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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, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File No. 0-25131
INFOSPACE, INC.
(Exact name of Registrant as specified in its charter)
Delaware 91-1718107
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
601 108th Avenue NE, Suite 1200, Bellevue, Washington 98004
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code:
(425) 201-6100
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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 28,
2001, as reported by Nasdaq, was approximately $811.3 million. 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 March 31, 2001, 320,011,092 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 21, 2001 (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..................................................... 29
Item 3. Legal Proceedings.............................................. 30
Item 4. Submission of Matters to a Vote of Security Holders............ 31
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 32
Item 6. Selected 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..... 47
Item 8. Financial Statements and Supplementary Data.................... 49
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 92
PART III
Item 10. Executive Officers and Directors of the Registrant............. 92
Item 11. Executive Compensation......................................... 92
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................... 92
Item 13. Certain Relationships and Related Transactions................. 92
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-
K.............................................................. 92
Signatures............................................................... 95
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ITEM 1. Business
This report contains forward-looking statements that involve risks and
uncertainties. The statements contained in this report that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. 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, levels of activity, performance, achievements and prospects,
and those of the Internet information infrastructure services industry, 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.
Overview
InfoSpace, Inc. is an international provider of commerce and consumer
infrastructure services to merchants and on wireless, wireline and broadband
platforms. We provide our services across multiple platforms simultaneously,
including PCs and non-PC devices, such as screen telephones, television set-top
boxes and online kiosks, which use ground wire Internet connections (wireline
devices) and wireless devices such as cell phones, pagers and personal digital
assistants. We are also preparing to enter the market for infrastructure
services which take greater advantage of high-speed (known as broadband)
wireline and wireless Internet connections, such as interactive gaming,
television and other entertainment services. Our customers include AT&T
Wireless, Cingular Wireless, Intel, Virgin Mobile, Verizon Wireless, Hasbro,
National Discount Brokers and Bloomberg, among others. Our affiliate network is
comprised of more than 3,200 Web sites, including America Online, Microsoft's
MSN, NBCi, Lycos and ABC's LocalNet.
The following chart provides an illustration of our business model. Our
integrated technology platform serves as the basis for all of our consumer and
commerce products and services and enables us to offer our infrastructure
services across multiple platforms simultaneously. More information on our
infrastructure services and distribution channels is provided below.
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DISTRIBUTION CHANNELS
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INFRASTRUCTURE Wireline Wireless Merchant Broadband
SERVICES
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Consumer Products and Web portals Wireless RBOCs Cable companies
Services carriers
Destination Merchant banks DSL providers
Commerce Products and sites Wireless
Services device and Merchant Wireless (2.5G
equipment aggregators and 3G)
manufacturers
Local media Satellite
networks television
Interactive
television
(iTV)
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InfoSpace Integrated Technology Platform
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Our Infrastructure Services
We have developed a scalable, flexible technology platform that enables us
to deliver a broad, integrated suite of consumer and commerce services to Web
sites, merchants and wireless carriers. All of our services utilize the same
core technology platform within the same operational infrastructure.
We design our infrastructure services to be highly flexible and
customizable, enabling our affiliates to select from among our broad range of
consumer and commerce products and services. We believe that 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 wireline affiliates and distribution
partners, including wireless carriers and merchant aggregators, build and
maintain their brands by delivering our consumer and commerce products and
services with the look and feel and navigation features specific to their
delivery platform and format, including on the growing number of emerging
wireless devices.
InfoSpace supports SMS, WAP, cHTML, VXML (speech) and a variety of other
protocols that may be proprietary to different wireless and wireline devices,
enabling the end user to access the same services, including services
personalized to the end user, across a variety of devices.
Consumer Products and Services
We provide information of broad appeal to users of wireless devices and PCs
and other wireline Internet devices, including maps, directories, financial
data, traffic reports, sports, news and entertainment. Our consumer products
and services are designed for the end user and are distributed through wireless
devices and Web sites. These products and services include:
. personal information management (PIM), including address book, calendar
and to-do lists;
. communications such as e-mail and instant messaging;
. information of broad appeal including directories, sports, news and
entertainment, financial data and traffic reports;
. search and reference products including metasearch services, which
simultaneously query a variety of search engines and directory services;
. entertainment services such as multi-player gaming; and
. a shopping product that includes comparison shopping and an e-wallet.
Our flexible technology platform enables end users to personalize many of
these products and services to meet their individual needs and preferences. In
addition, we are developing new services and applications based on speech
recognition technology we gained through our acquisition of Locus Dialogue.
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 numerous 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
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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.
We also offer unified communication services including device-independent e-
mail and instant messaging. We integrate these services into the community-
building services we offer, making it easy for users to send
e-mail and instant messages directly from their address book from any device
and also view personalized address lists on any device.
In October 2000, we acquired several branded Web properties through our
acquisition of Go2Net. These properties include:
. MetaCrawler (www.metacrawler.com) and Dogpile (www.dogpile.com),
providers of metasearch services, which simultaneously query a variety
of search engines and directories services and combine the search
results;
. Silicon Investor (www.siliconinvestor.com), a financial news and
discussion message board;
. 100Hot (www.100Hot.com), a directory of popular Web sites; and
. PlaySite (www.playsite.com), a Java-based multi-player games site.
We intend to continue distributing content provided by these sites through
our affiliate network, and licensing the search, message board and game
technology to our affiliates and customers.
Commerce Products and Services
We target our commerce products and services to local and national
merchants, including service-based merchants. Our commerce services enable
merchants to create, promote, sell and distribute their products and services
across multiple channels through our broad distribution network. We have
reseller agreements with RBOCs, merchant banks and other local media networks,
such as newspapers, who provide our services to local merchants worldwide.
Based on our platform of technology, we can deliver a broad array of
commerce products and services that include:
. the online delivery of promotions to wireless devices and PCs for online
and offline use;
. the ability to purchase products and services from a Web site directly
from a wireless device;
. shopping that includes e-wallet and price comparison features in
addition to finding products using UPC or other product codes;
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. yellow page listings and enhanced listings; and
. our Authorize.Net payment authorization service for businesses.
According to the Kelsey Group, $3.6 trillion of transactions were processed
through approximately 10 million merchants in the United States in 1999. By
offering merchants the tools needed to promote their products and services, as
well as the distribution channels to drive customer transactions, our network
enables merchants to leverage the power of the Internet to drive "real world'
transactions.
Through our acquisition of Millet Software, 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 purchasing.
Our Distribution Channels
We have built our 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 commerce products and services to
their network of thousands of Web sites; reseller agreements with all five
RBOCs; merchant banks such as American Express and Bank of America; and other
local media networks who provide our services to local merchants.
We currently focus on distributing our consumer and commerce products and
services to our four business areas: wireline, wireless, merchant and
broadband. We report revenues generated by each of these business areas.
Wireline
Through our wireline business unit, we distribute our consumer products and
services such as PIM, instant messaging and search to our affiliates, which
include Web sites (portals) and businesses. Our affiliate network consists of
more than 3,200 Web sites that include America Online, Microsoft's MSN, NBCi,
Lycos, and ABC's LocalNet, among others.
Wireless
Our wireless services include data and transaction services that users can
access from varying locations, on a variety of devices, over different
protocols or standards. Our wireless services platform serves as the underlying
infrastructure for wireless carriers and device and equipment manufacturers to
offer their customers the ability to conduct commerce, access information,
communicate and otherwise manage their lives.
Our consumer and commerce products and services are distributed to wireless
carriers, device manufacturers and software providers. We currently have
relationships with more than 20 domestic and international wireless carriers,
including Verizon Wireless, AT&T Wireless, Cingular Wireless, VoiceStream,
Austria One, ALLTEL, Virgin Mobile and Powertel, and equipment and device
manufacturers such as Nokia, Lucent and Ericsson. We also have a strategic
alliance with Nortel Networks to jointly offer our services and platform
together with Nortel Network's network infrastructure products to carriers
worldwide and to collaborate on the development of new 3G wireless Internet
technology services.
We support SMS, WAP, cHTML, VXML (speech) and a variety of other protocols
that may be proprietary to different devices, enabling our end users to access
the same personalization and services across a variety of devices. Our wireless
Internet services provide a platform which enables carriers to support a
variety of protocols such as WAP, PQAs for Palm VII and VXML, in addition to
HDML, SMTP and SMS. Our services
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are compatible with a variety of wireless gateway technologies including Nokia,
OpenWave, CMG and Ericsson.
Our wireless consumer and commerce products and services are private-labeled
for each carrier, preserving the brand of the carrier and their relationship
with their customer.
Merchant
Our commerce services enable merchants to create, promote, sell and
distribute their products and services across multiple channels through our
distribution network to the end users of our services. We have reseller
agreements with RBOCs, merchant banks and major merchant aggregators such as
Bank of America and American Express, and local media networks such as
newspapers and television and radio stations.
Broadband
We plan to deliver integrated, cross-platform broadband (DSL, 2.5/3G, cable
modem, iTV, satellite) services to customers worldwide. These services will
include a comprehensive infrastructure services suite for businesses, and
interactive TV services which combine broadcast programming with interactive
applications for media companies and service providers.
International Operations
We currently maintain offices in the United States, Canada, the Netherlands,
the United Kingdom, Australia and Brazil. 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.
In 1998, we entered into a joint venture with TDLI.com Limited, a subsidiary
of Thomson Directories Limited to form TDL InfoSpace to replicate our
infrastructure services in Europe. TDL InfoSpace 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 our
license agreement with TDL InfoSpace, we license our technology and provide
hosting services to TDL InfoSpace. On August 31, 2000, we acquired all of the
issued and outstanding capital stock of TDLI.com Limited. This acquisition gave
us 100% control of TDL InfoSpace.
We have also entered into an agreement to expand our services into China and
are currently investigating additional international opportunities. The
expansion into international markets involves a number of risks. See "Factors
Affecting Our Operating Results, Business Prospects and Market Price of Stock--
Our expansion into international markets may not be successful and may expose
us to risks that could harm our business" for a description of these risks.
Revenue Sources
We have derived substantially all of our revenues from our consumer and
commerce products and services. We generate revenues from commerce transaction
fees, licensing fees, advertising, subscriber fees, and development and
integration fees.
Commerce Transaction Fees
Transaction fees are generated as a percentage of the completed transaction
from our shopping, on-line promotions and payment authorization services.
Transaction fees are recognized in the period the transaction occurred.
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Licensing Fees
We have agreements with some affiliates, merchant aggregators and wireless
carriers and device manufacturers under which they agree to pay us guaranteed
minimum 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. These agreements
generally range from one to three years in duration. License fee revenue is
recognized ratably over the term of the contract.
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.
Advertising
Throughout our consumer services, we sell banner, button and text-link
advertisements based on costs per thousand impressions, or CPMs, and other CPM-
based advertising. Our 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. Revenues from contracts based on the
number of impressions displayed or click throughs provided are recognized as
services are rendered.
Subscriber Fees
We receive subscriber fees from some of our consumer and commerce services.
Subscription fees from commerce 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. Merchant agreements generate subscriber fees from
local and national merchants on a per-service, per-month basis. Wireless
contracts generate revenue from subscriber and per-query fees that are charged
to the wireless carriers. Subscription fee agreements for our consumer and
commerce services generally range from one to three years in duration.
Development and Integration Fees
We receive a lump sum payment, often in advance, to integrate our products
and services with our affiliates Web site(s) or onto a wireless carrier's
service. Development and integration fees are recognized ratably over the term
of the agreement.
We generate a significant amount of our revenues from our wireline 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 Stock--We must diversify our revenues to be less reliant
upon our wireline services."
Technology and Infrastructure
One of our principal strengths is our internally developed technology, which
we have designed specifically for our consumer and commerce products and
services. Our technology architecture features specially adapted capabilities
to enhance performance, reliability and scalability, consisting of multiple
software modules that support the core functions of our operations. Our
technology consists of three tiers: Tier I--Presentation and Authentication,
Tier II--Platforms and Applications and Tier III--Core Technology. Below is a
brief description of the functionality and purpose of each tier starting with
the core technology.
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Core Technology
Web Server Technology
We designed our Web Server Technology to enable rapid development and
deployment of information over multiple platforms and formats. It incorporates
an automated publishing engine that dynamically builds a page to conform to the
look and feel and navigation features of each affiliate. Our wireless Internet
services are device-independent and provide a platform which enables our
wireless carriers to support HDML and SMTP and a variety of emerging protocols
such as WAP, VXML and PQAs 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 applications that reside remotely with third-party
providers.
Database Technology
We have developed 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. 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 applications
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 commerce 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.
Platforms and Applications
Our platforms and applications reside on the core technology and support the
core functions of our operations.
The platforms include:
. alerts services,
. voice portal,
. games platform,
. location/geo-centric platform,
. short message service (SMS) platform, and
. content management.
Our applications consist of our consumer and commerce products and services
including shopping, promotions, payment authorization, games and entertainment,
instant messaging and e-mail, personal information management (PIM) and search.
Presentation and Authentication
Authentication
Requests for our consumer and commerce products and services are generated
from wireless, non-PC and PC devices. These requests enter our system through
our user management and authentications technology engine. The request is
routed by the technology, which determines which services are available to the
user based on the user's profile.
Presentation
The presentation technology allows the content to be displayed on different
devices each with their own protocols and formats (displays) without making
changes to the underlying application. With our presentation technology, we
have a device-, protocol-, and transport-independent platform. We support SMS,
WAP, cHTML, VXML (speech) and a variety of other protocols that may be
proprietary to different devices, enabling our end users to access the same
personalization and services across a variety of devices. Our wireless Internet
services provide a platform which enables carriers to support a variety of
protocols such as WAP, PQAs for Palm VII and VXML, in addition to HDML, SMTP
and SMS.
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 $40.6 million for the year ended December 31, 2000, $15.6 million
for the year ended December 31, 1999 and $9.0 million for the year ended
December 31, 1998.
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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. Most 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 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," the InfoSpace logo, "Go2Net," "Authorize.Net," the Dogpile
logo, "ActiveShopper," "Haggle Online," "HyperMart," "MetaCrawler," "MetaSpy,"
"MyAgent," "Silicon Investor," "FraudScreen.Net," the Get Rewarded logo,
"RubberChicken.com" and "WebMarket" are registered trademarks of ours. In
addition, we have applied for federal registration of other marks, including
"ActivePromotion," "Dogpile," "IntelliShopper" and "Playsite." We also have
applied for registration of certain service marks and trademarks in the United
States and in other countries, and will seek to register additional marks, as
appropriate. We may not be successful in obtaining the service marks and
trademarks for which we have applied.
We have been issued one U.S. patent and have filed 45 U.S. patent
applications relating to various aspects of our technology, including
technology we have developed for querying and developing databases, for
developing and constructing web pages, electronic commerce on-line directory
services and web scraping. We have received notices of allowance for three of
these patent applications. Our issued 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. 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."
MetaCrawler License Agreement. On January 31, 1997, Go2Net and Netbot
entered into the MetaCrawler License Agreement pursuant to which Netbot granted
Go2Net an exclusive, subject to certain limited exceptions, worldwide license
to provide the MetaCrawler Service. We acquired Go2Net in October
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2000. Netbot was acquired by Excite, Inc. in November 1997 and Excite was
acquired by @Home Corporation in May 1999. As part of the MetaCrawler License
Agreement, we have the exclusive right to operate, modify and reproduce the
MetaCrawler Service including, without limitation, the exclusive right to use,
modify and reproduce the name "MetaCrawler" and the MetaCrawler URL in
connection with the operation of the MetaCrawler Service. Netbot licensed the
MetaCrawler Service and the other intellectual property rights associated
therewith from the University of Washington on an exclusive basis. The search
technology underlying the MetaCrawler Service and the MetaCrawler trademark is
licensed to or owned by Netbot and sublicensed to us pursuant to the
MetaCrawler License Agreement. Although the MetaCrawler License Agreement may
be terminated by Netbot only upon a material default by us, the termination of
the MetaCrawler License Agreement would end our MetaCrawler Service.
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 meet the specific information and service demands of a
particular Web site or wireless device;
. the cost-effectiveness and reliability of the consumer and commerce
products and services;
. the ability to provide consumer and commerce products and services that
are innovative and attractive to consumers, subscribers and other end
users; and
. the ability to develop innovative products and services that enhance the
appearance and utility of the Web site, device or platform.
Although we believe that no one competitor offers all of the products and
services we do, our primary offerings face competition from various sources. We
compete, directly or indirectly, in the following ways, among others:
. our consumer and commerce 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 and Yahoo! Yellow Pages and White Pages;
. other consumer information services we provide, such as classifieds,
horoscopes and real-time stock quotes, compete with specialized content
providers;
. our commerce services compete with online payment processing services
such as Verisign's Signio and CyberCash, portals such as AOL, Yahoo! and
MSN, merchant aggregators such as Big Step and Microsoft's Bcentral, and
infrastructure providers such as Inktomi;
. our wireless services compete with in-house information technology
departments of wireless carriers and device manufacturers, and some of
our services compete with those provided by TellMe, Qpass and others;
and
. in international markets, we compete with local companies which may have
a competitive advantage due to their greater understanding of and focus
on a particular local market.
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@Home, Lycos and NBCi. Some of these companies
are currently customers of ours, the loss of which could harm our business.
Many of our current customers have established relationships with some 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.
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Governmental Regulation
Because of the increasing use of the Internet, U.S. and foreign governments
have adopted or may in the future 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 U.S. federal and state legislation to protect Internet user privacy.
Existing laws regarding user privacy that we may be subject to include the
Children's Online Privacy Protection Act, which regulates the online collection
of personal information from children under 13, and the Gramm-Leach-Bliley Act,
which regulates the collection and processing of personal financial
information. 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 greatly
impacted us so far. In October 1998, the European Union adopted a directive
that may limit our collection and use of information regarding Internet users
in Europe. European countries may pass new laws in accordance with the
directive, or may seek to more strictly enforce existing 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 Children's Online Protection
Act, which restricts the distribution of certain materials deemed harmful to
children. 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. See "Risk Factors--
Governmental regulation and the application of existing laws to the Internet
may slow the Internet's growth, increase our costs of doing business and create
potential liability for the dissemination of information over the Internet."
Employees
As of February 28, 2001, we had 1,033 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. We recently announced a realignment of resources to
concentrate on development of our wireless, merchant and broadband services.
This realignment included a reduction in our workforce of approximately 250
employees. This, or other future operational decisions, could create an
unstable work environment and have a negative effect on our ability to retain
and motivate employees.
13
Executive Officers
The following table sets forth certain information as of February 28, 2001
with respect to our executive officers:
Name Age Position
---- --- --------
Naveen Jain................. 41 Chairman and Chief Executive Officer
Edmund O. Belsheim, Jr. .... 48 Chief Operating Officer and Director
Tammy D. Halstead........... 37 Chief Financial Officer
Executive Vice President and Chief Technology
Rasipuram ("Russ") V. Arun.. 43 Officer
Prakash Kondepudi........... 37 Executive Vice President, Merchant
Michael J. Riccio, Jr. ..... 39 Executive Vice President, Broadband
Charles Stubbs.............. 28 Executive Vice President, Wireline
Edward Petersen............. 29 Senior Vice President, Wireless
Kumail S. Tyebjee........... 41 Senior Vice President, Wireless
Naveen Jain founded InfoSpace in March 1996. Mr. Jain served as our Chief
Executive Officer from our inception in March 1996 to April 2000 and was
reappointed as our Chief Executive Officer in January 2001. He also served as
our President from inception to November 1998 and as our sole director from our
inception to June 1998, when he was appointed Chairman of the Board. 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. 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.
Edmund O. Belsheim, Jr. joined us in November 2000 as Senior Vice President
and General Counsel, and was appointed Chief Operating Officer in January 2001.
From April 1999 to November 2000, he was a partner at Perkins Coie LLP, a
Seattle-based law firm. From 1996 to 1998, Mr. Belsheim served as Vice
President, Corporate Development, General Counsel and Secretary of Penford
Corporation, a maker of specialty starches. He also served as Senior Vice
President, Corporate Development, General Counsel and Secretary of Penwest
Pharmaceuticals Co., an oral drug delivery technology and products company.
Prior to joining Penford Corporation, Mr. Belsheim was a member of the law firm
Bogle & Gates, P.L.L.C. Mr. Belsheim holds an A.B. from Carlton College, an
M.A. from the University of Chicago, and a J.D. from the University of Oregon.
Tammy D. Halstead was appointed our Chief Financial Officer in January 2001.
Ms. Halstead had resigned her previous positions with us in November 2000. She
initially joined us as Corporate Controller in July 1998, was appointed Vice
President and Chief Accounting Officer in December 1998 and became a Senior
Vice President in June 2000. In addition, from November 1999 to June 2000 she
served as our 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 served as 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.B.A. from Idaho State University and is a licensed CPA.
Rasipuram ("Russ") V. Arun joined us in May 2000 as Chief Technology Officer
and was named Executive Vice President in October 2000. From 1992 to May 2000,
he worked for Microsoft in various capacities including Product Unit Manager,
responsible for development and strategy of products for handheld devices,
Win95 Base Program Manager, Windows 98 Team Group Manager and Java Group
Performance
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Manager. Prior to joining Microsoft, Mr. Arun had ten years of experience
working for SunSoft, Inc., Multisolutions, Inc. and Zenith Data Systems. Mr.
Arun holds a B.S. from the Indian Institute of Technology, an M.S. from
Syracuse University and an M.B.A. from the University of California at Los
Angeles.
Prakash Kondepudi joined us in April 2000 as Vice President, Mobile Commerce
and was appointed Executive Vice President, Merchant in February 2001. Mr.
Kondepudi had served as Vice President, Application Services of Saraide Inc.
(formerly saraide.com, inc.) from November 1998 until our acquisition of
Saraide in March 2000. At Saraide, he led the development of wireless
application services such as e-mail, content applications and mobile commerce
on GSM phones. From May 1995 to October 1998, Mr. Kondepudi worked for
VeriFone, Inc., where he initially served as Director, Client/Server Technology
and was later appointed Director, Business Development. Mr. Kondepudi holds a
Bachelors in Technology from Jawaharlal Nehru Technology University in India
and a Masters in Technology from the Indian Institute of Technology-Madars.
Michael J. Riccio, Jr. became our Executive Vice President, Broadband upon
the completion of our acquisition of Go2Net in October 2000. He served as
Go2Net's Chief Operating Officer from January 1999 to October 2000, and a
director of Go2Net from September 1997 through June 1999. From 1989 through
December 1998, Mr. Riccio was an attorney with Hutchins, Wheeler & Dittmar, a
Boston-based law firm, most recently serving as a shareholder of the firm.
Prior to joining Hutchins, Wheeler & Dittmar, Mr. Riccio was an associate of
Willkie Farr & Gallagher, a New York-based law firm. Mr. Riccio has a B.S. from
Bucknell University and a J.D. from Albany Law School of Union University.
Charles Stubbs joined us in July 1999 as a Vice President, Business
Development and was appointed Executive Vice President, Wireline in February
2001. From October 1996 to July 1999, he was employed by BellSouth, where he
served as a Director of Planning before being promoted to Vice President of
Marketing and Business Development in July 1998. Mr. Stubbs holds a B.A. from
Cornell University and an M.B.A. from Vanderbilt University.
Edward Petersen joined us in October 1999 as Vice President, Business
Development. He was promoted to Senior Vice President, Devices and Network
Equipment in June 2000 and was appointed Senior Vice President, Wireless in
February 2001. From June 1998 until he joined InfoSpace, Mr. Petersen was
President and founder of Union-Street.com, Inc., which we acquired in October
1999. Form May 1997 to May 1998, he served as a Program Manager at Zip2 Corp,
and from April 1996 to May 1997, he served as a Program Manager at Pantheon
Inc. Mr. Petersen holds a B.A. from Whittier College.
Kumail S. Tyebjee joined us in March 2000 as a Director, Business
Development and was appointed Senior Vice President, Wireless in February 2001.
He served as Director, Business Development of Saraide Inc. (formerly
saraide.com, inc.) from May 1999 until our acquisition of Saraide in March
2000. From June 1997 to April 2000, Mr. Tyebjee was a Principal with A.T.
Kearney, Inc., a management consulting firm. From March 1994 to June 1997, he
was employed as a Director of Alexander & Alexander, Inc., also a management
consulting firm. Mr. Tyebjee holds a B.S. from Bombay University and an M.B.A.
from the University of Illinois at Chicago.
15
FACTORS AFFECTING OUR OPERATING RESULTS,
BUSINESS PROSPECTS AND MARKET PRICE OF STOCK
Financial Risks Related to Our Business
We have a history of losses and expect to continue to incur significant
operating losses, and we may never be profitable.
We have incurred net losses from our inception through December 31, 2000. As
of December 31, 2000, we had an accumulated deficit of approximately $408.6
million. We have not achieved profitability and we expect to continue to incur
significant operating losses in the future. These losses may be significantly
higher than our current losses. We will need to generate sufficient additional
revenues to become profitable. We cannot assure you that we will successfully
generate sufficient revenues. Consequently, we may never achieve profitability;
and if we do achieve profitability, we may not be able to sustain it.
We have a relatively limited operating history and our business model is new
and unproven, which makes it difficult to evaluate our future prospects.
We were incorporated in March 1996 and accordingly, we have a relatively
short operating history and limited financial data upon which you may evaluate
our business and prospects. In addition, our business model to provide consumer
and commerce infrastructure services is new and unproven and is likely to
continue to evolve. We expect to derive a significant portion of our revenue
from products and services that we have only recently introduced. As a result,
our potential for future profitability must be considered in light of the
risks, uncertainties, expenses and difficulties frequently encountered by
companies in their early stages of development, particularly companies in new
and rapidly evolving markets such as ours. Some of these risks relate to our
potential inability to:
. develop and integrate new features with our existing services;
. expand our services to new and existing merchants, merchant aggregators
and wireless carrier partners;
. manage our growth, control expenditures and align costs with revenues;
. expand successfully into international markets;
. attract, retain and motivate qualified personnel; and
. respond to competitive developments.
If we do not effectively address the risks we face, our business will suffer
and we may not achieve or sustain profitability.
Our financial results are likely to continue to fluctuate and could cause our
stock price to continue to decline.
Our financial results have varied on a quarterly basis and are likely to
fluctuate substantially in the future. These fluctuations could cause our stock
price to continue to decline. Several factors, many of which are beyond our
control, that could cause our quarterly results to fluctuate materially
include:
. variable demand for our consumer and commerce services by end users,
subscribers and merchants;
. our ability to attract and retain advertisers, content providers,
affiliates and distribution partners, including wireless carriers and
merchant aggregators;
. the amount and timing of fees we pay to affiliates to include our
information services on their Web sites;
16
. the amount and timing of increased expenditures for expansion of our
operations, including the hiring of new employees, capital expenditures
and related costs;
. effects of acquisitions and other business combinations, and 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
partners;
. the result of litigation against us that is currently ongoing, or any
litigation that is filed against us in the future;
. the inability of our affiliates to pay us or to fulfill their
contractual obligations to us due to difficulty in raising sufficient
capital to support their long term operations;
. the effect of any changes in accounting rules or standards;
. technical difficulties, system downtime, system failures or Internet
brown-outs; and
. general economic conditions and economic conditions specific to the
Internet and telecommunications industries.
If one or more of these factors or other factors is unfavorable to us or
changes in an adverse way, our business could suffer.
As a result of our recent acquisitions and international expansion, we have
significantly increased our research and development and sales and general and
administrative expenses and intend to continue to do so for the foreseeable
future. Our expenses, which are partially based on our expectations regarding
future revenues and estimated expenses from our acquisitions, are largely fixed
in nature, particularly in the short term. As a result, if our revenues do not
meet our expectations, our financial results will likely suffer.
For these reasons, you should not rely on period-to-period comparisons of
our financial results to forecast our future performance. Our future operating
results may fall below the expectations of securities analysts or investors,
which would cause the trading price of our stock to decline.
Our stock price has been and is likely to continue to be volatile.
The trading price of our common stock has historically been highly volatile
and has declined significantly in recent months. Since we began trading on
December 15, 1998, our stock price has ranged from $1.875 to $138.50 (as
adjusted for stock splits). On March 28, 2001, the closing price of our common
stock was $2.2813. Our stock price could continue to decline or to be subject
to wide fluctuations in response to factors such as the following:
. actual or anticipated variations in quarterly results of operations;
. announcements of technological innovations, new products or services by
us or our competitors;
. changes in financial estimates or recommendations by securities
analysts;
. conditions or trends in the Internet and online commerce industries;
. announcements of significant acquisitions, strategic partnerships, joint
ventures or capital commitments by us, our customers or our competitors;
. changes in the market valuations of internet or online service
companies;
. additions or departures of key personnel; and
. general market or economic conditions, including changes in interest
rates.
17
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 have recently
suffered significant declines after having been at or near historical highs. In
the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted
against companies with publicly traded securities. This type of litigation, if
instituted, could result in substantial costs and diversion of management's
attention and resources.
We must diversify our revenues to be less reliant upon our wireline services.
Historically, we have primarily derived revenues from our wireline consumer
services, including licensing and per query fees from our affiliates and
advertising revenue from our customers. We anticipate that our wireline
consumer services will generate just over 50% of our revenues in 2001. Based
upon our reliance on revenues from wireline consumer services, our revenues may
decline if growth rates for use of wireline consumer services do not meet our
expectations.
As a result of unfavorable market or economic conditions, some of our
wireline consumer services affiliates and customers are having difficulty
raising sufficient capital to support their long-term operations or are
otherwise experiencing adverse business conditions. These affiliates and
customers may not be able to pay us some or all of the fees they are required
to pay us under their existing agreements or may not be able to enter into new
agreements. If we are unable to collect these fees or enter into new
agreements, our operating results will be harmed.
If we are unable to diversify our revenue base, a significant portion of our
revenues will continue to be derived from wireline consumer services, which
could weaken our financial position.
For 2001, we expect revenues from our consumer and commerce services
distributed on wireless platforms and revenues from our commerce services
distributed on our wireline platform and to our merchant aggregators to
represent a larger portion of our total revenues. Our ability to increase the
distribution of these new services, and thus diversify our revenues, could be
hindered by numerous risks, including:
. the ability of our business development personnel to effectively sell
consumer and commerce products and services to existing affiliates and
customers;
. the development of the Internet as an attractive platform for electronic
commerce;
. the use of our integrated commerce products and services by small and
medium sized online and offline merchants;
. our ability to effectively develop and market new products and services;
. the adoption of our commerce and consumer products and services by
wireless carriers and device manufacturers;
. the adoption of our infrastructure services for delivery over broadband
wireline platforms (DSL and cable) and broadband wireless standards
(2.5G and 3G); and
. the use of our commerce and consumer products and services by
subscribers on their wireless devices.
Our business will suffer if we are unsuccessful at integrating acquired
businesses.
We have acquired a large number of complementary technologies and businesses
in the past, and may do so in the future. Acquisitions typically involve
potentially dilutive issuances of stock, the incurrence of
18
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, content
providers and distribution partners;
. being unable to maintain uniform standards, controls, procedures and
policies;
. entering markets in which we have no direct prior experience;
. losing key employees of the acquired company; and
. failing to achieve the anticipated benefits of the acquisition in a
timely manner.
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 that may not be available to us on commercially
reasonable terms. We have attempted to retain key employees, often including
existing management, of acquired companies, under the overall supervision of
our senior management. We have, however, not always been successful in these
attempts at retention. 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 regularly evaluate the recorded amount of long-lived assets, consisting
primarily of goodwill, assembled workforce, acquired contracts and core
technology, to determine whether there has been any impairment of the value of
the assets and the appropriateness of their estimated remaining life. We
evaluate impairment whenever events or changed circumstances indicate that the
carrying amount of the long-lived assets might not be recoverable. At December
31, 2000, we determined that intangible assets from two purchase acquisitions
had been impaired. Accordingly, we recorded an impairment charge in the amount
of $8.97 million in the year ended December 31, 2000. We will continue to
regularly evaluate the recorded amount of our long-lived assets and test for
impairment. In the event we determine that any long-lived asset has been
impaired, we will record additional impairment charges in future quarters.
We have accounted for several of our acquisitions using the pooling-of-
interests method. If we were unable to account for these acquisitions under the
pooling-of-interests method, our operating results would be negatively
impacted.
Revenues derived from our consumer and commerce services are dependent on our
relationships with affiliates and distribution partners.
We will not be able to continue generating revenues from advertising,
transaction fees and promotions unless we can secure and maintain distribution
for our consumer and commerce services on acceptable commercial terms through a
wide range of affiliates and distribution partners. In particular, we expect
that a limited number of our affiliates, including America Online, Inc., its
CompuServe and Digital City divisions and Microsoft Network, LLC, will account
for a substantial portion of our affiliate traffic. We also rely on our
relationships with RBOCs and merchant aggregators for distribution of our
commerce services. Our distribution arrangements with our affiliates and
distribution partners 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
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
19
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 is likely to harm our business.
Our revenues are attributable to a small number of customers, the loss of any
one of which could harm our financial results.
We derive a substantial portion of our revenues from a small number of
customers. We expect that this will continue in the foreseeable future. Our top
ten customers represented 32% of our revenues for fiscal year 2000 and 30% of
our revenues for fiscal year 1999. No single customer accounted for more than
10% of our revenues in fiscal year 2000. If we lose any of these customers, or
if any of these customers are unable or unwilling to pay us amounts that they
owe us, our financial results will suffer.
Some of our affiliates may not be able to pay us.
As a result of unfavorable conditions in the venture capital and public
equity markets, some of our affiliates may have difficulty raising sufficient
capital to support their long-term operations. As a result, these affiliates
may not be able to pay us some or all of the fees they are required to pay us
under their existing agreements. In addition, our affiliates may experience
adverse business conditions due to market conditions, industry conditions or
other factors, which may render them unable to fulfill their contractual
obligations to us. Such conditions may also prevent potential affiliates from
entering into contractual relationships or other strategic business
relationships with us.
Bad debt expense was 3.4% of revenues for fiscal year 2000 and 1.8% for
fiscal year 1999. We specifically reserve all accounts sixty days or more past
due. In addition, we reserve an amount based on revenues and the accounts
receivable balance for accounts not specifically identified. We have a credit
review process and require payment in advance from those customers that do not
qualify under our trade credit guidelines. As a result, we may have to forego
business from customers who do not agree to our payment terms.
Our operating results have been, and may continue to be, negatively impacted by
our recognition of losses on investments in other companies.
We hold a number of investments in third parties directly and also
indirectly through the private InfoSpace Venture Capital Fund. The majority of
the companies we have invested in are engaged in the technology related
industries of the Internet, networking, e-commerce, telecommunications and
wireless technologies. These investments involve a high level of risk for a
number of reasons, including:
. some of our investments are in businesses based on new technologies or
products that may not be widely adopted in the evolving Internet and
wireless technology industries;
. the companies in which we have invested are generally development-stage
companies which are likely to continue to generate losses in the
foreseeable future and may not be profitable for a long time, if at all;
. in recent months, companies in the Internet and e-commerce industries
have experienced difficulties in raising capital to fund expansion or
continue operations; and
. most of our investments are in privately held companies, and if public
markets for their securities do not develop, it may be difficult to sell
those securities.
We regularly review all of our investments in public and private companies
for other than temporary declines in fair value. When we determine that the
decline in fair value of an investment below our accounting basis is other than
temporary, we reduce the carrying value of the securities we hold and record a
loss in the amount of any such decline. During the three months ended December
31, 2000, we determined that the
20
declines in value of two of our investments were other than temporary, and we
recognized losses totaling $9.8 million to record these investments at their
current fair values as of December 31, 2000.
If we conclude in future quarters that the fair values of any of our
investments have experienced more than a temporary decline, we will record
additional investment losses, which could adversely affect our financial
condition and results of operations.
Operational Risks Related to Our Business
Our business will suffer if we are unable to hire, retain and motivate highly
qualified employees.
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. Our services and the industries to which we
provide our services are relatively new, particularly with respect to our
wireless partners and commerce services. As a result, qualified technical
personnel with experience relevant to our business are scarce and competition
to recruit them is intense. If we fail to successfully attract, assimilate and
retain a sufficient number of highly qualified technical, managerial, sales and
marketing, business development and administrative personnel, our business
could suffer. We recently announced a realignment of resources to concentrate
on development of our wireless, merchant and broadband services. This
realignment included a reduction in our workforce of approximately 250
employees. This, or other future operational decisions, could create an
unstable work environment and have a negative effect on our ability to retain
and motivate employees.
Stock options and restricted stock, which each vest typically over a two- or
four-year period, are an important means by which we compensate employees. We
face a significant challenge in retaining our employees if the value of these
stock options and restricted stock is either not substantial enough or so
substantial that the employees leave after their stock options or restricted
stock have vested. To retain our employees, we expect to continue to grant new
options, subject to vesting, which could be dilutive to our current
stockholders. If our stock price does not increase significantly above the
prices of our options, we may also need to issue new options or grant
additional shares of stock in the future to motivate and retain our employees.
If we are unable to retain our executive officers or if our new management team
does not perform well, we may not be able to successfully manage our business
or achieve our objectives.
Our business and operations are substantially dependent on the performance
of our key employees, all of whom are employed on an at-will basis. If we lose
the services of one or more of our executive officers or key employees,
particularly within our commerce services and wireless business area, or if one
or more of them decides to join a competitor or otherwise compete directly or
indirectly with us, we may not be able to successfully manage our business or
achieve our business objectives. We maintain key person life insurance on
Naveen Jain, our Chairman and Chief Executive Officer. We do not maintain key
person life insurance policies on any of our other employees.
Due to our rapid growth, our anticipated expansion into new markets and our
recent acquisitions, several members of our management team are new to
InfoSpace or to their executive positions. Only two of our executive officers
were employed by us at the end of fiscal year 1999. Our current executive
officers may have only limited experience managing a rapidly growing public
company. Our business objectives may be adversely affected if our new executive
officers are not effective.
21
Our historical and future growth will continue to significantly strain our
management, operational and financial resources.
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
less than 100 at January 1, 1998 to 1,033 at February 28, 2001. We now have
development, operations and administrative facilities in Bellevue and Seattle,
Washington; Mountain View, California; Provo, Utah; Montreal, Canada;
Papendrecht, Netherlands; London, United Kingdom; Sydney, Australia; and Rio de
Janeiro, Brazil. We also have sales offices in San Francisco, California; New
York, New York; and Chicago, Illinois. This expansion has placed, and is
expected to continue to place, a significant strain on our management and
operational resources. We have limited 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.
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 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. We must also
effectively manage 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.
Our expansion into international markets may not be successful and may expose
us to risks that could harm our business.
We began providing consumer services in the United Kingdom in the third
quarter of 1998. With our acquisition of Saraide in March 2000, we now have a
development and operations facility in the Netherlands serving European
wireless carriers. In March 1999 we began providing infrastructure services to
Canadian affiliates through a Canadian subsidiary and we have begun to expand
our wireless services into Canada. We also have entered into agreements to
expand our services into Brazil, China and Australia and are currently
investigating other international opportunities. We plan to build a data center
in Rio de Janeiro during 2001.
We have limited experience in developing and syndicating localized versions
of our consumer and commerce services internationally, and we may not be able
to successfully execute our business model in these markets. In addition, most
international markets experience lower levels of Internet usage and Internet
advertising than the United States. For example, 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.
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.
We face a number of risks inherent in doing business in international
markets, including:
. higher costs of doing business;
. export controls relating to encryption technology;
. lower levels of adoption or use of the Internet and other technologies
used in our business, and the lack of appropriate infrastructure to
support widespread Internet usage;
. lower levels of credit card usage in some regions;
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. tariffs and other trade barriers;
. potentially adverse tax consequences;
. limitations on the repatriation of funds;
. difficulties in staffing and managing foreign operations;
. changing local or regional economic and political conditions;
. exposures to different legal jurisdictions and standards;
. different accounting practices and payment cycles;
. fluctuations in currency exchange rates; and
. seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world.
As the international markets for consumer and commerce services on wireline,
wireless and broadband platforms markets continue to grow, competition in these
markets will likely intensify. Local companies may have a substantial
competitive advantage because of their greater understanding of and focus on
the local markets.
We are subject to pending legal proceedings that could result in liability and
damage our business.
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 to equity of alleged employees and 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. We believe
we have meritorious defenses to all of the claims currently made against us.
Nevertheless, litigation is inherently uncertain, and we may not prevail in
these suits. We cannot predict whether future claims will be made or the
ultimate resolution of any currently outstanding or future claim. For an
expanded discussion of our pending legal proceedings, see "Item 3. Legal
Proceedings."
Insiders own a large percentage of our stock, which could delay or prevent a
change in control and may negatively affect your investment.
As of February 28, 2001, our officers, directors and affiliated persons
beneficially owned approximately 25.7% of our voting securities. Naveen Jain,
our Chairman and Chief Executive Officer, beneficially owned approximately
19.5% of our voting securities as of that date. These stockholders will be able
to exercise significant influence over all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions, which could have the effect of delaying or preventing a
third party from acquiring control over us and could affect the market price of
our common stock. In addition, some of our executive officers have stock option
grants which provide for accelerated vesting upon a change in control if their
employment is actually or constructively terminated as a result. The interests
of those holding this concentrated ownership may not always coincide with our
interests or the interests of other stockholders, and, accordingly, they could
cause us to enter into transactions or agreements that we would not otherwise
consider.
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We have implemented anti-takeover provisions that could make it more difficult
to acquire us.
Our certificate of incorporation, our bylaws and Delaware law contain
provisions that could make it more difficult for a third party to acquire us
without the consent of our board of directors, even if doing so would be
beneficial to our stockholders. For example, a takeover bid otherwise favored
by a majority of our stockholders might be rejected by our board of directors.
These provisions include:
. classifying our board of directors into three groups so that the
directors in each group will serve staggered three-year terms, which
would make it difficult for a potential acquirer to gain control of our
board of directors;
. authorizing the issuance of shares of undesignated preferred stock
without a vote of stockholders;
. prohibiting stockholder action by written consent; and
. limitations on stockholders' ability to call special stockholder
meetings.
Technological Risks Related to Our Business
Poor performance in or disruption of the services we deliver to our customers
could harm our reputation, delay market acceptance of our services and subject
us to liability.
We have transitioned our computer and communications hardware from our
former headquarters in Redmond, Washington to our new headquarters in Bellevue,
Washington. With the acquisitions of Prio and Saraide, we have data centers in
Mountain View, California serving our promotions technology 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 and commerce services and the expected growth of these services. We
may be unable to develop or successfully manage the infrastructure necessary to
meet current or future demands for reliability and scalability of our systems.
We have 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 and 24/7 support, and include
penalties for non-performance. We may be unable to fulfill these commitments,
which could subject us to penalties under our agreements, harm our reputation
and 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.
Our success depends, in part, on the performance, reliability and
availability of our services. Our revenues depend, in large part, on the number
of users that access our services. Any system interruptions resulting in the
unavailability of our consumer and commerce services would reduce the volume of
users able to access our consumer and commerce services and the attractiveness
of our service offerings to our affiliates, advertisers and content providers,
which could harm our business.
Our networks face security risks which could damage our services.
Even though we have implemented security measures, our wireless and wireline
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 operations. Internet and online service providers
have in the past experienced, and
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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. Our wireless Internet services may present additional
security risks that could lead to interruptions in services, security breaches
and related problems. 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 services,
any of which could harm our business.
We rely on internally developed software and systems which may require
modification to remain effective.
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 sites or our affiliates' Web sites increases substantially.
We could experience periodic capacity constraints, which may cause temporary
unanticipated system disruptions, slower response times and lower levels of
customer service. Our business could be harmed if we are unable to accurately
project the rate or timing of increases, if any, in the use of our consumer and
commerce services or expand and upgrade our systems and infrastructure to
accommodate these increases in a timely manner.
We depend on third parties for content, and the loss of access to this content
could harm our business.
We typically do not create our own content. Rather, we acquire rights to
information from numerous third-party content providers, and our future success
is 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.
We rely on the Internet infrastructure, over which we have no control and the
failure of which could substantially harm our business.
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.
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We rely heavily on our proprietary technology, but 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.
Our intellectual property may be subject to even greater risk in foreign
jurisdictions, as the laws of many countries do not protect proprietary rights
to the same extent as the laws of the United States. If we cannot adequately
protect our intellectual property our competitive position may 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. 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.
We may be subject to liability for our use or distribution of information that
we receive from third parties.
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. Our insurance coverage may be inadequate to cover
fully the amounts or types of claims that might be made against us.
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.
We also gather personal information from users in order to provide
personalized services. Gathering and processing this personal information may
subject us to legal liability for negligence, defamation, invasion of privacy,
product or service liability. We may also be subject to laws and regulations,
both in the United States and abroad, regarding user privacy.
Users of our services face security risks, which could subject us to liability.
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. We rely on secure socket layer technology, public key
cryptography and digital certificate technology to provide the security and
authentication necessary for secure transmission of confidential
26
information. Various regulatory and export restrictions may prohibit us from
using the strongest and most secure cryptographic protection available and
thereby expose us to a risk of data interception. A party who is able to
circumvent our security measures could misappropriate confidential personal or
proprietary information or interrupt our operations. Any such compromise or
elimination of our security could reduce demand for our services.
We may be required to expend significant capital and other resources to
protect against these security breaches or to address problems caused by these
breaches. Concerns over the security of the Internet and other online and
wireless transactions and the privacy of users may also inhibit the growth of
the Internet and other online and wireless services generally, and the Web in
particular, especially as a means of conducting commercial transactions.
Because some of our activities involve the storage and transmission of
confidential personal or 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. Our security measures may not prevent all
attempted security breaches.
Risks Related to our Industry
The Internet infrastructure services market is new, and our business will
suffer if the market does not develop as we expect.
The Internet infrastructure services market is new and may not grow or be
sustainable. Potential customers may choose not to purchase services from a
third-party provider due to concerns about security, reliability, cost or
system availability. It is possible that our services may never achieve market
acceptance. We have a limited number of customers and we have not yet provided
our services on the scale that is anticipated in the future. We incur operating
expenses based largely on anticipated revenue trends that are difficult to
predict given the recent emergence of the Internet infrastructure services
market. If this market does not develop, or develops more slowly than we
expect, we may not achieve significant market acceptance for our services and
the rate of our revenue growth may decline.
Our success depends on the continued growth in the usage of the Internet.
Rapid growth in the use of and interest in the Internet has occurred only
recently. Acceptance and use may not continue to develop at historical rates
and a sufficiently broad base of consumers and businesses may not adopt or
continue to use the Internet and other online services as a medium of commerce.
Factors that may affect Internet usage include:
. actual or perceived lack of security of information;
. congestion of Internet traffic or other usage delays; and
. reluctance to adopt new business methods.
If Internet usage does not continue to increase, demand of our services may
be limited and our business and results of operations could be harmed.
Underdeveloped telecommunications and Internet infrastructure may limit the
growth of the Internet overseas and the growth of our business.
Access to the Internet requires advanced telecommunications infrastructure.
The telecommunications infrastructure in many parts in Europe, the Asia-Pacific
region and Latin America is not as well developed as in the United States and
is partly owned and operated by current or former national monopoly
telecommunications carriers or may be subject to a restrictive regulatory
environment. The quality and continued development of telecommunications
infrastructure in Europe, the Asia-Pacific region and Latin America will have a
significant impact on our ability to deliver our services and on the market use
and acceptance of the Internet in general.
27
In addition, the recent growth in the use of the Internet has caused
frequent periods of performance degradation, requiring the upgrade of routers
and switches, telecommunications links and other components forming the
infrastructure of the Internet by Internet service providers and other
organizations with links to the Internet. Any perceived degradation in the
performance of the Internet as a whole could undermine the benefits of our
services. The quality of our services is ultimately limited by and reliant upon
the speed and reliability of Internet-related networks operated by third
parties. Consequently, the emergence and growth of the market for our services
is dependent on improvements being made to the entire Internet infrastructure
in Europe, the Asia-Pacific region and Latin America.
Intense competition in the wireline, wireless and broadband markets could
prevent us from entering those markets or cause us to lose market share.
Our current business model depends on distribution of our consumer and
commerce services to merchants and into the wireline, wireless and broadband
markets, all of which are extremely competitive and rapidly changing. Our
current and prospective competitors have substantially greater financial,
technical and marketing resources, larger customer bases, longer operating
histories, more developed infrastructures, greater name recognition and more
established relationships in the industry than we have. Many of our competitors
may be able to develop and expand their service offerings more rapidly, adapt
to new or emerging technologies and changes in customer requirements more
quickly, take advantage of acquisitions and other opportunities more readily,
achieve greater economies of scale, devote greater resources to the marketing
and sale of their services and adopt more aggressive pricing policies than we
can. Because of these competitive factors and due to our relatively small size
and financial resources we may be unable to compete successfully.
Some of the companies we compete with are currently customers of ours, the
loss of which could harm our business. 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 compete with ours, our business will suffer. For a description of
our competitors and competitive factors in our industry, see "Item 1.
Business--Competition."
The long-term viability of the Internet as a medium for commerce is not
certain.
Consumer use of the Internet as a medium for commerce is a recent phenomenon
and is subject to a high level of uncertainty. While the number of Internet
users has been rising, the Internet infrastructure may not expand fast enough
to meet the increased levels of demand. The increased use of the Internet as a
medium for commerce has raised concerns regarding Internet security,
reliability, pricing, accessibility and quality of service. If use of the
Internet as a medium for commerce does not continue to grow, or grows as a
slower rate than we anticipate, or if the necessary Internet infrastructure or
complementary services are not developed to effectively support growth that may
occur, our business would be harmed.
Our market is characterized by rapid technological change which could
negatively affect 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 new services, including broadband services,
on a timely and competitive basis and to improve the performance, content and
reliability of our consumer and commerce 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. If we are unable to be a technological
leader in our market our business is likely to be harmed.
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Consolidation in our industry could lead to increased competition and loss of
customers.
The Internet industry has recently experienced substantial consolidation.
For example, AOL, which previously acquired Netscape, has merged with Time
Warner, @Home has acquired Excite, and Compaq has acquired ZIP2. We expect this
consolidation to continue. These acquisitions could adversely affect our
business and results of operations in a number of ways, including:
. companies from whom we acquire content could acquire or be acquired by
one of our competitors and stop licensing content to us;
. our customers or distribution partners could acquire or be acquired by
one of our competitors and terminate their relationship with us; and
. our customers could merge with other customers, which could reduce the
size of our customer base.
Governmental regulation and the application of existing laws to the Internet
may slow the Internet's growth, increase our costs of doing business and create
potential liability for the dissemination of information over the Internet.
Laws and regulations governing Internet services, related communications
services and information technologies and electronic commerce are beginning to
emerge but remain largely unsettled, even in areas where there has been some
legislative action. It may take years to determine whether and how existing
laws, such as those governing intellectual property, privacy, libel,
telecommunications, and taxation, apply to the Internet and to related services
such as ours. Uncertainty and new laws and regulations, as well as the
application of existing laws to the Internet, in our markets could limit our
ability to operate in these markets, expose us to compliance costs and
substantial liability and result in costly and time consuming litigation. The
international nature of the Internet and the possibility that we may be subject
to conflicting laws of, or the exercise of jurisdiction by, different countries
may make it difficult or impossible to comply with all the laws that may govern
our activities. Furthermore, the laws and regulations relating to the liability
of online service providers for information carried on or disseminated through
their networks is currently unsettled.
ITEM 2. Properties
We have development, operations and administrative facilities in: Bellevue
and Seattle, Washington; Mountain View, California; Provo, Utah; Montreal,
Canada; Papendrecht, The Netherlands; London, United Kingdom; Sydney,
Australia; and Rio de Janeiro, Brazil. We also have sales offices in San
Francisco, California; New York, New York; and Chicago, Illinois.
In June 2000, we relocated to significantly larger facilities under a lease
for a new principal administrative, engineering, marketing and sales facility
located in Bellevue, Washington totaling approximately 137,419 square feet.
Under the five-year lease, we will pay a monthly base rent of $359,009 per
month during the first year, $252,647 per month during the second year,
$263,551 per month during the third year, $265,373 per month during the fourth
year and $276,276 per month during the final year.
In connection with our acquisition of Go2Net, we assumed Go2Net's lease for
its principal facility in Seattle, Washington. Rent for the 86,252 square-foot
facility is currently $172,683 per month. The lease is for a term of seven
years and expires in 2007.
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 Stock--Poor performance in or
disruption of the services we deliver to our customers could harm our
reputation, delay market acceptance of our services and subject us to
liability."
29
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 18, 2000, an employee filed a complaint against us in federal
court in Washington alleging claims for breach of contract, breach of the
covenant of good faith and fair dealing, and fraudulent and negligent
misrepresentation. The employee contends that he agreed to work for us on the
basis of an oral representation that he would be granted more stock options
than any other employee and that he would always have more stock options than
any other employee. The employee also contends that he was falsely promised
certain levels of authority and support in his position. The employee seeks
unspecified compensatory damages from us as well as equitable relief requiring
us to award him the largest number of stock options of any employee in the
future. Additionally, on the basis of a claim against Naveen Jain for
violations of the Racketeer Influenced Corrupt Organizations Act, the employee
also seeks trebling of any award of compensatory damages and recovery of his
attorneys' fees and costs. No trial date has been set. On March 30, 2001, the
employee's claim against us alleging breach of the covenant of good faith and
fair dealing was dismissed. We believe we have meritorious defenses to these
claims. Nevertheless, litigation is uncertain and we may not prevail in this
suit.
One of the shareholders of INEX Corporation filed a complaint on September
22, 1999 alleging that the original shareholders of INEX and INEX itself were
bound by a shareholders agreement that entitled the shareholder to pre-emptive
rights and rights of first refusal. The complaint alleges that INEX improperly
made private placements, issued employee options and permitted share transfers
after February 1997. The plaintiff alleges it should have acquired rights in
approximately 88% of the INEX share capital, which would be less than one
percent of our common stock after conversion. The plaintiff also alleges other
breaches of contract, breach of fiduciary duty, corporate oppression, unlawful
interference with economic relation and conspiracy. The complaint was amended
on December 20, 1999 to allege we assumed the obligations of INEX under the
alleged shareholders agreement as a result of our acquisition of INEX on
October 14, 1999. The plaintiff seeks damages against us and the former INEX
shareholders named in the suit for the difference between the issue or sale
price of INEX shares issued or transferred after February 1997 and before the
acquisition, and the highest trading value of the shares of our common stock
received or receivable in the exchange prior to the date of trial. In the
alternative, the plaintiff seeks special damages of $50 million Canadian. The
plaintiff also seeks $500,000 Canadian in punitive damages and other remedies
with regard to the disputed shares of stock. We have filed our response with
the court, and discovery has yet to take place. We believe we have meritorious
defenses to such claims but litigation is uncertain and we may not prevail in
this suit.
On March 19, 2001, one of our stockholders filed a derivative lawsuit in
King County Superior Court, Seattle, Washington. The complaint names current
and former executive officers and directors of ours, their marital communities
and related entities as defendants. As a shareholder derivative suit, the
complaint also names InfoSpace, Inc. as a nominal defendant. The plaintiff
alleges insider trading on the part of certain defendants, breach of fiduciary
duties by our directors in connection with the acquisition of Go2Net and other
breaches of contractual obligations and fiduciary duties in connection with the
Prio and Go2Net acquisitions. The plaintiffs are seeking various equitable
remedies, including disgorgement of profits from insider trading, restitution,
accounting and imposition of a constructive trust, unspecified monetary
damages, and attorney's fees. We are currently investigating and assessing the
claims at issue and preparing our response. As noted above, the complaint is
derivative in nature and does not seek monetary damages from, or the imposition
of equitable remedies on, us. However, under some circumstances, we may have
certain obligations to indemnify our directors and officers.
Two of nine founding shareholders of Authorize.Net Corporation, a subsidiary
recently acquired through our merger with Go2Net, filed a lawsuit on May 2,
2000 in Provo, Utah. This action was brought to reallocate amongst the founding
shareholders the consideration received in the acquisition of Authorize.Net by
Go2Net. The plaintiffs allege that the corporate officers of Authorize.Net
fraudulently obtained a percentage of
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Authorize.Net shares greater than what was anticipated by the founding
shareholders, and are making claims under the Utah Uniform Securities Act as
well as claims of fraud, negligent misrepresentation, breach of fiduciary duty,
conflict of interest, breach of contract and related claims. Plaintiffs seek
compensatory and punitive damages in the amount of $200 million, rescission of
certain transactions in Authorize.Net securities, and declaratory and
injunctive relief. The plaintiffs subsequently amended the claim to name
Authorize.Net as a defendant with regard to the claims under the Utah Uniform
Securities Act. The case is currently in the discovery phase, which is expected
to end on April 20, 2001. We have filed a motion for summary judgment on behalf
of Authorize.Net. We believe we have meritorious defenses to these claims.
Nevertheless, litigation is uncertain and we may not prevail in this suit.
On December 15, 1999, a former employee filed a complaint against us 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 contended that
he agreed to work for InfoSpace on the basis of certain misrepresentations,
that he entered into an agreement with us that entitled him to an option to
purchase 300,000 shares of our common stock, and that he was terminated without
cause. The former employee sought (1) the right to purchase 300,000 shares of
our common stock, (2) unspecified compensatory and punitive damages, and (3)
litigation costs and attorney's fees. The case was transferred to the United
States District Court for the Western District of Washington. By order dated
September 14, 2000, the Court dismissed with prejudice the former employee's
claims for breach of the covenant of good faith and fair dealing, fraud,
negligent misrepresentation, and promissory estoppel. The case was settled in
January 2001.
Authorize.Net Corporation was named as a defendant in a suit filed in June
2000 that purports to be a class action brought on behalf of persons who leased
"virtual terminals" to Authorize.Net among a myriad of other non-Authorize.Net
products in connection with actual or proposed Internet businesses. The leases
were allegedly financed by a third-party unaffiliated leasing company in
connection with sales efforts by a third-party unaffiliated reseller. The suit,
as it relates to Authorize.Net, alleges that the leases of the products at
issue were actually sales and that they were financed by the leasing company at
usurious rates. The suit further alleges that the reseller was acting as an
agent of Authorize.Net in these activities. Authorize.Net was dismissed without
prejudice as a defendant from this suit in December 2000, and no additional
claims were made against Authorize.Net prior to the deadline to amend the
complaint in February 2001.
ITEM 4. Submission of Matters to a Vote of Security Holders
At the special meeting of stockholders held on October 12, 2000, the
following proposals were adopted by the margin indicated:
1. To issue shares of InfoSpace common stock in connection with the
proposed merger of Go2Net, Inc. with a wholly-owned subsidiary of
InfoSpace:
Shares Voting:
For.......................................................... 145,806,855
Against...................................................... 873,165
Abstain...................................................... 1,470,159
2. To authorize the proxies to vote upon such other business as may
properly come before the meeting:
Shares Voting: