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As filed with the Securities And Exchange Commission on December 10, 1999
Registration No. 333-86313
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Post-Effective
Amendment No. 2
To
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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INFOSPACE.COM, INC.
(Exact name of Registrant as specified in its charter)
Delaware 7375 91-1718107
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
15375 N.E. 90th Street
Redmond, Washington 98052
(425) 602-0600
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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NAVEEN JAIN
Chief Executive Officer
InfoSpace.com, Inc.
15375 N.E. 90th Street
Redmond, Washington 98052
(425) 602-0600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
PATRICK J. SCHULTHEIS, ESQ.
RICHARD C. SOHN, ESQ.
DREW G. MARKHAM, ESQ.
Wilson Sonsini Goodrich & Rosati
Professional Corporation
5300 Carillon Point
Kirkland, Washington 98033
(425) 576-5800
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall hereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to such Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We +
+cannot sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 10, 1999
PROSPECTUS
612,203 Shares
[LOGO OF INFOSPACE.COM APPEARS HERE]
Common Stock
InfoSpace.com is offering 612,203 shares to the holders of exchangeable
shares of InfoSpace.com Canada Holdings Inc., an Ontario corporation and to the
holders of warrants to purchase shares of our common stock. InfoSpace.com
Canada Holdings issued the exchangeable shares in exchange for outstanding
shares of the common stock of INEX Corporation, an Ontario corporation, in
connection with the combination of InfoSpace.com and INEX. Holders of
exchangeable shares may exchange one exchangeable share for one share of our
common stock, and in some cases we may redeem each exchangeable share for one
share of our common stock. We describe the process by which exchangeable shares
may be exchanged for our common stock on page 74 of this prospectus under the
heading "Plan of Distribution."
Holders of exchangeable shares may exchange their exchangeable shares for
shares of our common stock immediately upon the completion of the combination
of InfoSpace.com and INEX or at a later time. We are offering the shares of our
common stock on a continuous basis pursuant to Rule 415 under the Securities
Act of 1933 only during the period when the registration statement relating to
this prospectus is effective. We will bear the registration costs incurred in
connection with this offering.
Our common stock is traded on the Nasdaq National Market under the symbol
"INSP." On December 8, 1999, the last reported sale price for the common stock
on the Nasdaq National Market was $169.6875 per share. See "Price Range of
Common Stock."
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Investing in the common stock involves a high degree of risk.
See "Risk Factors" beginning on page 5.
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The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is December 10, 1999
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
About Infospace.com................................................ 3
Recent Acquisitions................................................ 4
Risk Factors....................................................... 5
Forward-looking Statements......................................... 20
Use of Proceeds.................................................... 21
Dividend Policy.................................................... 21
Price Range of Common Stock........................................ 21
Capitalization..................................................... 22
Selected Consolidated Financial Data............................... 23
Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 24
Business........................................................... 44
Management......................................................... 59
Certain Transactions............................................... 66
Principal Stockholders............................................. 68
Description of Capital Stock....................................... 69
Plan of Distribution............................................... 74
Income Tax Considerations.......................................... 83
Experts............................................................ 91
Additional Information............................................. 91
Index to Financial Statements...................................... F-1
</TABLE>
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You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
We began operations in March 1996 as a Washington corporation and were
incorporated in Delaware in April 1996, at which time the operations of our
Washington corporation predecessor were transferred to the Delaware
corporation. As used in this prospectus, references to "we," "our," "us" and
"InfoSpace.com" refer to InfoSpace.com, Inc., its predecessors and its
consolidated subsidiaries.
Our executive offices are located at 15375 N.E. 90th Street, Redmond,
Washington 98052, and our telephone number is (425) 602-0600.
We maintain a World Wide Web site at www.infospace.com. Information contained
on our Web site does not constitute part of this prospectus.
"InfoSpace" is a registered trademark of ours. We have also applied for
federal registration of other marks, including "InfoSpace.com,"
"ActiveShopper," and our logo. Each logo, product name, tradename or service
mark of any other company appearing in this prospectus belongs to its holder.
Except as otherwise noted, all information in this prospectus gives effect to
a two-for-one stock split of our common stock consummated in May 1999 but does
not give effect to a two-for-one stock split of our common stock to be
consummated in January 2000.
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ABOUT INFOSPACE.COM, INC.
InfoSpace.com, a leading Internet information infrastructure company,
provides enabling technologies and Internet services for consumers, merchants,
and wireless devices. We provide private label solutions of Internet services
to an affiliate network of Internet portals, affinity Web sites and leading
companies enabling Internet access through wireless devices. Our affiliate
network includes more than 2,100 Web sites. Our affiliates include AOL,
Microsoft, Lycos, NBC's Snap, Go2Net, Disney/InfoSeek's GO Network, Network
Solutions, DoubleClick, Dow Jones (The Wall Street Journal Interactive
Edition), ABC LocalNet, BellSouth, US West, AT&T Wireless, GTE Sprint, Nokia
and Ericsson.
We have developed all of our private label solutions from our core technology
platform. Our consumer, merchant and wireless services all utilize the same
core technology within the same operational infrastructure. Our consumer
services include (1) content services, such as integrated directory, news, and
lifestyle information, (2) community building services, such as online address
books, calendars, chat and message boards, and (3) communication services, such
as instant messenging and Web-based e-mail. We also intend to offer
collaboration services such as real-time data collaboration, audio and video
conferencing and document sharing. Our merchant services consist of (1)
PageExpress, which enables local merchants to create a Web presence,
(2) StoreBuilder, which enables merchants to add e-commerce functions to their
Web presence, (3) ActivePromotion, which enables merchants to create targeted
product offers across our network, and (4) ActiveShopper, which provides an
open marketplace where consumers can find, research and purchase products from
our merchant network. Our wireless services include wireless portal services
tailored to provide mobile users relevant content such as real-time stock
quotes and traffic reports, commerce capabilities such as price comparison
shopping and purchasing goods, communication services such as device-
independent instant messaging and e-mail, personalization and localization.
We have built an extensive distribution network through our direct sales
force and through reseller channels. Our reseller channels consist of
distribution agreements with ad networks, such as DoubleClick and Flycast, who
offer both our consumer and merchant services to their network of thousands of
Web sites, reseller agreements with RBOCs, including BellSouth, SBC and USWest,
merchant banks including Capital One, and other local media networks who
provide our services to local merchants. We are also working with wireless
carriers such as AT&T, BellSouth and GTE Sprint, device manufacturers such as
Nokia, Ericsson and Neopoint, and software developers, such as Phone.com and
AvantGo, who offer our wireless portal services to mobile users.
We design our private label solutions to be highly flexible and customizable,
enabling affiliates to select from among our broad range of consumer, merchant
and wireless services. One of our principal strengths is our internally
developed technology, which enables us to easily and rapidly add new affiliates
and distribution partners by employing a distributed, scalable architecture
adapted specifically for our Internet-based infrastructure services. We help
our affiliates and distribution partners build and maintain their brands by
delivering our consumer, merchant and wireless services with the look and feel
and navigation features specific to each affiliate, creating the impression to
end users that they have not left the affiliate's site. We have designed our
technology to support affiliates across multiple platforms and formats,
including the growing number of emerging wireless devices.
We derive a significant percentage of our revenues from advertisements and
promotions on the pages on which our consumer services are delivered to our
affiliates. We also generate revenue through licensing fees, e-commerce fees,
and guaranteed transaction fees in lieu of revenue share.
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RECENT ACQUISITIONS
Acquisition of INEX Corporation
On October 14, 1999, we acquired Toronto-based INEX Corporation. The
combination was accounted for as a pooling of interests. We will issue up to
900,000 shares of our common stock (1) directly to those INEX shareholders who
elected to receive our common stock in exchange for their INEX shares at the
closing of the combination, (2) upon the exchange or redemption of the
exchangeable shares of InfoSpace.com Canada Holdings Inc., an indirect
subsidiary of ours, which exchangeable shares were issued to those INEX
shareholders who elected to receive exchangeable shares, or who did not make an
election to receive shares of our common stock, at the closing and (3) upon the
exercise of outstanding warrants and options to purchase INEX common shares,
which we assumed and which will become exercisable for shares of our common
stock. This prospectus relates to the shares of our common stock issuable upon
the exchange or redemption of the exchangeable shares and the exercise of the
warrants we assumed.
INEX Corporation developed and marketed Internet commerce solutions designed
for small and medium-sized merchants. Its two electronic commerce storefront
product offerings consisted of:
. INEX ezStore: a feature-rich, OEM solution that reseller channel
licensees and alliance partners can lease for a nominal fee on a monthly
basis to their small and medium-sized business merchants as part of a
complete end-to-end electronic storefront hosting service offering; and
. INEX Commerce Court Suite: an upgrade path from INEX ezStore for
merchants requiring a more sophisticated and powerful electronic
commerce solution.
We have added these products to our merchant services. We believe that the
acquisition of INEX has enabled us to offer our affiliates the ability to
attract and host online retailers and local merchants on their sites by
offering a complete, affordable and easy-to-use solution for these retailers
and merchants to build, manage and promote online storefronts.
Acquisition of Union-Street.com, Inc.
On October 14, 1999, we acquired Seattle-based Union-Street.com. Union-
Street.com provided Web portals, destination sites, and enterprise business
with a powerful, scalable, and easy-to-use suite of business-to-business
services, such as private label Web-based e-mail, address books, calendars,
personal home pages, chat and message boards. We now offer these services as
part of our consumer and wireless services. These interactive services help our
affiliates increase traffic, strengthen the value of their brand on the Web and
create direct marketing opportunities.
Under the terms of the acquisition, accounted for as a purchase, we exchanged
approximately 450,000 shares of our common stock for all of Union-Street.com's
outstanding shares, warrants and options.
Pending Acquisitions
On October 22, 1999, we entered into a definitive agreement to acquire
Redmond-based Zephyr Software Inc. and its wholly owned subsidiary in India,
Zephyr Software (India) Private Limited. Zephyr Software Inc. provides
infrastructure services for the Indian market. Zephyr India will become
InfoSpace.com India, a wholly owned subsidiary of InfoSpace.com. Under the
terms of the acquisition, which we will account for as a purchase, we will
exchange 166,956 shares of our common stock for all of Zephyr Software Inc.'s
outstanding shares, warrants and options. We expect to complete the acquisition
in the fourth quarter of 1999 upon receipt of regulatory approval from the
government of India and satisfaction of customary closing conditions, including
Zephyr Software Inc. shareholder approval.
On November 19, 1999, we entered into a definitive agreement to acquire
Fremont, California-based eComLive.com, Inc. eComLive is a leading provider of
Web-based real-time collaboration and interaction
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solutions specialized for consumer-to-consumer, business-to-business and
business-to-consumer vertical markets. Under the terms of the acquisition,
which we will account for as a purchase, we will exchange 355,618 shares of our
common stock for all of eComLive.com's outstanding shares and options. We
expect the acquisition to be completed in December 1999, subject to
satisfaction of customary closing conditions, including eComLive.com
shareholder approval.
On December 6, 1999, we entered into a definitive agreement to acquire
Mountain View, California-based Prio, Inc. Prio is a privately held provider of
"e-nabled" commerce solutions specializing in the development of strategic
partnerships, technologies and programs that drive commerce in both traditional
and online shopping environments. The acquisition will allow us to provide an
enhanced e-commerce infrastructure that integrates online promotion
technologies with merchants' existing credit card processing infrastructure.
Under the terms of the acquisition, which we will account for as a pooling of
interests, we will exchange 2,685,000 shares of our common stock for all of
Prio's outstanding shares, warrants and options. We expect to complete the
acquisition in the first quarter of 2000, subject to satisfaction of customary
closing conditions, including the receipt of regulatory approval and Prio
shareholder approval.
On December 6, 1999, we entered into a definitive agreement to acquire San
Mateo, California-based Saraide.com inc, a provider of wireless Internet
services in Europe, Japan and Canada. The acquisition will allow us to expand
the reach of our wireless Internet services to these markets. Under the terms
of the acquisition, which we will account for as a purchase, we will issue
2,397,716 shares of our common stock and contribute our wireless assets in
exchange for an 80% controlling interest in Saraide. We expect to complete the
acquisition in the first quarter of 2000, subject to satisfaction of customary
closing conditions, including the receipt of regulatory approval and Saraide
shareholder approval.
RISK FACTORS
You should carefully consider the risks and uncertainties described below
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.
This prospectus contains forward-looking statements that involve known and
unknown risks and uncertainties. These statements relate to our plans,
objectives, expectations and intentions. Our actual results could differ
materially from those discussed in these statements. Factors that could
contribute to these differences include those discussed below and elsewhere in
this prospectus.
You May Be Taxed on the Exchange.
The exchange of exchangeable shares of InfoSpace.com Canada Holdings Inc.
(the exchangeable shares) for shares of our common stock is generally a taxable
event in Canada and the United States. A holder's tax consequences can vary
depending on a number of factors, including the residency of the holder, the
method of the exchange (redemption or exchange) and the length of time that the
exchangeable shares were held prior to exchange. See "Income Tax
Considerations--Canadian Federal Income Tax Considerations" and "--United
States Federal Tax Considerations."
There May Be Differences in Canadian and U.S. Trading Markets.
The exchangeable shares are not and will not be listed on any stock exchange
in Canada or the United States. We have agreed that our shares of common stock
issuable from time to time in exchange for the exchangeable shares will be
listed on the Nasdaq National Market. There is no current intention to list our
common stock on any other stock exchange in Canada or the United States, nor is
there any current intention to establish a trading market for the exchangeable
shares. As a result of the foregoing, we believe that the value of the
exchangeable shares will reflect essentially the equivalent value of our common
stock on
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the Nasdaq National Market. However, if a market for the exchangeable shares
should develop, there can be no assurances that the market price of the
exchangeable shares would correspond to that of our common stock.
Pending and Potential Acquisitions Involve Risks.
We have acquired complementary technologies or businesses in the past, and
intend to do so in the future. Acquisitions may involve potentially dilutive
issuances of stock, the incurrence of additional debt and contingent
liabilities or large one-time write-offs and amortization expenses related to
goodwill and other intangible assets. Any of these factors could adversely
affect our results of operations or stock price. Acquisitions, including our
recent combination with INEX, involve numerous risks, including:
. difficulties in assimilating the operations, products, technology,
information systems and personnel of the acquired company;
. diverting management's attention from other business concerns;
. impairing relationships with our employees, affiliates, advertisers,
content providers and distribution partners;
. being unable to maintain uniform standards, controls, procedures and
policies;
. entering markets in which we have no direct prior experience; and
. losing key employees of the acquired company.
In June 1998, we acquired Outpost Network, Inc. As a result of this
acquisition, we acquired certain electronic commerce technology and hired
approximately ten employees. We issued approximately 3,000,000 shares of stock
to the former shareholders of Outpost and agreed to offer employment to certain
employees of Outpost. In June 1999, we acquired certain MyAgent Technology
assets from Active Voice Corporation and hired six employees who helped develop
the MyAgent Technology. In October 1999, we acquired INEX and Union-Street.com,
Inc. These companies became subsidiaries of ours, and we relocated some of
their employees to our headquarters in Redmond, Washington. We issued
approximately 1,350,000 shares of our common stock as a result of our
acquisitions of INEX and Union-Street.com, Inc.
In October 1999, we signed a definitive agreement to acquire Zephyr Software
Inc. In November 1999, we signed a definitive agreement to acquire eComLive.com
Inc. In December 1999, we signed a definitive agreement to acquire Prio, Inc.
and we signed a definitive agreement to acquire Saraide.com inc.
We may not be able to successfully integrate the technology and personnel we
acquired from these or any other businesses, technologies or personnel that we
acquire in the future. We and the businesses acquired by us may require
substantial additional capital, and there can be no assurance as to the
availability of such capital when needed, nor as to the terms on which such
capital might be made available to us. We have retained, and may in the future
retain, existing management of acquired companies or technologies, under the
overall supervision of our senior management. The success of the operations of
these acquired companies and technologies will depend, to a great extent, on
the continued efforts of the management of the acquired companies.
We 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 from our
inception in March 1996 through June 30, 1999. At September 30, 1999, we had an
accumulated deficit of approximately $14.2 million. We expect to incur
operating losses on a quarterly basis in the future. Our prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development,
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particularly companies in new and rapidly evolving markets such as Internet
services. To address the risks we face and to be able to achieve and sustain
profitability, we must, among other things:
. develop and maintain strategic relationships with potential affiliates,
distribution partners and content providers;
. identify and acquire the rights to additional content;
. successfully integrate new features with our consumer, merchant and
wireless 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, distribution 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 not sustain profitability. See "Selected Consolidated Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Our Business Model Is Evolving and Unproven.
Our business model is described below. We:
. aggregate content and commerce information from third-parties;
. integrate this content and commerce information with related information
and community services;
. distribute these integrated services on a private label basis to leading
Internet portals, affinity sites and wireless devices;
. generate revenues from the sale of advertisements and promotions on the
Web pages that deliver our consumer services;
. generate licensing revenues from our merchant and wireless technology and
services; and
. generate e-commerce revenue from transactions completed utilizing our
merchant services.
Our business model is relatively new to the Internet, is unproven and is
likely to continue to evolve. Accordingly, our business model may not be
successful, and we may need to change it. Our ability to generate significant
revenues by distributing integrated private label solutions depends, in part,
on our ability to successfully market our private label solutions to Internet
portals and affinity sites that currently do not rely on third-party sources
for their content and service infrastructure needs and do not typically utilize
content infrastructure services that are readily available to their
competitors. We intend to continue to develop our business model as we explore
opportunities internationally and in new and unproven areas such as electronic
commerce and in providing private label solutions for wireless devices.
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;
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. variable demand for our consumer, merchant and wireless services by our
affiliates;
. the cost of acquiring and the availability of content;
. the overall level of demand for consumer, merchant and wireless services;
. our ability to attract and retain advertisers, content providers,
affiliates and distribution partners;
. seasonal trends in Internet usage and advertising placements;
. the amount and timing of fees we pay to our affiliates to include our
private label solutions on their Web sites and wireless devices;
. 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, our affiliates or
distribution partners, 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 balance of 1999 and the year 2000. Our expenses
are partially based on our expectations regarding future revenues and estimated
expenses from our acquisitions, which 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. As
the Internet matures, we believe more companies will spend money on advertising
in the third quarter in anticipation of the year-end holiday season.
Historically, this spending has occurred mainly in the fourth quarter.
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.
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We Rely on Advertising and Transaction Revenues.
We derive a significant amount of our revenues from the sale of national and
local advertisements, transaction fees and promotions from our affiliates who
use our consumer services, and we expect this to continue in the future. Our
ability to increase and diversify 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 private label solutions by a large
number of users who have demographic characteristics that are attractive
to advertisers;
. the expansion and productivity of our advertising sales force;
. the development of the Internet as an attractive platform for electronic
commerce;
. the adoption of our wireless services and solutions by wireless carriers
and device manufacturers; and
. availability of attractive advertising space within our private label
solutions.
We Rely on Our Relationships with Affiliates.
We will be able to continue generating revenues from advertising and
promotions only if we can secure and maintain distribution for our private
label solutions on acceptable commercial terms through a wide range of
affiliates. We expect that revenues generated from the sale of advertisements
and promotions delivered through our network of affiliates will continue to
account for a significant portion of our revenues for the foreseeable future.
In particular, we expect that a limited number of our affiliates, including,
America Online, Inc., or AOL, its CompuServe and Digital City divisions and its
Netscape Communications subsidiary and Microsoft Network, LLC will account for
a substantial portion of our affiliate traffic and, therefore, revenues over
time. Our distribution arrangements with our affiliates typically are for
limited durations of between six months and two years and automatically renew
for successive terms thereafter, subject to termination on short notice. We
cannot assure you that such arrangements will not be terminated or that such
arrangements will be renewed upon expiration of their terms. We generally share
with each affiliate a portion of the revenues generated by advertising on the
Web pages that deliver our content services. We pay carriage fees to certain
affiliates, including AOL. These relationships may not be profitable or result
in benefits to us that outweigh the costs of the relationships.
Our affiliate relationships are in an early stage of development. If
affiliates, especially major affiliates, demand a greater portion of
advertising revenues or require us to make payments for access to their site or
device, our business may suffer. In addition, if we lose a major affiliate, we
may be unable to timely or effectively replace the affiliate with other
affiliates with comparable traffic patterns and user demographics. The loss of
any major affiliate could harm our business. See "Business--Affiliate and
Distribution Network."
We Rely on Third Parties for Sales of Internet Yellow Pages Advertising.
We rely on arrangements with RBOCs, independent yellow pages publishers,
media companies and direct marketing companies to generate local Internet
yellow pages advertising revenues, both domestically and internationally. These
companies sell enhanced yellow pages listings on our Internet yellow pages
directory services. Under some of our arrangements with independent yellow
pages publishers, we have granted exclusive rights to the publisher to sell
local advertising in a specific geographic area, and we do not restrict the
publisher's ability to sell advertising for any other source. These RBOCs,
independent yellow pages publishers, media companies and direct marketing
companies have only recently begun to offer local Internet yellow pages
advertising and, accordingly, have extremely limited experience in forecasting
and executing Internet advertising business models. We may have to expend
significant time and effort in training their sales forces.
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Advertisers May Not Adopt the Internet as an Advertising Medium.
Most advertising agencies and potential advertisers, particularly local
advertisers, have only limited experience advertising on the Internet and have
not devoted a significant portion of their advertising expenditures to Internet
advertising. As the Internet evolves, advertisers may find Internet advertising
to be a less effective means of promoting their products and services relative
to traditional methods of advertising and may not continue to allocate funds
for Internet advertising. In addition, advertising on the Internet is at a much
earlier stage of development in international markets compared to the United
States.
Fluid and intense competition in the sale of advertising on the Internet has
led different vendors to quote a wide range of rates and offer a variety of
pricing models for various advertising services. As a result, we have
difficulty projecting future advertising revenues and predicting which pricing
models advertisers will adopt. For example, if many advertisers base their
advertising rates on the number of click throughs from our content services to
their Web pages, instead of solely on the number of impressions received, our
revenues could decrease. There are no widely accepted standards for the
measurement of the effectiveness of Internet advertising, and standards may not
develop sufficiently to support Internet advertising as a significant
advertising medium. We typically base our advertising rates on the number of
impressions received, and our advertising customers may not accept our
measurements or such measurements may contain errors.
Industry analysts and others have made many predictions concerning the growth
of the Internet as a commercial medium. Many of these historical predictions
have overstated the growth of the Internet and should not be relied upon. This
growth may not occur or may occur more slowly than estimated. In addition, if a
large number of consumers use "filter" software programs that limit or remove
advertising from the Web, advertisers may choose not to advertise on the
Internet. If the commercial use of the Internet does not develop, or if the
Internet does not develop as an effective and measurable medium for
advertising, our business will suffer. See "Business--Advertising."
We Rely on a Small Number of Customers.
We derive a substantial portion of our revenues from a small number of
customers. We expect that this will continue in the forseeable future.
Our top ten customers represented 48% of our revenues in 1998 and 55% of our
revenues for the nine months ended September 30, 1999. In particular, 800-U.S.
Search, Inc. accounted for approximately 21% of our revenues for the year ended
December 31, 1998, and 26% of our revenues for the nine months ended September
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.
Our Advertising Arrangements Involve Risks.
We typically sell national advertisements pursuant to short-term agreements
of less than six months. As a result, our national advertising customers could
cancel these agreements, change their advertising expenditures or buy
advertising from our competitors on relatively short notice and without
penalty. Because we derive, and expect to continue to derive, a large portion
of our consumer services revenues from sales of national advertising, these
short-term agreements expose us to competitive pressures and potentially severe
fluctuations in our financial results.
In addition, we typically guarantee our national advertising customers a
minimum number of impressions or click throughs by Web users. These
arrangements expose us to potentially significant risks. If we fail to deliver
these minimum levels, we typically have to provide free advertising to the
customer until the minimum level is met, which could harm our financial
results.
We occasionally guarantee the availability of advertising space in connection
with promotion arrangements and content agreements. In addition, we
occasionally provide customized advertising
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campaigns for advertisers and agree with certain advertisers that we will not
accept advertising from any other customer within a particular subject matter.
All of these arrangements subject us to certain risks. These risks include:
. our potential inability to meet the guarantees we make to our customers;
. our allocation of resources to create customized advertising that may not
result in successful advertisements;
. a requirement to forego advertising from potential customers whose
advertisements would conflict with those of other customers; and
. a potential limitation on availability of additional advertising space.
Any of these results could harm our financial results.
We Depend on Third Parties for Content.
We typically do not create our own content. Rather, we acquire rights to
information from more than 85 third-party content providers, and our future
success is critically dependent upon our ability to maintain relationships with
these content providers and enter into new relationships with other content
providers.
We typically license content under short-term arrangements that do not
require us to pay royalties or other fees for the use of the content. However,
we do enter into revenue-sharing arrangements with certain content providers,
and we pay certain content providers a one-time fee or a fee for each query
from Web users. In the future, we expect that certain of our content providers
will likely demand a greater portion of advertising revenues or increase the
fees that they charge us for their content. If we fail to enter into and
maintain satisfactory arrangements with content providers, our business will
suffer. See "--We Need to Manage Our Growth and Maintain Procedures and
Controls."
We Depend on Key Personnel.
Our performance depends on the continued services of our executive officers
and other key personnel. We maintain key person life insurance on Naveen Jain,
our Chief Executive Officer, in the amount of $5.0 million. We do not maintain
key person life insurance policies on any of our other employees. If we lose
the services of any of our executive officers or other key employees, our
business could suffer. See "Business--Employees" and "Management."
We Need to Hire Additional Personnel.
Our future success depends on our ability to identify, attract, hire, train,
retain and motivate highly skilled technical, managerial, sales and marketing
and business development personnel. We intend to hire a significant number of
technical, sales and marketing, business development and administrative
personnel during the next year. If we fail to successfully attract, assimilate
and retain a sufficient number of qualified technical, managerial, sales and
marketing, business development and administrative personnel, our business
could suffer.
We Need to Manage Our Growth and Maintain Procedures and Controls.
We have rapidly and significantly expanded our operations and anticipate
further significant expansion to accommodate expected growth in our customer
base and market opportunities. We have increased the number of employees from
15 at January 1, 1998 to 184 at November 30, 1999. This expansion has placed,
and is expected to continue to place, a significant strain on our management,
and operational resources. Since May 1998, we have added a number of key
managerial, technical and operations personnel and we expect to add additional
key personnel in the near future. We also plan to significantly increase our
employee base.
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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. 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. See "--We Are Subject to
Pending Legal Proceedings."
Our relationships with affiliates and distribution partners, content
providers 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 affiliates and distribution partners, content
providers and advertisers evolve in an adverse manner, if we get into
contractual disputes with affiliates and distribution partners, content
providers or advertisers or if any agreements with such persons are terminated,
our business could suffer. See "Business--Legal Proceedings."
We have taken a number of steps to improve our accounting and information
systems, procedures and controls. In addition, we have adopted certain policies
with respect to the approval, tracking and management of our commercial
agreements, including:
. 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
. establishing 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.
Although these policies have been implemented, 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 maintaining and 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, wireless
carriers, advertisers, affiliates and other third parties necessary to our
business. If we are unable to manage growth effectively, our business could
suffer. See "--We Are Subject to Pending Legal Proceedings," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business--Employees" and "Management."
Our International Expansion Plans Involve Risks.
A key component of our strategy is expanding our operations into
international markets. We have entered into a joint venture agreement with
Thomson Directories Limited to replicate our content, community and commerce
services in Europe. The joint venture, TDL InfoSpace (Europe) Limited, has
targeted the United Kingdom as its first market, and it launched content
services in the third quarter of 1998. Under the joint venture agreement, each
of us is obligated to negotiate with TDL InfoSpace and the
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other party to jointly offer content, community and commerce services in other
European countries prior to offering such services independently or with other
parties. In March 1999, we began providing content, community and commerce
services to Canadian affiliates through our wholly-owned subsidiary,
InfoSpaceCanada.com. In connection with our anticipated acquisition of Zephyr
Software, we expect to launch InfoSpace.com India early in 2000 to provide
comprehensive localized consumer, merchant and wireless services to the Indian
market. In addition, with our anticipated acquisition of Saraide, we expect to
expand our wireless services into Europe, Japan and Canada.
To date, we have limited experience in developing and syndicating localized
versions of our private label solutions internationally, and we may not be able
to successfully execute our business model in these markets. In addition,
international markets experience lower levels of Internet usage and Internet
advertising than the United States. We rely on our business partner in Europe
for U.K. directory information and local sales forces and may enter into
similar relationships if we expand into other international markets.
Accordingly, our success in these markets will be directly linked to the
success of our business partners in such activities. If our business partners
fail to successfully establish operations and sales and marketing efforts in
these markets, our business could suffer. See "Business--International
Expansion."
In addition, we face a number of risks inherent in doing business in
international markets, including, among others:
. unexpected changes in regulatory requirements;
. potentially adverse tax consequences;
. export controls relating to encryption technology;
. tariffs and other trade barriers;
. difficulties in staffing and managing foreign operations;
. changing economic conditions;
. exposures to different legal standards (particularly with respect to
intellectual property and distribution of information over the Internet);
. burdens of complying with a variety of foreign laws;
. fluctuations in currency exchange rates; and
. seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world.
If any of these risks occur, our business could suffer.
Our Business Is Highly Competitive.
We operate in the Internet information infrastructure services market, which
is extremely competitive and is rapidly changing. Our current and prospective
competitors include many large companies that have substantially greater
resources than we have. We believe that the primary competitive factors in the
market for Internet private label solutions are:
. the ability to provide content and services of broad appeal, which is
likely to result in increased user traffic and increase the brand name
value of the Web sites and wireless devices to which the services are
provided;
. the ability to meet the specific content and service demands of a
particular Web site or wireless devices;
. the cost-effectiveness and reliability of the consumer, merchant and
wireless information services;
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. the ability to provide consumer, merchant and wireless information
services that are attractive to advertisers and end users;
. the ability to achieve comprehensive coverage of a particular category of
content or service; and
. the ability to integrate related information to increase the utility of
the consumer, merchant and wireless information services offered.
We compete, directly or indirectly, in the following ways, among others:
. our directory services compete with AnyWho? (a division of AT&T), GTE
SuperPages, Switchboard, ZIP2 (which was recently acquired by Compaq),
various RBOCs' directory services, infoUSA's Lookup USA, Microsoft
Sidewalk and Yahoo! Yellow Pages and White Pages;
. other information services we provide, such as classifieds, horoscopes
and real-time stock quotes, compete with specialized content providers;
. our U.K. joint venture competes with British Telecom's YELL service and
Scoot (UK) Limited;
. our merchant services compete with e-tailers such as Amazon.com and
portals such as AOL, Yahoo! and MSN; and
. our wireless commerce services compete with portals such as AOL, Yahoo!,
MSN and Lycos, and with specialized content providers.
We expect that in the future we will experience competition from other
Internet services companies and providers of Internet software, including
Microsoft, Yahoo!, AOL, Excite, Disney/Infoseek, Lycos, Go2Net's MetaCrawler
and NBC's Snap. Some of these companies are currently customers of ours, the
loss of which could harm our business. We may also face increased competition
from traditional media companies expanding onto the Internet.
Many of our current customers have established relationships with certain of
our current and potential future competitors. If our competitors develop
private label solutions that are superior to ours or that achieve greater
market acceptance than ours, our business will suffer.
Our Business Relies on the Performance of Our Systems.
Our success depends, in part, on the performance, reliability and
availability of our consumer, merchant and wireless services. Our revenues
depend, in large part, on the number of users that access our consumer,
merchant and wireless services. Our computer and communications hardware is
located at our main headquarters in Redmond, Washington and has been in
additional hosting facilities provided by Exodus Communications, Inc. and
Savvis Communications Corporation in the Seattle, Washington area. We are
currently consolidating our co-location arrangements with Exodus and Savvis
into a single geographically remote location. Our systems and operations could
be damaged or interrupted by fire, flood, power loss, telecommunications
failure, Internet breakdown, break-in, earthquake and similar events. We do not
have a formal disaster recovery plan, and we do not carry business interruption
insurance that is adequate to compensate us for losses that may occur. In
addition, systems that use sophisticated software may contain bugs, which could
also interrupt service. Any system interruptions resulting in the
unavailability of our consumer, merchant and wireless services would reduce the
volume of users able to access our consumer, merchant and wireless services and
the attractiveness of our service offerings to our affiliates, advertisers and
content providers, which could harm our business.
Our Industry Is Experiencing Consolidation.
The Internet industry has recently experienced substantial consolidation. For
example, AOL has acquired Netscape, At Home has acquired Excite, and Compaq has
acquired ZIP2. We expect this consolidation to continue. These acquisitions
could affect us in a number of ways, including:
. companies from whom we acquire content could be acquired by one of our
competitors and stop selling us content;
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. our customers could be acquired by one of our competitors and stop buying
advertising from us; and
. our customers could merge with other customers, which could reduce the
size of our customer base.
This consolidation in the Internet industry could harm our business.
We Are Subject to Pending 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. Such claims, even if not meritorious, could require the
expenditure of significant financial and managerial resources, which could harm
our business.
An alleged former employee has filed a complaint alleging that he was
terminated without cause and that he entered into an agreement with us that
entitles him to an option to purchase 2,000,000 shares of our common stock or
10% of our stock. The complaint alleges breach of contract, breach of the
covenant of good faith, breach of fiduciary duty, misrepresentation, promissory
estoppel, intentional interference with contractual relations and unfair and
deceptive acts and practices, seeking specific performance of the alleged
agreement for 10% of our stock, damages equal to the value of 10% of our stock,
punitive damages and attorneys' fees and costs and treble damages. To the
extent that we are required to issue shares of our common stock or options to
purchase common stock as a result of these claims filed by the alleged former
employee, we would recognize an expense equal to the number of shares issued
multiplied by the fair value of our common stock on the date of issuance, less
the exercise price of any options required to be issued. This could harm our
results of operations, and any such issuance would be dilutive to existing
stockholders, the impact of which may be mitigated to the extent it is offset
by shares of common stock in the escrow account described in "Business--Legal
Proceedings."
We have filed a complaint against Internet Yellow Pages, Inc., or IYP, and
Greg Crane, asserting claims for (a) account stated, (b) breach of contract,
and (c) fraud. IYP has asserted counterclaims against us for breach of
contract, fraud, extortion and violation of the Consumer Protection Act (RCW
19.86), and seeks relief consisting of $1,500,000 and other unquantified money
damages, punitive damages, treble damages and attorney's fees.
We believe we have meritorious defenses to all of these claims against us.
Nevertheless, litigation is inherently uncertain, and we may not prevail in
these suits.
We had discussions with a number of individuals in the past regarding
employment by us and also hired and subsequently terminated a number of
individuals as employees or consultants. Furthermore, primarily during our
early stage of development, our procedures with respect to the manner of
granting options to new employees were not clearly documented. As a result of
these factors, and in light of the receipt of the above claims, we have in the
past received, and may in the future receive, similar claims from one or more
individuals asserting rights to acquire shares of our stock or to receive cash
compensation. We cannot predict whether such future claims will be made or the
ultimate resolution of any currently outstanding or future claim. Naveen Jain,
our Chief Executive Officer, has placed into escrow 2,000,000 shares of our
stock beneficially owned by him to indemnify us and our directors for a period
of five years for certain liabilities relating to events prior to September 30,
1998. The indemnification agreement, however, does not provide for
indemnification for certain matters known by the Board prior to September 30,
1998 or losses less than $100,000. Satisfaction of such liabilities through the
issuance of escrowed shares could result in the recognition of future expenses,
which could harm our results of operations. See "Business--Legal Proceedings."
We Rely on Internally Developed Software and Systems.
We have developed custom software for our network servers and our private
label solutions. This software may contain undetected errors, defects or bugs.
Although we have not suffered significant harm from any errors or defects to
date, we may discover significant errors or defects in the future that we may
or
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may not be able to fix. We must expand and upgrade our technology, transaction-
processing systems and network infrastructure if the volume of traffic on our
Web site or our affiliates' Web sites increases substantially. In addition, as
we continue to expand our merchant and wireless services, we may have to
significantly modify our systems. We could experience periodic temporary
capacity constraints, which may cause unanticipated system disruptions, slower
response times and lower levels of customer service. We may be unable to
accurately project the rate or timing of increases, if any, in the use of our
consumer, merchant and wireless services or expand and upgrade our systems and
infrastructure to accommodate these increases in a timely manner. Any inability
to do so could harm our business. See "Business--Technology and
Infrastructure."
Rapid Technological Change Affects Our Business.
Rapidly changing technology, evolving industry standards, evolving customer
demands and frequent new product and service introductions characterize our
market. Our market's early stage of development exacerbates these
characteristics. Our future success depends in significant part on our ability
to improve the performance, content and reliability of our consumer, merchant
and wireless services in response to both the evolving demands of the market
and competitive product offerings. Our efforts in these areas may not be
successful. If a large number of affiliates adopt new Internet technologies or
standards, we may need to incur substantial expenditures modifying or adapting
our private label solutions.
We Rely on the Internet System Infrastructure.
Our success depends, in large part, on other companies maintaining the
Internet system infrastructure. In particular, we rely on other companies to
maintain a reliable network backbone that provides adequate speed, data
capacity and security and to develop products that enable reliable Internet
access and services. If the Internet continues to experience significant growth
in the number of users, frequency of use and amount of data transmitted, the
Internet system infrastructure may be unable to support the demands placed on
it, and the Internet's performance or reliability may suffer as a result of
this continued growth. In addition, the Internet could lose its commercial
viability as a form of media due to delays in the development or adoption of
new standards and protocols to process increased levels of Internet activity.
Any such degradation of Internet performance or reliability could cause
advertisers to reduce their Internet expenditures. If other companies do not
develop the infrastructure or complementary products and services necessary to
establish and maintain the Internet as a viable commercial medium, or if the
Internet does not become a viable commercial medium or platform for
advertising, promotions and electronic commerce, our business could suffer.
We Receive Information that May Subject Us to Liability.
We obtain content and commerce information from third parties. When we
integrate and distribute this information over the Internet, we may be liable
for the data that is contained in that content. This could subject us to legal
liability for such things as defamation, negligence, intellectual property
infringement and product or service liability. Many of the agreements by which
we obtain content do not contain indemnity provisions in favor of us. Even if a
given contract does contain indemnity provisions, these provisions may not
cover a particular claim. While we carry general business insurance with a
limit of $1.0 million for each occurrence and $2.0 million in the aggregate,
this coverage may be inadequate.
In addition, individuals whose names appear in our yellow pages and white
pages directories have occasionally contacted us. These individuals believed
that their phone numbers and addresses were unlisted, and our directories are
not always updated to delete phone numbers or addresses when they are changed
from listed to unlisted. While we have not received any claims from these
individuals, we may receive claims in the future. Any liability that we incur
as a result of content we receive from third parties could harm our financial
results.
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Our Networks Face Security Risks.
Even though we have implemented security measures, our networks may be
vulnerable to unauthorized access by hackers or others, computer viruses and
other disruptive problems. Someone who is able to circumvent security measures
could misappropriate our proprietary information or cause interruptions in our
Internet operations. Internet and online service providers have in the past
experienced, and may in the future experience, interruptions in service as a
result of the accidental or intentional actions of Internet users, current and
former employees or others. We may need to expend significant capital or other
resources protecting against the threat of security breaches or alleviating
problems caused by breaches. Although we intend to continue to implement
industry-standard security measures, persons may be able to circumvent the
measures that we implement in the future. Eliminating computer viruses and
alleviating other security problems may require interruptions, delays or
cessation of service to users accessing Web pages that deliver our content
services, any of which could harm our business. See "Business--Technology and
Infrastructure--Data Network Infrastructure" and "Business--Facilities."
Users of online commerce services are highly concerned about the security of
transmissions over public networks. Concerns over security and the privacy of
users may inhibit the growth of the Internet and other online services
generally, and the Web in particular, especially as a means of conducting
commercial transactions. As we expand our merchant services, we intend to rely
on encryption and authentication technology licensed from third parties to
provide the security and authentication necessary to securely transmit
confidential information, such as customer credit card numbers. Users could
possibly circumvent the measures we take to protect customer transaction data.
To the extent that our activities involve the storage and transmission of
proprietary information, such as credit card numbers, security breaches could
damage our reputation and expose us to a risk of loss or litigation and
possible liability. Any compromise of our security could harm our business.
We May Be Unable to Adequately Protect or Enforce Our Intellectual Property
Rights.
Our success depends significantly upon our proprietary technology. To protect
our proprietary rights, we rely on a combination of copyright and trademark
laws, patents, trade secrets, confidentiality agreements with employees and
third parties and protective contractual provisions. Despite our efforts to
protect our proprietary rights, unauthorized parties may copy aspects of our
products or services or obtain and use information that we regard as
proprietary. In addition, others could possibly independently develop
substantially equivalent intellectual property. If we do not effectively
protect our intellectual property, our business could suffer.
Companies in the computer industry have frequently resorted to litigation
regarding intellectual property rights. We may have to litigate to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of other parties' proprietary rights. From time to time, we
have received, and we may receive in the future, notice of claims of
infringement of other parties' proprietary rights. Any such claims could be
time-consuming, result in costly litigation, divert management's attention,
cause product or service release delays, require us to redesign our products or
services or require us to enter into royalty or licensing agreements. These
royalty or licensing agreements, if required, may not be available on
acceptable terms or at all. If a successful claim of infringement were made
against us and we could not develop non-infringing technology or license the
infringed or similar technology on a timely and cost-effective basis, our
business could suffer. See "Business--Intellectual Property" and "--Legal
Proceedings."
We May Become Subject to Governmental Regulation.
Because of the increasing use of the Internet, the government may adopt laws
and regulations with regard to the Internet covering issues such as user
privacy, pricing, content, taxation, copyrights, distribution and product and
services quality. For a description of certain risks relating to government
regulation, see "Business--Governmental Regulation."
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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 consumer,
merchant and wireless services on their site or service;
. the extent to which we expand our consumer, merchant and wireless
services;
. the extent to which we develop and upgrade our technology and data
network infrastructure;
. the occurrence, timing, size and success of acquisitions;
. the 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."
Management Owns a Large Percentage of Our Stock.
Our officers, directors and affiliated persons will beneficially own
approximately 42% of our common stock after all of the shares offered in this
prospectus or issuable directly to INEX and Union-Street shareholders upon the
closings of our acquisitions of them are issued. Naveen Jain, our Chief
Executive Officer, will beneficially own approximately 33% of our common stock.
As a result, our officers, directors and affiliated persons may effectively be
able to:
. elect, or defeat the election of, our directors;
. amend or prevent amendment of our Certificate of Incorporation or Bylaws;
. effect or prevent a merger, sale of assets or other corporate
transaction; and
. control the outcome of any other matter submitted to the stockholders for
vote.
Our public stockholders may have little control over the outcome of such
transactions. Management's stock ownership may discourage a potential acquirer
from making a tender offer or otherwise attempting to obtain control of
InfoSpace.com, which in turn could reduce our stock price or prevent our
stockholders from realizing a premium over our stock price. See "Management,"
"Certain Transactions" and "Principal Stockholders."
Year 2000 Compliance Issues Could Adversely Impact Our Business.
Despite our testing and remediation efforts, our systems and those of third
parties, including content providers, advertisers, affiliates, and end users
may contain errors or faults with respect to the Year 2000. Our efforts to
address this issue are described in more detail in "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000
Compliance." Known or unknown errors or defects that affect the operation of
our software and systems and those of third parties, including content
providers, advertisers, affiliates, and end users 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 harm our business.
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Our Stock Price Has Been and May Continue to be Volatile.
The trading price of our common stock has been and is likely to continue to
be highly volatile. Since we began trading on December 15, 1998, our stock
price has ranged from $7.50 to $181.00. Our stock price could be subject to
wide fluctuations in response to factors such as the following:
. actual or anticipated variations in quarterly results of operations;
. the addition or loss of affiliates, distribution partners or content
providers;
. announcements of technological innovations, new products or services by
us or our competitors;
. changes in financial estimates or recommendations by securities analysts;
. conditions or trends in the Internet and online commerce industries;
. changes in the market valuations of other Internet, online service or
software companies;
. our announcements of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
. additions or departures of key personnel;
. sales of our common stock;
. general market conditions; and
. other events or factors, many of which are beyond our control.
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 that have often been
unrelated or disproportionate to the operating performance of these companies.
These broad market and industry factors may materially and adversely affect our
stock price, regardless of our operating performance. The trading prices of the
stocks of many technology companies are at or near historical highs and reflect
price-earnings ratios substantially above historical levels. These trading
prices and price-earnings ratios may not be sustained.
Future Sales of Our Common Stock May Depress Our Stock Price.
Sales of a substantial number of shares of our common stock in the public
market could adversely affect the market price of our common stock. After this
offering and the consummation of our combination with INEX and acquisition of
Union-Street, 49,565,672 shares of our common stock will be outstanding. In the
past 12 months, we completed two offerings of our common stock. All of the
shares sold in these offerings are freely tradeable unless held by affiliates
of InfoSpace.com. See "Shares Eligible for Future Sale."
Certain Anti-Takeover Provisions May Affect the Price of Our Stock.
Certain provisions of our Certificate of Incorporation and Bylaws and
Washington and Delaware law could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders. Also, if
we receive a proposal from another company that could result in the acquisition
of InfoSpace.com, our agreement with AOL requires us to negotiate with AOL
before entertaining discussions with the other company. This provision could
discourage companies other than AOL from presenting acquisition proposals to us
and could delay, deter or prevent a change of control of us. See "Description
of Capital Stock."
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FORWARD-LOOKING STATEMENTS
You should not rely on forward-looking statements in this prospectus. This
prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends," "may," "will," "should," "estimates,"
"predicts," "potential," "continue" and similar expressions to identify such
forward-looking statements. These forward-looking statements include, but are
not limited to, statements regarding our business and growth strategy, the
expected benefits of our consumer, merchant and wireless services, the
expectation that AOL and its business divisions will meet certain contractual
minimum commitments, the expectation that actual carriage fee payments under
our agreements with AOL will exceed the sales and marketing expense recorded
for the periods in which payments are made, future carriage fees, increased
advertising and public relations expenditures, increased operating expenses and
the reasons for such increases, expected operating losses, increased product
development expenditures, increased costs of revenues, increased product
development expenses, increased sales and marketing expenses, future levels of
bad debt expense, increased general and administrative expenses, anticipated
capital equipment expenditures, anticipated cash needs, the absence of material
Year 2000 compliance problems and the time frame and cost of addressing any
Year 2000 problems, the successful integration of technology and services
acquired from Active Voice, INEX and Union-Street.com and the cost thereof, the
closing of our acquisitions of Prio and Saraide, and the successful integration
of the Prio and Saraide operations. This prospectus also contains forward-
looking statements attributed to third parties relating to their estimates
regarding the growth of certain markets. Forward-looking statements are subject
to known and unknown risks, uncertainties and other factors that may cause our
and the strategic Internet services industry's actual results, levels of
activity, performance, achievements and prospects to be materially different
from those expressed or implied by such forward-looking statements. These
risks, uncertainties and other factors include, among others, those identified
under "Risk Factors" and elsewhere in this prospectus.
These forward-looking statements apply only as of the date of this
prospectus. 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 prospectus 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 prospectus. See "Risk Factors."
20
<PAGE>
USE OF PROCEEDS
Of the 612,203 shares of our common stock offered in this prospectus, we will
issue approximately 540,001 shares of our common stock upon exchange or
redemption of the exchangeable shares; we will receive no net cash proceeds
upon the issuance of such shares. We may receive up to approximately
$1.7 million in net cash proceeds (assuming an exchange rate of Canadian
dollars to U.S. dollars of approximately 0.68:1), subject to fluctuations in
the exchange rate between Canadian dollars and U.S. dollars, in connection with
the exercise of warrants to purchase shares of our common stock being offered
in this prospectus. We will use these proceeds for general corporate purposes.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings and therefore do not anticipate
paying any cash dividends in the foreseeable future.
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the Nasdaq National Market under the
symbol "INSP" since December 15, 1998, the date of our initial public offering.
Prior to that time, there was no public market for our common stock. The
following table sets forth, for the periods indicated, the high and low sales
prices for our common stock as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
-------- -------
<S> <C> <C>
Fiscal Year Ended December 31, 1998:
Fourth Quarter (from December 15, 1998).................. $ 26.00 $ 7.50
Fiscal Year Ending December 31, 1999:
First Quarter............................................ $ 49.625 $14.25
Second Quarter........................................... $ 72.625 $35.25
Third Quarter............................................ $ 58.938 $36.875
Fourth Quarter (through December 7, 1999)................ $175.625 $38.75
</TABLE>
On December 7, 1999 the last reported sale price for our common stock on the
Nasdaq National Market was $173.6875 per share. As of December 7, 1999, there
were approximately 255 holders of record of our common stock. See "Risk
Factors--Our Stock Price Has Been and May Continue to be Volatile."
21
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999.
This table should be read in conjunction with our Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
As of
September 30, 1999
------------------
(in thousands,
except share data)
<S> <C>
Stockholders' equity:
Preferred Stock, $0.0001 par value per share; 15,000,000
shares authorized; no shares issued and outstanding...... $ --
Common Stock, $0.0001 par value per share; 200,000,000
shares authorized; 47,557,639 shares issued and
outstanding.............................................. 5
Additional paid-in capital................................ 293,741
Accumulated deficit....................................... (14,244)
Unearned warrants......................................... (2,515)
Unearned compensation--stock options...................... (135)
--------
Total stockholders' equity.............................. 276,852
--------
Total capitalization.................................. $276,852
========
</TABLE>
- --------
(1) Excludes as of September 30, 1999:
. 5,414,704 shares of common stock issuable upon exercise of outstanding
options at a weighted average exercise price of $10.20 per share;
. 6,595,720 shares of our common stock issuable upon exercise of
outstanding warrants at a weighted average exercise price of $2.64 per
share; and
. 5,225,256 shares of our common stock reserved for future issuance under
our Restated 1996 Flexible Stock Incentive Plan and 1998 Employee Stock
Purchase Plan.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except share and per share data)
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," our Consolidated Financial Statements and Notes
thereto and other financial information included elsewhere in this prospectus.
The selected consolidated statements of operations data for the period from
March 1, 1996 (inception) to December 31, 1996, for the years ended
December 31, 1997 and December 31, 1998 and the selected consolidated balance
sheet data at December 31, 1997 and 1998 are derived from our audited
consolidated financial statements, which have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports included elsewhere
herein, and are included elsewhere in this prospectus. The selected
consolidated statements of operations data for the nine months ended September
30, 1998 and 1999 and the selected consolidated balance sheet data as of
September 30, 1999 are derived from unaudited consolidated financial statements
included elsewhere in this prospectus. The selected consolidated balance sheet
data at December 31, 1996 have been derived from audited consolidated financial
statements that have not been included herein.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
March 1 to December 31, September 30,
December 31, ------------------------ ------------------------
1996 1997 1998 1998 1999
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues.............. $ 199 $ 1,685 $ 9,414 $ 5,374 $ 22,005
Cost of revenues...... 97 400 1,605 972 3,434
----------- ----------- ----------- ----------- -----------
Gross profit......... 102 1,285 7,809 4,402 18,571
Operating expenses:
Product development.. 109 213 599 305 885
Sales and marketing.. 231 841 5,541 2,522 16,602
General and
administrative...... 164 480 3,001 1,786 5,371
Amortization of
intangibles......... -- 64 710 413 1,618
Acquisition and
related charges..... -- -- 2,800 2,800 5,659
Other--non-recurring
charges............. -- 137 4,500 240 210
----------- ----------- ----------- ----------- -----------
Total operating
expenses.......... 504 1,735 17,151 8,066 30,345
----------- ----------- ----------- ----------- -----------
Loss from operations.. (402) (450) (9,342) (3,664) (11,774)
Other income, net..... 21 21 410 152 7,496
Equity in loss from
joint venture........ -- -- (125) (76) (101)
----------- ----------- ----------- ----------- -----------
Net loss.............. $ (381) $ (429) $ (9,057) $ (3,588) $ (4,379)
=========== =========== =========== =========== ===========
Basic and diluted net
loss per share....... $ (0.02) $ (0.02) $ (0.33) $ (0.14) $ (0.10)
=========== =========== =========== =========== ===========
Shares used in
computing basic and
diluted net loss per
share................ 18,560,326 21,996,314 27,120,536 25,277,014 45,608,271
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31,
December 31, --------------- September 30,
1996 1997 1998 1999
------------ ------ -------- -------------
<S> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and short-term investments.... $ 690 $ 324 $ 86,750 $158,953
Working capital.................... 825 543 85,780 172,906
Total assets....................... 1,072 1,398 102,258 283,882
Total stockholders' equity......... 1,020 1,028 94,248 276,852
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
"Selected Consolidated Financial Data" and our Consolidated Financial
Statements and Notes thereto included elsewhere in this prospectus. 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 prospectus as being applicable to
all related forward-looking statements wherever they appear in this prospectus.
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 "Risk Factors," as well as those discussed elsewhere herein. See
"Forward-Looking Statements." You should not rely on these forward-looking
statements, which reflect only our opinion as of the date of this prospectus.
We do not assume any obligation to revise forward-looking statements.
Overview
InfoSpace.com, Inc. is a leading Internet information infrastructure company
that provides enabling technologies and Internet services for consumers,
merchants and wireless devices. 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 with our
consumer services. Revenue in 1998 was also primarily generated through our
consumer services. Throughout the first nine months of 1999, we have expanded
our information infrastructure services to enhance our consumer, merchant and
wireless services. The following provides greater detail on each of our service
offerings:
Consumer Services: We provide end user services including content services
such as integrated directories, news and lifestyle information, community
building services such as online address books, calendars, chat and message
boards, and communication services such as instant messaging and Web-based e-
mail. These services are distributed through portals and affinity sites.
Revenues from our consumer services are generated from advertising, licensing
fees and guaranteed transaction fees in lieu of revenue share.
Merchant Services: We provide comprehensive end-to-end merchant services and
an extensive distribution network that includes regional "bell" operating
companies (known as RBOCs), merchant banks and other local media networks. Our
merchant services include: 1) InfoSpace.com PageExpress which enables local
merchants to create a Web presence; 2) InfoSpace.com StoreBuilder which enables
merchants to e-commerce enable their Web presence; 3) ActivePromotion which
allows local merchants to create and distribute product promotions across our
distribution network; and 4) ActiveShopper which provides an open marketplace
where consumers can find, research and purchase products from our merchant
network.
Revenues from our merchant services are primarily generated from e-commerce
fees and licensing, including per store/per month or per promotion/per month
payments.
Wireless Services: Our wireless services are comprised of a comprehensive,
integrated suite of wireless portal services that provide mobile users relevant
content such as real-time stock quotes and traffic reports, commerce
capabilities such as price comparison shopping, communication services such as
device-independent instant messaging, personalization capabilities and
location-based services. Our location-based service is an important feature for
mobile users as it enables the user to search for location-based
24
<PAGE>
information such as the ATM or restaurant closest to where the mobile user is
at that point in time. These services are distributed through wireless
carriers, device manufacturers and software providers.
Our wireless services are private-labeled for each carrier, preserving the
brand of the carrier and their relationship with their customer and creating a
barrier to switch. Revenues are primarily generated from licensing fees and
transaction revenue from the wireless carriers, device manufactures and
software providers.
All three of our services are built on our core technology platform and use
the same operational infrastructure. We do not allocate development or
operating costs to any of these services.
In May 1997, we acquired Yellow Pages on the Internet, LLC, or YPI, a
Washington limited liability company that provided Internet yellow pages
directory information. In June 1998, we acquired Outpost, a Washington
corporation engaged primarily in electronic commerce through the sale of cards
and gifts via the Internet. In June 1999, we acquired the MyAgent technology
and related assets from Active Voice Corporation. In October 1999, we acquired
Union-Street.com, a provider of business services including private label e-
mail, address book, calendar, personal home page, chat and message boards.
These acquisitions were accounted for under the purchase method and,
accordingly, are included in our operating results from the date of acquisition
forward. The impact of the YPI acquisition on our consolidated statement of
operations was not substantial. The acquisitions of Outpost, MyAgent and Union-
Street resulted in write-offs of in-process research and development, goodwill
and core technology amortization and product development costs. Revenues
resulting from these acquisitions have been negligible.
In October 1999, we acquired INEX Corporation, a developer of Internet
commerce solutions designed for small and medium-sized merchants. This
transaction was accounted for as a pooling of interests. The historical
operations of INEX are material to our results of operations, therefore, prior
period financial statements will be restated for this acquisition.
In July 1998, we entered into a joint venture agreement with Thomson to form
TDL InfoSpace to replicate our content, community and commerce services in
Europe. TDL InfoSpace has targeted the United Kingdom as its first market, and
content services were launched in the third quarter of 1998. Under the joint
venture agreement, Thomson will provide its directory information to TDL
InfoSpace and sell Internet yellow pages advertising for the joint venture
through its local sales forces. We also will license our technology and provide
hosting services to TDL InfoSpace. Thomson and we each purchased a 50% interest
in TDL InfoSpace and are required to provide reasonable working capital to TDL
InfoSpace. As of September 30, 1999, we had contributed $496,000 to the joint
venture. We account for our investment in the joint venture under the equity
method. For the year ended December 31, 1998, we recorded a loss from the joint
venture of $125,000. For the nine months ended September 30, 1999 we recorded a
loss from the joint venture of $101,000.
Effective as of July 1, 1998, we entered into two trademark license
agreements with Netscape to license two of Netscape's trademarks for a one-time
nonrefundable license fee. We capitalized the trademark license fees and are
amortizing them over one year, the expected useful life of the trademarks.
These trademarks were fully amortized as of June 30, 1999.
On August 24, 1998, we entered into agreements with AOL to provide white
pages directory and classifieds information services to AOL. Pursuant to the
white pages directory services agreement, we have agreed to provide to AOL
white pages listings and directory services. We are required to pay to AOL a
quarterly carriage fee, the retention of which is conditioned on the quarterly
achievement of a minimum number of searches on the AOL white pages site. We pay
the quarterly carriage fee in advance at the beginning of the quarter in which
the searches are expected to occur and record the carriage fee as a prepaid
expense in the quarter it is paid. The fee is refundable if we do not achieve
the minimum number of searches on the AOL white pages site for such quarter. In
addition, AOL has guaranteed us a minimum number of searches over the term of
the agreement. If AOL does not deliver the guaranteed minimum
25
<PAGE>
number of searches over the term of the agreement, AOL will pay us a cash
penalty payment. We will share with AOL revenues generated by advertising on
our white pages directory services delivered to AOL. We are entitled to a
greater percentage of advertising revenue than is AOL if the amount of revenue
we receive is less than the carriage fees paid to AOL.
We have agreed to provide white pages directory services to AOL for a three-
year term beginning on November 19, 1998, which term may be extended for four
additional one-year terms at AOL's discretion. AOL may terminate the agreement
for any reason after 18 months or at any time upon the acquisition by AOL of a
competing white pages directory services business. In the event of any such
termination, AOL is required to pay us a termination fee. In addition, without
the payment of a termination fee, AOL has the right to terminate the agreement
if we undergo a change of control.
We have agreed to provide classifieds information services to AOL for a two-
year term, with up to three one-year extensions at AOL's discretion. Pursuant
to this agreement, we supply classifieds information services to AOL's
proprietary service, AOL.com, its CompuServe and Digital City divisions and its
Netscape Communications subsidiary. AOL has agreed to pay us a quarterly fee
and will share with us revenues generated from payments by individuals and
commercial listing services for listings on the AOL classifieds service.
Pursuant to the terms of these agreements, we have granted AOL the right to
negotiate with us exclusively and in good faith for a period of 30 days with
respect to proposals or discussions that would result in a sale of a
controlling interest of us or other merger, asset sale or other disposition
that effectively results in a change of control of us.
In connection with the agreements, on August 24, 1998, we issued to AOL
warrants to purchase up to 1,979,832 shares of our common stock. The warrants
vest in 16 equal quarterly installments over four years, conditioned on the
delivery by AOL of a minimum number of searches each quarter on our white pages
directory service. The warrants are vested as to 123,738 shares on February 11,
1999, 123,740 shares on May 1, 1999, 123,740 shares on August 1, 1999, and
123,740 shares on November 1, 1999. The warrants have an exercise price of
$6.00 per share.
We will account for revenue and revenue sharing under the agreements with AOL
under our existing revenue recognition policies described in our Notes to
Consolidated Financial Statements. AOL provided in excess of the minimum number
of searches for the twelve months ended November 30, 1999, and we expect AOL to
meet the minimum number of searches each subsequent quarter. Accordingly, the
total carriage fee payments to be made under the white pages directory services
agreement will be recognized ratably over the term of the agreement as sales
and marketing expense. However, if AOL does not deliver the minimum searches on
the AOL white pages during that quarter, then AOL is obligated to refund the
quarterly carriage fee paid for that specific quarter, in which case we would
credit prepaid expense and reduce the total cost of the white pages directory
services agreement by the amount of the refund. The adjusted total cost of the
agreement would be recognized ratably over the remaining term of the agreement
as sales and marketing expense, which term would include the quarter in which
AOL did not deliver the minimum number of searches. For at least the first two
years of the white pages agreement, we expect that actual carriage fee payments
will exceed the sales and marketing expense recorded for the quarter in which
the payment is made. As such, we expect to experience increases in our prepaid
expense account during this time. Any termination fee paid to us by AOL will be
recognized as revenue when paid. The warrants will be valued under the fair
value method, as required under Statement of Financial Accounting Standards
("SFAS") 123, and amortized ratably over the four-year vesting period.
On June 30, 1999 we entered into an agreement with AOL to provide white pages
directory services to AOL's CompuServe and Digital City divisions and its
Netscape Communications subsidiary for a two-year term. Pursuant to the
agreement, we are required to pay to AOL a bi-annual carriage fee. In return,
AOL has agreed to deliver a certain number of searches of our white pages
directory services in each year of the
26
<PAGE>
agreement. If AOL delivers a greater number of searches in either or both of
the years, we are required to pay AOL additional fees on a cost per search
basis. In the event that AOL delivers a lesser number of searches as of the end
of the initial two-year term of the agreement, AOL will extend the term for six
months or until the shortfall is made up, whichever occurs first. We will
account for revenue and revenue sharing under the agreements with AOL under our
existing revenue recognition policies described in our Notes to Consolidated
Financial Statements. The total carriage fee payments to be made under the
white pages directory services agreement will be recognized based on actual
searches delivered over the term of the agreement as sales and marketing
expense.
We anticipate that carriage fees paid to certain affiliates to include our
consumer services on their Web sites will continue for the foreseeable future,
and we may also pay such carriage fees to other affiliates under arrangements
similar to those with AOL.
We have incurred losses since our inception and, as of September 30, 1999,
had an accumulated deficit of approximately $14.2 million. For the nine months
ended September 30, 1999, our net loss totaled $4.4 million, including $5.7
million in acquisition and related charges associated with the acquisition of
the MyAgent Technology from Active Voice. See "--MyAgent Technology
Acquisition." For the year ended December 31, 1998, our net loss totaled $9.1
million, including a $2.8 million write-off associated with our acquisition of
Outpost and a $4.5 million cash payment to settle a lawsuit filed by a former
employee. See "--Technology from the Outpost Acquisition" and "Business--Legal
Proceedings."
We believe that our future success will depend largely on our ability to
continue to offer commerce, merchant and wireless solutions that are attractive
to our existing and potential future affiliates and distribution partners.
Accordingly, we plan to increase significantly our operating expenses in order
to, among other things:
. expand our affiliate network, which may require us to pay additional
carriage fees to certain affiliates;
. expand our sales and marketing operations and hire more salespersons;
. increase our advertising and promotional activities;
. develop and upgrade our technology and purchase equipment for our
operations and network infrastructure;
. expand internationally; and
. expand our commerce, merchant and wireless services.
After giving effect to our recent acquisitions, we expect to incur
significant operating losses on a quarterly basis in the future. In light of
the rapidly evolving nature of our business and limited operating history, we
believe that period-to-period comparisons of our revenues and operating results
are not necessarily meaningful, and you should not rely upon them as
indications of future performance. Although we have experienced sequential
quarterly growth in revenues over the past nine quarters, we do not believe
that our historical growth rates are necessarily sustainable or indicative of
future growth.
27
<PAGE>
Historical Results of Operations
The following table sets forth the historical results of our operations
expressed as a percentage of total revenues.
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended September
March 1 to December 31, 30,
December 31, ------------- -------------
1996 1997 1998 1998 1999
------------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................. 48.5 23.7 17.0 18.1 15.6
------- ------ ----- ----- -----
Gross profit................... 51.5 76.3 83.0 81.9 84.4
Operating expenses:
Product development............ 55.0 12.6 6.4 5.7 4.0
Sales and marketing............ 115.8 50.0 58.9 46.9 75.4
General and administrative..... 82.2 28.5 31.9 33.2 24.4
Amortization of intangibles.... -- 3.8 7.5 7.7 7.4
Acquisition and related
charges....................... -- -- 29.7 52.1 25.7
Other--non-recurring charges... -- 8.1 47.8 4.5 1.0
------- ------ ----- ----- -----
Total operating expenses..... 253.0 103.0 182.2 150.1 137.9
------- ------ ----- ----- -----
Loss from operations............. (201.5) (26.7) (99.2) (68.2) (53.5)
Other income, net................ 10.6 1.3 4.4 2.8 34.1
Equity in loss from joint
venture......................... -- -- (1.3) (1.4) (.5)
------- ------ ----- ----- -----
Net loss......................... (190.9)% (25.4)% (96.1)% (66.8)% (19.9)%
======= ====== ===== ===== =====
</TABLE>
Results of Operations for the Years ended December 31, 1996, 1997, and 1998 and
Nine Months ended September 30, 1998 and 1999
Revenues. Currently our revenue is derived from our consumer, merchant and
wireless services. These include advertising, content carriage, licensing fees,
e-commerce transaction fees, and guaranteed transaction fees in lieu of revenue
share. We tailor agreements to fit the needs of our advertisers, affiliates and
distribution partners, and under any one agreement we may earn revenue from a
combination of these sources. We also have agreements that utilize services
from more than one of our areas of service. Revenues were $199,000 for the
period ended December 31, 1996, $1.7 million for the year ended December 31,
1997 and $9.4 million for the year ended December 31, 1998. The increases year
to year are due primarily to increased expansion of our affiliate network,
increased traffic to our affiliate network that results in increased page
views, and increased use of our private label solutions. Additionally, in 1997,
we began selling promotion arrangements, including content carriage,
syndication, and commerce, that contributed to the increase in revenues. For
the nine months ended September 30, 1999, revenues were $22.0 million, an
increase of $16.6 million, or 309%, from the comparable period in 1998. The
increases are primarily due to significant growth in our consumer and merchant
services as a result of increased expansion of our affiliate network, which
consists of more than 2,100 Web sites and wireless devices, increased traffic
to our affiliate network that results in increased page views, increased use of
our consumer, merchant and wireless services, as well as larger and longer term
agreements with advertisers, affiliates and distribution partners. We entered
into 116 new agreements with advertisers, affiliates and distribution partners
during the quarter ended September 30, 1999.
A portion of our revenues represents barter transactions resulting from our
exchange with other companies of banner advertising space for reciprocal banner
advertising space or for content licenses. Barter revenues totaled $853,000, or
9.1% of revenues for the year ended December 31, 1998, and $737,000, or 3.3% of
revenues for the nine months ended September 30, 1999.
28
<PAGE>
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. As the Internet matures, we believe more
companies will spend money on advertising in the third quarter in anticipation
of the year-end holiday season. Historically, this spending has occurred mainly
in the fourth quarter. 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 consumer, merchant and wireless
services, including direct personnel expenses, communication costs such as
high-speed Internet access with dedicated DS-3 communication lines, server
equipment depreciation, and content license fees. For the year ended December
31, 1997, cost of revenues also includes amortization of purchased advertising
agreements. Cost of revenues were $97,000, or 48.5% of revenues, for the period
ended December 31, 1996 as compared to $400,000, or 23.7% of revenues, for the
year ended December 31, 1997 and approximately $1.6 million, or 17.0% of
revenues, for the year ended December 31, 1998. Cost of revenues was $972,000,
or 18.1% of revenues for the nine months ended September 30, 1998. This
compares to $3.4 million for the nine months ended September 30, 1999, or 15.6%
of revenues. The absolute dollar increases are primarily attributable to
personnel costs and other costs incurred in order to support greatly increased
delivery of our consumer, merchant and wireless solutions, including
communication lines, data licenses and equipment. We expect the absolute
dollars spent on personnel, enhanced content and expanded communications will
continue to increase for the foreseeable future. We currently anticipate cost
of revenues will remain relatively constant as a percentage of revenues in the
range of high teens to low twenties 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 we use to aggregate, integrate and distribute our
consumer, merchant and wireless services. Product development expenses were
$109,000, or 55.0% of revenues, for the period ended December 31, 1996 as
compared to $213,000, or 12.6% of revenues, for the year ended December 31,
1997 and $599,000, or 6.4% of revenues, for the year ended December 31, 1998.
These expenses have declined significantly as a percentage of revenues due to
our rapid revenue growth. For the nine months ended September 30, 1998, product
development expenses were $305,000, or 5.7% of revenues, compared to $885,000,
or 4.0% of revenues for the nine months ended September 30, 1999. The year-to-
year 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 nine months ended September 30, 1999, we
capitalized approximately $247,000 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 content services on their Web sites,
sales office expenses and travel expenses. Sales and marketing expenses were
$231,000, or 115.8% of revenues, for the period ended December 31, 1996 as
compared to $841,000, or 50.0% of revenues, for the year ended
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<PAGE>
December 31, 1997 and approximately $5.5 million, or 58.9% of revenues, for the
year ended December 31, 1998. Sales and marketing expenses were $2.5 million,
or 46.9% of revenues for the nine months ended September 30, 1998. This
compares to $16.6 million, or 75.4% of revenues for the nine months ended
September 30, 1999. The increases from the prior year were primarily due to
carriage fees paid to certain affiliates under agreements entered into during
the third and fourth quarters of 1998, advertising, expansion of our business
development groups in Redmond, San Francisco and New York and distribution
revenue sharing.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries, fees for professional services, 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. General and administrative expenses were $164,000, or 82.2%
of revenues, for the period ended December 31, 1996 as compared to $480,000, or
28.5% of revenues, for the year ended December 31, 1997 and approximately $3.0
million, or 31.9% of revenues, for the year ended December 31, 1998, primarily
due to increased staffing levels necessary to manage and support our expanding
operations and expansion of our facilities. For the nine months ended September
30, 1998, general and administrative expenses were $1.8 million, or 33.2% of
revenues, compared to $5.4 million, or 24.4% of revenues for the nine months
ended September 30, 1999. The absolute dollar increases were primarily due to
increased staffing levels necessary to manage and support our expanding
operations, expansion of our facilities and professional services. On a going
forward basis, we will need to continue to strengthen our infrastructure to
support our planned growth. We expect general and administrative expenses to
remain relatively constant as a percent of revenues.
Amortization of Intangibles. Amortization of intangibles includes
amortization of goodwill, core technology, purchased domain names, trademark
and assembled workforce. 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 million. These assets are being
amortized over a five-year period beginning in July 1999. 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. In the event we complete additional
acquisitions, expenses relating to the amortization of intangibles could
increase in the future.
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. The acquisition and related charges for the
third quarter of 1999 were primarily for costs incurred in the acquisition of
INEX, which will be accounted for as a pooling of interests. 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.
See "--Technology from the Outpost Acquisition." We expect to continue to
pursue an aggressive growth strategy to enhance and expand our consumer,
merchant and wireless services. In the event we complete additional
acquisitions, we could incur additional acquisition and related charges in the
future.
Other-non-recurring Charges. Other-non-recurring charges in 1998 and 1999
consist of costs associated with litigation settlements. On February 22, 1999,
we reached a settlement with a former employee. Under the terms of the
settlement, the former employee received a cash payment of $4.5 million. We
accrued a liability of $240,000 for estimated settlement costs in the quarter
ended June 30, 1998. We recorded an expense of $4,260,000 for the difference
between the accrued liability and the actual settlement amount in the quarter
ended December 31, 1998. On July 23, 1999, we settled a patent infringment
claim in exchange for a lump sum royalty payment of $209,500. This settlement
expense was accrued on June 30, 1999.
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<PAGE>
Other Income, Net. Other income consists primarily of interest income for all
periods. Other income was $21,000 for the period ended December 31, 1996,
$21,000 for the year ended December 31, 1997, $411,000 for the year ended
December 31, 1998, $153,000 for the nine months ended September 30, 1998, and
$7.5 million for the nine months ended September 30, 1999, primarily due to
interest earned on higher average cash balances resulting from private
financings in July and August of 1998, the net proceeds from our initial public
offering completed on December 15, 1998, and the net proceeds from our follow-
on offering, which closed April 6, 1999.
Equity in Loss from Joint Venture. Equity in loss from joint venture consists
of losses attributable to our 50% interest in TDL InfoSpace, our joint venture
with Thomson Directories Limited in the United Kingdom. Beginning in the
quarter ended September 30, 1998, and continuing through December 31, 1998, we
recorded joint venture losses totaling approximately $125,000 in this joint
venture, due primarily to start-up operating costs associated with the venture.
For the nine months ended September 30, 1999 we recorded a loss from the joint
venture of $101,000, due primarily to direct selling costs and start-up 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 increased from $381,000 for the period ended December
31, 1996 to $429,000 for the year ended December 31, 1997 and to $9.1 million
for the year ended December 31, 1998. This loss includes the $2.8 million
write-off of in-process research and development from the Outpost acquisition
and the $4.5 million expense to settle a lawsuit filed by a former employee.
Our losses increased from $3.6 million for the nine months ended September 30,
1998 to $4.4 million for the nine months ended September 30, 1999. This loss
includes the $4.9 million write-off of in-process research and development from
the MyAgent Technology acquisition. Our cumulative losses sustained since
inception total $14.2 million.
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 September
30, 1999, we had cash, cash equivalents and short-term investments of $159.0
million and long-term investments of $74.5 million.
Net cash used by operating activities was $462,000 from our inception in
March 1996 through December 31, 1996, $202,000 in the year ended December 31,
1997 and $978,000 in the year ended December 31, 1998. Cash used in operating
activities from inception through December 31, 1998 consisted primarily of net
operating losses and increases in accounts receivable, which were partially
offset by increases in accrued expenses and accounts payable. Net cash provided
(used) by operating activities was $700,000 for the nine months ended September
30, 1998 and $(5.4 million) for the nine months ended September 30, 1999. Cash
used in operating activities for the nine months ended September 30, 1999 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 by investing activities was $219,000 in the period from
inception through December 31, 1996, $164,000 in the year ended December 31,
1997 and $78.6 million in the year ended December 31, 1998. Cash used in
investing activities consists primarily of short-term investments of net
proceeds from our
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<PAGE>
initial public offering and private placements of common stock and, to a lesser
extent, from purchases of trademark licenses, businesses and purchase of
property and equipment. Cash provided by financing activities consists of net
proceeds from our initial public offering and, to a lesser extent, from private
placements of common stock. Net cash used by investing activities for the nine
months ended September 30, 1998 was $4.9 million and $135.3 million for the
nine months ended September 30, 1999. Net cash used by investing activities for
the nine months ended September 30, 1999 was primarily comprised of business
acquisitions, securities investments, other investments and note receivable.
The change in securities investments is primarily a result of investing
proceeds from our follow-on offering in short and long-term investments.
Net cash of $93.9 million provided by financing activities for the year ended
December 31, 1998 was primarily from proceeds received from private placements
in May, July and August and from our initial public offering in December 1998.
Net cash of $186.2 million provided by financing activities for the nine months
ended September 30, 1999 was primarily from proceeds received in the follow-on
offering in April 1999.
We anticipate that we will spend up to $1.0 million for capital equipment in
the remainder of 1999. We have also entered into various agreements that
provide for us to make payments for carriage agreements of $4.5 million for the
remainder of 1999 and the year 2000.
At September 30, 1999, we had $159.0 million in cash and short-term
investments. We plan to use this for strategic investments and acquisitions,
investments in internally developed technology and advertising and marketing
initiatives. We also have $74.5 million in long-term investments which are
scheduled to mature over the next five years.
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 "Risk Factors--We May Require Additional Funding."
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<PAGE>
Quarterly Results of Operation
The following table sets forth certain consolidated statements of operations
data for our eight most recent quarters, as well as such data expressed as a
percentage of revenues. We have derived this information from our unaudited
consolidated financial statements. In management's opinion, we have prepared
this unaudited information on the same basis as the audited annual consolidated
financial statements, and this information includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation for the
quarters presented. You should read this information in conjunction with our
Consolidated Financial Statements and Notes thereto included elsewhere in this
prospectus. The operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31, March 31, June 30, September 30
1998 1998 1998 1998 1999 1999 1999
--------- -------- ------------- ------------ --------- -------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $1,015 $ 1,840 $2,519 $ 4,040 $5,142 $ 6,733 $10,130
Cost of revenues........ 212 287 474 632 833 1,127 1,474
------ ------- ------ ------- ------ ------- -------
Gross profit.......... 803 1,553 2,045 3,408 4,309 5,606 8,656
Operating expenses:
Product development... 50 99 156 295 196 342 348
Sales and marketing... 446 506 1,570 3,019 3,849 6,348 6,405
General and
administrative....... 310 523 953 1,215 1,672 1,715 1,984
Amortization of
intangibles.......... 14 107 293 296 299 305 1,014
Acquisition and
related charges...... 0 2,800 0 0 0 4,913 746
Other--non-recurring
charges.............. 0 240 0 4,260 0 210 --
------ ------- ------ ------- ------ ------- -------
Total operating
expenses............ 820 4,275 2,972 9,085 6,016 13,833 10,497
------ ------- ------ ------- ------ ------- -------
Loss from operations.... (17) (2,722) (927) (5,677) (1,707) (8,227) (1,841)
Other income, net....... 5 38 110 259 1,071 3,217 3,208
Equity in loss from
joint venture.......... 0 0 (76) (49) (70) (6) (24)
------ ------- ------ ------- ------ ------- -------
Net income (loss)....... $ (12) $(2,684) $ (893) $(5,467) $ (706) $(5,016) $ 1,343
====== ======= ====== ======= ====== ======= =======
<CAPTION>
March 31, June 30, September 30, December 31, March 31, June 30, September 30
1998 1998 1998 1998 1999 1999 1999
--------- -------- ------------- ------------ --------- -------- ------------
(as a percentage of revenues)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 20.9 15.6 18.8 15.6 16.2 16.7 14.5
------ ------- ------ ------- ------ ------- -------
Gross profit............ 79.1 84.4 81.2 84.4 83.8 83.3 85.5
Operating expenses:
Product development... 4.9 5.4 6.2 7.3 3.8 5.1 7.4
Sales and marketing... 43.9 27.5 62.3 74.7 74.9 94.3 63.2
General and
administrative....... 30.5 28.4 37.8 30.1 32.5 25.5 19.6
Amortization of
intangibles.......... 1.4 5.8 11.6 7.3 5.8 4.5 10.0
Acquisition and
related charges...... 0.0 152.2 0.0 0.0 0.0 73.0 7.4
Other--non-recurring
charges.............. 0.0 13.0 0.0 105.4 0.0 3.1 --
------ ------- ------ ------- ------ ------- -------
Total operating
expenses............ 80.7 232.3 117.9 224.8 117.0 205.5 103.6
------ ------- ------ ------- ------ ------- -------
Loss from operations.... (1.6) (147.9) (36.7) (140.4) (33.2) (122.2) (18.1)
Other income, net....... 0.5 2.1 4.4 6.4 20.8 47.8 31.6
Equity in loss from
joint venture.......... 0.0 0.0 (3.0) (1.2) (1.4) (0.1) (0.2)
------ ------- ------ ------- ------ ------- -------
Net income (loss)....... (1.1)% (145.9)% (35.3)% (135.2)% (13.8)% (74.5)% 13.3%
====== ======= ====== ======= ====== ======= =======
</TABLE>
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<PAGE>
Factors Affecting Quarterly Results of Operations
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 consumer, merchant and wireless services by our
affiliates;
. the cost of acquiring and the availability of content;
. the overall level of demand for consumer, merchant and wireless services;
. our ability to attract and retain affiliates and distribution providers;
. seasonal trends in Internet usage and advertising placements;
. the amount and timing of fees we pay to our affiliates to include our
consumer and merchant services on their Web sites;
. the productivity of our direct sales force and the sales forces of the
RBOCs, 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 information infrastructure services such as
ours is new and evolving, it is very difficult to predict future financial
results. 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.
INEX Corporation Acquisition
On October 14, 1999, we acquired Toronto-based INEX Corporation. Under the
terms of the acquisition, which was accounted for as a pooling of interests, we
will exchange up to 900,000 shares of common stock for all of INEX's
outstanding shares, warrants and options.
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<PAGE>
INEX Corporation Business Overview
INEX Corporation developed and marketed Internet commerce solutions designed
for small and medium-sized business merchants. INEX targeted the small and
medium-sized business merchant through its two electronic commerce storefront
product offerings that consisted of:
. INEX ezStore: a feature-rich, OEM solution that reseller channel
licensees and alliance partners can lease for a nominal fee on a monthly
basis to their small and medium-sized business merchants as part of a
complete end-to-end electronic commerce hosting service offering; and
. INEX Commerce Court Suite: an upgrade path from INEX ezStore for
merchants requiring a more sophisticated and powerful electronic commerce
solution.
The full range of Internet commerce solutions were offered by the OEM channel
licensees or hosting service providers. Customers of INEX at the time of our
acquisition included: Compaq Computer Corporation, 9Net Avenue, Inc.,
Concentric Corporation, Data Return Corporation, Maritime Telephone &
Telegraph, Citibank, Cybercash, Inc., and SkipjackIC Merchant Services.
The majority of revenues since inception were derived from sales of the INEX
Commerce Court Suite. INEX ezStore became commercially available in April 1999
and had not yet contributed substantially to INEX's revenues.
INEX Corporation ("Pre-INEX") was incorporated on June 28, 1996 and later
amalgamated with Ack-Sys Inc. ("Ack-Sys") on February 5, 1997 to form INEX.
Prior to the amalgamation, Ack-Sys held the rights to certain software that was
licensed to Pre-INEX pursuant to a licensing agreement with Ack-Sys. The
100,000 shares of Pre-INEX that were held by Ack-Sys were cancelled and the
1,000,000 outstanding shares of Ack-Sys were exchanged on a 10:1 basis for
common shares in INEX. INEX's fiscal year end is December 31.
INEX incurred losses since its inception and, as of December 31, 1998, had an
accumulated deficit of approximately $4.1 million. For the year ended December
31, 1998, INEX's net loss totaled $2.8 million.
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<PAGE>
Historical Results of INEX Operations
(in thousands)
The historical results of INEX operations for the years ended December 31,
1997 and December 31, 1998 are derived from INEX Corporation's audited
financial statements, which have been audited by PricewaterhouseCoopers LLP,
independent accountants, as stated in their reports included elsewhere herein,
and are included elsewhere in this prospectus. The historical results of INEX
operations data for the nine months ended September 30, 1998 and 1999 are
derived from unaudited financial statements included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
---------------- ------------------
1997 1998 1998 1999
------- ------- -------- --------
(unaudited)
<S> <C> <C> <C> <C>
Revenue................................... $ 57 $ 209 $ 145 $ 478
Cost of revenues.......................... 19 30 18 78
------- ------- -------- --------
Gross Profit............................ 38 179 127 400
Operating expenses:
Product development..................... 170 645 442 877
Sales and marketing..................... 635 744 532 905
General and administrative.............. 464 1,574 1,234 961
Acquisition and related charges......... -- -- -- 237
------- ------- -------- --------
Total operating expenses.............. 1,269 2,963 2,208 2,980
------- ------- -------- --------
Loss from operations...................... (1,231) (2,784) (2,081) (2,580)
Other income (expense).................... (1) 22 27 23
------- ------- -------- --------
Net loss.................................. (1,232) (2,762) (2,054) (2,557)
Deficit--Beginning of period.............. (136) (1,368) (1,368) (4,130)
------- ------- -------- --------
Deficit--End of period.................... $(1,368) $(4,130) $(3,422) $(6,687)
======= ======= ======== ========
</TABLE>
Results of INEX Operations
Years ended December 31, 1997 and 1998
Revenues. Prior to the launch of INEX ezStore in April 1999, INEX derived
substantially all of its revenues from the sale of INEX Commerce Court Suite
through INEX's reseller channels. Revenues were $57,446 for the year ended
December 31, 1997 and $208,910 for the year ended December 31, 1998. The year
over year increase is primarily due to the increased number of reseller
partners, increasing from approximately 10 in 1997 to 40 in 1998.
Cost of Revenues. Cost of revenues consists of product packaging expenses and
reseller marketing and training expenses. Costs of revenues were $18,932 or 33%
of revenues, for the year ended December 31, 1997 and $29,720 or 14% of
revenues, for the year ended December 31, 1998. The year over year percentage
decrease is primarily attributed to the discontinued reseller co-op credit
marketing program.
Product Development Expenses. Product development expenses consist
principally of personnel costs, and include expenses for research, design and
development of the proprietary technology for INEX's Internet commerce product
applications. Product development expenses were $170,459 or 297% of revenues,
for the year ended December 31, 1997 and $644,965 or 308% of revenues, for the
year ended December 31, 1998. The year to year increase in absolute dollars is
primarily attributed to the increase in development staff needed for ongoing
development of INEX's products.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of salaries and related benefits for sales and marketing personnel, advertising
and promotional expenses, public relations, tradeshow activities and travel
expenses. Sales and marketing expenses were $635,502 or 1,106% of revenues, for
the
36
<PAGE>
year ended December 31, 1997 and $744,636 or 356% of revenues, for the year
ended December 31, 1998. Such expenses were incurred primarily to support our
existing reseller channels and to generate greater awareness for INEX in the
industry.
General and Administrative Expenses. General and administrative expenses
consist primarily of fees for professional services, occupancy and general
office expenses and salaries and related benefits for administrative and
executive staff. General and administrative expenses were $463,740 or 807% of
revenues, for the year ended December 31, 1997 and $1,573,980 or 753% of
revenues, for the year ended December 31, 1998. The year to year increase in
absolute dollars is primarily attributed to stock-based compensation expenses
resulting from the repricing of senior executive options in June 1998.
Other Income (Expense). Other income (expense) consists primarily of interest
and investment income, interest expense and foreign exchange gains and losses.
Other income (expense) was ($1,038) for the year ended December 31, 1997 and
$22,146 for the year ended December 31, 1998.
Net Loss. INEX's losses increased from $1.2 million for the year ended
December 31, 1997 to $2.8 million for the year ended December 31, 1998. INEX's
cumulative losses since inception total $4.1 million.
Nine Month Periods ended September 30, 1998 and 1999
Revenues. Revenues were $145,000 for the nine month period ended September
30, 1998 and $478,000 for the nine month period ended September 30, 1999. The
year to year increase in absolute dollars is primarily due to the increase in
the number of resellers of INEX Commerce Court Suite. There were approximately
38 as of September 30, 1998 and 98 as of September 30, 1999.
Cost of Revenues. Cost of revenues were $18,000 or 12% of revenue, for the
nine month period ended September 30, 1998 and $78,000 or 16% of revenues, for
the nine month period ended September 30, 1999. The year to year increase is
primarily attributed to professional service costs for product installations.
Product Development Expenses. Product development expenses were $442,000 or
305% of revenues, for the nine month period ended September 30, 1998 and
$877,000 or 183% of revenues, for the nine month period ended September 30,
1999. The year to year increase in absolute dollars is primarily attributed to
the expanded development staff needed for the ongoing research, design and
development of INEX's technology.
Sales and Marketing Expenses. Sales and marketing expenses were $532,000 or
367% of revenues, for the nine month period ended September 30, 1998 and
$905,000 or 189% of the revenues, for the nine month period ended September 30,
1999. The year to year increase in absolute dollars is primarily attributed to
the increased sales and marketing activities needed to attract new partners and
rollout the INEX ezStore product offering.
General and Administrative Expenses. General and administrative expenses were
$1,234,000 or 851% of revenues, for the nine month period ended September 30,
1998 and $961,000 or 201% of revenues, for the nine month period ended
September 30, 1999. The year to year decrease in absolute dollars is primarily
attributed to the stock based compensation expense included in 1998.
Other Income (Expense). Other income (expense) was $27,000 for the nine month
period ended September 30, 1998 and $23,000 for the nine month period ended
September 30, 1999.
Net Loss. INEX's losses were $2,054,000 for the nine month period ended
September 30, 1998 and $2,557,000 for the nine month period ended September 30,
1999. INEX has incurred losses since inception.
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
37
<PAGE>
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.
InfoSpace.com
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.
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, 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,
community and commerce services.
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INEX Corporation
All of the current versions of INEX's significant software products have been
designed to recognize and use a four digit date in order to accommodate the
Year 2000. INEX's software products obtain date information, such as creation
dates and modification dates, directly from the computer's operating system and
other software applications. The current versions of INEX's products are
dependent upon the operating systems upon which they run and the software
applications that they interact with. There can be no assurances that such
operating systems or software applications will be Year 2000 compliant or that
unforeseen technical problems resulting from the calendar change for the Year
2000 will not adversely affect INEX's software products.
Although INEX does not believe there are any material operations issues or
costs associated with preparing its internal systems for Year 2000 compliance,
there can be no assurances that it will not experience serious unanticipated
negative consequences and/or material costs caused by undetected errors or
defects in the technology used in its internal systems.
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 of the MyAgent technology was
$18.1 million including direct acquisition expenses of $100,000. The purchase
price was allocated to the assets acquired based on their estimated fair values
as follows:
<TABLE>
<S> <C>
In-process research and development........................... $ 3,900,000
Core technology............................................... 400,000
Goodwill...................................................... 13,720,000
Acquired workforce............................................ 80,000
-----------
$18,100,000
===========
</TABLE>
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 in connection with the transaction, which was separate from
the purchase price paid to 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 technology 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 amount of core technology leveraged into the in-process
projects, estimating the expected life of each module, 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.
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
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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 utlized 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 utlized 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 quarter
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 reduce its size 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 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.
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Technology from the Outpost Acquisition
In June 1998, we acquired Outpost, which included the acquisition of the
Outpost Technology and the hiring of approximately ten employees. In the second
quarter of 1998, we wrote off approximately $2.8 million in connection with the
Outpost acquisition.
In connection with the acquisition, we conducted a valuation of the assets
acquired from Outpost, including core technology, assembled workforce and in-
process research and development, utilizing the following major assumptions:
. the revenue and margin contribution of each technology (in-process and
future yet-to-be defined);
. the percentage of carryover of technology from products under development
and products scheduled for development in the future;
. the expected life of the technology;
. anticipated module development and module introduction schedules;
. revenue forecasts, including expected aggregate growth rates for the
business as a whole and expected growth rates for the Internet content
provider industry;
. forecasted operating expenses, including selling, general and
administrative expenses, as a percentage of revenues; and
. a rate of return of 30% utilized to discount to present value the cash
flows associated with the in-process technologies.
Within the acquired Outpost Technology (smart-shopping services) there are
four main modules that we have integrated or intend to integrate into the
InfoSpace.com Web site. These modules in their developed state as of the
acquisition date of Outpost had certain technological limitations. Subsequent
to the acquisition date, we revised our strategy with respect to the
transaction proxy module, with the result being that most of the in-process
technology was discarded. Accordingly, no value was assigned to this module in
connection with our valuation of the assets acquired from Outpost. The four
modules are:
. integrated content that will provide users with product pricing and
merchant information;
. transaction proxy that will allow us to track sales transactions from
beginning to end and to receive confirmation reports from the retailers;
. branding that will allow users to travel to affiliate Web sites without
leaving the InfoSpace.com Web site; and
. universal shopping cart that will allow users to make multiple purchases
at different retailers in one execution.
These modules have been integrated into our full suite of Internet service
offerings. The integrated content module was completed and integrated into our
Web site in the third quarter of 1998. Relevant portions of the transaction
proxy, branding and universal shopping cart modules were completed and
integrated into the version 1.0 release of our ActiveShopper electronic
commerce private label solution that was launched in May 1999. Other portions
of these modules are estimated to be completed in the fourth quarter of 1999.
The direct impact of the smart-shopping service on current and future results
of operations, liquidity and capital resources is not known, as we do not have
the ability to calculate revenues specifically and exclusively attributable to
Outpost's integrated technology. Further, the modules are not distinguishable
market segments for financial reporting purposes or for management purposes.
However, we believe that these services will allow our affiliates to broaden
and enhance their core programming at minimal cost and to generate additional
advertising and transaction revenue opportunities for both us and our
affiliates, initially through our launching, and affiliates utilizing,
ActiveShopper as a private label electronic commerce
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solution. Further, the benefits to us and our affiliates can potentially extend
beyond electronic commerce transactions by:
. enabling us to apply the Outpost Technology to other functions such as
building employment classifieds and databases of local events;
. allowing end users to access consolidated bank statements or statements
of airline frequent flyer miles; and
. attracting additional Web users who are then exposed to the many other
features in our suite of content, community and commerce solutions.
Other Acquisitions
On October 14, 1999, we acquired Seattle-based Union-Street.com, Inc. for
approximately 450,000 shares of our common stock. We accounted for this
acquisition as a purchase. This acquisition allows us to provide portals,
destination sites, and enterprise businesses with a suite of business services
including private label Web-based e-mail, address books, calendars, personal
home pages, chat and message boards as part of our consumer and wireless
services. In connection with the acquisition of Union-Street, we expect to
record approximately $3.3 million as a non-recurring charge in the fourth
quarter of 1999 for the purchase of in-process research and development.
On October 22, 1999, we entered into a definitive agreement to acquire
Redmond-based Zephyr Software Inc. and its wholly owned subsidiary in India,
Zephyr Software (India) Private Limited. Zephyr Software Inc. provides
infrastructure services for the Indian market. Zephyr India will become
InfoSpace.com India, a wholly owned subsidiary of InfoSpace.com. Under the
terms of the acquisition, which we will account for as a purchase, we will
exchange 166,956 shares of our common stock for all of Zephyr Software Inc.'s
outstanding shares, warrants and options. We expect to complete the acquisition
in the fourth quarter of 1999 upon receipt of regulatory approval from the
government of India and satisfaction of customary closing conditions, including
Zephyr Software Inc. shareholder approval.
On November 19, 1999, we entered into a definitive agreement to acquire
Fremont, California-based eComLive.com, Inc. eComLive is a leading provider of
Web-based real-time collaboration and interaction solutions specialized for
consumer-to-consumer, business-to-business and business-to-consumer vertical
markets. Under the terms of the acquisition, which we will account for as a
purchase, we will exchange 355,618 shares of our common stock for all of
eComLive.com's outstanding shares and options. We expect the acquisition to be
completed in December 1999, subject to satisfaction of customary closing
conditions, including eComLive.com shareholder approval.
On December 6, 1999, we entered into a definitive agreement to acquire
Mountain View, California-based Prio, Inc. Prio is a privately held provider of
"e-nabled" commerce solutions specializing in the development of strategic
partnerships, technologies and programs that drive commerce in both traditional
and online shopping environments. Under the terms of the acquisition, which we
will account for as a pooling of interests, we will exchange 2,685,000 shares
of our common stock for all of Prio's outstanding shares, warrants and options.
We expect to complete the acquisition in the first quarter of 2000, subject to
satisfaction of customary closing conditions, including the receipt of
regulatory approval and Prio shareholder approval.
On December 6, 1999, we entered into a definitive agreement to acquire San
Mateo, California-based Saraide.com inc, a provider of wireless Internet
services in Europe, Japan and Canada. Under the terms of the acquisition, which
we will account for as a purchase, we will issue 2,397,716 shares of our common
stock and contribute our wireless assets in exchange for an 80% controlling
interest in Saraide. We expect to complete the acquisition in the first quarter
of 2000, subject to satisfaction of customary closing conditions, including the
receipt of regulatory approval and Saraide shareholder approval.
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Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivatives and
Hedging Activities, effective for fiscal years after June 2000, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. Because
we have never used and do not currently intend to use derivatives, management
does not anticipate that the adoption of this new standard will have a
significant effect on our earnings or financial position.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risks, including changes in interest
rates. 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 a significant portion of
our investment portfolio.
All of the potential changes noted above are based on sensitivity analysis
performed on our balances as of September 30, 1999.
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BUSINESS
Overview
InfoSpace.com, a leading Internet information infrastructure company,
provides enabling technologies and Internet services for consumers, merchants,
and wireless devices. We provide private label solutions of Internet services
to an affiliate network of Internet portals, affinity Web sites and leading
companies enabling Internet access through wireless devices. Our affiliate
network includes more than 2,100 Web sites. Our affiliates include AOL,
Microsoft, Lycos, NBC's Snap, Go2Net, Disney/InfoSeek's GO Network, Network
Solutions, DoubleClick, Dow Jones (The Wall Street Journal Interactive
Edition), ABC LocalNet, BellSouth, US West, AT&T Wireless, GTE Sprint, Nokia
and Ericsson.
We have developed all of our private label solutions from our core technology
platform. Our consumer, merchant and wireless services all utilize the same
core technology within the same operational infrastructure. Our consumer
services include (1) content services, such as integrated directory, news, and
lifestyle information, (2) community building services, such as online address
books, calendars, chat and message boards, and (3) communication services, such
as instant messenger and Web-based e-mail. We also intend to offer
collaboration services such as real-time data collaboration, audio and video
conferencing and document sharing. Our merchant services consist of (1)
PageExpress, which enables local merchants to create a Web presence,
(2) StoreBuilder, which enables merchants to add e-commerce functions to their
Web presence, (3) ActivePromotion, which enables merchants to create targeted
product offers across our network, and (4) ActiveShopper, which provides an
open marketplace where consumers can find, research and purchase products from
our merchant network. Our wireless services include wireless portal services
tailored to provide mobile users relevant content such as real-time stock
quotes and traffic reports, commerce capabilities such as price comparison
shopping and purchasing goods, communication services such as device-
independent instant messaging and e-mail, personalization and localization.
We have built an extensive distribution network through our direct sales
force and through reseller channels. Our reseller channels consist of
distribution agreements with ad networks, such as DoubleClick and Flycast, who
offer both our consumer and merchant services to their network of thousands of
Web sites, reseller agreements with RBOCs, including BellSouth, SBC and USWest,
merchant banks including Capital One, and other local media networks who
provide our services to local merchants. We are also working with wireless
carriers such as AT&T, BellSouth and GTE Sprint, device manufacturers such as
Nokia, Ericsson and Neopoint, and software developers, such as Phone.com and
AvantGo, who offer our wireless portal services to mobile users.
We design our private label solutions to be highly flexible and customizable,
enabling affiliates to select from among our broad range of consumer, merchant
and wireless services. One of our principal strengths is our internally
developed technology, which enables us to easily and rapidly add new affiliates
and distribution partners by employing a distributed, scalable architecture
adapted specifically for our Internet-based infrastructure services. We help
our affiliates and distribution partners build and maintain their brands by
delivering our consumer, merchant and wireless services with the look and feel
and navigation features specific to each affiliate, creating the impression to
end users that they have not left the affiliate's site. We have designed our
technology to support affiliates across multiple platforms and formats,
including the growing number of emerging wireless devices.
We derive a significant percentage of our revenues from advertisements and
promotions on the pages on which our consumer services are delivered to our
affiliates. We also generate revenue through licensing fees, e-commerce fees,
and guaranteed transaction fees in lieu of revenue share.
Our Private Label Solutions
Our private label solutions include consumer services, merchant services and
wireless services. Our consumer services include content services, such as
yellow pages and white pages, maps and directions,
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classified advertisements, real-time stock quotes, sports, information on local
businesses and events, weather forecasts and horoscopes; community services,
such as online address books, personal calendars, personal home pages, message
boards and online chat rooms; and communication services, such as instant
messaging and Web-based e-mail. We intend to offer collaboration services, such
as real-time data collaboration, audio and video conferencing and document
sharing. We distribute these services through Internet portals and affinity
sites. Our merchant services include electronic commerce solutions developed to
allow merchants to build, manage and promote their online presence. We
distribute these services through reseller agreements with RBOCs, merchant
banks and other local media networks. Our wireless services include content,
commerce, personalization, instant messaging and location-based services all
tailored for mobile devices. We distribute these services through wireless
carriers, device manufacturers and wireless software application providers.
Consumer Services
Content Services
We seek to provide our affiliates who use our consumer services with content
of broad appeal to end users, including directories, financial data, news and
entertainment. In most cases, we receive regular data feeds from our content
providers and store the content on our Web servers in order to maintain its
reliability and increase its accessibility. In other cases, our proprietary
technology allows Web users to transparently access content that is stored
directly on the content provider's system. In either case, our technology
enables us to aggregate heterogeneous content into an integrated service, which
is then delivered to our affiliates. Our technology pulls content dynamically
into a Web page or device output display that maintains the look and feel and
navigation features of each affiliate's Web site or wireless device.
We have acquired rights to third-party content pursuant to more than 85
license agreements, typically having terms of one to five years. The license
agreements require the content provider to update content on a regular basis,
the frequency of which varies depending on the type of content. In certain
arrangements, the content provider pays us a carriage fee for syndication of
its content to our network of affiliates. In other instances, we share with the
content provider advertising revenues attributable to end-user access of the
provider's content. For certain of our content, including our core directory
and map content, we pay a one-time or periodic fee or fee per content query to
the content provider. We typically enter into nonexclusive arrangements with
our content providers. However, in certain instances we have entered into
exclusive relationships, which may limit our ability to enter into additional
content agreements.
An element of our content services includes directory services. We license
what we believe to be the most comprehensive and accurate database of
businesses in the United States and Canada through a five-year agreement with
infoUSA (formerly known as American Business Information, Inc.). infoUSA is a
leading provider of online yellow pages directory information. Pursuant to our
agreement with infoUSA, we pay infoUSA an annual fee and have built a co-
branded version of our directory services for infoUSA's Web site. We will share
with infoUSA any revenues generated by this co-branded Web site. We receive
access to infoUSA's business data, and infoUSA is required to update its
information monthly. We enhance this content with expanded yellow pages
information obtained under agreements with RBOCs and independent yellow pages
publishers. This expanded information includes not only names, addresses and
telephone numbers, but also types of business, hours of operation and franchise
affiliations.
We license our white pages directory information for the United States and
Canada under a three-year agreement with Acxiom Corporation, which is
automatically renewed for additional annual terms unless terminated by either
party prior to the end of the initial three-year term or any subsequent term.
Pursuant
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to our agreement, we pay Acxiom an annual fee, and receive household data from
Acxiom that they update on a monthly basis.
We integrate our yellow pages and white pages information with each other and
utilize yellow pages category headings in combination with a natural word
search feature to provide a user-friendly interface and navigation vehicle for
our directory services. We also typically include maps and directions for
addresses included in our directory services. We further enhance the relevance
and accuracy of responses to user queries by employing a radial search feature
to our directory services, which allows users to specify the geographic scope
within a radial distance of a specific address, rather than more conventional
methods of searching by ZIP code or city and county divisions.
In addition to our directory services, we distribute other valuable
information of broad appeal. We seek to provide a comprehensive offering of
content services with everyday significance. Principal categories of content we
currently offer include classifieds, news, travel and city guide information,
real-time stock quotes and financial information, Web directories and
entertainment.
Our future success will depend in large part on our ability to aggregate,
integrate and distribute content of broad appeal. Our ability to maintain our
relationships with content providers and to build new relationships with
additional content providers is critical to the success of our business.
Community and Communications Services
As part of consumer services, we have broadened our service offerings to
include community and communication services and we also intend to offer
collaboration services.
Community building services that we offer our affiliates include a
personalized address books, calendars, personal home pages, online chat and
message boards. We also added communication services such as private label
e-mail and device-independent instant messaging.
In November 1999, we announced the acquisition of eComLive.com. With this
acquisition, we expect to offer consumers and merchants real-time collaboration
and interaction services including live data collaboration, audio and video
conferencing in addition to allowing users to share documents, browsers,
presentations and applications through a standard browser. These Web-based
real-time collaboration and interaction solutions are specialized for consumer-
to-consumer, business-to-business and business-to-consumer vertical markets.
The broad range of services we offer as part of our consumer services help
our affiliates increase traffic, strengthen the value of their brand, and
create additional opportunities to monetize their users.
Our affiliate network now consists of over 2,100 portals and affinity sites,
including 4 of the top 5 most trafficked sites. In addition, our affiliate
network now reaches over 86% of all Internet users.
Our consumer services revenue is derived from advertising, licensing fees and
guaranteed transaction fees in lieu of revenue share.
Merchant Services
We provide comprehensive end-to-end merchant services and an extensive
merchant network that are distributed through relationships with RBOCs,
merchant banks and other local media networks.
Our merchant services consist of ActiveShopper, PageExpress, StoreBuilder and
ActivePromotion.
ActiveShopper
In May 1999, we launched ActiveShopper which provides an open marketplace
where consumers can find, research and purchase products from our merchant
network. ActiveShopper utilizes our proprietary
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integration technology to combine merchant information, decision-making
services and merchandising services in a single shopping platform.
ActiveShopper provides research tools to enable users to come to a conclusion
about a product through access to product reviews, participation in online
forums such as message boards, as well as search for Web sites for additional
information. Once a buying decision has been made, ActiveShopper enables a
consumer to find promotional bargains and sales, as well as search for products
for sale by online merchants and auction sites, offline catalogs and through
online classifieds services and locate merchants in their local area. We offer
ActiveShopper to our affiliates to provide them with electronic commerce
capabilities from their own Web site to retain users who would otherwise go
directly to an online retailer's site. By offering a fully-featured commerce
service, a consumer can make critical purchase decisions without leaving an
affiliate's site.
PageExpress
In May 1999, we launched our Web-based PageExpress technology which allows
local merchants to create a Web presence.
StoreBuilder
In October 1999 following our acquisition of INEX, we launched Infospace.com
StoreBuilder, designed to allow local merchants to e-commerce enable their Web
presence with a complete, affordable and easy-to-use means to build, manage and
promote online storefronts.
ActivePromotion
In October 1999, we launched ActivePromotion, an integrated private label
merchandising solution for Web sites, local merchants and e-retailers which
provides a convenient way to create, test, promote, sell and distribute to a
targeted consumer base across multiple channels through our affiliate network.
ActivePromotion is designed to give merchants the ability to create real-time,
dynamic and targeted product offers. ActivePromotion has been integrated with
our other private label solutions, including yellow pages, classifieds and our
ActiveShopper comparison shopping engine.
In addition, we intend to launch our universal shopping cart which is
designed to allow buyers to purchase multiple products from multiple merchants
across the Internet.
Revenues from our merchant services are primarily generated from e-commerce
transactions and licensing fees. Currently, over 250,000 merchants use our
merchant services, over 1,500 Web sites license these services, and over two
million products are offered through the merchant network. Additionally, 4 of
the 5 RBOCs license and distribute our merchant services to thousands of local
merchants.
Wireless Services
Our wireless services are comprised of a comprehensive, integrated suite of
wireless portal services that provide mobile users content relevant to their
particular needs, such as real-time stock quotes and traffic reports, commerce
capabilities such as price comparison shopping, communication services such as
device- independent instant messaging, personalization capabilities and
location-based services.
We believe location-based services are important features for mobile users
because they enable users to search for location-based information, such as the
location of the ATM or restaurant closest to the mobile user's current
location. These services are distributed through wireless carriers, device
manufacturers and software providers.
Our wireless Internet services are device-independent and provide a platform
which enables our wireless carriers to support a variety of emerging protocols
such as WAP, PQA's for Palm VII and VXML, in addition to HDML and SMTP. Our
services are compatible with a variety of gateway technologies including WAP
gateways from Nokia, Phone.com and Ericsson.
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We have relationships with leading players in the wireless market including
wireless carriers such as AT&T, GTE Sprint and BellSouth; device manufacturers
such as Nokia, Ericsson and NeoPoint and wireless software application
providers such as Phone.com, AvantGo, @mobile, WolfeTech and JP Systems.
Our wireless services are private-labeled for each carrier, preserving the
brand of the carrier and their relationship with their customer and creating a
barrier to switch. Revenues are primarily generated from licensing and
transaction revenue from the wireless carriers, device manufactures and
software providers.
Affiliate and Distribution Network
We provide our private label solutions to portals and affinity sites that
comprise our affiliate networks. Our affiliate network consists of over 2,100
portals and affinity sites.
Consumer Services Affiliates
Affiliates who use our consumer services include leading Internet portals,
affinity sites and online service providers, such as America Online, Microsoft
Network, AT&T WorldNet, family.com, wsj.com, earthlink.com, findlaw.com,
DoubleClick and Network Solutions.
We design our consumer services solutions to be highly flexible and
customizable, enabling affiliates to select from among our broad range of
content, community, communication and collaboration services and to specify the
placement of the selected consumer services within their own Web sites and
devices.
In response to user queries originating from an affiliated Web site or
device, our automated publishing engine dynamically builds a page to conform to
the display format and look and feel and navigation features specific to that
affiliate. This feature helps our consumer services affiliates build and
maintain their brands by creating the impression to end users that they have
not left the affiliate's site. We manage the access of consumer services
information and process user queries from our own Web server until we deliver
these services to an affiliate, serving as a cost-effective single source
supplier of content and services.
Our arrangements with our consumer services affiliates typically provide for
sharing a portion of the revenues generated by advertising on the Web pages
that deliver our consumer services. Both we and the affiliate typically retain
the rights to sell such advertising. Our distribution arrangements with our
consumer services affiliates typically are for limited durations of between six
months and two years and automatically renew for successive terms thereafter,
subject to termination on short notice. These arrangements may be terminated or
may not be renewed upon expiration of their terms. We have also entered into a
strategic alliance with AOL, the largest Internet portal measured in terms of
user traffic to provide some of our services on the Netscape home page
(Netcenter), CompuServe's service and compuserve.com, Digital City, AOL's
proprietary service and AOL.com.
Netscape, CompuServe, Digital City. In June 1999 we entered into an agreement
with AOL to provide white pages directory services to AOL's CompuServe and
Digital City divisions and its Netscape Communications subsidiary for a two-
year term. Pursuant to the agreement, we are required to pay to AOL a bi-annual
carriage fee. In return, AOL has agreed to deliver a certain number of searches
of our white pages directory services in each year of the agreement. If AOL
delivers a greater number of searches in either or both of the years, we are
required to pay AOL additional fees on a cost-per-search basis. In the event
that AOL delivers a lesser number of searches as of the end of the initial two-
year term of the agreement, AOL will extend the term for six months or until
the shortfall is made up, whichever occurs first. We will account for revenue
and revenue sharing under the agreements with AOL under our existing revenue
recognition policies described in our Notes to Consolidated Financial
Statements. The total carriage fee payments to be made under the white pages
directory services agreement will be recognized based on actual searches
delivered over the term of the agreement as sales and marketing expense.
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AOL. In August 1998 we entered into agreements with AOL to provide white
pages directory services and classifieds information services to AOL. Under the
terms of the agreement related to our white pages directory services, we have
agreed to place our white pages directory services on AOL's NetFind home page
and throughout various other parts of AOL's proprietary service and AOL.com.
The white pages directory services are to be provided to AOL for a three-year
term, beginning on November 19, 1998, which term may be extended for an
additional year and subsequently renewed for up to three successive one-year
terms at AOL's discretion. This agreement may be terminated by AOL upon the
acquisition by AOL of a competing white pages directory services business or
for any reason after 18 months, upon payment of a termination fee, or at any
time in the event of a change of control of us. Under this agreement, we have
agreed to pay to AOL a quarterly carriage fee and share with AOL revenues
generated by advertising on our white pages directory services delivered to
AOL. Under the terms of the agreement related to our classifieds information
services, we have agreed to provide classified advertising development and
management services to AOL for two years, with up to three one-year extensions
at AOL's discretion. Pursuant to the agreement, we supply classifieds
information services to AOL's proprietary service, AOL.com, its CompuServe and
Digital City divisions and its Netscape Communications subsidiary. AOL will pay
to us a quarterly fee and share with us revenues generated by payments by
individuals and commercial listing services for listings on the AOL classifieds
service. In connection with these agreements, AOL received a warrant to
purchase our common stock and has certain rights of first negotiation in the
event of a proposed sale of us. For more information regarding this warrant and
the right of first negotiation, see "Description of Capital Stock--Warrants"
and "--Antitakeover Effects of Certain Provisions of Certificate of
Incorporation and Washington and Delaware Law; Right of First Negotiation."
Merchant Service Affiliates
We have reseller agreements with RBOCs, including BellSouth, SBC, USWest and
Ameritech, merchant banks, including Capital One and First USA, and other local
media networks who provide our services to local merchants.
Our agreements with our merchant service resellers typically provide for
licensing fees to be paid to us for our merchant services, including per
store/per month or per promotion/per month, and commissions to be paid to us on
e-commerce transactions.
Wireless Device Affiliates
We are working with certain wireless industry leaders that are incorporating
Internet access as a feature of the wireless device. We believe that the
growing number of wireless devices presents a significant potential
distribution channel for our private label solutions. Numerous suppliers of
cellular telephones, pagers, and hand-held computers are adapting wireless
devices to provide user-friendly access to the Internet. We have entered into
agreements with numerous providers of wireless devices, including the
following:
Selected Wireless Device Affiliates
<TABLE>
<CAPTION>
Industry Segment Company
---------------- -------
<C> <S>
Wireless Service Providers AT&T Wireless; GTE Sprint
Cellular Phone Manufacturers Ericsson; Nokia
Pagers WolfeTech (for Motorola PageWriter)
Hand-held Computer Software Developers AvantGo; InfoGear; Phone.com; Vaden
</TABLE>
We believe that users of wireless devices, in particular, seek useful
information and services of everyday relevance and are more likely to access
the Internet for specific real-world information and services. Since
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providers of wireless devices generally do not generate their own content and
services or have less content and services available to them than Web sites, we
believe there is an opportunity for our consumer and merchant services to be an
integral part of the services bundled with these devices. We work with these
affiliates to identify, acquire and integrate new consumer and merchant
services that bring additional value to their devices. Our technology allows us
to readily adapt the delivery of our services to the individual format and
display features of our wireless device affiliates.
Typically, our agreements with wireless device affiliates have terms of
between one and three years. Revenues from our wireless services are derived
from licensing and transaction revenue. We receive recurring monthly licensing
fees and guaranteed transaction revenue from wireless carriers, device
manufacturers and software providers. We also receive transaction revenue on a
per subscriber and per query base on existing devices, such as pagers.
Revenue Sources
We derive substantially all of our revenues for our consumer, merchant, and
wireless services from national and local advertising, content carriage fees,
licensing fees, e-commerce transaction fees, and guaranteed transaction fees in
lieu of revenue share. Our clients include a broad range of businesses that
advertise on the Internet, including certain of our content providers and
affiliates.
Advertising
National Advertising
Throughout our consumer services, we sell banner advertisements and other
CPM-based national advertising, including "button advertisements," "textlinks,"
and customized advertising solutions developed for specific advertisers. Button
advertisements are smaller than banner advertisements and can be placed
anywhere on a Web page. Textlinks appear on a Web page as highlighted text,
usually containing the advertiser's name. Multiple button advertisements and
textlinks can appear on the same Web page along with banner advertisements.
Both button advertisements and textlinks typically feature click-through
hyperlinks to the advertiser's own Web site.
Our national advertising agreements generally have terms of less than six
months and guarantee a minimum number of impressions. We charge fees for banner
advertising based on the specificity of the target audience. Our rates for
button advertisements and textlinks are lower than those for banner
advertisements. Actual CPMs depend on a variety of factors, including, without
limitation, the degree of targeting, the duration of the advertising contract
and the number of impressions purchased, and are often negotiated on a case-by-
case basis. Because of these factors, actual CPMs may fluctuate. Our guarantee
of minimum levels of impressions exposes us to potentially significant
financial risks, including the risk that we may fail to deliver required
minimum levels of user impressions, in which case we typically continue to
provide advertising without compensation until such levels are met.
Local Internet Yellow Pages Advertising
We generate an Internet yellow pages listing free of charge for all U.S.
local business listings provided by infoUSA. This listing includes name,
address and telephone number information, as well as maps and door-to-door
directions. Similar to traditional yellow pages industry practices, we generate
revenues by selling enhancements to this basic listing. Enhancement options
include boldface type, enlarged type size, multi-category listings, preferred
placement, email listings and Web site links, display advertisements and
category sponsorships.
Internet yellow pages advertising agreements provide for terms of one year,
with pricing comparable to print yellow pages advertising, typically paid in
monthly installments. Costs to the local advertisers generally range from $50
to $300 or greater per year, depending on the types of enhancements selected.
For convenience, these payments usually accompany the local advertiser's
monthly payment for its print advertising.
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Licensing Fees
We receive licensing fees from our consumer, merchant and wireless services.
Licensing fees are derived from the distribution of our consumer services to
many of the affiliates in our network. Licensing fees from merchant services
are derived through our reseller relationships with RBOCs, merchant banks and
other local media networks, and include per store/per month and per
promotion/per month fees. Licensing agreements for our consumer and merchant
services generally range from 3 to 36 months in duration. For our wireless
services, licensing fees are currently derived primarily from the upfront
payment of setup/integration fees.
e-Commerce Fees
We generate e-commerce fees from links and completed transactions through our
merchant services. Under our merchant services arrangements, merchants agree to
pay us a commission-based transaction fee when a user clicks-through to their
site and purchases a product. These commissions typically range from 5-20% of
the purchase amount. These fees are generally paid to us monthly or quarterly,
after the merchant has collected their payment from the user.
Guaranteed Transaction Fees
We have agreements with some affiliates and merchants under which they agree
to pay us guaranteed transaction fees. These arrangements are individually
negotiated and have a range of specially adapted features involving various
compensation structures which are often based on the range and extent of
customization rather than on CPMs. These arrangements vary in terms and
duration, but generally have longer terms than arrangements for our CPM-based
advertising. In some of these arrangements, we may also receive transaction
revenues when transactions exceed the guaranteed minimum payments. If the
merchant offers an e-commerce opportunity in its promotion, we may derive
transaction revenues based on the level of transactions made through the
promotion.
We also have arrangements with wireless carriers, device manufacturers and
software providers whereby we receive guaranteed transaction fees as well as
transaction revenues on a per-subscriber and per-query basis on existing
devices, such as pagers, in excess of the guaranteed minimum payments.
We generate a significant amount of our revenues from advertising and
guaranteed transaction fees from our affiliates who use our consumer services,
which involves a number of risks. For additional information about these risks,
see "Risk Factors--We Rely on Advertising and Transaction Revenues," "--We Rely
on Third Parties for Sales of Internet Yellow Pages Advertising," "--
Advertisers May Not Adopt the Internet as an Advertising Medium" and "--Our
Advertising Arrangements Involve Risks."
Technology and Infrastructure
One of our principal strengths is our internally developed technology, which
we have designed specifically for our Internet-based consumer, merchant and
wireless services. Our technology architecture features specially adapted
capabilities to enhance performance, reliability and scalability, consisting of
multiple proprietary software modules that support the core functions of our
operations. These modules include Web Server Technology, Database Technology, a
Web Scraping Engine and Gateway Technology.
Web Server Technology
We designed our Web Server Technology to enable rapid development and
deployment of information over multiple platforms and formats. It incorporates
an automated publishing engine that dynamically builds a page to conform to the
look and feel and navigation features of each affiliate. Our wireless Internet
services are device-independent and provide a platform which enables our
wireless carriers to support a
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variety of emerging protocols such as WAP, PQA's for Palm VII and VXML, in
addition to HDML and SMTP. Our services are compatible with a variety of
gateway technologies including WAP gateways from Nokia, Phone.com and Ericsson.
Our Web Server Technology includes other features designed to optimize the
performance of our content, community and commerce services, including:
. an HTML compressor that enables modifications of file content to reduce
size, thereby reducing download time for users;
. an "Adaptive Keep-Alive" feature that maximizes the time during which
client server connections are kept open, based on current server load,
thereby increasing user navigation and Web site traversal speed; and
. a Proxy Server that provides the capability for real-time integration and
branding of content that resides remotely with third-party content
providers.
Database Technology
We have developed proprietary database technology to address the specific
requirements of our business strategy and private label solutions. We designed
our Co-operative Database Architecture to function with a high degree of
efficiency within the unique operating parameters of the Internet, as opposed
to commonly used database systems that were developed prior to the widespread
acceptance of the Internet. The architecture is tightly integrated with our Web
Server Technology and incorporates the following features:
Heterogeneous Database Clustering. Our Heterogeneous Database Clustering
allows disparate data sources to be combined and accessed through a single
uniform interface, regardless of data structure or content. These clusters
facilitate database bridging, which allows a single database query to produce a
single result set containing data extracted from multiple databases, a vital
component of our ability to aggregate content from multiple sources. Database
clustering in this manner reduces dependence on single data sources,
facilitates easy data updates and reduces integration efforts. In addition, our
pre-search and post-search processing capabilities enable users to modify
search parameters in real time before and after querying a database.
Dynamic Parallel Index Traversal. Our Dynamic Parallel Index Traversal
mechanism utilizes the search parameters supplied by the user to determine the
appropriate database index (from among multiple indices) to efficiently locate
the data requested. Further, an index compression mechanism allows us to
achieve an efficient balance between disk space and compression/decompression
when storing or accessing data.
Automatic Query State Recovery. In a response to a database query,
conventional databases access previously displayed results in order to display
successive results to a given query, thus increasing response time by
performing redundant operations. Our Automatic Query State Recovery mechanism
decreases response time by maintaining the state of a query to allow the prompt
access of successive results. This feature is particularly important, for
example, when an end-user query retrieves a large number of results.
Natural Language Interface. We incorporate a natural word search interpreter,
which successfully utilizes familiar category and topic headings traditional to
print directory media to generate relevant and related results to information
queries. By incorporating a familiar navigation feature into our services, we
believe we provide end users with a more intuitive mechanism to search for and
locate information.
Data Warehouse. For our merchant services we have developed a comprehensive
enterprise-wide data warehouse. This data warehouse contains information
relating to merchants, products, services, users, customers, profiles,
storefronts, purchases, site traffic and metrics. The aggregation of this
information in one place allows us to leverage our development efforts and
reduce redundant information.
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Web Scraping Engine
We have developed our Web Scraping Engine to allow data from a variety of
sources on the Internet to be retrieved, parsed and presented as a single
virtual database result, either in real-time or at predetermined intervals. Our
State Machine-Based Profiling system catalogs the data on each source site,
which is later accessed by our Web Scraping Engine for real-time retrieval.
Data results can be internally cached to reduce network traffic and deliver the
fastest possible results to the end user.
The Web Scraping Engine has numerous applications, one of which is collecting
real-time information from multiple sources in a manner that eliminates the
need for a data provider to perform any local modifications. This technology is
currently being applied in the price comparison feature of our ActiveShopper
merchant service. Various other potential uses of the technology have been
identified, including the collection and real-time updating of event data such
as concert information, performing arts schedules and sporting events, and the
aggregation of classified listings, such as employment listings from corporate
Web sites.
Gateway Technology
Our Gateway Technology allows us to take content from one source protocol and
forward it to a device destination that does not include any of the hardware or
software necessary for establishing an internet connection. The content can be
sent directly or may have some processing performed before transmission to the
destination. This can be used for a single message, or multiple messages sent
on a timed basis such as weather, stock quotes, news and horoscopes. Messages
may be sent to a single user or group of users.
Data Network Infrastructure
We maintain a carrier-class data network center designed to ensure high-level
performance and reliability of our private label solutions. We connect directly
to the Internet from our facilities in Redmond, Washington through redundant,
dedicated DS-3 communication lines provided by multiple telecommunication
service providers. Our hardware resides in a secure climate-controlled room,
with local directors providing load balancing and failover. In addition to the
facilities located at our headquarters, we have been in hosting facilities
provided by Exodus Communications and Savvis Communications at their sites near
Seattle, Washington. We are currently consolidating our co-location
arrangements with Exodus and Savvis into a single geographically remote
location. As we expand our operations, we expect to locate server facilities at
various strategic geographic locations.
Product Development
We believe that strong product development capabilities are essential to
developing the technology necessary to successfully implement our strategy of
expanding our affiliate network, acquiring value-added content to add to our
consumer, merchant and wireless services, expanding internationally and into
other services and maintaining the attractiveness and competitiveness of our
private label solutions. We have invested significant time and resources in
creating our proprietary technology. Product development expenses were $110,000
for the period from March 1, 1996 (inception) to December 31, 1996, $213,000
for the year ended December 31, 1997, $604,000 for the year ended December 31,
1998, $305,000 for the nine months ended September 30, 1998 and $885,000 for
the nine months ended September 30, 1999.
Rapidly changing technology, evolving industry standards, evolving customer
demands and frequent new product and service introductions characterize our
market. See "Risk Factors--Rapid Technological Change Affects Our Business" for
a discussion of certain risks in this regard.
International Expansion
We intend to capitalize on what we perceive to be a significant opportunity
for our services in international markets. We expect to reduce the costs and
risks of international expansion by entering into
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strategic alliances with partners able to provide local directory information,
as well as local sales forces and contacts.
We entered into a joint venture with Thomson to form TDL InfoSpace to
replicate our content, community and commerce services in Europe. TDL InfoSpace
has targeted the United Kingdom as its first market, and content services were
launched in the third quarter of 1998. Pursuant to the terms of the joint
venture agreement, both we and Thomson entered into license agreements with TDL
InfoSpace for offsetting payments to each party of (Pounds)50,000. These
amounts were not intended to represent the fair market value of the license
agreements to an unrelated third party. Under the license agreement between
Thomson and TDL InfoSpace, Thomson licenses its U.K. directory information
database to TDL InfoSpace. Under the joint venture agreement, Thomson also
sells Internet yellow pages advertising for the joint venture through its local
sales force. Under our license agreement with TDL InfoSpace, we license our
technology and provide hosting services to TDL InfoSpace. In addition, under
our license agreement, TDL InfoSpace is obligated to reimburse us for any
incremental costs incurred by us for our efforts with respect to the hosting
services. In the event that TDL InfoSpace expands into other countries, it is
required to pay to us an additional technology license fee of up to $50,000 per
additional country. Our license agreement also provides that, in the event that
we no longer hold any ownership interest in the joint venture, TDL InfoSpace
and we will negotiate an arm's-length license fee for our technology, not to
exceed $1 million. Each party purchased a 50% interest in TDL InfoSpace and is
required to provide reasonable working capital to TDL InfoSpace.
We expect that TDL InfoSpace will expand its private label solutions to other
European countries by the second quarter of 2000. Under the joint venture
agreement, each of us and Thomson is obligated to negotiate with TDL InfoSpace
and the other party to jointly offer private label solutions in other European
countries prior to offering such services independently or with other parties.
In March 1999, we began providing private label solutions to Canadian
affiliates through our wholly-owned subsidiary, InfoSpaceCanada.com. In
connection with our anticipated acquisition of Zephyr Software, Inc., we expect
to launch InfoSpace.com India in the first quarter of 2000 to provide
comprehensive localized consumer, merchant and wireless services to the Indian
market. In addition, with our anticipated acquisition of Saraide, we expect to
expand our wireless services into Europe, Japan and Canada. We are currently
investigating additional international opportunities. The expansion into
international markets involves a number of risks. See "Risk Factors--Our
International Expansion Plans Involve Risks" for a description of these risks.
Intellectual Property
Our success depends significantly upon our proprietary technology. To protect
our proprietary rights, we rely on a combination of copyright and trademark
laws, patents, trade secrets, confidentiality agreements with employees and
third parties and protective contractual provisions. All of our employees have
executed confidentiality and nonuse agreements that transfer any rights they
may have in copyrightable works or patentable technologies to us. In addition,
prior to entering into discussions with potential content providers and
affiliates regarding our business and technologies, we generally require that
such parties enter into a nondisclosure agreements with us. If these
discussions result in a license or other business relationship, we also
generally require that the agreement setting forth the parties' respective
rights and obligations include provisions for the protection of our
intellectual property rights. For example, our standard affiliate agreement
provides that we retain ownership of all patents and copyrights in our
technology and requires our customers to display our copyright and trademark
notices.
"InfoSpace" is a registered trademark of ours. We have also applied for
registration of certain other service marks and trademarks, including
"InfoSpace.com," "ActiveShopper" and our logo in the United States and in other
countries, and will seek to register additional service marks and trademarks,
as appropriate. We may not be successful in obtaining the service marks and
trademarks that we have applied for. Approximately 16 U.S. patent applications
have been filed relating to various aspects of our technology for querying and
developing databases, for developing and constructing web pages, for electronic
commerce
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for on-line directory services and for web scraping. During the third quarter
of 1999, we received an allowance of claims on an application for an e-commerce
patent previously filed; we expect this patent will be granted by the end of
1999. We are preparing additional patent applications on other features of our
technology. We have instituted a formal patent program and anticipate increased
patent application activity in the future. Patents with respect to our
technology may not be granted, and, if granted, patents may be challenged or
invalidated. In addition, issued patents may not provide us with any
competitive advantages and may be challenged by third parties.
Despite our efforts to protect our proprietary rights, unauthorized parties
may copy aspects of our products or services or obtain and use information that
we regard as proprietary. The laws of some foreign countries do not protect
proprietary rights to as great an extent as do the laws of the United States,
and we do not currently have any patents or patent applications pending in any
foreign country. In addition, others could possibly independently develop
substantially equivalent intellectual property. If we do not effectively
protect our intellectual property, our business could suffer.
Companies in the computer industry have frequently resorted to litigation
regarding intellectual property rights. We may have to litigate to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of other parties' proprietary rights. From time to time, we
have received, and may receive in the future, notice of claims of infringement
of other parties' proprietary rights. Any such claims could be time-consuming,
result in costly litigation, divert management's attention, cause product or
service release delays, require us to redesign our products or services or
require us to enter into royalty or licensing agreements. These royalty or
licensing agreements, if required, may not be available on acceptable terms or
at all. If a successful claim of infringement were made against us and we could
not develop non-infringing technology or license the infringed or similar
technology on a timely and cost-effective bases, our business could suffer. See
"Business--Legal Proceedings."
Competition
We operate in the Internet information infrastructure services market, which
is extremely competitive and is rapidly changing. Our current and prospective
competitors include many large companies that have substantially greater
resources than we have. We believe that the primary competitive factors in the
market for Internet private label solutions are:
. the ability to provide content of broad appeal, which is likely to result
in increased user traffic and increase the brand name value of the Web
sites and wireless devices to which the services are provided;
. the ability to meet the specific content and service demands of a
particular Web site or wireless device;
. the cost-effectiveness and reliability of the consumer, merchant or
wireless information services;
. the ability to provide consumer, merchant or wireless information
services that are attractive to advertisers and end users;
. the ability to achieve comprehensive coverage of a particular category of
content or service; and
. the ability to integrate related information to increase the utility of
the consumer, merchant or wireless information services offered.
We compete, directly or indirectly, in the following ways, among others:
. our directory services compete with AnyWho? (a division of AT&T), GTE
SuperPages, Switchboard, ZIP2 (which was recently acquired by Compaq),
various RBOCs' directory services, infoUSA's Lookup USA, Microsoft
Sidewalk and Yahoo! Yellow Pages and White Pages;
. other information services we provide, such as classifieds, horoscopes
and real-time stock quotes, compete with specialized content providers;
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. our U.K. joint venture competes with British Telecom's YELL service and
Scoot (UK) Limited;
. our community services compete with services offered by Internet portals
such as AOL, Yahoo!, and Excite, as well as specialized content service
providers such as Hotmail; and
. our merchant services compete with e-tailers such as Amazon.com and
portals such as AOL, Yahoo! and MSN.
. our wireless services compete with portals such as AOL, Yahoo!, MSN and
Lycos, and with specialized content providers.
We expect that in the future we will experience competition from other
Internet services companies and providers of Internet software, including
Microsoft, Yahoo!, AOL, Excite, Disney/Infoseek, Lycos, go2net's MetaCrawler
and NBC's Snap. Some of these companies are currently customers of ours, the
loss of which could harm our business. We may also face increased competition
from traditional media companies expanding onto the Internet.
Many of our current customers have established relationships with certain of
our current and potential future competitors. If our competitors develop
private label solutions that are superior to ours or that achieve greater
market acceptance than ours, our business will suffer.
Governmental Regulation
Because of the increasing use of the Internet, the government may adopt laws
and regulations relating to the Internet, addressing issues such as user
privacy, pricing, content, taxation, copyrights, distribution and product and
services quality.
We may be subject to provisions of the Federal Trade Commission Act that
regulate advertising in all media, including the Internet, and require
advertisers to substantiate advertising claims before disseminating
advertising. The Federal Trade Commission has the power to enforce this Act. It
has recently brought several actions charging deceptive advertising via the
Internet and is actively seeking new cases involving advertising via the
Internet.
We may also be subject to the provisions of the recently enacted
Communications Decency Act. This Act imposes substantial monetary fines and/or
criminal penalties on anyone who distributes or displays certain prohibited
material over the Internet. Although some court decisions have cast doubt on
the constitutionality of this Act, it could subject us to substantial
liability.
These or any other laws or regulations that may be enacted in the future
could have several adverse effects on our business. These effects include:
. we may be subject to substantial liability, including fines and criminal
penalties;
. we could be prevented from offering certain products or services; and
. the growth in Internet usage could be substantially limited.
Government regulation may present a risk to our business. See "Risk Factors--
We May Become Subject to Government Regulation."
Employees
As of November 30, 1999, we had 184 employees. None of our employees is
represented by a labor union, and we consider our employee relations to be
good. Competition for qualified personnel in our industry is intense,
particularly among software development and other technical staff. We believe
that our future success will depend in part on our continued ability to
attract, hire and retain qualified personnel. See
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"Risk Factors--We Need to Manage Our Growth and Maintain Procedures and
Controls" and "--We Depend on Key Personnel" and "--We Need to Hire Additional
Personnel."
Facilities
Our principal administrative, engineering, marketing and sales facilities
total approximately 16,864 square feet and are located in Redmond, Washington.
Under the current lease, which commenced on July 13, 1998, and expires on
August 31, 2003, we pay a monthly base rent of $19,775 during the first three
years of the lease and $22,030 during the final two years of the lease. We have
both the right to extend the term of this lease for an additional 60 months and
the right of first opportunity on adjacent expansion space. Under this right of
first opportunity we have expanded into an additional 6,587 square foot space
at a rate of $7,875 per month under a sublease that expires on April 30, 2000.
We also plan to expand into an additional 6,305 square foot space in the same
complex in the near future. We expect that we will need to relocate to
significantly larger facilities during 2000. We maintain a sales office housed
in an approximately 2,271-square-foot space in San Francisco, California under
a lease that expires on November 30, 2001 with a monthly base rent of $5,299.
We also maintain a sales office in New York City for 1,900 square feet with a
monthly base rent of $3,667, under a lease that expires April 2004. Under the
lease at our former location in Redmond, we paid an aggregate rent of $28,840
for the first seven months of 1998 and an aggregate rent of $49,440 during
1997. We do not own any real estate.
Substantially all of our computer and communications hardware is located at
our facilities in Redmond, Washington and we also lease redundant network
facilities at two locations in the Seattle, Washington area under a month-to-
month agreement and an agreement that expires in July 2001. We intend to
install additional hardware and high-speed Internet connections at a location
outside the West Coast as well as in the United Kingdom to support our joint
venture, TDL InfoSpace.
Our systems and operations at these locations are vulnerable to damage or
interruption from fire, flood, power loss, telecommunications failure, break-
ins, earthquake and similar events. See "Risk Factors--Our Business Relies on
the Performance of Our Systems."
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 April 16, 1998, one of our former employees filed a complaint in the
Superior Court for Santa Clara County, California alleging, among other things,
that he had the right in connection with his employment to purchase shares of
our common stock representing up to 5% of our equity as of an unspecified date.
We settled this lawsuit in February 1999. Under the settlement, we made a cash
payment of $4.5 million.
On December 7, 1998, a complaint was filed against us on behalf of an alleged
former employee in Superior Court for Suffolk County in the Commonwealth of
Massachusetts alleging that he was terminated without cause and that he entered
into an agreement with us that entitles him to an option to purchase 2,000,000
shares of our common stock or 10% of our equity. The complaint alleges breach
of contract, breach of the covenant of good faith, breach of fiduciary duty,
misrepresentation, promissory estoppel, intentional interference with
contractual relations and unfair and deceptive acts and practices, seeking
specific performance of the alleged agreement for 10% of our equity, damages
equal to the value of 10% of our equity, punitive damages and attorneys' fees
and costs and treble damages under the Massachusetts Consumer Protection Act
(Mass. G.L. Chapter 93A). On January 7, 1999, the suit was removed to the
United States District Court for the District of Massachusetts. Discovery has
commenced and a trial is tentatively scheduled for March 2000. We are currently
investigating the claims at issue and believe we have
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meritorious defenses to such claims. Nevertheless, litigation is inherently
uncertain and we may not prevail in this suit. To the extent that we are
required to issue shares of our common stock or options to purchase common
stock as a result of the suit, we would recognize an expense equal to the
number of shares issued multiplied by the fair value of our common stock on the
date of issuance, less the exercise price of any options required to be issued.
This could harm our results of operations, and any such issuances would be
dilutive to existing stockholders, the impact of which may be mitigated to the
extent it is offset by shares of common stock in the escrow account described
below in this section.
On December 23, 1998, we initiated litigation against Internet Yellow Pages,
Inc. ("IYP") by filing suit in United States District Court for the Western
District of Washington. On February 3, 1999, we served a first amended
complaint on IYP and Greg Crane, an agent of IYP, in which we asserted claims
for (a) account stated, (b) breach of contract, and (c) fraud. On February 11,
1999, we were served with a complaint filed by IYP in Arizona Superior Court
for Maricopa County, which complaint was filed on February 3, 1999. In its
complaint, IYP asserts causes of action for breach of contract, fraud,
extortion, and racketeering under Arizona Revised Statutes, Section 13-
2301(D)(l) and (t), and seeks relief consisting of $1,500,000 and other
unquantified money damages, punitive damages, treble damages under Arizona
Revised Statutes, Sec. 13-2314.04, and attorney's fees. On March 5, 1999, IYP
answered our complaint in the Washington action, and asserted claims for breach
of contract, fraud, extortion and Consumer Protection Act violations. IYP seeks
relief consisting of $1,500,000 and other unquantified money damages, treble
damages under the CPA, and attorneys' fees. On October 7, 1999, the parties
filed a stipulation for dismissal in the Arizona action, and by order dated
October 8, 1999, the Court dismissed the Arizona action. Trial in the
Washington action is set for April 2000, and discovery is ongoing. We are
currently investigating the claims at issue and believe we have meritorious
defenses to such claims. Nevertheless, litigation is uncertain and we may not
prevail in these suits.
On February 18, 1999, a former consultant filed a complaint in the Superior
Court for Santa Clara County, California alleging, among other things, that he
had the right in connection with his consulting to the Company to purchase
28,462 shares of our common stock. We settled this lawsuit in September 1999.
Under the settlement, the former consultant was permitted to purchase 16,536
shares at a price of $.10 per share.
On January 26, 1999, Civix-DDI, LLC filed a complaint in the U.S. District
Court in Colorado against us and 19 other defendants for infringement of two
patents relating to electronic mapping systems. In July 1999 we settled this
litigation by entering into a license agreement for these patents, pursuant to
which we made a single lump sum royalty payment.
We had discussions with a number of individuals in the past regarding
employment by us and also hired and subsequently terminated a number of
individuals as employees or consultants. Furthermore, primarily during our
early stage of development, our procedures with respect to the manner of
granting options to new employees were not clearly documented. As a result of
these factors, and in light of the receipt of the above claims, we have in the
past received, and may in the future receive, similar claims from one or more
individuals asserting rights to acquire shares of our stock or to receive cash
compensation. We cannot predict whether such future claims will be made or the
ultimate resolution of any currently outstanding or future claim. Naveen Jain,
our Chief Executive Officer, has placed into escrow 2,000,000 shares of our
stock beneficially owned by him to indemnify us and our directors for a period
of five years for certain liabilities relating to events prior to September 30,
1998. The indemnification agreement, however, does not provide for
indemnification for certain matters known by the Board prior to September 30,
1998 or losses less than $100,000. Satisfaction of liabilities through the
issuance of escrowed shares could result in the recognition of future expenses,
which could harm our results of operations.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information as of December 1, 1999
with respect to our executive officers and directors:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Naveen Jain............... 40 Chief Executive Officer and Chairman of the
Board
Bernee D. L. Strom........ 52 President, Chief Operating Officer and Director
Ellen B. Alben............ 37 Senior Vice President, Legal and Business
Affairs and Secretary
Tammy D. Halstead......... 36 Vice President, Acting Chief Financial Officer
and Chief Accounting Officer
Kent A. Hellebust......... 41 Senior Vice President, Business Development and
Marketing
Michael Kantor............ 32 Senior Vice President, Advertising Sales
Randy Massengale.......... 42 Senior Vice President, Human Resources
John E. Cunningham, IV
(1)...................... 42 Director
Peter L. S. Currie (2).... 43 Director
Gary C. List (1).......... 48 Director
Rufus W. Lumry, III....... 52 Director
Carl Stork(2)............. 39 Director
</TABLE>
- --------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Naveen Jain founded InfoSpace.com in March 1996. Mr. Jain has served as our
Chief Executive Officer since its inception, as its President since its
inception to November 1998 and as its sole director from its inception to June
1998, when he was appointed Chairman of the Board upon the Board's expansion to
five directors. From June 1989 to March 1996, Mr. Jain held various positions
at Microsoft Corporation, including Group Manager for MSN, Microsoft's online
service. From 1987 to 1989, Mr. Jain served as Software Development Manager for
Tandon Computer Corporation, a PC manufacturing company. From 1985 to 1987, Mr.
Jain served as Software Manager for UniLogic, Inc., a PC manufacturing company
and from 1982 to 1985, he served as Product Manager and Software Engineer at
Unisys Corporation/Convergent Technologies, a computer manufacturing company.
Mr. Jain holds a B.S. from the University of Roorkee and an M.B.A. from St.
Xavier's School of Management.
Bernee D. L. Strom joined InfoSpace.com in November 1998 as President and
Chief Operating Officer and became a director in December 1998. Since 1990, Ms.
Strom served as President and Chief Executive Officer of the Strom Group, a
venture investment and business advisory firm specializing in high technology.
From April 1995 through June 1997, Ms. Strom served as President and Chief
Executive Officer of USA Digital Radio, LP, a partnership of Westinghouse
Electric Corporation and Gannett Co., Inc. that develops technology for AM and
FM digital radio broadcasting. From 1990 through 1994, she was President and
Chief Executive Officer of MBS Technologies, Inc., a software company. Ms.
Strom was a founder of Gemstar Development Corporation, which developed the
VCRPlus+(R) Instant Programmer, and served as its Vice President from its
founding in 1989 to 1993. Ms. Strom serves as a member of the Board of
Directors of the Polaroid Corporation, Krug International Corporation,
MilleCom, an Internet-based communications company, Walker Digital, an
intellectual property studio, and Quantum Development, a software and services
company. She is a trustee of the National Public Radio Foundation and a member
of CIGNA's Telecommunications Board of Advisors. She also serves as a member of
the Board of Advisors of the J. L. Kellogg Graduate School of Management at
Northwestern University. Ms. Strom holds a B.S., M.A. and Ph.D. from New York
University and an M.B.A. from the Anderson Graduate School of Management at
UCLA.
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<PAGE>
Ellen B. Alben joined InfoSpace.com in May 1998 as Vice President, Legal and
Business Affairs and Secretary, and became a Senior Vice President in September
1999. From April 1997 to May 1998, she was a senior attorney with Perkins Coie
LLP. From September 1996 to April 1997, Ms. Alben served as a consultant to
Paragon Trade Brands, Inc., a private-label diaper manufacturer, and as special
securities counsel to companies raising private financing. From September 1995
through June 1996, she served as Vice President, General Counsel and Secretary
of Paragon Trade Brands. Paragon Trade Brands filed for bankruptcy protection
under Chapter 11 of the Bankruptcy Code in January 1997. From July 1994 to
September 1995, she served as Senior Associate Counsel of The Hillhaven
Corporation, a nursing home provider, and from June 1993 to July 1994 she
served as Associate Counsel of Hillhaven. Prior to joining Hillhaven, Ms. Alben
was in private practice, specializing in corporate securities, finance, and
mergers and acquisitions. She holds a B.A. from Duke University and a J.D. from
Stanford Law School.
Tammy D. Halstead joined InfoSpace.com in July 1998 as Corporate Controller.
In December 1998, she was appointed Vice President and Chief Accounting
Officer, and in November 1999 she became Acting Chief Financial Officer. From
March 1997 to June 1998, she worked at the Seattle office of USWeb Corporation,
an Internet professional services firm, where she served as Director of Finance
and Administration and later as Vice President, Finance and Administration.
From April 1996 to March 1997, she was the Director of Finance and
Administration at Cosmix, Inc., which was acquired by USWeb Corporation in
March 1997. From December 1993 to February 1996, she served as Controller of
ConnectSoft, Inc., a software development company. Prior to joining
ConnectSoft, Inc., she spent eight years in private industry with a division of
Gearbulk Ltd., an international shipping company, and in public accounting with
Ernst & Whinney (now Ernst & Young LLP). She holds a B.A. in Business
Administration from Idaho State University and is a licensed CPA.
Kent A. Hellebust joined InfoSpace.com in September 1999 as Senior Vice
President, Business Development and Marketing. From January 1999 to August
1999, he was Vice President, Innovation Services for AT&T in Basking Ridge,
where he defined, coordinated and launched valued added internet services
across the AT&T consumer franchise of narrowband (WorldNet), broadband (cable)
and wireless networks. From July 1996 to December 1998, Mr. Hellebust served as
the Director of Product Development for AT&T Wireless Services. Prior to that,
Mr. Hellebust served as a Partner at the Los Angeles-based technology
consulting firm of Montgomery and Associates, and as Manager of Strategy and
Technology Consulting at Price Waterhouse. He holds a B.A. from Wesleyan
University and an MBA from the Wharton School of the University of
Pennsylvania, and was a graduate assistant at The Interactive
Telecommunications Program of New York University.
Michael Kantor joined InfoSpace.com in August 1996 as Vice President
Advertising Sales and became a Senior Vice President in November 1999. Mr.
Kantor is responsible for the development and implementation of the Company's
national advertising strategy and program. From March 1996 to August 1996, he
served as Account Manager for The McKinley Group, Inc., a World Wide Web
directory service, where he was responsible for selling Internet advertising
for the Magellan search engine. From May 1993 to November 1994, Mr. Kantor's
sales experience included serving as Account Manager for Golden Gaters
Production, a producer and syndicator of television programming. From March
1992 to May 1993, he was Account Executive with Network Ventures, Inc., a New
York advertising sales representative company. Mr. Kantor holds a B.A. in
psychology from Syracuse University.
Randy Massengale joined InfoSpace.com in December 1998 as Vice President of
Human Resources and became Senior Vice President of Human Resources in
September 1999. From 1992 to 1998 he was employed by Microsoft Corporation in
human resources as Director of Diversity. From 1985 to 1992 he was employed by
John Fluke Manufacturing Company Inc., a provider of general purpose electronic
test and measurement equipment located in Everett, Washington. Prior to that he
worked as a Recruiter for Intel Corp. and as Senior Human Resources Specialist
at Tektronix Inc. Mr. Massengale holds a BA degree from Lewis and Clark College
and a Masters of Science in Management from Antioch University.
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<PAGE>
John E. Cunningham, IV has served as a director of InfoSpace.com since July
1998. Since April 1995 he has served as President of Kellett Investment
Corporation, an investment fund for high-growth private companies. He is on the
Board of Advisors of Petra Mezzanine Fund, LLC, ArrayCom, Inc., Satellink, Inc.
and 1st Virtual Bank. During 1997, Mr. Cunningham was interim Chief Executive
Officer of Real Time Data. From December 1994 to August 1996, he was President
of Pulson Communications, Inc. From February 1991 to November 1994, he served
as Chairman and Chief Executive Officer of RealCom Office Communications, a
privately held telecommunications company that merged with MFS Communications
Company, Inc., and was subsequently acquired by WorldCom, Inc. Mr. Cunningham
holds a B.A. from Santa Clara University and an M.B.A. from the University of
Virginia.
Peter L. S. Currie has served as a director of InfoSpace.com since July 1998.
Since May 1999, Mr. Currie has served as President of the Barksdale Group, a
private venture capital investment firm. From April 1995 to May 1999, he held
various management positions with Netscape Communications Corporation, most
recently as its Executive Vice President and Chief Administrative Officer. From
April 1989 to April 1995, Mr. Currie held various management positions at McCaw
Cellular Communications, Inc., including Executive Vice President and Chief
Financial Officer and Executive Vice President of Corporate Development. Before
joining McCaw Cellular, he was a Principal at Morgan Stanley & Co.
Incorporated. Mr. Currie holds a B.A. from Williams College and an M.B.A. from
Stanford University.
Gary C. List has served as a director of InfoSpace.com since July 1998. Since
June 1997, Mr. List has served as Chief Executive of TDL Group Limited and
Chief Executive Officer and Chairman of its primary subsidiary, Thomson
Directories Limited, a print directory publishing company. From October 1987 to
June 1997, Mr. List held various executive positions with US West, Inc.,
including President of US West International Information Services and Vice
President and Chief Financial Officer of US West Marketing Resources Group.
Rufus W. Lumry, III has served as a director of InfoSpace.com since December
1998. Since 1992, Mr. Lumry has served as President of Acorn Ventures, Inc., a
venture capital firm he founded. Prior to founding Acorn Ventures, Mr. Lumry
served as a director and Chief Financial Officer of McCaw Cellular
Communications. Mr. Lumry was one of the founders of McCaw in 1982, and retired
from McCaw in 1990 as Executive Vice President and Chief Financial Officer. Mr.
Lumry holds an A.B. from Harvard University and an M.B.A. from the Harvard
Graduate School of Business Administration.
Carl Stork has served as a director of InfoSpace.com since September 1998.
Since April 1998, Mr. Stork has been General Manager, Hardware Strategy and
Business Development, at Microsoft Corporation. Mr. Stork has held various
other management positions at Microsoft since 1981. Mr. Stork holds a B.S. from
Harvard University and an M.B.A. from the University of Washington.
Board of Directors
Our Restated Certificate of Incorporation and Restated Bylaws provide that
the Board of Directors shall be composed of not less than five or more than
nine directors, with the specific number to be set by resolution of the Board.
We currently have seven directors.
Our Board of Directors is divided into three classes, with each class to be
as equal in number as possible. Each Class 1 director will serve until our next
annual meeting of stockholders, each Class 2 director will serve until the
following annual meeting of stockholders, and each Class 3 director will serve
until the third ensuing annual meeting of stockholders. Thereafter, each newly
elected director will serve for a term ending at the third annual meeting of
stockholders following such election. Messrs. Cunningham and List serve as
Class 1 directors, Messrs. Lumry and Stork and Ms. Strom serve as Class 2
directors and Messrs. Jain and Currie serve as Class 3 directors. Directors may
be removed by stockholders only for cause.
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<PAGE>
Committees of the Board of Directors
The Compensation Committee consists of Messrs. List and Cunningham. The
Compensation Committee reviews and approves the compensation and benefits for
our executive officers, administers our Stock Incentive Plan and makes
recommendations to the Board of Directors regarding such matters.
The Audit Committee consists of Messrs. Currie and Stork. Among other
functions, the Audit Committee makes recommendations to the Board of Directors
regarding the selection of independent auditors, reviews the results and scope
of the audit and other services provided by our independent auditors, reviews
our balance sheet, statement of operations and cash flows and reviews and
evaluates our internal control functions.
Compensation Committee Interlocks and Insider Participation
No member of the Board of Directors or of the Compensation Committee serves
as a member of the board of directors or compensation committee of any entity
that has one or more executive officers serving as a member of our Board of
Directors or Compensation Committee.
Director Compensation
We pay directors $750 for each Board of Directors meeting attended in person,
$500 for each Board of Directors meeting attended by telephone and $500 for
each committee meeting attended. We also reimburse directors for travel
expenses incurred to attend meetings of the Board of Directors or committee
meetings. Directors are eligible to participate in the Stock Incentive Plan.
See "--Benefit Plans--Stock Option Program for Nonemployee Directors."
Limitation of Liability and Indemnification Matters
Our Restated Certificate of Incorporation limits the liability of directors
to the full extent permitted by Delaware law. Delaware law provides that a
corporation's certificate of incorporation may contain a provision eliminating
or limiting the personal liability of directors for monetary damages for breach
of their fiduciary duties as directors, except for liability:
. for any breach of their duty of loyalty to the corporation or its
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
. for any transaction from which the director derived an improper personal
benefit.
Our Restated Bylaws provide that we shall indemnify our directors and
officers and may indemnify its employees and agents to the full extent
permitted by law. We believe that indemnification under our Restated Bylaws
covers at least negligence and gross negligence on the part of indemnified
parties. We have entered into agreements to indemnify our directors and
executive officers. These agreements, among other things, indemnify our
directors and officers for certain expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by them in any action or
proceeding arising out of their services as a director or officer. We believe
that these agreements are necessary to attract and retain qualified directors
and officers.
On December 11, 1998, InfoSpace.com, all of our directors and Naveen Jain,
our Chief Executive Officer, entered into an Indemnification Agreement whereby
Mr. Jain placed 2,000,000 shares of our common stock beneficially owned by him
in an escrow account to indemnify us and our directors for certain known and
unknown liabilities that may have arisen prior to September 30, 1998. See
"Business--Legal Proceedings."
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<PAGE>
Executive Compensation
The following table sets forth the compensation earned by our Chief Executive
Officer in the fiscal year ended December 31, 1998. No executive officer earned
more than $100,000 in salary and bonus from us in the fiscal year ended
December 31, 1998. Naveen Jain, our Chief Executive Officer, received no salary
or compensation for his services from the time of our inception to July 1998.
On February 22, 1999, Mr. Jain was granted an option to purchase 350,000 shares
of common stock, 300,000 of which will vest over a period of four years and
50,000 of which will vest on the sixth anniversary of the grant date or earlier
if specified revenue and net income criteria are met. In addition, on February
22, 1999, our board of directors raised Mr. Jain's base compensation to
$250,000 per year.
<TABLE>
<CAPTION>
Annual
Compensation
------------
Name and Principal Position Year Salary ($)
--------------------------- ---- ------------
<S> <C> <C>
Naveen Jain, Chief Executive Officer..................... 1998 $ 62,500
</TABLE>
Employment Agreement
Pursuant to an employment agreement with Bernee D. L. Strom, our President
and Chief Operating Officer, we have agreed to provide Ms. Strom with:
. an annual salary of $250,000;
. insurance and other employee benefits;
. options to purchase 1,000,000 shares of common stock which vest over a
period of four years; and
. options to purchase an additional 500,000 shares of common stock that
vest on the sixth anniversary of Ms. Strom's start date or earlier if
specified revenue and net income criteria are met.
In addition, the agreement contains a severance arrangement whereby Ms. Strom
is entitled to receive a payment equal to one year of her base salary and
benefits in the event we terminate her employment for any reason other than for
cause.
Benefit Plans
Restated 1996 Flexible Stock Incentive Plan
We adopted the Restated 1996 Flexible Stock Incentive Plan, or the Stock
Incentive Plan, in 1996. The purpose of the Stock Incentive Plan is to provide
an opportunity for employees, officers, directors, independent contractors and
consultants of InfoSpace.com to acquire our common stock. The Stock Incentive
Plan provides for grants of stock options, stock appreciation rights, or SARs,
and stock awards. We have authorized an aggregate of 10,000,000 shares of
common stock for issuance under the Stock Incentive Plan. At our Annual Meeting
in May 1999, our stockholders adopted an amendment to the Stock Incentive Plan
that provides that beginning with the year 2000, on the first day of our fiscal
year, the number of shares reserved for issuance under the Stock Incentive Plan
will automatically increase by the lesser of (a) 1,000,000 shares, (b) three
percent (3%) of our outstanding shares at the end of our preceding fiscal year,
and (c) a lesser amount as may be determined by our Board of Directors. As of
June 30, 1999, options to purchase 5,624,561 shares of common stock were
outstanding under the Stock Incentive Plan at a weighted average exercise price
of $6.89 per share, and options to purchase 4,091,736 shares were available for
future grant.
Stock Option Grants. Either the Board of Directors or the Compensation
Committee may administer the Stock Incentive Plan. The plan administrator has
the authority to select individuals who are to receive options under the Stock
Incentive Plan and the terms and conditions of each option so granted,
including the type of option granted (incentive or nonqualified), the exercise
price (which must be at least equal to the
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<PAGE>
fair market value of our common stock on the date of grant with respect to
incentive stock options), vesting provisions and the option term; provided,
however, that no more than 2,000,000 shares may be granted in any fiscal year
to an optionee (in addition to a maximum of 2,000,000 shares that may be
granted to such optionee on his or her initial employment, which does not count
against the annual limit).
Stock Appreciation Rights. The plan administrator may grant SARs to selected
individuals separately or in tandem with a stock option award. An SAR is an
incentive award that permits the holder to receive, for each share covered by
the SAR, an amount equal to the amount by which the fair market value of a
share of our common stock on the date of exercise exceeds the exercise price of
such share. The SAR may contain such terms, provisions and conditions not
inconsistent with the Stock Incentive Plan as may be established by the plan
administrator.
Stock Awards. The plan administrator is authorized under the Stock Incentive
Plan to issue shares of our common stock to eligible individuals on such terms
and conditions and subject to such restrictions, if any, as the plan
administrator may determine.
Adjustments. Proportional adjustments to the aggregate number of shares
issuable under the Stock Incentive Plan and to outstanding awards are made for
stock splits and other capital adjustments.
Corporate Transactions. In the event of certain Corporate Transactions (as
defined below), each outstanding option, SAR or stock award shall terminate and
any restricted stock shall be reconveyed to or repurchased by the Company
immediately prior to the specified effective date of the Corporate Transaction;
provided, however, that to the extent permitted by applicable law, any unvested
option, SARs or any restricted stock shall vest and become exercisable as to
25% of the unvested shares or become nonforfeitable as to 25% of the
forfeitable shares, as the case may be, immediately prior to the specified
effective date of the Corporate Transaction. Notwithstanding the foregoing,
options, SARs or restricted stock shall not terminate if, in connection with
the Corporate Transaction, they are to be assumed or substituted for by the
successor corporation or its parent company, pursuant to options, SARs or
restricted stock agreements providing substantially equal value and having
substantially equivalent provisions as the options, SARs or restricted stock
granted pursuant to the Stock Incentive Plan. If options, SARs or restricted
stock purchase rights are not assumed or substituted for by the successor
corporation or its parent company, such options, SARs or restricted stock
purchase rights shall become exercisable as to an additional 25% of the
unvested shares or forfeitable shares, as the case may be, immediately prior to
the effective date of the Corporate Transaction. The remainder of each
outstanding option, SAR or stock award will terminate and any restricted stock
will be reconveyed to or repurchased by us prior to the effective date of the
Corporate Transaction.
"Corporate Transaction," as defined in the Stock Incentive Plan, includes:
. a merger or consolidation in which we are not the surviving entity (other
than a transaction to change our state of incorporation or a transaction
in which holders of our outstanding securities immediately before such
transaction own more than 50% of the voting power of the entity following
such transaction);
. the disposition of all or substantially all of our assets (other than a
disposition in which stockholders immediately before such transaction own
more than 50% of the total voting power of the purchaser or other
transferee following such transaction); and
. certain reverse mergers in which we are the surviving entity but our
stockholders immediately prior to such merger do not hold more than 50%
of our total voting power immediately following such merger.
Stock Option Program for Nonemployee Directors
Under the Stock Incentive Plan, we grant a nonqualified stock option to
purchase 20,000 shares of common stock to each nonemployee director on the date
the director is first appointed or elected to the Board
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<PAGE>
of Directors. Nonemployee directors serving at the time of the adoption of the
program each received an option to purchase 2,500 shares of common stock. On
November 19, 1998, each nonemployee director received a supplemental option to
purchase 20,000 shares of common stock. At each Annual Meeting of Stockholders,
we will grant to each nonemployee director an additional nonqualified stock
option to purchase 5,000 shares of common stock immediately following such
Annual Meeting of Stockholders, except for those nonemployee directors who were
elected to the Board of Directors at such Annual Meeting of Stockholders or
within the three-month period prior to such Annual Meeting of Stockholders. All
options granted under the program for nonemployee directors fully vest on the
first anniversary of the date of such grant.
1998 Employee Stock Purchase Plan
We adopted the 1998 Employee Stock Purchase Plan in August 1998. The Purchase
Plan is intended to qualify under Section 423 of the Internal Revenue Code of
1986 and permits eligible employees to purchase our common stock through
payroll deductions of up to 15% of their compensation. Under the Purchase Plan,
no employee may purchase stock worth more than $25,000 in any calendar year,
valued as of the first day of each offering period. In addition, owners of 5%
or more of our common stock may not participate in the Purchase Plan. We have
authorized an aggregate of 900,000 shares of common stock for issuance under
the Purchase Plan.
The Purchase Plan is implemented with six-month offering periods. Offering
periods begin on each February 1 and August 1. The first offering period began
on December 15, 1998, the date of our initial public offering, and ended on
July 31, 1999. Participants purchase common stock under the Purchase Plan at a
price equal to the lesser of 85% of the fair market value on the first day of
an offering period and 85% of the fair market value on the last day of an
offering period. The Purchase Plan does not have a fixed expiration date, but
may be terminated by the Board of Directors at any time. No shares of common
stock have been issued under the Purchase Plan.
In the event of a merger, consolidation, or acquisition by another
corporation of all or substantially all of our assets, or our liquidation or
dissolution, the last day of an offering period on which a participant may
purchase stock will be the business day immediately preceding the effective
date of such event, unless the plan administrator provides for the assumption
or substitution of the outstanding purchase rights.
INEX Options
As a result of our combination with INEX, we assumed outstanding options
exercisable for approximately 102,544 shares of our common stock.
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<PAGE>
CERTAIN TRANSACTIONS
On April 10, 1996, Naveen Jain purchased 20,000,000 shares of our common
stock for an aggregate price of $2,000. In April 1996, Mr. Jain made an
interest-free loan to us in the amount of $150,000, which we fully repaid. On
April 10, 1996, we granted an option to purchase 500,000 shares of common stock
at an exercise price of $0.01 per share to Anuradha Jain, Mr. Jain's wife, in
connection with her employment as our Director of Human Resources, and granted
an option to purchase 300,000 shares of common stock at an exercise price of
$0.01 per share to Punam Agrawal, Mr. Jain's sister-in-law, in connection with
her employment as our Director of Marketing. In a private placement with other
investors on May 21, 1998, we sold 50,000 shares of common stock at $2.00 per
share to Siddarth Agrawal, Mr. Jain's brother-in-law, and 200,000 shares of
common stock to TEOCO Corporation at $2.00 per share. In addition, on June 29,
1999, we entered into an agreement with TEOCO Corporation for the development
of certain electronic commerce technology, pursuant to which we are obligated
to pay TEOCO an aggregate of $400,000 if certain development milestones are
met. The work by TEOCO Corporation is scheduled to be completed by the end of
October 1999. Atul Jain, Mr. Jain's brother, is President of TEOCO Corporation.
On May 21, 1998, we completed a private placement in which we sold shares of
common stock at a purchase price of $2.00 per share and issued warrants to
purchase shares of common stock at a weighted average exercise price of $2.935
per share as follows:
<TABLE>
<CAPTION>
No. of No. of Shares
Name Shares Subject to Warrants
---- --------- -------------------
<S> <C> <C>
Acorn Ventures-IS, LLC....................... 1,895,000 3,377,458
Kellet Partners LLP.......................... 312,500 460,562
John and Carolyn Cunningham.................. 62,500 153,524
Rufus W. Lumry, III, one of our directors, is the principal stockholder, sole
director and President of Acorn Ventures, Inc., the sole member of Acorn
Ventures. John E. Cunningham, IV, one of our directors, is President of Kellett
Investment Corporation, an affiliate of Kellett Partners. Mr. Cunningham
disclaims beneficial ownership of such shares held by Kellett Partners. Carolyn
Cunningham is John Cunningham's spouse.
Pursuant to the terms of the May private placement, on August 6, 1998, we
issued shares of common stock and warrants to purchase common stock at a
weighted average exercise price of $2.935 in exchange for the termination of
certain anti-dilution rights as follows:
<CAPTION>
No. of No. of Shares
Name Shares Subject to Warrants
---- --------- -------------------
<S> <C> <C>
Acorn Ventures-IS, LLC....................... 33,360 60,094
Kellet Partners LLP.......................... 4,854 7,156
John and Carolyn Cunningham.................. 964 2,372
</TABLE>
Acorn Ventures, Kellett Partners and John and Carolyn Cunningham are entitled
to certain registration rights with respect to the shares of common stock and
the common stock issuable upon exercise of the warrants purchased in the
private placement. See "Description of Capital Stock--Registration Rights."
On May 21, 1998, we entered into Consulting Agreements with Acorn Ventures,
John E. Cunningham, IV and Kellett Partners, pursuant to which we are required
to pay reasonable out-of-pocket expenses incurred by them in connection with
their services as consultants. In addition, we have entered into agreements to
indemnify Acorn Ventures, John E. Cunningham, IV and Kellett Partners against
expenses (including attorneys' fees), judgments, fines and settlement amounts
incurred by them in any action or proceeding in which they are parties or
participants arising out of their services as consultants. These consulting
services include assistance in defining our business strategy, identifying and
meeting with sources of financing and assisting us in structuring and
negotiating such financings. The Consulting Agreements have terms of five years
and are terminable by either party upon breach of the Consulting Agreement by
the other party or on 30 days' notice. Other than the reimbursement of out-of-
pocket expenses, there is no other cash compensation under the Consulting
Agreements.
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In July 1998, we sold 25,000 shares of common stock at $4.00 per share to
Steven Brady in a private placement with other investors. Mr. Brady is the
brother of Ellen B. Alben, our Vice President, Legal and Business Affairs and
Secretary.
Thomson Directories Limited entered into a joint venture agreement with us in
July 1998. Gary C. List, one of our directors, is Chief Executive Officer of
Thomson and a beneficial shareholder and the Chief Executive Officer of TDL
Group Limited, the holding company of Thomson. We sold Mr. List 25,000 shares
of common stock at $4.00 per share in a private placement with other investors
in July 1998.
On August 6, 1998, we sold shares of common stock at a purchase price of
$4.00 per share in a private placement as follows:
<TABLE>
<CAPTION>
No. of
Name Shares
---- -------
<S> <C>
Acorn Ventures-IS, LLC............................................. 125,000
Kellet Partners LLP................................................ 281,250
John and Carolyn Cunningham........................................ 31,250
</TABLE>
Acorn Ventures, Kellett Partners and John and Carolyn Cunningham are entitled
to certain registration rights with respect to the shares purchased in this
private placement. See "Description of Capital Stock--Registration Rights."
We believe that all the transactions set forth above were made on terms no
less favorable to us than could have been obtained from unaffiliated third
parties. Any future transactions, including loans, between us and our officers,
directors and principal stockholders and their affiliates will be approved by a
majority of the Board of Directors, including a majority of the independent and
disinterested directors, and will be on terms no less favorable to us than
could be obtained from unaffiliated third parties.
We have entered into indemnification agreements with each of our executive
officers and directors. See "Management--Limitation of Liability and
Indemnification Matters."
On December 11, 1998, InfoSpace.com, all of our directors and Naveen Jain
entered into an Indemnification Agreement. See "Business--Legal Proceedings"
and "Management--Limitation of Liability and Indemnification Matters."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our outstanding common stock as of October 31, 1999 for
(a) each person or entity that we know beneficially owns more than 5% of our
common stock, (b) each of our directors, (c) our Chief Executive Officer and
(d) all of our directors and executive officers as a group. Except as otherwise
indicated, we believe that the beneficial owners of the common stock listed
below, based on information furnished by such owners, have sole voting and
investment power with respect to such shares.
<TABLE>
<CAPTION>
Shares Beneficially
Owned(1)
-----------------------
Name of Beneficial Owner Number Percent
------------------------ ------------ ----------
<S> <C> <C>
Naveen Jain (2)...................................... 16,192,290 33.3%
c/o InfoSpace.com, Inc.
15375 N.E. 90th Street
Redmond, WA 98052
Acorn Ventures-IS, LLC (3) .......................... 5,177,612 10.0%
1309 114th Avenue S.E.
Suite 200
Bellevue, WA 98004
Rufus W. Lumry, III (3).............................. 5,177,612 10.0%
John E. Cunningham, IV (4)........................... 402,382 *
Gary C. List (5)..................................... 57,500 *
Peter L. S. Currie (5)............................... 32,500 *
Carl Stork........................................... 102,500 *
Bernee D. L. Strom (6)............................... 264,166 *
All directors and executive officers as a group (12
persons) (7)........................................ 22,364,180 42.3%
</TABLE>
- --------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person
that are currently exercisable or will become exercisable within 60 days
are deemed outstanding, while such shares are not deemed outstanding for
purposes of computing the percentage ownership of any other person. Unless
otherwise indicated in the footnotes below, the persons and entities named
in the table have sole voting and investment power with respect to all
shares beneficially owned, subject to community property laws where
applicable.
(2) Represents 14,933,332 shares of common stock held in the name of Naveen and
Anuradha Jain, 1,000,000 shares of common stock held by the Jain Family
Irrevocable Trust, 2,000,000 shares of common stock held by Naveen Jain
GRAT No. 1, 2,000,000 shares of common stock held by Anuradha Jain GRAT No.
1, 12,500 shares subject to options exercisable by Mr. Jain within 60 days
of October 31, 1999 and 466,458 shares subject to options exercisable by
Anuradha Jain within 60 days of October 31, 1999. Anuradha Jain is Mr.
Jain's spouse. Mr. Jain has placed 2,000,000 shares of common stock held by
Naveen Jain GRAT No. 1 in escrow pursuant to an Indemnification Agreement
dated as of December 11, 1998. Mr. Jain retains voting control over those
shares placed in escrow. See "Certain Transactions."
(3) Includes 3,437,552 shares of common stock issuable upon exercise of
warrants currently exercisable and 20,000 shares subject to options
exercisable within 60 days of October 31, 1999. Rufus W. Lumry, III is the
principal stockholder, sole director and President of Acorn Ventures, Inc.,
the sole member of Acorn Ventures.
(4) Includes 155,896 shares of common stock issuable upon exercise of warrants
currently exercisable. Also includes 39,376 shares of common stock held by
Clear Fir Partners, LP, an affiliate of Mr. Cunningham. Also includes
178,396 shares subject to options exercisable within 60 days of October 31,
1999.
(5) Includes 22,500 shares subject to options exercisable within 60 days of
October 31, 1999.
(6) Includes 244,166 shares subject to options exercisable within 60 days of
October 31, 1999.
(7) Includes 4,636,683 shares subject to options and warrants exercisable
within 60 days of October 31, 1999.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 200,000,000 shares of common stock,
$0.0001 par value per share, and 15,000,000 shares of preferred stock, $0.0001
par value per share. The following summary of certain provisions of our common
stock and preferred stock does not purport to be complete and is subject to,
and qualified in its entirety by reference to, the provisions of our
Certificate of Incorporation, which is included as an exhibit to the
registration statement of which this prospectus is a part, and by the
provisions of applicable law.
Common Stock
As of October 31, 1999, there were 48,199,453 shares of common stock
outstanding held by approximately 217 holders of record. There will be
48,996,882 shares of common stock outstanding after giving effect to (1) the
issuance of the 612,203 shares of our common stock offered in this prospectus
and (2) the issuance of 185,226 shares of our common stock issued directly to
INEX shareholders at the closing of our combination with them.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. There are no
cumulative voting rights. Subject to preferences that may be applicable to any
outstanding shares of preferred stock, the holders of common stock are entitled
to receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available for the payment of dividends. In the
event of a liquidation, dissolution or winding up of InfoSpace.com, the holders
of common stock are entitled to share ratably in all assets remaining after
payment of liabilities and liquidation preferences of any outstanding shares of
preferred stock. Holders of common stock have no preemptive rights or rights to
convert their common stock into any other securities. There are no redemption
or sinking fund provisions applicable to the common stock. All outstanding
shares of common stock are fully paid and nonassessable, and the shares of
common stock to be issued upon completion of this offering will be fully paid
and nonassessable. See "Risk Factors--Management Owns a Large Percentage of Our
Stock" and "Dividend Policy."
Preferred Stock
No shares of preferred stock are outstanding, however, upon the closing of
the combination with INEX, one share of preferred stock will be issued to the
trustee as described below. Pursuant to our Certificate of Incorporation, the
Board of Directors has the authority, without further action by the
stockholders, to issue up to 15,000,000 shares of preferred stock in one or
more series and to fix the designations, powers, preferences, privileges and
relative, participating, optional or special rights and the qualifications,
limitations or restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences, any or
all of which may be greater than the rights of the common stock. The Board of
Directors, without stockholder approval, can issue preferred stock with voting,
conversion or other rights that could adversely affect the voting power and
other rights of the holders of common stock. Preferred stock could thus be
issued quickly with terms calculated to delay or prevent a change of control or
make removal of management more difficult. Additionally, the issuance of
preferred stock may have the effect of decreasing the market price of the
common stock, and may adversely affect the voting and other rights of the
holders of common stock. We have no plans to issue any preferred stock. See
"Risk Factors--Certain Antitakeover Provisions May Affect the Price of Our
Stock."
Our Voting Share
Prior to the closing of our combination with INEX, we entered into a voting
and exchange trust agreement with InfoSpace.com Canada Holdings and Montreal
Trust Company of Canada, as trustee. The voting and exchange trust agreement
requires us to issue a voting share to the trustee who will hold the voting
share in trust for the benefit of the holders of exchangeable shares. The
voting share entitles the
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trustee to vote at meetings of the holders of our common stock. For each
exchangeable share which is not held by us or our subsidiaries, the trustee
will have the number of votes to which a holder of one share of our common
stock is entitled with respect to any vote. Unless our charter or applicable
law requires otherwise, the trustee and the holders of our common stock will
vote together as a single class in the election of directors and in all matters
which are submitted to a vote of our stockholders.
The voting share will not entitle the trustee to receive dividends. In the
event of our dissolution, liquidation or the winding up of our affairs, the
trustee will receive an amount equal to the par value of the voting share. This
amount will be adjusted to reflect the effect of any stock split, stock
dividend, combination or similar change on the voting share. When there are no
longer any outstanding exchangeable shares other than those exchangeable shares
which are held by us or our subsidiaries, the voting share will cease to have
any rights. In such event, we will redeem the voting share for an amount equal
to the par value of the voting share and it will automatically return to being
an authorized but unissued share of our preferred stock.
Warrants
As of September 30, 1999, there were outstanding warrants to purchase
6,595,720 shares of common stock. Five investors hold warrants to purchase an
aggregate of 4,057,046 and 70,626 shares of common stock, which expire on May
21, 2008 and August 6, 2008, respectively, at a weighted average exercise price
of $2.93 per share. One investor holds a warrant to purchase 955,934 shares at
an exercise price of $0.01 per share. This warrant expires on October 30, 2002.
On August 24, 1998, in connection with the agreement relating to our white
pages directory services, we issued to AOL warrants to purchase up to 1,979,832
shares of common stock, which warrants vest in 16 equal quarterly installments
over four years, based on the delivery by AOL of a minimum number of searches
on our white pages directory service and vested as to 371,219 shares on August
1, 1999. The warrants have an exercise price of $6.00 per share.
INEX Warrants
Upon consummation of our combination with INEX, we assumed warrants that are
exercisable for approximately 72,202 shares of our common stock. See "Plan of
Distribution--INEX Warrants."
Antitakeover Effects of Certain Provisions of Certificate of Incorporation and
Washington and Delaware Law; Right of First Negotiation
As noted above, our Board of Directors, without stockholder approval, has the
authority under our Certificate of Incorporation to issue preferred stock with
rights superior to the rights of the holders of common stock. As a result,
preferred stock could be issued quickly and easily, could adversely affect the
rights of holders of common stock and could be issued with terms calculated to
delay or prevent a change of control or make removal of management more
difficult.
Election and Removal of Directors. Effective with the first annual meeting of
stockholders following this offering, our Bylaws provide for the division of
our Board of Directors into three classes, as nearly equal in number as
possible, with the directors in each class serving for a three-year term, and
one class being elected each year by our stockholders. See "Management--Board
of Directors." Directors may be removed only for cause. This system of electing
and removing directors may tend to discourage a third party from making a
tender offer or otherwise attempting to obtain control of InfoSpace.com and may
maintain the incumbency of the Board of Directors, as it generally makes it
more difficult for stockholders to replace a majority of directors.
Approval for Certain Business Combinations. Our Certificate of Incorporation
requires that certain business combinations (including a merger, share exchange
and the sale, lease, exchange, mortgage, pledge, transfer or other disposition
or encumbrance of a substantial part of our assets other than in the usual and
regular course of business) be approved by the holders of not less than two-
thirds of the outstanding shares,
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unless such business combination has been approved by a majority of the Board
of Directors, in which case the affirmative vote required shall be a majority
of the outstanding shares.
Stockholder Meetings. Under our Certificate of Incorporation and Bylaws, the
stockholders may call a special meeting only upon the request of holders of at
least 30% of the outstanding shares. Additionally, the Board of Directors, the
Chairman of the Board and the President may call special meetings of
stockholders.
Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our Bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the Board of
Directors or a committee thereof.
Washington Statute. The laws of Washington, where our principal executive
offices are located, impose restrictions on certain transactions between
certain foreign corporations and significant stockholders. Chapter 23B.19 of
the Washington Business Corporation Act, or the WBCA, prohibits a "Target
Corporation," with certain exceptions, from engaging in certain "Significant
Business Transactions" with a person or group of persons which beneficially
owns 10% or more of the voting securities of the Target Corporation (an
"Acquiring Person") for a period of five years after such acquisition, unless
the transaction or acquisition of shares is approved by a majority of the
members of the Target Corporation's board of directors prior to the time of
acquisition. Such prohibited transactions include, among other things, a merger
or consolidation with, disposition of assets to, or issuance or redemption of
stock to or from, the Acquiring Person, termination of 5% or more of the
employees of the Target Corporation as a result of the Acquiring Person's
acquisition of 10% or more of the shares or allowing the Acquiring Person to
receive any disproportionate benefit as a stockholder. After the five-year
period, a Significant Business Transaction may take place as long as it
complies with certain fair price provisions of the statute or is approved at an
annual or special meeting of stockholders.
A Target Corporation includes a foreign corporation if:
. the corporation has a class of voting stock registered pursuant to
Section 12 or 15 of the Securities Exchange Act of 1934;
. the corporation's principal executive office is located in Washington;
. any of:
. more than 10% of the corporation's stockholders of record are
Washington residents;
. more than 10% of its shares of record are owned by Washington
residents; or
. 1,000 or more of its stockholders of record are Washington residents;
. a majority of the corporation's employees are Washington residents or
more than 1,000 Washington residents are employees of the corporation;
and
. a majority of the corporation's tangible assets are located in Washington
or the corporation has more than $50 million of tangible assets located
in Washington.
A corporation may not "opt out" of this statute. If we meet the definition of
a Target Corporation, Chapter 23B.19 of the WBCA may have the effect of
delaying, deferring or preventing a change of control of the Company.
Delaware Statute. We are subject to Section 203 of the Delaware General
Corporation law, which prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless:
. prior to such date, the board of directors of the corporation approves
either the business combination or the transaction that resulted in the
stockholder's becoming an interested stockholder;
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<PAGE>
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owns at
least 85% of the outstanding voting stock, excluding shares held by
directors, officers and certain employee stock plans; or
. on or after the consummation date the business combination is approved by
the board of directors and by the affirmative vote at an annual or
special meeting of stockholders of at least 66 2/3% of the outstanding
voting stock that is not owned by the interested stockholder.
For purposes of Section 203, a "business combination" includes, among other
things, a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an "interested stockholder" is
generally a person who, together with affiliates and associates of such person:
. owns 15% or more of the corporation's voting stock; or
. is an affiliate or associate of the corporation and was the owner of 15%
or more of the outstanding voting stock of the corporation at any time
within the prior three years.
AOL Agreement. Pursuant to certain agreements with AOL, if we receive an
unsolicited proposal, or we determine to solicit proposals or otherwise enter
into discussions that would result in a sale of a controlling interest in
InfoSpace.com or other merger, asset sale or other disposition that effectively
results in a change of control (a "Disposition"), then we are required to give
written notice to AOL, and AOL has seven days to provide notice to us of its
desire to negotiate in good faith with us regarding a Disposition involving
AOL. In the event that AOL timely delivers such a notice, then we will
negotiate exclusively and in good faith with AOL regarding a Disposition for a
period of 30 days from the date of delivery of our initial notice to AOL, after
which we will be free to negotiate a Disposition with other third parties if we
and AOL cannot in good faith come to terms. If such a Disposition is not
consummated within five months from the date of delivery of our initial notice
to AOL, the process described above will again apply. AOL's right of first
negotiation could have the effect of delaying, deterring or preventing a change
of control.
These charter provisions, provisions of Washington and Delaware law and AOL's
right of first negotiation may have the effect of delaying, deterring or
preventing a change of control.
Registration Rights
Pursuant to certain Investor Rights Agreements dated as of May 21, 1998,
three investors holding an aggregate of 2,229,178 shares of common stock and
warrants to purchase 3,593,448 shares of common stock (the "Holders") are
entitled to certain rights with respect to the registration of such shares
under the Securities Act of 1933. If we propose to register any of our
securities under the Securities Act, either for our own account or for the
account of other security holders, the Holders are entitled to notice of such
registration and to include shares of common stock in such registration at our
expense. Additionally, the Holders are entitled to certain demand registration
rights pursuant to which they may require us to file a registration statement
under the Securities Act at our expense with respect to their shares of common
stock, and we are required to use our commercially reasonable efforts to effect
such registration. Further, the Holders may require us to file up to three
additional registration statements on Form S-3 (and no more than two in any
calendar year), and we will bear the expense for up to one such registration in
any calendar year. All of these registration rights are subject to certain
conditions and limitations, among them the right of the underwriters of an
offering to limit the number of shares included in such registration.
Pursuant to a Stockholder Rights Agreement dated as of August 6, 1998, six
investors holding an aggregate of 925,000 shares of common stock are entitled
to notice of registration if we propose to register any of our securities under
the Securities Act, either for our own account or for the account of other
security holders, and are entitled to include shares of common stock in such
registration at our expense. These registration rights are subject to certain
conditions and limitations, among them the right of the underwriters of an
offering to limit the number of shares included in such registration.
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In connection with the acquisition of all the outstanding membership units of
YPI, the former members of YPI holding an aggregate of 170,000 shares of common
stock may require us to file additional registration statements on Form S-3 at
the expense of those stockholders requesting such registration.
AOL, which holds a warrant to purchase 1,979,832 shares of common stock, is
entitled to notice of registration if we propose to register any of our
securities under the Securities Act, either for our own account or for the
account of other security holders, and is entitled to include shares of common
stock issuable upon the exercise of such warrant in such registration at our
expense. Further, AOL may require us to file up to four additional registration
statements on Form S-3, and we will bear the expense for such registrations.
These registration rights are subject to certain conditions and limitations,
among them the right of the underwriters of an offering to limit the number of
shares included in such registration.
Transfer Agent And Registrar
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, Seattle, Washington.
Nasdaq National Market Listing
Our common stock is listed on the Nasdaq National Market under the symbol
"INSP."
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PLAN OF DISTRIBUTION
You should consult your own tax advisors with respect to the United States,
Canadian and other tax consequences of exchanging your exchangeable shares for
shares of our common stock as described below. For more information, see
"Income Tax Considerations."
Your Exchangeable Shares
On September 13, 1999, the shareholders of INEX voted to approve a plan of
arrangement pursuant to Section 182 of the Business Corporations Act (Ontario).
In accordance with the plan of arrangement, INEX shareholders received either
exchangeable shares issued by InfoSpace.com Canada Holdings or our common
shares. Additionally, we assumed all obligations under INEX's warrants and upon
exercise thereof shares of our common stock will be issued. The exchangeable
shares and our common shares were issued at a ratio of .20405 shares for each
INEX share.
We have filed with the SEC a registration statement on Form S-1 with respect
to our common stock being offered under this prospectus. This prospectus forms
a part of the registration statement. We have agreed to use our reasonable best
efforts to keep the registration statement effective until there are no
exchangeable shares outstanding. We have not engaged a broker, dealer or
underwriter in connection with the offering of our common stock described in
this prospectus.
You may obtain our common stock in exchange for your exchangeable shares in
the following ways:
. you may require InfoSpace.com Canada Holdings to exchange your
exchangeable shares for an equivalent number of shares of our common
stock. For more information, see "--Retraction of Exchangeable Shares."
. InfoSpace.com Canada Holdings will automatically redeem your exchangeable
shares for shares of our common stock at September 15, 2010 or upon the
occurrence of certain events. For more information, see "--Redemption of
Exchangeable Shares" and "--Early Redemption."
. upon our liquidation or the liquidation of InfoSpace.com Canada Holdings,
you may be required to, or may choose to, exchange your exchangeable
shares for shares of our common stock. For more information, see "--
Liquidation Rights with Respect to InfoSpace.com Canada Holdings" and "--
Liquidation Rights with Respect to InfoSpace.com."
We will bear all of the expenses of this distribution. We estimate that these
expenses will total approximately $125,000.
How You May Retract Or Redeem Your Exchangeable Shares
Retraction of Exchangeable Shares
Holders of the exchangeable shares will be entitled at any time following the
combination to retract (i.e. require InfoSpace.com Canada Holdings to redeem)
any or all of the exchangeable shares held by such holder for a retraction
price per share equal to the market price of our common stock on the last
business day prior to the date you request redemption plus, on the designated
payment date therefor, all declared but unpaid dividends. Holders of the
exchangeable shares may effect such retraction by presenting a certificate or
certificates to InfoSpace.com Canada Holdings or the Trustee representing the
number of exchangeable shares the holder desires to retract together with a
duly executed retraction request indicating the number of exchangeable shares
the holder desires to retract and the date upon which the holder desires to
receive the InfoSpace.com common shares, and such other documents as may be
required to effect the retraction.
When a holder requests InfoSpace.com Canada Holdings to redeem exchangeable
shares, InfoSpace.com Nova Scotia Company will have an overriding right to
purchase all but not less than all of the
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retracted shares, at a purchase price per share equal to the market price of
our common stock on the last business day prior to the date you request
redemption plus, on the designated payment date therefor, to the extent it is
not paid by InfoSpace.com Canada Holdings, all declared but unpaid dividends.
Upon receipt of a request for retraction, InfoSpace.com Canada Holdings will
immediately notify InfoSpace.com Nova Scotia Company. InfoSpace.com Nova Scotia
Company must then advise InfoSpace.com Canada Holdings within five business
days as to whether it will exercise its retraction right. If InfoSpace.com Nova
Scotia Company does not so advise InfoSpace.com Canada Holdings, InfoSpace.com
Canada Holdings will notify the holder as soon as possible thereafter that
InfoSpace.com Nova Scotia Company will not exercise the right. If InfoSpace.com
Nova Scotia Company advises InfoSpace.com Canada Holdings that InfoSpace.com
Nova Scotia Company will exercise the right within such five business day
period, then provided the request is not revoked by the holder as described
below, the retraction request shall thereupon be considered only to be an offer
by the holder to sell the shares to InfoSpace.com Nova Scotia Company in
accordance with its right.
A holder may revoke its request for retraction, in writing, at any time prior
to the close of business on the business day preceding the retraction date, in
which case the shares will neither be purchased by InfoSpace.com Nova Scotia
Company nor be redeemed by InfoSpace.com Canada Holdings. If the holder does
not revoke its retraction request on the retraction date, the shares will be
purchased by InfoSpace.com Nova Scotia Company or redeemed by InfoSpace.com
Canada Holdings, as the case may be, in each case as set out above.
InfoSpace.com Canada Holdings or InfoSpace.com Nova Scotia Company, as the case
may be, will deliver the aggregate of the price per share equal to the market
price of our common stock on the last business day prior to the date of
retraction request plus, on the designated payment date therefor, all declared
but unpaid dividends to the holder recorded in the securities register for the
exchangeable shares or at the address specified in the holder's retraction
request or, if so requested in the retraction request, will hold the same for
pick up by the holder at the registered office of InfoSpace.com Canada Holdings
or the office of the transfer agent as specified by InfoSpace.com Canada
Holdings, in each case, less any amounts required to be deducted and withheld
therefrom on account of tax.
If, as a result of solvency requirements or applicable law, InfoSpace.com
Canada Holdings is not permitted to redeem all retracted shares tendered by a
retracting holder, InfoSpace.com Canada Holdings will redeem only those shares
tendered by the holder (rounded down to a whole number of shares) as would not
be contrary to such provisions of applicable law. The Trustee, on behalf of the
holder of any retracted shares not so redeemed by InfoSpace.com Canada
Holdings, will require InfoSpace.com to purchase the shares not redeemed on the
retraction date pursuant to the exchange right.
Redemption of Exchangeable Shares
Subject to applicable law and the overriding right of InfoSpace.com Nova
Scotia Company to purchase all of the exchangeable shares from all of the
holders of exchangeable shares (other than us and our affiliates) on a certain
date in exchange for our common shares, on an established date no earlier than
September 15, 2010 InfoSpace.com Canada Holdings will redeem all of the then
outstanding exchangeable shares for a redemption price per share equal to the
market price of our common stock on the last business day prior to the date we
request redemption plus, on the designated payment date therefor, all declared
but unpaid dividends. InfoSpace.com Canada Holdings will, at least 60 days
prior to the relevant date, or such number of days as the board of directors of
InfoSpace.com Canada Holdings may determine to be reasonably practicable under
the circumstances in respect of a redemption date arising in connection with
certain events, provide the registered holders of the exchangeable shares with
written notice of the proposed redemption of the exchangeable shares by
InfoSpace.com Canada Holdings or the purchase of the exchangeable shares by
InfoSpace.com Nova Scotia Company pursuant to the redemption call right
described below.
On or after the redemption date, upon the holder's presentation and surrender
of the certificates representing the exchangeable shares and such other
documents as may be required at the office of the transfer agent or the
registered office of InfoSpace.com Canada Holdings, InfoSpace.com Canada
Holdings
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will deliver the price per share equal to the market price of our common stock
on the last business day prior to the date of redemption request plus, on the
designated payment date therefor, all declared but unpaid dividends as at such
date to the holder by mailing the same to the holder at the address of the
holder recorded in the securities register for the exchangeable shares or by
holding the same for pick up by the holder at the registered office of
InfoSpace.com Canada Holdings or the office of the transfer agent as specified
in the written notice of redemption in each case less any amounts required to
be deducted and withheld therefrom on account of tax.
InfoSpace.com Nova Scotia Company will have an overriding right to purchase
on the redemption date all of the exchangeable shares then outstanding (other
than exchangeable shares held by us and our affiliates) for a purchase price
per share equal to the market price of our common stock on the last business
day prior to the date you request redemption plus, on the designated payment
date therefor, to the extent it is not paid by InfoSpace.com Canada Holdings,
all declared but unpaid dividends. Upon the exercise of this right, holders
will be obligated to sell their exchangeable shares to InfoSpace.com Nova
Scotia Company. If InfoSpace.com Nova Scotia Company exercises this right,
InfoSpace.com Canada Holdings's right and obligation to redeem the exchangeable
shares on such redemption date will terminate.
Early Redemption
In certain circumstances, InfoSpace.com Canada Holdings has the right to
require a redemption of the exchangeable shares prior to September 15, 2010. An
early redemption may occur upon (i) there being fewer than 57,000 exchangeable
shares outstanding (other than exchangeable shares held by us and our
affiliates); (ii) the occurrence of a merger, amalgamation, tender offer,
material sale of shares or rights or interests therein or thereto or similar
transactions involving us, or any proposal to do so; (iii) a proposal for
certain matters in respect of which holders of exchangeable shares are entitled
to vote as shareholders of InfoSpace.com Canada Holdings; or (iv) the failure
to approve or disapprove, as applicable, certain matters in respect of which
holders of exchangeable shares are entitled to vote as shareholders of
InfoSpace.com Canada Holdings regarding changes required to maintain the
equivalence of exchangeable shares and our common shares.
If, prior to September 15, 2010, we are involved in any merger, amalgamation,
tender offer, material sale of shares or rights or interests therein or thereto
or similar transactions, or any proposal to do so, provided that the board of
directors of InfoSpace.com Canada Holdings determines, in good faith and in its
sole discretion, that it is not reasonably practicable to substantially
replicate the terms and conditions of the exchangeable shares in connection
with such a transaction and that the redemption of all but not less than all of
the outstanding exchangeable shares is necessary to enable the completion of
such transaction in accordance with its terms, the board of directors of
InfoSpace.com Canada Holdings may accelerate the redemption date discussed
above to such date prior to September 15, 2010 as it may determine, upon such
number of days prior written notice to the registered holders of the
exchangeable shares as the board of directors of InfoSpace.com Canada Holdings
may determine to be reasonably practicable in such circumstances.
An example of an event referred to above at (iii) is one to approve an
amalgamation involving InfoSpace.com Canada Holdings where the amalgamation
proposes changes to the exchangeable shares that, if contained in a proposed
amendment to InfoSpace.com Canada Holdings's articles, would entitle the
holders thereof to a vote under applicable corporate law or a sale of all or
substantially all of the assets of InfoSpace.com Canada Holdings where the
exchangeable shares would be affected differently from any other class of
shares of InfoSpace.com Canada Holdings. Such an event excludes that described
at (iv) above, and, for greater certainty, excludes any matter in respect of
which holders of exchangeable shares are entitled to vote (or instruct the
Trustee to vote) in their capacity as Beneficiaries under (and as that term is
defined in) the Voting and Exchange Trust Agreement. If, prior to September 15,
2010, such an event is proposed, provided that the board of directors of
InfoSpace.com Canada Holdings has determined, in good faith and in its sole
discretion, that it is not reasonably practicable to accomplish the business
purpose
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intended by the event, which business purpose must be bona fide and not for the
primary purpose of causing the occurrence of a redemption date, in any other
commercially reasonable manner that does not result in such an event, the
redemption date shall be the business day prior to the record date for any
meeting or vote of the holders of the exchangeable shares to consider the event
and the board of directors of InfoSpace.com Canada Holdings shall give such
number of days prior written notice of such redemption to the registered
holders of the exchangeable shares as the board of directors of InfoSpace.com
Canada Holdings may determine to be reasonably practicable in such
circumstances.
An event described at (iv) above means any matter in respect of which holders
of exchangeable shares are entitled to vote as shareholders of InfoSpace.com
Canada Holdings in order to approve or disapprove, as applicable, any change
to, or in the rights of the holders of, the exchangeable shares, where the
approval or disapproval, as applicable, of such change would be required to
maintain the equivalence of the exchangeable shares and the InfoSpace.com
common shares. If, prior to September 15, 2010, such an event is proposed and
the holders of the exchangeable shares fail to take the necessary action at a
meeting or other vote of holders of exchangeable shares, to approve or
disapprove, as applicable, the event, the redemption date shall be the business
day following the day on which the holders of the exchangeable shares failed to
take such action and the board of directors of InfoSpace.com Canada Holdings
shall give such number of days prior written notice of such redemption to the
registered holders of the exchangeable shares as the board of directors of
InfoSpace.com Canada Holdings may determine to be reasonably practicable in
such circumstances.
See "Income Tax Considerations--Canadian Federal Income Tax Considerations."
Liquidation Rights with Respect to InfoSpace.com Canada Holdings
In the event of the liquidation, dissolution or winding-up of InfoSpace.com
Canada Holdings or any other proposed distribution of the assets of
InfoSpace.com Canada Holdings among its shareholders for the purpose of
winding-up its affairs, holders of the exchangeable shares will have, subject
to applicable law, preferential rights to receive from InfoSpace.com Canada
Holdings, for each exchangeable share held, an amount equal to the market price
of our common stock on the last business day prior to the liquidation. Upon the
occurrence of such liquidation, dissolution or winding-up, InfoSpace.com Nova
Scotia Company will have an overriding right to purchase all of the outstanding
exchangeable shares (other than exchangeable shares held by us and our
affiliates) from the holders thereof on the effective date of such liquidation,
dissolution or winding-up for a purchase price per share equal to the market
price of our common stock on the last business day prior to the liquidation,
plus, to the extent it is not paid by InfoSpace.com Canada Holdings, the full
amount of all prior dividends, if any, declared and unpaid on exchangeable
shares.
Upon, and during the continuance of, insolvency of InfoSpace.com Canada
Holdings, a holder of exchangeable shares will be entitled to instruct the
Trustee to exercise the exchange right with respect to any or all of the
exchangeable shares held by such holder, thereby requiring us to purchase such
exchangeable shares from the holder. As soon as practicable following the
occurrence of such an insolvency of InfoSpace.com Canada Holdings or any event
which may, with the passage of time and/or the giving of notice, lead to
insolvency of InfoSpace.com Canada Holdings, we and InfoSpace.com Canada
Holdings will give written notice thereof to the Trustee. As soon as
practicable thereafter, the Trustee will then notify each holder of
exchangeable shares of such event or potential event and will advise the holder
of its rights with respect to the exchange right. The purchase price payable by
us for each exchangeable share purchased under this right will be satisfied by
the issuance of one share of our common stock plus, to the extent not paid by
InfoSpace.com Canada Holdings, the full amount of all prior dividends, if any,
declared and unpaid on exchangeable shares.
Liquidation Rights with Respect to InfoSpace.com
In order for the holders of the exchangeable shares to participate on a pro
rata basis with the holders of our common stock in the event of our
liquidation, on the fifth business day prior to the effective date of such
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an event, each exchangeable share will automatically be exchanged for an
equivalent number of shares of our common stock, plus, to the extent not paid
by InfoSpace.com Canada Holdings, the full amount of all prior dividends, if
any, declared and unpaid on exchangeable shares. Upon a holder's request and
surrender of exchangeable share certificates, duly endorsed in blank and
accompanied by such instruments of transfer as we may reasonably require, we
will deliver to such holder certificates representing an equivalent number of
shares of our common stock plus, to the extent not paid by InfoSpace.com Canada
Holdings, the full amount of all prior dividends, if any, declared and unpaid
on exchangeable shares for each exchangeable share exchanged pursuant to this
automatic exchange right. For a description of certain of our obligations with
respect to the dividend and liquidation rights of the holders of exchangeable
shares, see "InfoSpace.com Support Obligation" below.
Certain Rights and Restrictions of Exchangeable Shares
Dividend Rights
Holders of exchangeable shares will be entitled to receive, subject to
applicable law, dividends (i) in the case of a cash dividend declared on our
common stock, in an amount in cash for each exchangeable share corresponding to
the cash dividend declared on each of our common shares, (ii) in the case of a
stock dividend declared on our common stock to be paid in shares of our common
stock, in such number of exchangeable shares for each exchangeable share as is
equal to the number of our common shares to be paid on each share of our common
stock, or (iii) in the case of a dividend declared on our common stock in
property other than cash or our common shares, in such type and amount of
property as is the same as, or economically equivalent to, the type and amount
of property declared as a dividend on each of our common shares. Cash dividends
on the exchangeable shares are payable in U.S. dollars or the Canadian dollar
equivalent thereof, at the option of InfoSpace.com Canada Holdings. The
declaration date, record date and payment date for dividends on the
exchangeable shares will be the same as the relevant date for the corresponding
dividends on the shares of our common stock.
Ranking
The exchangeable shares will be entitled to a preference over the common
shares and the preferred shares of InfoSpace.com Canada Holdings and any other
shares ranking junior to the exchangeable shares with respect to the payment of
dividends and the distribution of assets in the event of a liquidation,
dissolution or winding-up of InfoSpace.com Canada Holdings, whether voluntary
or involuntary, or any other distribution of the assets of InfoSpace.com Canada
Holdings, among its shareholders for the purpose of winding-up its affairs.
Certain Restrictions
InfoSpace.com Canada Holdings will not, without the approval of the holders
of the exchangeable shares, as set forth below under "Amendment and Approval":
(a) pay any dividends on the common shares or the preferred shares of
InfoSpace.com Canada Holdings, or any other shares ranking junior to
the exchangeable shares, other than stock dividends payable in common
shares or preferred shares of InfoSpace.com Canada Holdings, or any
such other shares ranking junior to the exchangeable shares, as the
case may be;
(b) redeem, purchase or make any capital distribution in respect of common
shares or preferred shares of InfoSpace.com Canada Holdings, or any
other shares ranking junior to the exchangeable shares;
(c) redeem or purchase any other shares of InfoSpace.com Canada Holdings
ranking equally with the exchangeable shares with respect to the
payment of dividends or on any liquidation distribution; or
(d) issue any exchangeable shares or any other shares of InfoSpace.com
Canada Holdings ranking equally with, or superior to, the exchangeable
shares other than by way of stock dividends to the holders of such
exchangeable shares.
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The restrictions in clauses (a), (b), (c) and (d) above will not apply at any
time when the dividends on the outstanding exchangeable shares corresponding to
dividends declared and paid on our common stock have been declared and paid in
full.
Amendment and Approval
The rights, privileges, restrictions and conditions attaching to the
exchangeable shares may be added to, changed or removed only with the approval
of the holders thereof. Any such approval or any other approval or consent to
be given by the holders of the exchangeable shares will be deemed to have been
sufficiently given if given in accordance with applicable law subject to a
minimum requirement that such approval or consent be evidenced by a special
resolution passed by not less than two-thirds of the votes cast on such
resolution at a meeting of the holders of exchangeable shares duly called and
held at which holders of at least fifty percent (50%) of the then outstanding
exchangeable shares are present or represented by proxy. In the event that no
such quorum is present at such meeting within one-half hour after the time
appointed therefor, then the meeting will be adjourned to such place and time
(not less than five days later) as may be designated by the Chairman of such
meeting. At such adjourned meeting, the holders of exchangeable shares present
or represented by proxy may transact the business for which the meeting was
originally called and a special resolution passed thereat by the affirmative
vote of not less than two-thirds of the votes cast on such resolution will
constitute the approval or consent of the holders of the exchangeable shares.
Our Support Obligation
Pursuant to an Exchangeable Share Support Agreement, we will make the
following covenants for so long as any exchangeable shares (other than
exchangeable shares owned by us or our affiliates) remain outstanding: (i) we
will not declare or pay dividends on our common stock unless InfoSpace.com
Canada Holdings is able to declare and pay and simultaneously declares or pays,
as the case may be, an equivalent dividend on the exchangeable shares; (ii) we
will advise InfoSpace.com Canada Holdings in advance of the declaration of any
dividend on our common stock and ensure that the declaration date, record date
and payment date for dividends on the exchangeable shares are the same as that
for the corresponding dividend on our common stock; (iii) we will ensure that
the record date for any dividend declared on our common stock is not less than
ten business days after the declaration date of such dividend; (iv) we will
take all actions and do all things reasonably necessary or desirable to enable
and permit InfoSpace.com Canada Holdings, in accordance with applicable law, to
pay to the holders of the exchangeable shares the applicable InfoSpace.com
Canada Holdings amounts described above in the event of a liquidation,
dissolution or winding-up of InfoSpace.com Canada Holdings, a retraction
request by a holder of exchangeable shares or a redemption of exchangeable
shares by InfoSpace.com Canada Holdings; and (v) we will take all actions and
do all things reasonably necessary or desirable to enable and permit
InfoSpace.com Nova Scotia Company, in accordance with applicable law, to
perform its obligations arising upon the exercise by it of its rights,
including the delivery of our common stock in accordance with the provisions of
the applicable right.
The Exchangeable Share Support Agreement and the provisions of the
exchangeable shares provide that, without the prior approval of InfoSpace.com
Canada Holdings and the holders of the exchangeable shares as set forth above
under "Amendment and Approval," we will not issue or distribute additional
shares of our common stock, securities exchangeable for or convertible into or
carrying rights to acquire our common stock or rights to subscribe therefor or
other assets to all or substantially all holders of shares of our common stock,
nor change our common stock, unless the same or an economically equivalent
distribution on or change to the exchangeable shares (or in the rights of the
holders thereof) is made simultaneously. The InfoSpace.com Canada Holdings
board of directors is conclusively empowered to determine in good faith and in
its sole discretion whether any corresponding distribution on or change to the
exchangeable shares is the same as or economically equivalent to any proposed
distribution on or change to our common stock. In the event of any proposed
tender offer, share exchange offer, issuer bid, take-over bid or similar
transaction with respect to our common stock which is recommended by our board
of directors
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and in connection with which the exchangeable shares are not redeemed by
InfoSpace.com Canada Holdings or purchased by InfoSpace.com Nova Scotia Company
pursuant to the redemption call right, we will use reasonable efforts to enable
holders of exchangeable shares to participate in such transaction to the same
extent and on an economically equivalent basis as the holders of shares of our
common stock.
InfoSpace.com Canada Holdings is required to notify us and InfoSpace.com Nova
Scotia Company of the occurrence of certain events, such as the liquidation,
dissolution or winding-up of InfoSpace.com Canada Holdings, and of its receipt
of a retraction request from a holder of exchangeable shares.
Under the Exchangeable Share Support Agreement, we have agreed not to
exercise any voting rights attached to the exchangeable shares owned by us or
any of our affiliates on any matter considered at meetings of holders of
exchangeable shares.
With the exception of administrative changes for the purpose of adding
covenants for the protection of the holders of the exchangeable shares, making
certain necessary amendments or curing ambiguities or clerical errors (in each
case provided that our board of directors and the board of directors of each of
InfoSpace.com Canada Holdings and InfoSpace.com Nova Scotia Company are of the
opinion that such amendments are not prejudicial to the interests of the
holders of the exchangeable shares), the Exchangeable Share Support Agreement
may not be amended without the approval of the holders of the exchangeable
shares as set forth above under "Amendment and Approval."
INEX Warrants
On October 14, 1999, there were outstanding INEX common share purchase
warrants which, when vested, would be exercisable to acquire a total of 353,844
INEX common shares at prices per share of between Cdn.$3.75 to Cdn.$8.00 with
various expiry dates to 2002.
Upon the closing of the combination on October 14, 1999, we assumed INEX's
obligations under all of the above INEX warrants. Each warrant was exchanged
for a warrant to purchase a number of shares of our common stock equal to the
product obtained by multiplying .20405 by the number of INEX common shares
subject to such warrant (rounded down to a whole number of shares). The warrant
provides for an exercise price per share of our common stock equal to the
exercise price per INEX common share of such INEX warrant immediately prior to
the consummation of the combination divided by .20405. The term to expiry,
conditions to and the manner of exercising, vesting schedule, and all other
terms and conditions of such warrant are otherwise unchanged, and any document
or agreement previously evidencing an INEX warrant evidences and is deemed to
evidence the assumed warrant.
Resale of Exchangeable Shares and Our Common Shares Received in the Transaction
The exchangeable shares and our common shares issuable to the INEX
shareholders upon the closing of our combination with INEX were registered
under the Securities Act of 1933, as amended (the "Securities Act"). Such
shares were instead issued in reliance upon the exemption provided by Section
3(a)(10) of the Securities Act. Section 3(a)(10) exempts from registration
securities issued in exchange for one or more outstanding securities where the
terms and conditions of the issuance and exchange of such securities have been
approved by any court of competent jurisdiction, after a hearing upon the
fairness of the terms and conditions of the issuance and exchange at which all
persons to whom such securities will be issued have the right to appear. The
Court is authorized to conduct a hearing to determine the fairness of the terms
and conditions of the Arrangement, including the proposed issuance of
securities in exchange for other outstanding securities. The Court entered an
Interim Order on August 20, 1999, the Arrangement was approved by the INEX
shareholders on September 13, 1999, and a hearing on the fairness of the
Arrangement was held on October 4, 1999 by the Court. The Court entered a Final
Order on the fairness of the Arrangement on October 13, 1999. The registration
statement of which this prospectus forms a part is intended to register our
common shares to be issued upon exchange of the exchangeable shares and
exercise of the warrants assumed.
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The exchangeable shares and our common shares received in exchange for INEX
shares in the combination are freely transferable under U.S. Federal securities
laws, except for exchangeable shares held by persons who are deemed to be
"affiliates" (as such term is defined under the Securities Act) of INEX prior
to the transaction which may be resold by them only in transactions permitted
by the resale provisions of Rule 145(d)(1), (2), or (3) promulgated under the
Securities Act or as otherwise permitted under the Securities Act. Rule
145(d)(1) generally provides that "affiliates" of either INEX or us may not
resell the exchangeable shares and our common shares unless such sale is
effected pursuant to an effective registration statement or pursuant to the
volume, current public information, manner of sale and timing limitations of
Rule 144 promulgated under the Securities Act. These limitations generally
require that any sales made by an affiliate in any three-month period shall not
exceed the greater of one percent of the outstanding shares of the securities
being sold or the average weekly trading volume over the four calendar weeks
preceding the placement of the sell order and that such sales be made in
unsolicited, open market "brokers transactions." Rules 145(d)(2) and (3)
generally provide that the foregoing limitations lapse for our non-affiliates
after a period of one or two years, respectively, depending upon whether
certain of our currently available information continues to be available.
Persons who may be deemed to be affiliates of an issuer generally include
individuals or entities that control, are controlled by, or are under common
control with, such issuer and may include certain officers and directors of
such issuer as well as principal shareholders of such issuer. In the event that
this registration statement is declared effective, our common shares issuable
upon exchange of the exchangeable shares and upon exercise of the warrants that
we assumed from INEX will be transferable in the manner and under the
circumstances described in the foregoing paragraph.
In the event that this registration statement is not declared effective, our
common shares issuable upon exchange of the exchangeable shares and upon
exercise of the warrants that we assumed from INEX will be "restricted"
securities within the meaning of and as under the Securities Act and may not be
offered or sold except in accordance with Regulation S under the Securities
Act, pursuant to registration under the Securities Act or pursuant to an
available exemption from registration under the Securities Act. Accordingly, we
agreed, in the event that this registration statement was not declared
effective, to file a registration statement under the Securities Act with the
Securities and Exchange Commission prior to the closing of the combination in
order to register the resale of our common shares issuable upon exchange of the
exchangeable shares and exercise of the warrants that we assume from INEX. We
agreed to use our best efforts to cause that registration statement to become
effective and to remain effective until the date on which all shares of our
common stock have been issued. Under the terms of the combination, we may
suspend the use of such registration statement for such time as may be
necessary to update or amend it to correct any misstatement or omission of a
material fact. In addition, we may delay the filing if any such amendment or
supplement to such registration statement, for a period not to exceed ninety
days, if we in good faith determine the such amendment or supplement would
require us to disclose a material development or potential material development
and such disclosure would have a material adverse effect on us.
In the event that this registration statement is not declared effective,
holders of exchangeable shares who acquire our common shares pursuant to the
exchange of exchangeable shares or the exercise of the warrants which we
assumed from INEX after the fourth anniversary of the effective date of the
registration statement pertaining to the resale of our common stock may not
offer or sell our common stock except in compliance with an available exemption
from registration under the Securities Act.
We have registered under the Securities Act on Form S-8 the shares of our
common stock issuable upon exercise of employee options issued in exchange for
INEX employee options. Our common shares issuable upon exercise of those
options may be resold without restriction in the United States by persons who
are not our affiliates. Optionholders who are our affiliates must comply with
the volume, current public information and manner of sale limitations of Rule
144 under the Securities Act.
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Prior to the closing of the combination each of the INEX affiliates entered
into agreements restricting them in connection with the requirements for
pooling-of-interests accounting treatment and restricting the sale, pledge or
other disposal of exchangeable shares, our common shares and INEX shares.
Future Issuances of Shares
The articles of InfoSpace.com Canada Holdings authorize the issuance of an
unlimited number of exchangeable shares. The exchangeable shares that are
authorized may be issued, without approval of holders of exchangeable shares,
at such time or times, to such persons and for such consideration as
InfoSpace.com Canada Holdings may determine, except as may otherwise be
required by applicable laws and subject to all dividends on the outstanding
exchangeable shares corresponding to dividends declared and paid on the
outstanding shares of our common stock having been declared and paid at the
relevant times.
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INCOME TAX CONSIDERATIONS
Canadian Federal Income Tax Considerations
You should consider the following discussion of Canadian federal income taxes
before you acquire exchangeable shares or exchange exchangeable shares for
common stock. The following summarizes the principal Canadian federal income
tax considerations that generally apply to you if, under Canadian federal
income tax law, you are considered to
. hold as capital property
. your exchangeable shares,
. the voting rights relating to those shares, and
. the other ancillary rights relating to those shares;
. deal at arm's length with us, INEX, InfoSpace.com Canada Holdings, and
InfoSpace.com Nova Scotia Company.
If we are or will be a foreign affiliate of you under the Canadian federal
income tax laws, this summary will not apply to you. This summary does not
address the tax consequences of the transactions, including the arrangement, in
which you acquire the exchangeable shares, or the exercise of the warrants
which we assumed from INEX, or the sale of the shares obtainable upon exercise
of those warrants.
Under Canadian federal income tax laws, your exchangeable shares will
generally be considered to be capital property to you unless you are considered
to hold your exchangeable shares
. in the course of carrying on a business, or
. in an adventure in the nature of trade.
If you are resident in Canada but your shares might not otherwise qualify as
capital property, you may be entitled to make an irrevocable election to
qualify those shares as capital property. If you do not hold your exchangeable
shares as capital property, you should consult your own advisers regarding your
particular circumstances. If you are a "financial institution" under the
Canadian federal income tax laws applicable to securities held by financial
institutions, the summary does not apply to you; instead, you should consult
your own advisers regarding the application to you of the "mark-to-market"
rules.
The current provisions of the Income Tax Act (Canada) and regulations, the
current provisions of the income tax treaty between Canada and the United
States and counsel's understanding of the current administrative practices of
Revenue Canada form the basis of this summary. This summary takes into account
the proposed amendments to the Income Tax Act (Canada) and regulations that the
Minister of Finance has publicly announced prior to the date of this prospectus
and assumes that those proposed amendments will be enacted in their present
form. Counsel can give no assurances, however, that the proposed amendments
will be enacted in the form proposed, or at all.
Except for the proposed amendments, this summary does not take into account
or anticipate any changes in law, whether by legislative, administrative or
judicial decision or action, nor does it take into account provincial,
territorial or foreign income tax legislation or considerations, which may
differ from the Canadian federal income tax considerations described herein. We
have neither sought nor obtained an advance tax ruling from Revenue Canada to
confirm the tax consequences of any of the transactions we describe.
WHILE THIS SUMMARY ADDRESSES THE MATERIAL CANADIAN FEDERAL INCOME TAX
CONSIDERATIONS GENERALLY APPLICABLE TO YOU, IT IS NOT INTENDED TO BE, NOR
SHOULD IT BE CONSTRUED TO BE, LEGAL, BUSINESS OR TAX ADVICE TO YOU.
FURTHERMORE, AS REQUIRED BY THE "PLAIN ENGLISH" REQUIREMENTS OF THE SEC,
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THIS SUMMARY MAKES MINIMAL USE OF DEFINED TERMS. YOU SHOULD KNOW THAT MANY OF
THE WORDS AND PHRASES USED IN THIS SUMMARY HAVE VERY SPECIFIC MEANINGS UNDER
CANADIAN INCOME TAX LAW.
THEREFORE, YOU SHOULD CONSULT YOUR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES APPLICABLE TO YOU IN YOUR PARTICULAR CIRCUMSTANCES.
For Canadian tax purposes, you must express all amounts, including dividends,
adjusted cost base and proceeds of disposition, in Canadian dollars, and you
must convert amounts denominated in United States dollars into Canadian dollars
based on the United States dollar exchange rate generally prevailing when those
amounts arise.
Shareholders Resident In Canada
If you are resident or deemed to be resident in Canada under Canadian federal
income tax laws, the following portion of the summary applies to you.
Dividends on Exchangeable Shares. If you are an individual, the dividends
that you receive or are deemed to receive on your exchangeable shares will be
included in computing your income. Generally, they will be subject to the
gross-up and dividend tax credit rules that normally apply to taxable dividends
received from taxable Canadian corporations. If you are a corporation, the
dividends that you receive or are deemed to receive on your exchangeable shares
will be included in computing your income.
If you are a corporation, you must include dividends that you receive or are
deemed to receive on the exchangeable shares in your income and these dividends
will normally be deductible in computing your taxable income unless you are a
specified financial institution, in which case the deduction is generally
denied.
If you are a private corporation or any other corporation resident in Canada
controlled or deemed to be controlled by or for the benefit of an individual
(other than a trust) or a related group of individuals (other than trusts), you
may be liable to pay a refundable tax of 33 1/3 percent on dividends that you
receive or are deemed to receive on the exchangeable shares that are deductible
in computing your taxable income. If you are a "Canadian-controlled private
corporation," you may be liable to pay an additional refundable tax of 6
2/3 percent on dividends you receive or are deemed to receive that are not
deductible in computing your taxable income.
Under Canadian federal income tax laws, the exchangeable shares will be
taxable preferred shares and short-term preferred shares and term preferred
shares. Accordingly, InfoSpace.com Canada Holdings will be subject to a 66
2/3 percent tax on dividends (other than excluded dividends) that it pays or is
deemed to pay on the exchangeable shares. In certain circumstances,
InfoSpace.com Canada Holdings may be entitled to deductions that will
substantially offset the impact of this tax. If you are a corporation,
dividends that you receive or are deemed to receive on the exchangeable shares
will not be subject to the 10 percent tax under Part IV.1 of the Income Tax Act
(Canada).
If the Company or any person with whom the Company does not deal at arm's
length for purposes of the Income Tax Act (Canada) is a "specified financial
institution" at the time a dividend is paid on an exchangeable share and you
are a corporation, then, subject to the exemption described below, the
dividends that you receive or are deemed to receive will not be deductible in
computing your taxable income. Accordingly, as discussed above, those dividends
will be fully includible in computing your income. Generally, we will be a
specified financial institution for these purposes if
. we are, or are related to, an entity or corporation that is a bank, a
trust company, a credit union, or an insurance corporation, or
. our principal business, or the principal business of an entity or
corporation to which we are related, is (a) the lending of money to
persons with whom we deal at arm's length, (b) the purchasing of debt
obligations issued by persons with whom we deal at arm's length, or (c) a
combination of both (a) and (b).
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The same rules will apply to determine whether a person with whom we do not
deal at arm's length is a specified financial institution for these purposes.
Nonetheless, if you are a corporation, you will not be denied the dividend
deduction if at the time you receive a dividend or are deemed to receive a
dividend
. the exchangeable shares are listed on a prescribed stock exchange in
Canada,
. we control InfoSpace.com Canada Holdings, and
. you (together with any person with whom you do not deal at arm's length,
with any partnership of which you or that person is a member, and with
any trust of which you or that person is a beneficiary) do not receive
dividends on more than 10 percent of the issued and outstanding
exchangeable shares.
Redemption Or Exchange Of Exchangeable Shares
If InfoSpace.com Canada Holdings redeems (or you retract) your exchangeable
shares, you will generally be deemed to have received a dividend equal to the
amount, if any, by which the fair market value of the consideration you receive
as part of the redemption or retraction exceeds the aggregate of the paid-up
capital (as determined under Canadian federal income tax laws) of your
exchangeable shares at the time InfoSpace.com Canada Holdings redeems or you
retract your exchangeable shares.
The amount of any deemed dividend will generally be subject to the tax
treatment described above under "Dividends." On the redemption of your
exchangeable shares, you will also be considered to have disposed of your
exchangeable shares for proceeds of disposition equal to the paid-up capital of
your exchangeable shares redeemed or retracted. In general, you will realize a
capital gain (or a capital loss) equal to the amount by which the proceeds of
disposition of the exchangeable shares, net of reasonable costs of disposition
exceed (or are less than) the adjusted cost base of such shares (see "--
Taxation of Capital Gain or Capital Loss" below). If you are a corporation, in
some circumstances, the amount of any dividend you are deemed to have received
may be treated as proceeds of disposition and not as a dividend.
If you exchange exchangeable shares with InfoSpace.com Nova Scotia Company
for shares of common stock, other than on the redemption or retraction of
exchangeable shares, in general, you will realize a capital gain (or a capital
loss) to the extent the proceeds of disposition of the exchangeable shares, net
of any reasonable costs of disposition, exceed (or are less than) the adjusted
cost base of such shares to you. For these purposes, the proceeds of
disposition will be the aggregate fair market value, at the time of the
exchange, of the consideration you receive (see "--Taxation of Capital Gain or
Capital Loss" below).
Because of the rights relating to the exchangeable shares, you cannot control
whether you will receive shares of common stock upon the redemption of your
exchangeable shares or upon InfoSpace.com Nova Scotia Company's purchase of
your exchangeable shares. As described above, the tax consequences to you of a
redemption by InfoSpace.com Canada Holdings differ from those of an exchange
with InfoSpace.com Nova Scotia Company.
Taxation Of Capital Gain Or Capital Loss
You must include in your income for the year of disposition the taxable
portion of any capital gain you realize. The taxable portion of any capital
gain you realize (the "taxable capital gain") will be three-quarters of that
amount. You must deduct against such taxable capital gains for the year of
disposition three-quarters of any capital loss you realize in that year. If
three-quarters of any capital loss you realize in a taxation year exceeds your
taxable capital gains in that year, you may carry back the excess up to three
taxation years or forward indefinitely and deduct those excess amounts against
net taxable capital gains in those other years, subject to certain limitations
and in certain circumstances.
85
<PAGE>
If you are an individual or trust, other than certain trusts, capital gains
that you realize may give rise to alternative minimum tax. If you are a
Canadian-controlled private corporation, you may be liable to pay an additional
refundable tax of 6 2/3 percent on taxable capital gains. If you are a
corporation, subject to certain limitations and under certain circumstances,
you may be required to reduce the amount of any capital loss arising when you
dispose or are deemed to dispose of any exchangeable shares by the amount of
dividends you received or are deemed to have received on those shares. Similar
rules may apply to you if you are:
. a corporation that is a member of a partnership that owns exchangeable
shares;
. a corporation that is a beneficiary of a trust that owns exchangeable
shares;
. a member of a partnership that is a member of another partnership that
owns exchangeable shares;
. a member of a partnership that is a beneficiary of a trust that owns
exchangeable shares;
. a beneficiary of a trust that is a member of a partnership that owns
exchangeable shares; or
. a beneficiary of a trust that is the beneficiary of another trust that
owns exchangeable shares.
Taxation of Our Common Stock
Acquisition And Disposition Of Shares Of Our Common Stock. The cost amount of
shares of common stock that you receive on the retraction, redemption or
exchange of exchangeable shares will in general be equal to the fair market
value of those shares at that time.
If you dispose or are deemed to have disposed of shares of common stock,
generally, you will have a capital gain (or capital loss) to the extent that
the proceeds of disposition, net of any reasonable costs of disposition, exceed
(or are less than) the adjusted cost base to you of such shares immediately
before the disposition. In computing the adjusted cost base of a share of our
common stock, you must average the cost of the share with the adjusted cost
base of any other shares of our common stock that you hold as capital property
at that time.
Dividends On Shares Of Common Stock. In computing your income, you must
include dividends that you receive or are deemed to receive on shares of common
stock. If you are an individual, these dividends will not be subject to the
gross-up and the dividend tax credit rules that normally apply to taxable
dividends received from taxable Canadian corporations. If you are a
corporation, these dividends will not be deductible in computing your taxable
income. In certain circumstances, you may be entitled to a foreign tax credit
in respect of any U.S. withholding tax payable in connection with these
dividends. If you are a Canadian-controlled private corporation, you may be
liable to pay an additional refundable tax of 6 2/3 percent on such dividends.
Foreign Property Information Reporting. If you are a "specified Canadian
entity" for a taxation year or a fiscal period and your total cost amounts of
"specified foreign property," including the shares of common stock, at any time
in the year or fiscal period exceed Cdn. $100,000, you must file an information
return for the year or period disclosing prescribed information, including
. your cost amount,
. any dividends you received in the year, and
. any gains or losses you realized in the year,
in respect of that property.
With some exceptions, generally, if you are a taxpayer resident in Canada in
the year, you will be a specified Canadian entity. You should consult your own
advisors about whether you must comply with these rules.
86
<PAGE>
Shareholders Not Resident In Canada
The following portion of the summary is applicable to shareholders who, for
purposes of the Canadian Tax Act, have not been and will not be resident or
deemed to be resident in Canada at any time while they have held INEX common
shares or will hold exchangeable shares or shares of common stock.
Dividends On Exchangeable Shares. Dividends received or deemed to have been
received by a non-resident holder of exchangeable shares will be subject to
Canadian non-resident withholding tax at a rate of 25 percent, unless the rate
is reduced under the provisions of an applicable tax treaty.
Redemption Or Exchange Of Exchangeable Shares. Refer to the discussion above
for a description of the manner in which dividends will be deemed to have been
received by a shareholder and proceeds of disposition will be computed on the
redemption or exchange of exchangeable shares. Dividend withholding tax, as
described above, will apply to dividends deemed to have been received by a non-
resident holder on the redemption of an exchangeable share by InfoSpace.com
Canada Holdings.
Unless the exchangeable shares are listed on a prescribed stock exchange at
the time they are disposed of, they will be taxable Canadian property of a non-
resident holder. As a result, you will be subject to tax under the Canadian Tax
Act on gains realized on the exchange of exchangeable shares for shares of
common stock unless an applicable bilateral income tax convention between
Canada and the jurisdiction in which you reside exempts such gains from
Canadian tax.
You will be required to comply with certain notification requirements imposed
by section 116 of the Canadian Tax Act. Specifically, you must notify Revenue
Canada of your intention to dispose of the exchangeable shares prior to such
disposition or within ten days after such disposition. Revenue Canada will
issue a certificate in respect of such proposed disposition or disposition
provided you have complied with the requirements imposed by the Canadian Tax
Act, which may in some circumstances include payment of an amount equal to 33
1/3 percent of the amount by which the proceeds of disposition exceed your
adjusted cost base of the exchangeable shares, or the provision of acceptable
security in respect of the disposition. Evidence of that adjusted cost base
acceptable to Revenue Canada may have to be provided. Unless InfoSpace.com
Canada Holdings or InfoSpace.com Nova Scotia Company, as the case may be, is in
receipt of a copy of such certificate on or prior to the date of the redemption
or exchange, it will withhold 33 1/3 percent of the payment otherwise due to
the shareholder. If InfoSpace.com Canada Holdings or InfoSpace.com Nova Scotia
Company, as the case may be, has not received such certificate within 30 days
of the end of the month in which the redemption or exchange occurs, it will be
required to remit such withheld amount in cash to the Receiver General, as tax
on your behalf and will take all such action necessary to convert on your
behalf the 33 1/3 percent of the payment withheld to cash proceeds for the
remittance to the Receiver General.
The relevant notification form is Revenue Canada form T2062. A copy of the
form will be sent to INEX shareholders who indicate that they are not resident
in Canada.
United States Federal Income Tax Considerations
You should consider the following discussion of United States federal income
taxes before you acquire exchangeable shares or exchange exchangeable shares
for common stock. This discussion does not address all the federal income tax
considerations that may be relevant to you. In addition, this discussion does
not address the tax consequences of transactions in which you acquire your
exchangeable shares, including the arrangement, or the exercise of the warrants
which we will assumed from INEX. Furthermore, this discussion does not address
any foreign, state, or local tax considerations.
87
<PAGE>
WE STRONGLY URGE YOU TO CONSULT YOUR OWN TAX ADVISORS REGARDING THE SPECIFIC
TAX CONSIDERATIONS THAT APPLY TO YOU.
The laws, regulations, court decisions, and IRS rulings and regulations
effective on the date of this prospectus form the basis of this discussion.
This discussion is for general information only. No law, court decision, or
ruling or regulation directly addresses certain of the tax consequences of the
ownership of instruments and rights comparable to the exchangeable shares and
the rights attached to those shares.
Consequently, some aspects of the tax treatment of the arrangement, including
the exchange of exchangeable shares for shares of common stock, are uncertain.
We have neither sought nor obtained any advance income tax ruling regarding the
tax consequences of any of the transactions we describe.
Tax Considerations That Apply To U.S. Holders
If you are:
. an individual citizen or resident of the United States,
. a corporation or partnership created in the United States or under the
laws of the United States or of any state, or
. a United States estate or trust,
and you hold your exchangeable shares as capital assets, the following tax
considerations will generally apply to you.
Exchange Of Exchangeable Shares. Except as we describe below, when you
exchange your exchangeable shares for shares of common stock, you will
generally recognize gain or loss. Your gain or loss will equal the difference
between (a) the fair market value of the shares of common stock at the time you
exchange your exchangeable shares and (b) your tax basis in the exchangeable
shares you exchange. Your gain or loss will generally be a capital gain or
loss. You may, however, recognize ordinary income with respect to any declared
but unpaid dividends on the exchangeable shares. A capital gain or loss will be
long-term capital gain or loss if your holding period for the exchangeable
shares is more than one year. Your tax basis in the shares of common stock will
be their fair market value at the time of the exchange. Your holding period for
the shares of common stock that you receive will begin on the day after the
exchange.
In view of the likelihood that you will recognize gain or loss when you
exchange the exchangeable shares for shares of common stock, you may wish to
consider delaying the exchange until either
. you intend to dispose of the shares of common stock that you receive in
exchange for your exchangeable shares, or
. the exchange may be characterized as tax-free.
The gain or loss you realize when you exchange your exchangeable shares for
shares of common stock generally will be treated as United States source gain
or loss. Under the terms of the United States-Canada income tax treaty,
however, your gain may be treated as sourced in Canada. Subject to certain
limitations, you may be entitled to credit your United States taxes for any
Canadian tax imposed on the exchange. If you are ineligible for a credit for
any Canadian tax that you pay, you may be entitled to deduct that tax in
computing your United States taxable income.
Distributions On The Exchangeable Shares. If any distributions are paid to
you as a holder of exchangeable shares, we and InfoSpace.com Canada Holdings
intend to treat those distributions as distributions from InfoSpace.com Canada
Holdings, rather than from us. We and InfoSpace.com Canada Holdings can not
assure you, however, that the IRS or a court would agree that our intended
treatment is correct. Assuming that treatment is proper, these distributions
will be treated as dividends and will be
88
<PAGE>
taxable to you as ordinary income if InfoSpace.com Canada Holdings has earnings
and profits. Those dividends generally will be treated as foreign source
passive income for foreign tax credit limitation purposes. Under the U.S.-
Canada Tax Treaty, such dispositions generally will be subject to a Canadian
withholding tax at a rate of 15 percent. Subject to certain limitations, you
should generally be entitled to either credit your United States income tax
liability with, or deduct in computing your United States taxable income, any
Canadian income taxes withheld from these distributions.
Tax Considerations That Apply To Non-U.S. Holders
If you are not
. an individual citizen or resident of the United States,
. a corporation or partnership created in the United States or under the
laws of the United States or of any state, or
. a United States estate or trust,
the following summary applies to you.
Exchange Of Exchangeable Shares. Generally, you will not be subject to United
States federal income tax when you exchange your exchangeable shares for shares
of our common stock, unless your exchangeable shares were an asset of your
United States trade or business.
Distributions On The Exchangeable Shares. You should not be subject to United
States tax on dividends that you receive on the exchangeable shares. Therefore,
we and InfoSpace.com Canada Holdings do not intend to withhold any United
States taxes from those dividends. The IRS, however, may assert that dividends
paid to you on the exchangeable shares are subject to tax. As a result, you
could be subject to tax at a rate of 30 percent. An applicable treaty in effect
between the United States and your country of residence may reduce the rate. If
you are a resident of Canada, a maximum rate of 15 percent applies to dividends
paid to you.
Distributions On Shares Of Common Stock. Dividends that you receive on the
common stock generally will be subject to tax at a rate of 30 percent. An
applicable income tax treaty may reduce that rate. If you are a resident of
Canada, a maximum rate of 15 percent applies to dividends paid to you.
Gain On Sale Or Exchange Of Common Stock. Generally, you will not be subject
to tax when you sell or exchange your shares of common stock unless either
. your common stock was an asset of your United States trade or business
or, if a tax treaty applies, is attributable to your United States
permanent establishment; or
. you are an individual, you are present in the United States for 183 days
or more, or you satisfy certain other conditions.
If at any time we are a United States real property holding corporation, you
may be subject to certain additional rules. These rules would require
withholding of tax on the gross proceeds of your sale of shares of common
stock. We believe that we are not a United States real property holding
corporation. Although we consider it unlikely that we will become a United
States real property holding corporation, we can provide no assurance as to
this issue.
Federal Estate Taxes. If you are an individual who is not a citizen or
resident (as defined for United States federal estate tax purposes) of the
United States at the time of death, shares of common stock that you own will be
includable in your gross estate for United States federal estate tax purposes
(unless an applicable estate tax treaty provides otherwise), and therefore may
be subject to United States federal estate tax.
89
<PAGE>
Backup Withholding, Information Reporting and Other Reporting
Requirements. We must report annually to the Internal Revenue Service and to
each of you the amount of dividends paid to, and the tax withheld with respect
to, each of you. These reporting requirements apply regardless of whether
withholding was reduced or eliminated by an applicable tax treaty. Copies of
this information also may be made available under the provisions of a specific
treaty or agreement with the tax authorities of your country.
Under currently effective United States Treasury regulations, United States
backup withholding tax (which generally is imposed at the rate of 31 percent on
certain payments to persons that fail to furnish the information required under
the United States information reporting requirements) and information reporting
requirements (other than those discussed above) generally will not apply to
dividends paid on common stock if you have an address outside the United
States. Backup withholding and information reporting generally will apply to
dividends paid on shares of common stock if you have an address in the United
States, or if you fail to establish an exemption or to provide certain other
information to us. Under United States Treasury regulations that are effective
for payments made after December 31, 2000, if you fail to certify your status
in accordance with these regulations, you may be subject to backup withholding
on payments of dividends.
The payment of proceeds from the disposition of common stock to or through a
United States office of a broker will be subject to information reporting and
backup withholding unless you, under penalties of perjury, certify, among other
things, your status as a non-U.S. Holder or otherwise establish an exemption.
In general, backup withholding and information reporting will not apply to the
payment of the proceeds of a sale of common stock by or through a foreign
office of a broker. If, however, such broker is, for United States federal tax
purposes, a United States person, a "controlled foreign corporation" for U.S.
federal income tax purposes or a foreign person 50 percent or more of whose
gross income from certain periods is effectively connected with a United States
trade or business or has as partners one or more United States persons that, in
the aggregate, hold more than 50 percent of the income or capital interests in
the partnership, such payments will be subject to information reporting, but
not backup withholding, unless such broker has documentary evidence in its
records that you are a non-U.S. holder and certain other conditions are met or
you otherwise establish an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from a payment to you will be refunded or credited
against your United States federal income tax liability, if any, provided that
the required information is furnished to the Internal Revenue Service.
90
<PAGE>
EXPERTS
The consolidated financial statements of InfoSpace.com, Inc. as of December
31, 1997 and December 31, 1998, and for the period from March 1, 1996 (date of
inception) through December 31, 1996, the years ended December 31, 1997 and
December 31, 1998, included in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing elsewhere
herein, and have been so included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The financial statements of INEX Corporation as of December 31, 1997 and
December 31, 1998, and for each of the years ended December 31, 1996, 1997 and
1998, included in this Prospectus have been audited by PricewaterhouseCoopers
LLP, independent auditors, as stated in their report appearing elsewhere
herein, and have been so included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission (the "Commission")
a registration statement on Form S-1, of which this prospectus is a part, under
the Securities Act with respect to the shares of common stock offered hereby.
This prospectus omits certain information contained in the registration
statement, and reference is made to the registration statement and the exhibits
thereto for further information with respect to InfoSpace.com and the common
stock offered hereby. Statements contained herein concerning the provisions of
any documents are not necessarily complete, and in each instance reference is
made to the copy of such document filed as an exhibit to the registration
statement. Each such statement is qualified in its entirety by such reference.
We are also subject to the informational requirements of the Securities
Exchange Act and, in accordance therewith, file reports, proxy statements and
other information with the Commission. The registration statement, including
exhibits filed therewith, and the reports, proxy statements and other
information that we file may be inspected without charge at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at 7 World Trade Center, Suite 1300, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials may be obtained from the
Public Reference Section of the Commission, Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
maintains a Web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants, such as
InfoSpace.com, that file electronically with the Commission.
Statements contained in this prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete, and in
each instance reference is made to the copy of such contract, agreement or
other document filed as an exhibit to the registration statement, each such
statement being qualified in all respects by such reference.
91
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited Pro Forma Combined Consolidated Financial Statements:
INEX Corporation Acquisition.............................................. F-2
Pro Forma Combined Consolidated Balance Sheet as of September 30, 1999.... F-3
Pro Forma Combined Consolidated Statement of Operations for the Nine
Months Ended
September 30, 1999....................................................... F-4
Pro Forma Combined Consolidated Statement of Operations for the Nine
Months Ended
September 30, 1998....................................................... F-5
Pro Forma Combined Consolidated Statement of Operations for the Year Ended
December 31, 1998........................................................ F-6
Pro Forma Combined Consolidated Statement of Operations for the Year Ended
December 31, 1997........................................................ F-7
Pro Forma Combined Consolidated Statement of Operations for the Year Ended
December 31, 1996........................................................ F-8
Notes to Unaudited Pro Forma Combined Consolidated Financial Statements... F-9
InfoSpace.com, Inc.:
Independent Auditors' Report.............................................. F-10
Consolidated Balance Sheets............................................... F-11
Consolidated Statements of Operations..................................... F-12
Consolidated Statements of Changes in Stockholders' Equity................ F-13
Consolidated Statements of Cash Flows..................................... F-14
Notes to Consolidated Financial Statements................................ F-15
INEX Corporation:
Report of Independent Accountants......................................... F-36
Balance Sheets............................................................ F-37
Statements of Operations.................................................. F-38
Statements of Changes in Stockholders' Equity............................. F-39
Statements of Comprehensive Loss.......................................... F-40
Statements of Cash Flows.................................................. F-41
Notes to Financial Statements............................................. F-42
</TABLE>
F-1
<PAGE>
INEX Corporation Acquisition
On October 14, 1999, the Company acquired Toronto-based INEX Corporation.
Under the terms of the acquisition, which was accounted for as a pooling of
interests, the Company exchanged approximately 900,000 shares of common stock
for all of INEX's outstanding shares, warrants and options.
F-2
<PAGE>
INFOSPACE.COM, INC. AND INEX CORPORATION
PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
As of September 30, 1999
<TABLE>
<CAPTION>
INEX Pro Forma Pro Forma
InfoSpace.com Corporation Adjustments Combined
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 60,089,969 $1,010,796 $ 61,100,765
Short-term
investments.......... 98,863,091 -- 98,863,091
Accounts receivable,
net of allowance..... 5,927,773 223,866 6,151,639
Notes receivable...... 7,500,000 -- (1,000,000)(Note 1) 6,500,000
Prepaid expenses and
other assets......... 7,556,157 96,590 7,652,747
------------ ---------- ----------- ------------
179,936,990 1,331,252 (1,000,000) 180,268,242
Long-term investments... 74,549,949 -- 74,549,949
Property and equipment,
net.................... 2,999,414 151,891 3,151,305
Intangible assets, net.. 17,959,285 -- 17,959,285
Other investments....... 7,861,474 -- 7,861,471
Other................... 575,327 -- 575,327
------------ ---------- ----------- ------------
Total assets............ $283,882,439 $1,483,143 $(1,000,000) $284,365,582
============ ========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...... $ 689,755 $ 359,482 $ 1,049,237
Accrued expenses...... 3,719,712 -- 3,719,712
Promissory notes
payable.............. -- 1,000,000 (1,000,000)(Note 1)
Deferred revenues..... 2,621,249 -- 2,621,249
------------ ---------- ----------- ------------
Total current
liabilities........ 7,030,716 1,359,482 (1,000,000) 7,390,196
Convertible debentures.. -- 170,369 170,369
Shareholders' equity:
Common stock, par
value $.0001......... 4,756 0 90 (Note 4) 4,846
Common stock.......... 0 2,465,664 (2,465,664)(Note 4) --
Class A preference
shares............... 0 859,056 (859,056)(Note 4) --
Special warrants,
Series A............. 0 659,698 (659,698)(Note 4) --
Special warrants,
Series B............. 0 1,079,053 (1,079,053)(Note 4) --
Additional paid-in
capital.............. 293,741,026 1,606,030 5,063,381 (Note 4) 300,410,437
Accumulated deficit... (14,244,382) (6,687,211) (20,931,593)
Cumulative translation
adjustment........... 0 (5,364) (5,364)
Deferred expense--
warrants............. (2,515,086) -- (2,515,086)
Unearned
compensation--stock
options.............. (134,591) (23,634) (158,225)
------------ ---------- ----------- ------------
Total stockholders'
equity............. 276,851,723 (46,708) -- 276,805,015
------------ ---------- ----------- ------------
Total liabilities and
stockholders' equity... $283,882,439 $1,483,143 $(1,000,000) $284,365,582
============ ========== =========== ============
</TABLE>
See accompanying notes to pro forma combined consolidated financial statements.
F-3
<PAGE>
INFOSPACE.COM, INC. AND INEX CORPORATION
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
INEX Pro Forma Pro Forma
InfoSpace.com Corporation Adjustments Combined
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues................ $ 22,004,983 $ 478,062 $22,483,045
Cost of revenues........ 3,433,913 77,633 3,511,546
------------ ----------- -----------
Gross profit.......... 18,571,070 400,429 18,971,499
Operating expenses:
Product development... 885,053 876,826 1,761,879
Sales and marketing... 16,601,636 905,181 17,506,817
General and
administrative....... 5,371,623 961,050 6,332,673
Amortization of
intangibles.......... 1,618,483 -- 1,618,483
Acquisition and
related charges...... 5,658,768 237,438 5,896,206
Other--non-recurring
charges.............. 209,500 650,000 859,500
------------ ----------- -----------
Total operating
expenses........... 30,345,063 3,630,495 33,975,558
------------ ----------- -----------
Loss from operations.... (11,773,993) (3,230,066) (15,004,059)
Other income (expense),
net.................... 7,496,224 23,316 7,519,540
Equity in loss from
joint venture.......... (100,941) -- (100,941)
------------ ----------- -----------
Net loss................ $ (4,378,710) $(3,206,750) $(7,585,460)
============ =========== ===========
Basic and diluted net
loss per share......... $ (0.10) $ (0.16)
============ ===========
Shares used in computing
basic and diluted net
loss per share
calculations........... 45,608,271 480,621(Note 4) 46,088,892
============ ======= ===========
</TABLE>
See accompanying notes to pro forma combined consolidated financial statements.
F-4
<PAGE>
INFOSPACE.COM, INC. AND INEX CORPORATION
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
INEX Pro Forma Pro Forma
InfoSpace.com Corporation Adjustments Combined
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues................ $ 5,373,860 $ 145,425 $ 5,519,285
Cost of revenues........ 972,295 17,971 990,266
----------- ----------- -----------
Gross profit.......... 4,401,565 127,454 4,529,019
Operating expenses:
Product development... 304,596 441,876 746,472
Sales and marketing... 2,521,651 532,639 3,054,290
General and
administrative....... 1,786,291 1,234,164 3,020,455
Amortization of
intangibles.......... 413,422 -- 413,422
Acquisition and
related charges...... 2,800,000 -- 2,800,000
Other--non-recurring
charges.............. 240,000 -- 240,000
----------- ----------- -----------
Total operating
expenses........... 8,065,960 2,208,679 10,274,639
----------- ----------- -----------
Loss from operations.... (3,664,395) (2,081,225) (5,745,620)
Other income (expense),
net.................... 152,767 27,119 179,886
Equity in loss from
joint venture.......... (76,134) -- (76,134)
----------- ----------- -----------
Net loss................ $(3,587,762) $(2,054,106) $(5,641,868)
=========== =========== ===========
Basic and diluted net
loss per share......... $ (0.14) $ (0.22)
=========== ===========
Shares used in computing
basic and diluted net
loss per share
calculations........... 25,277,014 459,820(Note 4) 25,736,834
=========== ======= ===========
</TABLE>
See accompanying notes to pro forma combined consolidated financial statements.
F-5
<PAGE>
INFOSPACE.COM, INC. AND INEX CORPORATION
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
INEX Pro Forma Pro Forma
InfoSpace.com Corporation Adjustments Combined
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues................ $ 9,414,450 $ 208,910 $ 9,623,360
Cost of revenues........ 1,605,006 29,720 1,634,726
----------- ----------- ------------
Gross profit.......... 7,809,444 179,190 7,988,634
Operating expenses:
Product development... 599,673 644,965 1,244,638
Sales and marketing... 5,541,261 744,636 6,285,897
General and
administrative....... 3,001,434 1,573,980 4,575,414
Amortization of
intangibles.......... 709,923 -- 709,923
Acquisition and
related charges...... 2,800,000 -- 2,800,000
Other--non-recurring
charges.............. 4,500,000 -- 4,500,000
----------- ----------- ------------
Total operating
expenses........... 17,152,291 2,963,581 20,115,872
----------- ----------- ------------
Loss from operations.... (9,342,847) (2,784,391) (12,127,238)
Other income (expense),
net.................... 411,365 22,146 433,511
Equity in loss from
joint venture.......... (124,976) -- (124,976)
----------- ----------- ------------
Net loss................ $(9,056,458) $(2,762,245) $(11,818,703)
=========== =========== ============
Basic and diluted net
loss per share......... $ (0.33) $ (0.42)
=========== ============
Shares used in computing
basic and diluted net
loss per share
calculations........... 27,120,536 422,315(Note 4) 28,020,536
=========== ======= ============
</TABLE>
See accompanying notes to pro forma combined consolidated financial statements.
F-6
<PAGE>
INFOSPACE.COM, INC. AND INEX CORPORATION
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
INEX Pro Forma Pro Forma
InfoSpace.com Corporation Adjustments Combined
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues................ $1,685,096 $ 57,446 $ 1,742,542
Cost of revenues........ 399,877 18,932 418,809
---------- ----------- -----------
Gross profit.......... 1,285,219 38,514 1,323,733
Operating expenses:
Product development... 212,677 170,459 383,136
Sales and marketing... 841,074 635,502 1,476,576
General and
administrative....... 480,398 463,740 944,138
Amortization of
intangibles.......... 64,056 -- 64,056
Acquisition and
related charges...... -- -- --
Other--non-recurring
charges.............. 137,000 -- 137,000
---------- ----------- -----------
Total operating
expenses........... 1,735,205 1,269,701 3,004,906
---------- ----------- -----------
Loss from operations.... (449,986) (1,231,187) (1,681,173)
Other income (expense),
net.................... 21,296 (1,038) 20,258
Equity in loss from
joint venture.......... -- -- --
---------- ----------- -----------
Net loss................ $ (428,690) $(1,232,225) $(1,660,915)
========== =========== ===========
Basic and diluted net
loss per share......... $ (0.02) $ (0.07)
========== ===========
Shares used in computing
basic and diluted net
loss per share
calculations........... 21,996,314 279,131(Note 4) 22,896,314
========== ======= ===========
</TABLE>
See accompanying notes to pro forma combined consolidated financial statements.
F-7
<PAGE>
INFOSPACE.COM, INC. AND INEX CORPORATION
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
INEX Pro Forma Pro Forma
InfoSpace.com Corporation Adjustments Combined
------------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues................ $ 199,372 $ -- $ 199,372
Cost of revenues........ 96,641 -- 96,641
---------- --------- ----------
Gross profit.......... 102,731 -- 102,731
Operating expenses:
Product development... 109,671 39,212 148,883
Sales and marketing... 230,774 26,154 256,928
General and
administrative....... 163,896 70,271 234,167
Amortization of
intangibles.......... -- -- --
Acquisition and
related charges...... -- -- --
Other--non-recurring
charges.............. -- -- --
---------- --------- ----------
Total operating
expenses........... 504,341 135,637 639,978
---------- --------- ----------
Loss from operations.... (401,610) (135,637) (537,247)
Other income (expense),
net.................... 21,086 -- 21,086
Equity in loss from
joint venture.......... -- -- --
---------- --------- ----------
Net loss................ $ (380,524) $(135,637) $ (516,161)
========== ========= ==========
Basic and diluted net
loss per share......... $ (0.02) $ (0.03)
========== ==========
Shares used in computing
basic and diluted net
loss per share
calculations........... 18,560,326 204,429(Note 4) 19,460,326
========== ======= ==========
</TABLE>
See accompanying notes to pro forma combined consolidated financial statements.
F-8
<PAGE>
INFOSPACE.COM, INC. AND INEX CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED
CONSOLIDATED FINANCIAL STATEMENTS
Note 1: The Periods Combined
The InfoSpace.com, Inc. consolidated statements of operations for the years
ended December 31, 1996, 1997 and 1998 and for the nine months ended September
30, 1998 and 1999 have been combined with the INEX Corporation statements of
operations for the same periods as if the merger had occurred as of the
beginning of the period. All significant intercompany accounts and transactions
have been eliminated.
Note 2: Pro Forma Basis of Presentation
The pro forma adjustments made in connection with the development of the pro
forma information have been made solely for purposes of developing such pro
forma information as necessary to comply with the disclosure requirements of
the Securities and Exchange Commission. The Unaudited Pro Forma Combined
Consolidated Financial Statements do not purport to be indicative of the
combined financial position or results of operations of future periods or
indicative of the results of operations of future periods or indicative of the
results that actually would have been realized had the entities been a single
entity during these periods.
The Unaudited Pro Forma Combined Statement of Operations for the years ended
December 31, 1997 and 1998 and for the nine months ended September 30, 1998 and
1999 reflect the issuance of 900,000 shares of InfoSpace.com, Inc. Common Stock
in exchange for all of the outstanding stock, warrants, and options of INEX
Corporation. The pro forma adjustments reflect the additional shares that would
be used in computing basic and diluted earnings per share as if the Merger had
occurred at the beginning of the period.
Note 3: Pro Forma Earnings Per Share
The Unaudited Pro Forma Combined Consolidated Statements of Operations for
InfoSpace.com, Inc. have been prepared as if the merger was completed at the
beginning of the periods presented. The pro forma basic net loss per share is
based on the combined weighted average number of shares of InfoSpace.com, Inc.
Common Stock outstanding during the period and the number of InfoSpace.com,
Inc. Common Stock to be issued in exchange as discussed in Note 2.
The Pro Forma diluted loss per share is computed using the weighted average
number of InfoSpace.com, Inc. Common Stock and dilutive common equivalent
shares outstanding during the period and the number of shares of InfoSpace.com,
Inc. Common Stock to be issued in exchange. Common equivalent shares consist of
the incremental common shares issuable upon conversion of the exercise of stock
options and warrants using the treasury stock method. Common equivalent shares
are excluded from the computation if their effect is antidilutive. The combined
Company had a pro forma net loss for all periods presented herein; therefore,
none of the options and warrants outstanding during each of the periods
presented were included in the computation of pro forma dilutive earnings per
share as they were antidilutive.
Note 4: Pro Forma Adjustments
The objective of the pro forma information is to show what the significant
effects on the historical financial information might have been had the
Companies been combined for the periods presented. Pro Forma Adjustments
represent the issuance of shares of InfoSpace.com, Inc. Common Stock (1) in
exchange for the exchangeable shares of InfoSpace Canada Holdings Inc. issued
in respect of INEX common shares upon the closing of the combination, (2)
issued directly to INEX Corporation shareholders upon the closing and (3)
issuable upon the exercise or conversion of warrants, stock options and
convertible debentures. The pro forma adjustments reflect the additional shares
that would be used in computing basic and diluted earnings per share as if the
Merger had occurred at the beginning of each period.
F-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of InfoSpace.com, Inc.
Redmond, Washington
We have audited the accompanying consolidated balance sheets of
InfoSpace.com, Inc. and subsidiary (the Company) as of December 31, 1997 and
1998, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the period from March 1, 1996
(inception) to December 31, 1996, and the years ended December 31, 1997 and
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of InfoSpace.com, Inc. and subsidiary
as of December 31, 1997 and 1998, and results of their operations and their
cash flows for the period from March 1, 1996 (inception) to December 31, 1996,
and the years ended December 31, 1997 and 1998, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Seattle, Washington
February 24, 1999 (December
6, 1999 as to Note 14)
F-10
<PAGE>
INFOSPACE.COM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September
December 31, December 31, 30,
1997 1998 1999
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 324,415 $ 14,590,634 $ 60,089,969
Short-term investments, held-to-
maturity........................... -- 72,159,522 98,863,091
Accounts receivable, net of
allowance for doubtful accounts of
$47,000, $597,000 and $507,000
(unaudited)........................ 467,187 3,409,672 5,927,773
Notes receivable.................... -- -- 7,500,000
Prepaid expenses and other current
assets............................. 121,573 3,630,476 7,556,157
---------- ------------ ------------
Total current assets.............. 913,175 93,790,304 179,936,990
Long-term investments, held-to-
maturity............................. -- 1,252,438 74,549,949
Property and equipment, net........... 216,439 1,161,936 2,999,414
Intangible assets, net................ 268,420 5,276,880 17,959,285
Other investments..................... -- 370,790 7,861,474
Other................................. -- 405,906 575,327
---------- ------------ ------------
Total assets...................... $1,398,034 $102,258,254 $283,882,439
========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................... $ 85,814 $ 1,586,118 689,755
Accrued expenses.................... 204,311 5,032,450 3,719,712
Note payable........................ 30,000 -- --
Deferred revenues................... 50,000 1,391,849 2,621,249
---------- ------------ ------------
Total current liabilities......... 370,125 8,010,417 7,030,716
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, par value $.0001--
Authorized, 15,000,000 shares:
issued and outstanding, no shares.. -- -- --
Common stock, par value $.0001--
Authorized, 30,000,000, 50,000,000
and 200,000,000 (unaudited) shares;
issued and outstanding, 22,060,506,
42,283,604 and 47,557,639
(unaudited) shares................. 2,206 4,228 4,756
Additional paid-in capital.......... 1,997,152 107,546,932 293,741,026
Accumulated deficit................. (809,214) (9,865,672) (14,244,382)
Deferred expense--warrants.......... -- (3,126,862) (2,515,086)
Unearned compensation--stock
options............................ (162,235) (310,789) (134,591)
---------- ------------ ------------
Total stockholders' equity........ 1,027,909 94,247,837 276,851,723
---------- ------------ ------------
Total liabilities and stockholders'
equity............................... $1,398,034 $102,258,254 $283,882,439
========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
INFOSPACE.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
March 1 to Years Ended Nine Months Ended
December 31, December 31, September 30,
------------ ----------------------- -------------------------
1996 1997 1998 1998 1999
------------ ---------- ----------- ----------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 199,372 $1,685,096 $ 9,414,450 $ 5,373,860 $ 22,004,983
Cost of revenues........ 96,641 399,877 1,605,006 972,295 3,433,913
---------- ---------- ----------- ----------- ------------
Gross profit.......... 102,731 1,285,219 7,809,444 4,401,565 18,571,070
Operating expenses:
Product development... 109,671 212,677 599,673 304,596 885,053
Sales and marketing... 230,774 841,074 5,541,261 2,521,651 16,601,636
General and
administrative....... 163,896 480,398 3,001,434 1,786,291 5,371,623
Amortization of
intangibles.......... -- 64,056 709,923 413,422 1,618,483
Acquisition and
related charges...... -- -- 2,800,000 2,800,000 5,658,768
Other--non-recurring
charges.............. -- 137,000 4,500,000 240,000 209,500
---------- ---------- ----------- ----------- ------------
Total operating
expenses........... 504,341 1,735,205 17,152,291 8,065,960 30,345,063
---------- ---------- ----------- ----------- ------------
Loss from
operations......... (401,610) (449,986) (9,342,847) (3,664,395) (11,773,993)
Other income, net....... 21,086 21,296 411,365 152,767 7,496,224
Equity in loss from
joint venture.......... -- -- (124,976) (76,134) (100,941)
---------- ---------- ----------- ----------- ------------
Net loss................ $ (380,524) $ (428,690) $(9,056,458) $(3,587,762) $ (4,378,710)
========== ========== =========== =========== ============
Basic and diluted net
loss per share......... $ (0.02) $ (0.02) $ (0.33) $ (0.14) $ (0.10)
========== ========== =========== =========== ============
Shares used in computing
basic net loss per
share.................. 18,560,326 21,882,980 27,120,536 25,277,014 45,608,271
========== ========== =========== =========== ============
Shares used in computing
diluted net loss per
share.................. 18,560,326 21,996,314 27,120,536 25,277,014 45,608,271
========== ========== =========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
INFOSPACE.COM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common stock
----------------- Paid-in Accumulated Deferred Unearned
Shares Amount capital deficit expense Compensation Total
---------- ------ ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 1, 1996
(inception)............ -- $ -- $ -- $ -- $ -- $ -- $ --
Common stock issued..... 21,890,506 2,190 1,369,010 -- -- -- 1,371,200
Unearned compensation--
stock options.......... -- -- 101,250 -- -- (101,250) --
Compensation expense--
stock options.......... -- -- -- -- -- 29,813 29,813
Net loss................ -- -- -- (380,524) -- -- (380,524)
---------- ------ ------------ ------------ ----------- --------- ------------
Balance, December 31,
1996................... 21,890,506 2,190 1,470,260 (380,524) -- (71,437) 1,020,489
Common stock issued for
acquisition............ 170,000 16 292,172 -- -- -- 292,188
Unearned compensation--
stock options.......... -- -- 234,720 -- -- (234,720) --
Compensation expense--
stock options.......... -- -- -- -- -- 143,922 143,922
Net loss................ -- -- -- (428,690) -- -- (428,690)
---------- ------ ------------ ------------ ----------- --------- ------------
Balance, December 31,
1997................... 22,060,506 2,206 1,997,152 (809,214) -- (162,235) 1,027,909
Common stock and
warrants issued for
acquisition............ 2,999,976 300 7,902,009 -- -- -- 7,902,309
Common stock issued to
employees.............. 446,502 44 1,674,350 -- -- -- 1,674,394
Common stock issued in
initial public
offering............... 11,500,000 1,150 77,829,753 -- -- -- 77,830,903
Other common stock
issued to investors.... 4,724,790 472 13,438,086 -- -- -- 13,438,558
Warrants issued......... -- -- 40,161 -- -- -- 40,161
Exercise of stock
options................ 551,830 56 1,016,154 -- -- -- 1,016,210
Deferred expense--
warrants............... -- -- 3,262,813 -- (3,262,813) -- --
Warrants expense........ -- -- -- -- 135,951 -- 135,951
Unearned compensation--
stock options.......... -- -- 386,454 -- -- (386,454) --
Compensation expense--
stock options.......... -- -- -- -- -- 237,900 237,900
Net loss................ -- -- -- (9,056,458) -- -- (9,056,458)
---------- ------ ------------ ------------ ----------- --------- ------------
Balance, December 31,
1998................... 42,283,604 4,228 107,546,932 (9,865,672) (3,126,862) (310,789) 94,247,837
Common stock issued in
follow-on public
offering (unaudited)... 4,340,000 434 185,097,491 -- -- -- 185,097,925
Initial public offering
costs (unaudited)...... -- -- (55,464) -- (55,464)
Exercise of stock
options (unaudited).... 463,436 47 909,665 -- -- -- 909,712
Exercise of stock
warrants (unaudited)... 432,454 43 (43) -- -- -- --
Warrants expense
(unaudited)............ -- -- -- -- 611,776 -- 611,776
Unearned compensation--
stock options
(unaudited)............ -- -- (43,639) -- -- 176,198 132,559
Employee stock purchase
plan (unaudited)....... 38,145 4 286,084 -- -- -- 286,088
Net loss (unaudited).... -- -- -- (4,378,710) -- -- (4,378,710)
---------- ------ ------------ ------------ ----------- --------- ------------
Balance, September 30,
1999 (unaudited)....... 47,557,639 $4,756 $293,741,026 $(14,244,382) $(2,515,086) $(134,591) $276,851,723
========== ====== ============ ============ =========== ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE>
INFOSPACE.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
March 1 to Years Ended December Nine Months Ended
December 31, 31, September 30,
------------ ---------------------- -------------------------
1996 1997 1998 1998 1999
------------ --------- ----------- ----------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net loss............... $(380,524) $(428,690) $(9,056,458) $(3,587,762) $ (4,378,710)
Adjustments to
reconcile net loss to
net cash provided
(used) by operating
activities:
Trademark
amortization.......... -- -- 1,500,000 750,000 1,500,000
Depreciation and other
amortization.......... 23,513 224,270 991,749 575,515 2,164,486
Compensation expense--
stock options......... 29,813 143,922 237,900 164,861 132,559
Warrants expense....... -- -- 135,951 -- 611,776
Write-off of in process
research and
development........... -- -- 2,800,000 2,800,000 3,900,000
Noncash issuance of
common stock.......... -- -- 70,000 70,000 --
Noncash services
exchanged............. -- (60,000) (7,290) (5,785) --
Bad debt expense....... -- 47,000 687,602 500,602 295,359
Warrant income......... -- -- -- -- (341,275)
Equity in loss from
joint venture......... -- -- 124,976 76,134 100,941
Loss on disposal of
fixed assets.......... -- 3,743 (3,771) (3,771) 15,017
Gain on sale of
intangible............ -- -- -- -- (7,830)
Cash provided (used) by
changes in operating
assets and
liabilities:
Accounts receivable... (126,574) (387,613) (3,630,087) (1,598,098) (2,813,460)
Prepaid expense and
other current
assets............... (59,334) (33,152) (2,072,308) (1,407,280) (5,425,681)
Other long-term
assets............... -- -- (337,500) -- (169,421)
Other intangibles..... -- -- (66,865) (6,865) --
Accounts payable...... 39,553 46,261 1,500,305 1,517,355 (896,363)
Accrued expenses...... 4,663 199,648 4,805,428 657,300 (1,312,738)
Deferred revenue...... 7,239 42,761 1,341,849 197,314 1,229,400
--------- --------- ----------- ----------- ------------
Net cash provided
(used) by operating
activities............ (461,651) (201,850) (978,519) 699,520 (5,395,940)
Investing Activities:
Business acquisitions,
net of cash acquired.. -- (14,000) (311,951) (311,951) (18,083,054)
Purchase of
trademark(s).......... -- -- (3,290,000) (3,290,000) --
Investment in joint
venture............... -- -- (495,767) (495,767) --
Issuance of note
receivable............ -- -- -- -- (7,500,000)
Other investments...... -- -- -- -- (7,250,350)
Purchase of domain
name.................. -- -- -- (60,000) (120,000)
Capitalized internally
developed software.... -- -- -- -- (247,338)
Sale of domain name.... -- -- -- -- 10,000
Purchase of fixed
assets................ (219,375) (120,822) (1,150,807) (767,112) (2,151,164)
Proceeds from sale of
fixed assets.......... -- -- 4,997 4,997 --
Short-term investments
(purchase) sale....... -- -- (72,159,522) -- (73,297,511)
Long-term investments
purchase.............. -- -- (1,252,438) -- (26,703,569)
Other.................. -- (29,087) -- -- --
--------- --------- ----------- ----------- ------------
Net cash used by
investing activities.. (219,375) (163,909) (78,655,488) (4,919,833) (135,342,986)
Financing Activities:
Proceeds from follow-on
offering, net of
expenses.............. -- -- -- -- 185,097,925
Proceeds from issuance
of common stock to
employees............. -- -- 1,674,394 1,674,394 286,088
Payments for
shareholders for
fractional shares..... -- -- (28) (28) --
Proceeds from sale of
warrants.............. -- -- 40,161 40,161 --
Proceeds from initial
public offering, net
of expenses........... -- -- 77,830,903 (868,621) (55,464)
Proceeds from issuance
of other common stock
to investors.......... 1,371,200 -- 13,338,586 13,338,586 909,712
Proceeds from exercise
of stock options...... -- -- 1,016,210 375 --
--------- --------- ----------- ----------- ------------
Net cash provided by
financing activities.. 1,371,200 -- 93,900,226 14,184,867 186,238,261
--------- --------- ----------- ----------- ------------
Net Increase (Decrease)
in Cash and Cash
Equivalents............ 690,174 (365,759) 14,266,219 9,969,554 45,499,335
Cash and Cash
Equivalents:
Beginning of period.... -- 690,174 324,415 324,415 14,590,634
--------- --------- ----------- ----------- ------------
End of period.......... $ 690,174 $ 324,415 $14,590,634 $10,228,969 $ 60,089,969
========= ========= =========== =========== ============
Supplemental Disclosure of Noncash
Financing and Investing Activities:
Acquisition of
membership interest of
Yellow Pages on the
Internet, LLC (YPI)
through the Issuance
of common stock and
assumption of $90,000
payable............... $ -- $ 382,188 $ -- $ -- $ --
Acquisition of common
stock of Outpost
Network, Inc. through
the issuance of common
Stock and warrants and
assumption of
liabilities of
$191,000.............. -- -- 7,932,000 7,932,000 --
Warrants received in
exchange for
services.............. -- -- -- -- 341,275
Stock issued for legal
and consulting
services.............. -- -- 50,000 50,000 --
Stock issued for
settlement of legal
claim................. -- -- 50,000 50,000 --
Settlement of note
payable for noncash
services.............. -- -- 30,000 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Period from March 1, 1996 (inception) to December 31, 1996, Years Ended
December 31, 1997 and 1998 and Nine Months Ended September 30, 1998 and 1999
(unaudited)
Note 1: Summary of Significant Accounting Policies
Description of business: InfoSpace.com, Inc. (the Company or InfoSpace),
previously known as InfoSpace, Inc., a Delaware corporation, was founded in
March 1996. The Company is a leading Internet infrastructure company that
provides enabling technologies and Internet services for consumers, merchants
and wireless devices. The Company completed an initial public offering in
December 1998.
The Company derives revenues from its consumer, merchant and wireless
services. These include advertising, content carriage, licensing fees, e-
commerce transaction fees, and guaranteed transaction fees in lieu of revenue
share.
Principles of consolidation: The consolidated financial statements include
the accounts of the Company, InfoSpace Canada.com and its wholly owned
subsidiary Outpost Network, Inc. (Outpost). All significant intercompany
accounts and transactions have been eliminated.
Cash and cash equivalents: The Company considers all highly liquid debt
instruments with an original maturity of 90 days or less to be cash
equivalents. Cash and cash equivalents are carried at cost, which approximates
market.
Investments: The Company principally invests its available cash in high-
quality corporate issuers, and in debt instruments of the U.S. Government and
its agencies. At December 31, 1998, the short-term investments consist entirely
of short-term debt instruments. All debt instruments with original maturities
greater than three months from the balance sheet date are considered
investments. Investments maturing after twelve months from the balance sheet
date are considered long-term. The Company accounts for investments in
accordance with SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities. The Company's short-term and long-term investments are
classified as held-to-maturity as of the balance sheet date and are reported at
amortized cost.
Property and equipment: Property and equipment are stated at cost.
Depreciation is computed under the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
Computer equipment and software................................. 3 years
Office furniture and equipment.................................. 7 years
Leasehold improvements.......................................... Lease term
</TABLE>
Intangible assets: Goodwill, purchased technology and other intangibles are
amortized on a straight-line basis over their estimated useful lives. All
goodwill, purchased technology and internally developed software currently
recorded are amortized over five years. The trademark is amortized over its
remaining life of nine years and four months. Other intangibles, primarily
consisting of purchased domain name licenses, are amortized over an estimated
useful life of three years.
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.
Other Long-lived assets: Management periodically reevaluates long-lived
assets, consisting primarily of purchased technology, goodwill, property and
equipment, to determine whether there has been any
F-15
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
impairment of the value of these assets and the appropriateness of their
estimated remaining life. No impairment loss has been recognized through
December 31, 1998.
Revenue recognition: The Company's revenues are derived from its consumer,
merchant and wireless services. These include advertising, content carriage,
licensing fees, e-commerce fees and guaranteed transaction fees in lieu of
revenue share.
Advertising: Revenues from contracts based on the number of impressions
displayed or click throughs provided are recognized as services are rendered.
Content carriage: Revenues from fixed fee content carriage agreements are
recognized ratably over the related contract term. For content carriage fee
contracts that are performance based with an established maximum, the Company
recognizes revenues as the services are rendered, not to exceed the maximum
amount over the fixed term.
Licensing fees: Revenue from licensed services is recognized ratably over the
term of the license agreement.
e-Commerce fees: Transaction fees are recognized in the period the
transaction occurred and was reported to the Company by the content providers
or online merchants.
Guaranteed transaction fees: Guaranteed minimum payments are recognized
ratably over the term of the agreements. Revenues earned above the guaranteed
minimum payments are recognized ratably over the remaining term of the
agreements.
Also included in revenues are barter revenues generated from exchanging
banners for banners, banners for content, or banners for print or other
advertising. Barter revenues are recorded as advertising revenues at the lower
of the estimated fair market value of goods and services received or
impressions given, and are recognized when the Company's advertisements are
run. For barter agreements, the Company records a receivable or liability at
the end of a reporting period for the difference in the fair value of the
services provided or received.
Deferred revenues are primarily comprised of billings in excess of recognized
revenues relating to advertising agreements and payments received pursuant to
licensing agreements in advance of revenue recognition. The Company records a
liability at month-end for any shortfalls of minimum impressions or click
throughs that were not attained during the period of the agreement.
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. Fees paid for content licenses are
capitalized and amortized under the straight-line method over the license
period.
Product development: Product development expenses consist principally of
personnel costs for research, design and development of the proprietary
technology used to aggregate, integrate and distribute the Company's consumer,
merchant and wireless services.
Advertising costs: Design and production costs for print advertising are
recorded as expense the first time an advertisement appears. Print advertising
costs are expensed when the print advertising appears. Advertising costs
related to electronic impressions are recorded as expense as impressions are
provided.
F-16
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Advertising expense totaled $8,908, $217,798, and $1,261,338, for the years
ended December 31, 1996, 1997, and 1998, respectively. Advertising expense
totaled $597,959 and $3,652,348 for the nine months ended September 30, 1998
and 1999 (unaudited), respectively.
Unearned compensation: Unearned compensation represents the unamortized
difference between the option exercise price and the deemed fair market value
of the Company's common stock for shares subject to grant at the grant date,
for options issued under the Company's stock incentive plan (Note 4). The
amortization of deferred compensation is charged to operations and is amortized
over the vesting period of the options.
Deferred expense-warrants: Deferred expense-warrants represents the fair
value of the warrants that were issued and will be expensed ratably over the
four year vesting period. The amortization of deferred warrant expense is
charged to sales and marketing expense and is amortized over the term of the
contractual agreement with America Online, Inc. (see Notes 4 and 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, trade receivables and notes receivable, as
discussed in Note 3. The Company's cash equivalents and short-term investments
are held with major financial institutions. The Company operates in one
business segment and has revenue streams from consumer, merchant and wireless
services. 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 nine months ended September 30, 1999, one
customer accounted for approximately 26% of revenues. At September 30, 1999,
one customer accounted for approximately 19% of gross accounts receivable,
which was all current. At December 31, 1998, one customer accounted for
approximately 27% of gross accounts receivable, which was all current.
Income taxes: The Company has adopted SFAS No. 109, Accounting for Income
Taxes. Under SFAS No. 109, deferred tax assets, including net operating loss
carryforwards, and liabilities are determined based on temporary differences
between the book and tax basis of assets and liabilities. The Company believes
sufficient uncertainty exists regarding the realizability of the deferred tax
assets such that a full valuation allowance is required.
Reclassifications: Distribution revenue share costs, previously classified as
Cost of Revenues, are 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 and prior financial statements to conform with the
1999 presentation.
To reflect ongoing expenses from core operations, amortization of intangibles
is now classified in one line item. This reclassification has been made to the
1998 and prior financial statements to conform with the 1999 presentation.
Reverse stock split: A one-for-two reverse stock split of the Company's
common stock was effected on August 25, 1998. All references in the financial
statements to shares, share prices, per share amounts and stock plans have been
adjusted retroactively for the one-for-two reverse stock split.
Stock split: A two-for-one stock split of the Company's common stock was
effected in May 1999. All references in the financial statements to shares,
share prices, per share amounts and stock plans have been adjusted
retroactively for the two-for-one stock split.
F-17
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual amounts may differ from estimates.
Recent accounting pronouncements: In June 1997 the Financial Accounting
Standards Board (FASB) issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes the standards for reporting comprehensive income and
its components in financial statements. Comprehensive income as defined
includes all changes in equity (net assets) during a period from non-owner
sources. Examples of items to be included in comprehensive income, which are
excluded from net income, include foreign currency translation adjustments and
unrealized gains/losses on available-for-sale securities. The disclosure
prescribed by SFAS No. 130 must be made for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required upon adoption. The Company had no
comprehensive income items to report for the period from March 1, 1996
(inception) to December 31, 1996, the years ended December 31, 1997 and 1998.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivatives and
Hedging Activities, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. Because the Company has never used nor currently intends to use
derivatives, management does not anticipate that the adoption of this new
standard will have a significant effect on earnings or the financial position
of the Company.
Note 2: Balance Sheet Components
The following balance sheet components are presented as of the dates noted
below.
Cash and Cash Equivalents:
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1997 1998 1999
------------ ------------ -------------
(unaudited)
<S> <C> <C> <C>
Cash................................. $324,415 $ 173,566 $ 1,076,017
Commercial paper..................... -- -- 49,731,167
Money market......................... -- 14,417,068 6,282,785
Other................................ -- -- 3,000,000
-------- ----------- -----------
$324,415 $14,590,634 $60,089,969
======== =========== ===========
</TABLE>
Short and Long-Term Investments at December 31, 1998:
<TABLE>
<CAPTION>
Amortized Fair- Unrealized Unrealized
Cost Value Gain Loss
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Commercial paper.............. $66,668,475 $66,681,481 $13,259 $(253)
Municipal securities.......... 1,499,665 1,500,150 485 --
U.S. Government securities.... 5,243,820 5,243,433 -- (387)
----------- ----------- ------- -----
$73,411,960 $73,425,064 $13,744 $(640)
=========== =========== ======= =====
</TABLE>
F-18
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Maturity information is as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Within one year..................................... $72,159,522 $72,173,013
1 year through 5 years.............................. 1,252,438 1,252,051
----------- -----------
$73,411,960 $73,425,064
=========== ===========
</TABLE>
Short and Long-Term Investments at September 30, 1999 (unaudited):
<TABLE>
<CAPTION>
Amortized Market Unrealized Unrealized
Cost Value Gain Loss
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Corporate notes and
bonds................... $ 88,876,780 $ 87,788,501 $ 3,770 $(1,092,049)
U.S. Government
securities.............. 44,553,718 44,363,300 14,015 (204,233)
Commercial paper......... 23,373,517 23,291,601 -- (81,916)
Certificate of deposit... 16,609,025 16,466,319 -- (142,706)
------------ ------------ ------- -----------
$173,413,040 $171,909,921 $17,785 $(1,520,904)
============ ============ ======= ===========
</TABLE>
Maturity information is as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
------------ ------------
<S> <C> <C>
Within one year................................... $ 98,863,091 $ 98,270,764
1 year through 5 years............................ 74,549,949 73,639,157
------------ ------------
$173,413,040 $171,909,921
============ ============
</TABLE>
Prepaid expenses and other assets:
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1997 1998 1999
------------ ------------ -------------
(unaudited)
<S> <C> <C> <C>
Prepaid carriage fees................ $ -- $1,171,874 $4,044,676
Prepaid trademark license............ -- 1,500,000 --
Interest receivable.................. -- 9,874 1,344,634
Other................................ 121,573 948,728 2,166,847
-------- ---------- ----------
$121,573 $3,630,476 $7,556,157
======== ========== ==========
</TABLE>
Property and equipment:
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1997 1998 1999
------------ ------------ -------------
(unaudited)
<S> <C> <C> <C>
Computer equipment.................. $207,817 $1,390,988 $2,911,744
Internally developed software....... -- -- 489,311
Office equipment.................... 3,044 54,366 140,424
Office furniture.................... 8,514 77,789 155,139
Software............................ -- -- 154,632
Leasehold improvements.............. -- 17,632 58,294
-------- ---------- ----------
219,375 1,540,775 3,909,544
Accumulated depreciation............ (23,513) (378,839) (910,130)
-------- ---------- ----------
$195,862 $1,161,936 $2,999,414
======== ========== ==========
</TABLE>
F-19
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangibles assets:
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1997 1998 1999
------------ ------------ -------------
(unaudited)
<S> <C> <C> <C>
Goodwill............................. $ 310,583 $4,860,671 $18,563,725
Core technology...................... -- 800,000 1,200,000
Trademark............................ -- 290,000 290,000
Other................................ -- 40,000 120,000
Domain name.......................... -- 60,000 176,875
Advertising contracts................ 85,417 85,417 85,417
--------- ---------- -----------
396,000 6,136,088 20,436,017
Accumulated amortization............. (127,580) (859,208) (2,476,732)
--------- ---------- -----------
$ 268,420 $5,276,880 $17,959,285
========= ========== ===========
</TABLE>
Accrued expenses:
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1997 1998 1999
------------ ------------ -------------
(unaudited)
<S> <C> <C> <C>
Compensation and related............ $ 33,777 $ 193,592 $ 518,270
Carriage fees and revenue share..... -- 93,067 1,817,284
Legal fees.......................... 12,717 -- 1,006,913
Settlement costs.................... 137,000 4,500,000 --
Other............................... 20,817 245,791 377,245
--------- ---------- ----------
$ 204,311 $5,032,450 $3,719,712
========= ========== ==========
</TABLE>
Note 3: Notes Receivable (unaudited)
On June 30, 1999, the Company loaned an unrelated third party $6.0 million.
The short-term note is due the earlier of March 31, 2000 or upon a change of
control, and accrues interest at 12% per annum. The note is secured by all of
the assets of the borrower. On September 8, 1999 the borrower entered into a
definitive agreement to be purchased, with the transaction expected to close
before year-end.
During August 1999, the Company loaned $1,500,000 to two companies to be
acquired by the Company. On October 14, 1999, one of these acquisitions was
closed. The second acquisition is expected to close within the fourth quarter.
(See Note 14, Subsequent Event, for additional information.)
Note 4: Stockholders' Equity
Authorized shares: At incorporation, the Company was authorized to issue
25,000,000 shares, consisting of 20,000,000 shares of common stock with a par
value of $.0001 per share and 5,000,000 shares of preferred stock with a par
value of $.0001 per share. The preferred stock may be issued in one or more
series.
On June 17, 1996, the Certificate of Incorporation was amended to increase
the authorized number of shares of all classes of Company stock to 45,000,000
shares, consisting of 30,000,000 shares of common stock with a par value of
$.0001 per share and 15,000,000 shares of preferred stock with par value of
$.0001 per share.
On May 1, 1998, the Certificate of Incorporation was amended to increase the
authorized number of shares of all classes of Company stock to 55,000,000
shares, consisting of 40,000,000 shares of common stock
F-20
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
with a par value of $.0001 per share and 15,000,000 shares of preferred stock
with a par value of $.0001 per share.
On August 25, 1998, the Board of Directors approved and the Company effected
a one-for-two reverse stock split of the Company's common stock. All references
in the financial statements to shares, share prices, per share amounts and
stock plans have been adjusted retroactively for the one-for-two reverse stock
split.
Also, on August 25, 1998, the Company filed a Restated Certificate of
Incorporation. The effect was to change the authorized number of all classes of
Company stock to 65,000,000 shares, consisting of 50,000,000 shares of common
stock with a par value of $.0001 per share and 15,000,000 shares of preferred
stock with a par value of $.0001 per share after giving effect to the one-for-
two reverse stock split.
On April 6, 1999 Board of Directors approved a two-for-one stock split of the
Company's common stock. The stock split was effective on May 5, 1999. All
references in the financial statements to shares, share prices, per share
amounts and stock plans have been adjusted retroactively for the two-for-one
stock split.
On May 24, 1999, the stockholders of the Company approved an amendment to the
Company's Certificate of Incorporation to increase the authorized number of
shares of the Company's common stock to 200,000,000 shares. (unaudited).
Restated 1996 Flexible Stock Incentive Plan: On June 3, 1998, the Board of
Directors approved the Restated 1996 Flexible Stock Incentive Plan (the Plan).
The Plan provides employees (including officers and directors who are
employees) of the Company an opportunity to purchase shares of stock pursuant
to options which may qualify as incentive stock options under Section 422 of
the Internal Revenue Code of 1986, as amended (the Code), and employees,
officers, directors, independent contractors and consultants of the Company an
opportunity to purchase shares of stock pursuant to options which are not
described in Section 422 of the Code (nonqualified stock options). The Plan
also provides for the sale or bonus of stock to eligible individuals in
connection with the performance of service for the Company. Finally, the Plan
authorizes the grant of stock appreciation rights, either separately or in
tandem with stock options, which entitle holders to cash compensation measured
by appreciation in the value of the stock. Not more than 6,000,000 shares of
stock shall be available for the grant of options or the issuance of stock
under the Plan. If an option is surrendered or for any other reason ceases to
be exercisable in whole or in part, the shares which were subject to option but
on which the option has not been exercised shall continue to be available under
the Plan. The Plan is administered by the Board of Directors. Options granted
under the Plan typically vest over four years, 25% one year from the date of
grant and ratably thereafter on a monthly basis. Additional options have been
granted to retain certain existing employees, which options vest monthly over
four years.
On June 3, 1998, the Board of Directors approved the Option Exchange Program
and the Option Replacement Program, allowing employees of the Company to
exchange their nonqualified stock options for incentive stock options.
Nonqualified stock options to purchase a total of 725,106 shares were exchanged
for incentive stock options to purchase the equivalent number of shares with an
exercise price equal to the fair market value at the date of exchange.
On May 24, 1999, the stockholders' of the Company approved an amendment to
the Company's 1996 Flexible Stock Incentive Plan to increase the number of
share reserved for issuance by 4,000,000. The stockholders' also approved 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 (B) three percent
(3%) of the Company's outstanding shares at the end of the Company's preceding
fiscal year, and (C) a lesser amount determined by the Board of Directors. The
stockholders' also approved 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
F-21
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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). (unaudited).
Included in the table below as outstanding at September 30, 1999, are options
to purchase 40,676 shares (unaudited) that were issued outside of the Plan,
27,551 of which were exercisable as of September 30, 1999.
Activity and price information regarding the options are summarized as
follows:
<TABLE>
<CAPTION>
Weighted
average
Options exercise price
--------- --------------
<S> <C> <C>
Outstanding, March 1, 1996
(inception).............. -- $ --
Granted................. 2,063,462 0.07
---------
Outstanding, December 31,
1996..................... 2,063,462 0.07
Granted................. 702,500 1.54
---------
Outstanding, December 31,
1997..................... 2,765,962 0.44
Granted................. 3,967,204 5.15
Cancelled............... (725,106) 77
Exercised............... (551,830) 1.84
Forfeited............... (156,750) 2.15
---------
Outstanding, December 31,
1998..................... 5,299,480 3.73
Granted (unaudited)..... 1,140,400 37.73
Cancelled (unaudited)... (94,022) 18.54
Exercised (unaudited)... (931,154) 1.72
---------
Outstanding, September 30,
1999 (unaudited)......... 5,414,704 --
=========
Options exercisable,
December 31, 1998........ 1,509,466 0.66
=========
Options exercisable,
September 30, 1999
(unaudited).............. 1,939,652 1.22
=========
</TABLE>
Information regarding stock option grants during the period from March 1,
1996 to December 31, 1996, the years ended December 31, 1997 and 1998 and nine
months ended September 30, 1999 (unaudited) is summarized as follows:
<TABLE>
<CAPTION>
Years Ended
---------------------------------------------------------
March 1, 1996 to December 31,
1996 December 31, 1997 December 31, 1998
----------------------------- --------------------------- -----------------------------
Weighted Weighted Weighted
Average Weighted Average Weighted Average Weighted
exercise Average exercise Average exercise Average
Shares price fair value Shares price fair value Shares price fair value
--------- -------- ---------- ------- -------- ---------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise price
exceeds market
price.......... 110,000 $1.00 $0.02 500,000 $2.00 $ -- -- $ -- $ --
Exercise price
equals market
price.......... 1,800,000 0.01 -- -- -- -- 3,449,284 5.82 1.33
Exercise price
is less than
market price... 153,462 0.03 .80 202,500 0.39 1.33 518,000 .69 1.38
<CAPTION>
Nine months ended
September 30, 1999
(unaudited)
-----------------------------
Weighted
Average Weighted
exercise Average
Shares price fair value
--------- -------- ----------
<S> <C> <C> <C>
Exercise price
exceeds market
price.......... -- $ -- $ --
Exercise price
equals market
price.......... 1,140,400 37.73 42.81
Exercise price
is less than
market price... -- -- --
</TABLE>
The Company has elected to follow the measurement provisions of Accounting
Principles Board Opinion No. 25, under which no recognition of expense is
required in accounting for stock options granted to employees for which the
exercise price equals or exceeds the fair market value of the stock at the
grant
F-22
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
date. In those cases where options have been granted when the option price is
below fair market value, the Company recognizes compensation expense over the
vesting period using the aggregated percentage of compensation accrued method
as prescribed by Financial Accounting Standards Board Interpretation No. 28.
Compensation expense of $29,813, $143,922, $237,900 was recognized during the
period from March 1, 1996 (inception) to December 31, 1996, and for the years
ended December 31, 1997 and 1998, respectively, for options granted with
exercise prices less than grant date fair market value.
To estimate compensation expense which would be recognized under SFAS No.
123, Accounting for Stock-based Compensation, the Company uses the modified
Black-Scholes option-pricing model with the following weighted-average
assumptions for options granted through December 31, 1998: risk-free interest
rate ranging from 4.24% to 6%; expected dividend yield of 0%; no volatility
(prior to becoming a public company); and an expected life of six years.
Had compensation expense for the Plan been determined based on fair value at
the grant dates for awards under the Plan consistent with SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net losses for the
period from March 1, 1996 (inception) to December 31, 1996, and the years ended
December 31, 1997 and 1998, would have been adjusted to the following pro forma
amounts:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Net loss as reported........................ $(380,524) $(428,690) $(9,056,458)
Net loss, pro forma......................... (380,859) (430,180) (9,472,322)
Basic net loss per share, pro forma......... (0.02) (0.02) (0.35)
</TABLE>
Additional information regarding options outstanding as of December 31, 1998,
is as follows:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
-------------------------------------- --------------------------
Weighted
average
remaining Weighted Weighted
Range of Number contractual average Number average
exercise prices Outstanding life (yrs.) Exercise price Exercisable exercise price
--------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.01 1,965,876 7.31 $0.01 1,273,480 $0.01
0.10 28,462 7.67 0.10 28,462 0.10
1.00-1.50 44,646 8.28 1.23 24,750 1.00
2.00-3.00 693,396 8.93 2.02 74,916 2.00
3.75-4.00 233,000 9.56 3.88 -- --
6.00-7.50 2,330,100 9.93 7.41 107,858 7.50
23.53 4,000 10.00 23.53 -- --
--------- ---------
5,299,480 8.78 $3.73 1,509,466 $0.66
========= =========
</TABLE>
At December 31, 1998, 769,900 shares were available for future grants under
the Plan.
In connection with the May and August 1998 private placement offering, the
Company issued warrants to purchase 4,127,672 shares of common stock to five
third-party participants for consulting services performed in identifying,
structuring and negotiating future financings. These warrants expire between
May 21, 2008 and August 6, 2008. The exercise prices are as follows:
<TABLE>
<CAPTION>
Shares Price
------ -----
<S> <C>
2,201,424............................... $2.00
963,124............................... 3.00
963,124............................... 5.00
</TABLE>
F-23
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In July 1998, the Company issued warrants to purchase 955,934 shares of
common stock at an exercise price of $0.01 to a former consultant in
conjunction with the acquisition of Outpost (Note 4). These warrants expire on
October 30, 2002.
On August 24, 1998, the Company issued to AOL warrants to purchase up to
1,979,832 shares of common stock, which warrants vest in 16 equal quarterly
installments over four years, conditioned on the delivery by AOL of a minimum
number of searches each quarter on the Company's white pages directory service.
The warrants have an exercise price of $6.00 per share.
Stock purchase rights plan: On June 26, 1998, the Board of Directors approved
the InfoSpace, Inc. Stock Purchase Rights Plan. The plan is offered to
employees of the Company and its subsidiaries. The purpose of the plan is to
provide an opportunity for employees to invest in the Company and increase
their incentive to remain with the Company. A maximum of 1,000,000 shares of
common stock are available for issuance under the plan. During July 1998, the
Company offered shares to employees under the plan, resulting in the sale of
446,502 shares at $3.75 per share. The plan was terminated on August 24, 1998.
1998 Employee Stock Purchase Plan: The Company adopted the 1998 Employee
Stock Purchase Plan (the ESPP) in August 1998. The ESPP was implemented upon
the effectiveness of the initial public offering. The ESPP is intended to
qualify under Section 423 of the Code, and permits eligible employees of the
Company and its subsidiaries to purchase common stock through payroll
deductions of up to 15% of their compensation. Under the ESPP, no employee may
purchase common stock worth more than $25,000 in any calendar year, valued as
of the first day of each offering period. In addition, owners of 5% or more of
the Company's, or subsidiary's common stock may not participate in the ESPP. An
aggregate of 900,000 shares of common stock are authorized for issuance under
the ESPP.
The ESPP was implemented with six-month offering periods, with the first such
period commencing upon the effectiveness of the initial public offering through
July 31, 1999. Offering periods will begin on each February 1 and August 1. The
price of common stock purchased under the ESPP will be the lesser of 85% of the
fair market value on the first day of an offering period and 85% of the fair
market value on the last day of an offering period, except that the purchase
price for the first offering period was equal to the lesser of 100% of the
initial public offering price of the common stock offered hereby and 85% of the
fair market value on July 31, 1999. The ESPP does not have a fixed expiration
date, but may be terminated by the Company's Board of Directors at any time.
There were 38,145 shares (unaudited) issued for the first ESPP offering period
which ended July 31, 1999.
Note 5: Business Combinations
YPI: On May 16, 1997, the Company acquired all outstanding Membership
Interest Units of YPI, a limited liability company. YPI operations began to be
included in the Company's financial statements on the effective date of the
acquisition, May 1, 1997. The YPI advertising agreements provided yellow pages
directory publishers with an Internet distribution channel and had terms of one
month to one year. YPI is a yellow pages sales consortium business. In
conjunction with the acquisition, the Company acquired certain advertising
agreements and assumed a note payable for $90,000.
In connection with the acquisition of YPI during May 1997, 2,000,000 shares
of common stock were placed into an escrow account. The aggregate number of
shares of the escrow stock to be delivered was derived from revenues generated
by the business during the measurement period. Before December 31, 1997, the
number of shares to be released from escrow was finalized and a total of
170,000 escrow shares were issued to the sellers on January 2, 1998. These
shares were included in the calculation of basic earnings
F-24
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
per share as of January 1, 1998, and in the calculation of diluted earnings per
share as of the effective date of acquisition, May 1, 1997. The remaining
1,830,000 common shares were returned to the Company for cancellation. The
Company acquired YPI primarily to obtain rights to its advertising agreements
and the services of its founder to further develop the Company's business.
YPI's shareholders have represented that YPI had no significant operations and
that detailed YPI financial information is not available.
The allocation of purchase price, as determined after the release of shares
from escrow was finalized, is summarized as follows:
<TABLE>
<CAPTION>
Book and
fair value
----------
<S> <C>
Book value of net liabilities assumed at cost................. $(90,000)
Fair value adjustments:
Fair value of purchased advertising contracts............... 85,417
--------
Fair value of net assets acquired............................. (4,583)
Purchase price:
Acquisition costs........................................... 14,000
Fair value of 170,000 shares issued......................... 292,000
--------
Excess of purchase price over net assets acquired, allocated
to goodwill (amortized over five years)...................... $310,583
========
</TABLE>
Outpost Network, Inc.: On June 2, 1998, the Company acquired all of the
common stock of Outpost, a privately held company, for a purchase consideration
of 2,999,976 shares of the Company's common stock, cash of $35,000, assumed
liabilities of $264,000, and acquisition expenses of $1,957,000. In conjunction
with the acquisition, the Company was required to issue warrants valued at
$1,902,000 to a former consultant, which are included in acquisition costs. The
exercise price of the warrants was specified in the consulting agreement
between the Company and the former consultant dated October 30, 1997. Pursuant
to this agreement, the former consultant rendered advice to the Company
regarding the structure and terms of the Outpost merger and the warrants were
earned based on the completion of the merger. Therefore, the warrant value was
determined on June 2, 1998, the effective date of the merger. The transaction
was accounted for as a purchase for accounting purposes.
The allocation of purchase price is summarized as follows:
<TABLE>
<CAPTION>
Book and
fair value
----------
<S> <C>
Book value of net liabilities assumed at cost................ $ (191,000)
Fair value adjustments:
Fair value of purchased technology, including in-process
research and development.................................. 3,600,000
Fair value of assembled workforce.......................... 40,000
----------
Fair value of net assets acquired............................ 3,449,000
Purchase price:
Cash paid.................................................. 35,000
Fair value of shares issued................................ 6,000,000
Acquisition costs (including the warrants issued with a
fair value of $1,902,000)................................. 1,957,000
----------
Excess of purchase price over net assets acquired, allocated
to goodwill (amortized over five years)..................... $4,543,000
==========
</TABLE>
F-25
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The $3,600,000 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 year ended
December 31, 1998, include the write-off of $2,800,000 of purchased in-process
research and development. The remaining $800,000 represents the purchase of
core technology and existing products which are being amortized over an
estimated useful life of five years.
The following unaudited pro forma information shows the results of the
Company for the years ended December 31, 1998 and 1997, as if the acquisition
of Outpost occurred on January 1, 1997. The pro forma information includes
adjustments relating to the financing of the acquisition, the effect of
amortizing goodwill and other intangible assets acquired, and assumes that
Company shares issued in conjunction with the acquisition were outstanding as
of January 1, 1997. The pro forma results of operations are unaudited, have
been prepared for comparative purposes only, and do not purport to indicate the
results of operations which would actually have occurred had the combination
been in effect on the date indicated or which may occur in the future:
<TABLE>
<CAPTION>
(unaudited)
1997 1998
----------- ------------
<S> <C> <C>
Revenue......................................... $ 1,915,990 $ 9,333,459
Net loss........................................ (3,130,332) (10,551,855)
Basic and diluted net loss per share............ (0.13) (0.37)
</TABLE>
My Agent Technology (unaudited): 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:
<TABLE>
<S> <C>
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
===========
</TABLE>
F-26
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
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 operating segments for
financial reporting purposes or for management purposes.
Note 6: Commitments and Contingencies
The Company has noncancellable operating leases for corporate facilities. The
leases expire through June, 2004. Rent expense under operating leases totaled
$36,000, $83,000 and $179,000 for the period from March 1, 1996 (inception) to
December 31, 1996, the years ended December 31, 1997 and 1998, respectively.
Rent expense under operating leases totaled $113,068 and $302,847 (unaudited)
for the nine months ended September 30, 1998 and 1999, respectively. The
Company also has noncancellable carriage fee agreements with certain
affiliates.
Future minimum rental payments required under noncancellable operating leases
are as follows for the periods ending December 31:
<TABLE>
<S> <C>
1999............................................................ $ 106,180
2000............................................................ 393,018
2001............................................................ 353,089
2002............................................................ 311,972
2003............................................................ 225,280
----------
$1,389,539
==========
</TABLE>
Future payments required under noncancellable affiliate carriage fee
agreements are as follows for the periods ending December 31:
<TABLE>
<S> <C>
1999........................................................... $ 2,226,060
2000........................................................... 7,543,976
2001........................................................... 1,500,000
-----------
$11,270,036
===========
</TABLE>
Trademark license agreements: Effective as of July 1, 1998, the Company
entered into two trademark license agreements with Netscape Communications
Corporation (Netscape) to license two of Netscape's trademarks for one-time
nonrefundable license fees totaling $3,000,000. The trademark license fees were
capitalized and amortized over one year, the expected useful life of the
trademarks. The trademarks were fully amortized at June 30, 1999 (unaudited).
F-27
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Directory services agreements: The Company entered into two directory
services agreements with Netscape effective as of July 1, 1998. Under these
agreements, which provide for a one-year term, with automatic renewal, the
Company serves as the exclusive provider of co-branded yellow pages and white
pages directory services on the Netscape home page (Netcenter). Netscape has
guaranteed the Company a minimum level of use of the Company's yellow pages and
white pages directories, and the Company has agreed to pay Netscape a carriage
fee each quarter equal to the product of (x) the cost per click through as
specified in the applicable directory services agreement and (y) the number of
click throughs delivered by Netscape, up to a specified maximum. The Company
accrues monthly a liability for the estimated click throughs delivered.
Netscape reports the number of click throughs by month on a quarterly basis and
invoices the Company on a quarterly basis. Payments to Netscape will be
recorded as sales and marketing expenses during the quarter in which the click
throughs occur. This minimum payment is included in the noncancellable
affiliate carriage fee payments disclosed above. The Company expects Netscape
to meet the minimum guaranteed click throughs during the period of the
directory services agreements. In the event that Netscape fails to deliver the
guaranteed minimum number of click throughs, Netscape has agreed to either
continue the link to the Company's content services beyond the term of the
agreement until the guaranteed minimum click throughs have been achieved or
deliver to the Company a program of equivalent value as a remedy for the
shortfall in click throughs. Netscape and the Company will share advertising
revenue generated from a search of the Company's directory services initiated
on Netscape's home page.
Interactive Marketing Agreement (unaudited): On June 30, 1999 the Company
entered into an agreement with AOL to provide white page directory services to
AOL's Compuserve and Digital City divisions and its Netscape Communications
subsidiary for a two year term. Pursuant to the agreement, the Company agreed
to provide white pages listings and directory services. The Company is required
to pay to AOL a bi-annual carriage fee. In return, AOL has agreed to deliver a
minimum number of searches each year. If AOL delivers more searches in either
or both of the years, we are required to pay AOL additional fees on a cost per
search basis. In the event that there is a shortfall in searches as of the end
of the initial two year term of the agreement, AOL will extend the term for six
months or until the shortfall is made up, whichever occurs first. The Company
will account for revenue and revenue sharing under the agreements with AOL
under our existing revenue recognition policies described in our Note 1. The
total carriage fee payments to be made under the white pages directory services
agreement will be recognized based on actual searches delivered over the term
of the agreement as sales and marketing expense.
White pages and classifieds agreements: On August 24, 1998, the Company
entered into agreements with America Online, Inc. (AOL) to provide white pages
directory and classifieds information services to AOL. Pursuant to the white
pages directory services agreement, the Company has agreed to provide to AOL
white pages listings and directory service. The Company is required to pay to
AOL a quarterly carriage fee, the retention of which is conditioned on the
quarterly achievement of a minimum number of searches on the AOL white pages
site. The quarterly carriage fee is paid in advance at the beginning of the
quarter in which the searches are expected to occur and is recorded as a
prepaid expense in the quarter it is paid. The fee is refundable if the minimum
number of searches on the AOL white pages site for such quarter is not
achieved. In addition, AOL has guaranteed to the Company a minimum number of
searches over the term of the agreement. In the event that AOL does not deliver
the guaranteed minimum number of searches over the term of the agreement, AOL
has agreed to pay to the Company a cash penalty payment. The Company will share
with AOL revenues generated by advertising on the Company's white pages
directory services delivered to AOL. The Company is entitled to a greater
percentage of advertising revenues than is AOL if the amount of such revenues
received by the Company is less than the carriage fees paid to AOL.
The Company has agreed to provide white pages directory services to AOL for a
three-year term beginning on November 19, 1998, which term may be extended for
four additional one-year terms at AOL's
F-28
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
discretion. The agreement may be terminated by AOL for any reason after 18
months or at any time upon the acquisition by AOL of a competing white pages
directory services business. In the event of any such termination, AOL is
required to pay a termination fee to the Company. In addition, without the
payment of a termination fee, AOL has the right to terminate the agreement in
the event of a change of control of the Company.
The Company has agreed to provide classifieds information services to AOL for
a two-year term, with up to three one-year extensions at AOL's discretion. AOL
has agreed to pay to the Company a quarterly fee and will share with the
Company revenues generated from payments by individuals and commercial listing
services for listings on the AOL classifieds service.
Pursuant to the terms of these agreements, the Company has granted AOL the
right to negotiate with the Company exclusively and in good faith for a period
of 30 days with respect to proposals or discussions that would result in a sale
of a controlling interest of the Company or other merger, asset sale or other
disposition that effectively results in a change of control of the Company.
In connection with the agreements, on August 24, 1998, the Company issued to
AOL warrants to purchase up to 1,979,832 shares of common stock, which warrants
vest in 16 equal quarterly installments over four years, conditioned on the
delivery by AOL of a minimum number of searches each quarter on the Company's
white pages directory service. The warrants have an exercise price of $6.00 per
share.
The revenue and revenue sharing under the agreements with AOL will be
accounted for under the Company's existing revenue recognition policies
described in Note 1. The Company expects AOL to meet the minimum number of
searches each quarter. Accordingly, the total carriage fee payments to be made
under the white pages directory services agreement will be recognized ratably
over the term of the agreement as sales and marketing expense. However, if AOL
does not deliver the minimum searches on the AOL white pages during that
quarter, then AOL is obligated to refund the quarterly carriage fee paid for
that specific quarter, in which case the Company would credit prepaid expense
and reduce the total cost of the white pages directory services agreement by
the amount of the refund. The adjusted total cost of the agreement would be
recognized ratably over the remaining term of the agreement as sales and
marketing expense, which term would include the quarter in which AOL did not
deliver the minimum number of searches. For at least the first two years of the
white pages agreement, the Company expects that actual carriage fee payments
will exceed the sales and marketing expense recorded for the quarter in which
the payment is made. As such, the Company expects to experience increases in
its prepaid expense account during this time. These fees are included in the
noncancellable affiliate carriage fee payments disclosed above. Any termination
fee paid to the Company by AOL will be recognized as revenue when paid. The
warrants were valued using the fair value method, as required under SFAS No.
123. The fair value of the warrants was approximately $3,300,000 at the date of
grant, and is being amortized ratably over the four-year vesting period. The
underlying assumptions used to determine the value of the warrants are an
expected life of six years and a 5.5% risk-free interest rate.
Litigation: On December 7, 1998, a complaint was filed against the Company on
behalf of an alleged former employee in Superior Court for Suffolk County in
the Commonwealth of Massachusetts alleging that he was terminated without cause
and that he entered into an agreement with us that entitles him to an option to
purchase 4,000,000 shares of common stock or 10% of the Company's equity. The
complaint alleges breach of contract, breach of the covenant of good faith,
breach of fiduciary duty, misrepresentation, promissory estoppel, intentional
interference with contractual relations and unfair and deceptive acts and
practices, seeking specific performance of the alleged agreement for 10% of the
Company's equity, damages
F-29
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
equal to the value of 10% of the Company's equity, punitive damages and
attorneys' fees and costs and treble damages under the Massachusetts Consumer
Protection Act (Mass. G.L. Chapter 93A). On January 7, 1999, the suit was
removed to the United States District Court for the District of Massachusetts.
Discovery has commenced and a trial is tentatively scheduled for March 2000.
The Company is currently investigating the claims at issue and believes that it
has meritorious defenses to such claims. Nevertheless, litigation is inherently
uncertain and the Company may not prevail in this suit. To the extent that the
Company is required to issue shares of common stock or options to purchase
common stock as a result of the suit, the Company would recognize an expense
equal to the number of shares issued multiplied by the fair value of the common
stock on the date of issuance, less the exercise price of any options required
to be issued. This could have a material adverse effect on the Company's
results of operations, and any such issuances would be dilutive to existing
stockholders, the dilutive impact of which may be mitigated to the extent it is
offset by shares of common stock in an escrow account established by the
Company's Chief Executive Officer.
On December 23, 1998, the Company initiated litigation against Internet
Yellow Pages, Inc., or IYP, by filing suit in United States District Court for
the Western District of Washington. On February 3, 1999, the Company served a
first amended complaint on IYP and Greg Crane, an agent of IYP, in which the
Company asserted claims for (a) account stated, (b) breach of contract, and (c)
fraud. Neither IYP nor Crane have answered our complaint. On February 11, 1999,
however, the Company was served with a complaint filed by IYP in Arizona
Superior Court for Maricopa County, which complaint was filed on February 3,
1999. In its complaint, IYP asserts causes of action for breach of contract,
fraud, extortion, and racketeering under Arizona Revised Statutes, Section 13-
2301(D)(l) and (t), and seeks relief consisting of $1,500,000 and other
unquantified money damages, punitive damages, treble damages under Arizona
Revised Statutes, Sec. 13-2314.04, and attorney's fees. On March 5, 1999, IYP
answered the Company's complaint in the Washington action, and asserted claims
for breach of contract, fraud, extortion and Consumer Protection Act, or CPA,
violations. IYP seeks relief consisting of $1,500,000 and other unquantified
money damages, treble damages under the CPA, and attorneys' fees. Trial in the
Washington action is set for April 2000, and discovery is ongoing; the Arizona
action is presently stayed. The Company is currently investigating the claims
and believes it has meritorious defenses to such claims. Nevertheless,
litigation is uncertain and the Company may not prevail in this suit.
On February 24, 1999, the Company received a letter from counsel for a former
content provider claiming that it is entitled to an option to acquire up to 5%
of InfoSpace.com. The Company reviewed the claim and believes that it is
entirely without merit. The Company responded to the counsel accordingly in a
letter dated March 4, 1999 and intends to vigorously defend any suit if filed.
To the extent that the Company is required to issue shares of its common stock
or options to purchase common stock as a result of the claim, the Company would
recognize an expense equal to the number of shares issued multiplied by the
fair value of the Company's common stock on the date of issuance, less the
exercise price of any options required to be issued. This could harm the
Company's results of operations, and any such issuances would be dilutive to
existing stockholders, the impact of which may be mitigated to the extent it is
offset by shares of common stock in an escrow account established by the
Company's Chief Executive Officer.
Other-Non-recurring: On February 22, 1999, the Company reached a settlement
with a former employee. Under the terms of the settlement the former employee
will receive a cash payment of $4.5 million. The Company had previously accrued
a liability of $240,000 for estimated settlement costs. Accordingly, the
Company has recorded an additional expense of $4,260,000 for the difference
between the accrued liability and the actual settlement amount. As this
subsequent event was settled after December 31, 1998 but prior to the issuance
of the financial statements, the additional expense has been recorded in the
fourth quarter of 1998.
F-30
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 (unaudited). This settlement payment was paid in the
quarter ended September 30, 1999 and is reflected in Other-non-recurring
charges.
Contingencies: In the Company's early stage of development, the Company did
not clearly document arrangements with employees and consultants, including
matters relating to the issuance of stock options. As a result of this
incomplete documentation, the Company may receive claims in the future
asserting rights to acquire common stock.
Note 7: Income Taxes
No provision for federal income tax has been recorded as the Company has
incurred net operating losses through December 31, 1998 and through the nine
months ended September 30, 1999 (unaudited). The tax effects of temporary
differences and net operating loss carryforwards that give rise to the
Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------- September 30,
1997 1998 1999
--------- ----------- -------------
(unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward......... $ 106,000 $ 36,000 $ 4,222,000
Intangible amortization................. 37,000 60,000 65,000
Compensation expense--stock options..... 59,000 59,000 144,000
Allowance for bad debt.................. 16,000 203,000 172,000
Litigation accrual...................... 47,000 1,530,000 --
Warrants................................ -- 46,000 254,000
Deferred revenue........................ -- 473,000 473,000
Accrued carriage fees................... -- -- 332,000
Other, net.............................. 10,000 34,000 91,000
--------- ----------- -----------
Gross deferred tax assets............. 275,000 2,441,000 5,753,000
Deferred tax liabilities:
Purchased technology.................... -- 252,000 242,000
Prepaid advertising..................... -- 113,000 --
Depreciation............................ 2,000 13,000 29,000
Capitalized software.................... -- -- 166,000
Warrants................................ -- -- 116,000
Other, net.............................. 2,000 -- 106,000
--------- ----------- -----------
Gross deferred tax liabilities........ 4,000 378,000 659,000
--------- ----------- -----------
Net deferred tax assets................... 271,000 2,063,000 5,094,000
Valuation allowance....................... (271,000) (2,063,000) (5,094,000)
--------- ----------- -----------
Deferred tax balance...................... $ -- $ -- $ --
========= =========== ===========
</TABLE>
At December 31, 1997 and 1998 and September 30, 1999 (unaudited), the Company
fully reserved its deferred tax assets. The Company believes sufficient
uncertainty exists regarding the realizability of the deferred tax assets such
that a full valuation allowance is required. The net change in the valuation
allowance during the years ended December 31, 1997 and 1998, was $144,000 and
$1,792,000, respectively.
F-31
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8: Net Loss Per Share
The Company has adopted SFAS No. 128, Earnings per Share. Basic earnings per
share is computed using the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed using the
weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares consist of the incremental common
shares issuable upon conversion of the exercise of stock options and warrants
(using the treasury stock method). Common equivalent shares are excluded from
the computation if their effect is antidilutive. The Company had a net loss for
all periods presented herein; therefore, none of the options and warrants
outstanding during each of the periods presented, as discussed in Note 4, were
included in the computation of diluted loss per share as they were
antidilutive. Options and warrants to purchase a total of 2,025,000, 2,726,000,
12,362,918 and 12,619,756 shares of common stock were excluded from the
calculations of diluted loss per share for the period from March 1 to December
31, 1996, and the years ended December 31, 1997 and 1998, and the nine months
ended September 30, 1999, respectively. 170,000 contingently issuable shares of
common stock have been excluded from the calculation of basic earnings per
share for the year ended December 31, 1997 (Note 4).
Note 9: Information on Products and Services
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for the
way that companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers as well as
the reporting of selected information about operating segments in interim
financial statements for the year ended December 31, 1998. The adoption of SFAS
No. 131 did not have a material effect on the Company's primary consolidated
financial statements but did affect the Company's disclosures.
The Company generates substantially all of its revenues through common,
aggregated and integrated content delivered through a common physical
infrastructure, and therefore the Company has only one reportable segment.
Substantially all revenues are generated from domestic sources. All Company
long-lived assets are physically located within the United States.
Total operating expenses are controlled centrally based on established
budgets by operating department. Operating departments include product
development, sales and marketing, account management and customer service, and
finance and administration. Assets, technology, and personnel resources of the
Company are shared and utilized for all of the Company's service offerings.
These resources are allocated based on contractual requirements, the
identification of enhancements to the current service offerings, and other non-
financial criteria. The Company does not prepare operating statements by
revenue source. The Company does not account for, and does not report to
management, its assets or capital expenditures by revenue source.
F-32
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Information
Revenues are derived from the Company's consumer, merchant and wireless
services. These services generate revenues from advertising, content carriage,
licensing fees, e-commerce transaction fees, and guaranteed transaction fees in
lieu of revenue share. Contracts with customers often utilize services from
more than one of our areas of service and include revenue from more than one
revenue source.
<TABLE>
<CAPTION>
Nine months ended
Years ended December 31, September 30,
------------------------------ ----------------------
1996 1997 1998 1998 1999
-------- ---------- ---------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Consumer revenues... $189,372 $1,424,748 $8,370,965 $4,824,350 $17,852,671
Merchant revenues... 10,000 260,348 1,043,485 549,511 3,834,162
Wireless revenues... -- -- -- -- 318,150
-------- ---------- ---------- ---------- -----------
Total revenues...... $199,372 $1,685,096 $9,414,450 $5,373,861 $22,004,983
======== ========== ========== ========== ===========
</TABLE>
Customer Information
For the nine months ended September 30, 1999, one customer accounted for
approximately 26% (unaudited) of revenues. For the year ended December 31,
1998, the same customer accounted for approximately 21% of revenues. For the
year ended December 31, 1997 and for the period from March 1, 1996 (inception)
to December 31, 1996, no one customer accounted for more than 10% of revenues.
Note 10: Related-party transactions
During the period from March 1, 1996 (inception) to December 31, 1996, years
ended December 31, 1997 and 1998, the Company sold advertising to an entity in
which the Company's chief executive officer has an equity interest resulting in
revenues of $10,000, $200,000 and $19,269. For the nine months ended September
30, 1998 and 1999, the Company sold advertising to the same entity resulting in
revenues of $174 and $447,905 (unaudited), respectively.
Note 11: Investment in Joint Venture
On July 16, 1998, the Company established InfoSpace Investments, Ltd., a
wholly owned subsidiary incorporated in England and Wales. On July 16, 1998,
the Company and InfoSpace Investments, Ltd. entered into a joint venture
agreement (the Joint Venture Agreement) with another party forming a new
company, TDL InfoSpace (Europe) Limited (TDL InfoSpace), with the purpose of
carrying on the business of the aggregation and syndication of content on the
Internet, initially in the United Kingdom. Pursuant to the terms of the Joint
Venture Agreement, both the Company and its joint venture partner entered into
license agreements with TDL InfoSpace for offsetting payments to each of the
Company and its joint venture partner of (Pounds)50,000. These amounts were not
intended to represent the fair market value of the license agreements to an
unrelated third party. Under the license agreement between the joint venture
partner and TDL InfoSpace, the joint venture partner licenses its U. K.
directory information database to TDL InfoSpace. Under the Joint Venture
Agreement, the joint venture partner also sells Internet yellow pages
advertising of the joint venture through its local sales force. Under the
license agreement between the Company and TDL InfoSpace, the Company licenses
its technology and provides hosting services to TDL InfoSpace. In addition,
under the Company's license agreement, TDL InfoSpace is obligated to reimburse
F-33
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Company for any incremental costs incurred by the Company for its efforts
with respect to the hosting services. In the event that TDL InfoSpace expands
into other countries, it is required to pay to the Company an additional
technology license fee of $50,000 per additional country. The Company's license
agreement also provides that, in the event that the Company no longer holds any
ownership interest in the joint venture, InfoSpace and the Company will
negotiate an arm's-length license fee for the Company's technology, not to
exceed $1,000,000. On July 17, 1998, the Company transferred $496,000 to
InfoSpace Investments, Ltd. InfoSpace Investments, Ltd. utilized these funds to
acquire 475,000 shares of TDL InfoSpace, which represents a noncontrolling 50%
interest. Under the terms of the Joint Venture Agreement, the Company has
certain obligations as guarantor, principally to guarantee the performance by
InfoSpace Investments, Ltd. of its obligations under the Joint Venture
Agreement. The Company accounts for its investment in the joint venture under
the equity method. For the year ended December 31, 1998, the Company recorded a
loss from the joint venture of $125,000. For the nine months ended September
30, 1999, the Company recorded a loss from the joint venture of $101,000
(unaudited).
Note 12: Other Investments (unaudited)
The Company invests in equity instruments of privately held technology
companies for business and strategic purposes. These investments are included
in other long-term assets and are held for investment. 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.
To date, no adjustments have been made to the carrying values of these
investments. 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 July
19, 1999, the Company purchased 1,350,000 shares of Series E Convertible
Preferred Stock of the same online merchant company at $5.00 per share in a
private placement transaction.
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 for $8.17 per share in a private placement transaction.
The Company holds warrants in privately and publicly held technology
companies for business and strategic reasons. These warrant agreements contain
provisions that require the Company to meet certain performance criteria in
order for the warrants to vest. When the Company meets its performance
obligations it records revenue equal to the difference in the exercise price of
the warrant and the fair market value of the underlying security. During the
quarter ended September 30, 1999 the Company recorded revenue in the amount of
$341,275 for vesting in performance warrants. These are reflected as Other
Investments.
Note 13: Follow-on Offering (unaudited)
In April 1999, the Company closed a follow-on offering. The Company sold
4,340,000 shares and raised approximately $185 million, net of expenses.
Certain shareholders sold 3,020,000 shares.
Note 14: Subsequent Event
On October 14, 1999, the Company acquired Toronto-based INEX Corporation, a
provider of Internet commerce applications that deliver solutions for merchants
to build, manage and promote online storefronts.
F-34
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
This acquisition will be accounted for as a pooling of interests pursuant to
which the Company exchanged approximately 900,000 shares of the Company's
common stock for all of the outstanding shares, warrants and options of INEX.
On October 14, 1999, the Company acquired Seattle-based Union-Street.com for
436,632 shares of the Company's common stock. This acquisition will be
accounted for as a purchase. Union-Street provides portals, destination sites,
and enterprise businesses with a suite of business services including private
label e-mail, address book, calendar, personal home page, chat and message
boards. Approximately $3.3 million will be recorded as a non-recurring charge
for in-process research and development.
On October 22, 1999, the Company signed a definitive agreement to acquire
Redmond-based Zephyr Software Inc. and its wholly owned subsidiary in India,
Zephyr Software (India) Private Limited. Zephyr Software Inc. provides
infrastructure services for the Indian market. Zephyr India will become
InfoSpace.com India, a wholly owned subsidiary of InfoSpace.com. Under the
terms of the acquisition, which will be accounted for as a purchase,
InfoSpace.com will exchange 166,956 shares of the Company's common stock for
all of Zephyr Software Inc.'s outstanding shares, warrants and options. The
acquisition is expected to be completed in the fourth quarter of 1999 upon
receipt of regulatory approval from the government of India, and is also
subject to customary conditions, including Zephyr Software Inc. shareholder
approval.
On November 19, 1999, the Company signed a definitive agreement to acquire
Fremont, California-based eComLive.com Inc. eComLive.com is a leader in
providing Web-based real-time collaboration and interactive solutions such as
live data collaboration, audio and video conferencing in addition to allowing
users to share documents, browsers, presentations and applications through a
standard browser. Under the terms of the acquisition, which will be accounted
for as a purchase, the Company will exchange 355,618 shares of its common stock
for all of eComLive.com's outstanding shares and options. The acquisition is
expected to be completed in December, and is subject to customary conditions,
including eComLive shareholder approval.
On December 6, 1999, the Company signed a definitive agreement to acquire San
Mateo, California-based Saraide.com inc. Saraide is a leading wireless Internet
services provider in Europe, Japan and Canada. Under the terms of the
acquisition, which will be accounted for as a purchase, the Company will
exchange 2,397,716 shares of its common stock and contribute its wireless
assets for 80% control of Saraide. The acquisition is expected to be completed
in the first quarter of 2000, and is subject to customary conditions, including
regulatory approval and Saraide shareholder approval.
On December 6, 1999, the Company signed a definitive agreement to acquire
Mountain View, California-based Prio, Inc. Prio is a provider of "e-nabled'
commerce solutions specializing in the development of strategic partnerships,
technologies and programs that drive commerce in both traditional and online
shopping environments. Under the terms of the acquisition, which will be
accounted for as a pooling of interests, the Company will exchange 2,685,000
shares of its common stock for all of Prio's outstanding shares, warrants and
options. The acquisition is expected to be completed in the first quarter of
2000, and is subject to customary conditions, including the receipt of
regulatory approval and Prio shareholder approval.
On November 29, 1999, the Company's Board of Directors approved a 2-for-1
stock split of the Company's Common Stock. Stockholders of record will be
entitled to one additional share for each share held on that date.
F-35
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
INEX Corporation
In our opinion, the accompanying balance sheets and the related statements of
operations, comprehensive loss, changes in stockholders' equity and cash flows
present fairly, in all material respects, the financial position of INEX
Corporation as at December 31, 1998 and 1997 and the results of its operations,
comprehensive loss and its cash flows for each of the three years ended
December 31, 1998, 1997 and 1996 in conformity with generally accepted
accounting principles in the United States of America. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits in accordance with generally accepted
auditing standards in Canada, which require that we plan and perform an audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in note 1 to the
financial statements, the company has incurred losses and negative cash flows
from operations since inception, which raise substantial doubt about the
company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Canada
February 11, 1999
(except for note 12, which is as of August 13, 1999, and note 13, which is as
of September 22, 1999)
F-36
<PAGE>
INEX CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1997 1998 1999
------------ ------------ -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 34,231 $ 583,375 $ 1,010,796
Accounts receivable.................. 11,043 60,305 223,866
Prepaid expenses..................... 12,638 25,992 96,590
----------- ----------- -----------
Total current assets............... 57,912 669,672 1,331,252
Property and equipment -- net.......... 57,813 76,866 151,891
----------- ----------- -----------
Total assets....................... $ 115,725 $ 746,538 $ 1,483,143
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities......................... $ 135,804 $ 97,262 $ 359,482
Deferred revenue..................... 15,000 10,016 --
Promissory notes payable............. 20,972 -- 1,000,000
Stockholder's loan payable........... 5,304 -- --
----------- ----------- -----------
Total current liabilities.......... 177,080 107,278 1,359,482
Convertible debentures................. 174,764 163,343 170,369
----------- ----------- -----------
Total liabilities.................. 351,844 270,621 1,529,851
Commitments and contingency (Notes 10
and 13)
Stockholders' Equity (Deficiency):
Common stock
Authorized unlimited; 1,982,290 and
1,575,088 issued and outstanding
in 1998 and 1997.................. 1,047,190 2,337,801 2,465,664
Class A preference shares, Series 1
Authorized 1,625,000 issuable in
series; 240,271 and 0 issued and
outstanding in 1998 and 1997........ -- 859,056 859,056
Special warrants, Series A
250,000 and 0 issued and outstanding
in 1998 and 1997.................... -- 659,698 659,698
Special warrants, Series B
360,000 issued and outstanding in
1999................................ -- -- 1,729,053
Additional paid-in capital........... 110,687 910,257 1,606,030
Deferred stock-based compensation.... -- (118,086) (23,634)
----------- ----------- -----------
1,157,877 4,648,726 7,295,867
Cumulative translation adjustment...... (25,780) (42,348) (5,364)
Accumulated deficit.................... (1,368,216) (4,130,461) (7,337,211)
----------- ----------- -----------
Total stockholders' equity
(deficiency)...................... (236,119) 475,917 (46,708)
----------- ----------- -----------
Total liabilities and stockholder's
equity............................ $ 115,725 $ 746,538 $ 1,483,143
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE>
INEX CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine months ended
Years ended December 31, September 30,
------------------------------------ ------------------------
1996 1997 1998 1998 1999
---------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ $ -- $ 57,446 $ 208,910 $ 145,425 $ 478,062
Cost of revenues........ -- 18,932 29,720 17,971 77,633
---------- ----------- ----------- ----------- -----------
Gross profit........ -- 38,514 179,190 127,454 400,429
Operating expenses:
Product development... 39,212 170,459 644,965 441,876 876,826
Sales and marketing... 26,154 635,502 744,636 532,639 905,181
General and
administrative....... 70,271 463,740 1,573,980 1,234,164 961,050
Acquisition and
related costs........ -- -- -- -- 237,438
Other--non-recurring
charges.............. -- -- -- -- 650,000
---------- ----------- ----------- ----------- -----------
Total operating
expenses........... 135,637 1,269,701 2,963,581 2,208,679 3,630,495
---------- ----------- ----------- ----------- -----------
Loss from operations.... (135,637) (1,231,187) (2,784,391) (2,081,225) (3,230,066)
Other income (expense),
net.................... -- (1,038) 22,146 27,119 23,316
---------- ----------- ----------- ----------- -----------
Net loss................ $ (135,637) $(1,232,225) $(2,762,245) $(2,054,106) $(3,206,750)
========== =========== =========== =========== ===========
Basic and diluted net
loss per share......... $ (0.14) $ (0.96) $ (1.58) $ (1.21) $ (1.60)
========== =========== =========== =========== ===========
Shares used in computing
basis and diluted net
loss per share......... 1,001,859 1,289,897 1,753,249 1,700,091 1,999,461
========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-38
<PAGE>
INEX CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Class A Class A Special warrants,
special shares Common shares preference shares Series A and B Additional Deferred
------------------ -------------------- ------------------ ------------------- paid-in Stock-based
Shares Amount Shares Amount Shares Amount Warrants Amount Capital Compensation
------- --------- --------- ---------- -------- --------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1995......... -- $ -- 900,000 $ 659 -- -- -- $ -- $ -- $ --
Issued for
cash............ 34,847 77,047 -- -- -- -- -- -- -- --
Issued for
software and
trademark....... -- -- 100,000 43,441 -- -- -- -- -- --
Net loss for the
year............ -- -- -- -- -- -- -- -- -- --
------- --------- --------- ---------- -------- --------- ------- ---------- ---------- -----------
Balance, December
31, 1996......... 34,847 77,047 1,000,000 44,100 -- -- -- -- -- --
In respect of
services
rendered........ 10,112 25,564 -- -- -- -- -- -- -- --
Issued for
cash............ -- -- 341,405 679,030 -- -- -- -- -- --
Issued for cash,
together with a
common share
purchase
warrant......... -- -- 167,224 188,309 -- -- -- -- 84,648 --
Converted into
common shares on
October 16,
1997............ (44,959) (102,611) 44,959 102,611 -- -- -- -- -- --
Issued in
respect of
services
rendered on
December 17,
1997............ -- -- 18,300 33,117 -- -- -- -- -- --
Issued in
respect of
services
rendered
throughout the
year............ -- -- -- -- -- -- -- -- 26,039 --
Issued for cash
on exercise of
employee stock
options......... -- -- 3,200 23 -- -- -- -- -- --
Net loss for the
year............ -- -- -- -- -- -- -- -- -- --
------- --------- --------- ---------- -------- --------- ------- ---------- ---------- -----------
Balance, December
31, 1997......... -- -- 1,575,088 1,047,190 -- -- -- -- 110,687 --
Issued for
cash............ -- -- -- -- 240,271 859,056 250,000 659,698 503,217 --
Issued for cash
on exercise of
warrants........ -- -- 179,392 378,928 -- -- -- -- (84,648) --
Issued for cash
on exercise of
employee stock
options......... -- -- 227,810 911,683 -- -- -- -- (908,043) --
Issued in
connection with
promissory
notes........... -- -- -- -- -- -- -- -- 160,377 --
Issued in
respect of
services
rendered........ -- -- -- -- -- -- -- -- 2,349 --
Deferred
compensation
related to stock
option grants... -- -- -- -- -- -- -- -- 1,126,318 (1,126,318)
Amortization of
stock-based
compensation.... -- -- -- -- -- -- -- -- -- 1,008,232
Net loss for the
year............ -- -- -- -- -- -- -- -- -- --
------- --------- --------- ---------- -------- --------- ------- ---------- ---------- -----------
Balance, December
31, 1998......... -- -- 1,982,290 2,337,801 240,271 859,056 250,000 659,698 910,257 (118,086)
Issued for
cash............ -- -- -- -- -- -- 360,000 1,729,053 121,692 --
Issued for cash
on exercise of
employee stock
options......... -- -- 28,332 127,863 -- -- -- -- (75,919) --
Amortization of
stock-based
compensation.... -- -- -- -- -- -- -- -- -- 94,452
Issued in
connection with
abandoned
financing....... -- -- -- -- -- -- -- -- 650,000 --
Net loss for the
period.......... -- -- -- -- -- -- -- -- -- --
------- --------- --------- ---------- -------- --------- ------- ---------- ---------- -----------
Balance,
September 30,
1999
(unaudited)...... -- $ -- 2,010,622 $2,465,664 240,271 $ 859,056 610,000 $2,388,751 $1,606,030 $ (23,634)
======= ========= ========= ========== ======== ========= ======= ========== ========== ===========
<CAPTION>
Accumulated
Deficit Total
------------ ------------
<S> <C> <C>
Balance, December
31, 1995......... $ (354) $ 305
Issued for
cash............ -- 77,047
Issued for
software and
trademark....... -- 43,441
Net loss for the
year............ (135,637) (135,637)
------------ ------------
Balance, December
31, 1996......... (135,991) (14,844)
In respect of
services
rendered........ -- 25,564
Issued for
cash............ -- 679,030
Issued for cash,
together with a
common share
purchase
warrant......... -- 272,957
Converted into
common shares on
October 16,
1997............ -- --
Issued in
respect of
services
rendered on
December 17,
1997............ -- 33,117
Issued in
respect of
services
rendered
throughout the
year............ -- 26,039
Issued for cash
on exercise of
employee stock
options......... -- 23
Net loss for the
year............ (1,232,225) (1,232,225)
------------ ------------
Balance, December
31, 1997......... (1,368,216) (210,339)
Issued for
cash............ -- 2,021,971
Issued for cash
on exercise of
warrants........ -- 294,280
Issued for cash
on exercise of
employee stock
options......... -- 3,640
Issued in
connection with
promissory
notes........... -- 160,377
Issued in
respect of
services
rendered........ -- 2,349
Deferred
compensation
related to stock
option grants... -- --
Amortization of
stock-based
compensation.... -- 1,008,232
Net loss for the
year............ (2,762,245) (2,762,245)
------------ ------------
Balance, December
31, 1998......... (4,130,461) 518,265
Issued for
cash............ -- 1,850,745
Issued for cash
on exercise of
employee stock
options......... -- 51,944
Amortization of
stock-based
compensation.... -- 94,452
Issued in
connection with
abandoned
financing....... -- 650,000
Net loss for the
period.......... (3,206,750) (3,206,750)
------------ ------------
Balance,
September 30,
1999
(unaudited)...... $(7,337,211) $ (41,344)
============ ============
</TABLE>
See accompanying notes to financial statements.
F-39
<PAGE>
INEX CORPORATION
STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Nine months ended
Years ended December 31, September 30,
----------------------------------- ------------------------
1996 1997 1998 1998 1999
--------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net loss for the
period................. $(135,637) $(1,232,225) $(2,762,245) $(2,054,106) $(3,206,750)
Other comprehensive
income:
Foreign currency
translation
adjustments.......... (5,181) (20,599) (16,568) (11,318) 36,984
--------- ----------- ----------- ----------- -----------
Comprehensive loss for
the period............. $(140,818) $(1,252,824) $(2,778,813) $(2,065,424) $(3,169,766)
========= =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-40
<PAGE>
INEX CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
Years ended December 31, September 30,
----------------------------------- ------------------------
1996 1997 1998 1998 1999
--------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net loss............. $(135,637) $(1,232,225) $(2,762,245) $(2,054,106) $(3,206,750)
Adjustments to
reconcile net loss
to net cash used by
operating
activities:
Depreciation and
amortization...... 1,549 61,055 26,794 18,633 42,207
Non-cash expense
for services
rendered.......... -- 84,720 162,726 137,927 650,000
Amortization of
stock-based
compensation...... -- -- 1,008,232 828,716 94,452
Cash provided (used) by
changes in operating
assets and
liabilities:
Accounts receivable.. (1,404) (9,377) (51,581) (38,695) (158,526)
Prepaid expenses..... (972) (12,101) (14,633) (77,958) (68,427)
Accounts payable and
accrued
liabilities......... 34,173 101,113 (31,900) 117,212 254,123
Deferred revenue..... -- 15,500 (4,133) 7,022 (10,288)
--------- ----------- ----------- ----------- -----------
Net cash used by
operating
activities...... (102,291) (991,315) (1,666,740) (1,061,249) (2,403,209)
Investing Activities:
Purchase of property
and equipment....... (18,969) (60,844) (50,355) (23,153) (112,838)
--------- ----------- ----------- ----------- -----------
Net cash used by
investing
activities...... (18,969) (60,844) (50,355) (23,153) (112,838)
Financing Activities:
Issuance of capital
stock -- net of
issue costs......... 77,047 952,010 2,319,891 1,161,239 1,902,689
Issuance of
promissory notes
payable............. 1,253 21,670 235,992 239,087 1,000,000
Repayment of
promissory notes
payable............. -- (1,234) (256,220) (88,804) --
Change in
stockholder's loan
payable............. 45,893 (39,728) (5,116) (5,116) --
Issuance of
debentures payable.. -- 180,584 -- -- --
--------- ----------- ----------- ----------- -----------
Net cash provided
by financing
activities...... 124,193 1,113,302 2,294,547 1,306,406 2,902,689
Impact of foreign
exchange rate changes
on cash............... (15) (29,830) (28,308) (14,718) 40,779
--------- ----------- ----------- ----------- -----------
Net Increase in Cash
and Cash Equivalents.. 2,918 31,313 549,144 207,286 427,421
Cash and cash
equivalents:
Beginning of period.. -- 2,918 34,231 34,231 583,375
--------- ----------- ----------- ----------- -----------
End of period........ $ 2,918 $ 34,231 $ 583,375 $ 241,517 $ 1,010,796
========= =========== =========== =========== ===========
Supplemental cash flow
information
Common shares issued
for services
rendered............ $ -- $ 58,681 $ -- $ -- $ --
Options issued for
services rendered... -- 26,039 2,349 2,349 --
Warrants issued in
connection with
promissory notes.... -- -- 160,377 135,578 --
Common shares issued
for software and
trademarks.......... 43,441 -- -- -- --
Interest paid........ -- -- 14,923 12,334 --
Warrants issued in
connection with
abandoned
financing........... -- -- -- -- 650,000
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE>
INEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
Note 1: Organization and basis of presentation
The company, pursuant to an agreement and as confirmed by articles of
amalgamation dated February 5, 1997, amalgamated with Ack-Sys Inc. to continue
as INEX Corporation. As both of these companies had been under common control,
this business combination has been accounted for using a basis similar to the
pooling of interests method of accounting whereby the financial statements
reflect the combined historical carrying value of the assets, liabilities,
stockholders' equity (deficiency) and the historical operating results of Ack-
Sys Inc. and INEX Corporation for each of the years presented.
The company has sustained losses and negative cash flows from operations
since its inception. The company's ability to meet its obligations in the
ordinary course of business is dependent upon its ability to raise additional
financing through public or private equity financings, establish profitable
operations, enter into collaborative or other arrangements with corporate
sources, or secure other sources of financing to fund operations. During 1998,
the company received cash and services of approximately $3.4 million through
the issuance of common shares, Class A preference shares and special warrants,
Series A. In February 1999, the company received approximately $1.9 million
through the issuance of special warrants, Series B.
Management intends to obtain additional financing from the company with which
it is transacting a merger (note 12) in the current year. If anticipated
financing transactions and operating results are not achieved, management has
the intent and believes it has the ability to delay or reduce expenditures so
as not to require additional financial resources, if such resources were not
available on terms acceptable to the company. Nevertheless, these matters raise
substantial doubt about the company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
The company has a limited operating history and its prospects are subject to
the risks, expenses and uncertainties frequently encountered by companies in
the new and rapidly evolving markets for Internet products and services. These
risks include the failure to develop and extend the company's products, the
rejection of the company's products by Internet consumers, vendors and/or
advertisers, as well as other risks and uncertainties.
Note 2: Summary of significant accounting policies
Cash and cash equivalents
The company considers all highly liquid investments purchased with original
maturities of 90 days or less to be cash equivalents. Cash equivalents consist
primarily of deposits in money market funds.
Property and equipment
Property and equipment, which are recorded at cost, are depreciated over
their estimated useful lives using the straight-line method as follows:
<TABLE>
<S> <C>
Computer equipment........................................... 3 years
Furniture and fixtures....................................... 5 years
Office equipment............................................. 5 years
Leasehold improvements....................................... lease term
</TABLE>
F-42
<PAGE>
INEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income taxes
Income taxes are accounted for using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year
and deferred tax assets and liabilities for the future tax consequences of
events that have been recognized in the company's financial statements or tax
returns. The measurement of current and deferred tax assets and liabilities are
based on provisions of the enacted tax law; the effects of future changes in
tax laws or rates are not anticipated. A valuation allowance is recognized, if,
based on available evidence, it is more likely than not that some portion of
the deferred tax asset will not be realized.
Revenue recognition and deferred revenue
Revenue from the sales of computer software licences are recognized once
substantially all of the obligations under the sales agreements have been
satisfied. Full provision is made for any anticipated returns.
The company recognizes support revenue from contracts for ongoing technical
support ratably over the term of the contract, which is generally one year.
Deferred revenues are comprised of services that have yet to be provided and
contracts that have not been recorded as revenue as the earning process is not
complete.
Research and development
Research and development costs are expensed as incurred.
Acquired software is capitalized and amortized over its estimated useful life
not to exceed one year.
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed," issued by the
Financial Accounting Standards Board requires capitalization of certain
software development costs subsequent to the establishment of technological
feasibility. To date, costs incurred following the establishment of
technological feasibility, but prior to general release, have been
insignificant.
Stock-based compensation
In 1997, the company adopted the disclosure provisions of the Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation." The company
has elected to continue accounting for stock-based compensation issued to
employees using Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees," and, accordingly, pro forma disclosures
required under SFAS No. 123 have been presented (see note 7). Under APB Opinion
No. 25, compensation expense is based on the difference, if any, on the date of
the grant, between the fair value of the company's stock and the exercise
price. Stock issued to non-employees has been accounted for in accordance with
SFAS No. 123 and valued using the Black-Scholes model.
Concentration of credit risk
Financial instruments that potentially subject the company to a concentration
of credit risk consist of cash and cash equivalents and accounts receivable.
Cash and cash equivalents are deposited with a Canadian bank. The company
maintains allowances for potential credit losses and such losses have been
within
F-43
<PAGE>
INEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
management's expectations. There were no customers with a balance due to the
company in excess of 10% of aggregate accounts receivable as of December 31,
1998.
Comprehensive income
Effective for the fiscal years commencing after December 15, 1997, the
company adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting comprehensive income
and its components in financial statements. Comprehensive income, as defined,
includes all changes in equity during a period from non-owner sources.
Use of estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the 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 results could differ from those estimates.
Fair value of financial instruments
Financial instruments are initially recorded at historical cost. If
subsequent circumstances indicate that a decline in the fair value is other
than temporary, the financial asset is written down to its fair value. Unless
otherwise indicated, the fair values of financial instruments approximate their
recorded amounts.
Foreign currency translation
The company's functional currency is the Canadian dollar ("C$"). Assets and
liabilities are translated into United States dollars at the exchange rate
prevailing at the balance sheet date, and the results of their operations are
translated at average exchange rates for the year. The resulting translation
adjustments are reflected in the cumulative translation adjustment account.
Other exchange gains or losses are included in the statement of operations.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and hedging activities and
requires companies to recognize all derivatives as either assets or liabilities
in the statement of financial position and measures those instruments at fair
value. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Management does not believe that the
implementation of SFAS No. 133 will have any impact on the financial
instruments since the company does not engage in derivative or hedging
activities.
F-44
<PAGE>
INEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 3: Property and equipment
<TABLE>
<CAPTION>
September 30, 1999
------------------------------
(unaudited)
Accumulated
Cost depreciation Net
-------- ------------ --------
<S> <C> <C> <C>
Computer equipment......................... $120,189 $64,316 $ 55,873
Furniture and fixtures..................... 50,160 8,542 41,618
Office equipment........................... 61,674 12,724 48,950
Leasehold improvements..................... 8,478 3,028 5,450
-------- ------- --------
$240,501 $88,610 $151,891
======== ======= ========
<CAPTION>
December 31, 1998
------------------------------
Accumulated
Cost depreciation Net
-------- ------------ --------
<S> <C> <C> <C>
Computer equipment......................... $ 85,364 $34,104 $ 51,260
Furniture and fixtures..................... 13,387 2,778 10,609
Office equipment........................... 21,979 6,982 14,997
-------- ------- --------
$120,730 $43,864 $ 76,866
======== ======= ========
<CAPTION>
December 31, 1997
------------------------------
Accumulated
Cost depreciation Net
-------- ------------ --------
<S> <C> <C> <C>
Computer equipment......................... $ 54,082 $14,945 $ 39,137
Furniture and fixtures..................... 5,278 1,144 4,134
Office equipment........................... 17,604 3,062 14,542
-------- ------- --------
$ 76,964 $19,151 $ 57,813
======== ======= ========
</TABLE>
Note 4: Promissory notes payable
On January 29, 1998, the company received proceeds of C$100,000 in exchange
for the issuance of promissory notes and issued 26,667 common share purchase
warrants with an exercise price of C$3.75 per common share, which expire in two
years. The notes were repaid in 1998.
On February 20, 1998, the company received proceeds of C$250,000 in exchange
for the issuance of a promissory note and issued 66,667 common share purchase
warrants with an exercise price of C$3.75 per common share, which expire in two
years. The note was repaid in 1998.
The promissory note payable at December 31, 1997 was unsecured, bore interest
at 5% per annum and was payable to one of the directors of the company, who is
also a stockholder. The note was repaid in 1998.
Note 5: Stockholder's loan payable
The stockholder's loan payable was unsecured, non-interest bearing and due on
demand. The note was repaid in 1998.
Note 6: Convertible debentures
The convertible debentures are unsecured, non-interest bearing and
convertible at the lender's option into 104,515 common shares at the rate of
C$2.392 per share, maturing on September 5, 2000. They are due to directors and
stockholders of the company.
F-45
<PAGE>
INEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 7: Capital stock
Authorized and issued share capital
The authorized share capital consists of an unlimited number of common shares
and 1,625,000 Class A preference shares, issuable in series.
By certificate of amalgamation dated February 5, 1997, INEX Corporation and
Ack-Sys Inc. amalgamated to form INEX Corporation and the shareholdings were
reorganized as follows:
. 1,000,000 common shares of Ack-Sys Inc. were converted into 100,000
common shares of the amalgamated INEX Corporation;
. 900,000 common shares of INEX Corporation were converted into 900,000
common shares of the amalgamated INEX Corporation;
. 100,000 common shares of INEX Corporation held by Ack-Sys Inc. were
cancelled; and
. 44,959 Class A special shares of INEX Corporation were converted into
44,959 Class A special shares of the amalgamated INEX Corporation.
Class A special shares
As a result of passing a special resolution on June 19, 1997, Class A special
shares were converted on a one-for-one basis for common shares on October 16,
1997. The company cancelled the authorized Class A special shares, Class B
special shares and Class C special shares.
Class A preference shares
During 1998, 240,271 Class A preference shares, Series 1 were issued for
gross cash proceeds of $1 million. These shares are convertible into common
shares at a rate of C$5.91 per share and retractable on April 3, 2003 at the
issue price.
Special warrants, Series A
During 1998, 250,000 special warrants, Series A were issued for net cash
proceeds of $1,135,213. When exercised, each special warrant will convert into
one common share for no additional consideration. The special warrants become
exercisable at the earlier date of five days after a receipt is issued for a
final prospectus by a securities regulator and April 28, 2000.
F-46
<PAGE>
INEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Common share purchase warrants and brokers warrants
<TABLE>
<CAPTION>
Years ended Nine months
December 31, ended
---------------- September 30,
1997 1998 1999
------- -------- -------------
(unaudited)
<S> <C> <C> <C>
Issued:
Common share purchase warrants issued in
connection with common shares
exchangeable for one common share for
additional consideration of C$2.392 per
common share, expiring April 1998........ 104,515 -- --
Brokers warrants issued in connection with
the common share and common share
purchase warrants issued, exchangeable
for one common share for additional
consideration of C$2.392, expiring April
1998..................................... 5,226 -- --
Common share purchase warrants issued in
connection with common shares issued,
exchangeable for one common share for
additional consideration of C$2.392 per
common share, expiring July 1998......... 62,709 -- --
Brokers warrants issued in connection with
common shares issued, exchangeable for
one common share for additional
consideration of C$3.06, expiring October
1998..................................... 6,943 -- --
Common share purchase warrants issued in
connection with the issue of promissory
notes exchangeable for one common share
for additional consideration of C$3.75
per common share, expiring January 2000.. -- 26,667 --
Common share purchase warrants issued in
connection with the issue of a promissory
note exchangeable for one common share
for additional consideration of C$3.75
per common share, expiring February
2000..................................... -- 66,667 --
Brokers warrants issued in connection with
the issued special warrants, Series A,
exchangeable for one common share for
additional consideration of C$8.00 per
common share, 137,500 expiring April 2000
and 137,500 expiring June 2000........... -- 275,000 --
Brokers warrants issued in connection with
the issue of Class A preference shares,
exchangeable for one common share for
additional consideration of C$5.91 per
common share, expiring April 2001........ -- 14,416 --
Broker warrants issued in connection with
the issue of special warrants, Series B,
exchangeable for one common share for
additional consideration of C$8.00 per
common share, expiring January 2002...... -- -- 50,080
Broker warrants issued in connection with
an abandoned financing, exchangeable for
one common share for additional
consideration of C$8.00 per common share,
expiring January 2002.................... -- -- 149,920
------- -------- -------
179,393 382,750 200,000
------- -------- -------
Exercised:
At C$2.392 per common share............... -- (172,449) --
At C$3.06 per common share................ -- (6,943) --
Expired..................................... -- (1) --
------- -------- -------
-- (179,393) --
------- -------- -------
Balance--Beginning of period................ -- 179,393 382,750
------- -------- -------
Balance--End of period...................... 179,393 382,750 582,750
======= ======== =======
</TABLE>
F-47
<PAGE>
INEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The fair value of the 382,750 (1997--179,393) warrants issued is $663,594
(1997--$84,648), of which $503,217 (1997--$84,648) has been recorded as a cost
of issue and $160,377 (1997--$nil) as interest expense. The fair value of each
warrant issued to non-employees is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: dividend yield-nil, risk-free interest rate - 4.8%, expected
volatility - 65%, expected life - 1.5 years.
Subsequent to year-end, in connection with the issue of special warrants,
Series B, the company issued 50,080 brokers warrants exchangeable into common
shares for additional consideration of C$8.00 per common share, expiring in
January 2002. The Company issued an additional 149,920 broker warrants in
connection with an abandoned financing resulting in an expense of $650,000.
Stock Option Plan
The company established a Stock Option Plan in April 1997 under which 400,000
shares of common stock were reserved for issuance. During 1998, the company
amended the 1997 Plan and increased the number of shares of common stock
reserved under the 1997 Plan by 75,000 shares to 475,000 shares. Under the
Stock Option Plan, options can be issued to employees, officers, directors and
other key contributors of the company at an exercise price determined by the
Board of Directors. On June 30, 1998, the exercise price of outstanding options
to senior management was amended to C$0.01 per option, creating deferred stock-
based compensation of $1,126,318, which will be amortized over the remaining
vesting period of the options.
Vesting and expiry provisions are determined by the Board of Directors.
Generally, options issued to employees vest over three years and expire after
five years.
Option activity under the Stock Option Plan is as follows:
<TABLE>
<CAPTION>
Weighted
Options Options average
Authorized outstanding exercise price
---------- ----------- --------------
C$
<S> <C> <C> <C>
Options authorized................... 400,000 --
Options granted...................... -- 382,645 0.24
Options exercised.................... -- (3,200) 0.01
Options cancelled.................... -- (4,000)
------- --------
Balance--December 31, 1997........... 400,000 375,445 0.24
Options authorized................... 75,000 --
Options granted...................... -- 88,599 5.87
Options exercised.................... -- (227,810) 0.02
Options cancelled.................... -- (43,067) 0.16
------- --------
Balance--December 31, 1998........... 475,000 193,167 3.02
======= ========
</TABLE>
F-48
<PAGE>
INEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Options outstanding
--------------------------------------------
Weighted- Number
Number average vested and
outstanding at remaining exercisable at
Exercise December 31, contractual December 31,
price 1998 life 1998
-------- -------------- ----------- --------------
C$ (years)
<S> <C> <C> <C>
$0.01 77,666 1.3 4,066
$7.70 10,000 2.4 10,000
$5.91 34,000 2.7 10,000
$2.50 27,000 3.2 9,000
$3.06 20,001 3.9 1,999
$6.50 2,000 4.4 --
$7.00 12,000 4.7 --
$7.50 10,500 4.8 --
------- ------
193,167 35,065
======= ======
</TABLE>
Options granted for marketing services rendered
The company recorded an expense of $2,349 (1997--$26,039; 1996--$nil) in
connection with options granted for marketing services rendered.
SFAS 123
The company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option plan,
which are described below. Had compensation cost for the company's stock option
plans been determined based on the fair market value at the grant dates for
awards under the Plan consistent with the method provided by SFAS No. 123,
Accounting for Stock-Based Compensation, the company's net loss would have been
increased to the following pro forma amounts for the periods ended December 31,
1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Net loss--as reported................................ $(1,232,225) $(2,762,245)
Net loss--pro forma.................................. (1,265,067) (2,900,154)
Basic and fully diluted loss per share--pro forma.... (0.98) (1.65)
</TABLE>
The fair value of each option issued to employees is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted-
average assumptions: dividend yield--nil, risk-free interest rate--4.9%,
expected volatility--0%, expected life--2 years.
Net loss per share
The company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share." Under the provisions of SFAS No. 128, basic net loss per
share is computed by dividing the net loss available to common stockholders for
the period by the weighted average number of common shares outstanding during
the period. Diluted net loss per share is computed by dividing the net loss for
the period by the weighted average number of common shares and common
equivalent shares outstanding during the period. Common equivalent shares,
composed of incremental common shares issuable upon the exercise of stock
options and warrants and upon conversion of Class A preference shares,
convertible debentures and special warrants, Series A, are included in the
diluted net loss per share computation to the extent such shares are dilutive.
F-49
<PAGE>
INEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 8: Income taxes
The company did not incur any income taxes for the years ended December 31,
1996, 1997 and 1998 as a result of operating losses.
The company has approximately $2,805,000 of non-capital losses available to
reduce future years' taxable income that expire as follows:
<TABLE>
<S> <C>
2002............................................................ $ 20,000
2003............................................................ 184,000
2004............................................................ 993,000
2005............................................................ 1,608,000
----------
$2,805,000
==========
</TABLE>
Significant components of the company's deferred taxes as of December 31,
1996, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- --------- -----------
<S> <C> <C> <C>
Deferred tax assets
Tax loss carry-forwards................ $ 9,000 $ 571,000 $ 1,241,000
Other timing differences............... 2,000 2,000 14,000
-------- --------- -----------
Net deferred tax assets................ 11,000 573,000 1,255,000
Valuation allowance.................... (11,000) (573,000) (1,255,000)
-------- --------- -----------
Net deferred tax assets................ $ -- $ -- $ --
======== ========= ===========
</TABLE>
The company has established valuation allowances equal to the net deferred
tax assets due to uncertainties regarding the realization of deferred tax
assets based on the company's lack of earnings history.
The company's provisions for income taxes differs from the expected tax
benefit amounts computed by applying the statutory income tax rate of 44.62% to
income before income taxes primarily as a result of the valuation allowances.
Note 9: Related party transactions
During the year, the company paid marketing costs of $10,478 (1997--$91,643;
1996--$3,520) to a company owned by a stockholder of the company.
Note 10: Commitments
The company has entered into various operating leases for equipment,
services, and premises requiring minimum annual payments as follows:
<TABLE>
<S> <C>
1999.............................................................. $189,000
2000.............................................................. 146,000
2001.............................................................. 44,000
Thereafter........................................................ --
</TABLE>
F-50
<PAGE>
INEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 11: Business segments
SFAS No. 131 requires companies to report financial and other information
about key revenue segments of the entity for which such information is
available and is utilized by the chief operating decision maker. SFAS No. 131
is effective for fiscal years commencing after December 15, 1997. The company
conducts its business within one business segment primarily within North
America. Revenues from customers outside of North America were less than 10% of
net revenues for all periods presented in the accompanying statements of
operations. No customer represented more than 10% of net revenues for any year
presented.
Note 12: Subsequent events
On February 11, 1999, the company issued 360,000 special warrants, Series B
for net cash proceeds of $1.9 million. When exercised, each special warrant,
Series B will convert into one common share and one common share purchase
warrant for no additional consideration. The special warrants, Series B become
exercisable at the earlier date of five days after a receipt is issued for a
final prospectus by a securities regulator and July 31, 2000. Each common share
purchase warrant entitles the holder to purchase one common share for C$8.00 on
or before July 31, 2000.
On August 13, 1999, the company entered into an agreement and plan of
acquisition and arrangement with InfoSpace.com, Inc. (InfoSpace). Upon closing,
which is expected to occur in October 1999, the company will become a wholly-
owned subsidiary of InfoSpace.
Note 13: Contingency
On September 22, 1999, a shareholder of INEX Corporation (the "Shareholder")
issued a claim for damages (the "Claim") against INEX Corporation and certain
of its shareholders. The Claim alleges breach of a shareholders' agreement and
the denial of certain pre-emptive rights and rights of first refusal alleged to
be held by the Shareholder. Management believes that the Claim is without merit
and intends to defend it vigorously; however, management cannot determine the
outcome of this Claim at the present time.
F-51
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses payable by the
registrant in connection with the sale of the Common Stock being registered
hereby. All amounts shown are estimates, except the Securities and Exchange
Commission registration fee, and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $ 9,221
Nasdaq National Market listing fee................................. 17,500
Printing and engraving expenses.................................... 5,000
Legal fees and expenses............................................ 50,000
Accounting fees and expenses....................................... 25,000
Miscellaneous expenses............................................. 18,279
--------
Total............................................................ $125,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers, as well as other
employees and individuals, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation--a
"derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of such actions, and the statute requires court approval
before there can be any indemnification where the person seeking
indemnification has been found liable to the corporation. The statute provides
that it is not exclusive of other indemnification that may be granted by a
corporation's charter, bylaws, disinterested director vote, stockholder vote,
agreement or otherwise.
Section 10 of the registrant's Restated Bylaws (Exhibit 3.2 hereto) requires
indemnification to the full extent permitted under the DGCL as it now exists or
may hereafter be amended. Subject to any restrictions imposed by the DGCL, the
Restated Bylaws provide an unconditional right to indemnification for all
expense, liability and loss (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid in settlement) actually and
reasonably incurred or suffered by any person in connection with any actual or
threatened action, suit or proceeding, whether civil, criminal, administrative
or investigative by reason of the fact that such person is or was serving as a
director or officer of the registrant or that, being or having been a director
or officer of the registrant, such person is or was serving at the request of
the registrant as a director, officer, employee or agent of another
corporation, or of a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan. The Restated Bylaws
also provide that the registrant may, by action of its Board of Directors,
provide indemnification to its employees and agents with the same scope and
effect as the foregoing indemnification of directors and officers; provided,
however, that an undertaking shall be made by an employee or agent only if
required by the Board of Directors.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary
II-1
<PAGE>
damages for breach of fiduciary duty as a director, except for liability for
(i) any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) payments of
unlawful dividends or unlawful stock repurchases or redemptions, or (iv) any
transaction from which the director derived an improper personal benefit.
Article 10 of the registrant's Restated Certificate of Incorporation (Exhibit
3.1 hereto) provides that to the full extent that the DGCL, as it now exists or
may hereafter be amended, permits the limitation or elimination of the
liability of directors, a director of the registrant shall not be liable to the
registrant or its stockholders for monetary damages for breach of fiduciary
duty as a director. Any amendment to or repeal of such Article 10 shall not
adversely affect any right or protection of a director of the registrant for or
with respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
The registrant has entered into certain indemnification agreements with its
officers and directors, the form of which is attached as Exhibit 10.1 to this
Registration Statement and incorporated herein by reference. The
indemnification agreements provide the registrant's officers and directors with
indemnification to the maximum extent permitted by the DGCL. Reference is made
to the Underwriting Agreement (Exhibit 1.1 hereto), in which the Underwriters
have agreed to indemnify the officers and directors of the registrant against
certain liabilities.
Item 15. Recent Sales of Unregistered Securities
Since its incorporation in April 1996, the registrant has issued and sold
unregistered securities as follows:
(1) An aggregate of 20,000,000 shares of common stock was issued in a
private placement in April 1996 to Naveen Jain. The aggregate consideration
received for such shares was $2,000.
(2) An aggregate of 534,632 shares of common stock was issued in a
private placement on June 10, 1996, to three investors. The aggregate
consideration received for such shares was $219,199.94 or $0.41 per share.
(3) An aggregate of 1,219,512 shares of common stock was issued in a
private placement on June 17, 1996, to three investors. The aggregate
consideration received for such shares was $999,999.84 or $0.82 per share.
(4) An aggregate of 136,364 shares of common stock was issued in a
private placement on October 7, 1996, to one investor. The aggregate
consideration received for such shares was $150,000.40 or $1.10 per share.
(5) An aggregate of 2,000,000 shares of common stock was issued on May 6,
1997, in connection with the registrant's acquisition of all the issued and
outstanding membership interests in Yellow Pages on the Internet, LLC
("YPI"). Such shares were placed in an escrow account upon issuance pending
finalization of the purchase price for YPI. Prior to December 31, 1997, the
purchase price was finalized and on January 2, 1998 an aggregate of 170,000
shares of common stock was issued to the former members of YPI. The
remaining 1,830 shares held in the escrow account were released to the
registrant and canceled.
(6) An aggregate of 55,000 shares of common stock was issued in a private
placement on February 4, 1998 to one investor. The aggregate consideration
received for such shares was $110,000 or $2.00 per share.
(7) An aggregate of 25,000 shares of common stock was issued on April 20,
1998 to a former employee of the registrant in connection with the
settlement of a dispute involving compensation.
(8) An aggregate of 15,000 shares of common stock was issued in a private
placement on May 4, 1998 to the law firm of Garvey Schubert & Barer in
consideration for legal services rendered.
II-2
<PAGE>
(9) An aggregate of 250,000 shares of common stock was issued in a
private placement on May 21, 1998 to two investors. The aggregate
consideration was $500,000 or $2.00 per share.
(10) An aggregate of 2,290,000 shares of common stock and warrants for
the purchase of 4,057,046 shares of common stock at a weighted average
exercise price of $2.94 per share were issued in a private placement on May
21, 1998 to five investors pursuant to common stock and common stock
Warrant Purchase Agreements (the "May 1998 Stock Purchase"). The aggregate
consideration received for such shares was $4,580,000 and the aggregate
consideration received for such warrants was $40,570.38.
(11) An aggregate of 2,999,976 shares of common stock was issued on June
2, 1998, in exchange for the entire issued share capital of Outpost
Network, Inc. ("Outpost"). The form of the transaction was a merger,
whereby a wholly owned subsidiary of the registrant was merged with and
into Outpost (the "Outpost Merger"). The recipients of the common stock
were the former shareholders of Outpost.
(12) An aggregate of 10,000 shares of common stock was issued on June 30,
1998 to a consultant in exchange for services.
(13) An aggregate of 446,502 shares of common stock was issued on July 6,
1998 to nineteen investors pursuant to the registrant's 1998 Stock Purchase
Rights Plan, adopted June 26, 1998. The aggregate consideration received
for such shares was $1,674,393.75 or $3.75 per share.
(14) A warrant for the purchase of 955,934 shares of common stock with an
exercise price of $0.01 per share was issued on July 14, 1998, to a former
consultant to the registrant in connection with the Outpost Merger.
(15) An aggregate of 2,040,000 shares of common stock was issued in a
private placement completed in July and August 1998 to 26 investors. The
aggregate consideration received for such shares was $8,160,000 or $4.00
per share.
(16) An aggregate of 39,790 shares of common stock and warrants to
purchase 70,626 shares of common stock with a weighted average exercise
price of $2.94 per share were issued on August 6, 1998 to five investors in
connection with the May 1998 Stock Purchase.
(17) Warrants to purchase up to 1,979,832 shares of common stock at an
exercise price of $6.00 per share were issued on August 24, 1998 to a
strategic partner.
(18) An option to purchase 500,000 shares of common stock at an exercise
price of $7.00 per share was exercised by a former consultant on October
28, 1998.
(19) On March 22, 1999, the registrant issued 432,454 shares of common
stock upon the net exercise of warrants by an investor at a weighted
average exercise price of $2.94 per share. The warrants were issued on May
21,1998 and August 6, 1998 in connection with the May 1998 Stock Purchase.
(20) From April 1996 through June 30, 1999, the registrant granted stock
options to purchase an aggregate of 6,354,156 shares of common stock to
employees, consultants and directors with exercise prices ranging from
$.01-$67.44 per share pursuant to the registrant's Restated 1996 Flexible
Stock Incentive Plan in consideration for services. From April 10, 1996 to
December 31, 1998, the registrant also granted stock options outside of the
plan to purchase 1,009,210 shares of common stock, with a weighted average
exercise price of $1.00 per share, to employees, consultants and directors.
No underwriters were used in connection with these sales and issuances. The
sales and issuances of these securities were exempt from registration under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to Rule 701
promulgated thereunder on the basis that these options were offered and sold
either pursuant to a written compensatory benefit plan or pursuant to written
contracts relating to consideration, as provided by Rule 701, or pursuant to
Section 4(2) thereof on the basis that the transactions did not involve a
public offering.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
2.1* Agreement and Plan of Merger, dated as of May 12, 1998, among the
registrant, Outpost Network, Inc., certain shareholders of Outpost
Network, Inc. and Outpost Acquisition, Inc.
2.2.+ Agreement and Plan of Acquisition and Arrangement, dated as of August
13, 1999, among the registrant and INEX Corporation.
3.1.* Restated Certificate of Incorporation of the registrant.
3.2.* Restated Bylaws of the registrant.
4.1.+ Form of Certificate of the Powers, Designations, Preferences and
Rights of Series A Preferred Stock.
5.1.+ Opinion of Wilson Sonsini Goodrich & Rosati, P.C. as to the legality
of the shares.
10.1.* Form of Indemnification Agreement between the registrant and each of
its Directors and Executive Officers.
10.2.++ Restated 1996 Flexible Stock Incentive Plan and Terms of Stock Option
Grant Program for Nonemployee Directors under the Restated 1996
Flexible Stock Incentive Plan.
10.3.* 1998 Employee Stock Purchase Plan
10.4.* Lease, dated May 14, 1998, between the registrant and TIAA Realty,
Inc.
10.5.* Registration Rights Agreement, dated May 1, 1997, among the
registrant, John E. Richards, Peter S. Richards, John Enger and
Alexander Hutton Capital L.L.C., as subsequently amended by Agreement
dated as of January 2, 1998, among the registrant, John E. Richards,
Peter S. Richards, John Enger and Alexander Hutton Capital L.L.C.
10.6.* Agreement, dated January 2, 1998, among the registrant, John E.
Richards, Peter S. Richards, John Enger and Alexander Hutton Capital,
L.L.C.
10.7.* Form of Common Stock and Common Stock Warrant Purchase Agreements,
dated May 21, 1998, between the registrant and each of Acorn Ventures-
IS, LLC, Kellett Partners, LLP and John and Carolyn Cunningham.
10.8.* Form of Investor Rights Agreements, dated as of May 21, 1998, between
the registrant and each of Acorn Ventures-IS, LLC, Kellett Partners,
LLP and John and Carolyn Cunningham.
10.9.* Form of Co-Sale Agreements, dated as of May 21, 1998, among the
registrant, Naveen Jain and each of Acorn Ventures-IS, LLC, Kellett
Partners, LLP and John and Carolyn Cunningham.
10.10.* Form of Common Stock Warrant, dated May 21, 1998, between the
registrant and each of Acorn Ventures-IS, LLC, Kellett Partners, LLP
and John and Carolyn Cunningham.
10.11.* Common Stock Purchase Agreement, dated as of August 6, 1998, by and
among the registrant and the investors named therein.
10.12.* Stockholder Rights Agreement, dated as of August 6, 1998, by and among
the registrant and the investors named therein.
10.13.* Form of Amendment to Common Stock and Common Stock Warrant Purchase
Agreements, dated August 6, 1998, between the Registrant and each of
Acorn Ventures-IS, LLC, Kellett Partners, LLP and John and Carolyn
Cunningham.
10.14.* License Agreement, dated July 28, 1998, between the registrant and
American Business Information, Inc. (now known as infoUSA, Inc.).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.15.* Amended and Restated Content Provider Agreement, made as of August 24,
1998, effective as of April 25, 1998, between the registrant and 800-
U.S. Search.
10.16.* Interactive White Pages Marketing Agreement, dated as of August 24,
1998, between the registrant and America Online, Inc.
10.17.* Development and Management Agreement, dated as of August 24, 1998,
between the registrant and America Online, Inc.
10.18.* Letter Agreement with Bernee D. L. Strom, dated November 22, 1998.
10.19.* Indemnification Agreement dated as of December 11, 1998 between the
registrant, Naveen Jain, and all the current and future members of the
registrant's board of directors (excluding Mr. Jain).
21.1. Subsidiaries of the registrant.
23.1. Consent of Deloitte & Touche LLP, Independent Auditors.
23.2. Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.3.+ Consent of Wilson Sonsini Goodrich & Rosati, P.C. (contained in the
opinion filed as Exhibit 5.1 hereto).
24.1.+ Power of Attorney (contained on signature page hereto).
99.1.+ Form of Plan of Arrangement under Section 182 of the Business
Corporations Act (Ontario) of INEX Corporation.
99.2.+ Form of Voting and Exchange Trust Agreement among the Company,
InfoSpace.com Canada Holdings Inc., and Montreal Trust Company of
Canada, as trustee.
99.3.+ Form of Exchangeable Share Support Agreement among the Company,
InfoSpace.com Nova Scotia Company, InfoSpace.com Canada Holdings Inc.
and Montreal Trust Company of Canada, as trustee.
</TABLE>
- --------
* Incorporated by reference to the Registration Statement on Form S-1 (No.
333-62323) filed by the registrant on August 27, 1998, as amended.
+ Previously filed.
++ Incorporated by reference to the Registration Statement on Form S-8 (No.
333-81593) filed by the registrant on June 25, 1999.
(b) Financial Statement Schedules
All schedules are omitted because they are inapplicable or the requested
information is shown in the consolidated financial statements of the registrant
or related notes thereto.
Item 17. Undertakings
The undersigned registrant hereby undertakes;
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of
II-5
<PAGE>
securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) ((S)230.424(b) of this chapter) if, in the aggregate,
the changes in volume and price represent no more than a 20% change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Post-Effective Amendment No. 2 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Redmond, State of Washington, on the 10th day
of December, 1999.
InfoSpace.com, Inc.
/s/ Ellen B. Alben
By: _________________________________
Ellen B. Alben,
Senior Vice President, Legal and
Business Affairs
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Post-Effective Amendment No. 2 to the Registration Statement has been signed by
the following persons in the capacities indicated below on the 10th day of
December, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
* Naveen Jain Chief Executive Officer and Chairman of the
___________________________________________ Board (Principal Executive Officer)
Naveen Jain
* Tammy D. Halstead Vice President, Acting Chief Financial
___________________________________________ Officer and Chief Accounting Officer
Tammy D. Halstead (Principal Financial Officer and Principal
Accounting Officer)
* John E. Cunningham, IV Director
___________________________________________
John E. Cunningham, IV
* Peter L. S. Currie Director
___________________________________________
Peter L. S. Currie
* Gary C. List Director
___________________________________________
Gary C. List
* Rufus W. Lumry, III Director
___________________________________________
Rufus W. Lumry, III
* Carl Stork Director
___________________________________________
Carl Stork
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
* Bernee D. L. Strom Director
___________________________________________
Bernee D. L. Strom
</TABLE>
/s/ Ellen B. Alben
*By: __________________________
Ellen B. Alben
Attorney-in-Fact
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
2.1* Agreement and Plan of Merger, dated as of May 12, 1998, among the
registrant, Outpost Network, Inc., certain shareholders of Outpost
Network, Inc. and Outpost Acquisition, Inc.
2.2.+ Agreement and Plan of Acquisition and Arrangement, dated as of August
13, 1999, by and between the registrant and INEX Corporation.
3.1.* Restated Certificate of Incorporation of the registrant.
3.2.* Restated Bylaws of the registrant.
4.1.+ Form of Certificate of the Powers, Designations, Preferences and
Rights of Series A Preferred Stock.
5.1.+ Opinion of Wilson Sonsini Goodrich & Rosati, P.C. as to the legality
of the shares.
10.1.* Form of Indemnification Agreement between the registrant and each of
its Directors and Executive Officers.
10.2.++ Restated 1996 Flexible Stock Incentive Plan and Terms of Stock Option
Grant Program for Nonemployee Directors under the Restated 1996
Flexible Stock Incentive Plan.
10.3.* 1998 Employee Stock Purchase Plan
10.4.* Lease, dated May 14, 1998, between the registrant and TIAA Realty,
Inc.
10.5.* Registration Rights Agreement, dated May 1, 1997, among the
registrant, John E. Richards, Peter S. Richards, John Enger and
Alexander Hutton Capital L.L.C., as subsequently amended by Agreement
dated as of January 2, 1998, among the registrant, John E. Richards,
Peter S. Richards, John Enger and Alexander Hutton Capital L.L.C.
10.6.* Agreement, dated January 2, 1998, among the registrant, John E.
Richards, Peter S. Richards, John Enger and Alexander Hutton Capital,
L.L.C.
10.7.* Form of Common Stock and Common Stock Warrant Purchase Agreements,
dated May 21, 1998, between the registrant and each of Acorn Ventures-
IS, LLC, Kellett Partners, LLP and John and Carolyn Cunningham.
10.8.* Form of Investor Rights Agreements, dated as of May 21, 1998, between
the registrant and each of Acorn Ventures-IS, LLC, Kellett Partners,
LLP and John and Carolyn Cunningham.
10.9.* Form of Co-Sale Agreements, dated as of May 21, 1998, among the
registrant, Naveen Jain and each of Acorn Ventures-IS, LLC, Kellett
Partners, LLP and John and Carolyn Cunningham.
10.10.* Form of Common Stock Warrant, dated May 21, 1998, between the
registrant and each of Acorn Ventures-IS, LLC, Kellett Partners, LLP
and John and Carolyn Cunningham.
10.11.* Common Stock Purchase Agreement, dated as of August 6, 1998, by and
among the registrant and the investors named therein.
10.12.* Stockholder Rights Agreement, dated as of August 6, 1998, by and among
the registrant and the investors named therein.
10.13.* Form of Amendment to Common Stock and Common Stock Warrant Purchase
Agreements, dated August 6, 1998, between the Registrant and each of
Acorn Ventures-IS, LLC, Kellett Partners, LLP and John and Carolyn
Cunningham.
10.14.* License Agreement, dated July 28, 1998, between the registrant and
American Business Information, Inc. (now known as infoUSA, Inc.).
10.15.* Amended and Restated Content Provider Agreement, made as of August 24,
1998, effective as of April 25, 1998, between the registrant and 800-
U.S. Search.
10.16.* Interactive White Pages Marketing Agreement, dated as of August 24,
1998, between the registrant and America Online, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.17.* Development and Management Agreement, dated as of August 24, 1998,
between the registrant and America Online, Inc.
10.18.* Letter Agreement with Bernee D. L. Strom, dated November 22, 1998.
10.19.* Indemnification Agreement dated as of December 11, 1998 between the
registrant, Naveen Jain, and all the current and future members of the
registrant's board of directors (excluding Mr. Jain).
21.1. Subsidiaries of the registrant.
23.1. Consent of Deloitte & Touche LLP, Independent Auditors.
23.2. Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.3.+ Consent of Wilson Sonsini Goodrich & Rosati, P.C. (contained in the
opinion filed as Exhibit 5.1 hereto).
24.1.+ Power of Attorney (contained on signature page hereto).
99.1.+ Form of Plan of Arrangement under Section 182 of the Business
Corporations Act (Ontario) of INEX Corporation.
99.2.+ Form of Voting and Exchange Trust Agreement among the Company,
InfoSpace.com Canada Holdings Inc., and Montreal Trust Company of
Canada, as trustee.
99.3.+ Form of Exchangeable Share Support Agreement among the Company,
InfoSpace.com Nova Scotia Company, InfoSpace.com Canada Holdings Inc.
and Montreal Trust Company of Canada, as trustee.
</TABLE>
- --------
* Incorporated by reference to the Registration Statement on Form S-1 (No. 333-
62323) filed by the registrant on August 27, 1998, as amended.
+ Previously filed.
++ Incorporated by reference to the Registration Statement on Form S-8 (No.
333-81593) filed by the registrant on June 25, 1999.
<PAGE>
EXHIBIT 21.1
DESCRIPTION: SUBSIDIARIES OF THE REGISTRANT
EXHIBIT 21.1 LIST OF SUBSIDIARIES OF THE REGISTRANT
InfoSpace Investments, Ltd., a UK corporation.
Outpost Network, Inc., a Washington corporation.
InfoSpaceCanada.com, Inc., a Delaware corporation.
InfoSpace.com Canada Holdings Inc., an Ontario corporation.
InfoSpace.com Nova Scotia Company, a Nova Scotia unlimited liability company.
Union-Street.com, Inc., a Washington corporation.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-effective Amendment No. 2 Registration
Statement No. 333-86313 of InfoSpace.com, Inc. on Form S-1 of our report dated
February 24, 1999, (December 6, 1999 as to Note 14), appearing in the
Prospectus, which is part of this Registration Statement, and to the reference
to us under the headings "Selected Consolidated Financial Data" and "Experts"
in such Prospectus.
/s/ Deloitte & Touche LLP
Seattle, Washington
December 10, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement (Post-effective
Amendment No. 2) of InfoSpace.com, Inc. on Form S-1 of our report dated
February 11, 1999 (except for note 12, which is as of August 13, 1999, and Note
13, which is as of September 22, 1999) relating to the financial statements of
INEX Corporation, which appear in such Registration Statement. We also consent
to the reference to us under the heading "Experts" in such Registration
Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Canada
December 10, 1999
