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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, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to Commission File No. 0-25131
INFOSPACE.COM, INC.
(Exact name of Registrant as specified in its charter)
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Delaware 91-1718107
(State or other jurisdiction (I.R.S. Employer)
incorporation or organization) Identification Number)
15375 N.E. 90th Street
Redmond, Washington 98052
(Address of principal executive
offices) (Zip Code)
Registrant's telephone number, including area code: (425) 882-1602
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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 March 1, 1999, as
reported by Nasdaq, was approximately $559,543,343. Shares of voting stock held
by each officer and director and by each person who owns 5% or more of the
outstanding voting stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of February 28, 1999, 21,181,763 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 24, 1999, (the "Proxy Statement"). Part I, Part II and Part IV
incorporate certain information by reference from the Annual Report to
Stockholders for the fiscal year ended December 31, 1998.
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TABLE OF CONTENTS
ITEM Page
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PART I.
Item 1. Business..................................................... 3
Factors Affecting InfoSpace.com's Operating Results, Business
Prospects and Market Price of Stock......................... 21
Item 2. Properties................................................... 36
Item 3. Legal Proceedings............................................ 36
Item 4. Submission of Matters to a Vote of Security Holders.......... 37
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters..................................................... 38
Item 6. Selected Financial Data...................................... 40
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 41
Item 7a. Quantitative and Qualitative Disclosures About Market Risk... 58
Item 8. Financial Statements and Supplementary Data.................. 59
Item 9. Disagreements on Accounting and Financial Disclosure......... 82
PART III.
Item 10. Executive Officers and Directors of the Registrant........... 82
Item 11. Executive Compensation....................................... 82
Item 12. Security Ownership of Certain Beneficial Owners and
Management Principal Stockholders........................... 82
Item 13. Certain Relationships and Related Transactions............... 82
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 83
SIGNATURE
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PART I
Our report on Form 10-K contains forward-looking statements made 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. These statements relate
to our plans, objectives, expectations and intentions. These statements are no
guarantees of future performance and are subject to certain risks and
uncertainties--such as those discussed in the section entitled "Factors
Affecting InfoSpace.com's Operating Results, Business Prospects and Market
Price of Stock" below--that could cause actual results to differ materially
from those discussed in these statements. You should not rely on these forward-
looking statements, which reflect only our opinion as of the date of this
report. We do not assume any obligation to revise forward-looking statements.
You should also carefully review the risk factors set forth in other reports or
documents we file from time to time with the Securities and Exchange
Commission, particularly the quarterly reports on Form 10-Q and any current
reports on Form 8-K.
ITEM 1. BUSINESS
Overview
InfoSpace.com is a leading provider of private label solutions for content
and commerce to Web sites and Internet appliances. Our affiliate network
consists of more than 1,500 Web sites. Our affiliates include America Online,
Inc., or AOL, Netscape Communications Corporation, Microsoft Network, LLC,
Lycos, MetaCrawler, Dow Jones (The Wall Street Journal Interactive Edition),
ABC LocalNet and CBS's affiliated TV stations. We focus on real-world content,
such as yellow pages and white pages, maps, classified advertisements, real-
time stock quotes, sports, information on local businesses and events, weather
forecasts and horoscopes. By aggregating content from multiple sources and
integrating it with related content using our proprietary technology, we help
to increase the convenience, relevance and enjoyment of our affiliate users'
visits, thereby promoting increased traffic and repeat usage. This, in turn,
provides enhanced advertising and electronic commerce revenue opportunities to
affiliates with minimal additional investment. By leveraging our content
relationships and technology, affiliates are free to focus on their core
competencies.
We have acquired the rights to a wide range of content from more than 60
third-party content providers. The cornerstone of our content solution is our
nationwide yellow pages and white pages directory information. Using our
proprietary technology, we integrate this directory information with other
value-added content to help users find people, places and things in the real
world. As an example of the power of our contextual integration, a salesperson
using our content and commerce services can, from the results of a single
query, find the name and address of a new customer, obtain directions to his or
her office, check the weather forecast and, typically, make an online
reservation at the nearest hotel, browse the menu of a nearby restaurant and
review a schedule of entertainment events for the locale.
We design our content and commerce services to be highly flexible and
customizable, enabling affiliates to select from among our broad range of
content and commerce services. One of our principal strengths is our internally
developed technology, which enables us to easily and rapidly add new affiliates
by employing a distributed, scalable architecture adapted specifically for our
Internet-based content and commerce services. We help our affiliates build and
maintain their brands by delivering content with the look and feel and
navigation features specific to each affiliate, creating the impression to end
users that they have not left the affiliate's site. We have designed our
technology to support affiliates across multiple platforms and formats,
including the growing number of emerging Internet appliances. We typically
share advertising revenues with the affiliates whose sites incorporate our
content where advertisements are placed.
We derive substantially all of our revenues from national and local
advertising, promotions, including promotions for content and commerce, and, to
a lesser extent, non-advertising based private label solutions. Through our
direct sales force, we offer a variety of national advertising and promotions
that enable advertisers to access both broad and targeted audiences. We also
sell local Internet yellow pages advertising
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through cooperative sales relationships with established independent yellow
pages publishers, media companies and direct marketing companies. We believe
that these relationships provide us access to local sales expertise and
customer relationships that give us an advantage over competitors while
minimizing our own sales infrastructure investment.
Based on estimates from Media Metrix for the month of January 1999, our
affiliate network provides us with an unduplicated reach of more than 47.3
million unique Web users, representing more than 83% of all Web users in the
United States. "Reach" is defined as unique Web visitors who visited the site
over the course of the reporting period.
The InfoSpace.com Solution
We are a leading provider of private label solutions for content and commerce
to Web sites and Internet appliances. Our affiliates include AOL, Netscape,
Microsoft, Lycos, MetaCrawler, Dow Jones (The Wall Street Journal Interactive
Edition), ABC LocalNet and CBS's affiliated TV stations. We focus on real-world
content, such as yellow pages and white pages, maps, classified advertisements,
real-time stock quotes, sports, information on local businesses and events,
weather forecasts and horoscopes. By aggregating content from multiple sources
and integrating it with related content using our proprietary technology, we
help to increase the convenience, relevance and enjoyment of our affiliate
users' visits, thereby promoting increased traffic and repeat usage.
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InfoSpace.com is a leading provider of private label solutions for content and
commerce
to Web sites and Internet appliances.
[GRAPHIC OF INFOSPACE.COM SOLUTION, CONSTITUENTS, AND CONSTITUENT BENEFITS]
Aggregation
We currently aggregate content from more than 60 third-party content
providers to create an array of value-added information and services. Our
proprietary technology enables us to rapidly aggregate substantial volumes of
data and content in multiple formats and from multiple sources. 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 stored directly on the content provider's system.
In either case, our technology enables us to aggregate heterogeneous content
into an integrated service, which is then delivered to our affiliates.
Integration
Our proprietary technology integrates related content and enhances its value
through increased context. Using directory services as the cornerstone of our
content and commerce services, we integrate a broad range of relevant and
related localized information, such as maps, classified advertisements, news,
and local event, business and weather information, as well as other content and
services with everyday relevance, including real-time stock quotes, sports,
government directory listings, television listings and lottery results. We also
integrate traditional yellow pages categories with our natural word search
feature. This enables users of our directory services to more intuitively
navigate within the services and to achieve more accurate and relevant
responses to their queries. For example, a user employing general search
engines to seek
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information about buying a tuxedo might receive, in response to a query on the
word "tuxedo," a list of Web sites containing articles about the history and
usage of tuxedos. Through our services, that same query would be able to locate
retailers of tuxedos in the user's neighborhood, as well as identify retailers
of related goods and services such as dress shoes, limousine rentals and
florists.
Distribution
The InfoSpace.com solution is designed to efficiently and reliably distribute
integrated content and commerce services over the Internet to a broad network
of affiliates serving millions of end users. We have designed our technology
with built-in redundancies and a template-driven automated publishing engine to
allow affiliates to reliably and cost-effectively integrate our content into
their Web site or Internet appliance. Our technology enables us to easily and
rapidly add new affiliates by employing a distributed, scalable architecture
adapted specifically for our Internet-based content and commerce solutions. We
have also designed our technology to support affiliates across multiple
platforms and formats, including Web sites, cellular phones, pagers, screen
phones, television set-top boxes, online kiosks and personal digital
assistants.
Our solution is highly flexible and customizable, enabling affiliates to
select from among our broad range of content and commerce services and to
specify the placement of the selected content and commerce services within
their existing Web sites and devices. In response to user queries originating
from an affiliated Web site or device, our automated publishing engine
dynamically builds a page to conform to the display format and look and feel
and navigation features specific to that affiliate. This feature helps our
affiliates build and maintain their brands by creating the impression to end
users that they have not left the affiliate's site. We manage access to the
content and process user queries from our own Web server until ultimate
delivery of out services to an affiliate, serving as a cost-effective, single
source supplier of content and commerce services.
Constituent Benefits
Benefits to Affiliates. Our services provide affiliates with content and
commerce solutions that help to increase the convenience, relevance and
enjoyment of their users' visits, thereby promoting increased traffic and
repeat usage. In addition, we believe that our yellow pages and white pages
directory services can attract a greater mix of consumers, as opposed to
viewers or browsers. These benefits, in turn, provide enhanced advertising and
electronic commerce revenue opportunities to affiliates with minimal additional
investment. By leveraging our content relationships and technology, affiliates
are free to focus on their core competencies.
Benefits to Advertisers. Our network of affiliate Web sites and our access to
various Internet appliances position us as a one-stop vendor for advertisers.
Our advertisers can take advantage of our access to a broad and diverse
audience of Internet users derived through our network of affiliates. Based on
estimates from Media Metrix, our affiliate network provides us with an
unduplicated reach of more than 47.3 million unique Web users for the month of
January 1999, representing more than 83% of all Web users in the United States.
Our yellow pages and white pages directory services provide advertisers with
access to targeted audiences and consumers. Further, our local Internet yellow
pages advertising enables local advertisers to significantly expand their reach
onto the Internet. Our proprietary advertising server technology enables us to
offer differentiated, customized solutions to advertisers, and provides real-
time tracking and measurement capabilities to allow advertisers to receive
meaningful feedback on the effectiveness of their advertising programs.
Benefits to Content Providers. Our solution provides expanded distribution
and branding opportunities for content providers. We also enable them to
distribute their content to emerging Internet appliances with little or no
additional investment. In addition, we enhance the value of third-party content
by integrating it with yellow pages and white pages directory services and
other real-world content.
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Content Services
We seek to provide our affiliates with content of broad appeal to end users,
including local information, financial data and Web community services. We
believe that such content can provide advertisers with opportunities to both
reach a broad audience and target specific subgroups within that audience. In
most cases, we receive regular data feeds from our content providers and store
the content on our Web servers in order to maintain its reliability and
increase its accessibility. In other cases, our proprietary technology allows
Web users to transparently access content that is stored directly on the
content provider's system. In either case, our technology enables us to
aggregate heterogeneous content into an integrated service, which is then
delivered to our affiliates. Our technology pulls content dynamically into a
Web page or device output display that maintains the look and feel and
navigation features of each affiliate's Web site or Internet appliance.
We have acquired rights to third-party content pursuant to more than 60
license agreements, typically having terms of one to five years. The license
agreements require the content provider to update content on a regular basis,
the frequency of which varies depending on the type of content. In certain
arrangements, the content provider pays us a carriage fee for syndication of
its content to our network of affiliates. In other instances, we share with the
content provider advertising revenues attributable to end-user access of the
provider's content. For certain of our content, including our core directory
and map content, we pay a one-time or periodic fee or fee per content query to
the content provider. We typically enter into nonexclusive arrangements with
our content providers. However, in certain instances we have entered into
exclusive relationships, which may limit our ability to enter into additional
content agreements.
Directory Services
The cornerstone of our content and commerce services is our nationwide yellow
pages and white pages directories. In January 1999, Media Metrix ranked us as
the number one directory in terms of number of users. Yellow pages and white
pages are an indispensable resource for locating information regarding
individuals and businesses. Today, printed yellow pages and white pages
directories are published by RBOCs as well as by an estimated 200 independent
yellow pages publishers in the United States.
We license what we believe to be the most comprehensive and accurate database
of businesses and households in the United States and Canada through a five-
year agreement with infoUSA (formerly known as American Business Information,
Inc.). infoUSA is a leading provider of online yellow pages and white pages
directory information. Pursuant to our agreement with infoUSA, we pay infoUSA
an annual fee and are building a co-branded version of our directory services
for infoUSA's Web site. We will share with infoUSA any revenues generated by
this co-branded Web site. We receive access to infoUSA's business and household
data, and infoUSA is required to update its information monthly. We enhance
this content with expanded yellow pages information obtained under agreements
with independent yellow pages publishers that we estimate, based on 1997
revenue data published by Simba Information Inc., represent approximately 30%
of the independent yellow pages market share in the United States. This
expanded information includes not only names, addresses and telephone numbers,
but also types of business, hours of operation and franchise affiliations.
We integrate our yellow pages and white pages information with each other and
utilize yellow pages category headings in combination with a natural word
search feature to provide a user-friendly interface and navigation vehicle for
our directory services. We also typically include maps and directions for
addresses included in our directory services. We further enhance the relevance
and accuracy of responses to user queries by employing a radial search feature
to our directory services, which allows users to specify the geographic scope
within a radial distance of a specific address, rather than more conventional
methods of searching by ZIP code or city and county divisions. These features
enable us to create a powerful package of localized directory information.
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Information Services
In addition to our directory services, we distribute other valuable
information of broad appeal. We seek to provide a comprehensive offering of
content with everyday significance in order to help Internet users locate
people, places and things in the real world. Principal categories of content
currently offered by us include:
Yellow Pages White Pages
find businesses, companies online, phone numbers, email addresses,
fax numbers, toll-free numbers, reverse lookup, celebrities
maps, directions
Classifieds Finance
autos, homes, apartments, jobs,
businesses, real-time quotes, the markets, loan
personals center, insurance center
e-Shopping Public Records
product search, shopping sites, "Find Anyone!", background checks,
books, cards, flowers SS# checks, adoption reunions
Business Services City Guide
supplies, travel, trade shows links, concerts, weather, schools
Net Community News Break
home pages, email, auction, chat, top stories, world news, business,
message boards, events technology, sports
Fun Stuff International
ski reports, movies, lottery slide shows, directory services for
results, horoscopes, foolishness Canada, the United Kingdom, Germany
and other countries
Government
federal, state, local officials
Our future success will depend in large part on our ability to aggregate,
integrate and distribute content of broad appeal. Our ability to maintain our
relationships with content providers and to build new relationships with
additional content providers is critical to the success of our business. See
"Factors Affecting InfoSpace.com's Operating Results, Business Prospects and
Market Price of Stock--We Depend on Third Parties for Content." In addition,
our business model is relatively new and unproven, and it may not be
successful. See "Factors Affecting InfoSpace.com's Operating Results, Business
Prospects and Market Price of Stock--Our Business Model Is Evolving and
Unproven."
Affiliate Network
We provide our content and commerce services to a network of Web sites and
Internet appliances, such as cellular phones, pagers, screen phones, television
set-top boxes, online kiosks and personal digital assistants. We have more than
100 affiliates representing more than 1,500 Web sites. Based on estimates from
Media Metrix for the month of January 1999, our affiliate network provides us
with an unduplicated reach of more than 47.3 million unique Web users,
representing more than 83% of all Web users in the United States.
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Internet Portals and Destination Sites
Our affiliates include leading Internet portals and a wide variety of
destination sites, such as the following:
Internet Portals
Affiliate Location or Web Site Address
America Online AOL service, aol.com and digitalcities.com
AT&T WorldNet att.net
go2net metacrawler.com
Lycos lycos.com
Microsoft Network essentials.msn.com
Netscape netscape.com
Snap snap.com
Destination Sites
Affiliate Web Site Address
ABC News/Starwave abcnews.com and individual ABC network
affiliate Web sites (e.g., WABC's
7online.com, KOMO's komotv.com)
CBS cbs.com and individual CBS network affiliate
Web sites (e.g., WBBM's cbs2chicago.com,
KCBS's kcbs.cbsnow.com)
Paxson Communications affiliate television station Web sites (e.g.,
pax.net/WCPX)
Ask Jeeves askjeeves.com
Deja News dejanews.com
Disney OnLine family.com
Dow Jones wsj.com
EarthLink earthlink.com
FindLaw findlaw.com
Market Guide marketguide.com
Microsoft Expedia expedia.com
Morris Online savannah.com
OnRadio onradio.com
Playboy playboy.com
World Now worldnow.com
Xoom xoom.com
We design our content and commerce services to be highly flexible and
customizable, enabling affiliates to select from among our broad range of
content and commerce services and to specify the placement of the selected
content within their own Web sites and devices. For example, one of our
affiliates, local television station WABC's 7online.com, has selected our
yellow pages directory information and classifieds information and offers this
content on its Web site. Lycos, another affiliate, uses our smart-shopping
feature service on the Lycos home page.
In response to user queries originating from an affiliated Web site or
device, our automated publishing engine dynamically builds a page to conform to
the display format and look and feel and navigation features specific to that
affiliate. This feature helps our affiliates build and maintain their brands by
creating the
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impression to end users that they have not left the affiliate's site. We manage
the access of content and process user queries from our own Web server until
ultimate delivery of our services to an affiliate, serving as a cost-effective
single source supplier of content.
Our arrangements with affiliates typically provide for sharing a portion of
the revenues generated by advertising on the Web pages that deliver our content
and commerce services. Both we and the affiliate typically retain the rights to
sell such advertising. Our distribution arrangements with our affiliates
typically are for limited durations of between six months and two years and
automatically renew for successive terms thereafter, subject to termination on
short notice. There can be no assurance that such arrangements will not be
terminated or that such arrangements will be renewed upon expiration of their
terms. We have also entered into strategic alliances with AOL and Netscape
(which was acquired by AOL in March 1999), two of the largest Internet portals
measured in terms of user traffic.
Netscape. Under our July 1998 agreements with Netscape, each of which has a
one-year term with automatic renewal provisions, we are the exclusive provider
of co-branded yellow pages and white pages directory services on the Netscape
home page (Netcenter). In addition, Netscape will include a link for these
services in the bookmark section of future versions of the U.S. English-
language version of Netscape Communicator client software. We paid trademark
licensing fees to Netscape in connection with these agreements and are
obligated to make additional payments to Netscape based on the number of click
throughs to our services. Netscape guarantees us a certain minimum level of use
of our yellow pages and white pages directory services.
AOL. In August 1998 we entered into agreements with AOL to provide white
pages directory services and classifieds information services to AOL. Under the
terms of the agreement related to our white pages directory services, we have
agreed to place our white pages directory services on AOL's NetFind home page
and throughout various other parts of AOL's proprietary service, its Digital
City service and AOL.com. The white pages directory services are to be provided
to AOL for a three-year term, beginning on November 19, 1998, which term may be
extended for an additional year and subsequently renewed for up to three
successive one-year terms at AOL's discretion. This agreement may be terminated
by AOL upon the acquisition by AOL of a competing white pages directory
services business or for any reason after 18 months, upon payment of a
termination fee, or at any time in the event of a change of control of us.
Under this agreement, we will pay to AOL a quarterly carriage fee and share
with AOL revenues generated by advertising on our white pages directory
services delivered to AOL. Under the terms of the agreement related to our
classifieds information services, we have agreed to provide classified
advertising development and management services to AOL for two years, with up
to three one-year extensions at AOL's discretion. AOL will pay to us a
quarterly fee and share with us revenues generated by payments by individuals
and commercial listing services for listings on the AOL classifieds service. In
connection with these agreements, AOL received a warrant to purchase our common
stock and has certain rights of first negotiation in the event of a proposed
sale of us.
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Internet Appliances
We are working with certain PC manufacturers that are incorporating Internet
access as part of the start-up menu of the PC. In addition, we believe that the
growing number of non-PC Internet appliances presents a significant potential
distribution channel for our content and commerce services. Numerous suppliers
of cellular telephones, pagers, screen telephones, television set-top boxes,
online kiosks and personal digital assistants are adapting familiar appliances
to provide user-friendly access to the Internet. We have entered into
agreements with numerous providers of Internet appliances, including the
following:
Selected Internet Appliance Affiliates
Means of Internet Access Company
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PCs Acer America; The Pixel Company (for Packard
Bell NEC)
Cellular Phones AT&T Wireless; Unwired Planet
Pagers WolfeTech (for Motorola PageWriter)
Screen Telephones InfoGear; Mitel; Mitsui; Lucent
Television Set-Top Boxes American Interactive Media; @Home; Lucent;
On Command; Planetweb; Source Media
King kiosk platform; Lexitech kiosk software
Online Kiosks platform
AT&T Wireless; AvantGo; InfoGear; Unwired
Personal Digital Assistants Planet
We believe that users of Internet appliances, in particular, seek useful
information of everyday relevance and are more likely to access the Internet
for specific real-world information. Since providers of Internet appliances
generally do not generate their own content or have less content available to
them than Web sites, we believe there is an opportunity for our content and
commerce services to be an integral part of the information services bundled
with these appliances. We are working with these affiliates to identify,
acquire and integrate new information services that bring additional value to
their devices. Our technology allows us to readily adapt the delivery of our
services to the individual format and display features of our Internet
appliance affiliates.
Typically, our agreements with Internet appliance affiliates have terms of
between one and three years and, in some cases, provide for the sharing of
revenues between the affiliate and us generated by advertising included with
the delivery of our content and commerce services. In other cases, we receive
license fees on a per query or per device basis or through other arrangements
for use of our content and commerce services.
Our affiliate arrangements involve a number of risks. See "Factors Affecting
InfoSpace.com's Operating Results, Business Prospects and Market Price of
Stock--We Rely on our Relationships with Affiliates."
Advertising and Promotions
We derive substantially all of our revenues from national and local
advertising, promotions, including promotions for content and commerce, and, to
a lesser extent, non-advertising based private label solutions. Our clients
include a broad range of businesses that advertise on the Internet, including
certain of our content providers and affiliates.
National Advertising
Banner Advertisements. A banner advertisement is prominently displayed at the
top and, in some cases, at the bottom of each Web page generated for delivery
of our content and commerce services. From
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each banner advertisement, users can hyperlink directly to an advertiser's Web
site, thus enabling the advertiser to directly interact with an interested
consumer. Mass market placements deliver general rotation banner advertisements
throughout our content and commerce services. Targeted placements deliver
banner advertisements to specified audiences. For example, advertisers can
reach consumers in general by placing banner advertisements that rotate
throughout our directory services, classifieds and electronic commerce
services. Alternatively, advertisers can narrow their target audience by
category of information or service requested by users or by geographic
location. For example, advertisers can target investors by advertising only on
pages containing our real-time stock quotes or potential used car buyers by
advertising only on pages containing our automobile classifieds.
Other National Advertising. We also sell CPM-based national advertising other
than banner advertisements. The most common of these advertisements are known
as "button advertisements" and "textlinks," but can also include customized
advertising solutions developed for specific advertisers. Button advertisements
are smaller than banner advertisements and can be placed anywhere on a Web
page. Textlinks appear on a Web page as highlighted text, usually containing
the advertiser's name. Multiple button advertisements and textlinks can appear
on the same Web page along with banner advertisements. Both button
advertisements and textlinks typically feature click-through hyperlinks to the
advertiser's own Web site.
Our national advertising agreements generally have terms of less than six
months and guarantee a minimum number of impressions or click throughs. We
charge fees for banner advertising based on the specificity of the target
audience, generally ranging from $10 to $20 CPM for general rotation across
undifferentiated users to $50 or greater CPM for targeted category or
geographic advertisements. Our rates for button advertisements and textlinks
are lower than those for banner advertisements. Actual CPMs depend on a variety
of factors, including, without limitation, the degree of targeting, the
duration of the advertising contract and the number of impressions purchased,
and are often negotiated on a case-by-case basis. Because of these factors,
actual CPMs may fluctuate. Our guarantee of minimum levels of impressions or
click throughs exposes us to potentially significant financial risks, including
the risk that we may fail to deliver required minimum levels of user
impressions or click throughs, in which case we typically continue to provide
advertising without compensation until such levels are met. See "Factors
Affecting InfoSpace.com's Operating Results, Business Prospects and Market
Price of Stock--We Rely on Advertising and Promotion Revenues."
Local Internet Yellow Pages Advertising
We believe that local Internet advertising represents an attractive and
largely unexploited market opportunity. Spending on Internet advertising by
local businesses is currently a very small percentage of their overall
advertising expenditures. We believe that our affiliate network provides an
attractive Internet platform for local advertisers to reach a broader audience
and extends the reach of their advertising beyond their geographic area, as
well as to achieve targeted advertising within their geographic area.
We generate an Internet yellow pages listing free of charge for all U.S.
local business listings provided by infoUSA. This listing includes name,
address and telephone number information, as well as maps and door-to-door
directions. Similar to traditional yellow pages industry practices, we generate
revenues by selling enhancements to this basic listing. Enhancement options
include boldface type, enlarged type size, multi-category listings, preferred
placement, email listings and Web site links, display advertisements and
category sponsorships.
Internet yellow pages advertising agreements provide for terms of one year,
with pricing comparable to print yellow pages advertising, typically paid in
monthly installments. Costs to the local advertisers generally range from $50
to $300 or greater per year, depending on the types of enhancements selected.
For convenience, these payments usually accompany the local advertiser's
monthly payment for its print advertising.
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We have formed cooperative sales relationships with leading independent
yellow pages publishers, including TransWestern Publishing Company, Ltd. and
McLeodUSA Publishing Company, and media companies, including Guy Gannett
Communications and E.W. Scripps, which provide access to more than 1,300
salespeople and their local sales contacts. Further, we have started to build
relationships with direct marketing companies, whose mail and telephone
solicitations complement the sales forces of the independent yellow pages
publishers and media companies. Our agreements with these companies typically
have terms of one to five years and provide for revenue sharing, which varies
from relationship to relationship. In addition, we typically agree that the
yellow pages publisher will be our exclusive provider of Internet yellow pages
advertising within a particular geographic region. The local sales forces of
these companies are empowered to sell Internet yellow pages advertising on our
directory services, which are generally bundled with the traditional print
advertising they sell. As such, we believe our Internet yellow pages
advertising offers these sales forces attractive incremental revenue
opportunities from their existing client bases. These companies maintain, as
part of their existing print advertising infrastructure, the systems necessary
for generating online display advertisements, processing invoices and
collecting payments from advertisers. To assist in their efforts, we provide
the technology to streamline the transmission of data necessary to generate the
enhanced Internet yellow pages listings. This technology allows advertising
data files to be rapidly posted and integrated directly into our directory
services. We believe that these relationships provide local expertise and
access to local advertisers, as well as established advertising production
capabilities, that give us an advantage over competitors while minimizing our
investment in our own sales force and operations.
Our dependence on advertising and promotion revenues involves a number of
risks. See "Factors Affecting InfoSpace.com's Operating Results, Business
Prospects and Market Price of Stock--We Rely on Advertising and Promotion
Revenues," "--We Rely on Third Parties for Sales of Internet Yellow Pages
Advertising," "--Advertisers May Not Adopt the Internet as an Advertising
Medium" and "--Our Advertising Arrangements Involve Risks."
Promotions
In addition to our CPM-based national advertising, we also sell promotions,
which are integrated packages of advertising that bundle such features as:
. button and textlink advertisements;
. sponsorships of specific categories of content or content and commerce
services; and
. electronic commerce features.
Promotions also include distribution and co-branding services that we provide
to content providers, for which we receive a carriage fee. These arrangements
are individually negotiated with each advertiser and have a range of specially
adapted features involving various compensation structures (such as guaranteed
fee payments), none of which are based on CPMs. One of the most common forms of
our promotions are "sponsorships," which allow advertisers to sponsor a
specific category of content on our content and commerce services. These
sponsorships consist of a button advertisement or textlink that appears
prominently on the page each time that content category is queried by a user.
In some cases, we have entered into exclusive sponsorship arrangements for
certain categories of content. Promotions may also include an electronic
commerce feature, in which a button advertisement offers the end user an
opportunity to make an immediate online purchase.
Our promotions are specifically designed to allow advertisers to integrate
various forms of online advertising, such as button advertisements and
textlinks, content sponsorship and electronic commerce links and also include
innovative specially-designed advertising campaigns to fully exploit the reach
of our content and commerce services. For example, we have entered into an
agreement with BarnesandNoble.com, Inc. under which BarnesandNoble.com is the
exclusive bookseller on a majority of our content and commerce
13
services. Pursuant to this agreement, a button advertisement appears on Web
pages for certain categories of content, which offers the end user the
opportunity to purchase a book related to that category. For example, a search
for local restaurants in New York City results in a BarnesandNoble.com button
advertisement that, when clicked, lists restaurant guides and cookbooks for New
York City restaurants.
Promotion arrangements vary in terms and duration, but generally have longer
terms than arrangements for our CPM-based advertising. The fee arrangements are
individually negotiated with advertisers and are based on the range and the
extent of customization. These arrangements typically include minimum monthly
payments. If the advertiser offers an electronic commerce opportunity in its
promotion, we may derive transaction revenues based on the level of
transactions made through the promotion.
In addition, we work with advertisers to develop customized advertising
solutions that may include both CPM-based national advertising and non-CPM-
based promotions. For example, our campaign for 800-U.S. Search involves a
variety of targeted banner advertisements, button advertisements and textlinks,
as well as co-branding of 800-U.S. Search services with our content and
commerce services, such as the "Find Anyone!" service. Our advertising
agreement with 800-U.S. Search has a four-year term. Revenues generated from
800-U.S. Search accounted for approximately 20.6% of our revenues for 1998. See
"Factors Affecting InfoSpace.com's Operating Results, Business Prospects and
Market Price of Stock--We Rely on a Small Number of Advertising Customers."
As of December 31, 1998, we had agreements with more than 35 advertisers for
national advertising or promotions. The following is a representative list of
brands or companies for which advertisers purchased national advertising or
promotions on our content and commerce services during 1998:
800-U.S. Search KnowX
Apartments for Rent Leisure Planet
AT&T Locate-Me
BarnesandNoble.com Microsoft
CareerPath Multiple Zones
Dell Computers Netscape
E-Term Net-Temps
Hewlett-Packard NextCard
IBM ShopNow
InsWeb Women.com
iVillage
Under our non-advertising based private label solution arrangements,
affiliates pay us on a fixed fee, per-click or page view basis while typically
keeping any revenues generated by our content and commerce solutions. These
arrangements vary in terms and duration, and the fees are individually
negotiated with the affiliate.
Technology and Infrastructure
One of our principal strengths is our internally developed technology, which
we have designed specifically for our Internet-based content and commerce
services. Our technology architecture features specially adapted capabilities
to enhance performance, reliability and scalability, consisting of multiple
proprietary software modules that support the core functions of our operations.
These modules include Web Server Technology, Database Technology and a Remote
Data Aggregation Engine.
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. As such, our
technology
14
enables us to deliver content in a manner optimized to the unique display
formats of existing and emerging Internet appliances, such as cellular phones,
pagers, screen phones, television set-top boxes, online kiosks and personal
digital assistants.
Our Web Server Technology includes other features designed to optimize the
performance of our content and commerce services, including:
. an HTML compressor that enables modifications of file content to reduce
size, thereby reducing download time for users;
. an "Adaptive Keep-Alive" feature that maximizes the time during which
client server connections are kept open, based on current server load,
thereby increasing user navigation and Web site traversal speed; and
. a Proxy Server that provides the capability for real-time integration and
branding of content that resides remotely with third-party content
providers.
Database Technology
We have developed proprietary database technology to address the specific
requirements of our business strategy and content and commerce 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:
Heterogeneous Database Clustering. Our Heterogeneous Database Clustering
allows disparate data sources to be combined and accessed through a single
uniform interface, regardless of data structure or content. These clusters
facilitate database bridging, which allows a single database query to produce a
single result set containing data extracted from multiple databases, a vital
component of our ability to aggregate content from multiple sources. Database
clustering in this manner reduces dependence on single data sources,
facilitates easy data updates and reduces integration efforts. In addition, our
pre-search and post-search processing capabilities enable users to modify
search parameters in real time before and after querying a database.
Dynamic Parallel Index Traversal. Our Dynamic Parallel Index Traversal
mechanism utilizes the search parameters supplied by the user to determine the
appropriate database index (from among multiple indices) to efficiently locate
the data requested. Further, an index compression mechanism allows us to
achieve an efficient balance between disk space and compression/decompression
when storing or accessing data.
Automatic Query State Recovery. In a response to a database query,
conventional databases access previously displayed results in order to display
successive results to a given query, thus increasing response time by
performing redundant operations. Our Automatic Query State Recovery mechanism
decreases response time by maintaining the state of a query to allow the prompt
access of successive results. This feature is particularly important, for
example, when an end-user query retrieves a large number of results.
Natural Language Interface. We incorporate a natural word search interpreter,
which successfully utilizes familiar category and topic headings traditional to
print directory media to generate relevant and related results to information
queries. By incorporating a familiar navigation feature into our services, we
believe we provide end users with a more intuitive mechanism to search for and
locate information.
Remote Data Aggregation Engine
We have developed our Remote Data Aggregation Engine to allow data from a
variety of sources on the Internet to be retrieved, parsed and presented as a
single virtual database result, either in real-time or at
15
predetermined intervals. Our Template-Driven Profiling system catalogs the data
on each source site, which is later accessed by our Remote Data Aggregation
Engine for real-time retrieval. Data results can be internally cached to reduce
network traffic and deliver the fastest possible results to the end user.
The Remote Data Aggregation Engine has numerous applications, one of which is
collecting real-time information from multiple sources in a manner that
eliminates the need for a data provider to perform any local modifications.
This technology is currently being applied in our price comparison service.
Various other potential uses of the technology have been identified, including
the collection and real-time updating of event data such as concert
information, performing arts schedules and sporting events, and the aggregation
of classified listings, such as employment listings from corporate Web sites.
Data Network Infrastructure
We maintain a carrier-class data network center designed to ensure high-level
performance and reliability of our content and commerce services. We connect
directly to the Internet from our facilities in Redmond, Washington through
redundant, dedicated DS-3 communication lines provided by multiple
telecommunication service providers. Our hardware resides in a secure climate-
controlled room, with local directors providing load balancing and failover. In
addition to the facilities located at our headquarters, we contract for co-
location facilities with Exodus Communications and Savvis Communications at two
locations in Seattle, Washington. As we expand our operations, we expect to
locate server facilities at various strategic geographic locations.
Product Development
We believe that strong product development capabilities are essential to
developing the technology necessary to successfully implement our strategy of
expanding our affiliate network, acquiring value-added content to add to our
content and commerce services, expanding internationally and into other
services and maintaining the attractiveness and competitiveness of our content
and commerce services. We have invested significant time and resources in
creating our proprietary technology. Product development expenses were $110,000
for the period from March 1, 1996 (inception) to December 31, 1996, $213,000
for the year ended December 31, 1997 and $604,000 for the year ended December
31, 1998.
Rapidly changing technology, evolving industry standards, evolving customer
demands and frequent new product and service introductions characterize our
market. See "Factors Affecting InfoSpace.com's Operating Results, Business
Prospects and Market Price of Stock--Rapid Technological Change Affects Our
Business" for a discussion of certain risks in this regard.
International Expansion
We intend to capitalize on what we perceive to be a significant opportunity
for our content and commerce services in international markets. We expect to
reduce the costs and risks of international expansion by entering into
strategic alliances with partners able to provide local directory information,
as well as local sales forces and contacts.
We entered into a joint venture with Thomson Directories Limited to form TDL
InfoSpace (Europe) Limited to replicate our content and commerce services in
Europe. TDL InfoSpace has targeted the United Kingdom as its first market, and
content services were launched in the third quarter of 1998. Pursuant to the
terms of the joint venture agreement, both we and Thomson entered into license
agreements with TDL InfoSpace for offsetting payments to each party of
(Pounds)50,000. These amounts were not intended to represent the fair market
value of the license agreements to an unrelated third party. Under the license
agreement between Thomson and TDL InfoSpace, Thomson licenses its U.K.
directory information database to TDL InfoSpace. Under the joint venture
agreement, Thomson also sells Internet yellow pages advertising for the joint
venture through its local sales force. Under our license agreement with TDL
InfoSpace, we license our technology and provide hosting services to TDL
InfoSpace. In addition, under our license agreement, TDL
16
InfoSpace is obligated to reimburse us for any incremental costs incurred by us
for our efforts with respect to the hosting services. In the event that TDL
InfoSpace expands into other countries, it is required to pay to us an
additional technology license fee of up to $50,000 per additional country. Our
license agreement also provides that, in the event that we no longer hold any
ownership interest in the joint venture, TDL InfoSpace and we will negotiate an
arm's-length license fee for our technology, not to exceed $1 million. Each
party purchased a 50% interest in TDL InfoSpace and is required to provide
reasonable working capital to TDL InfoSpace.
We expect that TDL InfoSpace will expand its content and commerce services to
other European countries in 1999. Under the joint venture agreement, each of us
and Thomson is obligated to negotiate with TDL InfoSpace and the other party to
jointly offer content and commerce services in other European countries prior
to offering such services independently or with other parties. In addition, we
are currently investigating additional international opportunities. The
expansion into international markets involves a number of risks. See "Factors
Affecting InfoSpace.com's Operating Results, Business Prospects and Market
Price of Stock--Our International Expansion Plans Involve Risks."
Intellectual Property
Our success depends significantly upon our proprietary technology. To protect
our proprietary rights, we rely on a combination of copyright and trademark
laws, patents, trade secrets, confidentiality agreements with employees and
third parties and protective contractual provisions. All of our employees have
executed confidentiality and nonuse agreements that transfer any rights they
may have in copyrightable works or patentable technologies to us. In addition,
prior to entering into discussions with potential content providers and
affiliates regarding our business and technologies, we generally require that
such parties enter into a nondisclosure agreement. 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.
We have applied for registration of certain service marks and trademarks,
including "InfoSpace," "InfoSpace.com" and our logo in the United States and in
other countries, and will seek to register additional service marks and
trademarks, as appropriate. We may not be successful in obtaining the service
marks and trademarks that we have applied for. Approximately ten U.S. patent
applications have been filed relating to various aspects of our technology for
querying and developing databases, for developing and constructing web pages,
for electronic commerce for on-line directory services and for web scraping.
Additional patent applications are in preparation on other features of our
technology. We have instituted a formal patent program and anticipate increased
patent application activity in the future. Patents with respect to our
technology may not be granted, and, if granted, patents may be challenged or
invalidated. In addition, issued patents may not provide us with any
competitive advantages and may be challenged by third parties.
Despite our efforts to protect our proprietary rights, unauthorized parties
may copy aspects of our products or services or obtain and use information that
we regard as proprietary. The laws of some foreign countries do not protect
proprietary rights to as great an extent as do the laws of the United States,
and we do not currently have any patents or patent applications pending in any
foreign country. In addition, others could possibly independently develop
substantially equivalent intellectual property. If we do not effectively
protect our intellectual property, our business could suffer.
Companies in the computer industry have frequently resorted to litigation
regarding intellectual property rights. We may have to litigate to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of other parties' proprietary rights. From time to time, we
have received, and may receive in the future, notice of claims of infringement
of other parties' proprietary
17
rights. Any such claims could be time-consuming, result in costly litigation,
divert management's attention, cause product or service release delays, require
us to redesign our products or services or require us to enter into royalty or
licensing agreements. These royalty or licensing agreements, if required, may
not be available on acceptable terms or at all. If a successful claim of
infringement were made against us and we could not develop non-infringing
technology or license the infringed or similar technology on a timely and cost-
effective bases, our business could suffer. See "Legal Proceedings."
Competition
We operate in the Internet 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 content
and commerce services are:
. the ability to provide content of broad appeal, which is likely to result
in increased user traffic and increase the brand name value of the Web
sites and Internet appliances to which the services are provided;
. the ability to meet the specific content demands of a particular Web site
or Internet appliance;
. the cost-effectiveness and reliability of the content and commerce
services;
. the ability to provide content that is attractive to advertisers;
. the ability to achieve comprehensive coverage of a particular category of
content; and
. the ability to integrate related content to increase the utility of the
content and commerce services offered.
We compete, directly or indirectly, in the following ways, among others:
. our directory services compete with AnyWho? (a division of AT&T), GTE
SuperPages, Switchboard, ZIP2 (which recently announced its acquisition
by Compaq), various RBOCs' directory services, infoUSA's Lookup USA,
Microsoft Sidewalk and Yahoo! Yellow Pages and White Pages;
. other services we provide, such as classifieds, horoscopes and real-time
stock quotes, compete with specialized content providers;
. our U.K. joint venture will compete with British Telecom's YELL service
and Scoot (UK) Limited; and
. our commerce services will compete with Inktomi, Amazon.com's Junglee and
Excite's Jango.
We expect that in the future we will experience competition from other
Internet services companies and providers of Internet software, including
Microsoft, Netscape, Yahoo!, AOL, Excite, Infoseek, Lycos, go2net's MetaCrawler
and Snap. We may also face increased competition from traditional media
companies expanding onto the Internet.
Many of our current customers have established relationships with certain of
our current and potential future competitors. If our competitors develop
content and commerce services that are superior to ours or that achieve greater
market acceptance than ours, our business will suffer. See "Factors Affecting
InfoSpace.com's Operating Results, Business Prospects and Market Price of
Stock--Our Business Is Highly Competitive."
Governmental Regulation
Because of the increasing use of the Internet, the government may adopt laws
and regulations relating to the Internet, addressing issues such as user
privacy, pricing, content, taxation, copyrights, distribution and product and
services quality.
18
We may be subject to provisions of the Federal Trade Commission Act that
regulate advertising in all media, including the Internet, and require
advertisers to substantiate advertising claims before disseminating
advertising. The Federal Trade Commission has the power to enforce this Act. It
has recently brought several actions charging deceptive advertising via the
Internet and is actively seeking new cases involving advertising via the
Internet.
We may also be subject to the provisions of the recently enacted
Communications Decency Act. This Act imposes substantial monetary fines and/or
criminal penalties on anyone who distributes or displays certain prohibited
material over the Internet. Although recent court decisions have cast doubt on
the constitutionality of this Act, it could subject us to substantial
liability.
These or any other laws or regulations that may be enacted in the future
could have several adverse effects on our business. These effects include:
. we may be subject to substantial liability, including fines and criminal
penalties;
. we could be prevented from offering certain products or services; and
. the growth in Internet usage could be substantially limited.
Government regulation may present a risk to our business. See "Risk Factors--We
May Become Subject to Government Regulation."
Employees
As of February 28, 1999, we had 76 employees. None of our employees is
represented by a labor union, and we consider our employee relations to be
good. Competition for qualified personnel in our industry is intense,
particularly among software development and other technical staff. We believe
that our future success will depend in part on our continued ability to
attract, hire and retain qualified personnel. See "Factors Affecting
InfoSpace.com's Operating Results, Business Prospects and Market Price of
Stock--We Need to Manage Our Growth and Implement Procedures and Controls" and
"--We Depend on Key Personnel" and "--We Need to Hire Additional Personnel."
Our Executive Officers
The following table sets forth certain information as of March 1, 1999 with
respect to our executive officers and directors:
Name Age Position
- - ---- --- --------
Naveen Jain............. 39 Chief Executive Officer and Chairman of the Board
Bernee D. L. Strom...... 51 President, Chief Operating Officer and Director
Ellen B. Alben.......... 36 Vice President, Legal and Business Affairs and Secretary
Douglas A. Bevis........ 53 Vice President and Chief Financial Officer
Tammy D. Halstead....... 35 Vice President and Chief Accounting Officer
Naveen Jain founded InfoSpace.com in March 1996. Mr. Jain has served as our
Chief Executive Officer since our inception, as our President since our
inception to November 1998 and as our sole director from its inception to June
1998, when he was appointed Chairman of the Board upon the Board's expansion to
five directors. From June 1989 to March 1996, Mr. Jain held various positions
at Microsoft Corporation, including Group Manager for MSN, Microsoft's online
service. From 1987 to 1989, Mr. Jain served as Software Development Manager for
Tandon Computer Corporation, a PC manufacturing company. From 1985 to 1987, Mr.
Jain served as Software Manager for UniLogic, Inc., a PC manufacturing company
and from 1982 to 1985, he served as Product Manager and Software Engineer at
Unisys Corporation/Convergent Technologies, a computer manufacturing company.
Mr. Jain holds a B.S. from the University of Roorkee and an M.B.A. from St.
Xavier's School of Management.
19
Bernee D. L. Strom joined InfoSpace.com in November 1998 as President and
Chief Operating Officer and became a director in December 1998. Since 1990, Ms.
Strom served as President and Chief Executive Officer of the Strom Group, a
venture investment and business advisory firm specializing in high technology.
From April 1995 through June 1997, Ms. Strom served as President and Chief
Executive Officer of USA Digital Radio, LP, a partnership of Westinghouse
Electric Corporation and Gannett Co., Inc. that develops technology for AM and
FM digital radio broadcasting. From 1990 through 1994, she was President and
Chief Executive Officer of MBS Technologies, Inc., a software company. Ms.
Strom was a founder of Gemstar Development Corporation, which developed the
VCRPlus+(R) Instant Programmer, and served as its Vice President from its
founding in 1989 to 1993. Ms. Strom serves as a member of the Board of
Directors of the Polaroid Corporation, Krug International Corporation,
MilleCom, an Internet-based communications company, Walker Digital, an
intellectual property studio, and Quantum Development, a software and services
company. She is a trustee of the National Public Radio Foundation and a member
of CIGNA's Telecommunications Board of Advisors. She also serves as a member of
the Board of Advisors of the J. L. Kellogg Graduate School of Management at
Northwestern University. Ms. Strom holds a B.S., M.A. and Ph.D. from New York
University and an M.B.A. from the Anderson Graduate School of Management at
UCLA.
Ellen B. Alben joined InfoSpace.com in May 1998 as Vice President, Legal and
Business Affairs and Secretary. From April 1997 to May 1998, she was a senior
attorney with Perkins Coie LLP. From September 1996 to April 1997, Ms. Alben
served as a consultant to Paragon Trade Brands, Inc., a private-label diaper
manufacturer, and as special securities counsel to companies raising private
financing. From September 1995 through June 1996, she served as Vice President,
General Counsel and Secretary of Paragon Trade Brands. Paragon Trade Brands
filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code in
January 1997. From July 1994 to September 1995, she served as Senior Associate
Counsel of The Hillhaven Corporation, a nursing home provider, and from June
1993 to July 1994 she served as Associate Counsel of Hillhaven. Prior to
joining Hillhaven, Ms. Alben practiced law with private law firms for seven
years, specializing in corporate securities, finance, and mergers and
acquisitions. She holds a B.A. from Duke University and a J.D. from Stanford
Law School.
Douglas A. Bevis joined InfoSpace.com in August 1998 as Vice President and
Chief Financial Officer. From September 1996 until July 1998, he served as Vice
President and Chief Financial Officer of Apex PC Solutions, Inc., a
manufacturer of stand-alone switching systems and integrated server cabinet
solutions for the client/server computing market, and served as Secretary of
Apex from December 1996 to March 1998. From September 1990 to February 1996,
Mr. Bevis was employed at CH2M HILL, Inc., a national environmental engineering
consulting firm, where he served as Vice President and Treasurer from September
1990 to April 1993 and as Senior Vice President and Chief Financial Officer
from April 1993 to February 1996. Mr. Bevis holds a B.A. from Beloit College, a
Master of Architecture degree from the University of Minnesota and an M.B.A.
from the Harvard Graduate School of Business Administration.
Tammy D. Halstead joined InfoSpace.com in July 1998 as Corporate Controller.
In December 1998, she was appointed Vice President and Chief Accounting
Officer. From March 1997 to June 1998, she worked at the Seattle office of
USWeb Corporation, an Internet professional services firm, where she served as
Director of Finance and Administration and later as Vice President, Finance and
Administration. From April 1996 to March 1997, she was the Director of Finance
and Administration at Cosmix, Inc., which was acquired by USWeb Corporation in
March 1997. From December 1993 to February 1996, she served as Controller of
ConnectSoft, Inc., a software development company. Prior to joining
ConnectSoft, Inc., she spent eight years in private industry with a division of
Gearbulk Ltd., an international shipping company, and in public accounting with
Ernst & Whinney (now Ernst & Young LLP). She holds a B.A. in Business
Administration from Idaho State University and is a licensed CPA.
20
FACTORS AFFECTING INFOSPACE.COM'S OPERATING RESULTS,
BUSINESS PROSPECTS AND MARKET PRICE OF STOCK
In addition to other information in this report, investors evaluating us and
our business should carefully consider the following risk factors. These risks
may impair our operating results and business prospects and the market price of
our stock. This report contains forward-looking statements that involve risks
and uncertainties. These forward-looking statements include, but are not
limited to, statements regarding our business and growth strategy, the expected
benefits of our private label solutions for content and commerce to our
affiliates, advertisers and content providers, the expectation that Netscape
and AOL will meet certain contractual minimum commitments, the expectation that
actual carriage fee payments under the AOL agreement will exceed the sales and
marketing expense recorded for the quarter in which payment is made, the effect
of AOL's acquisition of Netscape, future carriage fees, increased advertising
and public relations expenditures, increased operating expenses and the reasons
for such increases, expected operating losses, increased product development
expenditures, increased costs of revenues, increased product development
expenses, increased sales and marketing expenses, future levels of bad debt
expense, increased general and administrative expenses, anticipated capital
equipment expenditures, anticipated cash needs, the absence of material Year
2000 compliance problems and the time frame and cost of addressing any Year
2000 problems and the successful integration of technology acquired from
Outpost and the cost thereof. Forward-looking statements are subject to known
and unknown risks, uncertainties and other factors that may cause our and the
strategic Internet services industry's actual results, levels of activity,
performance, achievements and prospects to be materially different from those
expressed or implied by such forward-looking statements. The risks set forth
below and elsewhere in this form report could cause actual results to differ
materially from those projected.
We Have a Limited Operating History and a History of Losses.
We have a very limited operating history, which makes it difficult to
evaluate our business and prospects. We have incurred net losses since our
inception in March 1996. At December 31, 1998, we had an accumulated deficit of
approximately $9.9 million. We expect to incur significant operating losses on
a quarterly basis in the future. We may never be profitable. Our prospects must
be considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as Internet services. To
address the risks we face and to be able to achieve and sustain profitability,
we must, among other things:
. develop and maintain strategic relationships with potential content
providers and affiliates;
. identify and acquire the rights to additional content;
. successfully integrate new features with our content and commerce
services;
. expand our sales and marketing efforts, including relationships with
third parties to sell local advertising for our Internet yellow pages
directory services;
. maintain and increase our affiliate and advertiser base;
. successfully expand into international markets;
. retain and motivate qualified personnel; and
. successfully respond to competitive developments.
If we do not effectively address the risks we face, our business will suffer
and we may never achieve or sustain profitability. See "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
21
Our Business Model Is Evolving and Unproven.
Our business model is described below. We:
. aggregate content from third-party content providers;
. integrate related content;
. distribute this content on a private label basis to leading Internet
portals, destination sites and suppliers of PCs and other Internet
appliances; and
. generate revenues from the sale of national and local advertisements and
promotions on the Web pages that deliver our content and commerce
solutions.
Our business model is relatively new to the Internet, is unproven and is
likely to continue to evolve. Accordingly, our business model may not be
successful, and we may need to change it. Our ability to generate significant
advertising and promotion revenues by distributing content services depends, in
part, on our ability to successfully market our content and commerce solutions
to Internet portals and destination sites that currently do not rely on third-
party sources for their content needs and do not typically utilize content
services that are readily available to their competitors. We intend to continue
to develop our business model as we explore opportunities internationally and
in new and unproven areas such as electronic commerce and in providing content
and commerce solutions for emerging Internet appliances.
Our Financial Results Are Likely to Fluctuate.
Our financial results have varied on a quarterly basis and are likely to
fluctuate substantially in the future. These fluctuations may be caused by
several factors, many of which are beyond our control. These factors include:
. the addition or loss of affiliates;
. variable demand for our content and commerce solutions by our affiliates;
. the cost of acquiring and the availability of content;
. the overall level of demand for content and commerce services;
. our ability to attract and retain advertisers and content providers;
. seasonal trends in Internet usage and advertising placements;
. the amount and timing of fees we pay to our affiliates to include our
content and commerce solutions on their Web sites;
. the productivity of our direct sales force and the sales forces of the
independent yellow pages publishers, media companies and direct marketing
companies that sell local Internet yellow pages advertising for us;
. the amount and timing of increased expenditures for expansion of our
operations, including the hiring of new employees, capital expenditures
and related costs;
. our ability to continue to enhance, maintain and support our technology;
. the result of litigation that is currently ongoing against InfoSpace.com,
or any litigation that is filed against us in the future;
. our ability to attract and retain personnel;
. the introduction of new or enhanced services by us or our affiliates, or
other companies that compete with us or our affiliates;
. price competition or pricing changes in Internet advertising and Internet
services, such as ours;
. technical difficulties, system downtime, system failures or Internet
brown-outs;
22
. political or economic events and governmental actions affecting Internet
operations or content; and
. general economic conditions and economic conditions specific to the
Internet.
If one or more of these factors or other factors occur, our business could
suffer.
In addition, because InfoSpace.com only began operations in March 1996, and
because the market for Internet services such as ours is new and evolving, it
is very difficult to predict future financial results. We plan to significantly
increase our sales and marketing, research and development and general and
administrative expenses in 1999. Our expenses are partially based on our
expectations regarding future revenues, and are largely fixed in nature,
particularly in the short term. As a result, if our revenues in a period do not
meet our expectations, our financial results will likely suffer.
Our Business Is Seasonal.
During the summer months and year-end holiday season, Internet usage
typically declines, and our affiliates experience reduced user traffic. In
addition, advertising sales in traditional media, such as broadcast and cable
television, generally declines in the first and third quarters of the year.
This seasonality is likely to cause fluctuations in our financial results.
We Rely on Advertising and Promotion Revenues.
We derive substantially all of our revenues from the sale of national and
local advertisements and promotions on the Web pages that deliver our content,
and we expect this to continue in the future. Our ability to increase our
revenues will depend upon a number of factors, including the following:
. the acceptance of the Internet as an advertising medium by national and
local advertisers;
. the acceptance and regular use of our content and commerce solutions by a
large number of users who have demographic characteristics that are
attractive to advertisers;
. the success of our strategy to sell local Internet yellow pages
advertising through third parties;
. the expansion and productivity of our advertising sales force; and
. the development of the Internet as an attractive platform for electronic
commerce.
We are relying on revenues from local Internet yellow pages advertising as a
significant source of our future revenues. However, we have not yet generated
significant revenues from local Internet yellow pages advertising. See "--We
Rely on Third Parties for Sales of Internet Yellow Pages Advertising."
We Rely on Our Relationships with Affiliates.
We will be able to continue generating revenues from advertising and
promotions only if we can secure and maintain distribution for our content and
commerce solutions on acceptable commercial terms through a wide range of
affiliates. We expect that revenues generated from the sale of advertisements
and promotions delivered through our network of affiliates will continue to
account for a significant portion of our revenues for the foreseeable future.
In particular, we expect that a limited number of our affiliates, including
Netscape, AOL (which acquired Netscape in March 1999), and Microsoft will
account for a substantial portion of our affiliate traffic and, therefore,
revenues over time. Our distribution arrangements with our affiliates typically
are for limited durations of between six months and two years and automatically
renew for successive terms thereafter, subject to termination on short notice.
We cannot assure you that such arrangements will not be terminated or that such
arrangements will be renewed upon expiration of their terms. We generally share
with each affiliate a portion of the revenues generated by advertising on the
Web pages that deliver our content services. We pay carriage fees to certain
affiliates, including Netscape and AOL. These relationships may not be
profitable or result in benefits to us that outweigh the costs of the
relationships.
Our affiliate relationships are in an early stage of development. If
affiliates, especially major affiliates, demand a greater portion of
advertising revenues or require us to make payments for access to their site or
23
device, our business may suffer. In addition, if we lose a major affiliate, we
may be unable to timely or effectively replace the affiliate with other
affiliates with comparable traffic patterns and user demographics. We cannot
predict whether AOL's acquisition of Netscape will harm our business. The loss
of any major affiliate could harm our business. See "Business--Affiliate
Network."
We Rely on Third Parties for Sales of Internet Yellow Pages Advertising.
We rely on arrangements with independent yellow pages publishers, media
companies and direct marketing companies to generate local Internet yellow
pages advertising revenues, both domestically and internationally. These
companies sell enhanced yellow pages listings on our Internet yellow pages
directory services. Under our arrangements with independent yellow pages
publishers, we typically provide exclusive rights to the publisher to sell
local advertising in a specific geographic area, and we do not restrict the
publisher's ability to sell advertising for any other source. We expect to
derive a greater portion of our advertising revenues from these relationships
in the future. These independent yellow pages publishers, media companies and
direct marketing companies have only recently begun to offer local Internet
yellow pages advertising and, accordingly, have extremely limited experience in
forecasting and executing Internet advertising business models. We may have to
expend significant time and effort in training their sales forces.
We base our future operating plans, in part, on the local Internet yellow
pages forecasts of the independent yellow pages publishers, media companies and
direct marketing companies with which we have relationships. We cannot
accurately predict the timing or the extent of the success of these local
advertising efforts. Further, the independent yellow pages publishers, media
companies and direct marketing companies have broad discretion in setting
advertising rates, and they may not develop a profitable business model. We
also rely on the advertisement production infrastructure of these companies for
the billing and collection of local advertising payments and the production and
filing of display advertisements and button advertisements. The failure of
these sales relationships to generate meaningful revenues for us or for these
companies to cease to maintain and support an advertisement production
infrastructure could harm our business. See "Business--Advertising and
Promotions."
Advertisers May Not Adopt the Internet as an Advertising Medium.
Most advertising agencies and potential advertisers, particularly local
advertisers, have only limited experience advertising on the Internet and have
not devoted a significant portion of their advertising expenditures to Internet
advertising. As the Internet evolves, advertisers may find Internet advertising
to be a less effective means of promoting their products and services relative
to traditional methods of advertising and may not continue to allocate funds
for Internet advertising. In addition, advertising on the Internet is at a much
earlier stage of development in international markets compared to the United
States.
Fluid and intense competition in the sale of advertising on the Internet has
led different vendors to quote a wide range of rates and offer a variety of
pricing models for various advertising services. As a result, we have
difficulty projecting future advertising revenues and predicting which pricing
models advertisers will adopt. For example, if many advertisers base their
advertising rates on the number of click throughs from our content services to
their Web pages, instead of solely on the number of impressions received, our
revenues could decrease. There are no widely accepted standards for the
measurement of the effectiveness of Internet advertising, and standards may not
develop sufficiently to support Internet advertising as a significant
advertising medium. We typically base our advertising rates on the number of
impressions received, and our advertising customers may not accept our
measurements or such measurements may contain errors.
Industry analysts and others have made many predictions concerning the growth
of the Internet as a commercial medium. Many of these historical predictions
have overstated the growth of the Internet and should not be relied upon. This
growth may not occur or may occur more slowly than estimated. In addition,
24
if a large number of consumers use "filter" software programs that limit or
remove advertising from the Web, advertisers may choose not to advertise on the
Internet. If the commercial use of the Internet does not develop, or if the
Internet does not develop as an effective and measurable medium for
advertising, our business will suffer. See "Business--Advertising and
Promotions."
We Rely on a Small Number of Advertising Customers.
We derive a substantial portion of our revenues from a small number of
advertising customers. We expect that this will continue in the forseeable
future. In particular, 800-U.S. Search, Inc. accounted for approximately 20.6%
of our revenues for the year ended December 31, 1998. In addition, 800-U.S.
Search represented approximately 38.1% of our accounts receivable as of
September 30, 1998 and 27.3% of our accounts receivable as of December 31,
1998.
Our top ten advertising customers represented 47.8% of our revenues in 1998.
If we lose any of these customers, including 800-U.S. Search in particular, or
if any of these customers are unable or unwilling to pay us amounts that they
owe us, our financial results will suffer.
Many of Our Customers Are Emerging Internet Companies.
A significant portion of our revenues is derived from sales of advertising to
other Internet companies. Many of these companies have limited operating
histories, are operating at a loss and have limited access to capital. Many of
these businesses could fail and, in any event, represent credit risks. Our bad
debt expense represented approximately 9.7% of our revenues in the quarter
ended September 30, 1998 and 4.6% of our revenues in the quarter ended December
31, 1998. If our customer base experiences financial difficulties or fails to
experience commercial success, our business will suffer.
Our Advertising Arrangements Involve Risks.
We typically sell national advertisements pursuant to short-term agreements
of less than six months. As a result, our national advertising customers could
cancel these agreements, change their advertising expenditures or buy
advertising from our competitors on relatively short notice and without
penalty. Because we expect to derive a large portion of our future revenues
from sales of national advertising, these short-term agreements expose us to
competitive pressures and potentially severe fluctuations in our financial
results.
In addition, we typically guarantee our national advertising customers a
minimum number of impressions or click throughs by Web users. These
arrangements expose us to potentially significant risks. If we fail to deliver
these minimum levels, we typically have to provide free advertising to the
customer until the minimum level is met, which could harm our financial
results.
We occasionally guarantee the availability of advertising space in connection
with promotion arrangements and content agreements. In addition, we
occasionally provide customized advertising campaigns for advertisers and agree
with certain advertisers that we will not accept advertising from any other
customer within a particular subject matter. All of these arrangements subject
us to certain risks. These risks include:
.our potential inability to meet the guarantees we make to our customers;
. our allocation of resources to create customized advertising that may not
result in successful advertisements; and
. a requirement to forego advertising from potential customers whose
advertisements would conflict with those of other customers.
Any of these results could harm our financial results.
25
We Depend on Third Parties for Content.
We typically do not create our own content. Rather, we acquire rights to
information from more than 60 third-party content providers, and our future
success is critically dependent upon our ability to maintain relationships with
these content providers and enter into new relationships with other content
providers. Our current content providers include:
. infoUSA, Inc. (formerly known as American Business Information, Inc.),
for yellow pages and white pages information;
. Carroll Publishing, Inc., for government directories;
. Leisure Planet, Inc., for enhanced hotel information; and
. CareerPath, Inc., for employment listings.
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, including infoUSA, a one-time fee or a
fee for each query from Web users. In the future, we expect that certain of our
content providers will likely demand a greater portion of advertising revenues
or increase the fees that they charge us for their content. If we fail to enter
into and maintain satisfactory arrangements with content providers, our
business will suffer. See "--We Need to Manage Our Growth and Implement
Procedures and Controls."
We Depend on Key Personnel.
Our performance depends on the continued services of our executive officers
and other key personnel. We maintain key person life insurance on Naveen Jain,
our Chief Executive Officer, in the amount of $5.0 million. We do not maintain
key person life insurance policies on any of our other employees. If we lose
the services of any of our executive officers or other key employees, our
business could suffer. See "Business--Employees" and "--Our Executive
Officers."
We Need to Hire Additional Personnel.
Our future success depends on our ability to identify, attract, hire, train,
retain and motivate highly skilled technical, managerial, sales and marketing
and business development personnel. We intend to hire a significant number of
technical, sales and marketing, business development and administrative
personnel during the next year. If we fail to successfully attract, assimilate
and retain a sufficient number of qualified technical, managerial, sales and
marketing, business development and administrative personnel, our business
could suffer.
We Need to Manage Our Growth and Implement Procedures and Controls.
We have rapidly and significantly expanded our operations and anticipate
further significant expansion to accommodate expected growth in our customer
base and market opportunities. We have increased the number of employees from
15 at January 1, 1998 to 76 at February 28, 1999. This expansion has placed,
and is expected to continue to place, a significant strain on our management,
operational and financial resources. Since May 1998, we have added a number of
key managerial, technical and operations personnel, including our President and
Chief Operating Officer, Chief Financial Officer, Chief Accounting Officer and
Vice President, Legal and Business Affairs, and we expect to add additional key
personnel in the near future. We are also significantly increasing our employee
base.
We are in the process of implementing improvements in our operational,
accounting and information systems, procedures and controls. In the past, our
controls have not been adequate to ensure proper communication within our
company regarding, and to properly document, the terms of certain of our
written and verbal contracts and the termination of certain contracts.
Specifically, in May 1997, we entered into a written acquisition agreement that
included a formula to be used in determining the final purchase
26
price. Subsequently, pursuant to a verbal understanding that did not include
the use of this formula, we made a determination of the final purchase price.
This understanding was not documented and, as a result, we initially accounted
for the transaction improperly, which required us to restate our financial
statements. Also in the past, we did not consistently follow our procedures
with respect to the documentation of the granting of options to new employees,
and, at times, we failed to maintain an appropriate level of internal
communication regarding the potential hiring of new employees, especially
management employees. These inadequacies have led to claims against us, some of
which are still pending. See "--We Are Subject to Pending Legal Proceedings."
Our relationships with content providers, affiliates and advertisers are
subject to frequent change and have often been informal. In particular, we may
have failed to perform our obligations under certain commercial contracts that
may have been modified or terminated by verbal agreement. We believe that any
failure to perform our obligations was not significant. This practice of the
modification or termination of past written agreements by verbal agreement has
resulted, and may result in the future, in disputes regarding the existence,
interpretation and circumstances regarding modification or termination of
commercial contracts. We are currently involved in litigation with Internet
Yellow Pages, Inc., a direct marketing company with which we had a cooperative
sales relationship, and have received other claims. infoUSA recently advised us
that they believed we were not complying with certain terms of our written
agreement and would terminate our agreement if we did not cure such non-
compliance. We believe that we have satisfactorily addressed their concerns. If
our relationships with content providers, affiliates and advertisers evolve in
an adverse manner, if we get into contractual disputes with content providers,
affiliates or advertisers or if any agreements with such persons are
terminated, our business could suffer. See "Legal Proceedings."
We have taken a number of steps to improve our accounting and information
systems, procedures and controls, including the hiring of a President and Chief
Operating Officer, Chief Financial Officer, Chief Accounting Officer and a Vice
President, Legal and Business Affairs and other financial and administrative
personnel. In addition, we have adopted certain policies with respect to the
approval, tracking and management of our commercial agreements, including:
. standardizing the form of our commercial agreements, where possible;
. requiring our legal and accounting departments to review any proposed
commercial contract and approve contract modifications prior to their
implementation;
. prohibiting ourselves from entering into verbal agreements or verbal
modifications or terminations of agreements; and
. establishing a contracts database to serve as a central source of key
information regarding our commercial contracts, which will facilitate the
tracking and management of these contracts.
We may be unable to successfully implement these policies. Furthermore, these
steps may be inadequate to prevent disputes or issues relating to inadequate
internal communications from arising in the future.
To manage the expected growth of our operations and personnel, we must
continue improving or replacing existing operational, accounting and
information systems, procedures and controls. We will also need to expand,
train and manage our growing employee base, particularly our finance,
administrative and operations staff. Further, we must manage effectively our
relationships with various Internet content providers, advertisers, affiliates
and other third parties necessary to our business. If we are unable to manage
growth effectively, our business could suffer. See "--We Are Subject to Pending
Legal Proceedings," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business--Employees" and "--Our
Executive Officers."
Our International Expansion Plans Involve Risks.
A key component of our strategy is expanding our operations into
international markets. We have entered into a joint venture agreement with
Thomson Directories Limited to replicate our content and commerce solutions in
Europe. The joint venture, TDL InfoSpace (Europe) Limited, has targeted the
27
United Kingdom as its first market, and it launched content services in the
third quarter of 1998. We expect that TDL InfoSpace will expand its content
services to other European countries. Under the joint venture agreement, each
of us is obligated to negotiate with TDL InfoSpace and the other party to
jointly offer content and commerce solutions in other European countries prior
to offering such services independently or with other parties. To date, we have
limited experience in developing and syndicating localized versions of our
content services internationally, and we may not be able to successfully
execute our business model in these markets. In addition, international markets
experience lower levels of Internet usage and Internet advertising than the
United States. We rely on our business partner in Europe for U.K. directory
information and local sales forces and may enter into similar relationships if
we expand into other international markets. Accordingly, our success in these
markets will be directly linked to the success of our business partners in such
activities. If our business partners fail to successfully establish operations
and sales and marketing efforts in these markets, our business could suffer.
See "Business--International Expansion."
In addition, we face a number of risks inherent in doing business in
international markets, including, among others:
.unexpected changes in regulatory requirements;
.potentially adverse tax consequences;
.export controls relating to encryption technology;
.tariffs and other trade barriers;
.difficulties in staffing and managing foreign operations;
.changing economic conditions;
. exposures to different legal standards (particularly with respect to
intellectual property and distribution of information over the Internet);
.burdens of complying with a variety of foreign laws;
.fluctuations in currency exchange rates; and
. seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world.
If any of these risks occur, our business could suffer.
Our Business Is Highly Competitive.
We operate in the Internet 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 content
and commerce services are:
. the ability to provide content of broad appeal, which is likely to result
in increased user traffic and increase the brand name value of the Web
sites and Internet appliances to which the services are provided;
. the ability to meet the specific content demands of a particular Web site
or Internet appliance;
. the cost-effectiveness and reliability of the content and commerce
services;
. the ability to provide content and commerce services that are attractive
to advertisers;
. the ability to achieve comprehensive coverage of a particular category of
content; and
. the ability to integrate related content to increase the utility of the
content and commerce services offered.
28
We compete, directly or indirectly, in the following ways, among others:
. our directory services compete with AnyWho? (a division of AT&T), GTE
SuperPages, Switchboard, ZIP2 (which recently announced its acquisition
by Compaq), various RBOCs' directory services, infoUSA's Lookup USA,
Microsoft Sidewalk and Yahoo! Yellow Pages and White Pages;
. other services we provide, such as classifieds, horoscopes and real-time
stock quotes, compete with specialized content providers;
. our U.K. joint venture will compete with British Telecom's YELL service
and Scoot (UK) Limited; and
.our commerce services will compete with Inktomi, Amazon.com's Junglee and
Excite's Jango.
We expect that in the future we will experience competition from other
Internet services companies and providers of Internet software, including
Microsoft, Netscape, Yahoo!, AOL, Excite, Infoseek, Lycos, go2net's MetaCrawler
and Snap. We may also face increased competition from traditional media
companies expanding onto the Internet.
Many of our current customers have established relationships with certain of
our current and potential future competitors. If our competitors develop
content and commerce services that are superior to ours or that achieve greater
market acceptance than ours, our business will suffer. See "Business--
Competition."
Our Business Relies on the Performance of Our Systems.
Our success depends, in part, on the performance, reliability and
availability of our content and commerce services. Our revenues depend, in
large part, on the number of users that access our content and commerce
services. Our computer and communications hardware is located at our main
headquarters in Redmond, Washington and in additional hosting facilities
provided by Exodus Communications, Inc. and Savvis Communications Corporation
in Seattle, Washington. Our systems and operations could be damaged or
interrupted by fire, flood, power loss, telecommunications failure, Internet
breakdown, break-in, earthquake and similar events. We do not have a formal
disaster recovery plan, and we do not carry business interruption insurance
that is adequate to compensate us for losses that may occur. In addition,
systems that use sophisticated software may contain bugs, which could also
interrupt service. Any system interruptions resulting in the unavailability of
our content and commerce services would reduce the volume of users able to
access our content and commerce services and the attractiveness of our service
offerings to our affiliates, advertisers and content providers, which could
harm our business.
Our Industry Is Experiencing Consolidation.
The Internet industry has recently experienced substantial consolidation. For
example, AOL has acquired Netscape, USA Networks has announced that it will
acquire Lycos, At Home has announced that it will acquire Excite and Compaq has
announced that it will acquire ZIP2. We expect this consolidation to continue.
These acquisitions could affect us in a number of ways, including:
. companies from whom we acquire content could be acquired by one of our
competitors and stop selling us content;
. our customers could be acquired by one of our competitors and stop buying
advertising from us; and
. our customers could merge with other customers, which could reduce the
size of our customer base.
This consolidation in the Internet industry could harm our business.
We Are Subject to Pending Legal Proceedings.
From time to time we have been, and expect to continue to be, subject to
legal proceedings and claims in the ordinary course of our business, including
claims of alleged infringement of third-party trademarks
29
and other intellectual property rights by us. Such claims, even if not
meritorious, could require the expenditure of significant financial and
managerial resources, which could harm our business.
On April 16, 1998, one of our former employees filed a complaint in the
Superior Court for Santa Clara County, California alleging, among other things,
that he had the right in connection with his employment to purchase shares of
our common stock representing up to 5% of our equity as of an unspecified date.
We settled this lawsuit in February 1999. Under the settlement, we made a cash
payment of $4.5 million.
An alleged former employee has filed a complaint alleging that he was
terminated without cause and that he entered into an agreement with us that
entitles him to an option to purchase 2,000,000 shares of our common stock or
10% of our stock. The complaint alleges breach of contract, breach of the
covenant of good faith, breach of fiduciary duty, misrepresentation, promissory
estoppel, intentional interference with contractual relations and unfair and
deceptive acts and practices, seeking specific performance of the alleged
agreement for 10% of our stock, damages equal to the value of 10% of our stock,
punitive damages and attorneys' fees and costs and treble damages.
We have filed a complaint against Internet Yellow Pages, Inc., or IYP,
asserting claims for (a) account stated, (b) breach of contract, and (c) fraud.
IYP has filed a complaint against us asserting causes of action for breach of
contract, fraud, extortion and racketeering and seeks relief consisting of
$1,500,000 and other unquantified money damages, punitive damages, treble
damages and attorney's fees.
On February 24, 1999, we received a letter from counsel for a former content
provider claiming that it is entitled to an option to acquire up to 5% of
InfoSpace.com. We have reviewed the claim and believe that it is entirely
without merit. We responded to the counsel accordingly in a letter dated March
4, 1999 and intend to vigorously defend any suit if filed.
We believe we have meritorious defenses to all of these claims against us.
Nevertheless, litigation is inherently uncertain, and we may not prevail in
these suits. To the extent that we are required to issue shares of our common
stock or options to purchase common stock as a result of the claim filed by the
alleged former employee or the former content provider, we would recognize an
expense equal to the number of shares issued multiplied by the fair value of
our common stock on the date of issuance, less the exercise price of any
options required to be issued. This could harm our results of operations, and
any such issuance would be dilutive to existing stockholders, the impact of
which may be mitigated to the extent it is offset by shares of common stock in
the escrow account described in "Legal Proceedings."
On January 26, 1999, Civix-DDI, LLC filed a complaint in U.S. District Court
in Colorado against us and 19 other defendants for infringement of two patents
relating to electronic mapping systems. Attorneys for Civix also have proposed
a settlement of the litigation by which the patents would be licensed to us in
exchange for a single unspecified lump sum royalty payment. We have not yet
been able to formulate a position on the complaint or on the proposed
settlement.
We had discussions with a number of individuals in the past regarding
employment by us and also hired and subsequently terminated a number of
individuals as employees or consultants. Furthermore, primarily during our
early stage of development, our procedures with respect to the manner of
granting options to new employees were not clearly documented. As a result of
these factors, and in light of the receipt of the above claims, we have in the
past received, and may in the future receive, similar claims from one or more
individuals asserting rights to acquire shares of our stock or to receive cash
compensation. We cannot predict whether such future claims will be made or the
ultimate resolution of any currently outstanding or future claim. Naveen Jain,
our Chief Executive Officer, has placed into escrow 1,000,000 shares of our
stock beneficially owned by him to indemnify us and our directors for a period
of five years for certain liabilities relating to events prior to September 30,
1998. The indemnification agreement, however, does not provide for
indemnification for certain matters known by the Board prior to September 30,
1998 or losses less than $100,000. Satisfaction of such liabilities through the
issuance of escrowed shares could result in the recognition of future expenses,
which could harm our results of operations. See "Legal Proceedings."
30
We Rely on Internally Developed Software and Systems.
We have developed custom software for our network servers. This software may
contain undetected errors, defects or bugs. Although we have not suffered
significant harm from any errors or defects to date, we may discover
significant errors or defects in the future that we may or may not be able to
fix. We must expand and upgrade our technology, transaction-processing systems
and network infrastructure if the volume of traffic on our Web site or our
affiliates' Web sites increases substantially. In addition, if we expand into
electronic commerce, we may have to significantly modify our systems. We could
experience periodic temporary capacity constraints, which may cause
unanticipated system disruptions, slower response times and lower levels of
customer service. We may be unable to accurately project the rate or timing of
increases, if any, in the use of our content services or expand and upgrade our
systems and infrastructure to accommodate these increases in a timely manner.
Any inability to do so could harm our business. See "Business--Technology and
Infrastructure."
Rapid Technological Change Affects Our Business.
Rapidly changing technology, evolving industry standards, evolving customer
demands and frequent new product and service introductions characterize our
market. Our market's early stage of development exacerbates these
characteristics. Our future success depends in significant part on our ability
to improve the performance, content and reliability of our content 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 content services.
We Rely on the Internet Infrastructure.
Our success depends, in large part, on other companies maintaining the
Internet 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
infrastructure may be unable to support the demands placed on it, and the
Internet's performance or reliability may suffer as a result of this continued
growth. In addition, the Internet could lose its commercial viability as a form
of media due to delays in the development or adoption of new standards and
protocols to process increased levels of Internet activity. Any such
degradation of Internet performance or reliability could cause advertisers to
reduce their Internet expenditures. If other companies do not develop the
infrastructure or complementary products and services necessary to establish
and maintain the Internet as a viable commercial medium, or if the Internet
does not become a viable commercial medium or platform for advertising,
promotions and electronic commerce, our business could suffer.
We Receive Information that May Subject Us to Liability.
We obtain content from third parties. When we aggregate, syndicate and
distribute this content 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 agreement with ETAK, Inc., which has provided our mapping and
directions content, does not contain an indemnity provision that would apply to
our pending litigation with Civix-DDI. While we carry general business
insurance with a limit of $1.0 million for each occurrence and $2.0 million in
the aggregate, this coverage may be inadequate.
In addition, individuals whose names appear in our yellow pages and white
pages directories have occasionally contacted us. These individuals believed
that their phone numbers and addresses were unlisted,
31
and our directories are not always updated to delete phone numbers or addresses
when they are changed from listed to unlisted. While we have not received any
claims from these individuals, we may receive claims in the future. Any
liability that we incur as a result of content we receive from third parties
could harm our financial results.
Our Networks Face Security Risks.
Even though we have implemented security measures, our networks may be
vulnerable to unauthorized access by hackers or others, computer viruses and
other disruptive problems. Someone who is able to circumvent security measures
could misappropriate our proprietary information or cause interruptions in our
Internet operations. Internet and online service providers have in the past
experienced, and may in the future experience, interruptions in service as a
result of the accidental or intentional actions of Internet users, current and
former employees or others. We may need to expend significant capital or other
resources protecting against the threat of security breaches or alleviating
problems caused by breaches. Although we intend to continue to implement
industry-standard security measures, persons may be able to circumvent the
measures that we implement in the future. Eliminating computer viruses and
alleviating other security problems may require interruptions, delays or
cessation of service to users accessing Web pages that deliver our content
services, any of which could harm our business. See "Business--Technology and
Infrastructure--Data Network Infrastructure" and "Business--Facilities."
Users of online commerce services are highly concerned about the security of
transmissions over public networks. Concerns over security and the privacy of
users may inhibit the growth of the Internet and other online services
generally, and the Web in particular, especially as a means of conducting
commercial transactions. As we expand our electronic commerce services, we
intend to rely on encryption and authentication technology licensed from third
parties to provide the security and authentication necessary to securely
transmit confidential information, such as customer credit card numbers. Users
could possibly circumvent the measures we take to prote