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BLUCORA, INC. 10-K 2005
ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

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, 2004

 

OR

 

¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                          to                         

 

Commission File Number 0-25131

 

INFOSPACE, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   91-1718107

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

601 108th Avenue NE, Suite 1200, Bellevue, Washington 98004

(Address of principal executive offices) (Zip code)

 

Registrant’s telephone number, including area code:

(425) 201-6100

 


 

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.  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).  Yes  x  No  ¨

 

The aggregate market value of the voting stock held by non-affiliates of the registrant outstanding as of June 30, 2004, based upon the closing price of Common Stock on June 30, 2004 as reported by Nasdaq, was approximately $961.2 million. Shares of voting stock held by each officer and director and by each person who owns 5% or more of the outstanding voting stock (as publicly reported by such persons pursuant to Section 13 and Section 16 of the Securities Exchange Act of 1934) 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 25, 2005, 33,124,961 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 9, 2005 (the “Proxy Statement”).

 



Table of Contents

TABLE OF CONTENTS

 

Part I

         

Item 1.

   Business    3

Item 2.

   Properties    22

Item 3.

   Legal Proceedings    22

Item 4.

   Submission of Matters to a Vote of Security Holders    22

Part II

         

Item 5.

   Market for Registrant’s Common Stock and Related Stockholder Matters    23

Item 6.

   Selected Consolidated Financial Data    24

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    26

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk    47

Item 8.

   Financial Statements and Supplementary Data    48

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    87

Item 9A.

   Controls and Procedures    87

Part III

         

Item 10.

   Executive Officers and Directors of the Registrant    87

Item 11.

   Executive Compensation    88

Item 12.

   Security Ownership of Certain Beneficial Owners and Management    88

Item 13.

   Certain Relationships and Related Transactions    88

Item 14.

   Principal Accounting Fees and Services    88

Part IV

         

Item 15.

   Exhibits and Financial Statement Schedules    89

Signatures

   92

 

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ITEM 1.    Business

 

This report contains forward-looking statements that involve risks and uncertainties. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “anticipates,” “believes,” “plans,” “expects,” “future,” “intends,” “may,” “will,” “should,” “estimates,” “predicts,” “potential,” “continue,” and similar expressions to identify such forward-looking statements. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance, achievements and prospects, and those of the wireless and Internet software and application services industry generally, to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties and other factors include, among others, those identified under “Factors Affecting Our Operating Results, Business Prospects and Market Price of Stock” and elsewhere in this report.

 

On September 13, 2002, we effected a one-for-ten reverse split of our issued and outstanding common stock. We also effected two-for-one stock splits on May 5, 1999, January 4, 2000 and April 6, 2000. Historical share numbers and prices throughout this Annual Report on Form 10-K are split-adjusted.

 

Overview

 

InfoSpace, Inc. (“InfoSpace”, “Our” or “We”) is a diversified technology and services company comprised of our Search & Directory and Mobile business units. We were founded in 1996 and are incorporated in the state of Delaware. Our principal corporate offices are located in Bellevue, Washington. We also have facilities in Los Angeles and San Mateo, California; Westboro, Massachusetts; Woking and Eastleigh, United Kingdom; Papendrecht, The Netherlands; and Wedel, Germany. Our common stock is listed on the Nasdaq National Market under the symbol “INSP.”

 

Prior to 1997, we had insignificant revenues and were primarily engaged in the development of technology for the aggregation, integration and distribution of Internet content. In 1997, we expanded our operations, adding sales personnel to capitalize on the opportunity to generate Internet advertising revenues and began generating significant revenue with our on-line services. Since then, we have expanded and enhanced our products and application services through both internal development and acquisitions.

 

In 2003 and 2004, we tightened our strategic focus to two businesses: Search & Directory and Mobile. We sold our Payment Solutions business for $82.0 million in cash and sold or otherwise disposed of other non-core services, expanded our Search & Directory business, which included the acquisition of Switchboard Incorporated (“Switchboard”), an on-line directory company, and expanded our Mobile business with the acquisition of several mobile content and application businesses.

 

Company Internet Site and Availability of SEC Filings.    Our corporate Internet site is located at www.infospaceinc.com. We make available on that site our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, as well as any amendments to those filings, and other filings we make electronically with the U.S. Securities and Exchange Commission (the “SEC”). The filings can be found in the Investor Relations section of our site and are available free of charge. Information on our Internet site is not part of this Form 10-K. In addition to our Web site, the SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding us and other issuers that file electronically with the SEC.

 

SEARCH & DIRECTORY

 

Our Search & Directory services enable Internet users to locate information, merchants, individuals and products on-line. We offer Search & Directory services through our branded Web sites, InfoSpace.com, Dogpile.com, Switchboard.com, Webcrawler.com and MetaCrawler.com, as well as through the Web properties of distribution partners. Partner versions of our Search & Directory services are generally private-labeled and delivered with each customer’s unique requirements.

 

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Revenue growth in Search & Directory is primarily determined by two key drivers: the number of paid searches and the price per paid search. Generally, each time a user “clicks” on a commercial search result or views a paid directory listing, the search engine or listing provider pays us a fee. Beginning in the second quarter of 2003, we began reporting the number of paid searches and the average revenue per paid search. Our Search & Directory business in North America generated an aggregate of approximately 750 million paid searches during the year ended December 31, 2004, at an average revenue per paid search of approximately $0.17.

 

Search

 

Our Search properties enable Internet users to locate relevant information, merchants and products on-line. We deliver results from leading search engines, including Yahoo! and Google, among others. Our search offerings differ from most other mainstream search services in that they provide “meta-search” technology that selects results from several search engines. We offer search services through our own Web sites, as well as through the Web properties of distribution partners including WebSearch.com, WhenU.com, Cablevision, Verizon Online, Info.com and others. The majority of Search revenue growth in 2004 and 2003 was generated through the addition of new distribution partners and the growth of existing distribution partners.

 

We compete against major Internet portals and other providers of Web search services. We also compete against more traditional advertising media, including radio, network and cable television, newspaper, magazines, Internet, direct mail and others for a share of the U.S. advertising media market.

 

Directory

 

Our Directory services include on-line yellow and white pages services. InfoSpace Directory properties help Internet users find local and national merchants and individuals in North America. With our Directory products, users can identify local or national businesses, locate contact information for friends and associates, or search for items to buy, sell, or rent. We offer Directory services through our branded Web sites, such as Switchboard.com and InfoSpace.com, as well as through distribution relationships. Our distribution partners include AT&T’s Anywho.com and AOL.

 

On June 3, 2004, we acquired all of the outstanding stock of Switchboard, a provider of local on-line advertising and Internet based yellow pages, for $7.75 per share totaling approximately $159.4 million in cash, plus transaction fees of approximately $6.2 million, for an aggregate purchase price of approximately $165.6 million. As of the acquisition date, Switchboard had approximately $56.4 million in cash and marketable securities and no debt. We acquired Switchboard to further expand our presence in the on-line directory industry, and, in addition to other items, because of Switchboard’s brand name and trademark recognition and existing traffic base.

 

Our on-line yellow page services allow users to find telephone, address and other information for local and national merchants. We provide both on-line and “brick-and-mortar” merchants with a Web-based yellow pages listing that is targeted to consumers looking specifically for the products and services that those merchants offer. We obtain the underlying directory listings primarily through our relationships with Verizon, BellSouth and Dex Media.

 

Our on-line white pages service enables users to find telephone and address information, as well as more detailed information, on individuals. In the white pages market, we have relationships with U.S. advertisers of services that make available public information on people and businesses, and derive substantially all of our revenue from advertising.

 

Our Directory services compete against major Internet portals, print and on-line directories from the Regional Bell Operating Companies (“RBOCs”), and independent print and Web-based directories. We also compete against more traditional advertising media, including radio, network and cable television, newspapers, magazines, Internet, direct mail and others for a share of the total U.S. advertising market.

 

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MOBILE

 

Our Mobile division provides mobile media products and content to mobile operators across multiple devices and portal and infrastructure services that enable mobile carriers to deliver content and programming to their subscribers. Through our products, content and service offerings, our mobile operator partners are able to aggregate, configure and customize the services they offer under their own brand and deliver them to their customers.

 

In November 2003, we acquired Moviso LLC (“Moviso”), a mobile media company, from Vivendi Universal Net USA Group, Inc. for $25.0 million in cash. The acquisition of Moviso provided us with mobile operator relationships and an extensive content library, primarily ringtones and graphics, improving our ability to help content brands and media companies get their content and applications quickly and easily to wireless subscribers. Additionally, during 2004 and early 2005, we expanded our mobile content portfolio by acquiring three mobile gaming companies. On July 1, 2004, we acquired the assets of Atlas Mobile, Inc. (“Atlas Mobile”), a provider of mobile multi-player tournament games, for $6.3 million in cash. The acquisition of Atlas Mobile allows us to add multiplayer gaming to our portfolio of applications and products. On December 1, 2004, we acquired all of the outstanding stock of IOMO Limited (“IOMO”), a designer and publisher of mobile games, for approximately $15.4 million in cash, and on January 7, 2005, we acquired elkware GmbH (“elkware”), a German mobile games company, for approximately $26.4 million in cash. The acquisition of both IOMO and elkware expands our role in mobile games by increasing our gaming product portfolio and European operator relationships. Additionally, the acquisition of elkware provides us with a proprietary porting capability technology which allows our games to be converted more rapidly to different mobile phone application platforms.

 

Today, the Mobile division generates revenue primarily from transaction fees, subscriber fees, revenue sharing fees, set-up fees and professional service fees. As of December 31, 2004, we had relationships with many leading mobile operators, including Cingular Wireless, T-Mobile, Verizon Wireless, and Virgin Mobile, and media publishers including Sony BMG, EMI, Warner and Universal Music Group.

 

Competitors include mobile application providers, mobile application aggregators, mobile application enablers, entertainment and other digital media companies, and the mobile operators themselves.

 

Seasonality

 

Our search services and mobile services are generally impacted by traditional retail seasonality, with sales usually increasing in the fourth quarter of each calendar year. Additionally, our search & directory services are generally affected by seasonal fluctuations in Internet usage, which generally declines in the summer months.

 

International Operations

 

We currently maintain facilities in the United States, The Netherlands, the United Kingdom and Germany.

 

We have historically generated most of our revenues from customers in the United States. Revenue generated in the United States accounted for 93% in 2004, 88% in 2003 and 89% in 2002 of our total revenues in those years.

 

Revenue Sources

 

Our revenues are derived from products and services delivered to our customers across our two business units, Search & Directory and Mobile. In 2003 and 2002, we derived 7.9% and 15.0%, respectively, of our revenue from our non-core services. As of the end of 2003, we had sold or otherwise disposed of our non-core services. Additionally, we sold our Payment Solutions business on March 31, 2004, and revenue from the Payment Solutions business is reflected as part of our discontinued operations.

 

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Search & Directory Revenue:    We generate revenues from our Web search and directory (on-line yellow pages and white pages) services. Revenues are generated when an end-user of our services generates a paid search at our Web site. We also generate revenue from paid searches through a distribution partner’s Web property. Revenues are recognized in the period in which a paid search occurs and are based on the amounts earned and remitted to us. We also generate advertising revenues by selling banner, button and text-link advertisements based on cost per search or page view, which are recognized when the services are delivered.

 

Mobile Revenue:    We earn revenues, typically from agreements with mobile operators, for content delivery services, which include both product downloads or subscriber usage, hosting and maintenance services and professional services. We recognize revenue from media and content downloads when the product is delivered. We recognize subscriber revenues based on a fee per user or per usage by the end user. We recognize revenue from hosting services and maintenance of such services in the period in which the service is provided. We sometimes earn one-time user set-up fees, which are generally amortized over the term of the customer contract. We also generate revenues from professional services, which are recognized as revenue in the period in which the work is completed and accepted by the customer.

 

Product Development

 

We believe that our technology is essential to successfully implement our strategy of expanding and enhancing our Search & Directory services and Mobile products, expanding in the mobile data market and maintaining the attractiveness and competitiveness of our products and services. Product development expenses were $23.1 million in the year ended December 31, 2004, $17.8 million in the year ended December 31, 2003, and $29.1 million in the year ended December 31, 2002.

 

Intellectual Property

 

Our success depends significantly upon our technology. To protect our rights, we rely on a combination of copyright and trademark laws, patents, trade secrets, confidentiality agreements with employees and third parties and protective contractual provisions. Most of our employees have executed confidentiality and non-use agreements that contain provisions prohibiting the unauthorized disclosure and use of our confidential and proprietary information and that transfer any rights they may have in copyrightable works or patentable technologies to us that they may develop while under our employ. In addition, prior to entering into discussions with potential content providers and customers regarding our business and technologies, we generally require that such parties enter into nondisclosure agreements with us. If these discussions result in a license or other business relationship, we also generally require that the agreement setting forth the parties’ respective rights and obligations include provisions for the protection of our intellectual property rights. For example, the standard language in our agreements provides that we retain ownership of all patents and copyrights in our technologies and requires our customers to display our patent, copyright and trademark notices.

 

We hold 66 U.S. registered trademarks and 122 foreign trademarks registered in various countries. We also have applied for registration of certain service marks and trademarks in the United States and in other countries, and will seek to register additional marks in the U.S. and foreign countries, as appropriate. We may not be successful in obtaining registration for the service marks and trademarks for which we have applied.

 

We hold 38 U.S. patents. Our issued patents relate to our on-line directory, advertisement and location services, among others. We have many issued foreign patents and patents pending covering some of these technologies. We are currently pursuing certain pending U.S. and foreign patent applications that relate to various aspects of our technology. We anticipate on-going patent application activity in the future. However, patent claims may not be issued, and, if issued, may be challenged or invalidated. In addition, issued patents may not provide us with any competitive advantages and may be challenged or invalidated by third parties.

 

Despite our efforts to protect our 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

 

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proprietary rights to as great an extent as do the laws of the United States. In addition, others could independently develop substantially equivalent intellectual property. If we do not effectively protect our intellectual property, our business could suffer.

 

Companies in the Internet software and application services industry have frequently resorted to litigation regarding intellectual property rights. We may have to litigate to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of others’ proprietary rights. From time to time, we have received, and may receive in the future, notice of claims of infringement of others’ proprietary rights. Responding to any such claims could be time-consuming, result in costly litigation, divert management’s attention, cause product or service release delays, require us to redesign our products or services or require us to enter into royalty or licensing agreements. If a successful claim of infringement were made against us and we could not develop non-infringing technology or license the infringed or similar technology on a timely and cost-effective basis, our business could suffer.

 

MetaCrawler License Agreement.    We hold an exclusive, perpetual worldwide license, subject to certain limited exceptions, to the MetaCrawler intellectual property and related search technology from the University of Washington, which we use in our Search business.

 

Competition

 

We operate in the Internet software and application and mobile services markets, which are extremely competitive and 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 mobile and Internet software and applications are:

 

    the ability to meet the specific information and service demands of a particular Web site, mobile device or platform;

 

    the cost-effectiveness, reliability and security of the products and application services;

 

    the ability to provide products and application services that are innovative and attractive to consumers, merchants, subscribers and other end users;

 

    the ability to develop innovative products and services that enhance the appearance and utility of the Web site, mobile device or platform; and

 

    the ability to meet needs of mobile operators and other major customers.

 

Although we believe that no one competitor offers all of the products and services we do, our primary offerings face competition from various sources. We compete, directly or indirectly, in the following ways, among others:

 

    Our search services compete with major Internet portals and search providers such as Google, Yahoo! and Microsoft’s MSN. Our on-line directory services compete with print and on-line directories from the RBOCs, major Internet portals, and independent print and Web-based directories. Our Search & Directory services also compete against more traditional advertising media, including radio, network and cable television, newspaper, magazines, Internet, direct mail and others for a share of the U.S. advertising market. Other information services we provide compete with specialized content providers.

 

    Our mobile services compete with mobile application aggregators, mobile application enablers, media companies, content developers and publishers, and in-house information technology departments of mobile operators and device manufacturers.

 

    In international markets, we compete with local companies which may have a competitive advantage due to their greater understanding of and focus on a particular local market.

 

We expect that in the future we will experience competition from other Internet software and application and mobile services companies. Some of these companies are currently customers or distribution partners of ours, the loss of which could harm our business.

 

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Many of our current customers have established relationships with some of our current and potential future competitors. Some of our customers are also our competitors. If our competitors develop software and application services that are superior to ours, or that achieve greater market acceptance than ours, our business will suffer.

 

Governmental Regulation

 

Because of the increasing use of the Internet and wireless devices, U.S. and foreign governments have adopted or may in the future adopt laws and regulations relating to the Internet or use of wireless devices, addressing issues such as user privacy, pricing, age verification, content, taxation, copyrights, distribution, and product and services quality.

 

Recent concerns regarding Internet and wireless device user privacy have led to the introduction of U.S. federal and state legislation to protect user privacy. Existing laws regarding user privacy that we may be subject to include the Children’s Online Privacy Protection Act, which regulates the on-line and, in some interpretations, wireless collection of personal information from children under 13, and the Gramm-Leach-Bliley Act, which regulates the collection and processing of personal financial information. Also, with respect to our tournament games, certain states prohibit the provision of prizes in mobile games, and other states may adopt similar prohibitions. In addition, the Federal Trade Commission (the “FTC”) has initiated investigations and hearings regarding Internet user privacy, which could result in rules or regulations that could adversely affect our business. As a result, we could become subject to new laws and regulations that could limit our ability to conduct targeted advertising, or to distribute or collect user information. The various states likewise have sought to regulate advertising and privacy.

 

The various states have likewise sought to regulate advertising and privacy in ways that that may effect the collection, use and disclosure of information. For example, California recently passed several laws relating the collection, storage and distribution of personal information, requiring in part the posting of a privacy policy and disclosure of how information is shared with third parties for marketing purposes.

 

Outside of the United States, other countries have more restrictive privacy laws. The European Union, for example, strictly regulates the collection, use and transfer of personal information of European residents. Further, information lawfully collected in the European Union may not be transferred for processing outside Europe to a country that lacks adequate protections. The European Union has deemed the U.S. to lack such protections and transfers are only permitted under limited circumstances. Other countries such as Canada follow the European model. These and similar restrictions may limit our ability to collect and use information regarding Internet users in those countries.

 

We may be subject to provisions of the Federal Trade Commission Act that regulate advertising in all media, including the Internet, and require advertisers to substantiate advertising claims before disseminating advertising. The FTC has the power to enforce this Act. It has recently brought several actions charging deceptive advertising via the Internet and is actively monitoring advertising via the Internet. States as well have brought such actions. In addition to U.S. laws regulating advertising, other countries strictly regulate direct and indirect marketing over the Internet. For example, the European Union has enacted an electronic communications directive that imposes certain restrictions on the use of cookies and action tags as well as sending of unsolicited communications.

 

We may also be subject to the provisions of the Child Online Protection Act, which restricts the distribution of certain materials deemed harmful to children. The Act is also designed to restrict access to such materials by children, and accordingly, the provisions of this Act may apply to certain Internet and wireless product and service providers even though such companies are not engaged in the business of distributing the harmful materials. Although some court decisions have cast doubt on the constitutionality of this Act, and we have instituted processes for voluntary compliance with provisions of the Act that may be relevant to our business, it could subject us to liability.

 

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These or any other laws or regulations that may be enacted in the future could have adverse effects on our business, including higher regulatory compliance costs, limitations on our ability to provide some services in some countries, and liabilities which might be incurred through lawsuits or regulatory penalties. For example, California requires and several other states are considering requiring that customers whose personal information is disclosed as part of a security breach be notified of the disclosure. We believe we take reasonable steps to protect the security and confidentiality of the information we collect and store but there is no guarantee that third parties will not gain unauthorized access despite our efforts.

 

Employees

 

As of February 25, 2005, we had approximately 515 employees. None of our employees are represented by a labor union, and we consider employee relations to be positive. There is competition for qualified personnel in our industry, particularly for software development and other technical staff. We believe that our future success will depend in part on our continued ability to hire and retain qualified personnel.

 

Executive Officers and Directors of the Registrant

 

The following table sets forth certain information as of February 25, 2005 with respect to our executive officers and directors:

 

Name


   Age

  

Position


James F. Voelker

   53    Chairman and Chief Executive Officer

Kathleen H. Rae

   48    President and Chief Operating Officer

David E. Rostov

   39    Chief Financial Officer

Edmund O. Belsheim, Jr.

   52    Chief Administrative Officer and Director

Victor J. Melfi, Jr.

   47    Chief Strategy Officer

Brian T. McManus

   47    Executive Vice President, Search & Directory

Allen M. Hsieh

   45    Chief Accounting Officer and VP Financial Operations

John E. Cunningham, IV

   47    Director

Rufus W. Lumry, III

   58    Director

Lewis M. Taffer.

   57    Director

Richard D. Hearney

   65    Director

George M. Tronsrue, III

   48    Director

Vanessa A. Wittman

   37    Director

 

James F. Voelker has served as our Chairman and Chief Executive Officer since December 2002. He also held the title of President from December 2002 to April 2003. He has served as a director since July 2002. He served as President and a director of NEXTLINK Communications, Inc. (now XO Communications, Inc.), a broadband communications company, from inception in 1994 through 1998. Prior to NEXTLINK, he served as Chief Executive Officer and director of U.S. Signal, a full service competitive local exchange carrier.

 

Kathleen H. Rae was appointed President and Chief Operating Officer in April 2003. She served as a partner of Ignition Partners, LLC, an early stage investment company, from inception in March 2000 to June 2001. She served as Chief Financial Officer and a member of the founding operational team for NEXTLINK Communications, Inc. (now XO Communications, Inc.), from January 1996 through December 1999. She served with Alaska Airlines, Inc. and Horizon Air Industries, Inc., subsidiaries of Alaska Air Group, Inc. from 1987 to 1995, serving as President and Chief Executive Officer of Horizon Air from 1994 to 1995. Ms. Rae holds a B.S. in Business from the University of California, Berkeley.

 

David E. Rostov was appointed Chief Financial Officer in April 2003. From March 2001 to November 2002, he served as Chief Financial Officer of Apex Learning Inc., a provider of on-line advanced placement courses for U.S. high schools. From May 2002 to November 2002, he also served as acting Chief Operating Officer of Apex

 

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Learning. Prior to Apex Learning, he served as Chief Financial Officer of drugstore.com, Inc., an on-line drugstore, from January 1999 to January 2001. He served as Chief Financial Officer of Nextel International (now NII Holdings, Inc.), a provider of integrated wireless communication services, from 1996 to 1999. He served in various financial positions at McCaw Cellular Communications, Inc. from 1992 to 1995. Mr. Rostov holds a B.A. in Economics from Oberlin College, and an M.B.A and M.A. in Public Policy from The University of Chicago.

 

Edmund O. Belsheim, Jr. joined us in November 2000 as Senior Vice President and General Counsel, and was appointed Chief Operating Officer in January 2001 and Chief Administrative Officer in April 2003. He also served as President from July 2001 to December 2002. Mr. Belsheim has also been a director since January 2001. From April 1999 to November 2000, he was a partner at Perkins Coie LLP, a Seattle-based law firm. From 1996 to 1998, Mr. Belsheim served as Vice President, Corporate Development, General Counsel and Secretary of Penford Corporation, a maker of specialty starches. He also served as Senior Vice President, Corporate Development, General Counsel and Secretary of Penwest Pharmaceuticals Co., an oral drug delivery technology and products company. Prior to joining Penford Corporation, Mr. Belsheim was a member of the law firm Bogle & Gates, P.L.L.C. Mr. Belsheim holds an A.B. from Carleton College, an M.A. from The University of Chicago and a J.D. from the University of Oregon.

 

Victor J. Melfi, Jr. joined us in November 2003 as Chief Strategy Officer, after serving in a consulting role from June 2003 to November 2003. Since 1998, he has served as a consultant to and board member of several technology companies, including License Online, a software licensing solutions provider. From July 1998 to October 1999, Mr. Melfi served as CEO of VirtualSpin LLC, a provider of ecommerce software. From February 2000 to January 2002, he was an Entrepreneur Partner at eFund, LLC, a venture capital investment firm. During the same period from February 2000 to December 2001, Mr. Melfi served as CEO of PrairieLaw.com, a legal Web portal. From March 1996 to January 1997, he served as Chief Executive Officer of Multiple Zones International, Inc. (now Zones, Inc.), a direct marketing reseller of technology products, after holding several other positions there from October 1994. From 1990 to 1994, he held several positions at Reader’s Digest Association, Inc. Mr. Melfi holds a bachelor’s degree from Shimer College and an M.B.A. from Yale University.

 

Brian T. McManus joined us in April 2003 as Executive Vice President, Search and Directory. From April 2000 to October 2002, he served as Vice President of Corporate Development at Internet service provider Epoch Internet. From October 1999 to April 2000, he served as Chief Operating Officer of Bazillion Inc., an Internet service provider. From December 1993 to October 1999, he served in a variety of executive positions in Seattle area technology companies, including Chief Executive Officer of Intermind Corporation, an open-source software company, and Chief Executive Officer of AccessLine Technologies Inc., a telecommunications company. Mr. McManus holds a B.S. in Business Administration and Economics from the University of California, Berkeley. He also holds a M.B.A. and a J.D. from the University of Washington.

 

Allen M. Hsieh joined us in June 2003 as Chief Accounting Officer and Vice President Financial Operations. From February 2000 to March 2003, he served as Vice President Finance at Terabeam Corp., a start up technology company. Prior to Terabeam Corp. he served in various positions at PricewaterhouseCoopers LLP, a big four accounting firm, from July 1985 to February 2000, and the last two years as a partner in their accounting and auditing practice. Mr. Hsieh holds a B.A. in Business Administration from the University of Washington.

 

John E. Cunningham, IV has served as a director since July 1998. Mr. Cunningham has been a general partner of Clear Fir Partners, L.P., a private equity investment partnership, since February 1998. Since January 2004, he has served as non-executive chairman of the board of Citel Technologies, Inc., a telecommunications company. From April 1995 until February 2003, he served as President of Kellett Investment Corporation, an investment fund for private companies. During 1997, Mr. Cunningham acted as interim Chief Executive Officer of Real Time Data, a wireless services company. From 1991 to 1994, he served as Chairman and Chief Executive Officer of RealCom Office Communications, a privately-held telecommunications company that merged with MFS Communications Company, Inc. Mr. Cunningham is on the board of directors of Petra Capital, LLC and

 

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Revenue Science, Inc., formerly digiMine.com, and also serves as an advisor to Petra Mezzanine Fund, L.P. He holds a B.A. from Santa Clara University and an M.B.A. from the University of Virginia.

 

Rufus W. Lumry, III has served as a director since December 1998. Since 1992, Mr. Lumry has served as President of Acorn Ventures, Inc., a venture capital firm he founded. Prior to founding Acorn Ventures, Mr. Lumry served as a director and Chief Financial Officer of McCaw Cellular Communications. Mr. Lumry was one of the founders of McCaw in 1982, and retired from McCaw in 1990 as Executive Vice President and Chief Financial Officer. Mr. Lumry holds an A.B. from Harvard University and an M.B.A. from the Harvard Graduate School of Business Administration.

 

Lewis M. Taffer has served as a director since June 2001. Mr. Taffer is currently an independent management consultant. From January 2004 to January 2005, Mr. Taffer served as Executive Vice President, Acquisition Marketing of America Online. From May 2001 to January 2004, Mr. Taffer was an independent consultant specializing in marketing, business development and strategic partnerships. From 1979 through April 2001, Mr. Taffer served in various positions at American Express Company, most recently as Senior Vice President—Corporate Business Development, a position at which he developed and launched an on-line shopping portal for American Express Cardmembers, which utilized InfoSpace services. Mr. Taffer serves on the board of directors of Lymphoma Research Foundation, a nonprofit entity. Mr. Taffer holds a B.A. from the University of Pittsburgh and a J.D. from the University of Michigan.

 

Richard D. Hearney has served as a director since September 2001. General Hearney served as President and Chief Executive Officer of Business Executives for National Security, an organization focusing on national security policy, from January 2000 to April 2002. General Hearney joined McDonnell Douglas Corporation in 1996 and served as Regional Vice President of Business Development—Western Europe until the acquisition of McDonnell Douglas by The Boeing Company in 1997, and subsequently served as Vice President of the Military Aircraft and Missile Systems Group of Boeing until November 1999. General Hearney served in the United States Marine Corps for over 35 years, and retired from military service in 1996 as Assistant Commandant of the Marine Corps. He holds a B.A. from Stanford University and an M.A. from Pepperdine University and graduated from the Naval War College.

 

George M. Tronsrue, III was appointed as a director in February 2003. Mr. Tronsrue is currently Co-Manager of Jericho Fund, LLC, an investment and consulting company. From January 2000 to March 2004, Mr. Tronsrue served as Chairman and Chief Executive Officer of Monet Mobile Networks Inc., a Seattle-based wireless Internet service provider. Monet Mobile filed for Chapter 11 bankruptcy protection in March 2004, and a U.S. trustee was appointed. From October 1997 to October 1999, Mr. Tronsrue was with XO Communications, Inc. (formerly NEXTLINK Communications, Inc.), a broadband communications company, where he served as Chief Operating Officer and was also appointed as President in July 1998. Prior to his tenure at XO Communications, Mr. Tronsrue was a member of the initial executive management team of American Communications Services, Inc. (later called e.spire Communications, Inc.), an Internet data and fiber infrastructure company. Prior to e.spire, Mr. Tronsrue was employed by Teleport Communications Group and MFS Communications. Mr. Tronsrue serves on the boards of directors of several private companies and charitable organizations. Mr. Tronsrue holds a B.S. from the U.S. Military Academy.

 

Vanessa A. Wittman was appointed as a director in April 2003. She presently serves as Executive Vice President and Chief Financial Officer of Adelphia Communications Corporation, where she has served since March 2003. From February 2000 to March 2003, she was Chief Financial Officer of broadband network services provider 360networks Inc. 360networks filed for Chapter 11 bankruptcy protection in the U.S. and similar protection in Canada in June 2001, from which it emerged in November 2002. Previously, she served as senior director of Corporate Development at Microsoft Corporation, and was Chief Financial Officer of the wireless-services company Metricom, Inc. Ms. Wittman holds a BS/BA in Business Administration from the University of North Carolina at Chapel Hill, and an MBA from the University of Virginia’s Darden Graduate School of Business.

 

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FACTORS AFFECTING OUR OPERATING RESULTS,

BUSINESS PROSPECTS AND MARKET PRICE OF STOCK

 

RISKS RELATED TO OUR BUSINESS

 

We have a history of incurring net losses, we may incur net losses in the future, and we may not be able to sustain profitability on a quarterly or annual basis.

 

We have incurred net losses on an annual basis from our inception through December 31, 2003. As of December 31, 2004, we had an accumulated deficit of approximately $1.2 billion. We may continue to incur net losses in the future. Some of our operating expenses are fixed. We may in the future incur losses from the impairment of goodwill or other intangible assets, losses from acquisitions, or restructuring charges. We must therefore generate revenues sufficient to offset these expenses in order for us to be profitable. While we achieved profitability in each of our last six fiscal quarters and on an annual basis for the fiscal year ended December 31, 2004, we may not be able to sustain profitability on a quarterly or annual basis.

 

Our revenues are dependent on our relationships with companies who distribute our products and services.

 

We rely on our relationships with distribution partners, including Web portals, software application providers and mobile operators, for distribution or usage of our products and application services. We generated approximately 55% of our total revenues through our relationships with our top ten distribution partners for the year ended December 31, 2004. In particular, we rely on a small number of distribution partners for a significant portion of the revenues associated with our search and directory products, and most of these partners are development-stage companies with limited operating histories and evolving business models. We cannot assure you that any of these relationships will continue, be sustainable or result in benefits to us that outweigh the costs of the relationships. In addition, our Search & Directory distribution partners or mobile operators may create their own content or license content directly from others that competes with or replaces the content that we provide.

 

Certain of our agreements with our distribution partners will come up for renewal in 2005 and 2006, and our mobile operator contracts generally come up for renewal on an annual basis. Also, if a distribution partner does not comply with their agreement with us, we may terminate the agreement. Such agreements may be terminated or may not be renewed or replaced on favorable terms, which could adversely impact our operating results and earnings. In particular, competition is increasing for consumer traffic in the search and directory markets and we are currently experiencing pricing pressure in our wireless business. We anticipate that the cost of our revenue sharing arrangements with our distribution partners will increase as revenues grow and may increase on a relative basis compared to revenues to the extent that there are changes to existing arrangements or we enter into new revenue sharing arrangements on less favorable terms.

 

Certain terms of our agreements with our third party content providers may be amended from time to time by both parties or may be subject to different interpretation by either party, which may require the rights we grant to our distribution partners to be modified to comply with such amendments or interpretations. Our agreements with our distribution partners in our Search & Directory business generally provide that we may modify the rights we grant to our distribution partners to avoid being in conflict with the agreements with our content providers. Failure of a distribution partner to comply with any such modification may require us either to not provide content from the applicable content provider to such distribution partner or to terminate the distribution agreement.

 

If we are unable to maintain these relationships on favorable terms, our financial results would materially suffer.

 

A substantial portion of our revenues is attributable to a small number of customers, the loss of any one of which would harm our financial results.

 

We derive a substantial portion of our revenues from a small number of customers. We expect that this concentration will continue in the foreseeable future. Our top ten customers represented approximately 89%,

 

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82% and 66% of our revenues for the fiscal years ended December 31, 2004, 2003 and 2002, respectively. Yahoo!, Google, Cingular Wireless and Verizon each accounted for more than 10% of our revenues in the year ended December 31, 2004. Yahoo!, Verizon, and Google each accounted for more than 10% of our revenues in the year ended December 31, 2003. Yahoo! and Verizon each accounted for more than 10% of our revenues in the year ended December 31, 2002. Our agreements with these customers expire in 2005 and 2006. If we lose any of these customers, are unable to renew the contracts on favorable terms, or if any of these customers are unable or unwilling to pay us amounts that they owe us, our financial results would materially suffer.

 

Our financial results are likely to continue to fluctuate, which could cause our stock price to be volatile or decline.

 

Our financial results have varied on a quarterly basis and are likely to fluctuate in the future. These fluctuations could cause our stock price to be volatile or decline. Several factors could cause our quarterly results to fluctuate materially, including:

 

    variable demand for our products and application services, including seasonal fluctuations;

 

    the impact on revenues or profitability of changes in pricing for our products and services;

 

    the loss, termination or reduction in scope of key customer, distribution and content relationships;

 

    the results from shifts in the mix of products and services we provide to our customers;

 

    the effects of acquisitions by us, our customers or our distribution partners;

 

    increases in the costs or availability of content for or distribution of our products;

 

    impairment in the value of long-lived assets or the value of acquired assets, including goodwill, core technology and acquired contracts and relationships;

 

    the effect of changes in accounting principles or in our accounting treatment of revenue or expense matters;

 

    the foreign currency effects from transactions denominated in currencies other than the U.S. dollar;

 

    litigation expense; and

 

    the adoption of new regulations or accounting standards, including the new accounting standard that requires us to expense the fair value of our employee stock options beginning with the third quarter of 2005.

 

For these reasons, among others, you should not rely on period-to-period comparisons of our financial results to forecast our future performance. Furthermore, our fluctuating operating results may fall below the expectations of securities analysts or investors, which could cause the trading price of our stock to decline.

 

We operate in new and rapidly evolving markets, and our business model continues to evolve, which make it difficult to evaluate our future prospects.

 

Our potential for future profitability must be considered in the light of the risks, uncertainties, and difficulties encountered by companies that are in new and rapidly evolving markets and continuing to innovate with new and unproven technologies or services, as well as undergoing significant change. Our Search & Directory and Mobile businesses are in young industries that have undergone rapid and dramatic changes in their short history. In addition to the other risks we describe in this section, some of these risks relate to our potential inability to:

 

    attract and retain distribution partners for our search and directory products;

 

    retain and expand our existing mobile operator arrangements;

 

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    attract and retain content partners;

 

    respond quickly and appropriately to competitive developments, including:

 

    rapid technological change,

 

    changes in customer requirements,

 

    new products introduced into our markets by our competitors, and

 

    regulatory changes affecting the industries we operate in or the markets we serve both in the United States and foreign countries; and

 

    manage our growth, control expenditures and align costs with revenues.

 

If we do not effectively address the risks we face, we may not sustain profitability.

 

Our strategic direction is evolving, which could negatively affect our future results.

 

Since inception, our business model has evolved and is likely to continue to evolve as we refine our product offerings and market focus. In particular, in 2003 we completed an in-depth analysis of our business and have since tightened our strategic focus to our Search & Directory and Mobile businesses. Businesses and services falling outside of these areas, including our Payment Solutions business, were sold or otherwise divested. There can be no assurance that our increased focus on and investment in our core businesses will produce better financial results than we would have achieved with our prior businesses or that we will be successful in effectively utilizing the proceeds of the sales. Further changes in strategic direction may occur as we continue to evaluate opportunities in a rapidly evolving market. These changes to our business may not prove successful in the short or long term and may negatively impact our financial results.

 

In addition, we have in the past and may in the future find it advisable to streamline operations and reduce expenses, including, without limitation, such measures as reductions in the workforce, reductions in discretionary spending, reductions in capital expenditures as well as other steps to reduce expenses. Effecting any such restructuring would likely place significant strains on management and our operational, financial, employee and other resources. In addition, any such restructuring could impair our development, marketing, sales and customer support efforts or alter our product development plans.

 

Our financial and operating results will suffer if we are unsuccessful at integrating acquired businesses.

 

We have acquired a number of technologies and businesses in the past and may engage in further acquisitions in the future. For example, in November 2003, we acquired Moviso, a provider of mobile media content, entertainment and personalization services; in June 2004, we acquired Switchboard, a provider of local on-line advertising solutions and Internet-based yellow pages; in July 2004, we acquired the assets of Atlas Mobile, a provider of mobile multi-player tournament games; in December 2004 we acquired IOMO, a U.K. developer and publisher of mobile games; and in January 2005, we acquired elkware, a German developer and publisher of mobile games.

 

Acquisitions may involve use of cash, potentially dilutive issuances of stock, the potential incurrence of debt and contingent liabilities or amortization expenses related to certain intangible assets. In the past, our financial results have suffered significantly due to impairment charges of goodwill and other intangible assets related to prior acquisitions. Acquisitions also involve numerous risks which could materially and adversely affect our results of operations or stock price, including:

 

    difficulties in assimilating the operations, products, technology, information systems and personnel of acquired companies which result in unanticipated costs, delays or allocation of resources;

 

    difficulties in acquiring foreign companies, including risks related to integrating operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries;

 

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    the dilutive effect on earnings per share as a result of incurring operating losses and the amortization of acquired intangible assets for the acquired business;

 

    diverting management’s attention from other business concerns;

 

    impairing relationships with our customers or those of the acquired companies, or breaching a material contract due to the consummation of the acquisition;

 

    impairing relationships with our employees or those of the acquired companies;

 

    failing to achieve the anticipated benefits of the acquisitions in a timely manner; and

 

    adverse outcome of litigation matters assumed in or arising out of the acquisitions.

 

The success of the operations of companies and technologies that we have acquired will often depend on the continued efforts of the management and key employees of those acquired companies. Accordingly, we have typically attempted to retain key employees and members of existing management of acquired companies under the overall supervision of our senior management. We have, however, not always been successful in these attempts at retention. Failure to retain key employees of an acquired company may make it more difficult to integrate or manage the business of the acquired company, and may reduce the anticipated benefits of the acquisition by increasing costs, causing delays, or otherwise.

 

We depend on third parties for content, and the loss of access to or increased cost of this content could cause us to reduce our product offerings to customers and could negatively impact our financial results.

 

We currently create only a relatively small portion of our content. In most cases, we acquire rights to content from numerous third-party content providers, and our future success is highly dependent upon our ability to maintain relationships with these content providers and enter into new relationships with other content providers.

 

We typically license content under arrangements that require us to pay usage or fixed monthly fees for the use of the content or require us to pay under a revenue-sharing arrangement. Further, our musical composition and other media licenses for the creation of mobile content consisting of ringtones generally require royalty payments on a “most favored nation” basis, which requires us to pay the highest royalty paid to any licensor to all such licensors. In the future, some of our content providers may not give us access to important content or may increase the royalties, fees or percentages that they charge us for their content, which could have a negative impact on our net earnings. If we fail to enter into or maintain satisfactory arrangements with content providers, our ability to provide a variety of products and services to our customers could be severely limited, thus harming our operating results. Additionally, our content license and royalty fees will increase to the extent that our revenues related to such products and services increase and may increase as a percent of revenues as a result of price competition and carrier demand for our products and services and the mix of our product sales.

 

Our stock price has been and is likely to continue to be highly volatile.

 

The trading price of our common stock has been highly volatile. Since we began trading on December 15, 1998, our stock price has ranged from $3.70 to $1,385.00 (as adjusted for stock splits). On February 25, 2005, the closing price of our common stock was $41.13. Our stock price could decline or be subject to wide fluctuations in response to factors such as the other risks discussed in this section and the following, among others:

 

    actual or anticipated variations in quarterly results of operations;

 

    announcements of significant acquisitions, dispositions, changes in material contracts or other business developments by us, our customers, distribution partners or competitors;

 

    conditions or trends in the search, directory or mobile data services markets;

 

    announcements or publicity relating to litigation and similar matters;

 

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    announcements of technological innovations, new products or services, or new customer or partner relationships by us or our competitors;

 

    changes in financial estimates or recommendations by securities analysts;

 

    disclosures of any material weaknesses in internal control over financial reporting; and

 

    the adoption of new regulations or accounting standards, including the new accounting standard that requires us to expense the fair value of our employee stock options beginning with the third quarter of 2005.

 

In addition, the stock market in general, and the Nasdaq National Market and the market for Internet and technology company securities in particular, have experienced extreme price and volume fluctuations. These broad market and industry factors and general economic conditions may materially and adversely affect our stock price.

 

We are subject to legal proceedings that could result in liability and damage our business.

 

We have been, and expect to continue to be, subject to legal proceedings and claims. Approximately ten lawsuits are currently pending in which claims have been asserted against us or current and former directors and executive officers, in addition to ordinary course commercial and collection matters and intellectual property infringement claims that we believe are not material to our business. We are unable to determine the amount for which we potentially could be liable since a number of these lawsuits do not specify an amount for damages sought. We maintain insurance which may cover some defense costs and some of the claims, should we not prevail. Such proceedings and claims, even if claims against us are not meritorious, require the expenditure of significant financial and managerial resources, which could materially harm our business. We believe we have meritorious defenses to all the claims currently made against us. However, litigation is inherently uncertain, and we may not prevail in these suits. We cannot predict whether future claims will be made or the ultimate resolution of any current or future claim. For an expanded discussion of material pending legal proceedings, see Note 9 to our consolidated financial statements.

 

We may not be able to collect all or a portion of our payroll tax receivable.

 

As of December 31, 2004, we had $13.2 million recorded as a tax receivable. In October 2000, Anuradha Jain, a former officer of InfoSpace and the spouse of Naveen Jain, our former chairman and chief executive officer, exercised non-qualified stock options. We withheld and remitted to the IRS $12.6 million for federal income taxes based on the market price of the stock on the day of exercise and we also remitted the employer payroll tax of $620,000. Due primarily to the affiliate lock-up period resulting from our merger with Go2Net, Inc., the former officer was restricted from transferring or selling the stock until February 2001, and we believe that such restriction delayed the taxation of income until the restriction lapsed. We, therefore, returned the federal income tax withholding to the former officer and filed an amendment to our payroll tax return to request the tax refund. Our payroll tax returns for the year 2000 have been audited by the IRS and we have received an examination report from the IRS disallowing the claim for the refund of $13.2 million. We are appealing that determination by the IRS and may seek recovery from the former officer. We believe that we have meritorious arguments to recover this receivable and that it is probable that we will recover this receivable. However, there can be no assurance regarding the timing, structure or extent of our recovery of this tax receivable.

 

Our efforts to increase our presence in markets outside the United States may be unsuccessful and could result in losses.

 

We have limited experience in developing localized versions of our products and services internationally, and we may not be able to successfully execute our business model in these markets. Our success in these markets will be directly linked to the success of relationships with our customers and other third parties.

 

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As the international markets in which we operate continue to grow, competition in these markets will intensify. Local companies may have a substantial competitive advantage because of their greater understanding of and focus on the local markets. International expansion may also require significant financial investment including, among other things, the expense of developing localized products, the costs of acquiring existing foreign companies and the integration of such companies with existing operations, expenditure of resources in developing customer and distribution relationships and the increased costs of supporting remote operations.

 

Other risks of doing business in international markets include the increased risks and burdens of complying with different legal and regulatory standards, difficulties in managing and staffing foreign operations, limitations on the repatriation of funds and fluctuations of foreign exchange rates, and varying levels of Internet technology adoption and infrastructure. In addition, our success in international expansion could be limited by barriers to international expansion such as tariffs, adverse tax consequences, and technology export controls. If we cannot manage these risks effectively, the costs of doing business in some international markets may be prohibitive or our costs may increase disproportionately to our revenues.

 

We have implemented anti-takeover provisions that could make it more difficult to acquire us.

 

Our certificate of incorporation, bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors, even if the transaction would be beneficial to our stockholders. Provisions of our charter documents which could have an anti-takeover effect include:

 

    the classification of our board of directors into three groups so that directors serve staggered three-year terms, which may make it difficult for a potential acquirer to gain control of our board of directors;

 

    the ability to authorize the issuance of shares of undesignated preferred stock without a vote of stockholders;

 

    a prohibition on stockholder action by written consent; and

 

    limitations on stockholders’ ability to call special stockholder meetings.

 

On July 19, 2002, our board of directors adopted a stockholder rights plan, pursuant to which we declared and paid a dividend of one right for each share of common stock held by stockholders of record as of August 9, 2002. Unless redeemed by us prior to the time the rights are exercised, upon the occurrence of certain events, the rights will entitle the holders to receive shares of our preferred stock, or shares of an acquiring entity. The issuance of the rights would make the acquisition of InfoSpace more expensive to the acquirer and could delay or discourage third parties from acquiring InfoSpace without the approval of our board of directors.

 

Our systems could fail or become unavailable, which could harm our reputation, result in a loss of current and potential customers and cause us to breach existing agreements.

 

Our success depends, in part, on the performance, reliability and availability of our services. We have data centers in Seattle and Bellevue, Washington; Los Angeles, California; Waltham, Massachusetts; Papendrecht, The Netherlands and Hamburg, Germany. We have not yet completed our disaster recovery and redundancy planning, and none of our data centers are currently redundant. Our systems and operations could be damaged or interrupted by fire, flood, power loss, telecommunications failure, Internet breakdown, break-in, earthquake or similar events. We would face significant damage as a result of these events, and our business interruption insurance may not be adequate to compensate us for all the losses that may occur. In addition, our systems use sophisticated software that may contain bugs that could interrupt service. For these reasons we may be unable to develop or successfully manage the infrastructure necessary to meet current or future demands for reliability and scalability of our systems.

 

If the volume of traffic to our products and services increases substantially, we must respond in a timely fashion by expanding our systems, which may entail upgrading our technology and network infrastructure. Due

 

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to the number of our customers and the products and application services that we offer, we could experience periodic capacity constraints which may cause temporary unanticipated system disruptions, slower response times and lower levels of customer service. Our business could be harmed if we are unable to accurately project the rate or timing of increases, if any, in the use of our products and application services or expand and upgrade our systems and infrastructure to accommodate these increases in a timely manner.

 

Furthermore, we have entered into service level agreements with most of our mobile operator customers and certain other customers. These agreements sometimes call for specific system up times and 24/7 support, and include penalties for non-performance. We may be unable to fulfill these commitments, which could subject us to penalties under our agreements, harm our reputation and result in the loss of customers and distributors.

 

The security measures we have implemented to secure information we collect and store may be breached, which could cause us to breach existing agreements and expose us to potential investigation by authorities and potential claims by persons whose information was disclosed.

 

We take reasonable steps to protect the security and confidentiality of the information we collect and store but there is no guarantee that third parties will not gain unauthorized access despite our efforts. If such unauthorized access does occur, we may be required to notify persons whose information was accessed under existing and proposed laws. We also may be subject to claims of breach of contract for such disclosure, investigation by regulatory authorities and potential claims by persons whose information was disclosed.

 

If we are unable to retain our key employees, we may not be able to successfully manage our business.

 

Our business and operations are substantially dependent on the performance of our executive officers and key employees, who are employed on an at-will basis. If we lose the services of one or more of our executive officers or key employees, and are unable to recruit and retain a suitable successor, we may not be able to successfully manage our business or achieve our business objectives.

 

Unless we are able to hire, retain and motivate highly qualified employees, we will be unable to execute our business strategy.

 

Our future success depends on our ability to identify, attract, hire, retain and motivate highly skilled technical, managerial, professional sales and marketing, and corporate development personnel. Our services and the industries to which we provide our services are relatively new. Qualified personnel with experience relevant to our business are scarce and competition to recruit them is intense. If we fail to successfully hire and retain a sufficient number of highly qualified employees, we may have difficulties in supporting our customers or expanding our business. Additional realignments of resources or reductions in workforce, or other future operational decisions could create an unstable work environment and may have a negative effect on our ability to retain and motivate employees.

 

In light of current market and regulatory conditions, the value of stock options granted to employees may cease to provide sufficient incentive to our employees.

 

Like many technology companies, we use stock options to recruit technology professionals and senior level employees. Our stock options, which typically vest over a four-year period, are one of the means by which we motivate long-term employee performance. Recent changes in accounting treatment of options requiring us to expense the fair value of our employee stock options beginning with the third quarter of 2005 may make it difficult or overly expensive for us to issue stock options to our employees in the future. We also face a significant challenge in retaining our employees if the value of these stock options is either not substantial enough or so substantial that the employees leave after their stock options have vested. If our stock price does not increase significantly above the prices of our options, or option programs become impracticable, we may in the future need to issue new options or equity incentives or increase other forms of compensation to motivate and

 

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retain our employees. We may undertake or seek stockholder approval to undertake programs to retain our employees, which may be viewed as dilutive to our stockholders or may increase our compensation costs.

 

We may be subject to liability for our use or distribution of information that we receive from third parties.

 

We obtain content and commerce information from third parties. When we integrate and distribute this information over the Internet, we may be liable for the data that is contained in that content. This could subject us to legal liability for such things as defamation, negligence, intellectual property infringement and product or service liability, among others. Many of the agreements by which we obtain content do not contain indemnity provisions in favor of us. Even if a given contract does contain indemnity provisions, these provisions may not cover a particular claim. Our insurance coverage may be inadequate to cover fully the amounts or types of claims that might be made against us. Any liability that we incur as a result of content we receive from third parties could harm our financial results.

 

We also gather personal information from users in order to provide personalized services. Gathering and processing this personal information may subject us to legal liability for, among other things, negligence, defamation, invasion of privacy, or product or service liability. We may also be subject to laws and regulations, both in the United States and abroad, regarding user privacy. If we do not comply with these laws and regulations, we may be exposed to legal liability.

 

If others claim that our products infringe their intellectual property rights, we may be forced to seek expensive licenses, reengineer our products, engage in expensive and time-consuming litigation or stop marketing and licensing our products.

 

We attempt to avoid infringing known proprietary rights of third parties in our product development efforts. However, we do not regularly conduct patent searches to determine whether the technology used in our products infringes patents held by third parties. Patent searches generally return only a fraction of the issued patents that may be deemed relevant to a particular product or service. It is therefore nearly impossible to determine, with any level of certainty, whether a particular product or service may be construed as infringing a U.S. or foreign patent. Because patent applications in the United States are not publicly disclosed until the patent is issued, applications may have been filed by third parties that relate to our products. In addition, other companies, as well as research and academic institutions, have conducted research for many years in the electronic messaging field, and this research could lead to the filing of further patent applications.

 

In addition to patent claims, third parties may make claims against us alleging infringement of copyrights, trademark rights, trade secret rights or other proprietary rights, or alleging unfair competition or violations of privacy rights.

 

If we were to discover that our products violated or potentially violated third-party proprietary rights, we might be required to obtain licenses that are costly or contained terms unfavorable to us, or expend substantial resources to reengineer those products so that they would not violate third party rights. Any reengineering effort may not be successful, and we cannot be certain that any such licenses would be available on commercially reasonable terms. Any third-party infringement claims against us could result in costly litigation and be time consuming to defend, divert management’s attention and resources, cause product and service delays or require us to enter into royalty and licensing agreements.

 

Our Search & Directory products and services may expose us to claims relating to how the content was obtained or distributed.

 

Our Search & Directory services link users, either directly through our Web sites or indirectly through the Web properties of our distribution partners, to third party Web pages and content in response to search queries. These services could expose us to legal liability from claims relating to such third-party content and sites, the

 

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manner in which these services are distributed by us or our distribution partners, or how the content provided by our third-party content providers was obtained or provided by our content providers. Such claims could include: infringement of copyright, trademark, trade secret or other proprietary rights; violation of privacy and publicity rights; unfair competition; defamation; providing false or misleading information; obscenity; and illegal gambling. Regardless of the legal merits of any such claims, they could result in costly litigation, be time consuming to defend and divert management’s attention and resources. If there was a determination that we had violated third-party rights or applicable law, we could incur substantial monetary liability, be required to enter into costly royalty or licensing arrangements (if available), or be required to change our business practices. Implementing measures to reduce our exposure to such claims could require us to expend substantial resources and limit the attractiveness of our products and services to our customers. As a result, these claims could result in material harm to our business.

 

We rely heavily on our technology, but we may be unable to adequately or cost-effectively protect or enforce our intellectual property rights, thus weakening our competitive position and negatively impacting our financial results.

 

To protect our rights in our products and technology, we rely on a combination of copyright and trademark laws, patents, trade secrets, and confidentiality agreements with employees and third parties and protective contractual provisions. We also rely on the law pertaining to trademarks and domain names to protect the value of our corporate brands and reputation. 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, or infringe our trademarks. In addition, it is possible that others could independently develop substantially equivalent intellectual property. If we do not effectively protect our intellectual property, we could lose our competitive position.

 

Effectively policing the unauthorized use of our products and trademarks is time-consuming and costly, and there can be no assurance that the steps taken by us will prevent misappropriation of our technology or trademarks. Our intellectual property may be subject to even greater risk in foreign jurisdictions, as protection is not sought or obtained in every country in which our services are available. Also, the laws of many countries do not protect proprietary rights to the same extent as the laws of the United States. If we cannot adequately protect our intellectual property, our competitive position in markets abroad may suffer.

 

RISKS RELATED TO THE INDUSTRIES IN WHICH WE OPERATE

 

Intense competition in the search, directory and wireless markets could prevent us from increasing distribution of our services in those markets or cause us to lose market share.

 

Our current business model depends on distribution of our products and services into the search and directory and wireless markets, which are extremely competitive and rapidly changing. Many of our competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, more developed infrastructures, greater name recognition or more established relationships in the industry than we have. Our competitors may be able to adopt more aggressive pricing policies than we can, develop and expand their service offerings more rapidly, adapt to new or emerging technologies and changes in customer requirements more quickly, take advantage of acquisitions and other opportunities more readily, achieve greater economies of scale, and devote greater resources to the marketing and sale of their services. Because of these competitive factors and due to our relatively small size and financial resources, we may be unable to compete successfully.

 

Some of the companies we compete with are currently customers of ours, the loss of which could harm our business. Many of our customers have established relationships with some of our competitors. If these competitors develop products and services that compete with ours, we could lose market share and our revenues could decrease.

 

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Consolidation in the industries in which we operate could lead to increased competition and loss of customers.

 

The Internet industry (including the search and directory segments) and the wireless industry have experienced substantial consolidation. We expect this consolidation to continue. These acquisitions could adversely affect our business and results of operations in a number of ways, including the following:

 

    our customers or distribution partners could acquire or be acquired by one of our competitors and terminate their relationship with us;

 

    our customers or distribution partners could merge with other customers, which could reduce the size of our customer or partner base and potentially reduce our ability to negotiate favorable terms;

 

    competitors could improve their competitive positions through strategic acquisitions; and

 

    companies from whom we acquire content could acquire or be acquired by one of our competitors and stop licensing content to us, or gain additional negotiating leverage in their relationships with us.

 

Security breaches may pose risks to the uninterrupted operation of our systems.

 

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 operations. Subscribers to some of our services are required to provide information in order to utilize the service that may be considered to be personally identifiable or private information. Unauthorized access to, and abuse of, this information could subject us to a risk of loss or litigation and possible liability.

 

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 and improve our 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 our services, any of which could harm our business.

 

Governmental regulation and the application of existing laws may slow business growth, increase our costs of doing business and create potential liability.

 

The growth and development of the Internet has led to new laws and regulations, as well as the application of existing laws to the Internet and wireless communications. Application of these laws can be unclear. The costs of complying or failure to comply with these laws and regulations could limit our ability to operate in our markets, expose us to compliance costs and substantial liability and result in costly and time-consuming litigation.

 

Several federal or state laws, including the following, could have an impact on our business. Recent federal laws include those designed to restrict the on-line distribution of certain materials deemed harmful to children and impose additional restrictions or obligations for on-line services when dealing with minors. Such legislation may impose significant additional costs on our business or subject us to additional liabilities. The application to advertising in our industries of existing laws regulating or requiring licenses for certain businesses can be unclear. Such regulated businesses may include, for example, gambling; distribution of pharmaceuticals, alcohol, tobacco or firearms; or insurance, securities brokerage and legal services.

 

We post our privacy policies and practices concerning the use and disclosure of user data. Any failure by us to comply with our posted privacy policies, FTC requirements or other privacy-related laws and regulations could result in proceedings by the FTC or others which could potentially have an adverse effect on our business, results of operations and financial condition. In this regard, there are a large number of legislative proposals before the United States Congress and various state legislative bodies regarding privacy issues related to our

 

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business. It is not possible to predict whether or when such legislation may be adopted, and certain proposals, if adopted, could materially and adversely affect our business through a decrease in user registrations and revenues. This could be caused by, among other possible provisions, the required use of disclaimers or other requirements before users can utilize our services.

 

The FTC has recommended to search engine providers that paid-ranking search results be delineated from non-paid results. To the extent that the FTC may in the future issue specific requirements regarding the nature of such delineation, which would require modifications to the presentation of search results, revenue from the affected search engines could be negatively impacted.

 

Due to the nature of the Internet, it is possible that the governments of other states and foreign countries might attempt to regulate Internet transmissions or prosecute us for violations of their laws. We might unintentionally violate such laws, such laws may be modified and new laws may be enacted in the future. Any such developments (or developments stemming from enactment or modification of other laws) could increase the costs of regulatory compliance for us or force us to change our business practices.

 

We rely on the Internet infrastructure, over which we have no control and the failure of which could substantially undermine our operations.

 

Our success depends, in large part, on other companies maintaining the Internet system infrastructure. In particular, we rely on other companies to maintain a reliable network backbone that provides adequate speed, data capacity and security and to develop products that enable reliable Internet access and services. As the Internet continues to experience growth in the number of users, frequency of use and amount of data transmitted, the Internet system infrastructure may be unable to support the demands placed on it, and the Internet’s performance or reliability may suffer as a result of this continued growth. Some of the companies that we rely upon to maintain the network infrastructure may lack sufficient capital to support their long-term operations.

 

ITEM 2.    Properties

 

Our principal corporate office is located in Bellevue, Washington, and we have business operations in: Los Angeles and San Mateo, California; Westboro, Massachusetts; Woking and Eastleigh, United Kingdom, Papendrecht, The Netherlands, and Wedel, Germany. Our Bellevue and Woking facilities are utilized by both our Search & Directory and Mobile businesses; our Westboro facilities are utilized by our Search and Directory business; and our Los Angeles, San Mateo, Eastleigh, Papendrecht and Wedel facilities are utilized by our Mobile business. We have data centers in Bellevue and Seattle, Washington, Los Angeles, California, Waltham, Massachusetts, Papendrecht, The Netherlands, and Hamburg, Germany. All of our facilities are leased. We believe our properties are suitable and adequate for our present and anticipated near term needs.

 

ITEM 3.    Legal Proceedings

 

See Note 9—Commitments and Contingencies of the Notes to Consolidated Financial Statements (Item 8) for information regarding legal proceedings.

 

ITEM 4.    Submission of Matters to a Vote of Security Holders

 

Not applicable.

 

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PART II

 

ITEM 5.    Market for Registrant’s Common Stock and Related Stockholder Matters

 

Market for Our Common Stock

 

Our common stock has been traded on the Nasdaq National Market under the symbol “INSP” since December 15, 1998, the date of our initial public offering. Prior to that time, there was no public market for our common stock. The following table sets forth, for the periods indicated, the high and low sales prices for our common stock as reported by the Nasdaq National Market.

 

     High

   Low

Fiscal Year Ending December 31, 2003:

             

First Quarter

   $ 12.32    $ 8.48

Second Quarter

   $ 15.51    $ 10.70

Third Quarter

   $ 23.34    $ 12.81

Fourth Quarter

   $ 27.75    $ 20.06

Fiscal Year Ending December 31, 2004:

             

First Quarter

   $ 40.87    $ 23.05

Second Quarter

   $ 45.85    $ 30.00

Third Quarter

   $ 48.50    $ 26.50

Fourth Quarter

   $ 57.92    $ 43.02

 

On February 25, 2005, the last reported sale price for our common stock on the Nasdaq National Market was $41.13 per share. As of February 25, 2005, there were approximately 1,038 holders of record of our common stock.

 

We have never declared, nor have we paid, any cash dividends on our common stock. We currently intend to retain our earnings to finance future growth and, therefore, do not anticipate paying any cash dividends on our common stock in the foreseeable future.

 

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ITEM 6.    Selected Consolidated Financial Data

 

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and notes thereto and other financial information included elsewhere in this report. The selected consolidated statements of operations data for the years ended December 31, 2000, 2001, 2002, 2003, and 2004 are derived from our audited consolidated financial statements.

 

     Years Ended December 31,

 
     2000(1)

    2001(1)

    2002

    2003

    2004

 
     (in thousands, except per share data)  

Consolidated Statements of Operations Data:

                                        

Revenues

   $ 201,187     $ 146,565     $ 114,972     $ 132,230     $ 249,354  

Operating expenses (2)

                                        

Content and distribution

     10,544       20,568       15,026       27,583       92,688  

Systems and network operations

     27,619       24,587       16,101       10,988       14,220  

Product development

     38,485       36,631       29,128       17,781       23,142  

Sales and marketing

     56,142       32,889       19,433       17,487       23,486  

General and administrative

     56,400       52,517       42,687       32,225       36,348  

Depreciation

     7,942       18,733       18,089       10,819       6,974  

Amortization of intangible assets

     134,399       199,777       12,854       6,819       9,920  

Impairment of goodwill and other intangible assets

     8,952       107,729       76,385       1,151       —    

Acquisition and related charges

     123,998       (3,504 )     —         —         —    

Restructuring

     986       17,392       1,814       11,722       222  

Other, net

     4,732       11,505       4,167       1,529       (3,203 )
    


 


 


 


 


Total operating expenses

     470,199       518,824       235,684       138,104       203,797  
    


 


 


 


 


Operating income (loss)

     (269,012 )     (372,259 )     (120,712 )     (5,874 )     45,557  

Gain (loss) on investments

     (588 )     (108,158 )     (20,940 )     (11,997 )     425  

Other income, net

     27,344       16,902       6,932       8,190       4,991  
    


 


 


 


 


Income (loss) from continuing operations before minority interest, income taxes, discontinued operations and cumulative effect of change in accounting principle

     (242,256 )     (463,515 )     (134,720 )     (9,681 )     50,973  

Minority interest

     (3,171 )     (17 )     —         —         —    

Income tax benefit (expense)

     (137 )     (664 )     (430 )     607       29  
    


 


 


 


 


Income (loss) from continuing operations before discontinued operations and cumulative effect of change in accounting principle

     (245,564 )     (464,196 )     (135,150 )     (9,074 )     51,002  

Discontinued operations (3):

                                        

Income (loss) from discontinued operations, net of taxes

     (34,792 )     (34,712 )     (3,481 )     2,755       2,277  

Gain on sale of discontinued operations, net of taxes

     —         —         —         —         29,122  

Cumulative effect of change in accounting principle

     (2,056 )     (3,171 )     (206,619 )     —         —    
    


 


 


 


 


Net income (loss)

   $ (282,412 )   $ (502,079 )   $ (345,250 )   $ (6,319 )   $ 82,401  
    


 


 


 


 


Basic income (loss) per share:

                                        

Income (loss) from continuing operations

   $ (8.07 )   $ (14.59 )   $ (4.41 )   $ (0.29 )   $ 1.59  

Income (loss) from discontinued operations

     (1.14 )     (1.09 )     (0.11 )     0.09       0.98  

Cumulative effect of change in accounting principle

     (0.07 )     (0.10 )     (6.74 )     —         —    
    


 


 


 


 


Basic net income (loss) per share

   $ (9.28 )   $ (15.78 )   $ (11.26 )   $ (0.20 )   $ 2.57  
    


 


 


 


 


Shares used in computing basic net income (loss) per share

     30,448       31,822       30,656       31,232       32,109  
    


 


 


 


 


Diluted income (loss) per share:

                                        

Income (loss) from continuing operations

   $ (8.07 )   $ (14.59 )   $ (4.41 )   $ (0.29 )   $ 1.40  

Income (loss) from discontinued operations

     (1.14 )     (1.09 )     (0.11 )     0.09       0.86  

Cumulative effect of change in accounting principle

     (0.07 )     (0.10 )     (6.74 )     —         —    
    


 


 


 


 


Diluted net income (loss) per share

   $ (9.28 )   $ (15.78 )   $ (11.26 )   $ (0.20 )   $ 2.26  
    


 


 


 


 


Shares used in computing diluted net income (loss) per share

     30,448       31,822       30,656       31,232       36,541  
    


 


 


 


 


 

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     As of December 31,

     2000

   2001

   2002

   2003

   2004

     (in thousands)

Consolidated Balance Sheet Data:

                                  

Cash, cash equivalents and short-term investments

   $ 361,426    $ 187,647    $ 258,987    $ 295,323    $ 283,655

Working capital

     366,875      199,897      287,228      302,647      309,620

Total assets

     1,272,110      837,005      481,396      492,315      623,530

Total stockholders’ equity

     1,168,572      782,588      448,136      446,532      562,396

(1)   The share amounts for this year have been retroactively adjusted to give effect to the one-for-ten reverse stock split of our common stock consummated in September 2002.
(2)   In 2004, we revised the presentation of our Consolidated Statements of Operations to eliminate the caption Cost of Revenues and separately present Content and Distribution, Systems and Network Operations, and Depreciation expense. Certain reclassifications have been made to the previously reported amounts to conform to the current presentation. The reclassifications did not impact our previously reported revenues, total operating expenses, operating income (loss) or net income (loss).
(3)   We consummated the sale of our Payment Solutions business on March 31, 2004, and the operating results of the Payment Solutions business have been presented as discontinued operations for all periods presented.

 

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ITEM   7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following discussion and analysis in conjunction with “Selected Consolidated Financial Data” and our consolidated financial statements and notes thereto included elsewhere in this report. In addition to historical information, the following discussion contains forward-looking statements that involve known and unknown risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. You should read the cautionary statements made in this report. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and in the section entitled “Factors Affecting Our Operating Results, Business Prospects and Market Price of Stock,” as well as those discussed elsewhere herein. You should not rely on these forward-looking statements, which reflect only our opinion as of the date of this report.

 

Overview

 

InfoSpace, Inc. (“InfoSpace”, “Our” or “We”) is a diversified technology and services company comprised of our Search & Directory and Mobile business units. We were founded in 1996 and are incorporated in the state of Delaware. Our principal corporate offices are located in Bellevue, Washington. Our common stock is listed on the Nasdaq National Market under the symbol “INSP.”

 

Prior to 1997, we had insignificant revenues and were primarily engaged in the development of technology for the aggregation, integration and distribution of Internet content. In 1997, we expanded our operations, adding sales personnel to capitalize on the opportunity to generate Internet advertising revenues and began generating significant revenue with our on-line services. Since then, we have expanded and enhanced our products and application services, including those for the wireless data industry, through both internal development and acquisitions.

 

In 2003 and 2004, we narrowed our strategic focus to two businesses: Search & Directory and Mobile. In 2003, we sold or otherwise disposed of our non-core services and, in March 2004, we sold our Payment Solutions business.

 

Our Search & Directory properties enable Internet users to locate information, merchants, individuals and products on-line. We offer Search & Directory services through our branded Web sites: Dogpile.com, Switchboard.com, InfoSpace.com, Webcrawler.com and MetaCrawler.com, as well as through the Web properties of distribution partners. Partner versions of our Search & Directory services are generally private-labeled and delivered with each customer’s unique requirements.

 

Our Mobile division provides mobile media programming to mobile operators across multiple devices, and infrastructure services that enable them to deliver programming to their subscribers. Our mobile operator partners are able to aggregate, configure and customize the services they offer under their own brand and deliver them to their customers.

 

Overview of 2004 Operating Results

 

The following is an overview of our operating results for the year ended December 31, 2004. A more detailed discussion of our operating results, comparing our operating results for the years ended December 31, 2004, 2003 and 2002 is included the heading “Historical Results of Operations” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

In 2004, we grew and expanded our Search & Directory and Mobile businesses and, in March 2004, we sold our Payment Solutions business. The overall growth in our business was a result of greater focus on expanding our existing products and services and acquisitions of complimentary businesses. We acquired Moviso LLC (“Moviso”), a mobile media content company, in November 2003, Switchboard Incorporated (“Switchboard”), an on-line directory company, in June 2004 and three mobile gaming companies in 2004 and early 2005.

 

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Revenues increased to $249.4 million in 2004 from $132.2 million in 2003. Revenues from our Search & Directory business increased to $156.8 million in 2004 from $93.9 million, primarily due to the growth in search revenues from distribution in our search business, in which we private label our search products for others to offer on their own Web properties. The acquisition of Switchboard expanded the number of on-line users of our services and added several new partner relationships. During 2004, more than 60% of our search revenues from our Search & Directory business came from distribution compared to less than 35% during 2003. We expect that revenue from our distribution partners will continue to be a greater share of our search revenues. Revenues from our Mobile business increased to $92.5 million in 2004 from $27.9 million in 2003, primarily attributable to an increase in sales of our media download products, such as ringtones and graphics.

 

Our operating expenses in 2004 increased to $203.8 million from $138.1 million in 2003. The increase was primarily attributable to increased distribution costs related to revenue share amounts due to our distribution partners in our Search & Directory business and increased mobile content costs related to media download products. We expect these costs to increase as revenues from these products or services increase. Additionally, other operating costs increased as we expanded our operations, including increases in personnel costs, including salaries, benefits and other employee costs, and amortization of intangible assets related to our acquisitions of Moviso, Switchboard, Atlas Mobile, Inc. (“Atlas Mobile”), and IOMO Limited (“IOMO”), and temporary help from contractors and consultants to augment our staffing needs. Offsetting these increases in operating expenses was a reduction in restructuring charges of $11.5 million from 2003, related to employee severance and other separation charges, a charge for excess facilities, including lease termination costs, and the writedown of leasehold improvements and equipment related to the excess facilities. We did not record similar charges in 2004.

 

For the year ended December 31, 2004, our net income was $82.4 million compared to a net loss of $6.3 million in 2003. The increase is primarily attributable to the items noted above and a $29.1 million gain on the sale of our Payment Solutions business that was recorded as a gain on the sale of a discontinued operation.

 

Critical Accounting Policies and Estimates

 

The “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as disclosures included elsewhere in this Form 10-K, are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingencies.

 

The SEC has defined a company’s most critical accounting policies as the ones that are the most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. On an ongoing basis, we evaluate the estimates used, including those related to impairment of goodwill and other intangible assets, useful lives of other intangible assets, other-than-temporary impairment of investments, revenue recognition, the estimated allowance for sales returns and doubtful accounts, restructuring-related liabilities, accrued contingencies and valuation allowance for our deferred tax assets. We base our estimates on historical experience, current conditions and on various other assumptions that we believe to be reasonable under the circumstances and based on information available to us at that time, from which we make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources as well as identify and assess our accounting treatment with respect to commitments and contingencies. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions. We believe the following critical accounting policies involve the more significant judgments and estimates used in the preparation of our consolidated financial statements. We also have other accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information see Item 8 of Part II “Financial Statements and Supplementary Data – Note 1: Summary of Significant Accounting Policies.”

 

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Accounting for Goodwill and Certain Other Intangible Assets

 

Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests in certain circumstances. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit. As of December 31, 2004 we have approximately $158.8 million of goodwill and $46.2 million of other intangible assets on our balance sheet.

 

Business combinations

 

Business combinations accounted for under the purchase method of accounting require management to estimate the fair value of the assets and liabilities acquired. The allocation of the purchase price based on the estimated fair value of assets and liabilities acquired may be subject to adjustments during the year following the date of acquisition.

 

Revenue Recognition

 

Our revenues are derived from products and services delivered to our customers across our two business units, Search & Directory and Mobile. In general, we recognize revenues in the period in which the services are performed, products are delivered or transaction occurs. In certain customer arrangements, we record deferred revenue for amounts received from customers in advance of the performance of services or upon execution of an agreement and recognize revenues ratably over the term of the agreement or expected customer life. We generally record revenue on a gross basis in accordance with EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. For distribution partner arrangements in our Search & Directory business we record revenue on a gross basis and the corresponding revenue sharing payments as a content and distribution expense. For mobile operator customers in which we license the content, we record revenue on a gross basis and the corresponding licensing expense as a content and distribution expense. In the event the mobile operator customer directly licenses the content, we record as revenue the service fees we earn. See Note 1 to our consolidated financial statements for a description of products and services and the related revenue recognition policy for each of our business units.

 

Allowances for Sales and Doubtful Accounts

 

Our management must make estimates of potential future sales allowances related to current period revenues for our products and services. We analyze historical adjustments, current economic trends and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales allowances. Estimates must be made and used in connection with establishing the sales allowance in any accounting period.

 

The allowance for doubtful accounts is a management estimate that considers actual facts and circumstances of individual customers and other debtors, such as financial condition and historical payment trends. We evaluate the adequacy of the allowance utilizing a combination of specific identification of potentially problematic accounts and identification of accounts that have exceeded payment terms.

 

Restructuring Estimates

 

Restructuring-related liabilities include estimates for, among other things, anticipated disposition of lease obligations. Key variables in determining such estimates include anticipated commencement timing of sublease

 

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rentals, estimates of sublease rental payment amounts and tenant improvement costs and estimates for brokerage and other related costs. We periodically evaluate and, if necessary, adjust our estimates based on currently available information.

 

Valuation Allowance for Deferred Tax Assets

 

We have provided a full valuation allowance for our net deferred tax assets, primarily comprised of accumulated net operating loss carryforwards as we believe that sufficient uncertainty exists. Once we have reached profitability for an extended period and that realization is reasonably assured, we will reduce a portion or all of the valuation allowance in the period that such a determination is made.

 

Stock-Based Compensation

 

We account for stock-based compensation under the intrinsic method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Under the intrinsic method, we do not record any expenses when stock options are granted that are priced at the fair market value of our stock at the date of grant.

 

Contingencies

 

We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. SFAS No. 5, Accounting for Contingencies, requires that an estimated loss from a loss contingency should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred. We evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial position or our results of operations. See Note 9 to our Condensed Consolidated Financial Statements for further information regarding contingencies.

 

Historical Results of Operations

 

For the year ending December 31, 2004, our net income totaled $82.4 million, including income from discontinued operations and the gain on our sale of our Payment Solutions business. While we have achieved profitability during our last six quarters, prior to that we have incurred losses since our inception and, as of December 31, 2004, had an accumulated deficit of approximately $1.2 billion.

 

In light of the rapidly evolving nature of our business and overall market conditions, we believe that period-to-period comparisons of our revenues and operating results are not necessarily meaningful, and you should not necessarily rely solely upon them as indications of future performance.

 

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The following table sets forth the historical results of our operations (in thousands and as percent of revenues).

 

     Years Ended December 31,

    Years Ended December 31,

 
         2004    

        2003    

        2002    

        2004    

        2003    

        2002    

 
     (in thousands)     (as a percent of revenue)  

Revenues

   $ 249,354     $ 132,230     $ 114,972     100.0 %   100.0 %   100.0 %

Operating expenses

                                          

Content and distribution

     92,688       27,583       15,026     37.1     20.9     13.1  

Systems and network operations

     14,220       10,988       16,101     5.7     8.3     14.0  

Product development

     23,142       17,781       29,128     9.3     13.4     25.4  

Sales and marketing

     23,486       17,487       19,433     9.4     13.2     16.9  

General and administrative

     36,348       32,225       42,687     14.6     24.4     37.1  

Depreciation

     6,974       10,819       18,089     2.8     8.2     15.7  

Amortization of intangible assets

     9,920       6,819       12,854     4.0     5.1     11.2  

Impairment of other intangible assets

     —         1,151       76,385     —       0.9     66.4  

Restructuring

     222       11,722       1,814     0.1     8.9     1.6  

Other, net

     (3,203 )     1,529       4,167     (1.3 )   1.1     3.6  
    


 


 


 

 

 

Total operating expenses

     203,797       138,104       235,684     81.7     104.4     205.0  
    


 


 


 

 

 

Operating income/(loss)

     45,557       (5,874 )     (120,712 )   18.3     (4.4 )   (105.0 )

Gain/(loss) on investments

     425       (11,997 )     (20,940 )   0.1     (9.1 )   (18.2 )

Other income, net

     4,991       8,190       6,932     2.0     6.2     6.0  
    


 


 


 

 

 

Income (loss) from continuing operations before income taxes, discontinued operations and cumulative effect of change in accounting principle

     50,973       (9,681 )     (134,720 )   20.4     (7.3 )   (117.2 )

Income tax benefit (expense)

     29       607       (430 )   0.1     0.4     (0.4 )
    


 


 


 

 

 

Income (loss) from continuing operations before discontinued operations and cumulative effect of change in accounting principle

     51,002       (9,074 )     (135,150 )   20.5     (6.9 )   (117.6 )

Income (loss) from discontinued operations, net of taxes

     2,277       2,755       (3,481 )   0.9     2.1     (3.0 )

Gain on sale of discontinued operations, net of taxes

     29,122       —         —       11.6     —       —    

Cumulative effect of change in accounting principle

     —         —         (206,619 )   —       —       (179.7 )
    


 


 


 

 

 

Net income/(loss)

   $ 82,401     $ (6,319 )   $ (345,250 )   33.0 %   (4.8 )%   (300.3 )%
    


 


 


 

 

 

 

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Results of Operations for the Years Ended December 31, 2004, 2003, and 2002

 

Revenues.    Our revenues are derived from deploying our Internet software and applications and mobile services to our customers and distribution partners. Under many of our agreements, we earn revenues from a combination of our products and services delivered to customers that span our business units of Search & Directory and Mobile. In 2003, we sold or otherwise divested all of our non-core services. Revenues for the years ended December 31, 2004, 2003, and 2002 are presented below (in thousands):

 

    2004

 

Percentage

of Total


   

Change

from 2003


    2003

 

Percentage

of Total


   

Change

from 2002


    2002

 

Percentage

of Total


 

Search & Directory

  $ 156,839   62.9 %   $ 62,946     $ 93,893   71.0 %   $ 25,359     $ 68,534   59.6 %

Mobile

    92,515   37.1       64,586       27,929   21.1       (1,278 )     29,207   25.4  

Non-core services

    —     0.0       (10,408 )     10,408   7.9       (6,823 )     17,231   15.0  
   

 

 


 

 

 


 

 

Total

  $ 249,354   100.0 %   $ 117,124     $ 132,230   100.0 %   $ 17,258     $ 114,972   100.0 %
   

 

 


 

 

 


 

 

 

Search & Directory Revenue

 

The absolute dollar increase in Search & Directory revenue from 2003 to 2004 is primarily due to growth in our paid search services from both our search and directory businesses, in particular, paid searches from our distribution partners’ Web properties and greater revenue per paid search, and directory revenues related to our acquisition of Switchboard in June 2004. In 2004, search revenues from distribution increased to over 60% of our search revenues in North America compared to less than 35% in 2003.

 

The absolute dollar increase in Search & Directory revenue from 2002 to 2003 primarily reflects the growth in the number of paid searches and greater revenue per paid search, in particular, growth in paid searches from our distribution partners’ Web properties and greater revenue per paid search. In 2002, our search revenues from distribution were less than 10% of our search revenues in North America, compared to less than 35% of our search revenues in 2003.

 

We expect that search revenue from our distribution partners will continue to be a greater share of our search revenues.

 

Mobile Revenue

 

The absolute dollar increase in Mobile revenue from 2003 to 2004 is primarily due to an increase in the sales of our mobile media download and content products as a result of our acquisition of Moviso in November 2003.

 

During 2003 and 2002, we generated revenue primarily from our from content delivery services, hosting and maintenance services, professional services and other infrastructure services to mobile operators. The absolute dollar decrease in Mobile revenue from 2002 to 2003 is primarily due to the loss of a major customer in 2002, a one-time gain in 2002 from the closure of our operations in Brazil, and pricing reductions. Partially offsetting the decrease in 2003 were revenues generated from our acquisition of Moviso in November 2003.

 

Revenue from non-core services

 

In 2003, as part of narrowing our focus, we sold or otherwise disposed of services falling outside of our core businesses. The absolute dollar decrease in non-core services revenue from 2003 and 2002 is due to the disposition of these non-core services in 2003.

 

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Additional Revenue Information

 

Related party revenue, warrant revenue, and barter revenue for the years ended December 31, 2004, 2003, and 2002 are presented below (in thousands):

 

     2004

  

Change

from 2003


    2003

  

Change

from 2002


    2002

Related Party Revenue

   $ —      $ (190 )   $ 190    $ (1,812 )   $ 2,002

Warrant Revenue

   $ —      $ (135 )   $ 135    $ (2,307 )   $ 2,442

Barter Revenue

   $ —      $ —       $ —      $ (243 )   $ 243

 

We have made investments in private and public companies for business and strategic purposes and, in the normal course of business, we entered into separate agreements to provide various promotional and other services for some of these companies. Revenues earned from companies in which we own stock are considered related party revenue. During 2004, 2003 and 2002, we did not enter into any significant new agreements with related parties and this, along with the completion of agreements entered into in prior years, contributed to a substantial decline in related party revenues in 2004, 2003 and 2002 compared to those recognized in prior years. We recognize revenue from our agreements with related parties on the same basis as we recognize revenue from similar agreements with unrelated parties.

 

Included in the related party revenues presented above are approximately $135,000 and $1.7 million of warrant revenue in 2003 and 2002, respectively. There was no related party warrant revenue in 2004.

 

We hold warrants and stock in public and privately-held companies for business and strategic purposes. Some of these warrants were received in conjunction with equity investments, and are also included in the related party revenue previously described. Additionally, some warrants and stock were received in connection with business agreements whereby we provided our products and services to the issuers in exchange for these equity securities. Some of these agreements contain provisions that required us to meet specific performance criteria in order for the stock or warrants to vest. When we met our performance obligations we recorded revenue equal to the fair value of the stock or warrant. If no future performance is required, we recognized the revenue on a straight-line basis over the contract term. Fair values are determined based on values negotiated by third party investors or independent appraisal. We entered into no new agreements during 2004, 2003 and 2002 whereby we received warrants as compensation, but we continued providing services for such agreements entered into during prior years.

 

Barter revenues are generated from non-cash transactions as defined by EITF Issue No. 99-17, Accounting for Advertising Barter Transactions. Revenue is recognized when we complete all of our obligations under the agreement. For non-cash agreements, we record a receivable or liability at the end of the reporting period for the difference in the fair value of the services provided or received based on the value of comparable cash transactions. Generally, barter transactions consist of the right to place Internet advertisements.

 

Additionally, for the year ended December 31, 2004, barter advertising expense was $0 compared to $400,000 in 2003 and $1.1 million in 2002. We do not anticipate significant related party, warrant or barter revenue or expenses in the future.

 

Content and Distribution Expenses.    Content and distribution expenses consist principally of costs related to revenue sharing arrangements with our distribution partners in connection with our Search & Directory business, royalty and license fees related to our content and media download products for items such as ringtones, graphics and games in connection with our Mobile business, and other content and data licenses. Content and distribution expenses in total dollars (in thousands) and percent of revenue for the years ended December 31, 2004, 2003, and 2002 are presented below:

 

     2004

    Change

    2003

    Change

    2002

 

Content and Distribution Expenses

   $ 92,688     $ 65,105     $ 27,583     $ 12,557     $ 15,026  

Percent of Revenue

     37.1 %     16.2 %     20.9 %     7.8 %     13.1 %

 

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Content and distribution expenses increased by $65.1 million to $92.7 million (or 37.1% of revenues) in 2004 as compared to $27.6 million (or 20.9% of revenues) in 2003. The absolute dollar and percent of revenue increase was attributable to revenue growth from our Search & Directory distribution partners in which we have revenue sharing arrangements where we private label our search products for our partners to offer on their own Web properties, and the growth from sales of our content and media download products to our wireless customers which require licensing and royalty payments to third parties.

 

Content and distribution expenses increased by $12.6 million to $27.6 million (or 20.9% of revenues) in 2003 as compared to $15.0 million (or 13.1% of revenues) in 2002. The absolute dollar and percent of revenue increase was primarily attributable to our revenue growth from our Search & Directory distribution partners in which we have revenue sharing arrangements where we private label our search products for others to offer on their own Web properties and, to a lesser extent, from sales of our content and media download products to our wireless customers.

 

We anticipate that our content and distribution expenses will continue to increase in absolute dollars if revenues from our Search & Directory distribution partners and sales of our content and media download products to our wireless customers continue to increase.

 

Systems and Network Operations Expenses.    Systems and network operations expenses consist of expenses associated with the delivery, maintenance and support of our products, services and infrastructure, including personnel expenses, which include salaries, benefits and other related employee costs, communication costs and equipment repair and maintenance. Systems and network operations expenses in total dollars (in thousands) and percent of revenue for the years ended December 31, 2004, 2003, and 2002 are presented below:

 

     2004

    Change

    2003

    Change

    2002

 

Systems and Network Operations Expenses

   $ 14,220     $ 3,232     $ 10,988     $ (5,113 )   $ 16,101  

Percent of Revenue

     5.7 %     (2.6 )%     8.3 %     (5.7 )%     14.0 %

 

Systems and network operations expenses increased by $3.2 million to $14.2 million (or 5.7% of revenues) for the year ended December 31, 2004 as compared to $11.0 million (or 8.3% of revenues) for the year ended December 31, 2003. The increase in absolute dollars was primarily attributable to an increase of $4.0 million in personnel expenses, including employee salaries and benefits and temporary help and contractors to augment our staffing, which was the result of additional headcount due to the growth in our business and also related to our acquisitions of Moviso and Switchboard. Partially offsetting these increases was a decrease in communications costs of $1.1 million related to the renegotiation of certain contracts.

 

Systems and network operations expenses decreased by $5.1 million to $11.0 million (or 8.3% of revenues) in 2003 as compared to $16.1 million (or 14.0% of revenues) in 2002. The absolute dollar and percent of revenue decrease from 2002 to 2003 were primarily attributable to workforce reductions and facility closures in 2003 and the fourth quarter of 2002, resulting in a decrease of personnel expenses of $2.3 million and communication and facility and maintenance costs of $2.1 million.

 

Product Development Expenses.    Product development expenses consist principally of personnel costs, which include salaries, benefits and other employee related costs, for research, development, support and ongoing enhancements of our products and services we deliver to our customers and distribution partners. Product development expenses in total dollars (in thousands) and percent of revenue for the years ended December 31, 2004, 2003 and 2002, are presented below:

 

     2004

    Change

    2003

    Change

    2002

 

Product Development Expenses

   $ 23,142     $ 5,361     $ 17,781     $ (11,347 )   $ 29,128  

Percent of Revenue

     9.3 %     (4.1 )%     13.4 %     (12.0 )%     25.4 %

 

Product development expenses increased by $5.4 million to $23.1 million (or 9.3% of revenues) in 2004 as compared to $17.8 million (or 13.4% of revenues) in 2003. The increase in absolute dollars was primarily due to

 

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an increase of $4.7 million in personnel expenses, including employee salaries and benefits and temporary help and contractors to augment our staffing, which increased as we continued to invest in the development and enhancement of our products and services and also as a result of additional headcount related to our acquisitions of Moviso, Switchboard, Atlas Mobile and IOMO.

 

Product development expenses decreased by $11.4 million to $17.8 million (or 13.4% of revenues) for the year ended December 31, 2003 as compared to $29.1 million (or 25.4% of revenues) for the year ended December 31, 2002. The absolute dollar and percent of revenue decreases from 2002 to 2003 were primarily attributable to a decrease in personnel costs of $10.7 million and facility and maintenance costs of $670,000, resulting from reductions of our workforce in 2003 and in the fourth quarter of 2002.

 

Product development costs may not be consistent with trends in changes in revenue and as a percent of revenues as they represent key costs to develop and enhance our product and service offerings. We believe that investments in technology are necessary to remain competitive, and we anticipate that product development expenses will increase as we continue to invest in our products and services.

 

Sales and Marketing Expenses.    Sales and marketing expenses consist principally of personnel costs, which include salaries, benefits and other employee related costs, advertising, market research and promotion expenses. Sales and marketing expenses in total dollars (in thousands) and percent of revenue for the years ended December 31, 2004, 2003 and 2002 are presented below:

 

     2004

    Change

    2003

    Change

    2002

 

Sales and Marketing Expenses

   $ 23,486     $ 5,999     $ 17,487     $ (1,946 )   $ 19,433  

Percent of Revenue

     9.4 %     (3.8 )%     13.2 %     (3.7 )%     16.9 %

 

Sales and marketing expenses increased by $6.0 million to $23.5 million (or 9.4% of revenues) in 2004 as compared to $17.5 million (or 13.2% of revenues) in 2003. The increase in absolute dollars was primarily attributable to an increase of $3.0 million in personnel expenses, including salaries and benefits and temporary help and contractors to augment our staffing, as we continue to grow our business, and also as a result of our acquisitions of Moviso, Switchboard, Atlas Mobile and IOMO, and an increase of $2.7 million in advertising and promotion expense.

 

Sales and marketing expenses decreased by $1.9 million to $17.5 million (or 13.2% of revenues) in 2003 as compared to $19.4 million (or 16.9% of revenues) in 2002. The absolute dollar decrease was primarily attributable to decrease of $4.0 million in personnel costs as the result of reductions of our workforce in 2003 and in the fourth quarter of 2002. Partially offsetting the decrease was an increase of $2.1 million in advertising and promotion expense.

 

We anticipate sales and marketing expenses to increase in absolute dollars as we continue to invest in marketing initiatives and sales promotions and expand our products and services.

 

General and Administrative Expenses.    General and administrative expenses consist primarily of personnel costs, which include salaries, benefits and other employee related costs, professional service fees, which include legal fees, audit fees, SEC compliance costs and costs related to compliance with the Sarbanes-Oxley Act of 2002, occupancy and general office expenses, and general business development and management expenses. General and administrative expenses in total dollars (in thousands) and percent of revenue for the years ended December 31, 2004, 2003 and 2002 are presented below:

 

     2004

    Change

    2003

    Change

    2002

 

General and Administrative Expenses

   $ 36,348     $ 4,123     $ 32,225     $ (10,462 )   $ 42,687  

Percent of Revenue

     14.6 %     (9.8 )%     24.4 %     (12.7 )%     37.1 %

 

General and administrative expenses increased by $4.1 million to $36.3 million (or 14.6% of revenues) in 2004 as compared to $32.2 million (or 24.4% of revenues) in 2003. The increase in absolute dollars was primarily attributable to an increase of $5.5 million in personnel costs and temporary help and contractors, to

 

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Table of Contents

augment our staffing, as a result of our acquisitions of Moviso, Switchboard, Atlas Mobile and IOMO, the hiring of our senior management team, which was completed in the latter part of 2003, and increased costs related to our compliance with the Sarbanes-Oxley Act of 2002, and a $1.4 million increase in our bad debt expense, as we recorded a net bad debt recovery of $1.0 million in 2003. Partially offsetting these increases were decreases in occupancy costs of $1.8 million as a result of restructurings, renegotiations or expiration of certain contracts, and a reduction in our insurance costs of $1.1 million.

 

The absolute dollar decreases from 2002 to 2003 were primarily attributable to a $6.1 million decrease in outside professional services costs, the majority of which related to lower legal fees, and a $3.3 million reduction in our occupancy costs, which include facility charges, communications cost and general office expense, as a result of our restructurings and the renegotiation or expiration of certain contracts.

 

We anticipate that professional fees for legal matters will continue to fluctuate depending on the timing and development of on-going legal matters.

 

Depreciation.    Depreciation of property and equipment includes depreciation of network servers and data center equipment, computers, software, office equipment and fixtures, and leasehold improvements. Depreciation expenses for the years ended December 31, 2004, 2003 and 2002 are presented below (in thousands):

 

     2004

   Change

    2003

   Change

    2002

Depreciation Expenses

   $ 6,974    $ (3,845 )   $ 10,819    $ (7,270 )   $ 18,089

 

The $3.8 million decrease from 2003 to 2004 and the $7.2 million decrease from 2002 to 2003 are primarily attributable to certain of our property and equipment reaching the end of its depreciable life.

 

Amortization of Other Intangible Assets.    Amortization of definite-lived intangible assets includes amortization of core technology, customer and content relationships, customer lists and other intangible assets. Amortization of other intangible assets is presented below for the years ended December 31, 2004, 2003 and 2002 (in thousands):

 

     2004

   Change

   2003

   Change

    2002

Amortization of Other Intangible Assets

   $ 9,920    $ 3,101    $ 6,819    $ (6,035 )   $ 12,854

 

The $3.1 million absolute dollar increase from 2003 to 2004 is attributable to the intangible assets that were acquired in the acquisitions of Moviso and Contactpage.com in 2003 and Switchboard, Atlas Mobile and IOMO in 2004. The increase in amortization expense related to these acquisitions was partially offset by a reduction of intangible assets that were either impaired or fully amortized during 2004 and 2003.

 

The $6.0 million absolute dollar decrease from 2002 to 2003 is attributable to lower amortizable balances of other intangible assets due to impairment changes recorded in 2003 and 2002 (see “Impairment of Goodwill and Other Intangible Assets” below). As the balance of other intangible assets decreased, the corresponding amortization expense also decreased.

 

Impairment of Goodwill and Other Intangible Assets.    Impairment of goodwill and other intangible assets is presented below for the years ended December 31, 2004, 2003 and 2002 (in thousands):

 

     2004

   2003

   2002

Impairment of Goodwill

   $ —      $ —      $ 56,104

Impairment of Other Intangible Assets

   $ —      $ 1,151    $ 20,281

 

We evaluated our goodwill for impairment during 2004, 2003 and 2002, as required under SFAS No. 142. Our annual evaluation conducted in 2004 and 2003 concluded that the carrying value of goodwill associated with each of our business units had not been impaired. During 2002, we determined that the carrying value of the goodwill associated with our Mobile business unit had been fully impaired and, accordingly, we recorded a charge for the impairment of goodwill of $56.1 million. The annual evaluations conducted in 2004, 2003 and

 

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Table of Contents

2002 were based on a valuation of our reporting units using a combination of our quoted stock price and projections of future discounted cash flows for each reporting unit.

 

During 2003, we determined that we would not pursue products related to a certain core technology we acquired in a business acquisition and recorded an impairment charge for the remaining carrying value.

 

During 2002, we determined that we would not pursue the development of certain technologies acquired in certain business acquisitions and also sold assets of a previously acquired business. As a result, we recorded an impairment charge of $14.9 million for the remaining carrying value of such core technologies. Additionally, we made the decision in 2002 to migrate certain customers from a platform acquired in a business acquisition to an existing platform. This migration was completed in 2002 and we recorded an impairment charge of $1.5 million for the unamortized balance of this acquired core technology. Furthermore, we determined that the actual and forecasted revenue from customer lists acquired in certain business acquisitions were substantially less than forecasted at the time of acquisition as many of these contracts were subsequently cancelled by us post-acquisition. As a result, we recorded an impairment charge of $3.9 million to write down the value of the acquired customer lists to zero.

 

Restructuring Charges.    Restructuring charges reflect actual and estimated costs associated with the reductions in workforce and costs associated with the consolidation and closures of certain of our facilities. Restructuring charges for the years ended December 31, 2004, 2003 and 2002, are presented below (in thousands):

 

     2004

    2003

   2002

 

Restructuring charges:

                       

Severance and related costs

   $ (22 )   $ 4,543    $ 487  

Estimated future lease losses

     (935 )     4,723      (156 )

Leasehold improvements and other asset disposal costs

     —         1,903      946  

Lease termination penalties

     1,179       405      —    

Realized loss on fluctuation of foreign currency

     —         148      537  
    


 

  


     $ 222     $ 11,722    $ 1,814  
    


 

  


 

The restructuring charge in 2004 is attributable to an adjustment of our estimated reserves for the restructuring in 2003, discussed below, primarily related to the payment of lease termination costs in lieu of subleasing our excess facilities.

 

In 2003, we narrowed our strategic focus, which included the restructuring of our business units and the identification of certain non-core services to divest, and implemented operational restructuring plans to reduce operating costs, which included workforce reductions and consolidation of corporate facilities. In 2003, we recorded a charge of $11.7 million comprised of employee severance and other separation charges, a charge for excess facilities, the write down of leasehold improvements and equipment related to the excess facilities and a charge for terminating a lease. The estimated future excess facilities cost was based on reducing the present value of future committed lease payments. Additionally, as part of our decision to close our operations in Australia, we recorded a charge of $148,000 relating to the realized loss on foreign currency fluctuations. This amount was previously included in accumulated other comprehensive income on our consolidated balance sheet.

 

In 2002, as part of our decision to sell certain assets of a previous business acquisition, we incurred a loss on the sale of these assets of $991,000, which is included in other asset disposal costs. Also, during 2002, we closed our operations in Brazil, resulting in a charge of $537,000 relating to the realized loss on foreign currency fluctuations. This amount was previously included in accumulated other comprehensive income on our consolidated balance sheet. Additionally, we reduced our workforce in 2002 and incurred employee severance and related charges. The charges above were partially offset by a reduction of $156,000 to the estimated lease expenses related to our former Seattle and Mountain View facilities.

 

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Table of Contents

Other, Net.    Other, net consists of costs, charges, refunds or gains that are not directly associated with other revenue or operating expense classifications. Other, net for the years ended December 31, 2004, 2003 and 2002 is presented below (in thousands):

 

     2004

    2003

    2002

Other, net:

                      

Litigation settlement

   $ (3,906 )   $ 7,549     $ 756

Tax settlement

     —         3,963       —  

Tax refunds and credits

     (266 )     (3,192 )     —  

Gain on sale of non-core services

     —         (6,376 )     —  

Notes receivable allowances

     —         —         3,411

Executive severance and stock-based compensation

     1,225       —         —  

Miscellaneous

     (256 )     (415 )     —  
    


 


 

     $ (3,203 )   $ 1,529     $ 4,167
    


 


 

 

During 2004, we recorded other charges, net for a gain of $3.2 million. We settled a litigation matter concerning promissory notes due from a former officer, resulting in a gain of $3.9 million. Pursuant to the settlement agreement, we received $3.3 million in cash and 18,438 shares of our common stock with a fair value of $622,000 from the former officer in full settlement of promissory notes previously recorded for $10.0 million and interest earned of $1.6 million on the promissory notes. We previously recorded a valuation allowance related to the promissory notes and related interest for $11.6 million. Additionally, we recorded a charge of $1.2 million related to the separation of a former executive officer, and we received a final assessment from the IRS for a payroll tax settlement regarding certain aspects of our payroll tax returns for the year 2000, in which we had previously recorded a $4.0 million charge in 2003 that included penalties and estimated interest, and, accordingly, paid the IRS. The interest charges were less than originally estimated and, as a result, we reversed previously recognized interest charges of approximately $246,000 upon our payment of the final assessment.

 

During 2003, we recorded other charges, net of $1.5 million, primarily comprised of a $7.5 million charge for litigation and other settlement related to our Mobile business and a charge, which included interest and penalties, related to a settlement agreement with the IRS regarding the audit of our payroll tax returns for the year 2000 in the amount of $4.0 million. Partially offsetting these charges were research and development tax refunds or credits from local and foreign tax jurisdictions and gains on the sale or disposition of our non-core services, all of which have been divested as of December 31, 2003.

 

During 2002, we recorded other charges, net of $4.2 million to increase the valuation allowance for certain notes receivable due from a former officer of InfoSpace, as previously discussed, and for a litigation settlement. The promissory notes were due on December 16, 2001 and were in default. A valuation allowance of $8.5 million was recorded in 2001, which represented the outstanding notes and interest due less the value of the secured shares and other known assets of the former officer. We sued the former officer in January 2002; however, due to the inherent uncertainty of litigation, we increased our valuation allowance by $3.1 million in 2002 to fully reserve the notes and interest receivables.

 

Gain (Loss) on Investments, Net.    Gain (loss) on investments, net, consists of recognized gains and losses on investments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, realized gains and losses on investments, and impairment of investments. Loss on investments, net is comprised of the following for the years ended December 31, 2004, 2003 and 2002 (in thousands):

 

     2004

    2003

    2002

 

Other-than-temporary investment impairments

   $ (916 )   $ (12,281 )   $ (20,288 )

Loss on sale of investments

     —         (398 )     (104 )

Increase (decrease) in fair value of warrants

     1,341       682       (548 )
    


 


 


     $ 425     $ (11,997 )   $ (20,940 )
    


 


 


 

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Other-than-temporary investment impairment:    We have equity investments in public and privately held companies and periodically evaluate whether the decline in fair value of an investment is other-than-temporary. During 2004, 2003 and 2002, we concluded that there had been an other-than-temporary impairment of certain equity investments and we recorded an impairment charge related to those specific investments.

 

Gains and losses on sale of investments:    During 2004, 2003 and 2002, we sold our equity investments in public and privately-held companies as opportunities arose.

 

Gains and losses in accordance with SFAS No. 133:    Effective January 1, 2001, we adopted SFAS No. 133 which requires us to adjust our derivative instruments to fair value and recognize the change in the recorded fair value in earnings. We hold warrants to purchase stock in other companies, which qualify as derivatives, and therefore gains or losses are based on the fair value.

 

As of December 31, 2004, we have sold or otherwise disposed of substantially all of our investments in publicly and privately held companies.

 

Other Income, Net.    Other income, net, primarily consists of interest income, except for 2004 in which a gain of $456,000 from a foreign currency contract was recorded and 2003 in which a gain of $4.1 million from a litigation settlement was recorded. Other income, net was $5.0 million in 2004 compared to $8.2 million in 2003 and $6.9 million in 2002. Excluding the 2004 gain from the foreign currency contract and the 2003 gain from a legal settlement, other income primarily consisted of interest income of $4.7 million, $4.1 million, and $7.6 million in 2004, 2003 and 2002, respectively. The increase in interest income in 2004 was attributable to more available cash and marketable investments on hand to invest, and, to a lesser extent, an increase in interest rates. The decrease in interest income from 2002 to 2003 is mainly from lower interest rates received on our marketable investments. During 2004, we entered into a definitive agreement to acquire elkware, a mobile gaming company, at a cost of 20 million Euro. Due to the continuing decline in the exchange rate of the U.S. Dollar to the Euro, we entered into the foreign exchange contract on December 22, 2004 to mitigate further foreign currency exposure. As of December 31, 2004, the exchange rate of the U.S. dollar had further declined relative to the Euro and we recorded a gain of $456,000 on the forward exchange contract. Subsequently, in early 2005 when the acquisition of elkware was completed, the U.S. dollar strengthened against the Euro, and we will record a loss of $934,000 in 2005 as a result of the settlement of that exchange contract.

 

Income Tax Expense.    We have recorded an income tax benefit of $29,000 in 2004, $607,000 in 2003, and an expense of $430,000 in 2002. Income tax expense is primarily for our international operations, except in 2003, which includes a tax benefit related to the allocation of income tax expense to our discontinued operations of $1.5 million, partially offset by a tax expense for Federal alternative minimum tax. We expect to continue to record a tax provision for our international operations and Federal alternative minimum taxes in the future.

 

At December 31, 2004, we have a deferred tax asset of approximately $477.5 million, primarily comprised of our accumulated net operating loss carryforwards. We have provided a full valuation allowance for our deferred tax assets as we believe that sufficient uncertainty exists regarding the realizability of the deferred tax assets. Once we have reached profitability for an extended period and believe that realization is more likely than not, we will reduce a portion or all of the valuation allowance in the period that such a determination is made and record a significant tax benefit. For the periods following the recognition of this tax benefit and to the extent we are profitable, we will record a tax provision for which the actual payment may be offset against our accumulated net operating loss carryforwards.

 

Income from Discontinued Operations and Gain on Sale of Discontinued Operation.    On March 31, 2004, we consummated the sale of our Payment Solutions business and have reflected income from Payment Solutions as income from discontinued operations. For 2004, we recorded a gain on the sale of Payment Solutions of $29.1 million, which was comprised of proceeds from the sale of $82.0 million less the net book value of assets sold of $49.3 million (including goodwill of $48.9 million), and transaction related costs of $3.6 million, which consist of investment banking fees, legal fees and employee related costs.

 

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We have presented the operating results of Payment Solutions as a discontinued operation for all periods presented. We recorded income, net of taxes, from the operating results of Payment Solutions of $2.3 million and $2.8 million for the year ended December 31, 2004 and 2003, respectively, and a loss of $3.5 million for the year ended December 31, 2002. Income from discontinued operations includes previously unallocated depreciation, amortization, corporate expenses, and income taxes that were attributed to Payment Solutions.

 

Cumulative Effect of Changes in Accounting Principle.    Effective January 1, 2002, we adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. In accordance with SFAS No. 142, we evaluated the classification of our intangible assets using the criteria of SFAS No. 141, Business Combinations, which broadened the criteria for recording intangible assets apart from goodwill, which resulted in $1.0 million of intangible assets (comprised entirely of assembled workforce intangibles) being classified as goodwill on January 1, 2002.

 

SFAS No. 142 requires that purchased goodwill and indefinite-lived intangibles no longer be amortized into results of operations, but instead be tested for impairment at least annually. We evaluated our other intangible assets, including core technology, customer lists, and other intangible assets, and determined that these assets have definite lives. These are classified on our consolidated balance sheets as Other intangible assets, net.

 

We recorded a charge for the cumulative effect of change in accounting principle of $206.6 million as of January 1, 2002, which was related to impairment of goodwill. This amount was determined based on a valuation of our reporting units as of January 1, 2002 using a combination of our quoted stock price and projections of future discounted cash flows for each reporting unit.

 

Balance Sheet Commentary

 

Payroll Taxes.    As of December 31, 2004, we had $13.2 million recorded as a tax receivable. In October 2000, Anuradha Jain, a former officer of InfoSpace and the spouse of Naveen Jain, our former chairman and chief executive officer, exercised non-qualified stock options. We withheld and remitted to the IRS $12.6 million for federal income taxes based on the market price of the stock on the day of exercise and we also remitted the employer payroll tax of $620,000. Due primarily to the affiliate lock-up period resulting from our merger with Go2Net, Inc. (“Go2Net”), the former officer was restricted from transferring or selling the stock until February 2001, and we believe that such restriction delayed the taxation of income until the restriction lapsed. We, therefore, returned the federal income tax withholding to the former officer and filed an amendment to our payroll tax return to request the tax refund. Our payroll tax returns for the year 2000 have been audited by the IRS and we have received an examination report from the IRS disallowing the claim for the refund of $13.2 million. We are appealing that determination by the IRS and may seek recovery from the former officer. We believe that we have meritorious arguments to recover this refund and that it is probable that we will recover this receivable. However, there can be no assurance regarding the timing, structure or extent of our recovery of this tax receivable.

 

Liquidity and Capital Resources

 

Our principal source of liquidity is our cash and cash equivalents, short-term investments and long-term investments, initially generated from proceeds from stock sales of approximately $614 million, which include private placements of our common stock and Go2Net’s private placement of preferred stock, our initial public offering in December 1998, our follow-on public offering in April 1999 and Go2Net’s initial public offering in April 1997. In addition, more recently we have generated cash from operations and proceeds from the exercising of options to purchase shares of our common stock and proceeds of $82.0 million from the sale of our Payment Solutions business unit.

 

As of December 31, 2004, we had cash and marketable investments of approximately $321.8 million, consisting of cash and cash equivalents of $85.2 million, short-term investments available-for-sale of $198.4

 

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million, and long-term investments available-for-sale of $38.2 million. We invest our excess cash in high quality marketable investments. These investments include securities issued by U.S. government agencies, certificates of deposit, money market funds, and taxable municipal bonds.

 

Commitments and Pledged Funds

 

The following are our contractual commitments associated with our operating lease obligations (in thousands):

 

     2005

    2006

    2007

   2008

   Total

 

Minimum lease payments required

   $ 5,084     $ 3,986     $ 3,882    $ 640    $ 13,592  

Less sublease income

     (523 )     (163 )     —        —        (686 )
    


 


 

  

  


Net lease payments required

   $ 4,561     $ 3,823     $ 3,882    $ 640    $ 12,906  
    


 


 

  

  


 

We have pledged a portion of our cash and cash equivalents as collateral for standby letters of credit and bank guaranties for certain of our property leases and banking arrangements. At December 31, 2004, the total amount of collateral pledged under these agreements was approximately $4.6 million. The change in the total amount of collateral pledged under these agreements was as follows (in thousands):

 

     Standby
Letters of
Credit


    Certificates
of Deposit


   Total

Balance at December 31, 2003

   $ 4,133     $ 343    $ 4,476

Net change in collateral pledged

     (90 )     170      80
    


 

  

Balance at December 31, 2004

   $ 4,043     $ 513    $ 4,556
    


 

  

 

Cash Flows

 

Net cash provided (used) by operating activities consists of net income (loss) offset by certain adjustments not affecting current-period cash flows and the effect of changes in our operating assets and liabilities. Adjustments to net income (loss) to determine cash flow from operations include depreciation and amortization, impairment of intangible assets, gains or losses on equity investments, warrant and stock-based related revenues and expenses, gains and losses from the disposition of non-core services and other assets, certain restructuring charges, and the cumulative effect of changes in accounting principles. Net cash (used) provided by investing activities consists of net cash used to acquire businesses, transactions related to our investments, purchases of property and equipment and proceeds from the sale of certain assets. Net cash provided (used) by financing activities consists of proceeds from the issuance of stock through the exercise of stock options or warrants and our employee stock purchase plan.

 

Our net cash flows are comprised of the following for the years ended December 31, 2004, 2003 and 2002 (in thousands):

 

     Year Ended December 31,

 
     2004

    2003

    2002

 

Net cash provided (used) by operating activities

   $ 52,483     $ 46,408     $ (17,393 )

Net cash (used) provided by investing activities

     (110,893 )     (25,931 )     31,088  

Net cash provided by financing activities

     32,747       3,616       935  
    


 


 


Net (decrease) increase in cash and cash equivalents

   $ (25,663 )   $ 24,093     $ 14,630  
    


 


 


 

Net cash provided by operating activities was $52.5 million in 2004, consisting of our net income of $82.4 million, cash provided by changes in our operating assets and liabilities of $17.7 million, consisting of an

 

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increase in our deferred revenues and accrued expenses and other current liabilities, and adjustments not affecting cash flows provided by operating activities of $18.4 million, primarily consisting of depreciation and amortization, stock-based compensation, bad debt expense, and non-cash restructuring charges. Partially offsetting the increase are cash used by changes in our operating assets and liabilities of $33.6 million, primarily consisting of increases in our accounts receivable, notes and other receivables and a decrease in our accounts payable, and adjustments not affecting cash flows provided by operating activities of $32.4 million, primarily consisting of income and the gain on sale of our Payment Solutions business of $31.4 million, accounted for as a discontinued operation, and gains from our equity investments.

 

Net cash provided by operating activities was $46.4 million in 2003, consisting of our net loss of $6.3 million, cash provided by changes in our operating assets and liabilities of $34.2 million, primarily consisting of increases in accrued expenses and other current liabilities, changes in net assets of discontinued operations, increases in notes and other receivables, and an increase in our accounts receivable, and adjustments not affecting cash flows provided by operating activities of $33.8 million, primarily consisting of depreciation and amortization, losses on equity investments, and restructuring and impairment charges. Partially offsetting the increase are cash used by changes in our operating assets and liabilities of $5.0 million, primarily consisting of increases in our prepaid expenses and other assets, and a decrease in our deferred revenue, and adjustments not affecting cash flows provided by operating activities of $10.3 million, primarily consisting of gains from the sale of our non-core services, bad debt recoveries and income from our discontinued operation.

 

Net cash used by operating activities was $17.4 million in 2002, consisting of our net loss of $345.3 million, cash used by changes in our operating assets and liabilities of $26.2 million, primarily consisting increases in accounts receivables and decreases of accounts payable, accrued expenses and other current liabilities, deferred revenue and changes in net assets of discontinued operations, and adjustments not affecting cash flows used by operating activities of $3.9 million primarily consisting of stock related revenues and bad debt recoveries. Partially offsetting the decrease are changes in our operating assets and liabilities of $7.7 million, primarily consisting of decreases in notes and other receivable, prepaid assets and other current and long term assets, and adjustments not affecting cash flows of $350.1 million, primarily associated with the cumulative effect of adopting SFAS No. 142 of $206.6 million, impairment of goodwill and other intangible assets, depreciation and amortization, losses on our equity investments.

 

Net cash used by investing activities was $110.9 million in 2004, primarily from the purchase of $446.4 million of marketable investments, the use of $130.6 million for business acquisitions, net of cash acquired, and $10.4 million of property and equipment purchases. Partially offsetting cash used in investing activities were proceeds from the sale or maturity of our marketable investments of $499.2 million, proceeds of $82.0 million from the sale of our Payment Solutions business, and proceeds of $1.0 million from the sale of equity investments and our non-core services.

 

Net cash used by investing activities was $25.9 million in 2003, primarily from the proceeds of $263.5 million from the sale or maturity of our marketable investments and proceeds of $18.1 million from the sale of equity investments and non-core services and assets. Partially offsetting cash provided by investing activities were the purchase of $276.2 million of marketable investments, the use of $29.1 million for business acquisitions, net of cash acquired, and purchases of property and equipment of $2.2 million.

 

Net cash provided by investing activities was $31.1 million in 2002, primarily from the proceeds of $228.9 million from the sale or maturity of our marketable investments and proceeds of $2.0 million from a note receivable. Partially offsetting cash provided by investing activities were the purchase of $192.1 million of marketable investments, purchase of property and equipment of $5.2 million, and the use of $2.4 million for business acquisitions, net of cash acquired.

 

Net cash provided by financing activities in 2004, 2003 and 2002 was $32.7 million, $3.6 million, and $935,000, respectively. Cash proceeds from financing activities resulted from the exercise of stock options and from the sales of shares through our employee stock purchase plan.

 

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We plan to use our cash to fund operations, develop technology, advertise, market and distribute our products and application services, and continue the enhancement of infrastructure including the build-out of a redundant data center. We may use our cash for acquisitions, an example being our 2004 acquisition of Switchboard and the acquisition of three mobile gaming companies in 2004 and early 2005.

 

We believe that existing cash balances, cash equivalents, short term investments and cash generated from operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. However, the underlying assumed levels of revenues and expenses may not prove to be accurate. Our anticipated cash needs exclude any payments for pending or future litigation matters. In addition, we evaluate acquisitions of businesses, products or technologies that complement our business from time to time. Any such transactions, if consummated, may use a significant portion of our cash balances and marketable investments. We may seek additional funding through public or private financings or other arrangements prior to such time. Adequate funds may not be available when needed or may not be available on favorable terms. If we raise additional funds by issuing equity securities, dilution to existing stockholders will result. If funding is insufficient at any time in the future, we may be unable to develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could harm our business.

 

Market Sensitive Derivatives and Financial Instruments

 

On December 15, 2004, we entered into a definitive agreement to acquire 100% of the outstanding stock of elkware, a German mobile games company. The agreed purchase price is denominated in Euros in the amount of 20.0 million Euros. Due to significant changes in the exchange rate and the continued decrease of the U.S. dollar to the Euro, on December 22, 2004 we entered into a forward exchange contract, to minimize any further exposure of the U.S. dollar weakening relative to the Euro, which locked the exchange rate at 1.3416 for each dollar per Euro. The acquisition of elkware was completed on January 7, 2005.

 

Acquisitions

 

Summary of Our Acquisitions

 

Company or Assets


   Date Closed

  

Total Value of

Transaction

(in thousands)


IOMO Limited

   12/01/2004    $ 15,400

Atlas Mobile, Inc.

   07/01/2004      6,300

Switchboard Incorporated

   06/03/2004      159,400

Moviso LLC

   11/26/2003      25,000

Saraide, Inc. (remaining interest)

   11/26/2003
and 12/31/03
     1,100

Contactpage.com, Inc

   10/21/2003      2,600

eCash Technologies, Inc.

   02/08/2002      4,600

 

IOMO Limited.    On December 1, 2004 we acquired all of the outstanding stock of IOMO Limited, a designer and publisher of mobile games, for approximately $15.4 million, excluding acquisition costs and liabilities assumed. In addition, the purchase agreement required that approximately $2.1 million of the purchase price be placed in escrow to provide security for certain indemnification obligations set forth in the purchase agreement.

 

Atlas Mobile, Inc.    In July 2004, we acquired the assets of Atlas Mobile, a provider of mobile multi-player tournament games, for $6.3 million.

 

Switchboard Incorporated.    In June 2004, we acquired all of the outstanding stock of Switchboard Incorporated, a provider of local on-line advertising and Internet based yellow pages, for $7.75 per share in cash

 

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totaling approximately $159.4 million, which excludes transaction fees of approximately $6.2 million and liabilities assumed. As of the acquisition date, Switchboard had approximately $56.4 million in cash.

 

Moviso LLC.    In November 2003, we acquired all of the membership interests of Moviso LLC, a North American mobile media content provider, from Vivendi Universal Net USA Group, Inc. for $25.0 million in cash, excluding acquisition costs and liabilities assumed.

 

Saraide, Inc.    In March 2000, we acquired 80% of the common stock of Saraide, Inc., a component of the Mobile segment. In 2003, we acquired the remaining 20% interest in Saraide, Inc. at an aggregate cost of approximately $8.6 million, which includes the cost of a settlement with certain shareholders of Saraide, Inc. of approximately $7.5 million.

 

Contactpage.com, Inc.    In October 2003, we acquired substantially all of the technology and intellectual property of Contactpage.com, Inc. for $2.6 million in cash.

 

eCash Technologies, Inc.    In February 2002, we acquired substantially all of the technology and intellectual property of eCash Technologies, Inc., a developer of electronic debit and stored value technologies, for purchase consideration of $2.7 million and 106,482 shares of our common stock.

 

Events Subsequent to December 31, 2004

 

elkware GmbH On December 15, 2004, we entered into a definitive agreement to acquire 100% of the outstanding shares of elkware GmbH, a German mobile games company, for 20.0 million Euro, which approximated $26.4 million in cash. The transaction was consummated on January 7, 2005. In addition, the purchase agreement required that 5.0 million Euros of the purchase price be placed in escrow to provide security for certain indemnification obligations set forth in the purchase agreement.

 

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Quarterly Results of Operations (Unaudited)

 

The following table presents a summary of our unaudited consolidated results of operations for the eight quarters ended December 31, 2004. The information for each of these quarters has been prepared on a basis consistent with our audited consolidated financial statements. You should read this information in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. The operating results for any quarter are not necessarily indicative of results for any future period.

 

   

March 31,

2003


   

June 30,

2003


    September 30,
2003


    December 31,
2003


   

March 31,

2004


   

June 30,

2004


    September 30,
2004


    December 31,
2004


 
    (in thousands except per share data)  

Revenues

  $ 30,283     $ 31,685     $ 31,232     $ 39,030     $ 48,081     $ 54,448     $ 67,151     $ 79,674  

Operating expenses:

                                                               

Content and distribution

    3,539       5,343       7,389       11,312       16,886       18,611       24,537       32,654  

Systems and network operations

    3,421       2,743       2,240       2,584       3,218       3,813       3,498       3,691  

Product development

    6,010       3,853       3,747       4,171       4,438       5,580       6,436       6,688  

Sales and marketing

    4,556       4,100       3,999       4,832       5,458       5,083       6,212       6,733  

General and administrative

    7,477       9,527       7,372       7,849       9,494       8,998       9,565       8,291  

Depreciation

    3,295       3,215       2,342       1,967       1,799       1,745       1,681       1,749  

Amortization of intangible assets

    1,622       1,623       1,622       1,952       1,741       2,002       3,061       3,116  

Impairment of other intangible assets

    —         —         1,151       —         —         —         —         —    

Restructuring

    167       10,451       (128 )     1,232       (49 )     271       —         —    

Other, net

    3,956       (149 )     1,533       (3,811 )     1,090       (3,922 )     (246 )     (125 )
   


 


 


 


 


 


 


 


Total operating expenses

    34,043       40,706       31,267       32,088       44,075       42,181       54,744       62,797  
   


 


 


 


 


 


 


 


Operating income (loss)

    (3,760 )     (9,021 )     (35 )     6,942       4,006       12,267       12,407       16,877  

Gain (loss) on equity investments

    413       (12,427 )     74       (57 )     458       —         (33 )     —    

Other income, net

    1,170       5,619       681       720       985       1,176       1,000       1,830  
   


 


 


 


 


 


 


 


Income (loss) from continuing operations before income taxes

    (2,177 )     (15,829 )     720       7,605       5,449       13,443       13,374       18,707  

Income tax benefit (expense)

    259       (192 )     85       455       (32 )     (71 )     (18 )     50  
   


 


 


 


 


 


 


 


Income (loss) from continuing operations

    (1,918 )     (16,021 )     805       8,060       5,417       13,372       13,356       18,857  

Discontinued Operations:

                                                               

Income from discontinued operations, net of taxes

    611       (471 )     787       1,828       2,277       —         —         —    

Gain on sale of discontinued operations, net of taxes

    —         —         —         —         28,989       133       —         —    
   


 


 


 


 


 


 


 


Net income (loss)

  $ (1,307 )   $ (16,492 )   $ 1,592     $ 9,888     $ 36,683     $ 13,505     $ 13,356     $ 18,857  
   


 


 


 


 


 


 


 


Earnings per share—Basic

                                                               

Income (loss) from continuing operations

  $ (0.06 )   $ (0.51 )   $ 0.03     $ 0.25     $ 0.17     $ 0.42     $ 0.42     $ 0.58  

Income (loss) from discontinued operations

  $ 0.02     $ (0.02 )   $ 0.02     $ 0.06     $ 0.99     $ —       $ —       $ —    
   


 


 


 


 


 


 


 


Net income (loss) per share

  $ (0.04 )   $ (0.53 )   $ 0.05     $ 0.31     $ 1.16     $ 0.42     $ 0.42     $ 0.58  
   


 


 


 


 


 


 


 


Weighted average shares outstanding used in computing basic net income (loss) per share

    30,979       31,153       31,337       31,456       31,568       31,915       32,183       32,766  
   


 


 


 


 


 


 


 


Earnings per share—Diluted

                                                               

Income (loss) from continuing operations

  $ (0.06 )   $ (0.51 )   $ 0.03     $ 0.23     $ 0.15     $ 0.37     $ 0.37     $ 0.50  

Income (loss) from discontinued operations

  $ 0.02     $ (0.02 )   $ 0.02     $ 0.06     $ 0.88     $ —       $ —       $ —    
   


 


 


 


 


 


 


 


Net income (loss) per share

  $ (0.04 )   $ (0.53 )   $ 0.05     $ 0.29     $ 1.03     $ 0.37     $ 0.37     $ 0.50  
   


 


 


 


 


 


 


 


Weighted average shares outstanding used in computing diluted net income (loss) per share

    30,979       31,153       33,259       34,692       35,654       36,245       36,411       37,850  
   


 


 


 


 


 


 


 


 

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March 31,

2003


   

June 30,

2003


    September 30,
2003


    December 31,
2003


   

March 31,

2004


   

June 30,

2004


    September 30,
2004


    December 31,
2004


 
    (as a percent of revenue)  

Revenues

  100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %

Operating expenses:

                                               

Content and distribution

  11.7     16.9     23.7     29.0     35.1     34.2     36.5     41.0  

Systems and network operations

  11.3     8.7     7.2     6.6     6.7     7.0     5.2     4.6  

Product development

  19.8     12.2     12.0     10.7     9.2     10.3     9.6     8.4  

Sales and marketing

  15.0     12.9     12.8     12.4     11.4     9.3     9.3     8.5  

General and administrative

  24.7     30.1     23.6     20.1     19.8     16.5     14.2     10.4  

Depreciation

  10.9     10.1     7.4     5.0     3.7     3.2     2.5     2.2  

Amortization of intangible assets

  5.4     5.1     5.2     5.0     3.6     3.7     4.6     3.9  

Impairment of other intangible assets

  —       —       3.7     —       —       —       —       —    

Restructuring

  0.5     33.0     (0.4 )   3.2     (0.1 )   0.5     —       —    

Other, net

  13.1     (0.5 )   4.9     (9.8 )   2.3     (7.2 )   (0.4 )   (0.2 )
   

 

 

 

 

 

 

 

Total operating expenses

  112.4     128.5     100.1     82.2     91.7     77.5     81.5     78.8  
   

 

 

 

 

 

 

 

Operating income (loss)

  (12.4 )   (28.5 )   (0.1 )   17.8     8.3     22.5     18.5     21.2  

Gain (loss) on equity investments

  1.3     (39.2 )   0.2     (0.1 )   1.0     —       —       —    

Other income, net

  3.9     17.7     2.2     1.8     2.0     2.2     1.4     2.3  
   

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

  (7.2 )   (50.0 )   2.3     19.5     11.3     24.7     19.9     23.5  

Income tax benefit (expense)

  0.9     (0.6 )   0.3     1.2     —       (0.1 )   —       0.2  
   

 

 

 

 

 

 

 

Income (loss) from continuing operations

  (6.3 )   (50.6 )   2.6     20.7     11.3     24.6     19.9     23.7  

Discontinued Operations:

                                               

Income from discontinued operations, net of taxes

  2.0     (1.4 )   2.5     4.6     4.7     —       —       —    

Gain on sale of discontinued operations, net of taxes

  —       —       —       —       60.3     0.2     —       —    
   

 

 

 

 

 

 

 

Net income (loss)

  (4.3 )%   (52.0 )%   5.1 %   25.3 %   76.3 %   24.8 %   19.9 %   23.7 %
   

 

 

 

 

 

 

 

 

Recent Accounting Pronouncements

 

We account for stock-based compensation awards using the intrinsic value measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, we record no compensation expense for stock options granted with exercise prices greater than or equal to the fair value of the underlying common stock at the date of grant. On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123(R)”). SFAS No. 123(R) eliminates the alternative of applying the intrinsic value measurement provisions of APB Opinion No. 25 to stock compensation awards. Rather, SFAS No. 123(R) requires enterprises to measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award at the date of grant. That cost will be recognized over the period during which a person is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).

 

We have not yet quantified the effects of the adoption of SFAS No. 123(R), but we expect that the new standard will result in significant stock-based compensation expense. The pro forma effects on net income and earnings per share if we had applied the fair value recognition provisions of original SFAS No. 123 on stock compensation awards (rather than applying the intrinsic value measurement provisions of APB Opinion No. 25) are disclosed in Item 8 of Part II “Financial Statements and Supplementary Data – Note 1: Stock-based compensation.” Although such pro forma effects of applying the original SFAS No. 123 may be indicative of the effects of adopting SFAS No. 123(R), the provisions of these two statements differ in important respects. The actual effects of adopting SFAS No. 123(R) will be dependent on numerous factors including, but not limited to, the valuation model chosen by us to value stock-based awards; the assumed award forfeiture rate; the accounting policies adopted concerning the method of recognizing the fair value of awards over the requisite service period; and the transition method (as described below) chosen for adopting SFAS No. 123(R).

 

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SFAS No. 123(R) will be effective for our fiscal quarter beginning July 1, 2005, and requires the use of the Modified Prospective Application Method. Under this method SFAS No. 123(R) is applied to new awards and to awards modified, repurchased, or cancelled after the effective date. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered (such as unvested options) that are outstanding as of the date of adoption shall be recognized as the remaining requisite services are rendered. The compensation cost relating to unvested awards at the date of adoption shall be based on the fair value at the date of grant of those awards as calculated for pro forma disclosures under the original SFAS No. 123. In addition, we may use the Modified Retrospective Application Method. This method may be applied to all prior years for which the original SFAS No. 123 was effective or only to prior interim periods in the year of initial adoption. If the Modified Retrospective Application Method is applied, financial statements for prior periods shall be adjusted to give effect to the fair-value-based method of accounting for awards on a consistent basis with the pro forma disclosures required for those periods under the original SFAS No. 123.

 

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ITEM 7A.    Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to financial market risks, including changes in interest rates and equity price fluctuations.

 

Interest Rate Risk.    We invest our available cash in investment-grade debt instruments of corporate issuers and in debt instruments of the U.S. Government and its agencies. By policy, we limit our credit exposure to any one issuer. We do not have any derivative instruments in our investment portfolio. We protect and preserve invested funds by limiting default, market and reinvestment risk. Investments in both fixed-rate and floating-rate interest earning instruments carry a degree of interest rate risk. Fixed-rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating-rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates. At December 31, 2004, our short-term and long-term investment balances were $236.6 million.

 

The following table provides information about our cash equivalent and marketable fixed-income securities, including principal cash flows for 2004 and the related weighted average interest rates. Amounts are presented in U.S. dollar equivalents, which is our reporting currency.

 

Principal amounts by expected year of maturity in U.S. dollars as of December 31, 2004 are as follows (in thousands, except percentages):

 

     2005

    2006

    Total

    Fair Value

Taxable municipal bonds (1)

   $ 115,525     $ —       $ 115,525     $ 115,525

Weighted average interest rate

     2.44 %     —         2.44 %      

U.S. government securities

     72,763       25,036       97,799       97,339

Weighted average interest rate

     2.25 %     2.44 %     2.30 %      

Commercial Paper

     23,977       —         23,977       23,975

Weighted average interest rate

     2.27 %     —         2.27 %      

Corporate notes and bonds

     11,489       13,420       24,909       24,704

Weighted average interest rate

     1.93 %     2.55 %     2.27 %     —  
    


 


 


 

Cash equivalents and marketable fixed-income securities

   $ 223,754     $ 38,456     $ 262,210     $ 261,543
    


 


 


 


(1)   Consists of Auction Rate Securities.

 

Foreign Currency Risk:    Our earnings and cash flows are subject to fluctuations due to changes in the exchange rates of the principal currency of countries that we operate in (Canada and countries in Europe) versus the U.S. dollar. We are exposed to these exchange rate fluctuations as the financial results of our non-U.S. based subsidiaries are translated into U.S. dollars in consolidation. As exchange rates vary, those results, when translated, may vary from expectations and adversely impact our results. The cumulative translation effects for subsidiaries using functional currencies other than the U.S. dollar are included in accumulated other comprehensive income in stockholders’ equity. Other than the forward currency exchange contract that we entered into in connection with the purchase of elkware GmbH, a mobile gaming company based in Germany, we do not currently use derivative instruments to manage our exposure to changes in foreign currency exchange rates as this exposure has had a minimal impact on our past financial results.

 

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ITEM 8.    Financial Statements and Supplementary Data

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

INFOSPACE, Inc.


   Page

Reports of Independent Registered Public Accounting Firm

   49

Consolidated Balance Sheets

   51

Consolidated Statements of Operations and Comprehensive Income (Loss)

   52

Consolidated Statements of Changes in Stockholders’ Equity

   53

Consolidated Statements of Cash Flows

   54

Notes to Consolidated Financial Statements

   55

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

InfoSpace, Inc. and subsidiaries

Bellevue, Washington

 

We have audited the accompanying consolidated balance sheets of InfoSpace, Inc. and subsidiaries (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of InfoSpace, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002.

 

We have also audited, in accordance with the standards of the PCAOB the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 2, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

DELOITTE & TOUCHE LLP

 

Seattle, Washington

March 2, 2005

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

InfoSpace, Inc. and Subsidiaries

Bellevue, Washington

 

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that InfoSpace, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Oversight Board (United States) (“PCAOB”). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004 is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited, in accordance with the standards of the PCAOB, the consolidated financial statements as of and for the year ended December 31, 2004 of the Company and our report dated March 2, 2005 expressed an unqualified opinion and includes an explanatory paragraph regarding the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, on January 1, 2002, as discussed in Note 1 to the consolidated financial statements.

 

DELOITTE & TOUCHE LLP

 

Seattle, Washington

March 2, 2005

 

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INFOSPACE, INC.

 

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

 

     December 31,

 
     2004

    2003

 
ASSETS                 

Current assets:

                

Cash and cash equivalents

   $ 85,245     $ 110,908  

Short-term investments, available-for-sale

     198,410       184,415  

Accounts receivable, net of allowance of $929 and $911.

     57,110       24,585  

Notes and other receivables, net of allowance of $93 and $11,893

     7,259       4,454  

Payroll tax receivable

     13,214       13,214  

Prepaid expenses and other current assets

     3,623       3,425  

Assets of discontinued operations

     —         58,366  
    


 


Total current assets

     364,861       399,367  

Long-term investments, available-for-sale

     38,159       —    

Property and equipment, net

     16,782       13,281  

Other investments

     —         1,396  

Goodwill

     158,810       57,133  

Other intangible assets, net

     46,189       20,388  

Other long-term assets

     1,293       750  
    


 


Total assets

   $ 626,094     $ 492,315  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY                 

Current liabilities:

                

Accounts payable

   $ 6,669     $ 4,363  

Accrued expenses and other current liabilities

     44,031       29,529  

Short-term deferred revenue

     4,750       3,315  

Liabilities of discontinued operations

     —         8,501  
    


 


Total current liabilities

     55,450       45,708  

Long-term liabilities:

                

Long-term deferred revenue

     503       75  

Deferred taxes

     7,745       —    
    


 


Total long-term liabilities

     8,248       75  
    


 


Total liabilities

     63,698       45,783  

Commitments and contingencies (Note 9)

     —         —    

Stockholders’ equity:

                

Preferred stock, par value $.0001—authorized, 15,000,000 shares; issued and outstanding, 2 shares

     —         —    

Common stock, par value $.0001—authorized, 900,000,000 shares; issued and outstanding, 32,894,177 and 31,470,635 shares

     3       3  

Additional paid-in capital

     1,741,241       1,707,617  

Accumulated deficit

     (1,179,893 )     (1,262,294 )

Accumulated other comprehensive income

     1,045       1,206  
    


 


Total stockholders’ equity

     562,396       446,532  
    


 


Total liabilities and stockholders’ equity

   $ 626,094     $ 492,315  
    


 


 

See notes to consolidated financial statements.

 

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INFOSPACE, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(amounts in thousands, except per share data)

 

     Years Ended December 31,

 
     2004

    2003

    2002

 

Revenues (including related party revenues of $0, $190 and $2,002 )

   $ 249,354     $ 132,230     $ 114,972  

Operating expenses:

                        

Content and distribution

     92,688       27,583       15,026  

Systems and network operations

     14,220       10,988       16,101  

Product development

     23,142       17,781       29,128  

Sales and marketing

     23,486       17,487       19,433  

General and administrative

     36,348       32,225       42,687  

Depreciation

     6,974       10,819       18,089  

Amortization of other intangible assets

     9,920       6,819       12,854  

Impairment of goodwill

     —         —         56,104  

Impairment of other intangible assets

     —         1,151       20,281  

Restructuring

     222       11,722       1,814  

Other, net

     (3,203 )     1,529       4,167  
    


 


 


Total operating expenses

     203,797       138,104       235,684  
    


 


 


Operating income (loss)

     45,557       (5,874 )     (120,712 )

Gain (loss) on investments, net

     425       (11,997 )     (20,940 )

Other income, net

     4,991       8,190       6,932  
    


 


 


Income (loss) from continuing operations before income tax benefit (expense) and cumulative effect of change in accounting principle

     50,973       (9,681 )     (134,720 )

Income tax benefit (expense)

     29       607       (430 )
    


 


 


Income (loss) from continuing operations before cumulative effect of change in accounting principle

     51,002       (9,074 )     (135,150 )

Discontinued operations:

                        

Income (loss) from discontinued operations, net of taxes

     2,277       2,755       (3,481 )

Gain on sale of discontinued operations, net of taxes

     29,122       —         —    

Cumulative effect of change in accounting principle

     —         —         (206,619 )
    


 


 


Net income (loss)

   $ 82,401     $ (6,319 )   $ (345,250 )
    


 


 


Earnings per share—Basic:

                        

Income (loss) from continuing operations

   $ 1.59     $ (0.29 )   $ (4.41 )

Income (loss) from discontinued operations

   $ 0.98