.
6
3. Acquisition
On June 30, 1999 the Company acquired the MyAgent technology and related assets
from Active Voice Corporation for $18 million dollars. The acquisition was
accounted for as a purchase in accordance with the provisions of Accounting
Principles Board Opinion ("APB") No. 16. Under the purchase method of
accounting, the purchase price is allocated to the assets acquired and the
liabilities assumed based on their fair values at the date of the acquisition.
Other than the MyAgent technology modules, no other assets or liabilities were
assumed as part of this acquisition.
The Company recorded a non-recurring charge of $3.9 million for in-process
research and development that had not yet reached technological feasibility and
had no alternative future use. The Company also recorded a one-time charge of
$1.0 million for expenses incurred with the transaction. These expenses
consisted of bonus payments made to certain Active Voice MyAgent team employees
who accepted employment with InfoSpace.com but who are under no agreement to
continue their employment with InfoSpace. The Company also recorded $13.7
million of goodwill and $480,000 of other intangible assets. These intangibles
will be amortized over their useful life, which the Company has estimated to be
five years.
The allocation of the purchase price is summarized as follows:
Fair value of purchased technology, including in-process
research and development $ 4,300,000
Fair value of assembled workforce 80,000
-----------
Fair value of net assets acquired $ 4,380,000
Purchase price:
Cash paid 18,000,000
Acquisition costs 100,000
-----------
Excess of purchase price over net assets acquired,
Allocated to goodwill (amortized over five years) $13,720,000
===========
The $4.3 million value of purchased technology includes purchased in-process
research and development for future InfoSpace products. Generally accepted
accounting principles require purchased in-process research and development with
no alternative future use to be recorded and charged to expense in the period
acquired. Accordingly, the results of operations for the quarter ended June 30,
1999, include the write-off of $3.9 million of purchased in-process research and
development. The remaining $400,000 represents the purchase of core technology
which is being amortized over an estimated useful life of five years.
The MyAgent product team was not accounted for as a separate entity, a
subsidiary, or a line of business, or division of the business, but rather was
rolled up as part of the research and development group. Accordingly, historical
financial information is not available. The Company expects these modules to be
fully integrated into the Company's full suite of Internet service offerings.
Further, the modules will not be distinguishable market segments for financial
reporting purposes or for management purposes.
7
In conjunction with the acquisition, the Company and Active Voice entered into a
License Agreement whereby Active Voice has the right to use the MyAgent
technology for a limited purpose as a product or service interfaced with or
integrated into a private telephone switch, or a voice messaging or unified
messaging system directly connected to a private telephone switch, or a packaged
software product for use by substantially all the employees of the enterprise.
4. Notes Receivable
On June 30, 1999, the Company loaned an unrelated third party $6.0 million.
The short-term note is due March 31, 2000 and accrues interest at 12% per annum.
The note is secured by all of the assets of the borrower.
5. Follow-on Offering
In April 1999, the Company closed a follow-on offering. The Company sold
2,170,000 shares and raised approximately $185 million, net of expenses.
Certain shareholders sold 1,510,000 shares.
6. Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash equivalents, short-term investments, and
trade receivables. The Company places its cash equivalents with major financial
institutions. The Company operates in one business segment and sells advertising
to various companies across several industries. Accounts receivable are
typically unsecured and are derived from revenues earned from customers
primarily located in the United States operating in a wide variety of industries
and geographic areas. The Company performs ongoing credit evaluations of its
customers and maintains reserves for potential credit losses. For the three and
six months ended June 30, 1999, one customer accounted for approximately 26% and
27% of revenues, respectively. At June 30, 1999, one customer accounted for
approximately 20% of gross accounts receivable. At December 31, 1998, one
customer accounted for approximately 27% of gross accounts receivable.
7. Reclassification of Expense
Management determined that distribution revenue share costs, previously
classified as Cost of Revenues, were more appropriately classified as Sales and
Marketing. Under these agreements, affiliates are paid a portion of certain
advertising revenues generated from traffic on co-branded distribution pages.
This reclassification has been made to the 1998 financial statements to conform
with the 1999 presentation.
To reflect ongoing expenses from core operations, management determined that
amortization of intangibles was more appropriately classified in one line item.
This reclassification has been made to the 1998 financial statements to conform
with the 1999 presentation.
8
The line item Other-non-recurring charges includes charges for settlement of
litigation. The 1998 financials have been adjusted to conform with the 1999
presentation.
8. Litigation Settlement
On July 23, 1999, the Company settled the patent infringement claim that was
filed by Civix-DDI, LLC in January 1999. Under the settlement agreement, the
patents have been licensed to the Company in exchange for a lump sum royalty
payment of $209,500. This settlement payment has been accrued in the quarter
ended June 30, 1999 and is reflected in Other-non-recurring charges.
9
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 Condensed Consolidated Financial Statements and Notes to Condensed
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 InfoSpace.com's 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, 1998 (the "Form 10-K"). You should not rely on
these forward-looking statements, which reflect only our opinion as of the date
of this report. We do not assume any obligation to revise forward-looking
statements.
Overview
InfoSpace.com, Inc. is a leading Internet infrastructure company that
provides private label solutions for content, community and commerce to web
sites and Internet appliances. We began operations in March 1996. During the
period from inception through December 31, 1996, we had insignificant revenues
and were primarily engaged in the development of technology for the aggregation,
integration and distribution of Internet content and the hiring of employees. In
1997, we expanded our operations, adding business development and sales
personnel in order to capitalize on the opportunity to generate Internet
advertising revenues. We began generating material revenues in 1997 through the
sale of advertising on the Web pages that deliver our content services.
We currently derive substantially all of our revenues from advertising,
which includes national, local and classifieds, promotions, including content
carriage, e-commerce, premium services, and from our non-advertising based
private label solutions. We tailor agreements to fit the needs of our partners,
and under any one agreement we may earn revenue from a combination of these
sources.
In order to evaluate and forecast revenue derived from these different
revenue sources, the principal revenue metric we utilize is productivity per
page. This metric measures our ability to generate revenue from traffic. To
compute revenue produced per page you divide total revenue for a reporting
period by the total number of page views in the same period, then multiply by
1,000. Productivity per page will vary due to the lag time it takes to monetize
our increasing traffic. For the three-month and six-month period ended June 30,
1999, traffic totaled 1.4 billion and 2.6 billion page views, respectively. This
compares to 375 million and 742 million page views for the three and six month
periods ended June 30, 1998. Revenue per thousand page views was $4.81 for the
second quarter of 1999, an increase of $.58 from $4.23
10
for the first quarter of 1999. We expect revenue per thousand page views for the
remainder of 1999 to range between $3.75 and $5.00.
We expect to incur significant operating losses on a quarterly basis in the
future. In light of the rapidly evolving nature of our business, and limited
operating history, we believe that period-to-period comparisons of our revenues
and operating results are not necessarily meaningful, and you should not rely on
them as indicators of future performance. Although we have experienced
sequential quarterly growth in revenues over the past eight quarters, we do not
believe that our historical growth rates are necessarily sustainable or
indicative of future growth.
MyAgent Technology Acquisition
On June 30, 1999 we acquired the MyAgent technology and related assets from
Active Voice Corporation for a cash payment of $18 million dollars. In addition
we hired six employees that comprised the MyAgent development team at Active
Voice. The acquisition was accounted for as a purchase in accordance with the
provisions of Accounting Principles Board Opinion ("APB") No. 16. Under the
purchase method of accounting, the purchase price is allocated to the assets
acquired and the liabilities assumed based on their fair values at the date of
the acquisition. Other than the MyAgent technology modules, no other assets or
liabilities were assumed as part of this acquisition.
The total purchase price of the acquisition was $18.1 million including
acquisition expenses of $100,000. The purchase price was allocated to the assets
acquired based on their estimated fair values as
follows:
In-process research and development $ 3,900,000
Core technology 400,000
Goodwill 13,720,000
Acquired workforce 80,000
-----------
$18,100,000
===========
We recorded a non-recurring charge of $3.9 million for in-process research
and development that had not yet reached technological feasibility and had no
alternative future use. We also recorded a one-time charge of $1.0 million for
expenses incurred with the transaction, which was separate from the purchase
price from Active Voice. These expenses consisted of bonus payments made to the
Active Voice MyAgent team employees who accepted employment with us on the date
of the MyAgent acquisition, but who have no obligation to continue their
employment with us.
Among the factors we considered in determining the amount of the allocation
of the purchase price to in-process research and development were various
factors such as estimating the stage of development of each module of the
technology, including the complexity and technical obstacles to overcome,
estimating the expected life of each module, estimating the amount of core
technology leveraged into the in-process projects, estimating cash flows
resulting from the expected revenues, margins, and operating expenses generated
from each module, and discounting to present value the cash flows associated
with the in-process technologies. We utilized a rate of return of 30% to
discount to present value the cash flows associated with the in-process
technologies.
11
Within the MyAgent technology there are three main modules, the Client,
Server Intelligence, and Web Interface. We intend to integrate the MyAgent
technology into the InfoSpace.com Web site and launch the technology with our
desktop portal. We also plan to offer a co-branded version to our affiliates as
part of our suite of co-branded service offerings. As of the date of
acquisition, we estimated that the Client, Server Intelligence, and Web
Interface were 50%, 49%, and 29% completed, respectively. The percentage
completed pre-acquisition for each module was based primarily on the evaluation
of three major factors: time-based data, cost-based data, and complexity-based
data.
The expected life of the modules being developed was assumed to be five
years, after which substantial modification and enhancement would be required
for the modules to remain competitive.
Our revenue assumptions for these modules were based on the number of page
views we estimate the desktop portal will generate, and the portion of those
page views we estimate will be attributable to the MyAgent technology modules.
We estimated that the number of page views will double as a result of the launch
of the desktop portal. We estimated that 50% of the incremental page view growth
would be attributable to the MyAgent modules. Page view revenue generated by the
desktop portal will vary from our standard page view revenue since fewer
advertisements can be placed on the desktop portal.
Our expense assumptions for these modules included cost of revenues, which
we estimated to be 17% of revenues in the first year and thereafter to drop to
9% as we will incur minimal costs as we leverage the technology in future
periods. Sales and marketing expenses combined with general and administrative
expenses were estimated to be 34% in the first year, and thereafter to drop to
22% of revenues. However, cost of revenues, sales and marketing expenses and
general and administrative expenses may vary, both in absolute dollars and as a
percentage of revenues.
While we believe that the assumptions discussed above were made in good
faith and were reasonable when made, such assumptions remain largely untested,
as the three modules are not yet in service. Accordingly, the assumptions we
made may prove to be inaccurate, and there can be no assurance that we will
realize the revenues, gross profit, growth rates, expense levels or other
variables set forth in such assumptions. Considering the inherent difficulty in
developing estimates of future performance for emerging technologies such as the
MyAgent modules, we utilized a relatively high rate of return (30%) to discount
to present value the cash flows associated with the in-process technologies. The
discount rate was selected based on evaluation of our weighted average cost of
capital, the weighted average return on assets, the internal rate of return
implied from the transaction, and management's assessment of the risk inherent
in the future performance estimates utilized in the valuation.
The Client and Server Intelligence are scheduled for completion and beta
testing in the fourth quarter of 1999 and for release in the first quarter of
2000. The Web Interface is scheduled for release in the second or third quarters
of 2000. Significant technology development efforts are necessary before any one
of these modules can successfully be completed and integrated into our full
suite of service offerings of on-line services available both on the our Web
site and on those of the our many affiliates Web sites. We plan to make the
Client modular and slim it down considerably in order shorten the download time.
As acquired, the Client does not have a mechanism to support co-branding. This
will need to be designed, developed, and tested.
We expect these modules to be fully integrated into our full suite of
Internet service offerings. Further, the modules will not be distinguishable
market segments for financial
12
reporting purposes or for management purposes. Consequently, there will be no
separate and distinguishable allocations or utilizations of net working capital,
and no specific charges for use of contributory assets. None of our operating
expenses are allocated to specific service offerings.
We do not expect to have the ability to calculate revenues specifically and
exclusively attributable to the integrated MyAgent technology. Further, the
absence of such attribution will not be material to any module's success. The
amount that we can charge customers for access and use of these modules will be
greatly influenced by market forces and competitors' pricing of their own
packaged and integrated offerings.
The MyAgent product team was not accounted for by Active Voice as a
separate entity, a subsidiary, or a line of business, or division of the
business, but rather was rolled up as part of the research and development
group. Accordingly, historical financial information was not available and we
were unable to utilize historical results of operations in the valuation of the
MyAgent technology.
Results of Operations
Revenues. For the three months ended June 30, 1999, revenues were $6.73
million, an increase of $4.90 million, or 266%, from the comparable period in
1998. For the six months ended June 30, 1999, revenues were $11.87 million, an
increase of $9.02 million or 316%, from the comparable period in 1998. The
increases from the prior year are primarily due to increased expansion of our
affiliate network, which now consists of more than 1,800 Web sites and Internet
appliances, increased traffic to our affiliate network that results in increased
page views, increased use of our content and commerce services, as well as
larger and longer term agreements with certain advertisers and affiliates.
Barter revenues represented 2% and 3% of total revenues for the three and six
month periods ended June 30, 1999, respectively.
We have experienced, and expect to continue to experience, seasonality in
our business, with reduced user traffic on our affiliate network expected during
the summer and year-end vacation and holiday periods, when usage of the Internet
has typically declined. Advertising sales in traditional media, such as
broadcast and cable television, generally decline in the first and third
quarters of each year. Depending on the extent to which the Internet and
commercial online services are accepted as an advertising medium, seasonality in
the level of advertising expenditures could become more pronounced for Internet-
based advertising. Seasonality in Internet service usage and advertising
expenditures is likely to cause quarterly fluctuations in our results of
operations.
Cost of Revenues. Cost of revenues consists of expenses associated with the
enhancement, maintenance and support of our content services, including direct
personnel expenses, communication costs such as high-speed Internet access with
dedicated DS-3 communication lines, server equipment depreciation, and license
fees related to third-party content. Cost of revenues was $1.13 million and
$1.96 million for the three and six months ended June 30, 1999, respectively,
representing 17% of revenues for both periods. This compares to $287,000 and
$499,000 for the three and six months ended June 30, 1998,
13
respectively. The absolute dollar increases are primarily attributable to
personnel costs and other costs incurred in order to support greatly increased
delivery of content and commerce solutions. We expect the absolute dollars spent
on personnel and enhanced content and expanded communication backbone will
continue to increase for the foreseeable future. We currently anticipate cost of
revenues will be in the range of high teens to low twenties as a percentage of
revenues for the remainder of 1999.
Product Development Expenses. Product development expenses consist
principally of personnel costs for research, design and development of the
proprietary technology used to aggregate, integrate and distribute our content
and commerce services. Product development expenses for the three and six months
ended June 30, 1999 increased 245% and 262% from the three and six months ended
June 30, 1998, to $342,000 and $537,000, respectively. The increases in absolute
dollars are primarily attributable to increases in engineering personnel needed
for continued development of our products and service offerings. We believe that
significant investments in technology are necessary to remain competitive.
Accordingly, we expect product development expenses to continue to increase in
absolute dollars as we hire additional engineering personnel who will develop
and enhance our proprietary technology.
On January 1, 1999 we adopted Statement of Position 98-1 (SOP 98-1),
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use, which requires certain product development costs to be capitalized and
amortized over future periods, which, prior to the adoption of SOP 98-1, were
expensed. For the three and six months ended June 30, 1999, we capitalized
approximately $64,000 and $143,000, respectively, of product development costs.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of salaries and related benefits for sales and marketing personnel,
advertising expenses, trademark licensing, carriage fees and distribution
revenue share paid to certain affiliates to include our content services on
their Web sites, sales office expenses and travel expenses. Sales and marketing
expenses were $6.35 million and $10.20 million for the three and six months
ended June 30, 1999, respectively. This compares to $506,000 and $952,000 for
the comparable periods in the prior year. The increases from the prior year were
primarily due to trademark licensing and carriage fees paid to certain
affiliates under agreements entered into during the third and fourth quarters of
1998, the launching of our first advertising campaign during the second quarter
of 1999, expansion of our business development group in Redmond and expansion of
our sales offices in San Francisco and New York. In accordance with our plan for
1999, in coming quarters we plan to continue our advertising and marketing
initiatives.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries, professional fees, occupancy and general office
expenses, B&O tax paid to the State of Washington on gross revenues and
franchise tax paid to the State of Delaware on total assets and outstanding
shares and bad debt expense. General and administrative expenses increased $1.19
million, or 228%, to $1.72 million in the three-month period ended June 30, 1999
compared with the comparable period in the prior year. For the six months ended
June 30, 1999, general and administrative expenses increased $2.55 million, or
306%, to $3.39 million compared with the comparable period in the prior year. As
a percent of revenues, general and administrative was 25% and 29% for the three
and six months ended June 30, 1999, respectively. The increases were primarily
due to increased staffing levels necessary to manage and support
14
our expanding operations and expansion of our facilities. Bad debt expense was
1.1% for the quarter ended June 30, 1999, compared to 8.2% in the same quarter
of 1998. We expect general and administrative expenses to range in the low to
mid 30's as a percent of revenues for the remainder of 1999.
Amortization of Intangibles. Amortization of intangibles includes
amortization of goodwill, core technology, purchased domain names, trademark and
assembled workforce. As part of the Outpost Network, Inc. acquisition in the
second quarter of 1998, we recorded intangible assets related to goodwill, core
technology and acquired workforce in the amount of $5.8 million. These
intangibles are being amortized over a five-year period which began in June
1998. As part of the June 1999 MyAgent technology acquisition, we recorded
intangible assets related to goodwill, core technology and acquired workforce in
the amount of $14.2. These assets are being amortized over a five-year period
beginning in July 1999.
Acquisition and Related Charges. Acquisition and other related charges
consists of in-process research and development and other one-time charges
related directly to acquisitions. In the second quarter of 1999, we recorded
$4.91 million in acquisition and other related charges in connection with the
purchase of the MyAgent technology. See "MyAgent Acquisition." In the second
quarter of 1998, we recorded $2.8 million in acquisition and other related
charges as part of the Outpost acquisition.
Other-non-recurring. Other-non-recurring charges in 1999 and 1998 consists
of costs associated with litigation settlements.
Other Income, Net. Other income consists primarily of interest income.
Other income increased to $3.22 million and $4.29 million in the three and six
month periods ended June 30, 1999, from $38,000 and $43,000 for the comparable
periods in 1998. The increases from the prior year were primarily due to
interest earned on higher average cash and investment balances resulting from
proceeds received from private financings in the third quarter of 1998, the net
proceeds from our initial public offering completed in December 1998 and our
follow-on offering completed in April 1999.
Equity in Loss from Joint Venture. Equity in loss from joint venture
consists of losses attributable to our 50% interest in TDL InfoSpace (Europe)
Limited, our joint venture with Thomson Directories Limited in the United
Kingdom. For the three and six months ended June 30, 1999, we recorded joint
venture losses totaling approximately $6,000 and $76,000, respectively. These
losses are due primarily to start-up operating costs and direct selling costs.
Provision for Income Taxes. Net operating losses have been incurred to date
on a cumulative basis, and no tax benefit has been recorded, as sufficient
uncertainty exists regarding the realizability of the deferred tax assets.
Net Loss. Our losses were $5.02 million and $5.72 million for the three and
six months ended June 30, 1999, respectively, compared to $2.68 million and
$2.69 million for the comparable periods in 1998. Our cumulative losses
sustained since inception total $15.59 million.
15
Quarterly and Seasonal Fluctuations. Our financial results have varied on a
quarterly basis and are likely to fluctuate substantially in the future. These
fluctuations may be caused by several factors, many of which are beyond our
control. These factors include:
. the addition or loss of affiliates;
. variable demand for our content and commerce solutions by our
affiliates;
. the cost of acquiring and the availability of content;
. the overall level of demand for content and commerce services;
. our ability to attract and retain advertisers and content providers;
. seasonal trends in Internet usage and advertising placements;
. the amount and timing of fees we pay to our affiliates to include our
content and commerce solutions on their Web sites;
. the productivity of our direct sales force and the sales forces of the
independent yellow pages publishers, media companies and direct
marketing companies that sell local Internet yellow pages advertising
for us;
. the amount and timing of increased expenditures for expansion of our
operations, including the hiring of new employees, capital
expenditures and related costs;
. our ability to continue to enhance, maintain and support our
technology;
. the result of litigation that is currently ongoing against
InfoSpace.com, or any litigation that is filed against us in the
future;
. our ability to attract and retain personnel;
. the introduction of new or enhanced services by us or our affiliates,
or other companies that compete with us or our affiliates;
. price competition or pricing changes in Internet advertising and
Internet services, such as ours;
. technical difficulties, system downtime, system failures or Internet
brown-outs;
. political or economic events and governmental actions affecting
Internet operations or content; and
. general economic conditions and economic conditions specific to the
Internet.
If one or more of these factors or other factors occur, our business could
suffer.
In addition, because InfoSpace.com only began operations in March 1996, and
because the market for Internet services such as ours is new and evolving, it is
very difficult to predict future financial results. We plan to significantly
increase our sales and marketing, research and development and general and
administrative expenses in the remainder of 1999. Our expenses are partially
based on our expectations regarding future revenues, and are largely fixed in
nature, particularly in the short term. As a result, if our revenues in a period
do not meet our expectations, our financial results will likely suffer.
16
Liquidity and Capital Resources
From our inception in March 1996 through May 1998, we funded operations
with approximately $1.5 million in equity financing and, to a lesser extent,
from revenues generated for services performed. In May 1998, we completed a $5.1
million private placement of our common stock, and in July and August 1998, we
completed an additional private placement of our common stock for $8.2 million.
Sales of our common stock to employees pursuant to our 1998 Stock Purchase
Rights Plan also raised $1.7 million in July 1998. Our initial public offering
in December 1998 yielded net proceeds of $77.8 million and a follow-on public
offering in April 1999 yielded net proceeds of $185.1 million. As of June 30,
1999, we had cash, cash equivalents and short-term investments of $167.6 million
and long-term investments of $70.89 million.
Net cash used by operating activities was $3.9 million for the six months
ended June 30, 1999. Cash used in operating activities for this period was
primarily comprised of net operating losses, increases in accounts receivable
and prepaid expenses and other assets, and decreases in accounts payable and
accrued expenses. These uses of cash were partially offset with the write-off of
in process research and development.
Net cash used in investing activities was $87.4 million in the six months
ended June 30, 1999. Cash used in investing activities consisted primarily of
business acquisitions, securities investments, other investments and note
receivable. The change in securities investments is primarily a result of
investing proceeds from the initial public and follow-on offerings in short and
long-term investments.
Net cash of $185.4 million was provided by financing activities for the six
months ended June 30, 1999, is primarily from proceeds received in the follow-on
offering in April 1999.
We anticipate we will spend up to $1.0 million for capital equipment in the
remainder of 1999. We have entered into various agreements that provide for us
to make payments for carriage fees of $4.2 million for the remainder of 1999.
At June 30, 1999, we had $238.5 million in cash and investments. We plan to
use this cash for strategic investments and acquisitions, investment in
internally developed technology and advertising and marketing campaigns.
We believe that existing cash balances, cash equivalents and cash generated
from operations will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 12 months.
However, the underlying assumed levels of revenues and expenses may not prove to
be accurate. We may seek additional funding through public or private financings
or other arrangements prior to such time. Adequate funds may not be available
when needed or may not be available on favorable terms. If we raise additional
funds by issuing equity securities, dilution to existing stockholders will
result. If funding is insufficient at any time in the future, we may be unable
to develop or enhance our products or services, take advantage of business
opportunities or respond to competitive pressures, any of which could harm our
business. See "Factors Affecting InfoSpace.com's Operating Results, Business
Prospects and Market Price of Stock--We May Require Additional Funding."
17
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. These date code fields will need to
accept four digit entries to distinguish 21st century dates. As a result, many
companies may need to upgrade, repair or replace their computer systems and
software ("IT Systems") and other property and equipment not directly associated
with IT Systems ("Non-IT Systems"), including ones with embedded technology such
as microcontrollers, in order to comply with Year 2000 requirements.
We have conducted an internal review of most of our internal IT Systems and
Non-IT Systems. Because we developed our software products and services
internally, beginning at inception in 1996 when the Year 2000 problem already
had some visibility, we were largely able to anticipate four digit requirements.
In conjunction with ongoing reviews of our own products and services, we are
also reviewing our IT infrastructure, including network equipment and servers.
We do not anticipate material problems with network equipment, as our current
configuration was installed in 1998. Similarly, most of our servers were
purchased in 1997 and 1998, and each server is being amortized over a three-year
period. With this relatively current equipment, we do not anticipate material
Year 2000 compliance problems, and any servers that we find cannot be updated
will be replaced either in the normal replacement cycle or on an accelerated
basis. We have also internally standardized our machines on Windows NT 4.0,
using reasonably current service packs, which we are advised by our vendor are
Year 2000 compliant.
We use multiple software systems for internal business purposes, including
accounting, email, development, human resources, customer service and support,
and sales tracking systems. All of these applications have been purchased within
the last three years. We have made inquiries of vendors of systems we believe to
be mission critical to our business regarding their Year 2000 readiness.
Although we have received various assurances, we have not received affirmative
documentation of Year 2000 compliance from any of these vendors, and we have not
performed any operational tests on our internal systems. We generally do not
have any contractual rights with third party providers should their equipment or
software fail due to Year 2000 issues. If this third party equipment or software
does not operate properly with regard to Year 2000, we may incur unexpected
expenses to remedy any problems. These expenses could potentially include
purchasing replacement hardware and software. We have not determined the state
of compliance of certain third-party suppliers of services such as phone
companies, long distance carriers, financial institutions and electric
companies, the failure of any one of which could severely disrupt our ability to
carry on our business.
We anticipate that our review of Year 2000 issues and any remediation
efforts will continue throughout calendar 1999. To date, we have spent less than
an estimated $10,000 to remediate our Year 2000 issues. If any Year 2000 issues
are uncovered with respect to these systems or our other internal systems, we
believe that these problems will be able to be resolved without material
difficulty as replacement systems are available on commercially reasonable
terms. We presently estimate that the total remaining cost of addressing Year
2000 issues will not exceed $100,000. These estimates were derived utilizing a
number of assumptions, including the assumption that we have already identified
our most significant Year 2000 issues. However,
18
these assumptions may not be accurate, and actual results could differ
materially from those anticipated. In view of our Year 2000 review and
remediation efforts to date, the recent development of our products and
services, the recent installation of our networking equipment and servers, and
the limited activities that remain to be completed, we do not consider
contingency planning to be necessary at this time.
Our applications operate in complex network environments and directly and
indirectly interact with a number of other hardware and software systems. We are
unable to predict to what extent our business may be affected if our systems or
the systems that operate in conjunction with it experience a material Year 2000
failure. Known or unknown errors or defects that affect the operation of our
software and systems could result in delay or loss of revenue, interruption of
services, cancellation of customer contracts, diversion of development
resources, damage to our reputation, increased service and warranty costs, and
litigation costs, any of which could adversely affect our business, financial
condition and results of operations. The most likely worst case scenario is that
the Internet fails and we are unable to offer our content and commerce services.
Factors Affecting Infospace.com's Operating Results, Business Prospects and
Market Price of Stock
In addition to other information in this report, investors evaluating us
and our business should carefully consider the following risk factors and the
additional risk factors set forth in our Form 10-K under the heading "Factors
Affecting InfoSpace.com Operating Results," including the following risks: our
business model is evolving and unproven, we rely on our relationships with
affiliates, we rely on third parties for sales of Internet yellow pages
advertising, advertisers may not adopt the Internet as an advertising medium,
our advertising arrangements involve risks, we depend on third parties for
content, we depend on key personnel, we need to hire additional personnel, our
international expansion plans involve risks, our business is highly competitive,
our business relies on the performance of our systems, our industry is
experiencing consolidation, we are subject to pending legal proceedings, we rely
on internally developed software and systems, rapid technological change affects
our business, we rely on the Internet infrastructure, we receive information
that may subject us to liability, our networks face security risks, we may be
unable to adequately protect or enforce our intellectual property rights, we may
become subject to government regulation, potential acquisitions involve risks,
management owns a large percentage of our stock, year 2000 issues could
adversely impact our business, our stock price has been and may continue to be
volatile, future sales of our common stock may depress our stock price, certain
anti-takeover provisions my affect the price of our stock. These risks may
impair our operating results and business prospects and the market price of our
stock. This report contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements include, but are not limited to,
statements regarding expected revenue per thousand page views, expected
operating losses, estimates made in determining the amount of the allocation of
the purchase price of the MyAgent technology and related assets to in-process
research and development, increased spending on personnel and enhanced content
and expanded communication backbone, anticipated cost of revenues, increased
product development expenses, plans for continued advertising and marketing
initiatives, expected levels of general and administrative expenses, anticipated
capital expenditures, anticipated cash needs and the absence of material Year
2000 compliance problems and the time frame and cost of addressing
19
any Year 2000 problems. Forward-looking statements are subject to known and
unknown risks, uncertainties and other factors that may cause our and the
strategic Internet services industry's actual results, levels of activity,
performance, achievements and prospects to be materially different from those
expressed or implied by such forward-looking statements. The risks set forth
below and elsewhere in this form report could cause actual results to differ
materially from those projected.
We Have a Limited Operating History and a History of Losses.
We have a very limited operating history, which makes it difficult to
evaluate our business and prospects. We have incurred net losses since our
inception in March 1996. At June 30, 1999, we had an accumulated deficit of
approximately $15.6 million. We expect to incur significant operating losses on
a quarterly basis in the future. We may never be profitable. Our prospects must
be considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as Internet services. To
address the risks we face and to be able to achieve and sustain profitability,
we must, among other things:
. develop and maintain strategic relationships with potential content
providers and affiliates;
. identify and acquire the rights to additional content;
. successfully integrate new features with our content and commerce
services;
. expand our sales and marketing efforts, including relationships with
third parties to sell local advertising for our Internet yellow pages
directory services;
. maintain and increase our affiliate and advertiser base;
. successfully expand into international markets;
. retain and motivate qualified personnel; and
. successfully respond to competitive developments.
If we do not effectively address the risks we face, our business will
suffer and we may never achieve or sustain profitability.
Our Financial Results Are Likely to Fluctuate.
Our financial results have varied on a quarterly basis and are likely
to fluctuate substantially in the future. These fluctuations may be caused by
several factors, many of which are beyond our control. These factors include:
. the addition or loss of affiliates;
. variable demand for our content and commerce solutions by our
affiliates;
. the cost of acquiring and the availability of content;
. the overall level of demand for content and commerce services;
20
. our ability to attract and retain advertisers and content providers;
. seasonal trends in Internet usage and advertising placements;
. the amount and timing of fees we pay to our affiliates to include our
content and commerce solutions on their Web sites;
. the productivity of our direct sales force and the sales forces of the
independent yellow pages publishers, media companies and direct
marketing companies that sell local Internet yellow pages advertising
for us;
. the amount and timing of increased expenditures for expansion of our
operations, including the hiring of new employees, capital
expenditures and related costs;
. our ability to continue to enhance, maintain and support our
technology;
. the result of litigation that is currently ongoing against
InfoSpace.com, or any litigation that is filed against us in the
future;
. our ability to attract and retain personnel;
. the introduction of new or enhanced services by us or our affiliates,
or other companies that compete with us or our affiliates;
. price competition or pricing changes in Internet advertising and
Internet services, such as ours;
. technical difficulties, system downtime, system failures or Internet
brown-outs;
. political or economic events and governmental actions affecting
Internet operations or content; and
. general economic conditions and economic conditions specific to the
Internet.
If one or more of these factors or other factors occur, our business could
suffer.
In addition, because InfoSpace.com only began operations in March 1996, and
because the market for Internet services such as ours is new and evolving, it is
very difficult to predict future financial results. We plan to significantly
increase our sales and marketing, research and development and general and
administrative expenses in 1999. Our expenses are partially based on our
expectations regarding future revenues, and are largely fixed in nature,
particularly in the short term. As a result, if our revenues in a period do not
meet our expectations, our financial results will likely suffer.
Our Business Is Seasonal.
During the summer months and year-end holiday season, Internet usage
typically declines, and our affiliates experience reduced user traffic. In
addition, advertising sales in traditional media, such as broadcast and cable
television, generally declines in the first and third quarters of the year. This
seasonality is likely to cause fluctuations in our financial results.
21
We Rely on Advertising and Promotion Revenues.
We derive substantially all of our revenues from the sale of national
and local advertisements and promotions on the Web pages that deliver our
content, and we expect this to continue in the future. Our ability to increase
our revenues will depend upon a number of factors, including the following:
. the acceptance of the Internet as an advertising medium by national
and local advertisers;
. the acceptance and regular use of our content and commerce solutions
by a large number of users who have demographic characteristics that
are attractive to advertisers;
. the success of our strategy to sell local Internet yellow pages
advertising through third parties;
. the expansion and productivity of our advertising sales force; and
. the development of the Internet as an attractive platform for
electronic commerce.
We are relying on revenues from local Internet yellow pages advertising as
a significant source of our future revenues. However, we have not yet generated
significant revenues from local Internet yellow pages advertising.
We Rely on a Small Number of Advertising Customers.
We derive a substantial portion of our revenues from a small number of
advertising customers. We expect that this will continue in the foreseeable
future. In particular, 800-U.S. Search, Inc. accounted for 26% and 27% of our
revenue for the three and six months ended June 30, 1999, respectively, and 20%
of our accounts receivable at June 30, 1999.
Our top ten advertising customers represented 60% and 59% of our revenues
in the three and six months ended June 30, 1999. If we lose any of these
customers, including 800-U.S. Search in particular, or if any of these customers
are unable or unwilling to pay us amounts that they owe us, our financial
results will suffer.
Many of Our Customers Are Emerging Internet Companies.
A significant portion of our revenues is derived from sales of advertising
to other Internet companies. Many of these companies have limited operating
histories, are operating at a loss and have limited access to capital. Many of
these businesses could fail and, in any event, represent credit risks. Our bad
debt expense represented approximately1.1% and 2.1% of our revenues in the three
and six months ended June 30, 1999, respectively, compared to 8.2% and 9.0% in
the comparable periods of 1998. If our customer base experiences financial
difficulties or fails to experience commercial success, our business will suffer
22
We Need to Manage Our Growth and Implement Procedures and Controls.
We have rapidly and significantly expanded our operations and anticipate
further significant expansion to accommodate expected growth in our customer
base and market opportunities. We have increased the number of employees from 15
at January 1, 1998 to 98 at June 30, 1999. This expansion has placed, and is
expected to continue to place, a significant strain on our management,
operational and financial resources. Since May 1998, we have added a number of
key managerial, technical and operations personnel, including our President and
Chief Operating Officer, Chief Financial Officer, Chief Accounting Officer, Vice
President, Legal and Business Affairs and Vice President, Human Resources, and
we expect to add additional key personnel in the near future. We are also
significantly increasing our employee base.
We have implemented improvements in our operational, accounting and
information systems, procedures and controls. In the past, our controls have not
been adequate to ensure proper communication within our company regarding, and
to properly document, the terms of certain of our written and verbal contracts
and the termination of certain contracts. Specifically, in May 1997, we entered
into a written acquisition agreement that included a formula to be used in
determining the final purchase price. Subsequently, pursuant to a verbal
understanding that did not include the use of this formula, we made a
determination of the final purchase price. This understanding was not documented
and, as a result, we initially accounted for the transaction improperly, which
required us to restate our financial statements. Also in the past, we did not
consistently follow our procedures with respect to the documentation of the
granting of options to new employees, and, at times, we failed to maintain an
appropriate level of internal communication regarding the potential hiring of
new employees, especially management employees. These inadequacies have led to
claims against us, some of which are still pending.
Our relationships with content providers, affiliates and advertisers are
subject to frequent change. Prior to implementing procedures and controls in
this area, these changes were often informal. In particular, we may have failed
to perform our obligations under certain commercial contracts that may have been
modified or terminated by verbal agreement. We believe that any failure to
perform our obligations was not significant. This practice of the modification
or termination of past written agreements by verbal agreement has resulted, and
may result in the future, in disputes regarding the existence, interpretation
and circumstances regarding modification or termination of commercial contracts.
We are currently involved in litigation with Internet Yellow Pages, Inc., a
direct marketing company with which we had a cooperative sales relationship, and
have received other claims. If our relationships with content providers,
affiliates and advertisers evolve in an adverse manner, if we get into
contractual disputes with content providers, affiliates or advertisers or if any
agreements with such persons are terminated, our business could suffer.
We have taken a number of steps to improve our accounting and information
systems, procedures and controls, including the hiring of a President and Chief
Operating Officer, Chief Financial Officer, Chief Accounting Officer, a Vice
President, Legal and Business Affairs and Vice President, Human Resources and
other financial and administrative personnel. In addition, we have adopted
certain policies with respect to the approval, tracking and management of our
commercial agreements, including:
23
. standardizing the form of our commercial agreements, where possible;
. requiring our legal and accounting departments to review any proposed
commercial contract and approve contract modifications prior to their
implementation;
. prohibiting ourselves from entering into verbal agreements or verbal
modifications or terminations of agreements; and
. etablishing a contracts database to serve as a central source of key
information regarding our commercial contracts, which will facilitate
the tracking and management of these contracts.
We may be unable to successfully implement these policies. Furthermore, these
steps may be inadequate to prevent disputes or issues relating to inadequate
internal communications from arising in the future.
To manage the expected growth of our operations and personnel, we must
continue improving or replacing existing operational, accounting and information
systems, procedures and controls. We will also need to expand, train and manage
our growing employee base, particularly our finance, administrative and
operations staff. Further, we must manage effectively our relationships with
various Internet content providers, advertisers, affiliates and other third
parties necessary to our business. If we are unable to manage growth
effectively, our business could suffer. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
We May Require Additional Funding.
Although we believe that our cash reserves and cash flows from operations
will be adequate to fund our operations for at least the next 12 months, such
sources may be inadequate. Consequently, we may require additional funds during
or after such period. Additional financing may not be available on favorable
terms or at all. If we raise additional funds by selling stock, the percentage
ownership of our then current stockholders will be reduced. If we cannot raise
adequate funds to satisfy our capital requirements, we may have to limit our
operations significantly. Our future capital requirements depend upon many
factors, including, but not limited to:
. the rate at which we expand our sales and marketing operations;
. the amount and timing of fees paid to affiliates to include our
content and commerce solutions on their site or service;
. the extent to which we expand our content and commerce solutions;
. the extent to which we develop and upgrade our technology and data
network infrastructure;
24
. the occurrence, timing, size and success of acquisitions;
. the rate at which we expand internationally; and
. the response of competitors to our service offerings.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
You Should Not Rely on Forward-looking Statements.
You should not rely on forward-looking statements in this report. This
report contains forward-looking statements that involve risks and uncertainties.
We use words such as "anticipates," "believes," "plans," "expects," "future,"
"intends" "may," "will," "should," "estimates," "predicts," "potential,"
"continue" and similar expressions to identify such forward-looking statements.
This report also contains forward-looking statements attributed to certain third
parties relating to their estimates regarding the growth of certain markets.
Forward-looking statements are subject to known and unknown risks, uncertainties
and other factors that may cause our and the strategic Internet services
industry's actual results, levels of activity, performance, achievements and
prospects to be materially different from those expressed or implied by such
forward-looking statements. These risks, uncertainties and other factors
include, among others, those identified under "Factors Affecting InfoSpace.com's
Operating Results, Business Prospects and Market Price of Stock" and elsewhere
in this report.
These forward-looking statements, apply only as of the date of this report.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties, and assumptions, the forward-looking
events discussed in this report might not occur. Our actual results could differ
materially from those anticipated in these forward-looking statements for many
reasons, including the risks faced by us described above and elsewhere in this
report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risks, including changes in interest
rates. We typically do not attempt to reduce or eliminate our market exposures
on our investment securities because the majority of our investments are short-
term. We do not have any derivative instruments.
The fair value of our investment portfolio or related income would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates due mainly to the short-term nature of the major portion of our
investment portfolio.
All the potential changes notes above are based on sensitivity analysis
performed on our balances as of June 30, 1999.
25
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
See notes to financial statements.
Item 2. Change in Securities and Use of Proceeds
Not applicable with respect to the current reporting period.
Item 3. Defaults Upon Senior Securities
Not applicable with respect to the current reporting period.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual stockholders' meeting held on May 24, 1999, the following
proposals were adopted by the margin indicated:
1. To elect the Board of Directors to hold office until their successors are
duly elected and qualified.
- ----------------------------------------------------------
NOMINEE SHARES SHARES
- ------- FOR WITHHELD
--- --------
- ----------------------------------------------------------
- ----------------------------------------------------------
Naveen Jain 38,080,694 22,778
- ----------------------------------------------------------
Bernee D. L. Strom 38,079,758 23,714
- ----------------------------------------------------------
John E. Cunningham 38,080,476 22,996
- ----------------------------------------------------------
Peter L. S. Currie 38,087,586 15,886
- ----------------------------------------------------------
Gary C. List 38,086,516 16,954
- ----------------------------------------------------------
Rufus W. Lumry III 38,081,386 22,086
- ----------------------------------------------------------
Carl Stock 38,083,426 20,046
- ----------------------------------------------------------
2. Amend the Company's 1996 Flexible Stock Incentive Plan to increase the
number of shares of Common Stock reserved for issuance thereunder by
2,000,000.
Shares Voting:
--------------
For 28,991,912
Against 3,878,728
Abstain 56,756
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3. To ratify and approve an amendment to the Stock Incentive Plan to annually
increase the number of shares reserved for issuance on the first day of the
Company's fiscal year beginning in 2000 by the amount equal to the lesser
of (A) 1,000,000 shares, (B) three percent of the Company's outstanding
shares at the end of the Company's preceding fiscal year, and (C) a lesser
amount determined by the board, received the following votes:
Shares Voting:
--------------
For 28,991,906
Against 3,959,262
Abstain 58,784
4. To ratify and approve an amendment to the Stock Incentive Plan to limit the
number of shares of Common Stock that may be granted to one individual
pursuant to stock options in any fiscal year of the Company to 2,000,000
(plus an additional 2,000,000 shares in connection with his or her initial
employment with the Company), which grant shall not count against the
limit.
Shares Voting:
--------------
For 37,868,126
Against 218,666
Abstain 16,680
5. Amend the Company's Certificate of Incorporation to increase the authorized
Common Stock from 50,000,000 to 200,000,000 shares, in part, to facilitate
a two-for-one forward stock split of the Common Stock.
Shares Voting:
--------------
For 35,185,034
Against 2,863,268
Abstain 55,170
6. To ratify the appointment of Deloitte & Touche LLP as independent auditors
of the Company for the fiscal year ending December 31, 1999.
Shares Voting:
--------------
For 38,038,816
Against 55,130
Abstain 9,526
Item 5. Other Information
Not applicable with respect to the current reporting period.
27
Item 6. -- Exhibits and Reports on Form 8-K:
a. Exhibits
10.1* Restated 1996 Flexible Stock Incentive Plan
*Incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-8 (No. 333-
81593) filed June 25, 1999.
27.1 Financial Data Schedule
6. Reports on Form 8-K.
InfoSpace.com filed no reports on Form 8-K during the quarter ended June
30, 1999.
28
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.COM, INC.
By: /s/ Tammy D. Halstead
---------------------
Tammy D. Halstead
Vice President and
Chief Accounting Officer
Dated: August 13, 1999
29