<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________________ to _________________
Commission File Number 0-25131
INFOSPACE, INC.
(Exact name of registrant as specified in its charter)
Delaware 91-1718107
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
601 108th Avenue NE, Suite 1200 98004
Bellevue, Washington (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (425) 201-6100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class July 31, 2000
----- --------------
Common Stock, Par Value $.0001 233,776,364
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INFOSPACE, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I - Financial Information
<TABLE>
<S> <C>
Item 1. -- Financial Statements
Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999................................................... 3
Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 2000 and 1999.............................................. 4
Consolidated Statements of Cash Flows for the Three and Six Months Ended
June 30, 2000 and 1999.............................................. 5
Notes to Consolidated Financial Statements................................ 6
Item 2. -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview.................................................................. 10
Results of Operations..................................................... 12
Balance Sheet Commentary.................................................. 15
Liquidity and Capital Resources........................................... 16
Factors Affecting InfoSpace's Operating Results, Business Prospects and
Market Price of Stock................................................... 17
Item 3. -- Quantitative and Qualitative Disclosures About Market Risk....... 23
Part II - Other Information
Items 1 through 3 are not applicable with respect to the current reporting
period.
Item 4. -- Submission of Matters to a Vote of Security Holders................. 25
Item 5 is not applicable with respect to the current reporting period
Item 6. -- Exhibits and Reports on Form 8-K.................................... 26
Signatures..................................................................... 27
</TABLE>
2
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Item 1. - Financial Statements
INFOSPACE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
ASSETS (unaudited)
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................. $ 35,992,483 $ 37,985,250
Short-term investments................................................. 107,422,059 124,720,142
Accounts receivable, net of allowance for doubtful accounts............ 14,148,316 6,663,497
Notes and other receivables............................................ 34,940,665 14,914,638
Prepaid expenses and other current assets.............................. 10,496,287 10,304,244
------------- ------------
Total current assets................................................ 202,999,810 194,587,771
Other long-term assets................................................... 3,935,928 702,641
Property and equipment, net.............................................. 27,402,689 7,998,957
Long-term investments.................................................... 13,805,271 71,416,776
Other investments........................................................ 62,725,876 17,038,508
Intangible assets, net................................................... 365,805,073 73,842,557
------------- ------------
Total.................................................................... $ 676,674,647 $365,587,210
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 3,132,721 $ 2,810,141
Accrued expenses and other current liabilities......................... 11,688,758 19,543,490
Deferred revenues...................................................... 15,983,279 2,672,531
------------- ------------
Total current liabilities........................................... 30,804,758 25,026,162
Long-term liabilities and minority interest:
Long-term debt and other long-term liabilities......................... 416,346 685,762
Minority interest...................................................... 25,310,803 --
------------- ------------
Total long-term liabilities and minority interest................... 25,727,149 685,762
Stockholders' equity
Preferred stock, par value $.0001-authorized, 15,000,000 shares:
issued and outstanding, 1 and 0 share................................ -- --
Common stock, par value $.0001-authorized, 900,000,000 shares;
issued and outstanding, 231,915,485 and 211,826,168 shares........... 23,192 21,183
Additional paid-in capital............................................. 838,466,993 440,878,393
Accumulated deficit.................................................... (213,456,817) (98,512,435)
Accumulated other comprehensive income................................. (1,979,213) 1,317,448
Deferred expense-warrants.............................................. (1,903,308) (2,311,159)
Unearned compensation-stock options.................................... (1,008,107) (1,518,144)
------------- ------------
Total stockholders' equity.......................................... 620,142,740 339,875,286
------------- ------------
Total.................................................................... $ 676,674,647 $365,587,210
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
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INFOSPACE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Six Months Ended June 30, 2000 and 1999
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ------------------------------
2000 1999 2000 1999
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Revenues................................. $ 24,572,095 $ 6,980,686 $ 43,577,835 $ 12,240,104
Cost of revenues......................... 4,477,601 1,645,701 7,596,373 2,954,201
------------ ------------ ------------- -------------
Gross profit................... 20,094,494 5,334,985 35,981,462 9,285,903
Operating expenses:
Product development................. 5,649,288 2,437,962 10,426,568 4,924,566
Sales, general and administrative... 20,937,853 10,634,618 35,467,566 18,701,842
Amortization of intangibles......... 19,937,714 304,661 27,428,465 603,940
Acquisition and other related
charges............................ 202,103 4,969,365 86,599,409 4,969,365
Other - non-recurring charges....... -- 209,500 2,887,609 209,500
------------ ------------ ------------- -------------
Total operating expenses....... 46,726,958 18,556,106 162,809,617 29,409,213
------------ ------------ ------------- -------------
Loss from operations........... (26,632,464) (13,221,121) (126,828,155) (20,123,310)
Other income, net........................ 2,583,494 3,360,226 6,046,246 4,625,712
Unrealized gain (loss) on investments.... (8,447,333) -- 15,150,355 --
Restructuring charges.................... (2,171,462) -- (2,171,462) --
Minority interest........................ 3,445,289 -- (6,398,032) --
------------ ------------ ------------- -------------
Loss from operations before income tax
expense and cumulative effect of change
in accounting principle................ (31,222,476) (9,860,895) (114,201,048) (15,497,598)
Income tax expense....................... 6,598 -- 24,118 --
------------ ------------ ------------- -------------
Loss from operations before cumulative
effect of change in accounting
principle............................. (31,229,074) (9,860,895) (114,225,166) (15,497,598)
Cumulative effect of change in accounting
principle.............................. -- -- (719,216) --
------------ ------------ ------------- -------------
Net loss................................. $(31,229,074) $ (9,860,895) $(114,944,382) $ (15,497,598)
============ ============ ============= =============
Comprehensive loss....................... $(31,887,818) $ (9,854,503) $(118,241,043) $ (15,455,711)
============ ============ ============= =============
Basic and diluted net loss per share..... $(0.14) $(0.05) $(0.51) $(0.08)
============ ============ ============= =============
Shares used in computing basic and
diluted net loss per share.............. 230,322,824 198,449,788 223,707,864 189,085,936
============ ============ ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
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INFOSPACE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2000 and 1999
(unaudited)
<TABLE>
<CAPTION>
-------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Operating activities
Net loss.............................................................................. $(114,944,382) $ (15,497,598)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Depreciation and other amortization................................................ 30,205,019 1,591,846
Trademark amortization............................................................. -- 1,500,000
Compensation expense-stock options................................................. 510,037 402,567
Warrants expense................................................................... 3,295,460 407,851
Performance warrant revenue........................................................ (5,919,609) --
Noncash services exchanged......................................................... 110,000 --
Bad debt expense................................................................... 1,085,700 245,783
(Equity) loss from joint venture................................................... (64,207) 76,459
Gain on sale of intangibles........................................................ -- (7,830)
Loss on disposal of fixed assets................................................... 360,086 10,583
Unrealized gain on investments..................................................... (15,150,355) --
Cumulative translation adjustment.................................................. (294,758) 41,887
Minority interest in venture fund.................................................. 6,398,032 --
Business acquisition costs......................................................... 12,499,409 --
In-process research and development................................................ 74,100,000 3,900,000
Cumulative effect of change in accounting principle................................ 351,332 --
Cash provided (used) by changes in operating assets and liabilities:
Accounts receivable.............................................................. (9,627,316) (1,271,897)
Prepaid expense and other current assets......................................... 520,466 (2,468,611)
Other long-term assets........................................................... (772,804) (173,676)
Accounts payable................................................................. (607,053) (2,301,544)
Accrued expenses................................................................. (16,088,251) (188,671)
Deferred revenue................................................................. 12,959,416 188,324
------------ ------------
Net cash used by operating activities.............................................. (21,073,778) (13,544,527)
Investing activities
Purchase of property and equipment................................................. (14,849,336) (2,363,778)
Notes and other receivables, net................................................... (18,446,134) (5,955,065)
Business acquisitions, net of cash acquired........................................ (9,591,595) (18,083,054)
Proceeds from sale of domain name.................................................. -- 10,000
Investment in domain name.......................................................... -- (100,000)
Minority interest contribution in venture fund..................................... 19,365,000 --
Purchase of other investments...................................................... (27,500,000) (5,488,265)
Short-term investments, net........................................................ 17,298,083 (2,879,544)
Long-term investments, net......................................................... 57,611,506 (69,637,745)
------------- -------------
Net cash provided (used) by investing activities................................... 23,887,574 (104,497,451)
Financing activities:
Proceeds from issuance of ESPP shares.............................................. 343,126 --
Proceeds from issuance of common stock............................................. -- 186,990,573
Proceeds from exercise of warrants................................................. 6,890,580 --
Proceeds from exercise of stock options............................................ 10,689,470 353,062
Short-term and long-term debt, net................................................. (22,729,739) 460,367
------------ -------------
Net cash provided (used) by financing activities................................... (4,806,563) 187,804,002
------------ -------------
Net increase (decrease) in cash and cash equivalents.................................. (1,992,737) 69,762,024
Cash and cash equivalents:
Beginning of period................................................................ 37,985,250 39,986,609
------------ -------------
End of period...................................................................... 35,992,483 109,748,633
============ =============
Supplemental disclosure of noncash activities
Stock issued in exchange transaction............................................... 110,000 --
</TABLE>
See accompanying notes to consolidated financial statements.
5
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INFOSPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company and Basis of Presentation
InfoSpace, Inc. (the Company or InfoSpace), previously known as InfoSpace.com,
Inc., a Delaware corporation, was founded in March 1996. The Company is an
international information infrastructure services company that provides enabling
technologies and Internet services to Web sites, merchants and wireless devices.
The accompanying unaudited consolidated financial statements include all
adjustments, consisting of normal recurring adjustments that, in the opinion of
management, are necessary to present fairly the financial information set forth
therein. Prior period financial statements have been recast to give effect to
mergers accounted for as a pooling of interests. Certain information and note
disclosures normally included in financial statements, prepared in accordance
with generally accepted accounting principles, have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
Results of operations for the three and six-month periods ended June 30, 2000
are not necessarily indicative of future financial results.
Investors should read these interim statements in conjunction with the audited
financial statements and notes thereto included in our annual report (Commission
File Number 0-25131) filed on Form 10-K for the fiscal year ended December 31,
1999. Prior period balances have been reclassified to conform to current period
presentation.
Stock split: A two-for-one stock split of the Company's common stock was
effected on April 7, 2000. All references in the financial statements to
shares, share prices and per share amounts have been adjusted retroactively for
this stock split.
Other non-recurring charges: Other non-recurring charges in the six months
ended June 30, 2000 represent an expense recorded for the fair market value of
warrants issued by Prio, Inc. Prio had previously issued warrants for services
provided. These warrants were accounted for under variable plan accounting.
Subsequent to the acquisition of Prio, the agreement associated with these
warrants was terminated and the remaining unvested warrants accelerated to full
vesting.
Restructuring Charges: Restructuring charges of $2.2 million for the three and
six months ended June 30, 2000 reflect actual and estimated costs associated
with the closure of our Dallas, Texas facility. These costs are primarily
comprised of the write off of leasehold improvements, early lease termination
penalties, relocation costs and other personnel costs. The Company acquired
this facility in the acquisition of Saraide, Inc. in March of 2000.
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Cumulative effect of change in accounting principle: On January 1, 2000, the
Company adopted SAB 101, Revenue Recognition in Financial Statements, which
established certain criteria for net versus gross recording of sales
transactions. Prior to January 1, 2000, the Company recorded revenues from
customers for development fees, implementation fees and/or integration fees when
the service was completed. If this revenue was recognized on a straight-lined
basis over the term of the related service agreements, in accordance with SAB
101, the Company would have deferred $719,216 as of January 1, 2000. In
accordance with SAB 101, the Company recorded a cumulative effect of change in
accounting principle of $719,216. The Company recorded $367,896 in revenue in
the six months ended June 30, 2000 related to this deferred revenue. The
remaining amount will be recognized from July 2000 through November 2001.
2. Acquisitions
Millet Software: On March 31, 2000 the Company acquired all of the common stock
of Millet Software (privacybank.com) for purchase consideration of 488,224
shares of the Company's common stock and acquisition expenses of $54,531. The
Company recorded a non-recurring charge of $2.4 million for in-process research
and development and $27.6 million for intangible assets. Millet was a privately
held company that developed secure technology that provides an automated process
for filling in payment forms. The acquisition was accounted for as a purchase
in accordance with Accounting Principles Board Opinion ("APB") No. 16. Results
of operations for Millet have been included with those of the Company for the
period subsequent to the date of acquisition.
Saraide Inc.: On March 10, 2000 the Company acquired eighty percent of the
common stock of Saraide, Inc. (formerly saraide.com, inc.), a privately held
provider of wireless Internet services in Europe, Japan and Canada, for purchase
consideration of 9,233,672 shares of the Company's common stock and acquisition
expenses of $340,489. The Company recorded a non-recurring charge of $71.7
million for in-process research and development and $291.8 million in intangible
assets. The acquisition was accounted for as a purchase in accordance with APB
No. 16. Results of operations for Saraide have been included with those of the
Company for the period subsequent to the date of acquisition.
Net liabilities and losses applicable to the minority interest in Saraide exceed
the minority interest equity capital in Saraide. The minority interest portion
of the net liabilities and further losses are charged against the Company, the
majority interest, since the minority interest is not obligated to fund these
net liabilities and further losses. If Saraide has future earnings, the Company
will recognize income to the extent of such losses previously absorbed.
Prio, Inc.: On February 14, 2000, the Company completed the merger with Prio,
Inc., a privately held provider of commerce solutions specializing in the
development of strategic partnerships, technologies and programs that drive
commerce in both traditional and online shopping environments. Under the terms
of the merger, which was accounted for as a pooling-of-interests, the Company
exchanged 9,322,418 shares of the Company's common stock for all of the
preferred and common shares of Prio. The condensed consolidated balance sheet
as of June 30, 2000 and December 31, 1999 and the statement of operations for
the three and six months ended June 30, 2000 and 1999 are presented as if Prio
was a wholly-owned subsidiary since inception.
7
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3. Venture Capital Fund
On January 1, 2000, the Company established the InfoSpace Capital Venture Fund
2000 LLC. This fund is an investment vehicle through which the Company will
invest in Internet and technology companies. Investors in this fund are the
Company and its employees. The Company will contribute a total of $30,000,000
to this fund, $26,450,000 of which had been contributed as of June 30, 2000.
Employees meeting the accredited investor criteria contributed $16,365,000 to
the fund. The Company contributed $3,000,000 of its total investment on behalf
of the employees of the Company employed as of March 31, 2000. The employee
contribution vests on March 31, 2003. The Company recognizes this expense on a
straight-lined basis over the three year vesting term. Amounts forfeited during
the vesting term will revert to the Company.
The funds investments are selected and managed by an investment committee that
includes members of the Company's management. The Company has a majority and
controlling interest in the fund.
All investments held in the fund are recorded at their fair market value and
unrealized gains and losses on the investments are recorded as gains or losses
in the statement of operations of the fund. As of June 30, 2000, the fund had
$13,461,534 in cash and $44,509,208 in investments. The investment balance is
reflected at fair market value and includes $15,059,209 of unrealized gains that
were recorded in Other Income on the Company's Statement of Operations for the
six months ended June 30, 2000. The Company has recorded minority interest on
the Balance Sheet and Statement of Operations for the employee-owned portion of
the fund.
4. Notes Receivable
On February 28, 2000, the Company loaned $10.0 million to IQOrder.com, Inc. The
Company acquired IQOrder on July 3, 2000. The outstanding note will be relieved
through a reduction of the purchase price of the acquisition.
On December 1, 1999, the Company loaned The boxLot Company $2.5 million. This
short-term note is due by August 1, 2000, and accrues interest at 12% per annum.
On January 19, 2000 and February 18, 2000, the Company loaned The boxLot Company
an additional $1.0 million and $1.5 million. These two notes are due by
September 1, 2000 and accrue interest at 12% per annum. At June 30, 2000,
accrued interest on the notes was $299,667. The Company signed a definitive
agreement for an asset purchase with boxLot on June 27, 2000. These loans will
be offset against the purchase price of the assets at the close of the
transaction.
From December 21, 1999 to February 29, 2000, the Company loaned a former officer
of the Company $10.0 million. The promissory note is due on December 6, 2001,
and accrues interest at the prime rate. The note is secured by a pledge of the
officer's shares of the Company's common stock. The pledged shares are valued
in excess of the note balance. At June 30, 2000, accrued interest on this note
was $410,151.
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5. Restructuring Charges
The Company recorded a restructuring charge of $2,171,462 in the second quarter
of 2000 for the closure of its Dallas, Texas facility. The restructuring
charges are broken down as follows:
<TABLE>
<CAPTION>
Type of charge Cash / Non-cash Restructuring charge Reserve balance
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Severance and related costs Cash $ 957,000 $957,000
---------------------------------------------------------------------------------------------------------------------
Lease termination penalties Cash 412,300 --
---------------------------------------------------------------------------------------------------------------------
Leasehold improvements Non-cash 802,162 --
========== ========
---------------------------------------------------------------------------------------------------------------------
$2,171,462 $957,000
---------------------------------------------------------------------------------------------------------------------
</TABLE>
6. Subsequent Events
On August 4, 2000 the Company acquired all of the outstanding capital stock of
Orchest, Inc., a privately held company based in Cupertino, California, for a
purchase consideration of 255,288 shares of our common stock. Orchest is an
online provider of financial services that enables users to access a
consolidated view of their personal financial information from multiple
institutions. The acquisition was accounted for as a purchase.
On July 26, 2000, the Company signed a definitive agreement to acquire Seattle,
Washington-based Go2Net, Inc., a provider of applications and technology
infrastructure for narrowband and broadband. Under terms of the acquisition,
which will be accounted for as a pooling of interests, the Company will exchange
1.82 shares of its common stock for each of Go2Net's shares and options. The
Company expects to complete this acquisition in the third or fourth quarter of
2000, subject to satisfaction of customary closing conditions, including
shareholder approval.
On July 24, 2000, the Company signed a definitive agreement to acquire Thomson
Directories Limited's investment in TDL InfoSpace. The acquisition of this
investment will give the Company control of TDL InfoSpace. The number of shares
to be exchanged will be determined at the close of the transaction. The Company
expects this transaction to close in the third or fourth quarter of 2000.
On July 3, 2000, the Company acquired Tempe, Arizona-based IQorder.com, a
company that has developed technology that allows consumers to enter in a model
number, UPC code, part number, barcode or ISBN to locate a product, compare
prices and make an instant purchase. Under the terms of the acquisition, which
will be accounted for as a purchase, the Company exchanged 989,959 shares of
common stock for all of IQorder's outstanding shares, warrants and options
valued at $58 million.
On June 27, 2000, the Company signed a definitive agreement for an asset
purchase with The boxLot Company. The asset purchase is valued at approximately
$21.5 million. The Company expects this purchase to be completed in the third
or fourth quarter of 2000.
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Item 2. -- Management's Discussion and Analysis of Financial Condition and
Results of Operations.
You should read the following discussion and analysis in conjunction with our
Consolidated Financial Statements and Notes to Consolidated Financial Statements
thereto included elsewhere in this report. In addition to historical
information, the following discussion contains certain forward-looking
statements that involve known and unknown risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. You should
read the cautionary statements made in this report as being applicable to all
related forward-looking statements wherever they appear in this report. Our
actual results could differ materially from those discussed in the forward-
looking statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below and in the section
entitled "Factors Affecting Our Operating Results, Business Prospects and Market
Price of Stock" and in our reports filed with the Securities and Exchange
Commission including our annual report on Form 10-K for the year ended December
31, 1999 (the "Form 10-K"). You should not rely on these forward-looking
statements, which reflect only our opinion as of the date of this report. We do
not assume any obligation to revise forward-looking statements.
Overview
InfoSpace, Inc. is an international information infrastructure services company.
We provide commerce, information and communication infrastructure services to
wireless devices, merchants and Web sites. 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 1999 and the first half of 2000, we have expanded
our information infrastructure services to enhance our consumer, merchant and
wireless services. At June 30, 2000, we had 502 employees. The following
provides greater detail on each of our service offerings:
Consumer Services: We provide information of broad appeal to users of wireless
devices and PC's including directories, sports, news and entertainment,
financial data and traffic reports. We also offer an integrated platform of
consumer services that includes community building services such as online
address books, calendars, online chat and message boards and communication
services including device independent e-mail and instant messaging. Our
consumer services are designed for the end user and are distributed through
wireless devices and Web sites. Our affiliate network consists of more than
3,100 portals and affinity Web sites.
Revenues from our consumer services are generated from advertising, subscriber
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),
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merchant banks and other local media networks. Our end-to-end merchant services
give merchants the ability to create, promote, sell and distribute their
products and services across multiple channels through our broad distribution
network. We have extensive reseller agreements with RBOCs, including BellSouth,
SBC, Verizon and Qwest (formerly US West), merchant banks such as American
Express and Bank of America and other local media networks such as newspapers
and television and radio stations who provide our services to millions of local
merchants worldwide.
Our merchant services consist of a comprehensive platform of technology that
enables us to deliver unique services such as:
. the online delivery of promotions to any device that can be used online and
offline;
. buying from anyWeb site directly from a wireless device with a single click;
. Page Express which enables local merchants to create a Web presence;
. StoreBuilder which enables merchants to build on-line stores;
. ActivePromotion/TM/ which enables merchants to create targeted product
promotions and distribute them across our network; and
. ActiveShopper/TM/ 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 commerce fees
and subscriber fees, including per store/per month or per promotion/per month
fees. Our national and local merchant network consists of more than 600,000
local and national merchants.
Wireless Services: Our wireless services are comprised of a comprehensive,
integrated suite of wireless portal services that provide mobile users relevant
information services such as real-time stock quotes and traffic reports, the
ability to conduct secure commerce transactions including single click buying,
communication services such as device-independent instant messaging and e-mail,
personalization capabilities and location-based services that enable the user to
search for location-based information such as the restaurant closest to the
mobile user's current location. These services are distributed through wireless
carriers, device manufacturers and software providers. Our wireless affiliates
include Verizon, AT&T Wireless, SBC and ALLTEL.
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 the carrier and include
licensing fees, per subscriber/per month fees in the U.S. and per query/per
message fees in Europe and Japan. In addition, we receive commerce revenue for
the transactions delivered on the wireless devices.
All of our services are built on our core technology platform and use the same
operational infrastructure. We do not allocate development or operating costs to
any of these services.
Acquisitions: In February 2000, we acquired Prio, Inc., a provider of commerce
solutions specializing in the development of strategic partnerships,
technologies and programs that drive commerce in both traditional and online
shopping environments. The consolidated financial statements and accompanying
notes reflect the Company's financial position and results of operations as if
Prio was a wholly owned subsidiary since inception. In March 2000, we
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acquired an eighty-percent interest in Saraide Inc. (formerly saraide.com, inc),
a provider of wireless Internet services in Europe, Japan and Canada. Also in
March 2000, we acquired Millet Software (privacybank.com). Millet developed
secure technology that provides an automated process for filling in payment
forms.
We have incurred losses since our inception and, as of June 30, 2000, we had an
accumulated deficit of approximately $213.5 million. For the three months ended
June 30, 2000, our net loss totaled $31.2 million, including $19.9 million in
amortization of intangibles. For the six months ended June 30, 2000, our net
loss totaled $114.9 million, including amortization of intangibles of $27.4
million, $86.6 million in acquisition and related charges associated with the
acquisitions of Prio, Saraide and Millet Software and $2.9 million in other non-
recurring charges related to a one-time warrant expense that resulted from the
acquisition of Prio.
We believe that our future success will depend largely on our ability to
continue to offer consumer, merchant and wireless solutions that are attractive
to our existing and potential future affiliates and distribution partners.
Accordingly, we plan to significantly increase 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 business development and marketing operations and hire more
business development personnel;
. 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 consumer, merchant and wireless services.
After giving effect to our recent acquisitions and continued global expansion,
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 twelve quarters, we do not
believe that our historical growth rates are necessarily sustainable or
indicative of future growth.
Results of Operations
Revenues. Revenues increased $17.6 million, or 252%, to $24.6 million in the
three-month period ended June 30, 2000 from the comparable period of 1999.
Revenues increased $31.3
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million or 256%, to $43.6 million in the six months ended June 30, 2000 from the
comparable period in 1999. The increases for both the three and six month
periods are primarily due to significant growth in our consumer and merchant
services as a result of the expansion of our affiliate network, which consists
of more that 3,100 Web sites and wireless devices, and increased use of our
consumer, merchant and wireless services, as well as larger and longer term
agreements with advertisers, affiliates and distribution partners.
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, consultant costs, communication
costs such as high-speed Internet access, server equipment depreciation and
content license fees. Cost of revenues were $4.5 million, or 18% of revenues,
for the three-month period ended June 30, 2000 compared to $1.6 million, or 24%
of revenues, for the three-month period ended June 30, 1999. For the six-month
period ended June 30, 2000, cost of revenues were $7.6 million, or 17% of
revenues. This compares to $3.0 million, or 24% of revenues, for the six months
ended June 30, 1999. The absolute dollar increases are primarily attributable
to costs incurred in order to support greatly increased delivery of consumer,
merchant and wireless solutions, including personnel expenses, 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 that cost of
revenues will be in the high teens as a percentage of revenues for the remainder
of 2000.
Product Development Expenses. Product development expenses consist principally
of personnel costs for research, design and development of the proprietary
technology we use to integrate and distribute our consumer, merchant and
wireless services. Product development expenses increased $3.2 million, or
132%, to $5.6 million in the three-month period ended June 30, 2000, from $2.4
million for the comparable period in 1999. For the six months ended June 30,
2000, product development expenses increased $5.5 million to $10.4 million from
the comparable period in 1999. The increase in absolute dollars is 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.
Sales, General and Administrative Expenses. Sales, general and administrative
expenses consist primarily of salaries and related benefits for sales, general
and administrative personnel, advertising and promotion expenses, carriage fees,
professional service fees, occupancy and general office expenses and travel
expenses. Sales, general and administrative expenses were $20.9 million or 85%
of revenues in the three months ended June 30, 2000 compared to $10.6 million or
152% of revenues for the comparable period in 1999. Sale, general and
administrative expense were $35.5 million or 81% of revenues for the six months
ended June 30, 2000 compared to $18.7 million or 153% of revenues for the
comparable period in 1999. The absolute dollar increase is primarily due to
increased personnel costs, occupancy costs, professional service fees, carriage
fees paid to certain affiliates to include our content services on their Web
sites and travel expenses.
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Amortization of Intangibles. Amortization of intangibles includes amortization
of goodwill, core technology, purchased domain names, trademark, contract lists
and assembled workforce. Amortization of intangibles was $19.9 million in the
three months ended June 30, 2000, compared to $305,000 in the three months ended
June 30, 1999. Amortization of intangibles was $27.4 million in the six months
ended June 30, 2000, compared to $604,000 in the six months ended June 30, 1999.
The increases are a result of amortization of intangibles recorded from the
acquisitions of Millet Software (privacybank.com) and Saraide in March 2000,
Zephyr Software and eComLive in December of 1999, Union-Street in October 1999,
the MyAgent technology acquisition in June 1999 and Outpost Network in July
1998. With the exception of Zephyr, intangibles of applicable goodwill, core
technology, contract list and acquired workforce for each acquisition are being
amortized over five years. The amortization of goodwill for Zephyr is over
three years. We closed the acquisition of IQOrder on July 3, 2000.
Amortization expense for the intangibles acquired in this transaction will be
included the third quarter of 2000. In the event that we complete additional
acquisitions, which we expect to do, expenses relating to the amortization of
intangibles could increase in the future.
Acquisition and Related Charges. Acquisition and other related charges consist
of in-process research and development and other one-time charges related
directly to acquisitions, such as legal and accounting fees. The acquisition
and related charges in the six months ended June 30, 2000 were one-time in-
process research and development charges and costs incurred in the purchase
acquisitions of Saraide and Millet Software and costs incurred in the
acquisition of Prio, which was accounted for as a pooling-of-interests
transaction. Total in-process research and development charges in the six
months ended June 30, 2000 was $74.1 million. 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 the six months
ended June 30, 2000 represent an expense recorded for the fair market value of
warrants issued by Prio. Prio had previously issued warrants for services
provided. These warrants were accounted for under variable plan accounting.
Subsequent to the acquisition of Prio, the agreement pursuant to which these
warrants were granted was terminated and the remaining unvested warrants
accelerated to full vesting.
Unrealized Gain(Loss) on Investments Held: Unrealized gain (loss) on
investments held represents the unrealized gain on the investments in the
InfoSpace Venture Capital Fund 2000. In accordance with Accounting for
Investments in Venture Capital Funds, the investments are recorded at their
market value and the unrealized gains and losses are reflected in the income
statement in the Fund, which is fully consolidated. The $8.4 million unrealized
loss recognized in the three months ended June 30, 2000 and $15.1 million
unrealized gain recognized in the six months ended June 30, 2000 are not
necessarily indicative of future results.
Minority Interest in Venture Capital Fund: As the majority interest holder in
the InfoSpace Venture Capital Fund 2000, we have recorded 100% of the balance
sheet and statement of operations in our consolidated financial statements. The
non-InfoSpace portion of the net
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income in the fund has been reflected as minority interest. At June 30, 2000,
InfoSpace owned 59.2% of the fund, our employees own the remaining 40.8% of the
fund.
Restructuring Charges: Restructuring charges of $2.2 million for the three and
six months ended June 30, 2000 reflect actual and estimated costs associated
with the closure of our Dallas, Texas facility. These costs are primarily
comprised of the write off of leasehold improvements, early lease termination
penalties, relocation costs and other personnel costs. We acquired this
facility in the acquisition of Saraide, Inc in March of 2000. Our decision to
close this office was primarily due to duplicated efforts in this facility and
our other locations and the forecasted cost savings from the closure of the
facility.
Other Income, Net. Other income consists primarily of interest income for all
periods. Other income was $2.6 million in the three months ended June 30, 2000,
compared to $3.4 million from the three months ended June 30, 1999. The
decrease from the prior year is primarily due to reinvestment of funds to equity
securities from fixed income securities. For the six months ended June 30,
2000, other income was $6.0 million compared to $4.6 million in the six months
ended June 30, 2000. This increase from the prior year is primarily due to
interest earned on higher average cash balances resulting from the net proceeds
from our follow-on offering, which closed in April 1999.
We have reinvested and will continue to reinvest part of our fixed income
securities in equity investments. We anticipate that our expansion plans may
require greater cash uses in the remainder of 2000 than in prior years. With
these two factors, we anticipate that our interest income from our fixed
securities will decrease in the remainder of 2000, compared with 1999.
Income Taxes Expense. The income tax expense in the six months ended June 30,
2000 is from our international operations in Europe.
Balance Sheet Commentary
Accounts Receivable. As we enter into agreements for larger amounts with larger,
well established companies, we periodically must provide extended payment terms
beyond our standard 15 to 30 day terms to allow for the customer's internal
approval and payment processing systems. In addition, we are issuing single
invoices for larger dollar amounts. For example, at June 30, 2000 the receivable
from one customer represented 23% of the accounts receivable balance. This
amount was received within payment terms subsequent to period end.
Allowance for Doubtful Accounts. We specifically reserve all accounts sixty days
or more past due. In addition, we reserve an amount based on revenues and the
accounts receivable balance for accounts not specifically identified.
We have a stringent credit review process and require payment in advance from
those customers that do not qualify under our trade credit guidelines.
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Deferred Revenue. The increase in the six months ending June 30, 2000 was
primarily due to prepayment under two new large contracts closed during the
quarter and our policy put in place at the beginning of the year of obtaining
payment from customers in advance of delivering services whenever practicable.
Liquidity and Capital Resources
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
$185.0 million. As of June 30, 2000, we had cash, cash equivalents and short-
term investments of $146.7 million and long-term investments of $76.5 million.
Net cash used by operating activities was $21.1 million in the six months ended
June 30, 2000. This primarily consisted of net operating losses, increases in
accounts receivable and deferred revenue and decreases in accounts payable and
accrued liabilities. Net cash used by operating activities was $13.6 million
during the six months ended June 30, 1999. This consisted primarily of net
operating losses and the decrease in accounts payable.
Net cash provided by investing activities was $23.9 million in the six months
ended June 30, 2000. The increase in cash from investing activities was
primarily comprised of the reduction of short-term and long-term investments,
the inclusion of minority interest, purchases of property, plant and equipment,
business acquisition costs and note receivable issuances. This cash increase
was offset by business acquisition costs, issuance of notes receivable and
additional investments. Net cash used by investing activities during the six
months ended June 30, 1999 was $104.4 million. This was primarily a result of
investing cash in short and long-term investments and the acquisition cost of My
Agent in June of 1999.
Cash used by financing activities in the six months ended June 30, 2000 of $4.8
million was primarily comprised of the payoff of debt assumed in the acquisition
of Saraide and offset by proceeds from the exercise of stock options and
warrants. Cash provided by financing activities in the six months ended June 30,
1999 of $187.8 was primarily comprised of proceeds from the issuance of common
stock from our follow-on offering in April 1999.
We plan to use our cash for strategic investments and acquisitions, investments
in internally developed technology, global expansion of our services and
continued build-out of infrastructure in Europe, Asia and South America.
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
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business opportunities or respond to competitive pressures, any of which could
harm our business. See "Factors Affecting Our Operating Results, Business
Prospects and Market Price of Stock."
Acquisitions
Orchest, Inc. On August 4, 2000 we acquired all of the outstanding capital stock
of Orchest, Inc., a privately held company based in Cupertino, California, for a
purchase consideration of 255,288 shares of our common stock. Orchest is an
online provider of financial services that enables users to access a
consolidated view of their personal financial information from multiple
institutions. The acquisition was accounted for as a purchase.
IQorder.com. On July 3, 2000, we acquired Tempe, Arizona-based IQorder.com, a
company that has developed technology that allows consumers to enter in a model
number, UPC code, part number, barcode or ISBN to locate a product, compare
prices and make an instant purchase. Under the terms of the acquisition, which
will be accounted for as a purchase, we exchanged 989,959 shares of our common
stock for all of IQorder's outstanding shares, warrants and options valued at
$58 million.
Millet Software. On March 31, 2000 we acquired all of the common stock of
Millet Software, a privately held company, for a purchase consideration of
488,224 shares of our common stock and acquisition expenses of $54,531. We
recorded a one-time in-process research and development charge of $2.4 million
recorded $27.6 million in intangible assets.
Saraide Inc. On March 10, 2000 we acquired eighty percent of the common stock
of Saraide, a privately held company, for a purchase consideration of 9,233,672
shares and acquisition expenses of $340,489. We recorded a one-time in-process
research and development charge of $71.7 million recorded $291.8 million in
intangible assets.
Prio, Inc.: On February 14, 2000, we consummated the acquisition of Prio, a
privately held company. The combination was accounted for as a pooling of
interests. We issued 9,322,418 shares of our common stock in exchange for all
the outstanding common and preferred stock of Prio. The consolidated financial
statements for the three and six months ended June 30, 2000 and June 30, 1999
and periods ended June 30, 2000 and December 31, 1999 and the accompanying notes
reflect our financial position and the results of operations as if Prio was our
wholly-owned subsidiary since inception.
Factors Affecting Our Operating Results, Business Prospects and Market Price of
Stock
In addition to other information in this report, investors evaluating us and our
business should carefully consider the following risk factors. These risks may
impair our operating results and business prospects and the market price of our
stock.
This report contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements include, but are not limited to,
statements regarding our business and growth strategy, the expected demand for
and benefits of our Internet information infrastructure services for our
affiliates, advertisers and content providers, anticipated benefits from the
business and technologies we have acquired or intend to acquire, 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,
increased general and administrative expenses, anticipated capital equipment
expenditures and anticipated cash needs. 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. 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
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expressed or implied by such forward-looking statements. The risks set forth
below and elsewhere in this report could cause actual results to differ
materially from those projected.
We Have a Limited Operating History and a History of Losses.
We have a 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, 2000. At June 30, 2000, we had an accumulated deficit of
approximately $213.5 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, 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, technology and
services;
. successfully integrate new features with our consumer, merchant and
wireless services;
. expand our sales and marketing efforts, including relationships with third
parties to sell our merchant 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.
Our Financial Results Are Likely to Fluctuate.
Our financial results have varied on a quarterly basis and are likely to
fluctuate substantially in the future. These fluctuations may be caused by
several factors, many of which are beyond our control. These factors include:
. the addition or loss of affiliates;
. variable demand for our consumer, merchant and wireless services by our
affiliates and distribution providers;
. the cost of acquiring and the availability of content, technology and
services;
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. the growth and 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
information services on their Web sites and wireless devices;
. the productivity of our direct sales force and the sales forces of our
distribution partners;
. 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, or
any litigation that is filed against us in the future;
. our ability to attract and retain personnel;
. our ability to successfully integrate and manage newly acquired companies;
. 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 information infrastructure
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 only began operations in March 1996, and because
the market for Internet infrastructure services such as ours is new and
evolving, it is very difficult to predict future financial results. As a result
of our recent acquisitions and continued global expansion, we have and intend to
continue to significantly increase our sales and marketing, research and
development and general and administrative expenses in the remainder of 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.
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As a result, if our revenues in a period do not meet our expectations, our
financial results will likely suffer.
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 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.
We may not be able to successfully integrate the technology and personnel we
have acquired or the 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 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 502 at June 30, 2000. We now have offices in Bellevue,
Washington; San Francisco, San Mateo and Mountain View, California; New York
City and Rochester, New York; Toronto and Ottawa, Canada; Papendrecht,
Netherlands; and London, United Kingdom. This expansion has placed, and is
expected to continue to place, a significant strain on our management and
operational resources. We do not have experience managing multiple offices with
multiple facilities and personnel in disparate locations. As a result, we may
not be able to effectively manage our resources, coordinate our efforts,
supervise our personnel or otherwise successfully manage our resources.
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We have recently 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 continue to significantly increase our employee base. These
additional personnel may further strain our management resources.
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. 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.
The rapid growth of our business has strained our ability to meet customer
demands and manage the growing number of affiliate relationships. In addition,
our affiliate relationships are also growing in their size and complexity of
services. As a result of the growth in the size, number, and complexity of our
relationships we may be unable to meet the demands of our customer
relationships, which could result in the loss of customers, subject us to
penalties under our affiliate agreements and harm our business reputation.
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. Further, we must manage
effectively our relationships with various Internet content providers,
distribution partners, wireless carriers, advertisers, affiliates and other
third parties necessary to our business. If we are unable to manage growth
effectively, our business could suffer.
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 into the third quarter
of 2000. 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 information infrastructure services
by a large number of users who have demographic characteristics that are
attractive to advertisers;
. the availability of attractive advertising space within our private label
solutions;
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. the ability of our business development and sales personnel to effectively
sell our broad suite of consumer, merchant and wireless services;
. the development of the Internet as an attractive platform for electronic
commerce;
. the use of our integrated merchant tools by small and medium sized online
and offline merchants;
. the adoption of our wireless services and solutions by wireless carriers
and device manufacturers; and
. the use of our information services by subscribers on their wireless
devices.
Our ability to maintain or increase our advertising revenue will also be
affected by changes in fee levels and structures. Many of our advertising
contracts provide for fees to be paid to us on a cost per thousand impressions
(CPM) basis. If CPMs decrease in future contracts, or we fail to provide
required minimum levels of user impressions, our revenue growth may slow or
revenues may even decrease.
Our Affiliates May Be Unable to Raise Sufficient Capital or May Experience
Adverse Business Conditions.
As a result of unfavorable conditions in the public equity markets, some of our
affiliates may have difficulty raising sufficient capital to support their long-
term operations. As a result, these affiliates may not be able to pay us some or
all of the fees they are required to pay us under their existing agreements. In
addition, our affiliates may experience adverse business conditions due to
market conditions, industry conditions or other factors, which may render them
unable to fulfill their contractual obligations to us. Such conditions may also
prevent potential affiliates to enter into contractual relationships or other
strategic business relationships with us.
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 foreseeable future.
Our top ten customers represented 54% of our revenues in the second quarter of
2000 and 61% of our revenues for second quarter of 1999. In particular, Knight
Ridder accounted for 14% and 800-U.S. Search, Inc. accounted for 10% of our
revenues for the quarter ended June 30, 2000. U.S. Search accounted for 25% of
our revenues for the quarter ended June 30, 1999. If we lose any of these
customers or if any of these customers are unable or unwilling to pay us amounts
that they owe us, our financial results will suffer.
We May Require Additional Funding.
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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 business development 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 cash requirements of entities we have acquired;
. the number and amount of investments we make in privately held technology
companies;
. the rate at which we expand internationally; and
. the response of competitors to our service offerings.
Item 3. -- Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risks, including changes in interest rates
and equity price fluctuations.
Interest Rate Risk: We invest our excess cash in high-quality corporate
issuers, and in debt instruments of the U.S. Government and its agencies. By
policy, we limit our credit exposure to any one issuer. We do not have any
derivative instruments in our investment portfolio. We protect and preserve
invested funds by limiting default, market and reinvestment risk. Investments
in both fixed rate and floating rate interest earning instruments carries a
degree of interest rate risk. Fixed rate securities may have their fair market
value adversely impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest rates fall. Due in
part to these factors, the Company's future investment income may fall short of
expectations due to changes in interest rates or the Company may suffer losses
in
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principal if forced to sell securities which have declined in market value
due to changes in interest rates.
Equity Investment Risk The Company invests in equity instruments of public and
privately-held, technology companies for business and strategic purposes. These
investments are recorded as long-term assets and are classified as available-
for-sale. For the privately-held investments, our policy is to regularly review
the assumptions underlying the operating performance and cash flow forecasts in
assessing the carrying value. For our publicly-held investments, we are subject
to significant fluctuations in fair market value due to the volatility of the
stock market. Changes in fair market value are recorded as a component of other
comprehensive income and do not effect net income until the securities are sold
and a realized gain or loss is incurred.
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PART II -- OTHER INFORMATION
Items 1 through 3
Not applicable with respect to the current reporting period.
Item 4. -- Submission of Matters to a Vote of Security Holders
At the annual stockholders' meeting held on May 22, 2000, the following
proposals were adopted by the margin indicated:
1. To elect the Board of Directors to hold office until their successors are
duly elected and qualified:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
NOMINEE SHARES SHARES
FOR WITHHELD
---------------------------------------------------------------------
<S> <C> <C>
John E. Cunningham, IV 92,965,623 406,052
---------------------------------------------------------------------
Ashok Narasimhan 92,216,337 1,155,338
---------------------------------------------------------------------
Arun Sarin 92,963,410 408,265
---------------------------------------------------------------------
</TABLE>
2. To ratify the appointment of Deloitte & Touche LLP as independent auditors
of the Company for the fiscal year ending December 31, 2000.
Shares Voting:
--------------
For 93,313,244
Against 21,819
Abstain 36,612
At the special meeting of stockholders held on April 3, 2000, the following
proposals were adopted by the margin indicated:
1. To amend InfoSpace.com, Inc.'s Amended and Restated Certificate of
Incorporation to change the name of InfoSpace.com, Inc., to InfoSpace,
Inc.:
Shares Voting:
--------------
For 73,368,167
Against 1,191
Abstain 17
2. To amend InfoSpace.com's Amended and Restated Certificate of Incorporation
to increase the authorized number of shares of Common Stock from
200,000,000 to 900,000,000:
Shares Voting:
--------------
For 64,205,151
Against 9,160,862
25
<PAGE>
Abstain 449
Item 5. -- Other Information
Not applicable with respect to the current reporting period.
Item 6. -- Exhibits and Reports on Form 8-K:
a. Exhibits
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
b. Reports on Form 8-K
Form 8-K filed with the SEC on April 20, 2000, dated March 31, 2000,
with respect to the acquisition of Millet Software, Inc. reported
pursuant to Item 5.
Form 8-K/A filed with the SEC on April 24, 2000, dated February 25,
2000, which included the financials statement of Prio, Inc. and the
pro forma financial statements required as a result of Registrant's
acquisition of Prio.
Form 8-K/A filed May 1, 2000, dated February 25, 2000, which
restated Item 7(b) and certain exhibits filed in the Form 8-K/A
filed on April 25, 2000.
Form 8-K filed with the SEC on May 10, 2000, dated April 25, 2000,
with respect to the acquisition of IQOrder.com, Inc., reported
pursuant to Item 5.
Form 8-K/A filed with the SEC on May 24, 2000, dated March 10, 2000,
with respect to the acquisition of Saraide, Inc. which included the
financial statements of Saraide and the pro forma financial
statements required as a result of Registrant's acquisition of
Saraide.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INFOSPACE, INC.
By: /s/ Tammy D. Halstead
------------------------------------------
Tammy D. Halstead
Senior Vice President and Chief Accounting
Officer
Dated: August 11, 2000
27
