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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to Commission File No. 0-25131
INFOSPACE.COM, INC.
(Exact name of Registrant as specified in its charter)
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Delaware 91-1718107
(State or other jurisdiction (I.R.S. Employer)
incorporation or organization) Identification Number)
15375 N.E. 90th Street
Redmond, Washington 98052
(Address of principal executive
offices) (Zip Code)
Registrant's telephone number, including area code: (425) 602-0600
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Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.0001 per share
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of Common Stock on February 29, 2000,
as reported by Nasdaq, was approximately $12.8 billion. Shares of voting stock
held by each officer and director and by each person who owns 5% or more of the
outstanding voting stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of February 29, 2000, 108,288,253 shares of the registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the definitive
proxy statement for the Annual Meeting of Stockholders tentatively scheduled
for May 22, 2000, (the "Proxy Statement").
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TABLE OF CONTENTS
Part I
Item 1. Business................................................................................ 3
Factors Affecting Our Operating Results, Business Prospects and Market Price of Stock.. 16
Item 2. Properties.............................................................................. 28
Item 3. Legal Proceedings....................................................................... 29
Item 4. Submission of Matters to a Vote of Security Holders..................................... 30
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................... 31
Item 6. Selected Consolidated Financial Data.................................................... 33
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations... 34
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.............................. 46
Item 8. Financial Statements and Supplementary Data............................................. 48
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.... 75
Part III
Item 10. Executive Officers and Directors of the Registrant...................................... 75
Item 11. Executive Compensation.................................................................. 75
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 75
Item 13. Certain Relationships and Related Transactions.......................................... 75
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 76
Signatures ....................................................................................... 78
2
ITEM 1. BUSINESS
Overview
InfoSpace is a global Internet information infrastructure services company.
InfoSpace provides enabling technologies to Web sites, merchants and wireless
devices. Our affiliates utilize and distribute these services via PCs and a
network of wireless and other non-PC devices including PCs, cellular phones,
pagers, screen telephones, television set-top boxes, online kiosks, and
personal digital assistants. We have relationships with AT&T Wireless, GTE,
USWEST, Intel, Ericsson, Nokia, NeoPoint, Sprint, Mitsui and Acer America.
InfoSpace's affiliate network also consists of more 2,500 Web sites that
include AOL, Microsoft, Disney/InfoSeek's GO Network, NBC's Snap, Lycos, Go2Net
Inc., DoubleClick, Dow Jones (The Wall Street Journal Interactive Edition) and
ABC LocalNet, among others.
Our Infrastructure Services
We have developed a scalable, flexible technology platform that enables us to
deliver a broad, integrated suite of services to Web sites, merchants and
wireless carriers. All of our consumer, merchant and wireless services utilize
the same core technology platform within the same operational infrastructure.
Our consumer services are designed for the end user and are distributed through
wireless devices and Web sites. These services include four main components:
(1) unified communication services, including device-independent email and
instant messaging; (2) information services, such as integrated directory,
news, and lifestyle information; (3) community services, including the "sticky"
services such as online address books and calendars; and (4) the ability to
offer collaboration services, including real-time document sharing. We target
merchant services to local merchants (including service-based merchants such as
restaurants and dry cleaners) and distribute these services through our
relationships with the regional bell operating companies (RBOCs), merchant
banks and other financial institutions and other local media networks,
including newspapers and television and radio stations. These services include
commerce services such as online storebuilding and technology that promotes
merchant services. We target wireless services to mobile users, whether on a
cellular phone, personal digital assistant (or PDA), pager or other non-PC
device, and distribute these services through our relationships with wireless
carriers and device manufacturers. These services include the ability to
conduct secure commerce using single-click buying, integrated information
services such as real-time stock quotes and traffic reports, and services that
manage users' lives, including online address books and calendars.
We design our infrastructure services 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 to 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's delivery platform and
format, including the growing number of emerging wireless devices.
We have built an extensive distribution network through our direct sales
force and through reseller channels. Our reseller channels are based on
distribution agreements with online advertising 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, Bell Atlantic and USWEST, merchant banks and other local media networks
who provide our services to local merchants. We also work with wireless
carriers such as AT&T Wireless, Airtouch, USWest and GTE, device manufacturers
such as Nokia, Ericsson and Neopoint, and software developers such as AvantGo,
who offer our wireless portal services to mobile users.
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Consumer Services
Information Services
We provide information of broad appeal to users of wireless devices and PCs,
including maps, directories, financial data, traffic reports, sports, 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 integrate heterogeneous content from multiple sources and make it
appear as if it comes from one source, which is then delivered to our
affiliates. Our technology pulls the information 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.
For our directory services, 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 within 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.
In addition to our directory services, we distribute other valuable
information of broad appeal with everyday significance, such as classifieds,
news, travel and city guide information, real-time stock quotes and financial
information, Web directories and entertainment.
Our future success will depend on our ability to continue to integrate and
distribute information services 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
We offer an extensive and integrated platform of consumer services that
includes community services and communication services.
Community-building services that we offer our affiliates include the "sticky"
services that are designed to keep a user on an affiliates' site. These include
personalized Web-based address books and calendars, personal home pages, online
chat and message boards.
We also offer unified communication services including device-independent
email and instant messaging. We integrate these services into the community-
building services we offer, making it easy for users to send email and instant
messages directly from their address book from any device and also view "buddy
lists" on any device.
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Our Affiliate Network
We offer our infrastructure services to wireless device manufacturers such as
Nokia and Ericcson, wireless carriers such as GTE and USWEST and wireless
service providers such as AvantGo. Our PC-based affiliate network now consists
of over 2,500 portals and affinity sites, including 4 of the top 5 most
trafficked sites, according to Media Metrix. In addition, we believe our
affiliate network now reaches over 88% of all Internet users based on data as
of December 31, 1999, provided by Media Metrix.
Our consumer services revenue is derived from advertising, licensing fees and
guaranteed transaction fees in lieu of revenue share.
Merchant Services
Our 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 reseller agreements with RBOCs, including
BellSouth, SBC, Bell Atlantic and USWEST, merchant banks and other local media
networks, such as newspapers, who provide our services to local merchants
worldwide.
Based on a broad platform of technology, we can deliver a broad array of
merchant services such as:
. the online delivery to any device of promotions that can be used online
and offline;
. single-click buying from any Web site directly from a wireless device;
. Page Express, which enables local merchants to create a Web presence;
. StoreBuilder, which enables merchants to build online stores;
. ActivePromotion, which enables merchants to create targeted product
promotions and distribute them across our network; and
. ActiveShopper, which provides an open marketplace where consumers can
find, research and purchase products from our merchant network.
With our acquisition of Prio, Inc. in February 2000, we can now integrate
online promotion technologies with an offline merchant's existing credit card
processing infrastructure, bridging the gap between the online and offline
worlds. Our enhanced commerce infrastructure will be designed to target and
deliver online promotions to consumers on their wireless devices or while they
are looking for goods and services on Web sites. To take advantage of the
promotion, the user can purchase the goods online, through a catalog or at a
physical retail store.
Through our recently announced acquisition of Millet Software
(PrivacyBank.com), we believe we will be able to provide a server-based
technology that enables wireless Internet devices to become commerce-enabled
devices by giving mobile users the ability to press one key to make on-the-spot
purchases from virtually any Web site. This is possible through a patent-
pending secure technology that provides an automated process for completing
payment forms, eliminating the need to continually enter in payment or shipping
information, register at sites or enter any specific passwords.
Buyers can also purchase multiple products from multiple merchants, using our
shopping cart that provides the convenience of single-click purchasing.
Currently, over 350,000 merchants use our merchant service offerings.
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Wireless Services
Our wireless services are comprised of an integrated suite of wireless portal
services that provide mobile users with relevant information services, such as
real-time stock quotes and traffic reports, the ability to conduct secure
commerce transactions from a wireless device, including single-click buying,
communication services such as device-independent instant messaging and email,
personalization capabilities and location-based services that enable users to
search for location-based information, such as the restaurant closest to the
mobile user's current location.
As a result of our acquisition of Saraide, we will have relationships with
over 24 wireless carriers worldwide including British Telecom, Cellnet,
Dutchtone, Panafon, J-Phone, Omnitel and Libertel.
Our wireless services are distributed through the following wireless
carriers, device manufacturers and software providers.
Wireless Carriers AT&T Wireless, Airtouch, Sprint, GTE, USWEST
Wireless Software application
developers AvantGo, JP Systems, WolfeTech, Phone.com
Wireless Device Manufacturers Nokia, Ericcson and Neopoint
Pagers Motorola
Web Appliances Intel
Our platform of wireless services includes:
. Form-filling instant buying technology, which allows mobile users to
press a single key to conduct transactions from virtually any Web site.
. Promotions technology, which allows mobile users to find and receive
real-time promotions on wireless devices from retailers and service-based
merchants, such as dry cleaners and restaurants, that can be used online
and offline. To take advantage of the promotion, the user can either
purchase the goods online, go to the retail store or simply utilize the
service. Promotions are seamlessly matched and automatically credited to
the user's credit card statement through secure back-end transaction
processing.
. Location-based directory services, that enable mobile users to search for
information, such as finding an Italian restaurant closest to where they
are when they conduct the search.
. Secure wireless commerce through a collaboration with VeriSign to deliver
a broad range of services aimed at facilitating trusted and secure
commerce applications across the wired and wireless Internet. By
incorporating VeriSign's strengths in Internet authentication, validation
and payment services, we will be able to offer a broad range of secure
services tailored to the wireless market.
Our wireless Internet services are device-independent and provide a platform
which enables our wireless carriers to support HDML and SMTP and a variety of
emerging protocols such as WAP, VXML and PQA's for Palm VII. Our services are
compatible with a variety of gateway technologies including WAP gateways from
Nokia, Phone.com and Ericsson.
Our wireless services are private-labeled for each carrier, preserving the
brand of the carrier and their relationship with their customer and helping to
create a barrier to switch. Revenues are primarily generated from the carrier
and include licensing fees, per subscriber/per month fees in the United States
and per query/per message fees in Europe. In addition, we receive commerce
revenue for the transactions completed on the wireless devices.
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International Expansion
We intend to capitalize on what we perceive to be a significant opportunity
for our services in international markets. We currently maintain offices in the
United States, Canada and India and have a joint venture in the United Kingdom.
Our wholly-owned subsidiary, InfoSpaceCanada.com, was formed in early 1999 and
has affiliate relationships with canada.com, a leading Canadian Web site and
search engine, as well as AOL Canada, MSN Canada and Sprint Canada.
InfoSpace.com India was formed as a result of our December 1999 acquisition
of privately-held Zephyr Software and its wholly owned subsidiary, Zephyr
Software (India) Private Limited.
In 1998, we entered into a joint venture with Thomson Directories Limited 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 license
agreement between Thomson and TDL InfoSpace, Thomson licenses its U.K.
directory information database to TDL InfoSpace. Under the Web site services
agreement between Thomson and TDL InfoSpace, 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.
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.
With our acquisition of Saraide.com, Inc. in March 2000, we intend to expand
our wireless services into Europe, Japan and Canada. We are currently
investigating additional international opportunities, but have no specific
plans to enter any particular market at this time. The expansion into
international markets involves a number of risks. See "Factors Affecting Our
Operating Results, Business Prospects and Market Price of Our Stock--Our
International Expansion Plans Involve Risks" for a description of these risks.
Revenue Sources
We have derived substantially all of our revenues for our consumer, merchant,
and wireless services from national and local advertising, licensing fees,
commerce transaction fees, and guaranteed transaction fees in lieu of revenue
share.
Advertising
National Advertising
Throughout our consumer services, we sell banner advertisements based on
costs per thousand impressions (CPMs) and other CPM-based national advertising.
Our national advertising agreements generally have terms of less than six
months and guarantee a minimum number of impressions. 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 a basic Internet yellow pages listing free of charge for all U.S.
local business listings. Similar to traditional yellow pages industry
practices, we generate revenues by selling enhancements to this
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basic listing. Internet yellow pages advertising agreements provide for terms
of one year with costs to the local advertisers ranging from $50 to $300 or
greater per year, depending on the types of enhancements selected.
Licensing Fees
We receive licensing fees from some of 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 wireless carriers,
device manufacturers, RBOCs, merchant banks and other local media networks, and
include per store/per month fees and per service/per month fees. Licensing
agreements for our consumer and merchant services generally range from one to
three years in duration.
Commerce Fees
We generate commerce fees from links and completed transactions through our
merchant services delivered on wireless devices and the PC. 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 to 25 percent of the purchase amount. These
fees are generally paid to us monthly or quarterly, after the merchant has
collected its 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. These 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 a commerce opportunity in its promotion, we may derive
transaction revenues based on the number 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 "Factors Affecting Our Operating Results, Business Prospects and Market
Price of Our Stock--We Rely on Advertising and Transaction Revenues," "--
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. Our technology includes Web Server Technology, Database Technology,
a Web Scraping Engine, Gateway Technology and database network infrastructure.
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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 HDML and SMTP and a variety of emerging protocols
such as WAP, VXML and PQA's for Palm VII. 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 information infrastructure 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 information infrastructure services.
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:
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.
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.
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.
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.
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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.
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 information services. 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. As
we expand our operations, we expect to locate server facilities at various
strategic geographic locations.
With the acquisitions of Prio and Saraide, we have data centers in Mountain
View, California serving the promotions technology, Dallas, Texas serving
wireless customers in North America, and Papendrecht, Netherlands serving
wireless customers in Europe.
Product Development
We believe that our technology platform is essential 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 $3.2 million for the year ended December 31, 1999, $1.2 million
for the year ended December 31, 1998 and $383,000 for the year ended December
31, 1997.
Rapidly changing technology, evolving industry standards, evolving customer
demands and frequent new product and service introductions characterize our
market. See "Factors Affecting Our Operating Results, Business Prospects and
Market Price of Our Stock--Rapid Technological Change Affects Our Business" for
a discussion of certain risks in this regard.
10
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 also have applied for
registration of certain other service marks and trademarks, including
"InfoSpace.com " "ActiveShopper" and the "InfoSpace" 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. As of March 1, 2000 we have
filed 23 U.S. patent applications relating to various aspects of our technology
for querying and developing databases, for developing and constructing web
pages, for electronic commerce for on-line directory services and for web
scraping. With the acquisition of PrivacyBank, we obtain rights to several
additional pending patent applications. During January 2000, we received
notification of an issued patent for commerce infrastructure services on the
Internet and wireless devices. The patent covers private-label commerce
solutions and tracking the purchase of products, services and information on
the Internet and on wireless devices. We are preparing additional patent
applications on other features of our technology. We have instituted a formal
patent program and anticipate on-going 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.
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 Internet services 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 basis, our
business could suffer. See "Item 3. Legal Proceedings."
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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 information infrastructure services are:
. the ability to provide information 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 information 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
information or services; 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 acquired by Compaq), various
RBOCs' directory services, infoUSA's Lookup USA, City Search's 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 in directory services; Inktomi and Autonomy in
infrastructure services, Excite, Yahoo! and MSN in syndication;
Shopguide, Shopsmart and Yahoo! shopping for merchant services and
various specialized content providers for information services;
. our community and communication services compete with services offered by
Internet portals such as AOL, Yahoo!, and Excite, as well as specialized
content service providers such as Hotmail;
. our merchant services compete with e-tailers such as Amazon.com, portals
such as AOL, Yahoo! and MSN and merchant aggregators such as Big Step and
Microsoft's Bcentral; and
. 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
information infrastructure services that are superior to ours or that achieve
greater market acceptance than ours, our business will suffer.
12
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.
Recent concerns regarding Internet user privacy has led to the introduction
of federal and state legislation to protect Internet user privacy. In addition,
the Federal Trade Commission has initiated investigations and hearings
regarding Internet user privacy which could result in rules or regulations that
could adversely affect our business. As a result, we could become subject to
new laws and regulations that could limit our ability to conduct targeted
advertising, or to distribute or collect user information.
European legislation to protect Internet user privacy has not heretofore
greatly impacted us. European countries may seek to more strictly enforce such
legislation, which may prevent us from offering some or all of our services in
some European countries.
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 "Factors
Affecting Our Operating Results, Business Prospects and Market Price of Our
Stock--We May Become Subject to Government Regulation."
Employees
As of February 29, 2000, we had 330 employees. As of March 15, 2000, with the
acquisition of Saraide.com, we had over 450 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 for software development and other technical staff and for
personnel with experience in wireless services. We believe that our future
success will depend in part on our continued ability to attract, hire and
retain qualified personnel. See "Factors Affecting Our Operating Results,
Business Prospects and Market Price of Our Stock--We Need to Manage Our Growth
and Maintain Procedures and Controls" and "--We Depend on Key Personnel" and
"--We Need to Hire Additional Personnel."
13
Executive Officers
The following table sets forth certain information as of February 29, 2000
with respect to our executive officers:
Name Age Position
---- --- --------
Naveen Jain......................... 40 Chief Executive Officer and Chairman
of the Board
Ashok Narasimhan.................... 51 President, Merchant Services
Arif Janjua......................... 44 President, Consumer Services
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
Randy Massengale.................... 42 Senior Vice President, Human
Resources
Naveen Jain founded InfoSpace 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 a M.B.A. from St.
Xavier's School of Management.
Ashok Narasimhan joined InfoSpace in February 2000 as President of Merchant
Services. He founded Prio, Inc. in March 1996 and served as Chairman and Chief
Executive Officer. InfoSpace acquired Prio in February 2000. During the seven
years prior to forming Prio, he was part of the core management team of
VeriFone, where he served as Vice President of Product Development. Prior to
VeriFone, he was the founding Chief Executive Officer of the computer
businesses of Wipro, the largest computer, software and information technology
company in India. He holds B.S. and a M.B.A. from Indian Institute of
Management, associated with the Sloan School of Management at MIT.
Arif Janjua joined InfoSpace.com, Inc. in December 1999 as President of
Consumer Services. From February 1999 to November 1999, he was General Manager
of North American operations at Saraide. Prior to Saraide, from 1995 to 1999,
he was a Vice President at A.T. Kearney, a global management consulting firm,
where he led the firm's high technology practice. Prior to that, Mr. Janjua was
Director of Business Operations at a leading graphics semiconductor firm, S3,
where he had marketing responsibility for all desktop products. From 1991 to
1994, Mr. Janjua was a senior manager with Gemini Consulting, specializing in
the communications and computer industry. From 1985 to 1989, Mr. Janjua was
Director of Marketing at the Imaging and Graphics Division of Gould
Electronics. From 1981 to 1985, Mr. Janjua was Product Marketing Manager at
International Imaging Systems. He holds a B.S and M.S. in Electrical
Engineering from University of Windsor, Canada and an M.B.A. from University of
California, Berkeley.
Ellen B. Alben joined InfoSpace 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
14
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 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.
Randy Massengale joined InfoSpace 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 B.A. degree from Lewis and Clark
College and a M. S. in Management from Antioch University.
15
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, content providers and distribution partners
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. Forward-looking statements are subject to known and
unknown risks, uncertainties and other factors that may cause our and the
strategic Internet services industry's actual results, levels of activity,
performance, achievements and prospects to be materially different from those
expressed or implied by such forward-looking statements. The risks set forth
below and elsewhere in this 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 December 31, 1999. At December 31, 1999, we had an accumulated
deficit of approximately $35.7 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.
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 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;
16
. the cost of acquiring and the availability of content, technology and
services;
. 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.com 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. We plan to
significantly increase our sales and marketing, research and development and
general and administrative expenses in 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.
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;
17
. 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 330 at February 29, 2000. As of March 15, 2000, with
the acquisition of Saraide, we have over 450 employees. We now have offices in
Redmond, Washington, San Francisco and Mountain View, California, New York City
and Rochester, New York, and Toronto, Canada, With the acquisition of Saraide,
we have added offices in San Mateo, California, Dallas, Texas, Ottawa, Canada,
Papendrecht, Netherlands, and London, UK. 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. 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. 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."
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.
18
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. See "--We Are Subject
to Pending Legal Proceedings," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business--Employees" and "--
Our Executive Officers."
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 for the first half 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;
. 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.
We Rely on Our Relationships with Affiliates.
We will be able to continue generating revenues from advertising, transaction
fees and promotions only if we can secure and maintain distribution for our
information infrastructure services on acceptable commercial terms through a
wide range of affiliates. 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.
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. 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.
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.
19
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 based their
advertising rates on the number of click throughs from our information 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 foreseeable future.
Our top ten customers represented 57% of our revenues in 1999 and 48% of our
revenues for 1998. In particular, 800-U.S. Search, Inc. accounted for
approximately 21% of our revenues for the years ended December 31, 1999 and
1998. 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 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;
20
. 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, a periodic 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, particularly within our merchant services and wireless
services business areas. 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 "--Executive Officers."
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. Our services and the industries to which we
provide our services are relatively new, particularly with respect to our
wireless and merchant services. As a result, qualified technical personnel with
relevant experience to our business are scarce and therefore difficult to
recruit. 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.
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 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.
We expect to launch InfoSpace.com India in 2000 to provide comprehensive
localized consumer, merchant and wireless services to the Indian market. In
addition, with our acquisition of Saraide, we expect to expand our wireless
services into Europe, Japan and Canada.
21
To date, we have limited experience in developing and syndicating localized
versions of our information infrastructure services 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 information infrastructure services are:
. the ability to provide information 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 information and service demands of a
particular Web site or wireless devices;
. the cost-effectiveness and reliability of the consumer, merchant and
wireless information services;
. 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
information or services; 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, City Search
Sidewalk and Yahoo! Yellow Pages and White Pages;
22
. 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 in directory services; Inktomi and Autonomy in
infrastructure services, Excite, Yahoo! and MSN in syndication;
Shopguide, Shopsmart and Yahoo! shopping for merchant services and
various specialized content providers for information services;
. 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;
. our merchant services compete with e-tailers such as Amazon.com, portals
such as AOL, Yahoo! and MSN, and merchant aggregators such as Big Step
and Microsoft's Bcentral; 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
Internet information infrastructure services 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
currently located at our main headquarters in Redmond, Washington.
With the acquisitions of Prio and Saraide, we will have data centers in
Mountain View, California serving the promotions technology, Dallas, Texas
serving wireless customers in North America, and Papendrecht, Netherlands
serving wireless customers in Europe. None of our data centers are currently
redundant. Our success on a global basis will depend in part on our ability to
create carrier class infrastructure systems and build network operations
centers worldwide that can support the delivery of integrated consumer,
merchant and wireless services and the expected growth of these services. We
may be unable to develop or successfully manage the infrastructure necessary to
meet current demands for reliability and scalability of our systems.
The Company has entered into Service Level Agreements with certain merchant
services distributors including merchant banks and most of our wireless
customers. These agreements call for system up times, 24/7 support and include
penalties for non-performance. We may be unable to fulfill these commitments,
which would subject us to penalties under our agreements, harm our reputation
and could result in the loss of customers and distributors, which would harm
our business.
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 all the 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
23
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 and has agreed to acquire Time-Warner, 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 licensing us content;
. 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.
On February 8, 2000, we reached a settlement with an alleged former employee.
Under the terms of the settlement, the alleged employee received a cash payment
of $10.5 million.
On December 15, 1999, a complaint was filed against us by a former employee
alleging claims for breach of contract, fraud, negligent misrepresentation, and
promissory estoppel. The former employee contends he agreed to work for us on
the basis of certain misrepresentation, that he entered into an agreement with
the Company that entitles him to an option to purchase 150,000 shares of the
Company's common stock, and that he was terminated without cause. The former
employee is seeking the right to purchase the shares of stock, unspecified
compensatory and punitive damages, and litigation costs and attorney's fees.
On December 23, 1998, we 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 See "Item
3. Legal Proceedings."
24
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 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.
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 develop and introduce compelling services on a timely and competitive basis
and 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 enabling technologies and Internet information infrastructure services.
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. We carry general business insurance, however, this
coverage may be inadequate.
25
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.
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".
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 member profiles and 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 "Item 3. Legal
Proceedings."
26
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."
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 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.
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.
As of February 29, 2000, our officers, directors and affiliated persons
beneficially owned approximately 38% of our common stock. Naveen Jain, our
Chief Executive Officer, currently beneficially owns approximately 29% 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, which in turn could reduce our stock price or prevent our
stockholders from realizing a premium over our stock price.
27
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 $277.00. 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.
You Should Not Rely on Forward-looking Statements.
You should not rely on forward-looking statements in this report. This report
contains forward-looking statements that involve risks and uncertainties. We
use words such as "anticipates," "believes," "plans," "expects," "future,"
"intends," "may," "will," "should," "estimates," "predicts," "potential,"
"continue," and similar expressions to identify such forward-looking
statements. Forward-looking statements are subject to known and unknown risks,
uncertainties and other factors that may cause our results and the Internet
information infrastructure services industry results, levels of activity,
performance, achievements and prospects to be materially different from those
expressed or implied by such forward-looking statements. These risks,
uncertainties and other factors include, among others, those identified under
"Factors Affecting Our Operating Results, Business Prospects and Market Price
of Stock" and elsewhere in this report.
Item 2. Properties
Prior to the acquisitions of Saraide and Prio, 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 through August 2001 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 will be relocating to significantly
larger facilities in the second quarter of 2000 under a lease for a new
principal administrative, engineering, marketing and sales facility located in
Bellevue, Washington totaling approximately
28
108,000 square feet. Under the five-year lease which is projected to commence
in May 2000, we will pay a monthly base rent of $199,783 per month during the
first two years, $208,864 per month during the second two years and $217,864
per month during the final year. 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.
With the acquisitions of Saraide and Prio, we now have facilities in Mountain
View, California, San Mateo, California, Dallas, Texas, Ottawa, Canada,
Papendrecht, Netherlands and London, UK.
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 "Factors Affecting Our Operating
Results, Business Prospects and Market Price of Our Stock--Our Business Relies
on the Performance of Our Systems."
Item 3. 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 December 15, 1999, a complaint was filed against us on behalf of a former
employee in federal court in New Jersey alleging claims for breach of contract,
breach of the covenant of good faith and fair dealing, fraud, negligent
misrepresentation, and promissory estoppel. The former employee contends he
agreed to work for InfoSpace on the basis of certain misrepresentations, that
he entered into an agreement with us that entitles him to an option to purchase
150,000 shares of our common stock, and that he was terminated without cause.
The former employee seeks (1) the right to purchase 150,000 shares of our
common stock, (2) unspecified compensatory and punitive damages, and (3)
litigation costs and attorney's fees. On January 31, 2000, we answered the
complaint, denying the claims. Discovery is ongoing, and trial is set for
September 2000. 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 this suit.
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
56,924 shares of our common stock. We settled this lawsuit in September 1999.
Under the settlement, the former consultant was permitted to purchase 33,012
shares of our common stock at a price of $.05 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.
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
29
(a) account stated, (b) breach of contract, and (c) fraud. 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. 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. Trial is set for April 2000, but the parties are
finalizing an agreement to dispose of the case through a streamlined mini-trial
before a federal magistrate.
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 4,000,000
shares of our common stock or 10% of our equity. We settled this lawsuit in
February 2000. Under the settlement, we made a cash payment of $10.5 million.
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.
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.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
30
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Market for Our Common Stock
Our common stock has traded on the Nasdaq National Market under the symbol
"INSP" since December 15, 1998, the date of the initial public offering. Prior
to that time, there was no public market for our common stock. The following
table sets forth the range of high and lows sales prices for the Company's
Common Stock for the periods indicated:
High Low
-------- --------
For the quarter ended:
December 31, 1999.......................................... $ 108.50 $ 19.375
September 30, 1999......................................... $ 29.469 $18.4375
June 30, 1999.............................................. $36.3125 $ 17.625
March 31, 1999............................................. $24.8125 $ 7.125
December 31, 1998 (from December 15, 1998)................. $ 13.00 $ 3.75
The Company has never declared, nor has it paid, any cash dividends on its
Common Stock. The Company currently intends to retain its earnings to finance
future growth and, therefore, does not anticipate paying any cash dividends on
its Common Stock in the foreseeable future.
As of March 15, 2000, the approximate number of stockholders of record of
Common Stock was 397. See "Factors Affecting Our Operating Results, Business
Prospects and Market Price of Stock--Our Stock Price Has Been and May Continue
to be Volatile."
Recent Sales of Unregistered Securities
Since October 1, 1999 we issued and sold unregistered securities as follows:
(a) In connection with our acquisition of INEX Corporation, on October
14, 1999, we issued 185,226 shares of our common stock to some of the
former shareholders of INEX in exchange for their shares of capital stock
in INEX. InfoSpace.com Canada Holdings Inc., our wholly owned indirect
subsidiary, issued 540,001 Exchangeable Shares to some of the former
shareholders of INEX in exchange for their shares of capital stock of INEX.
The Exchangeable Shares are exchangeable on a one-to-one basis into shares
of our common stock. The shares of our common stock and the Exchangeable
Shares were issued pursuant to exemptions from registration under the
Securities Act of 1933, as amended (the "Securities Act") under Section
3(a)(10) of the Securities Act.
(b) In connection with our acquisition of Union-Street.com, Inc., on
October 14, 1999, we issued 873,294 shares of our common stock to the
former shareholders of Union-Street.com, Inc. in exchange for all of the
outstanding capital stock of Union-Street.com. We issued these shares
pursuant to an exemption from registration pursuant to Section 4(2) of the
Securities Act.
(c) In connection with our acquisition of eComLive, Inc., on December 16,
1999, we issued 711,248 shares of our common stock to the former
stockholders of eComLive in exchange for all outstanding shares and options
to purchase shares of eComLive, Inc. We issued these shares pursuant to an
exemption from registration under Section 4(2) of the Securities Act.
(d) In connection with our acquisition of Zephyr Software Inc., on
December 29, 1999, we issued 333,912 shares of our common stock to the
former stockholders of Zephyr Software in exchange for all of the
outstanding shares of capital stock of Zephyr Software. We issued these
shares pursuant to an exemption from registration under Section 4(2) of the
Securities Act.
31
No underwriters were used in connection with these sales and issuances.
Report of Offering of Securities and Use of Proceeds Therefrom
In December 1998, we completed a firm commitment underwritten initial public
offering of, 23,000,000 shares (the "Shares") of our Common Stock, including
3,000,000 shares related to the underwriter's over-allotment option, at a price
of $3.75 per share (as adjusted for two-for-one stock splits effected by the
Company in May 1999 and January 2000). The Shares were registered with the
Securities and Exchange Commission pursuant to a Registration Statement on Form
S-1 (No. 333- 62323), which was declared effective on December 15, 1998. After
deducting underwriting discounts and commissions and offering expenses, we
received net proceeds of approximately $77,800,000.
Pending their use, we have invested the net proceeds from our initial public
offering in short- and long-term investments in order to meet anticipated cash
needs for future working capital. We invested our available cash principally in
high-quality corporate issuers and in debt instruments of the U.S. Government
and its agencies. We have used the net proceeds of our initial public offering
for general corporate purposes, including for working capital, and to a lesser
extent, to acquire assets from Active Voice Corporation, to invest in a variety
of private and early stage public Internet companies and to make settlement
payments in connection with litigation.
32
Item 6. Selected Consolidated Financial 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 report.
Year Ended December 31,
-----------------------------------
1999 1998 1997 1996
-------- -------- ------- ------
(in thousands, except
per share data)
Consolidated Statements of Operations
Data:
Revenues................................ $ 36,907 $ 9,623 $ 1,743 $ 199
Cost of revenues........................ 5,259 1,635 419 96
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Gross profit............................ 31,648 7,988 1,324 103
Operating expenses:
Product development................... 3,189 1,245 383 149
Sales and marketing................... 23,695 6,286 1,477 257
General and administrative............ 9,688 4,575 944 234
Amortization of intangibles........... 3,223 710 64 --
Acquisition and related charges ...... 13,250 2,800 -- --
Other--non-recurring charges ......... 11,359 4,500 137 --
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Total operating expenses............ 64,404 20,116 3,005 640
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Loss from operations.................... (32,756) (12,128) (1,681) (537)
Other income, net....................... 11,074 434 20 21
Equity in loss from joint venture....... (12) (125) -- --
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Net loss ............................... $(21,694) $(11,819) $(1,661) 516
======== ======== ======= ======
Basic and diluted net loss per share.... $ (0.23) $ (0.22) $ (0.04) $(0.01)
======== ======== ======= ======
Shares used in computing basic net loss
per share.............................. 93,566 54,847 44,114 37,530
======== ======== ======= ======
Shares used in computing diluted net
loss per share......................... 93,566 54,847 44,341 37,530
======== ======== ======= ======
December 31,
-------------------------------
1999 1998 1997 1996
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(in thousands)