Prepared by R.R. Donnelley Financial -- FORM 10K FOR THE FISCAL YEAR ENDED 12/31/2001
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, 2001
 
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
(State or other jurisdiction of
incorporation or organization)
 
91-1718107
(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.  ¨
 
The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of Common Stock on February 28, 2002 as reported by Nasdaq, was approximately $325.0 million. Shares of voting stock held by each officer and director and by each person who owns 5% or more of the outstanding voting stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
 
As of February 28, 2002, 309,179,234 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 20, 2002 (the “Proxy Statement”).
 


Table of Contents
 
TABLE OF CONTENTS
 
PART I
        
Item 1.
    
3
      
16
Item 2.
    
27
Item 3.
    
27
Item 4.
    
29
PART II
    
Item 5.
    
29
Item 6.
    
30
Item 7.
    
31
Item 7A.
    
51
Item 8.
    
53
Item 9.
    
98
PART III
    
Item 10.
    
98
Item 11.
    
98
Item 12.
    
98
Item 13.
    
98
PART IV
    
Item 14.
    
98
      
101

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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, to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties and other factors include, among others, those identified under “Factors Affecting Our Operating Results, Business Prospects and Market Price of Stock” and elsewhere in this report.
 
Overview
 
InfoSpace, Inc. is a provider of wireless and Internet software and application services. We have developed and deliver a wireless and Internet platform of software and application services that enable companies to offer network-based services under their own brands. Our customers in turn, offer these products and application services to their customers as their solutions. We provide our services across multiple platforms simultaneously, including PCs and non-PC devices.
 
We develop and deliver our products and application services to a broad range of customers that span each of our business areas of wireline and broadband, merchant and wireless. In our wireline and broadband business, we deliver our services to Web portals such as America Online, destination sites such as Disney, and DSL providers such as Verizon Online. In our merchant business, we deliver our products to regional Bell operating companies such as Verizon, merchant banks such as Union Bank of California, and financial institutions such as American Express. In our wireless business, we deliver our products and application services to wireless carriers such as Verizon Wireless, AT&T Wireless and Cingular, and other consumer service companies such as Charles Schwab.
 
Our services are predominately built on our core technology platform and use the same operational infrastructure. We do not currently allocate development or operating costs to any of these services. The following provides detail on each of our business areas.
 
Wireline and Broadband
 
Through our wireline and broadband business area, we develop and deliver Internet services for high-speed broadband and dial-up narrowband Web sites. We enable our customers such as destination Web sites and broadband service providers, including digital subscriber line (DSL) companies, to offer their customers an array of private-labeled services. We deliver our services to Web sites including America Online, Microsoft’s MSN, NBCi, Lycos and Verizon Online, among others.
 
InfoSpace’s product offerings are designed to help businesses attract customers, improve loyalty, create new revenue streams and monetize their customer base. Further, our services are private-labeled and delivered with each customer’s logo, color scheme and navigation design, to help strengthen the value of their brand. This ensures that our customers own the value relationship with their customer. Our wireline business unit is focused on delivering three main categories of products:
 
 
 
Web search products are meta-search engines in that they simultaneously search many engines at the same time, producing fast, extensive results. Rather than offering just a single search engine, our search solutions offer some of the best search engines on the Web. We integrate search engines including Alta Vista, Overture, About, Direct Hit and Looksmart, among others, into our meta-search products.

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Directory services are an extension of search and include Internet products (White Pages and Classifieds) people use every day.
 
 
 
Broadband services are designed to take advantage of higher bandwidth networks. Our current and next-generation applications and services are targeted at the DSL and cable modem markets, and are designed to create compelling reasons for customers to subscribe or migrate to high-speed connections.
 
In wireline, for search and directory services we are paid on a per query basis. We do not expect broadband revenues to be material in the near future.
 
Merchant
 
Our merchant business area develops and delivers products and application services that are designed to help merchants leverage Internet and wireless technologies to attract customers, reduce costs, grow sales and conduct business. These applications and services enable businesses to establish an online presence, promote their products and services, and conduct secure commerce using an Internet connected device. Our merchant services are branded for leading merchant banks and other merchant service providers who in turn offer these solutions to their business customers. Our merchant services are available through a broad merchant reseller channel, including Verizon, one of the largest providers of products and services for small to medium-sized businesses in the U.S., and major financial institutions such as American Express and Union Bank of California. Our merchant services include:
 
 
 
Payment solutions that enable merchants to authorize, process, and manage credit card and electronic check transactions on Internet-enabled mobile devices and personal computers. InfoSpace payment solutions are offered as a private-label service to leading merchant banks such as Wells Fargo and Union Bank of California and directly to merchants through InfoSpace’s reseller network.
 
 
 
Shopping services that offer a private-labeled, end-to-end solution designed to help partners increase traffic, build customer loyalty and drive additional revenue through offering a comparison-shopping service to their customers under their own brand. This flexible service can be customized to appeal to a partner’s specific target market(s) and can be integrated with customer registration and internal loyalty programs.
 
 
 
Merchant promotions is primarily our yellow pages services, and are distributed through leading Web sites and wireless carriers over a wide range of fixed and mobile Internet connected devices, offering merchants expansive networks over which to promote their products and services.
 
 
 
Hosting solutions that provide merchants and Web developers with a flexible and scalable solution for establishing and building secure Web sites.
 
We generate revenue in our merchant business area from the following sources:
 
 
 
Payment transactions include our payment authorization and shopping services. In payment authorization, we earn revenue from our merchants through set-up fees and from monthly subscription fees, which may include a certain number of monthly transactions. As merchants exceed their minimum, we receive additional revenue per transaction. For shopping, we generally receive a percentage of the total dollars processed in each transaction, as well as a number of basis points for shopping transactions completed on certain Web sites.
 
 
 
Merchant promotions, which are primarily our yellow pages services, generate revenues on a per query basis.
 
 
 
Merchant hosting revenues are generated on a monthly basis from subscription fees and monetization of users to the merchant’s Web sites.

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Wireless
 
Through our wireless business area, we develop, deliver and support solutions enabling our carrier customers to deliver wireless data services to their subscribers under their own brand over current and next generation networks. With our wireless platform, carriers can effectively manage and seamlessly deliver InfoSpace’s private- labeled applications and services, third party services and their own content and applications, to create a unique mobile data experience for their subscribers.
 
InfoSpace provides its wireless solutions to leading companies worldwide, including wireless carriers such as Verizon Wireless, Cingular Wireless, AT&T Wireless, ALLTEL, Virgin Mobile and Deutsche Telekom’s VoiceStream; and consumer services companies such as Charles Schwab. InfoSpace’s wireless solutions include:
 
Content Applications and ServicesWe offer an array of content application and services that bring personalized and timely information and entertainment services across many devices. These products include:
 
 
 
Content applications including news, finance, weather, sports and entertainment applications, among others.
 
 
 
Content services such as InfoSpace’s Alerts Service, including speech-enabled SMS (short message service) alerts, speech information services, 2-way SMS services and our downloadable content service. Our applications offer multiple delivery options for content distribution on any device in various data modes. Our content can be pushed or pulled as text messages over SMS to handsets and pagers, as WML or HDML decks on wireless internet-enabled phones, as HTML or cHTML pages on desktops and PDAs, or as VoiceXML for speech delivery. Our SMS delivery platform supports SMTP and a variety of direct messaging protocols such as SMPP and CIMD as well as a variety of downloadable content formats such as Nokia Smart Messaging and EMS (enhanced messaging service). For example:
 
 
 
We have deployed wireless alerts service applications in four different languages delivering content and messaging notifications to the subscribers of Verizon Wireless, Cingular Wireless, VoiceStream Wireless, ALLTEL, Cincinnati Bell, Vodafone, Virgin Mobile, KPN, Libertel, Dutchtone, BEN, Telfort, diAx, Telemig, ATL, Amazonia and Telet.
 
 
 
We have deployed two-way SMS service applications in four different languages delivering content on demand to the subscribers of Vodafone, Iusacell, One2One, KPN, Libertel, Dutchtone, BEN, Telfort and Microcell.
 
 
 
Content Provisioning.    We provide our customers a wide selection of provisioning options. Our solutions allow users to access, personalize and schedule information services via multiple interfaces including Web, WAP, speech and one-way and mobile-originated SMS.
 
MessagingOur messaging products are designed to help carriers attract and retain subscribers and drive mobile data use by providing a unified environment with a single interface where their subscribers can access and manage their voice and data communications from multiple accounts.
 
 
 
Email.     Our email solution leverages both the wireless and wired Internet, and the interplay between devices and communications modes. Whether a subscriber is solely active on their wireless device or mixed use with their PC, has several existing email accounts or needs a new email account, our solution is designed to meet their needs.
 
 
 
Personal Information Manager.    Designed to meet the needs of both consumers and business professionals, our personal information manager (PIM) solutions leverage both the wireless and wired Internet, and the interplay between devices and communications modes. By providing a server-based solution suite hosted by InfoSpace, a customer’s data is securely stored, and is accessible from virtually anywhere, using a wide variety of Internet connected device. Users can upgrade handsets, change or alternate devices without any loss of information.

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Voice Activated Dialing.    The easiest way to get in touch with contacts from an address book. Voice-Activated Dialing can be used with any type of phone.
 
Customization and Personalization—Our customization and personalization tools give wireless carriers direct control over the wireless services they offer. These tools also give subscribers the flexibility to personalize their services, making them more valuable to the subscribers and easier to use.
 
 
 
User Manager.    Our User Manager incorporates a core set of standards-based technologies to combine subscription management, provisioning, personalization services, device services, loyalty and payment services in an economical, flexible and seamless wireless customer personalization and integrated provisioning solution.
 
 
 
Wireless Application Manager.    Our Wireless Application Manager delivers end user customization and wireless carrier control of decks, or the list of application services on the screen, content links and production releases.
 
We support SMS, WAP, cHTML, VoiceXML (speech) and a variety of other protocols that may be proprietary to different devices, enabling our end users to access the same personalization and services across a variety of devices. Our wireless Internet services enable carriers to support a variety of protocols such as WAP, PQAs for Palm VII and VoiceXML, in addition to HDML, SMTP and SMS. Our services are compatible with a variety of wireless gateway technologies including Nokia, OpenWave, CMG and Ericsson.
 
We generate revenue in our wireless business area from development and integration fees, subscription fees and licensing fees. License fee revenue is recognized ratably over the term of the agreement. Licensing fees may include a minimum number of users or usages by users. In those cases that do not have minimums or when the minimums are exceeded, we receive per subscriber or per message fees that are generated either on a monthly or quarterly basis.
 
International Operations
 
We currently maintain facilities in the United States, Canada, The Netherlands, the United Kingdom, Australia and Brazil.
 
We have also entered into an agreement to expand our services into Mexico and are currently investigating additional international opportunities. The expansion into international markets involves a number of risks. See “Risk Factors—Our expansion into international markets may not be successful and may expose us to risks that could harm our business” for a description of these risks.
 
We have historically generated the majority of revenues from our customers in the United States. Revenue generated in the United States accounted for 91% of our total revenues in 2001 and 2000 and 99% of our total revenues in 1999.
 
For further information about our business areas, see Note 11 to the consolidated financial statements.
 
Revenue Sources
 
We have derived all of our revenues from our wireline and broadband, merchant and wireless business areas. We generate revenues from payment transaction fees, licensing fees, subscription fees, advertising and development and integration fees.
 
Payment Transaction Fees
 
Payment transactions include our shopping and payment authorization services. In payment authorization we earn revenue from our merchants through set-up fees and monthly subscription fees, which may include a

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certain number of transactions. As merchants exceed their minimum, we receive additional revenue per transaction. For shopping, we receive a percentage of the total dollars processed in each transaction, as well as a number of basis points for shopping transactions completed on certain Web sites. Transaction fees are recognized in the period the transaction occurs.
 
Licensing Fees
 
Licensing fees are generated from the access and utilization of our products and application services. License fee revenue is recognized ratably over the term of the agreement.
 
We have agreements with some customers, merchant banks and aggregators and wireless carriers under which they agree to pay us licensing fees, which may include guaranteed minimum fees. These arrangements are individually negotiated and have a range of specially adapted features involving various compensation structures. These are often based on the range and extent of customization. These agreements generally range from one to three years in duration.
 
For our wireless agreements, the licensing fees may include a minimum number of users or usages by users. In those cases that do not have minimums, or when the minimums are exceeded, we receive per subscriber or per message fees that are generated either on a monthly or quarterly basis.
 
Subscription Fees
 
We receive monthly subscription fees from our merchant hosting services and our payment authorization services. Subscription fee agreements generally range from one to three years in duration. Subscription fee revenue is recognized in the period the services are provided.
 
Advertising
 
We monetize the users of our Web sites by selling banner, button and text-link advertisements based on cost per click, or CPCs, costs per thousand impressions, or CPMs, and other CPM-based advertising. Our advertising agreements generally have terms of less than six months and guarantee a minimum number of impressions. Actual CPMs depend on a variety of factors, including, without limitation, the degree of targeting, the duration of the advertising contract and the numbers of impressions purchased, and are often negotiated on a case-by-case basis. Because of these factors, actual CPMs may fluctuate. Revenues from contracts based on the number of impressions displayed or click-throughs provided are recognized as services are rendered.
 
In some cases, we share some of the revenues generated from banner advertising with some of our content providers and with customers who have co-branded Web pages. We generally retain the right to enter into agreements with and sell the advertising to third parties and we are responsible for serving the advertisements and billing the advertisers. After deducting a selling fee, we usually share the revenues with the content provider or customer once a minimum impression threshold is achieved.
 
Development and Integration Fees
 
Development fees are charged for the development of private-labeled solutions for customers. Integration fees are charged for the integration of our products and application services into these private-labeled solutions. Although these fees are generally paid to us at the commencement of the agreement, the fees are recognized ratably over the term of the agreement.
 
Professional Services
 
During the fourth quarter of 2001, we established a professional services group to offer services that will help us serve the design, integration and support needs of our customers.

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We expect to generate revenues from projects by charging for both time and materials, as well as under agreements with specific contractual terms. These revenues will be recognized as the services are rendered.
 
In 2001, we generated 56% of our revenues from our wireline business area. We expect to generate 40 to 45% of our revenues from our wireline and broadband business area in 2002. Our reliance on these revenues involves a number of risks. For additional information about these risks, see “Risk Factors—We have historically been, and currently remain, reliant upon revenues from our wireline services. Our operating results would be harmed by a decline in sales of our wireline services or our failure to collect fees for these services.”
 
Technology and Infrastructure
 
We believe that one of our principal strengths is our internally developed technology that we have designed specifically for our products and application services. Our technology architecture features specially adapted capabilities to enhance performance, reliability and scalability, consisting of multiple software modules that support the core functions of our operations. Our technology consists of three tiers: Tier I—Presentation and Authentication, Tier II—Platforms and Applications and Tier III—Core Technology. Below is a brief description of the functionality and purpose of each tier.
 
Tier I: Presentation and Authentication
 
Authentication
 
Requests for our products and application services are generated from wireless, non-PC and PC devices. Requests that require authentication are routed to our user manager subsystem that authenticates the user and makes that user’s profile of authorized capabilities available to the rest of our applicants and services.
 
Presentation
 
The presentation technology allows our products and services to be displayed on different devices each with their own protocols and formats without making changes to the underlying application. With our presentation technology, we have a device-, protocol-, and transport-independent platform. We support SMS, WAP, cHTML, VoiceXML (speech) and a variety of other protocols that may be proprietary to different devices, enabling our end users to access the same personalization and services across a variety of devices. The platform directly supports co-brand ability permitting easy changes to the look and structure of a site. Our wireless Internet services provide a platform which enables carriers to support a variety of protocols such as WAP, PQAs for Palm VII and VoiceXML, in addition to HDML, SMTP and SMS.
 
Tier II: Platforms and Applications
 
Our platforms and applications build upon the core technology and support the core functions of our operations.
 
The components include alerts services, speech, location/geo-centric platform, short message service (SMS) platform, user manager, content management and wireless access management.
 
Our application services include search, directory, broadband, payments, merchant promotions, hosting, shopping and a platform of wireless data services such as user manager, wireless access manager, SMS and speech among others. Most applications support HTTP/XML based programmatic interfaces to ease integration with partners and evolve into complete Web services.
 
Tier III: Core Technology
 
Web Server Technology
 
We designed our Web Server Technology to enable rapid development and deployment of information over multiple delivery mechanisms and output formats. It incorporates an automated publishing engine that

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dynamically builds a page to conform to the look and feel and navigation features of each Web site. Our wireless data services are device-independent and provide a platform that enables our wireless carriers to support HDML, SMTP, SMPP, and a variety of emerging protocols such as VoiceXML and PQAs for Palm VII. Our services are compatible with a variety of gateway technologies including WAP gateways from Nokia, OpenWave and Ericsson.
 
Our Web Server Technology includes other features designed to optimize the performance of our information infrastructure services, including:
 
 
 
a HTML compressor that leverages semantics-preserving modifications of file content to reduce size, thereby reducing download time for users;
 
 
 
an adaptive Keep-Alive feature that maximizes the duration of HTTP connections, based on current server load, thereby improving the user experience by reducing latency; and
 
 
 
a proxy server that provides the capability for real-time integration and branding of applications that reside remotely with third-party providers.
 
Database Technology
 
We have developed database technology to address the specific requirements of our business strategy and information infrastructure services. We designed our Co-operative Database Architecture to function efficiently within the unique operating parameters of the Internet, as opposed to commonly used database systems that were developed prior to the widespread acceptance of the Internet. The architecture is integrated with our Web Server Technology and incorporates the following features:
 
 
 
Our Heterogeneous Database Clustering allows disparate data sources to be combined and accessed through a single uniform programmatic interface, regardless of data structure. These clusters facilitate database bridging, allowing a single database query to produce a single result set containing data extracted from multiple databases, which is a vital component of our ability to aggregate applications from multiple sources. Database clustering in this manner reduces dependence on single data sources, facilitates easy data updates and reduces integration efforts. In addition, our pre-search and post-search processing capabilities enable users to modify search parameters in real time before and after querying a database.
 
 
 
Our Dynamic Parallel Index Traversal mechanism utilizes the search parameters supplied by the user to determine the appropriate database index (from among multiple indices) to efficiently locate the data requested. Further, an index compression mechanism allows us to achieve an efficient balance between disk space and compression/decompression when storing or accessing data.
 
 
 
In a response to a database query, conventional databases access previously displayed results in order to display successive results to a given query, thus increasing response time by performing redundant operations. Our Automatic Query State Recovery mechanism decreases response time by maintaining the state of a query to allow the prompt access of successive results. This feature is particularly important, for example, when an end-user query retrieves a large number of results.
 
 
 
We incorporate a natural word search interpreter, which utilizes familiar category and topic headings that are traditional to print directory media to generate relevant and related results to queries. By supporting a familiar navigation feature in our services, we provide end users with a more intuitive mechanism to search for and locate information.
 
 
 
For our merchant services we have developed a comprehensive, enterprise-wide data warehouse. This data warehouse contains information relating to merchants, products, services, users, customers, profiles, storefronts, purchases, site traffic and metrics. The aggregation of this information in one place allows us to leverage our development efforts and reduce redundant information.

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Product Development
 
We believe that our technology platform is essential to successfully implement our strategy of expanding and enhancing our services, expanding in the wireless and Internet software and application services market and maintaining the attractiveness and competitiveness of our solutions. We have invested significant time and resources in creating our patented and patent-pending technology. Product development expenses were $39.3 million for the year ended December 31, 2001, $40.6 million for the year ended December 31, 2000 and $15.6 million for the year ended December 31, 1999.
 
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 nonuse agreements that transfer any rights they may have in copyrightable works or patentable technologies to us. In addition, prior to entering into discussions with potential content providers and 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 agreement provides that we retain ownership of all patents and copyrights in our technology and requires our customers to display our copyright and trademark notices.
 
“InfoSpace,” the InfoSpace logo, “Go2Net,” “Authorize.Net,” the Dogpile logo, “ActiveShopper,” “100Hot,” “Web21,” “Haggle Online,” “HyperMart,” “MetaCrawler,” “MetaSpy,” “MyAgent,” “Silicon Investor,” “FraudScreen.Net,” the Get Rewarded logo, “RubberChicken.com” and “WebMarket” are registered trademarks of ours. We recently purchased the following registered trademarks from At Home Corporation: “Classifieds2000,” “Cool Notify,” “Excite,” “Excite Classifieds,” “Excite Search,” “Jango,” “Webcrawler,” and “Webcrawler Direct.” Other recently acquired registered trademarks include “Giantbear.com,” acquired with other assets from GiantBear, Inc., and “E-Cash,” “Digicash,” “E-Vote, “ “Kidcash,” “Net-Cash” and “Net-Pay,” acquired as part of our purchase of substantially all assets of eCash Technologies, Inc. In addition, we have applied for federal registration of other marks, including “ActivePromotion,” “Dogpile,” “IntelliShopper” and “Playsite,” the Go2Net logo, “Discover What You Can Do,” “Airpay,” and “SMS Direct.” From the GiantBear, Inc. asset purchase, we acquired the federal applications for “Audiocub,” “Bearcub,” “Beartracks,” “Business Bear” and “Giant Bear.” From the At Home Corporation asset purchase, we acquired the federal application for “Excite Precision Search.” We also have applied for registration of certain service marks and trademarks in the United States and in other countries, and will seek to register additional marks, as appropriate. We may not be successful in obtaining the service marks and trademarks for which we have applied.
 
We have been issued six U.S. patents, and recently acquired twenty more in connection with the eCash asset purchase in February 2002. Our issued patents cover private-label commerce solutions; tracking the purchase of products, services and information on the Internet and on wireless devices; and electronic transaction technologies. We also have several foreign patents and patents pending covering some of these technologies. We also have over forty-nine U.S. patent applications pending relating to various aspects of our technology, including technology we have developed for querying and developing databases, for developing and constructing Web pages, electronic commerce on-line directory services and Web scraping. We have received a notice of allowance for one of these patent applications. From the GiantBear asset purchase, we acquired three pending U.S. patents relating to wireless technology and through the eCash asset purchase, we acquired one pending patent related to electronic transaction technology. We are preparing additional patent applications on other features of our technology. We have instituted a formal patent program and anticipate on-going patent application activity in the future. Patents with respect to our technology may not be granted, and, if granted, patents may be challenged or invalidated. In addition, issued patents may not provide us with any competitive advantages and may be challenged by third parties.

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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 proprietary rights to as great an extent as do the laws of the United States. In addition, others could possibly independently develop substantially equivalent intellectual property. If we do not effectively protect our intellectual property, our business could suffer.
 
Companies in the Internet 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 other parties’ proprietary rights. From time to time, we have received, and may receive in the future, notice of claims of infringement of other parties’ proprietary rights. Any such claims could be time-consuming, result in costly litigation, divert management’s attention, cause product or service release delays, require us to redesign our products or services or require us to enter into royalty or licensing agreements. If a successful claim of infringement were made against us and we could not develop non-infringing technology or license the infringed or similar technology on a timely and cost-effective basis, our business could suffer.
 
MetaCrawler License Agreement.    On January 31, 1997, Go2Net and Netbot entered into the MetaCrawler License Agreement pursuant to which Netbot granted Go2Net an exclusive, subject to certain limited exceptions, worldwide license to provide the MetaCrawler service. We acquired Go2Net in October 2000. Netbot was acquired by Excite, Inc. in November 1997 and Excite was acquired by At Home Corporation in May 1999. As part of the MetaCrawler License Agreement, we have the exclusive right to operate, modify and reproduce the MetaCrawler service including, without limitation, the exclusive right to use, modify and reproduce the name “MetaCrawler” and the MetaCrawler URL in connection with the operation of the MetaCrawler service. Netbot licensed the MetaCrawler service and the other intellectual property rights associated therewith from the University of Washington on an exclusive, perpetual basis. The search technology underlying the MetaCrawler service and the MetaCrawler trademark is licensed to or owned by Netbot and sublicensed to us pursuant to the MetaCrawler License Agreement. At Home Corporation is currently in bankruptcy proceedings. However, we have entered into a contingent arrangement with the original licensor of MetaCrawler and do not believe that the At Home Corporation bankruptcy will impact our ability to offer the MetaCrawler service.
 
Competition
 
We operate in the wireless and Internet software and application services market, which is 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 wireless and Internet software and applications are:
 
 
 
the ability to meet the specific information and service demands of a particular Web site or wireless device;
 
 
 
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; and
 
 
 
the ability to develop innovative products and services that enhance the appearance and utility of the Web site, device or platform.
 
Although we believe that no one competitor offers all of the products and services we do, our primary offerings face competition from various sources. We compete, directly or indirectly, in the following ways, among others:
 
 
 
wireline services compete with search providers such as Google, Yahoo and Microsoft’s MSN, directory providers such as Yahoo and Microsoft’s MSN, and broadband providers such as Yahoo,

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iPlanet and Microsoft’s MSN; other information services we provide, such as classifieds, horoscopes and real-time market quotes, compete with specialized content providers.
 
 
 
our merchant services compete with online payment processing services such as VeriSign’s Signio, Plug ‘n Play, CyberSource, portals such as AOL, Yahoo and MSN, merchant aggregators such as Big Step and Microsoft’s Bcentral, and merchant hosting providers such as Verio, Interland and Dellhost; our yellow pages services compete with other providers such as Switchboard, InfoUSA, Yahoo Yellow Pages and AnyWho.com; our shopping services compete with other providers such as MySimon;
 
 
 
our wireless services compete with in-house information technology departments of wireless carriers and device manufacturers, and some of our services compete with those provided by OpenWave, i3Mobile, and Seven; and
 
 
 
in international markets, we compete with local companies which may have a competitive advantage due to their greater understanding of and focus on a particular local market.
 
We expect that in the future we will experience competition from other Internet software and application services companies, including Microsoft and AOL. Some of these companies are currently customers of ours, the loss of which could harm our business.
 
Many of our current customers have established relationships with some of our current and potential future competitors. If our competitors develop information Internet 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, U.S. and foreign governments have adopted or may in the future adopt laws and regulations relating to the Internet, addressing issues such as user privacy, pricing, content, taxation, copyrights, distribution and product and services quality.
 
Recent concerns regarding Internet user privacy have led to the introduction of U.S. federal and state legislation to protect Internet user privacy. Existing laws regarding user privacy that we may be subject to include the Children’s Online Privacy Protection Act, which regulates the online collection of personal information from children under 13, and the Gramm-Leach-Bliley Act, which regulates the collection and processing of personal financial information. In addition, the Federal Trade Commission has initiated investigations and hearings regarding Internet user privacy, which could result in rules or regulations that could adversely affect our business. As a result, we could become subject to new laws and regulations that could limit our ability to conduct targeted advertising, or to distribute or collect user information.
 
European legislation to protect Internet user privacy has not greatly impacted us so far. In October 1998, the European Union adopted a directive that may limit our collection and use of information regarding Internet users in Europe. European countries may pass new laws in accordance with the directive, or may seek to more strictly enforce existing legislation, which may prevent us from offering some or all of our services in some European countries.
 
We may be subject to provisions of the Federal Trade Commission Act that regulate advertising in all media, including the Internet, and require advertisers to substantiate advertising claims before disseminating advertising. The Federal Trade Commission has the power to enforce this Act. It has recently brought several actions charging deceptive advertising via the Internet and is actively seeking new cases involving advertising via the Internet.
 
We may also be subject to the provisions of the Children’s Online Protection Act, which restricts the distribution of certain materials deemed harmful to children. Although some court decisions have cast doubt on the constitutionality of this Act, it could subject us to substantial liability.
 

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These or any other laws or regulations that may be enacted in the future could have several adverse effects on our business.
 
Employees
 
As of February 28, 2002, we had 741 employees. None of our employees are represented by a labor union, and we consider our employee relations to be good. Competition for qualified personnel in our industry is intense, particularly for software development and other technical staff and for personnel with experience in wireless services. During 2001, we realigned our resources to concentrate on development of our wireless, merchant and broadband services and aligned our engineering resources along business lines. These realignments allowed us to reduce our workforce by approximately 375 employees. We believe that our future success will depend in part on our continued ability to attract, hire and retain qualified personnel.
 
Executive Officers and Directors
 
The following table sets forth certain information as of February 28, 2002 with respect to our executive officers and directors:
 
Name

  
Age

  
Position

Naveen Jain
  
42
  
Chairman and Chief Executive Officer
Edmund O. Belsheim, Jr.
  
49
  
President, Chief Operating Officer and Director
Tammy D. Halstead
  
38
  
Chief Financial Officer
Rasipuram (“Russ”) V. Arun
  
44
  
Executive Vice President and Chief Technology Officer
York Baur
  
37
  
Executive Vice President, Wireline and Broadband
Jan E. Claesson
  
46
  
Executive Vice President, Wireless
Prakash Kondepudi
  
38
  
Executive Vice President, Merchant
John E. Cunningham, IV
  
44
  
Director
Richard D. Hearney
  
62
  
Director
Rufus W. Lumry, III
  
55
  
Director
William D. Savoy
  
37
  
Director
Lewis M. Taffer
  
54
  
Director
 
Naveen Jain founded InfoSpace in March 1996. Mr. Jain served as our Chief Executive Officer from our inception in March 1996 to April 2000 and was reappointed as our Chief Executive Officer in January 2001. He also served as our President from inception to November 1998 and as our sole director from our inception to June 1998, when he was appointed Chairman of the Board. From June 1989 to March 1996, Mr. Jain held various positions at Microsoft Corporation, including Group Manager for MSN, Microsoft’s online service. From 1987 to 1989, Mr. Jain served as Software Development Manager for Tandon Computer Corporation, a PC manufacturing company. From 1985 to 1987, Mr. Jain served as Software Manager for UniLogic, Inc., a PC manufacturing company. From 1982 to 1985, he served as Product Manager and Software Engineer at Unisys Corporation/Convergent Technologies, a computer manufacturing company. Mr. Jain holds a B.S. from the University of Roorkee and a M.B.A. from St. Xavier’s School of Management.
 
Edmund O. Belsheim, Jr. joined us in November 2000 as Senior Vice President and General Counsel, and was appointed Chief Operating Officer in January 2001 and President in July 2001. He has served as 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.

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Tammy D. Halstead was appointed our Chief Financial Officer in January 2001. Ms. Halstead had resigned her previous positions with us in November 2000. She initially joined us as Corporate Controller in July 1998, was appointed Vice President and Chief Accounting Officer in December 1998 and became a Senior Vice President in June 2000. In addition, from November 1999 to June 2000 she served as our acting Chief Financial Officer. From March 1997 to June 1998, she worked at the Seattle office of USWeb Corporation, an Internet professional services firm, where she served as Director of Finance and Administration and later as Vice President, Finance and Administration. From April 1996 to March 1997, she served as Director of Finance and Administration at Cosmix, Inc., which was acquired by USWeb Corporation in March 1997. From December 1993 to February 1996, she served as Controller of ConnectSoft, Inc., a software development company. Prior to joining ConnectSoft, Inc., she spent eight years in private industry with a division of Gearbulk Ltd., an international shipping company, and in public accounting with Ernst & Whinney (now Ernst & Young LLP). She holds a B.B.A. from Idaho State University and is a licensed CPA.
 
Rasipuram (“Russ”) V. Arun joined us in May 2000 as Chief Technology Officer and was named Executive Vice President in October 2000. From 1992 to May 2000, he worked for Microsoft in various capacities including Product Unit Manager, responsible for development and strategy of products for handheld devices, Win95 Base Program Manager, Windows 98 Team Group Manager and Java Group Program Manager. Prior to joining Microsoft, Mr. Arun had ten years of experience working for SunSoft, Inc., Multisolutions, Inc. and Zenith Data Systems. Mr. Arun holds a B.S. from the Indian Institute of Technology, an M.S. from Syracuse University and an M.B.A. from the University of California at Los Angeles.
 
York Baur joined us in September 2001 as Executive Vice President, Wireline and Broadband. In 2000, Mr. Baur co-founded SafariDog, Incorporated, an Internet e-commerce and media consumer application company, and served as its Vice President, Sales and Marketing through August 2001. From August 1999 to January 2000, he served as Vice President, Sales of InterVU Incorporated (now Akamai Technologies, Inc.), and served as Vice President, Sales of Netpodium, Incorporated from January to August 1999. From 1994 to January 1999, Mr. Baur was employed by Wall Data, Incorporated most recently serving as Vice President, Cyberprise Products. He also has worked for Attachmate Corporation, Microsoft Corporation, Zenith Data Systems and TRW. Mr. Baur holds a B.S. from the University of Southern California.
 
Jan E. Claesson joined us in September 2001 as Executive Vice President, Wireless. Prior to joining InfoSpace, from August 1999 to August 2001, Mr. Claesson served as Executive Vice President Sales, Marketing and Business Development of GoAhead Software, a developer of service availability software for the wireless 3G telecom and web cluster markets. From September 1996 to July 1999, he was Chairman and Chief Executive Officer of Her Interactive.Com, Inc., a company producing interactive entertainment for girls, and was also a founding partner of Millenium Venture Management LLC, an executive management consulting and venture capital company. Mr. Claesson was employed by Microsoft Corporation from 1985 to June 1996, most recently as Director, OEM, US Mega Accounts. He holds an M.B.A. from the University of Gothenburg (Sweden).
 
Prakash Kondepudi joined us in April 2000 as Vice President, Mobile Commerce and was appointed Executive Vice President, Merchant in February 2001. Mr. Kondepudi had served as Vice President, Application Services of Saraide Inc. (formerly saraide.com, inc.) from November 1998 until our acquisition of Saraide in March 2000. At Saraide, he led the development of wireless application services such as e-mail, content applications and mobile commerce on GSM phones. From May 1995 to October 1998, Mr. Kondepudi worked for VeriFone, Inc., where he initially served as Director, Client/Server Technology and was later appointed Director, Business Development. Mr. Kondepudi holds a Bachelors in Technology from Jawaharlal Nehru Technology University (India) and a Masters in Technology from the Indian Institute of Technology-Madras.
 
John E. Cunningham, IV has served as a director since July 1998. Since April 1995 he has served as President of Kellett Investment Corporation, an investment fund for early-stage, high-growth private companies. He is on the Board of Directors of Petra Capital, LLC and digiMine.com. Mr. Cunningham also serves as an advisor to Petra Mezzanine Fund, LP and Virtual Bank.com. During 1997, Mr. Cunningham acted as interim

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Chief Executive Officer of Real Time Data, a wireless services company. From December 1994 to August 1996, he was President of Pulson Communications, Inc. From February 1991 to November 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., and was subsequently acquired by WorldCom, Inc. Mr. Cunningham holds a B.A. from Santa Clara University and an M.B.A. from the University of Virginia.
 
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 30 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.
 
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.
 
William D. Savoy has served as a director since October 2000. He served as a director of Go2Net, Inc. from May 1999 until its acquisition by InfoSpace. Currently, Mr. Savoy serves as a President of Vulcan Inc., managing the personal finances of Paul G. Allen, and President of Vulcan Ventures Inc. wholly-owned by Paul G. Allen. From 1987 until November 1990, Mr. Savoy was employed by Layered, Inc. and became its President in 1988. Mr. Savoy serves on the Advisory Board of DreamWorks SKG and also serves as director of Charter Communications, Inc., drugstore.com, INVESTools, Inc., Peregrine Systems, Inc., RCN Corporation and USA Networks, Inc. Mr. Savoy holds a B.S. from Atlantic Union College.
 
Lewis M. Taffer has served as a director since June 2001. Since May 2001, Mr. Taffer has been 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 online shopping portal for American Express Cardmembers which utilized InfoSpace services. Previously, Mr. Taffer’s career at American Express focused primarily on managing the company’s relationships with large, U.S.-based airlines, hotels, retailers, restaurants and entertainment companies. 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.

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FACTORS AFFECTING OUR OPERATING RESULTS,
BUSINESS PROSPECTS AND MARKET PRICE OF STOCK
 
Financial Risks Related to Our Business
 
We have a history of losses and expect to continue to incur significant operating losses, and we may never be profitable.
 
We have incurred net losses from our inception through December 31, 2001. As of December 31, 2001, we had an accumulated deficit of approximately $910.7 million. We have not achieved profitability under accounting principles generally accepted in the United States of America (GAAP) and we expect to continue to incur operating losses in the future. These losses may be higher than our current losses. Many of our operating expenses are relatively fixed in nature, particularly in the short term. As we have previously disclosed, we expect to incur a non-cash charge estimated to range from $100 million to $200 million, which will be recorded in the first quarter of 2002 for the cumulative effect of adopting SFAS No. 142 Goodwill and Other Intangible Assets. We have retained an independent valuation firm to conduct the valuation analysis pursuant to SFAS 142 and we expect to receive the results of their analysis by the end of April 2002. There can be no assurance that the results of the analysis by this independent valuation firm will not result in a non-cash charge less than or in excess, perhaps substantially, of the amount previously estimated and disclosed by us. We will also perform an annual evaluation of our intangibles and may have future non-cash charges as a result of implementing this accounting standard. We must therefore generate revenues sufficient to offset these expenses in order for us to become profitable under GAAP. We cannot assure you that we will successfully generate sufficient revenues or that we will ever achieve profitability under GAAP. If we do achieve profitability, we may not be able to sustain it.
 
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;
 
 
 
our ability to attract and retain customers;
 
 
 
the amount and timing of fees we pay to Web portals to include our information services on their Web sites;
 
 
 
expenditures for expansion of our operations;
 
 
 
effects of acquisitions and other business combinations;
 
 
 
our ability to meet service level agreements with our carrier partners;
 
 
 
the introduction of new or enhanced services by us, or other companies that compete with us or our customers; and
 
 
 
the inability of our customers to pay us or to fulfill their contractual obligations to us.
 
For these reasons, 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 would 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 makes it difficult to evaluate our future prospects.
 
Since inception, our business model has evolved and is likely to continue to evolve as we expand our product offerings and enter new markets. As a result, our potential for future profitability must be considered in

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light of the risks, uncertainties, expenses and difficulties frequently encountered by companies that are in new and/or rapidly evolving markets and continuing to innovate with new and unproven technologies. Some of these risks relate to our potential inability to:
 
 
 
develop and integrate new features with our existing services;
 
 
 
expand our services to new and existing merchants, merchant banks and aggregators and wireless carriers;
 
 
 
manage our growth, control expenditures and align costs with revenues;
 
 
 
expand successfully into international markets;
 
 
 
attract, retain and motivate qualified personnel; and
 
 
 
respond to competitive developments, including rapid technological change, changes in customer requirements and new products introduced into our markets by our competitors.
 
If we do not effectively address the risks we face, our business model may become unworkable and we may not achieve or sustain profitability.
 
Our stock price has been and is likely to continue to be highly volatile.
 
The trading price of our common stock has historically been highly volatile. Since we began trading on December 15, 1998, our stock price has ranged from $1.06 to $138.50 (as adjusted for stock splits). On February 28, 2002, the closing price of our common stock was $1.35. Our stock price could continue to decline or to be subject to wide fluctuations in response to factors such as the following:
 
 
 
actual or anticipated variations in quarterly results of operations;
 
 
 
announcements of technological innovations, new products or services by us or our competitors;
 
 
 
changes in financial estimates or recommendations by securities analysts;
 
 
 
conditions or trends in the Internet and online commerce industries;
 
 
 
announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us, our customers or our competitors; and
 
 
 
additions or departures of key personnel.
 
In addition, the stock market in general, and the Nasdaq National Market and the market for Internet and technology companies in particular, have experienced extreme price and volume fluctuations. These broad market and industry factors and general economic conditions may materially and adversely affect our stock price.
 
We have historically been, and currently remain, reliant upon revenues from our wireline services. Our operating results would be harmed by a decline in sales of our wireline services or our failure to collect fees for these services.
 
Historically, we have derived a majority of our revenues from our wireline services, including licensing and advertising revenue from our customers. Based upon our reliance on revenues from wireline services, total revenues may decline if revenues from our wireline services do not meet our expectations.
 
As a result of unfavorable market or economic conditions, some of our wireline customers are having difficulty raising sufficient capital to support their long-term operations or are otherwise experiencing adverse business conditions. These customers may not be able to pay us some or all of the fees they are required to pay us under their existing agreements or may not be able to enter into new agreements. If we are unable to collect these fees or enter into new agreements, our operating results will be harmed.

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If we are unable to continue the diversification of our revenues, a significant portion of our revenues will continue to be derived from wireline products and application services, which could weaken our financial position.
 
For 2002, we expect more of our total revenues to come from our merchant and wireless business areas than in prior years. Our ability to diversify our revenues could be hindered by numerous risks, including:
 
 
 
our ability to effectively develop, market and sell our products and application services to new and existing customers;
 
 
 
the continued development of electronic commerce on the Internet;
 
 
 
the adoption of our products and application services by wireless carriers and device manufacturers;
 
 
 
the adoption of our services for delivery over broadband wireline platforms (DSL and cable) and broadband wireless standards (2.5G and 3G); and
 
 
 
the use of our products and application services by subscribers on their wireless devices.
 
Our future earnings could be negatively affected by significant charges resulting from the impairment in the value of acquired assets.
 
For acquisitions which we have accounted for using the purchase method, we regularly evaluate the recorded amount of long-lived assets, consisting primarily of goodwill, assembled workforce, acquired contracts and core technology, to determine whether there has been any impairment of the value of the assets and the appropriateness of their estimated remaining life. We evaluate impairment whenever events or changed circumstances indicate that the carrying amount of the long-lived assets might not be recoverable. During the fourth quarter of 2000, we determined that intangible assets from two purchase acquisitions had been impaired. Accordingly, we recorded an impairment charge of $9.0 million in the year ended December 31, 2000. In the year ended December 31, 2001, we determined that intangible assets from eleven purchase acquisitions had partial or full impairment. Accordingly, we recorded an impairment charge of $107.7 million in the period. We will continue to regularly evaluate the recorded amount of our long-lived assets and test for impairment. In the event we determine that any long-lived asset has been impaired, we will record additional impairment charges in future quarters.
 
In addition, recent changes in GAAP will require us to discontinue amortizing goodwill and certain intangibles. We adopted these changes effective January 1, 2002. Under this approach, goodwill and certain intangibles will not be amortized into results of operations, but instead will be reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. As we have previously disclosed, we expect to incur a non-cash charge estimated to range from $100 million to $200 million, which will be recorded in the first quarter of 2002 for the cumulative effect of adopting SFAS No. 142. We have retained an independent valuation firm to conduct the valuation analysis pursuant to SFAS 142 and we expect to receive the results of their analysis by the end of April 2002. There can be no assurance that the results of the analysis by this independent valuation firm will not result in a non-cash charge less than or in excess, perhaps substantially, of the amount previously estimated and disclosed by us.
 
Our financial and operating results will suffer if we are unsuccessful at integrating acquired businesses.
 
We have acquired a large number of complementary technologies and businesses in the past, and may do so in the future. Acquisitions typically involve potentially dilutive issuances of stock, the incurrence of additional debt and contingent liabilities or large write-offs and amortization expenses related to certain intangible assets. Past and future acquisitions involve numerous risks which could adversely affect our results of operations or stock price, including:
 
 
 
assimilating the operations, products, technology, information systems and personnel of acquired companies;

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diverting management’s attention from other business concerns;
 
 
 
impairing relationships with our employees, customers, merchant banks and aggregators and wireless carriers;
 
 
 
losing key employees of acquired companies; and
 
 
 
failing to achieve the anticipated benefits of these acquisitions in a timely manner.
 
The success of the operations of companies and technologies which we have acquired will often depend on the continued efforts of the management 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.
 
Our revenues are attributable to a small number of customers, the loss of any one of which could harm our financial results.
 
We derive a substantial portion of our revenues from a small number of customers. We expect that this concentration will continue in the foreseeable future. Our top ten customers represented 38% of our revenues for the year ended December 31, 2001, 32% of our revenues for fiscal year 2000 and 30% of our revenues for fiscal year 1999. No single customer accounted for more than 10% of our revenues in fiscal year 2001. However, Verizon and Overture each accounted for more than 10% of our revenues for the quarter ended December 31, 2001. We expect each of these two companies to continue to represent more than 10% of revenue in future quarters. If we lose any of these customers, or if any of these customers are unable or unwilling to pay us amounts that they owe us, our financial results will suffer.
 
Our revenues are dependent on our relationships with companies who distribute our application services.
 
We will not be able to continue generating revenues from advertising, commerce transaction fees and subscription fees unless we can secure and maintain distribution for our products and application services on acceptable commercial terms through a wide range of customers and resellers including Web portals, merchant banks and other financial institutions, and wireless carriers who provide access to our products and application services to their customers. In particular, we expect that America Online, Inc. (AOL), its CompuServe and Digital City divisions and Microsoft Network, LLC (MSN), will account for a substantial portion of our wireline traffic. We also rely on our relationships with regional Bell operating companies and other merchant banks and financial institutions, including American Express and Wells Fargo, for distribution of our merchant services. Our agreements with these companies typically are for between one and three years and automatically renew for successive terms thereafter, subject to termination on short notice. We cannot assure you that such arrangements will not be terminated or that such arrangements will be renewed upon expiration of their terms. Additionally, we cannot assure you that these relationships will be profitable or result in benefits to us that outweigh the costs of the relationships. We pay carriage fees to AOL and MSN. If we lose a major Web portal or destination Web site, we may be unable to timely or effectively replace the traffic with comparable traffic patterns and user demographics.
 
We depend on third parties for content, and the loss of access to this content could cause us to reduce our product offerings to customers.
 
We typically do not create our own content. Rather, we acquire rights to information from numerous third-party content providers, and our future success is 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 (per query) or fixed monthly fees for the use of the content or require us to pay under an advertising revenue-sharing arrangement. In the

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future, some of our content providers may demand a greater portion of advertising revenues or increase the fees that they charge us for their content thus having a negative impact on our net earnings. If we fail to enter into and maintain satisfactory arrangements with content providers our ability to provide a variety of products and services to our customers would be severely limited, thus harming our business reputation and operating results.
 
Due to unfavorable economic conditions some of our customers may be unable to pay us or otherwise satisfy their obligations to us, thus harming our financial results and potentially our provision of services to other customers.
 
As a result of generally unfavorable economic conditions including difficulties with raising necessary equity and debt financing, some of our customers may lack sufficient capital to support their long-term operations. As a result, these customers may not be able to pay us some or all of the fees they are required to pay us under their existing agreements. These conditions may also prevent potential customers from entering into contractual relationships or other strategic business relationships with us.
 
Bad debt expense was 2.7% of revenues for the year ended December 31, 2001, 3.4% of revenues for fiscal year 2000 and 1.8% of revenues for fiscal year 1999. Management regularly reviews all receivables for collectibility. We generally provide allowances for all accounts sixty days or more past due and also allow for an amount based on revenues and the accounts receivable balance for accounts not specifically identified. We have a credit review process and, when circumstances warrant, require payment in advance from customers. As a result, we may have to forego business from customers who do not agree to our payment terms.
 
Our operating results have been, and may continue to be, negatively impacted by our recognition of losses on investments in other companies.
 
We hold a number of investments in third parties. The majority of the companies we have invested in are engaged in Internet, networking, e-commerce, telecommunications and wireless technologies. These investments involve a high level of risk for a number of reasons, including:
 
 
 
the companies in which we have invested are generally development-stage companies which are likely to continue to generate losses in the foreseeable future and may not be profitable for a long time, if at all;
 
 
 
during the past twelve to eighteen months, companies in the Internet and e-commerce industries have experienced difficulties in raising capital to fund expansion or continue operations; and, if available at all, financing is often on unfavorable terms which may impair the value of our investments;
 
 
 
some of our investments are in businesses based on new technologies or products that may not be widely adopted in the evolving Internet and wireless technology industries; and
 
 
 
most of our investments are in privately held companies, and if public markets for their securities do not develop, it may be difficult to sell those securities.
 
We regularly review all of our investments in public and private companies for other-than-temporary declines in fair value. When we determine that the decline in fair value of an investment below our accounting basis is other-than-temporary, we reduce the carrying value of the securities we hold and record a loss in the amount of any such decline. During the year ended December 31, 2001, we determined that the declines in value of twenty-two of our investments were other-than-temporary and we recognized losses totaling $100.9 million, which represented 20% of the net loss for the period, to record these investments at their current fair values as of December 31, 2001. We also recorded losses of $20.4 million for other-than-temporary declines in the fair value of certain investments during the year ended December 31, 2000. With the current economic environment, it is difficult to accurately predict the amount of exposure to future investment impairment. As of December 31, 2001, our other investments were carried at $47.1 million.

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If we conclude in future quarters that the fair values of any of our investments have experienced more than a temporary decline, we will record additional investment losses, which would adversely affect our financial condition and results of operations.
 
An audit of our payroll tax returns could result in material liabilities that could adversely affect our financial position and results of operations.
 
The Internal Revenue Service is auditing our payroll tax returns for the year 2000. We expect this audit to be concluded in 2002. No amounts have been accrued in our financial statements, as we are not able to determine the amount of the liability that may result, if any, at this time. If the Internal Revenue Service determines that we owe additional payroll taxes, and the amount we owe is material to us, our financial position and results of operations will be adversely affected.
 
Operational Risks Related to Our Business
 
If we are unable to retain our executive officers, we may not be able to successfully manage our business.
 
Our business and operations are substantially dependent on the performance of our key employees, all of who are employed on an at-will basis. If we lose the services of one or more of our executive officers or key employees, particularly within our commerce services or wireless business, we may not be able to successfully manage our business or achieve our business objectives. The only person on whom we maintain key person life insurance is Naveen Jain, our Chairman and Chief Executive Officer. Although our executive officers have signed agreements which limit their ability to compete with us for one year after their employment with us ends, our business could be harmed if subsequent to the non-compete period one or more of them joined a competitor or otherwise decided to compete with us. Naveen Jain has signed a two-year non-competition agreement.
 
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, train, retain and motivate highly skilled technical, managerial, sales and marketing and business development personnel. Our services and the industries to which we provide our services are relatively new, particularly with respect to our merchant services and our wireless data services. Qualified personnel with experience relevant to our business are scarce and competition to recruit them is intense. If we fail to successfully attract, assimilate and retain a sufficient number of highly qualified technical, managerial, sales and marketing, business development and administrative personnel, our business could suffer. In February and October of 2001, we announced realignments of resources to concentrate on development of our wireless, merchant and broadband services. These realignments included a reduction in our workforce of approximately 375 employees. These, 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.
 
If the market price of our stock continues to decline, the value of stock options granted to employees may cease to provide sufficient incentive to our employees.
 
Stock options, which typically vest over a two- or four-year period, are an important means by which we compensate employees. We face a significant challenge in retaining our employees if the value of these stock options 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, we may in the future need to issue new options or other equity incentives to motivate and retain our employees.
 
Our historical and future expansion in personnel and facilities will continue to significantly strain our management, operational and financial resources.
 
We have rapidly and significantly expanded our operations during the past three years. Further expansion may be necessary to accommodate growth in our customer base and to take advantage of market opportunities.

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We have increased the number of employees from less than 100 at January 1, 1998 to 741 at February 28, 2002. We have also expanded our facilities and now have development, operations and administrative facilities in Bellevue, Washington; American Fork, Utah; Montreal, Canada; Papendrecht, The Netherlands; Woking, United Kingdom; and Sydney, Australia. We have sales offices in San Francisco, California and New York City, New York. We also have a data center in Rio de Janeiro, Brazil.
 
This expansion has placed, and is expected to continue to place, a significant strain on our management and operational resources. To manage the expected growth of our operations and personnel, we must continue maintaining and improving or replacing existing operational, accounting and information systems, procedures and controls.
 
We have limited experience managing multiple offices with multiple facilities and personnel in disparate locations. As a result, we may not be able to effectively coordinate our efforts, supervise our personnel or otherwise successfully manage our resources.
 
If we are unable to effectively manage the growth in our relationships with customers and other third parties, our business and reputation could be harmed.
 
The rapid growth of our business has strained our ability to meet customer demands and manage the growing number of customer relationships. In addition, our customer relationships are growing in their size and complexity of services. As a result of the growth in the size, number, and complexity of our relationships we may be unable to meet the demands of our customer relationships, which could result in the loss of customers, subject us to penalties under our agreements and harm our business and reputation.
 
We must also effectively manage our relationships with various Internet content providers, merchant resellers, wireless carriers and other third parties necessary to our business. If we are unable to effectively manage the growth of these relationships, our ability to provide our products and application services through multiple distribution channels to a wide audience of end users could suffer.
 
Our expansion into international markets may not be successful and may expose us to risks that could harm our business.
 
We began providing wireline services in the United Kingdom in the third quarter of 1998. With our acquisition of Saraide in March 2000, we now have a development and operations facility in The Netherlands serving European wireless carriers. In March 1999, we began providing Internet software and application services through a Canadian subsidiary and subsequently began to expand our wireless services into Canada. In 2001, we opened facilities in Australia and Brazil to serve our customers in the Asia-Pacific and Latin America regions. We also have entered into an agreement to expand our services into Mexico and are currently pursuing other international opportunities.
 
We have limited experience in developing localized versions of our products and application 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 our customers, merchant banks and aggregators and wireless carriers with whom we work in such activities. If they fail to successfully establish operations and sales and marketing efforts in these markets our business could suffer.
 
We face a number of risks inherent in doing business in international markets, including:
 
 
 
lower levels of adoption or use of the Internet and other technologies used in our business, and the lack of appropriate infrastructure to support widespread Internet usage;
 
 
 
export controls relating to encryption technology;
 
 
 
tariffs and other trade barriers;

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potentially adverse tax consequences;
 
 
 
limitations on the repatriation of funds;
 
 
 
difficulties in staffing and managing foreign operations;
 
 
 
changing local or regional economic and political conditions;
 
 
 
exposure to different legal jurisdictions and standards; and
 
 
 
different accounting practices and payment cycles.
 
As the international markets for Internet software and application services for wireline, wireless and broadband continue to grow, competition in these markets will likely intensify. Local companies may have a substantial competitive advantage because of their greater understanding of and focus on the local markets. If we do not effectively manage risks related to our expansion internationally, our business is likely to be harmed.
 
We are subject to legal proceedings that could result in liability and damage our business.
 
From time to time, we have been, and expect to continue to be, subject to legal proceedings and claims in the ordinary course of our business, including claims to equity by alleged employees and claims of infringement of intellectual property rights by us, as well as a putative securities class action lawsuit and other securities-related litigation. Approximately fifteen lawsuits against us are currently pending in which claims have been asserted against us or directors and executive officers, in addition to ordinary course collection matters and intellectual property infringement claims that 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, and we maintain insurance which may cover some or all of the claims, should they be successful. Such proceedings and claims, even if not meritorious, could require the expenditure of significant financial and managerial resources, which could harm our business. We believe we have meritorious defenses to all the claims currently made against InfoSpace. 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 our pending legal proceedings, see “Item 3. Legal Proceedings.”
 
Insiders own a large percentage of our stock, which could delay or prevent a change in control and may negatively affect your investment.
 
As of February 28, 2002, our officers, directors and affiliated persons beneficially owned approximately 26.8% of our voting securities. Naveen Jain, our Chairman and Chief Executive Officer, beneficially owned approximately 20.7% of our voting securities as of that date. These stockholders will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which could have the effect of delaying or preventing a third party from acquiring control over us and could affect the market price of our common stock. In addition, some of our executive officers have stock option grants that provide for accelerated vesting if their employment is actually or constructively terminated after a change of control. The interests of those holding this concentrated ownership may not always coincide with our interests or the interests of other stockholders, and, accordingly, they could cause us to enter into transactions or agreements that we would not otherwise consider or could prevent us from entering into transactions or agreements that we may consider beneficial to our business.
 
We have implemented anti-takeover provisions that could make it more difficult to acquire us.
 
Our certificate of incorporation, our bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors, even if the transaction would be beneficial to our stockholders. These provisions 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;

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authorizing 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.
 
In addition, we have an agreement with America Online that provides them the right of first negotiation in the event that we receive an unsolicited proposal from a third party regarding a sale, merger or other disposition of our assets that would result in a change of control. If we receive this type of proposal, America Online will have the first opportunity to negotiate with us regarding a disposition. This agreement could make us less attractive to a potential acquiror.
 
Technological Risks Related to Our Business
 
Our systems could fail or become unavailable, which would harm our reputation, result in a loss of current and potential customers and could 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 Bellevue, Washington; Papendrecht, The Netherlands; and Rio de Janeiro, Brazil. 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 and similar events. We would face significant damage as a result of these events because we do not have a formal disaster recovery plan, and we do not carry business interruption insurance that is adequate to compensate us for all the losses that may occur. In addition, our systems use sophisticated software which 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 on our Web sites or our customers’ Web sites increases substantially, we must respond in a timely fashion by expanding and upgrading our technology, transaction-processing systems and network infrastructure. Due to the expansion in 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 certain merchant services distributors, including merchant banks, portal sites and most of our wireless customers. These agreements call for system up times and 24/7 support, and include penalties for non-performance. We may be unable to fulfill these commitments, which could subject us to penalties under our agreements, harm our reputation and result in the loss of customers and distributors.
 
We rely heavily on our technology, but we may be unable to adequately protect or enforce our intellectual property rights thus weakening our competitive position and negatively impacting our financial results.
 
Our success significantly depends upon our patented and patent-pending technology. In particular, we believe that our core technology platform provides us with a significant competitive advantage because it is protocol and device agnostic, enabling us to provide our services through a variety of platforms, formats and devices. We have achieved and are able to maintain our current competitive position due to the unique nature of 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. Despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our products or services or

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obtain and use information that we regard as proprietary. 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.
 
Our intellectual property may be subject to even greater risk in foreign jurisdictions, as the laws of many countries do not protect proprietary rights to the same extent as the laws of the United States. If we cannot adequately protect our intellectual property our competitive position in markets abroad may suffer.
 
Risks Related to Our Industry
 
Intense competition in the wireline and broadband, merchant 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 application services into the wireline and broadband, merchant and wireless markets, all of which are extremely competitive and rapidly changing. Many of our current and prospective competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, more developed infrastructures, greater name recognition and/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 current customers have established relationships with some of our current and potential future competitors. If these competitors develop Internet software and application services that compete with ours, we could lose market share and our revenues would decrease.
 
We could be subject to liability due to security risks both to users of our merchant services and to the uninterrupted operation of our systems.
 
Security and privacy concerns of users of online commerce services such as our merchant services may inhibit the growth of the Internet and other online services, especially as a means of conducting commercial transactions. We rely on secure socket layer technology, public key cryptography and digital certificate technology to provide the security and authentication necessary for secure transmission of confidential information. Various regulatory and export restrictions may prohibit us from using the strongest and most secure cryptographic protection available and thereby expose us to a risk of data interception. Because some of our activities involve the storage and transmission of confidential personal or proprietary information, such as credit card numbers, security breaches and fraud schemes could damage our reputation and expose us to a risk of loss or litigation and possible liability. In addition, our payment transaction services may be susceptible to credit card and other payment fraud schemes perpetrated by hackers or other criminals. If such fraud schemes become widespread or otherwise cause merchants to lose confidence in our services in particular, or in Internet payments systems generally, our business could suffer.
 
Additionally, our wireless and wireline networks may be vulnerable to unauthorized access by hackers or others, computer viruses and other disruptive problems. Someone who is able to circumvent security measures could misappropriate our proprietary information or cause interruptions in our operations. 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 Web pages that deliver our services, any of which could harm our business.

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We rely on the Internet infrastructure, and its continued commercial viability, over which we have no control and the failure of which could substantially undermine our business strategy.
 
Our success depends, in large part, on other companies maintaining the Internet system infrastructure. In particular, we rely on other companies to maintain a reliable network backbone that provides adequate speed, data capacity and security and to develop products that enable reliable Internet access and services. If the Internet continues to experience significant growth in the number of users, frequency of use and amount of data transmitted, the Internet system infrastructure may be unable to support the demands placed on it, and the Internet’s performance or reliability may suffer as a result of this continued growth.
 
In addition, the Internet could lose its commercial viability as a form of media due to delays in the development or adoption of new standards and protocols to process increased levels of Internet activity. Any such degradation of Internet performance or reliability could cause advertisers to reduce their Internet expenditures; in recent months, in fact, advertisers have begun to attribute less value to advertising on the Internet. Furthermore, any loss in the commercial viability of the Internet would have a significant negative impact on our merchant services. If other companies do not develop the infrastructure or complementary products and services necessary to establish and maintain the Internet as a viable commercial medium, or if the Internet does not become a viable commercial medium or platform for advertising, promotions and electronic commerce our business could suffer.
 
Underdeveloped telecommunications and Internet infrastructure may limit the growth of the Internet overseas thereby limiting the growth of our business.
 
Access to the Internet requires advanced telecommunications infrastructure. The telecommunications infrastructure in many parts of Europe, the Asia-Pacific region and Latin America is not as well developed as in the United States and is partly owned and operated by current or former national monopoly telecommunications carriers or may be subject to a restrictive regulatory environment. The quality and continued development of telecommunications infrastructure in Europe, the Asia-Pacific region and Latin America will have a significant impact on our ability to deliver our services and on the market use and acceptance of the Internet in general.
 
In addition, the recent growth in the use of the Internet has caused frequent periods of performance degradation, requiring the upgrade of routers and switches, telecommunications links and other components forming the infrastructure of the Internet by Internet service providers and other organizations with links to the Internet. Any perceived degradation in the performance of the Internet as a whole could undermine the benefits of our services. The quality of our services is ultimately limited by and reliant upon the speed and reliability of Internet-related networks operated by third parties. Consequently, the emergence and growth of the market for our services is dependent on improvements being made to the entire Internet infrastructure in Europe, the Asia-Pacific region and Latin America.
 
Consolidation in our industry could lead to increased competition and loss of customers.
 
The Internet industry has experienced substantial consolidation. For example, AOL, which previously acquired Netscape, has merged with Time Warner and Compaq has acquired ZIP2. We expect this consolidation to continue. These acquisitions could adversely affect our business and results of operations in a number of ways, including:
 
 
 
companies from whom we acquire content could acquire or be acquired by one of our competitors and stop licensing content to us;
 
 
 
our customers could acquire or be acquired by one of our competitors and terminate their relationship with us; and
 
 
 
our customers could merge with other customers, which could reduce the size of our customer base.

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ITEM 2.    Properties
 
We have development, operations and administrative facilities in: Bellevue, Washington; American Fork, Utah; Montreal, Canada; Papendrecht, The Netherlands; Woking, United Kingdom; and Sydney, Australia. We have data centers in Bellevue, Washington; Papendrecht, The Netherlands; and Rio de Janeiro, Brazil. We also have sales offices in San Francisco, California and New York City, New York. All of our facilities are leased.
 
Our systems and operations at these locations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, break-ins, earthquake and similar events. See “Risk Factors—Poor performance in or disruption of the services we deliver to our customers could harm our reputation, delay market acceptance of our services and subject us to liability.”
 
ITEM 3.    Legal Proceedings
 
From time to time we have been, and expect to continue to be, subject to legal proceedings and claims in the ordinary course of our business, including claims of alleged infringement of third-party trademarks and other intellectual property rights by us. These claims, even if not meritorious, could require the expenditure of significant financial and managerial resources.
 
On June 19, 2001, a putative securities class action complaint entitled Horton v. InfoSpace, Inc., et al. was filed in the United States District Court for the Western District of Washington. The complaint alleges that InfoSpace and its chief executive officer made false and misleading statements about InfoSpace’s business and prospects during the period between January 26, 2000 and January 30, 2001. The complaint alleges violations of the federal securities laws and does not specify the amount of damages sought. Subsequently, other similar complaints were filed. The Horton matter and the subsequent complaints have been consolidated into one matter, captioned In re InfoSpace, Inc. Securities Litigation. The Court has appointed lead plaintiffs and counsel, and a consolidated complaint was filed on January 22, 2002, which, among other things, added our chief financial officer as a defendant. We believe we have meritorious defenses to these claims but litigation is inherently uncertain and we may not prevail in this matter.
 
On March 19, 2001, a purported shareholder derivative complaint entitled Youtz v. Jain, et al. was filed in the Superior Court of Washington for King County. The complaint has been amended twice thus far and has been renamed Dreiling v. Jain, et al. The complaint names as defendants current and former officers and directors of ours and entities related to a few of the individual defendants; InfoSpace is named as a “nominal defendant.” The complaint alleges that certain defendants breached their fiduciary duties to us and were unjustly enriched by engaging in insider trading, and also alleges that certain defendants breached their fiduciary duties in connection with the Go2Net and Prio mergers and that one defendant converted our assets to his personal use. Various equitable remedies are requested in the complaint, including disgorgement, restitution, accounting and imposition of a constructive trust, and the complaint also seeks monetary damages. As stated, the complaint is derivative in nature and does not seek monetary damages from, or the imposition of equitable remedies on, InfoSpace. We have entered into indemnification agreements in the ordinary course of business with officers and directors and may be obligated throughout the pendency of this action to advance payment of legal fees and costs incurred by the defendant officers and directors pursuant to our obligations under the indemnification agreements and applicable Delaware law. The special litigation committee of our Board of Directors, with the assistance of independent legal counsel, has investigated the complaint, and filed on March 22, 2002 a motion to terminate this derivative action.
 
On December 18, 2000, an employee filed a complaint against us in the United States District Court for the Western District of Washington alleging claims for breach of contract, breach of the covenant of good faith and fair dealing, and fraudulent and negligent misrepresentation. The suit also included a claim against Naveen Jain, our Chief Executive Officer, for violations of the Racketeer Influenced Corrupt Organizations (RICO) Act. The employee contends that he agreed to work for us on the basis of an oral representation that he would be granted more stock options than any other employee and that he would always have more stock options than any other

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employee (other than Mr. Jain) and that he would always have more stock options than any other such employee. The employee also contends that he was falsely promised certain levels of authority and support in his position. The employee seeks unspecified compensatory damages from us as well as equitable relief. On March 29, 2001 the court dismissed the plaintiff’s claims for breach of the covenant of good faith and fair dealing. On March 1, 2002, the court dismissed the employee’s claims for breach of contract, fraudulent and negligent misrepresentation with respect to the alleged promise that the employee would always have more stock options than any other InfoSpace employee, and violation of the RICO Act, and also denied certain other motions by the plaintiff. The only surviving claim is plaintiff’s allegation of fraudulent and negligent misrepresentation based on the alleged representation that the stock options received by the employee at the time he was hired were the most given to any InfoSpace employee (other than Mr. Jain). The parties are scheduled for trial on the surviving claim on June 24, 2002. We believe we have meritorious defenses to this claim. Nevertheless, litigation is uncertain and we may not prevail in this suit.
 
In September of 2000, Go2Net sued FreeYellow.com, Inc. a Florida corporation, and John Molino, FreeYellow’s sole shareholder, in the Superior Court of Washington for King County seeking to rescind its acquisition of FreeYellow that closed in October of 1999, and in the alternative, seeking damages. Molino denied the allegations, and asserted a counterclaim for breach of the merger agreement. In October 2000, Go2Net was acquired by and become a wholly owned subsidiary of InfoSpace. On August 6, 2001, Go2Net amended the complaint to add a claim against FreeYellow and Molino under the Securities Act of Washington (“WSA”). Both parties moved for summary judgment on the merits of their respective claims, and those motions were denied. In February of 2002, Go2Net moved for summary judgment to dismiss Molino’s equitable defenses of waiver and estoppel to Go2Net’s WSA claim. Molino opposed that motion, and moved to dismiss Go2Net’s WSA claim. On March 8, 2002, the court granted Go2Net’s summary judgment motion and denied Molino’s motion to dismiss. The case is scheduled to go to trial on July 1, 2002. We believe we have meritorious defenses to these claims. Nevertheless, litigation is uncertain and we may not prevail in this suit.
 
Two of nine founding shareholders and three other shareholders of Authorize.Net Corporation, a subsidiary acquired through our merger with Go2Net, filed a lawsuit on May 2, 2000 in Utah State Court in Provo, Utah. This action was brought to reallocate amongst the founding shareholders the consideration received in the acquisition of Authorize.Net by Go2Net. The plaintiffs allege that the corporate officers of Authorize.Net fraudulently obtained a percentage of Authorize.Net shares greater than what was anticipated by the founding shareholders, and are making claims under the Utah Uniform Securities Act as well as claims of fraud, negligent misrepresentation, breach of fiduciary duty, conflict of interest, breach of contract and related claims. Plaintiffs seek compensatory and punitive damages in the amount of $200 million, rescission of certain transactions in Authorize.Net securities, and declaratory and injunctive relief. The plaintiffs subsequently amended the claim to name Authorize.Net as a defendant with regard to the claims under the Utah Uniform Securities Act and have asserted related claims against Go2Net. The case is currently in the expert witness discovery phase, which is expected to end on March 29, 2002. We have filed a motion for summary judgment on behalf of Authorize.Net and have asserted counterclaims against the plaintiffs. We believe we have meritorious defenses to these plaintiffs’ claims. Nevertheless, litigation is uncertain and we may not prevail in this suit.
 
One of the shareholders of INEX Corporation filed a complaint with the Ontario Superior Court of Justice in Canada on September 22, 1999 alleging that the original shareholders of INEX and INEX itself were bound by a shareholders agreement that entitled the shareholder to pre-emptive rights and rights of first refusal. The complaint was amended on December 20, 1999 to allege that we assumed the obligations of INEX under the alleged shareholders agreement as a result of our acquisition of INEX on October 14, 1999. The plaintiff has agreed to dismiss the complaint with prejudice and release all claims against defendants in exchange for the defendants’ agreement to forego collection of litigation costs assessed against the plaintiff to date in the suit. Defendants have submitted settlement documents to plaintiff’s counsel who has approved them. The parties are awaiting final signatures to complete the settlement.
 
On December 5, 2001, a complaint entitled The boxLot Company v. InfoSpace, Inc., et. al. was filed in the Superior Court of California for San Diego County. The complaint names as defendants InfoSpace and certain of

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our current and former directors, and alleges violations of state law in connection with the asset purchase transaction between InfoSpace, Inc. and The boxLot Company in December of 2000. Plaintiffs filed an amended complaint on February 15, 2002, and the defendants have not yet responded to the amended complaint. We believe we have meritorious defenses to these claims but litigation is inherently uncertain and we may not prevail in this matter.
 
ITEM 4.    Submission of Matters to a Vote of Security Holders
 
Not applicable.
 
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. These prices and other share numbers throughout this Annual Report on Form 10-K have been adjusted to give effect to two-for-one stock splits of our common stock consummated in May 1999, January 2000 and April 2000.
 
    
High

  
Low

Fiscal Year Ending December 31, 2000:
         
First Quarter
  
$138.50
  
$40.25
Second Quarter
  
$  78.25
  
$37.125
Third Quarter
  
$  60.00
  
$25.50
Fourth Quarter
  
$  31.3125
  
$  5.4375
Fiscal Year Ending December 31, 2001:
         
First Quarter
  
$    9.875
  
$  2.0625
Second Quarter
  
$    5.65
  
$  1.5625
Third Quarter
  
$    3.79
  
$  1.06
Fourth Quarter
  
$    2.75
  
$  1.32
 
On February 28, 2002, the last reported sale price for our common stock on the Nasdaq National Market was $1.35 per share. As of February 28, 2002, there were approximately 1,332 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, 1997, 1998, 1999, 2000 and 2001 are derived from our audited consolidated financial statements which have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports. The consolidated financial statements give retroactive effect to the acquisitions of Go2Net, Inc., Prio, Inc., and INEX Corp. which have been accounted for on a pooling-of-interests basis as described in Note 7 to our consolidated financial statements.
 
    
Year Ended December 31,

 
    
1997

    
1998

    
1999

    
2000

    
2001

 
    
(In thousands, except per share data)
 
Consolidated Statements of Operations Data:
                                            
Revenues
  
$
3,445
 
  
$
18,490
 
  
$
71,980
 
  
$
214,530
 
  
$
161,921
 
Cost of revenues
  
 
865
 
  
 
4,919
 
  
 
13,472
 
  
 
35,627
 
  
 
41,841
 
    


  


  


  


  


Gross profit
  
 
2,580
 
  
 
13,571
 
  
 
58,508
 
  
 
178,903
 
  
 
120,080
 
Operating expenses:
                                            
Product development
  
 
5,358
 
  
 
9,005
 
  
 
15,580
 
  
 
40,624
 
  
 
39,341
 
Sales, general and administrative
  
 
8,860
 
  
 
23,893
 
  
 
77,777
 
  
 
131,081
 
  
 
118,333
 
Amortization of intangibles
  
 
64
 
  
 
710
 
  
 
42,761
 
  
 
171,336
 
  
 
236,714
 
Impairment of intangibles
           
 
398
 
  
 
—  
 
  
 
8,952
 
  
 
107,729
 
Acquisition and related charges
  
 
137
 
  
 
4,486
 
  
 
13,574
 
  
 
123,998
 
  
 
(3,504
)
Other charges
  
 
—  
 
  
 
4,500
 
  
 
11,360
 
  
 
4,732
 
  
 
11,505
 
Restructuring charges
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
2,322
 
  
 
17,392
 
    


  


  


  


  


Total operating expenses
  
 
14,419
 
  
 
42,992
 
  
 
161,052
 
  
 
483,045
 
  
 
527,510
 
    


  


  


  


  


Loss from operations
  
 
(11,839
)
  
 
(29,421
)
  
 
(102,544
)
  
 
(304,142
)
  
 
(407,430
)
Loss on investments
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
(588
)
  
 
(108,158
)
Other income, net
  
 
288
 
  
 
946
 
  
 
22,342
 
  
 
27,682
 
  
 
17,361
 
Minority interest
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
(3,171
)
  
 
(17
)
Income tax expense
  
 
(67
)
  
 
(64
)
  
 
—  
 
  
 
(137
)
  
 
(664
)
Cumulative effect of change in accounting principle(1)
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
(2,056
)
  
 
(3,171
)
Preferred stock dividend
  
 
—  
 
  
 
—  
 
  
 
(159,931
)
  
 
—  
 
  
 
—  
 
    


  


  


  


  


Net loss applicable to common stockholders
  
$
(11,618
)
  
$
(28,539
)
  
$
(240,133
)
  
$
(282,412
)
  
$
(502,079
)
    


  


  


  


  


Basic and diluted net loss per share
  
$
(0.10
)
  
$
(0.19
)
  
$
(0.93
)
  
$
(0.93
)
  
$
(1.58
)
    


  


  


  


  


Shares used in computing basic and diluted net loss per share
  
 
120,044
 
  
 
152,655
 
  
 
257,752
 
  
 
304,480
 
  
 
318,395
 
    


  


  


  


  


    
December 31,

 
    
1997

    
1998

    
1999

    
2000

    
2001

 
    
(in thousands)
 
Consolidated Balance Sheet Data:
                                            
Cash, cash equivalents and short-term investments
  
$
23,032
 
  
$
123,152
 
  
$
414,661
 
  
$
370,148
 
  
$
198,880
 
Working capital
  
 
21,650
 
  
 
118,064
 
  
 
418,297
 
  
 
366,875
 
  
 
199,897
 
Total assets
  
 
27,689
 
  
 
146,205
 
  
 
953,919
 
  
 
1,272,110
 
  
 
837,005
 
Total stockholders’ equity
  
 
23,882
 
  
 
130,702
 
  
 
909,020
 
  
 
1,168,572
 
  
 
782,588
 

(1)
 
See note 1 to our consolidated financial statements.

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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. We do not assume any obligation to revise forward-looking statements.
 
Overview
 
InfoSpace, Inc. is a provider of wireless and Internet software and application services. We have developed and deliver a wireless and Internet platform of software and application services that enable companies to offer network-based services under their own brands. Our customers in turn, offer these products and application services to their customers as their solutions. We provide our services across multiple platforms simultaneously, including PCs and non-PC devices.
 
We develop and deliver our products and application services to a broad range of customers that span each of our business areas of wireline and broadband, merchant and wireless. In our wireline and broadband business, we deliver our services to Web portals such as America Online, destination sites such as Disney, and DSL providers such as Verizon Online. In our merchant business, we deliver our products to regional Bell operating companies such as Verizon, merchant banks such as Union Bank of California, and financial institutions such as American Express. In our wireless business, we deliver our products and application services to wireless carriers such as Verizon Wireless, AT&T Wireless and Cingular and other consumer service companies such as Charles Schwab.
 
Our services are predominately built on our core technology platform and use the same operational infrastructure. We do not currently allocate development or operating costs to any of these services.
 
Naveen Jain, our Chief Executive Officer and Chairman, founded InfoSpace in March 1996. During the period from our inception through December 31, 1996, we had insignificant revenues and were primarily engaged in the development of technology for the aggregation, integration and distribution of Internet content and the hiring of employees. In 1997, we expanded our operations, adding business development and sales personnel in order to capitalize on the opportunity to generate Internet advertising revenues. We began generating material revenues in 1997 with our wireline services. Revenues in 1998 were also primarily generated through our wireline consumer services and we also started distributing our services on wireless platforms. Throughout 1999, 2000 and 2001, we expanded and enhanced our products and application services through both internal development and acquisitions and focused on developing and deploying our Internet software and application services to merchants and on wireless platforms. We do not expect our broadband services to generate meaningful revenues until 2003. We have offices in the United States, Canada, Australia, the United Kingdom and The Netherlands. As of February 28, 2002, we had 741 employees worldwide.
 
Our Business Areas
 
We develop and deliver our products and services to a broad range of customers that span each of our business areas of wireline and broadband, merchant and wireless. The following provides detail on each of our business areas:

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Wireline and Broadband
 
Through our wireline and broadband business area, we develop and deliver Internet services that are designed for high-speed broadband and dial-up narrowband websites. We enable our customers that include destination Web sites, businesses and broadband service providers, including digital subscriber line (DSL) companies, to offer their customers an array of private-labeled services. We deliver our services to Web sites that include America Online, Microsoft’s MSN, NBCi, Lycos and Verizon Online among others.
 
InfoSpace’s product offerings can help businesses attract customers, improve loyalty, create new revenue streams and monetize their customer base. Further, InfoSpace’s services are private-labeled and delivered with each customer’s logo, color scheme and navigation design, strengthening the value of the customer’s brand. This ensures that our customers own the value relationship with their customer.
 
Merchant
 
Our merchant business area develops and delivers applications and services that are designed to help merchants leverage Internet and wireless technologies to help attract customers, reduce costs, grow sales and conduct business, anywhere, anytime. These applications and services enable businesses to establish an online presence, promote their products and services, and conduct secure commerce using an Internet connected device. Our commerce services are privately branded for leading merchant banks and other merchant service providers who in turn offer these solutions to their business customers. InfoSpace’s merchant services are available through a broad merchant reseller channel, including Verizon, one of the largest providers of products and services for small to medium sized businesses in the U.S., and major financial institutions such as American Express, Wells Fargo and Union Bank of California.
 
Wireless
 
Through our wireless business area, we develop, deliver and support solutions enabling our carrier partners to deliver wireless data services to their subscribers under their own brand over current and next generation networks. With our wireless platform, wireless carriers can effectively manage and seamlessly deliver (1) our private-labeled applications and services, (2) third party applications and services and (3) their own content and applications, to create a unique mobile data experience for their subscribers. Through our InfoSpace Speech Solutions group, we offer a multi-modal solution that leverages speech for input and query, combined with other display modes to optimize the wireless experience.
 
InfoSpace provides its wireless solutions to leading companies worldwide, including wireless carriers such as Verizon Wireless, Cingular Wireless, AT&T Wireless, ALLTEL, Virgin Mobile and Deutsche Telekom’s VoiceStream and consumer services companies such as Charles Schwab.
 
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. On an ongoing basis, we evaluate the estimates used, including those related to impairment and useful lives of intangible assets, other-than-temporary impairment of investments, assumptions used to estimate fair values of warrants we hold to purchase equity securities of other companies, allowances for accounts receivable and notes receivable and fair values used to record revenue related to related party revenue transactions. We base our estimates on historical experience, current conditions and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources as well as identifying and assessing our accounting

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treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies involve the more significant judgments and estimates used in the preparation of the consolidated financial statements.
 
Approximately 48% of our assets as of December 31, 2001 consist of intangible assets, most of which have been acquired in business combinations and were recorded based on the fair value of the common stock we issued to effect those business combinations. During the years ended December 31, 2001 and 2000, we determined that the values of certain intangible assets associated with certain of these business combinations were impaired. As such, we recorded impairment charges totaling $107.7 million and $9.0 million in 2001 and 2000, respectively. As discussed below in the “Recent Accounting Pronouncements” section, we adopted SFAS No. 142 on January 1, 2002 and expect to record a substantial charge to reduce the carrying value of our intangible assets to their estimated fair value as of January 1, 2002. Ongoing analyses of whether the fair value of recorded goodwill is impaired will involve a substantial amount of judgment, as will establishing and monitoring estimated lives of amortizable intangible assets. Future charges related to intangible assets could be material depending on future developments and changes in technology and our business.
 
We have invested in public and private companies for business and strategic purposes. As of December 31, 2001, the carrying value of our publicly held and privately held investments was $8.7 million and $38.4 million, respectively. The determination as to whether a decline in the fair value of a publicly held security is other-than-temporary requires a considerable amount of judgment. However, determining whether other-than-temporary declines in the fair values of investments in the equity securities of private companies have occurred requires an even higher level of judgment due to the absence of an observable market price for the investment. As discussed above, we regularly review the status of our private company investees to determine whether such a decline has occurred. However, this determination involves various assumptions about the investee companies’ business prospects in addition to an understanding of their capital structure and financing developments. To the extent the companies in which we have invested experience significant business difficulties in the future, we may record additional impairment charges beyond those incurred during 2001.
 
We periodically evaluate whether the declines in fair value of our investments are other-than-temporary. This evaluation consists of a review by members of senior management in finance and treasury. For investments in companies with publicly quoted market prices, we compare the market price to the investment’s carrying value and, if the quoted market price is less than the investment’s accounting basis for an extended period of time, generally six months, we then consider additional factors to determine whether the decline in fair value is other-than-temporary. These include the financial condition, results of operations and operating trends for each of the companies, as well as publicly available information regarding the investee companies, including reports from investment analysts. We also consider our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value, specific adverse conditions causing a decline in fair value of a particular investment, conditions in an industry or geographic area, seasonal factors, downgrading of a debt security by a rating agency, and, if applicable, whether dividends have been reduced or eliminated, or scheduled interest payments on debt securities have not been made. For investments in private companies with no quoted market price, we consider similar qualitative factors and also consider the implied value from any recent rounds of financing completed by the investee as well as market prices of comparable public companies. We obtain periodic financial statements from the private company investees to assist us in reviewing relevant financial data and to assist us in determining whether such data may indicate other-than-temporary declines in fair value below the investment’s carrying value.
 
A portion of our revenue is earned from advertising barter transactions and from arrangements with companies in which we have invested. In both cases, the determination of the fair value of consideration given and received requires judgment. For advertising barter transactions, we identify comparable cash transactions, as required by EITF Issue No. 99-17, to determine the amount of revenue and expense to be recorded for the advertising we receive and surrender in such transactions. For transactions with related parties where we invest in a company and also agree to provide advertising or other services, we determine the fair value of securities we

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receive by reference to prices paid by other investors in the investee company and/or through obtaining independent third-party valuations. Valuation of private company equity securities is inherently subjective. We also record revenue from arrangements that contain multiple revenue-generating activities. In such arrangements, we recognize revenue for individual elements where evidence of the fair value of the individual elements exists. Where no such evidence exists, revenue is recognized for the individual components as one element.
 
Historical Results of Operations
 
We have incurred losses since our inception and, as of December 31, 2001, we had an accumulated deficit of approximately $910.7 million. For the year ended December 31, 2001, our net loss was $502.1 million, including amortization of intangibles of $236.7 million, impairment on intangibles of $107.7 million and loss on investments of $108.2 million. For the year ended December 31, 2000, our net loss was $282.4 million, including amortization of intangibles of $171.3 million, impairment of intangibles of $9.0 million and $124.0 million in acquisition and related charges associated with the acquisitions of Prio, Saraide, Millet Software, IQorder and Go2Net, of which $80.1 million was a non-cash charge for in-process research and development associated with the acquisitions. For the year ended December 31, 1999, our net loss totaled $240.1 million, including a $159.9 preferred stock dividend recorded by Go2Net in connection with the preferred stock sold to Vulcan Ventures in March and June 1999 and $13.6 million in acquisition and related charges.
 
We believe that our future success will depend largely on our ability to continue to offer products and application services to merchants and on wireline, wireless and broadband platforms that are attractive to our existing and potential future customers. Accordingly, we will need to, among other things:
 
 
 
develop and continually enhance our technology and products and services;
 
 
 
continue to up-sell and retain our existing carrier partners;
 
 
 
expand our base of international customers;
 
 
 
increase capital equipment expenditures to meet service level agreement requirements and build out our delivery infrastructure in North America, Europe and Asia; and
 
 
 
sell additional services to our existing merchants and merchant aggregator partners and grow our network of merchants.
 
In light of the rapidly evolving nature of our business and limited operating history, we believe that period-to-period comparisons of our revenues and operating results are not necessarily meaningful, and you should not rely upon them as indications of future performance. We do not believe that our historical growth rates are necessarily sustainable or indicative of future growth. Our future operating results may fall below the expectations of securities analysts or investors, which would likely cause the trading price of our common stock to decline.

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The following table sets forth the historical results of our operations expressed as a percentage of total revenues.
 
      
2001

      
2000

      
1999

 
Revenues
    
100.0
%
    
100.0
%
    
100.0
%
Cost of revenues
    
25.8
%
    
16.6
%
    
18.7
%
      

    

    

Gross profit
    
74.2
%
    
83.4
%
    
81.3
%
Operating expenses:
                          
Product development
    
24.3
%
    
18.9
%
    
21.7
%
Sales, general and administrative
    
73.1
%
    
61.1
%
    
108.0
%
Amortization of intangibles
    
146.2
%
    
79.9
%
    
59.4
%
Impairment of intangibles
    
66.5
%
    
4.2
%
    
—  
 
Acquisition and other related charges
    
(2.2
)%
    
57.8
%
    
18.9
%
Other charges
    
7.1
%
    
2.2
%
    
15.8
%
Restructuring charges
    
10.8
%
    
1.1
%
    
0.0
%
      

    

    

Total operating expenses
    
325.8
%
    
225.2
%
    
223.8
%
      

    

    

Loss from operations
    
(251.6
)%
    
(141.8
)%
    
(142.5
)%
Loss on investments
    
(66.8
)%
    
(0.2
)%
    
0.0
%
Other income, net
    
10.7
%
    
12.9
%
    
31.1
%
Minority interest
    
0.0
%
    
(1.5
)%
    
0.0
%
      

    

    

Loss from operations before income tax expense and cumulative effect of change in accounting principle
    
(307.7
)%
    
(130.6
)%
    
(111.4
)%
Income tax expense
    
(0.4
)%
    
(0.1
)%
    
0.0
%
      

    

    

Loss from operations before cumulative effect of change in accounting principle and preferred stock dividend
    
(308.1
)%
    
(130.7
)%
    
(111.4
)%
Preferred stock dividend
    
—  
 
    
0.0
 %
    
(222.2
)%
Cumulative effect of change in accounting principle
    
(2.0
)%
    
(1.0
)%
    
0.00
%
      

    

    

Net loss applicable to common stockholders
    
(310.1
)%
    
(131.7
)%
    
(333.6
)%
      

    

    

 
Results of Operations for the Years Ended December 31, 1999, 2000 and 2001
 
Revenues.    Our revenues are derived from our products and application services, which are delivered to users and subscribers on wireline, wireless and broadband platforms and to merchants via merchant aggregators including merchant banks. We tailor agreements to fit the needs of our customers, merchant banks and aggregators and wireless carriers. Under any one agreement we may earn revenue from a combination of our products and application services. We identify revenues by our three business areas, which are wireline and broadband, merchant and wireless. We do not expect broadband to generate meaningful revenue until 2003.
 
Revenues for wireline and broadband were $90.4 million in the year ended December 31, 2001, $156.9 million in the year ended December 31, 2000 and $56.1 million in the year ended December 31, 1999. The decline in total revenue from 2000 to 2001 reflects several factors including our decision in the first quarter of 2001 to eliminate direct to consumer properties including certain destination sites acquired in the Go2Net merger, our announcement in the second quarter of 2001 of our intention to not pursue agreements that are short-term and comprised of non-recurring revenue streams and declines in general economic conditions during the year. The revenue growth from 1999 to 2000 reflects the growth of our network of Web portals and affinity Web sites, Go2Net’s acquisition of Dogpile in August 1999, and the launch of new services that drove Web traffic and promoted longer usage at Web sites.
 
Revenues for merchant were $39.8 million in the year ended December 31, 2001, $36.9 million in the year ended December 31, 2000 and $15.2 million in the year ended December 31, 1999. The decline in the annual

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growth rates from 2000 to 2001 compared to 1999 to 2000 reflects the impact of general economic conditions and the transition of our merchant hosting services from a free service to a subscription model which resulted in a decline in monetization of the traffic to those services. The revenue increase from 1999 to 2000 is primarily attributable to the acquisition of Authorize.net in July 1999, accounted for as a purchase.
 
Revenues for wireless were $31.7 million in the year ended December 31, 2001, $20.8 million in the year ended December 31, 2000 and $663,000 in the year ended December 31, 1999. The annual growth reflects the adoption of our wireless platform of products and application services by wireless carriers and consumer services companies and the launch of new applications and services. The number of active subscribers using our services grew from 1.2 million at December 31, 2000 to 2.4 million at December 31, 2001. The revenue growth from 1999 to 2000 reflects the acquisition of Saraide in March 2000.
 
For the first quarter of 2002, we expect revenues from our business areas to represent as a percentage of total revenues: Wireline and Broadband—40% to 45%; Merchant—30% to 35%; and Wireless—20% to 25%.
 
Included in revenue are barter revenues generated from non-cash transactions as defined by Emerging Issues Task Force (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. We recognized barter revenue of $14.0 million for the year ended December 31, 2001 compared to $9.8 million for the year ended December 31, 2000 and $948,000 for the year ended December 31, 1999, from these non-cash agreements. Non-cash barter transactions are common in our industry. Generally, these transactions consist of the right to place Internet advertisements. For the year ended December 31, 2001, barter advertising expense was $13.2 million compared to $8.7 million for the year ended December 31, 2000 and $878,000 for the year ended December 31, 1999. We expect barter revenue in 2002 will decrease from the amount of barter revenue recorded for 2001.
 
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 described below. Additionally, some warrants and stock were received in connection with business agreements whereby we provide our products and services to the issuers. Some of these agreements contain provisions that require us to meet specific performance criteria in order for the stock or warrants to vest. When we meet our performance obligations we record revenue equal to the fair value of the stock or warrant. If no future performance is required, we recognize the revenue on a straight-line basis over the contract term. Fair values are determined through third party investors or independent appraisal. We recorded revenue in the amount of $14.0 million for vesting in stock and warrants for the year ended December 31, 2001 compared to $22.1 million for the year ended December 31, 2000 and $3.2 million for the year ended December 31, 1999. We expect warrant revenue in 2002 will decrease from the amount of warrant revenue recorded for 2001.
 
From time to time, we have made investments in private and public companies for business and strategic purposes. In the normal course of business, we have 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, including independent service agreements entered into during the current year with companies we or Go2Net invested in during prior years. During the year ended December 31, 2001, we made investments in four private companies for business and strategic purposes. In the normal course of business, we also entered into short-term agreements to provide various promotional services for these companies and other companies that we have made investments in during prior years. For the year ended December 31, 2001, related party revenue was $31.4 million compared to related party revenue of $32.1 million for the year ended December 31, 2000 and $2.9 million for the year ended December 31, 1999. We recognize revenue from our advertising, licensing and distribution agreements with related parties on the same basis as we recognize revenue from similar agreements with unrelated parties.
 
Cost of Revenues.    Cost of revenues consists of expenses associated with the delivery, maintenance and support of our products and application services, including direct personnel expenses, communication costs such

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as high-speed Internet access, server equipment depreciation, and content license fees. Cost of revenues were $41.8 million, or 26% of revenue for the year ended December 31, 2001 compared to $35.6 million, or 17% of revenue for the year ended December 31, 2000 and $13.5 million or 19% of revenue for the year ended December 31, 1999. The absolute dollar increase of cost of revenue for the year ended December 31, 2001 was primarily attributable to increases in the cost of data licenses from expanding and enhancing our licensed content and delivery and increases in depreciation and non-capitalized equipment. The absolute dollar increase in cost of revenue for the year ended December 31, 2000 compared to the year ended December 31, 1999 was primarily attributable to personnel costs and other costs incurred in order to support greatly increased delivery of our products and application services, including communication lines, data licenses and equipment. In the near term, the majority of our expenses in cost of revenue are fixed. Therefore, we expect cost of revenue as a percentage of revenue to decrease as our revenues increase.
 
Product Development Expenses.    Product development expenses consist principally of personnel costs for research, development, support and ongoing enhancements of the proprietary products and application services we deliver to our customers across wireline, wireless and broadband networks. Product development expenses were $39.3 million, or 24% of revenue, for the year ended December 31, 2001 compared with $40.6 million, or 19% of revenue, for the year ended December 31, 2000 and $15.6 million or 22% of revenue for the year ended December 31, 1999. In accordance with Statement of Position 98-1, certain product development expenses are capitalized as internally developed software. We capitalized $2.6 million of salaries and benefits from personnel associated with internally developed software in 2001. This compares to $279,000 in 2000 and $478,000 in 1999 of capitalized costs. With these costs included in product development expenses, net of amortization of previously capitalized internally developed software, 2001 product development expenses would have been $41.6 million, 2000 product development expenses would have been $40.8 million and 1999 product development expenses would have been $16.1 million. The 2001 expenses include approximately $1.5 million in one-time payments, including one-time payments to certain employees for retention obligations from acquisitions and to the employees for accelerated vesting of our contribution to the InfoSpace Venture Capital Fund 2000, LLC (“Venture Fund”) on their behalf that occurred in the first quarter of 2001. Generally, product development costs are not consistent with changes in revenue as they represent key infrastructure costs to develop and enhance service offerings and are not directly associated with current period revenue. We believe that continued significant investments in technology are necessary to remain competitive.
 
Sales, General and Administrative Expenses.    Sales, general and administrative expenses consist primarily of salaries and related benefits, carriage fees, professional service fees, occupancy and general office expenses, business development and management travel expenses and advertising and promotion expenses. Sales, general and administrative expenses were $118.3 million, or 73% of revenues, for the year ended December 31, 2001 compared to $131.1 million, or 61% of revenues, for the year ended December 31, 2000 and $77.8 million or 108% of revenues for the year ended December 31, 1999. The absolute dollar decrease for the year ended December 31, 2001 is attributable to reduced salaries and benefits from our realignments in the first quarter and third quarter of 2001, reduced advertising and promotions expenses and lower bad debt expense. These decreases were partially offset by increased occupancy expenses from the leases for our headquarters facility, which began in July 2000, and our Montreal facility from our acquisition of Locus Dialogue in January 2001 and higher carriage expenses. The increase in sales, general and administrative expenses in 2000 from 1999 was a result of increased personnel expenses from larger staffing levels and greater occupancy expenses, depreciation and equipment costs from our move to our new Bellevue, Washington facilities in July 2000 and from our international expansion into Brazil and Australia. We expect sales, general and administrative expenses to continue to decline in absolute dollars in 2002 compared to 2001.
 
2001 sales, general and administrative expense includes $1.5 million of charges for an allowance of a note receivable from an officer of the Company. 2000 sales, general and administrative expense includes $3.1 million of charges for an allowance of a note receivable from one of our executive officers. In October 2000, we loaned this officer $4.0 million. The promissory note matured on December 31, 2001. The note was secured by a pledge of 200,000 shares of our common stock, valued at $410,000 on the date of maturity. The terms of the note provided, however, that if the officer remained employed by us through December 31, 2001, then we would

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require only the collateral securing the note for repayment. In the event that the collateral was insufficient to repay the note and accrued interest at maturity, and the officer remained employed by us through the maturity date, then we would forgive the difference between the fair market value of the collateral and the principal plus accrued interest and make a cash distribution to the officer sufficient to cover his resulting tax liability from the forgiveness of the debt. Since this officer remained employed by us through the maturity date, we have written off the entire amount of the note, plus accrued interest, less the value of the collateral, and have accrued his related tax liability.
 
Amortization of Intangibles.    Amortization of intangibles includes amortization of goodwill, core technology, purchased domain names, trademarks, contract lists and assembled workforce. Amortization of intangibles was $236.7 million in the year ended December 31, 2001, compared to $171.3 million in the year ended December 31, 2000 and $42.8 million in the year ended December 31, 1999. The increases are a result of amortization of intangibles recorded from the acquisitions of Locus Dialogue in January 2001, The boxLot Company in December 2000, iJapan technology in September 2000, TDLI.com and Orchest in August 2000, IQorder in July 2000 and Saraide and Millet Software in March 2000.
 
Impairment of Intangibles.    During the year ended December 31, 2001, we determined that the values of certain intangible assets associated with previous acquisitions were impaired. A total of $107.7 million of impairment charges were recorded during the year ended December 31, 2001. This amount is included in “Impairment of intangibles” in the accompanying consolidated statements of operations and is comprised of $2.8 million of charges related to assembled workforce, $40.7 million of charges related to abandoned technology and related goodwill amounts and $64.2 million related to writedowns of the core technology and associated goodwill from the sale of certain assets of Locus Dialogue.
 
During the year ended December 31, 2000, we recorded an impairment loss on intangible assets of approximately $9.0 million. This impairment was comprised of $8.5 million of charges related to goodwill and $451,000 of core technology and assembled workforce. The impairment included the write-off of goodwill of $6.1 million from the acquisition of Zephyr Software, Inc. The impairment included goodwill, core technology and assembled workforce of $2.6 million from the acquisition of Outpost Networks, Inc. Additionally, transaction revenue and customer value of $226,000 from the acquisition of Haggle Online and an assembled workforce of $45,000 from the acquisition of Dogpile, LLC were determined to be impaired.
 
The assembled workforce intangible impairment charges of $2.8 million recorded during the year ended December 31, 2001 are associated with several previous acquisitions for which we determined, based on substantial declines in the acquired workforce, that the fair values assigned to these assets were less than the recorded amounts. As such, we determined the fair value of the remaining workforce intangible using the same assumptions used to estimate the fair value at the respective acquisition dates, and recorded a charge to reduce the related assembled workforce intangible assets to their estimated fair values as of December 31, 2001.
 
Also during the year ended December 31, 2001, we determined that we would not pursue development of technologies acquired in certain previous acquisitions due to changes in market factors and our business. We therefore recorded charges totaling $40.7 million to write off the remaining book value of any core technology intangible assets recorded in connection with these acquisitions which related to abandoned technology, along with related goodwill.
 
In connection with the sale of certain assets related to the Liaison enterprise solution business of Locus Dialogue, we recorded a charge of $64.2 million, reflecting an impairment in the core technology intangible asset and related goodwill. Based on future estimated cash flows from the Liaison enterprise solution business to be received after the asset sale, we determined the estimated fair value of the core technology and related goodwill totaled $500,000. The charge recorded during the year ended December 31, 2001 reduces the carrying amounts of these intangible assets to this estimated fair value as of the date of the asset sale.

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In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142 Goodwill and Other Intangible Assets, which requires use of a non-amortization approach to account for purchased goodwill and certain intangibles, effective January 1, 2002. Under this non-amortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead will be reviewed annually for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. We expect the adoption of this accounting standard will have the impact of significantly reducing our amortization of goodwill and intangibles commencing January 1, 2002. As we have previously disclosed, we expect to incur a non-cash charge estimated to range from $100 million to $200 million, which will be recorded in the first quarter of 2002 for the cumulative effect of adopting SFAS No. 142. We have retained an independent valuation firm to conduct the valuation analysis pursuant to SFAS 142 and we expect to receive the results of their analysis by the end of April 2002. There can be no assurance that the results of the analysis by this independent valuation firm will not result in a non-cash charge less than or in excess, perhaps substantially, of the amount previously estimated and disclosed by us.
 
Acquisition and Other Related Charges.    Acquisition and other related charges consist of in-process research and development and other charges related directly to acquisitions, such as professional fees for transactions accounted for as pooling-of-interests, prior to the adoption of Statement of Financial Accounting Standards No. 141 Business Combinations. During the third quarter of 2001, a reduction of acquisition costs accrued in 2000 was negotiated. The acquisition and related charges for the year ended December 31, 2001 included this acquisition accrual adjustment, $600,000 of in-process research and development charges in the purchase acquisition of Locus Dialogue, $200,000 of severance pay to the former chief executive officer of Locus Dialogue and $300,000 of legal, accounting and other fees related to acquisitions. Acquisition and related charges for the year ended December 31, 2000 of $124.0 million included $80.1 million of in-process research and development charges in the purchase acquisitions of Saraide, Millet Software and IQorder. Also included were costs incurred in the acquisitions of Prio and Go2Net, which were accounted for as poolings-of-interests. Total acquisition and related charges in 1999 were $13.6 million. The acquisition and related charges in 1999 included $9.2 million of in-process research and development charges in the purchase acquisitions of eComLive, Union-Street and the MyAgent technology. Also included were costs incurred in the acquisition of INEX, which was accounted for as a pooling-of-interests.
 
Other Charges.    Other charges consist of one-time costs and/or charges that are not directly associated with other operating expense classifications. Other charges for the year ended December 31, 2001 include a charge of $10.6 million in allowance for notes receivable and employee loans, $2.4 million for settlement charges on litigation matters and $848,000 for the write off of a prepaid license for software that is no longer being utilized. These amounts are offset by a reduction in the estimated liability for overtime wages accrual for past overtime worked due of $2.4 million.
 
We were audited by the Department of Labor in February 2001. The Department of Labor determined that numerous employees, primarily former employees of Go2Net, were improperly classified as exempt and should have been classified as non-exempt. As a result, in the year ended December 31, 2000, we recorded an estimated accrual in the amount of $3.0 million for the past wages due for overtime worked. Based on the overtime questionnaires we have received from the applicable employees and a revision to the methodology used to calculate overtime pay approved by the Department of Labor, we have revised our estimate for this liability to be $629,000, of which $507,000 has been paid through December 31, 2001.
 
Other charges for the year ended December 31, 2000 includes settlement charges on two litigation matters of $1.7 million and $3.0 million for an estimated liability for past overtime worked. Other charges for the year ended December 31, 1999 consist of charges associated with litigation settlements.

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The following tables detail acquisition and related costs and other charges (in thousands):
 
    
Year ended December 31,

    
2001

    
2000

  
1999

Acquisition and related costs:
                      
In-process research and development
  
$
600
 
  
$
80,100
  
$
9,200
Merger-related costs
  
 
(4,104
)
  
 
43,898
  
 
4,374
    


  

  

    
$
(3,504
)
  
$
123,998
  
$
13,574
    


  

  

 
    
Year ended December 31,

    
2001

    
2000

  
1999

Other charges:
                      
Litigation settlement charges
  
$
2,398
 
  
$
1,732
  
$
11,360
Past overtime worked
  
 
(2,371
)
  
 
3,000
  
 
—  
Notes receivable allowances
  
 
10,630
 
  
 
—  
  
 
—  
Impaired prepaid data license
  
 
848
 
  
 
—  
  
 
—  
    


  

  

    
$
11,505
 
  
$
4,732
  
$
11,360
    


  

  

 
Restructuring Charges.    The restructuring charges of $17.4 million in the year ended December 31, 2001 includes leasehold improvements, furniture and office equipment and future operating lease costs, net of estimated sublease income, from the closure of our Seattle and Mountain View facilities and a portion of our Montreal facility. In negotiations with potential sublessees, we determined that due to current economic conditions and vacancy rates the properties would not be subleased at a rate that would provide for full recovery of future lease payments. Accordingly, a charge for the difference between the future lease costs and the probable sublease income was recorded at the time we made the decision to abandon the property. Also included in the restructuring charges for the year ended December 31, 2001 are severance costs for the reduction in workforce from the closure of the Mountain View facility and from the February and October 2001 company-wide formal workforce reductions. We recorded a restructuring charge of $2.3 million in the year ended December 31, 2000 for the closures of the Dallas, Texas and Ottawa, Canada facilities.
 
Loss on Investments, net.    Loss on investments consists of recognized gains and losses on investments in accordance with Statement of Financial Accounting Standards (SFAS) No. 133 Accounting for Derivative Instruments and Hedging Activities, recognized gains and losses on investments marked to fair value in the Venture Fund, which was active from January 1, 2000 through March 31, 2001, realized gains and losses on investments and impairment on investments.
 
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 fair value in earnings. We hold warrants to purchase stock in other companies, which qualify as derivatives. For the year ended December 31, 2001, we recognized a $5.4 million loss on these warrants.
 
Venture Fund:  On January 26, 2001, our Board of Directors approved the liquidation of the Venture Fund. In the first quarter of 2001, we disbursed $16.4 million to the accredited investors, representing 100% of the accredited investor ownership. The Board of Directors also approved the acceleration of vesting of the contribution we made on behalf of our employees. The contribution was paid out in conjunction with the dissolution of the fund, resulting in compensation expense of $1.0 million in the first quarter of 2001. We recorded $517,000 of compensation expense in the year ended December 31, 2000 related to the contribution.
 
Investments held by the Venture Fund were held at fair value, with changes in fair value reflected as gains and losses in the Statement of Operations, as required by investment company accounting, which was carried forward in consolidation pursuant to EITF Issue No. 85-12 Retention of Specialized Accounting for Investments

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in Consolidation. Prior to dissolution of the Venture Fund, its investments were therefore adjusted to their fair value, resulting in the recognition of $2.3 million of unrealized losses and $17.1 million of losses due to impairment on an investment in the quarter ended March 31, 2001. As of March 31, 2001, the Venture Fund was dissolved and the investments that were held by the Venture Fund were transferred to InfoSpace. A gain of $3.2 million for the dissolution of the Venture Fund was also recorded in 2001. During 2000, we recorded gains of $14.8 million for appreciation of investments held by the Venture Fund.
 
Realized gains and losses on investments:  Realized losses on the sale of an investment during the year ended December 31, 2001 were $2.7 million. Realized gains on sales on investments during the year ended December 31, 2000 were $4.9 million.
 
Impairment on investments:  We determined that the decline in value of our investments was other-than-temporary for twenty-two investments in the year ended December 31, 2001 and for four investments in the year ended December 31, 2000. For the year ended December 31, 2001, we recorded impairment and write-off charges of $100.9 million, which includes the $17.1 million impairment on the Venture Fund investment discussed above. For the year ended December 31, 2000, we recorded impairment and write-off charges of $20.4 million.
 
Other Income, Net.    Other income, consisting primarily of interest income, was $17.4 million in the year ended December 31, 2001 compared to $27.7 million in the year ended December 31, 2000 and $22.3 million in the year ended December 31, 1999. The decrease is primarily due to re-investment of funds to equity securities from interest bearing fixed income securities and from cash used for operating activities and acquisitions in 2001 and the fourth quarter of 2000.
 
We have reinvested and may in the future reinvest part of our fixed income securities in non-interest bearing equity instruments and investments. With the prevailing lower short-term rates, we expect lower yields on our marketable investments and expect our interest income to be lower in 2002 compared to 2001.
 
Income Tax Expense.    We have recorded tax expense of approximately $664,000 for the year ended December 31, 2001 and approximately $137,000 for the year ended December 31, 2000, for our international operations. We expect to continue to record a tax provision for our international operations and do not anticipate recording a U.S. federal tax provision for 2002.
 
Cumulative Effect of Change in Accounting Principle.    On January 1, 2001, we adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value and changes in fair value are recognized in earnings unless certain hedge criteria are met. As a result of adopting SFAS No. 133, we recorded a charge of $3.2 million to record warrants held to purchase stock in other companies at their fair value as of January 1, 2001 as a cumulative effect of change in accounting principle. As of December 31, 2000 warrants to purchase stock in public companies were held at fair value, with unrealized gains and losses included in accumulated other comprehensive loss, and warrants to purchase stock in private companies were held at cost.
 
On January 1, 2000, we adopted Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. Prior to January 1, 2000, we recorded revenues from customers for development fees, implementation fees and/or integration fees when the service was completed. If this revenue were recognized on a straight-lined basis over the term of the related service agreements, in accordance with SAB No. 101, we would have deferred revenue of $2.1 million as of January 1, 2000 originally recorded in prior years. In accordance with SAB No. 101, we recorded a charge for the cumulative effect of change in accounting principle of $2.1 million.
 
We adopted SFAS No. 142 on January 1, 2002. We expect to record a cumulative effect adjustment in the first quarter of 2002 as described above under “Impairment of Intangibles.”

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Preferred Stock Dividend.    Go2Net sold 546,000 shares of Go2Net preferred stock, convertible into 16.5 million shares of common stock, to Vulcan Ventures in March and June 1999. This stock was sold at a price of $18.1648 per share which was a discount to the current market price of common stock into which the preferred stock was then convertible. The discount of $159.9 million was recognized as a dividend to Vulcan in the year ended December 31, 1999.
 
Balance Sheet Commentary
 
Payroll Tax Receivable.    As of December 31, 2001, our balance sheet included $13.2 million recorded as a tax receivable due from the Federal government. In October 2000, one of our employees exercised non-qualified stock options and remitted $12.6 million for federal income tax based on the market price of the stock on the day of exercise and we remitted the employer payroll tax of $620,000. Due to the affiliate lock-up period from the Go2Net merger, the employee was restricted from transferring or selling the stock until February 2001. Treasury Regulations provide that the valuation for purposes of determining taxable income is not required until these restrictions have lapsed. We, therefore, returned the federal income tax withholding to the employee and filed an amendment to our payroll tax return to request the tax refund.
 
Stockholders’ Equity.    On September 10, 2001, we repurchased approximately 21.7 million shares of our common stock from Vulcan Ventures Inc. at a discounted purchase price of $1.05 per share in a privately negotiated block transaction. The closing sale price of the stock on the date of purchase was $1.40. We retired the repurchased shares.
 
Liquidity and Capital Resources
 
From our inception in March 1996 through May 1998, we funded operations with approximately $1.5 million in equity financing and, to a lesser extent, from revenues generated for services performed. In April 1997, Go2Net completed its initial public offering which yielded net proceeds of approximately $12.8 million. In May 1998, we completed a $5.1 million private placement of our common stock, and in July and August 1998, we completed an additional private placement of our common stock for $8.2 million. Sales of our common stock to employees pursuant to our 1998 Employee Stock Purchase Plan also raised $1.7 million in July 1998. Our initial public offering in December 1998 yielded net proceeds of $77.8 million and a follow-on public offering in April 1999 yielded net proceeds of $185.0 million. Our principal source of liquidity is our cash and cash equivalents, short-term investments and long-term investments. As of December 31, 2001, we had cash, cash equivalents and short-term investments available-for-sale of $198.9 million and long-term investments available-for-sale of $94.9 million.
 
We have pledged a portion of our cash as collateral for standby letters of credit, a bank guaranty and in the form of certificates of deposit that guarantee the future monthly lease payments for certain of our property leases. At December 31, 2001, the total amount of collateral pledged under these agreements was approximately $4.7 million, which consisted of $4.0 million of standby letters of credit, $418,000 of certificates of deposit and $342,000 of bank guaranty.
 
Net cash used by operating activities was $41.0 million for the year ended December 31, 2001. This represents $20.4 million in the first quarter, $1.3 million in the second quarter, $14.7 million in the third quarter and $4.6 million in the fourth quarter. The use of cash in the year ended December 31, 2001 included a cash outlay of $12.6 million for a payroll tax receivable due from the Federal government, $10.6 million for payment of accrued acquisition fees from 2000, $1.8 million of one-time payments to certain employees for retention obligations from acquisitions, $2.2 million in settlement payments, $1.5 million of one-time payouts to the employees for the accelerated vesting of our contribution to the Venture Fund for the employees, $2.4 million of one-time severance pay for the reductions of workforce in the first and third quarters of 2001 and $500,000 of payments associated with the closure of our Ottawa office. Net cash provided by operating activities was $16.8 million for the year ended December 31, 2000. Significant components of cash provided by operating activities for the year ended December 31, 2000 were depreciation and amortization and write-offs of acquired

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in-process research and development, net operating losses, increases of accounts receivable and decreases in accrued expenses. Net cash used by operating activities was $11.8 million in 1999. Cash used in operating activities for the year ended December 31, 1999 consisted primarily of net operating losses offset by increases in accrued expenses and the discount on the issuance of preferred stock by Go2Net accounted for as a non-cash dividend.
 
Net cash provided by investing activities was $21.9 million in the year ended December 31, 2001. Cash provided by investing activities was primarily a result of reinvesting in securities with an original maturity of 90 days or less which are classified as cash equivalents. Offsetting the $75.0 million of short and long-term investment maturities and the $2.7 million proceeds from the sale of a segment of the Liaison enterprise solution business was $11.0 million in equity investments, $12.0 million in purchases of fixed assets, $16.6 million in business acquisition costs from the Locus Dialogue, Excite.com and GiantBear acquisitions and $16.4 million for the buyout of the minority interest ownership in the Venture Fund. Net cash used by investing activities was $5.6 million in the year ended December 31, 2000. During that period, cash used in investing activities was primarily comprised of costs associated with the acquisition of Prio, notes receivable additions, purchase of fixed assets and equity investments. The cash used in investing activities was partially offset by cash received from the minority interest of the Venture Fund and maturities of debt investments. Net cash used by investing activities for the year ended December 31, 1999 of $423.3 million was primarily composed of business acquisitions, securities investments, other investments and purchase of fixed assets.
 
Net cash used by financing activities in the year ended December 31, 2001 was $16.3 million. $22.8 million was used in the share repurchase from Vulcan Ventures. $3.1 million was used to payoff the acquired debt of Locus Dialogue. Cash proceeds from financing activities were comprised of $9.6 million from the exercise of stock options and warrants and from share purchases through our employee stock purchase plan. Net cash provided by financing activities for the year ended December 31, 2000 of $38.3 million was primarily comprised of our net proceeds from the exercise of stock options and warrants, offset by payments of debt acquired in the Prio and Saraide acquisitions. Cash provided by financing activities in 1999 was $498.3 million and was primarily comprised of our net proceeds from our follow-on offering in April 1999 and the net proceeds from the March and June 1999 preferred stock issuance by Go2Net.
 
We plan to use our cash for investments in internally developed technology, global expansion of our services and continued build-out of infrastructure in the United States and Europe. We may use our cash for acquisitions of complimentary businesses and technologies, a stock repurchase program or the build out of a redundant data center. We have non-cancelable operating leases for our corporate facilities with lease terms through 2005. Future minimum rental payments required under non-cancelable operating leases are: $13.2 million in 2002, $6.4 million in 2003, $6.0 million in 2004, $3.0 million in 2005 and $417,000 thereafter. Included in the 2002 commitments is $4.4 million for a buyout payment in connection with the lease for our Seattle facility, which is included in our 2001 restructuring charge. The Seattle facility was the corporate headquarters of Go2Net prior to our merger with Go2Net in October 2000. This buyout releases us of all future obligations under that lease including approximately $9.0 million of scheduled lease payments over the life of that lease.
 
We believe that existing cash balances, cash equivalents, short and long-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 are subject to a number of conditions and uncertainties, some of which are out of our control, and actual revenues and expenses may be materially different. We may seek additional funding through public or private financings or other arrangements prior to such time. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. 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.

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Acquisitions & Dispositions
 
Summary of Our Acquisitions
 
Company or Assets

  
Date Closed

  
Accounting Method

  
Total Value of Transactions (in thousands)

eCash Technologies, Inc.
  
02/08/2002
  
Asset Purchase
  
$
4,600
Giant Bear, Inc.
  
12/19/2001
  
Purchase
  
$
6,000
Excite.com
  
11/28/2001
  
Asset Purchase
  
$
6,700
Locus Dialogue Inc.
  
01/01/2001
  
Purchase
  
$
112,900
The boxLot Company
  
12/07/2000
  
Asset Purchase
  
$
8,900
Go2Net, Inc
  
10/12/2000
  
Pooling-of-interests
      
iJapan technology
  
09/13/2000
  
Asset Purchase
  
$
2,000
TDLI.com Limited
  
08/31/2000
  
Purchase
  
$
116,500
Orchest, Inc.
  
08/04/2000
  
Purchase
  
$
7,900
IQorder.com, Inc.
  
07/03/2000
  
Purchase
  
$
65,800
Millet Software, Inc.
  
03/31/2000
  
Purchase
  
$
29,700
Saraide, Inc.
  
03/10/2000
  
Purchase
  
$
347,000
Prio, Inc.
  
02/15/2000
  
Pooling-of-interests
      
Zephyr Software, Inc.
  
12/29/1999
  
Purchase
  
$
8,600
eComLive.com, Inc.
  
12/16/1999
  
Purchase
  
$
32,000
FreeYellow.com, Inc.
  
10/27/1999
  
Purchase
  
$
20,000
Union-Street.com, Inc.
  
10/14/1999
  
Purchase
  
$
20,500
INEX Corporation
  
10/14/1999
  
Pooling-of-interests
      
Dogpile, LLC
  
08/04/1999
  
Purchase
  
$
52,000
Authorize.Net Corporation
  
07/01/1999
  
Purchase
  
$
98,600
MyAgent technology
  
06/30/1999
  
Asset Purchase
  
$
18,000
IQC Corporation
  
05/13/1999
  
Purchase
  
$
20,000
Virtual Avenue
  
04/28/1999
  
Purchase
  
$
24,700
Haggle Online, Inc.
  
04/16/1999
  
Purchase
  
$
6,800
 
eCash Technologies, Inc.    On February 8, 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 1,064,815 shares of our common stock.
 
GiantBear, Inc.    On December 19, 2001, we acquired substantially all of the assets of GiantBear, Inc., a wireless technology and service provider that enables wireless carriers to offer their subscribers access to content, data and mobile commerce through wireless devices, delivery channels and applications, for purchase consideration of $6.0 million, which includes acquisition expenses of $21,000. We recorded $2.5 million of goodwill, $1.9 million of core technology and $700,000 for customer lists as a result of this transaction. The core technology and customer lists will be amortized over a five-year period. The goodwill will not be amortized, in accordance with SFAS 142, but instead will be reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill is more than its fair value.
 
Excite.com.    On November 28, 2001, we acquired certain assets of the At Home Corporation. The acquired assets included certain domain names, trademarks and user data associated with the Excite.com Web site. Total net consideration for the acquired assets was $6.7 million. Concurrently, we announced an Internet services agreement with iWon. Under the agreement, we agreed to power the search and directory components of the Excite Web site. As we did not acquire all of the assets of the Excite portal, which was a component of the At Home Corporation, and we have licensed certain of the acquired assets to iWon, this acquisition was not classified as a purchase of a business. We have determined that the acquired assets have a useful life of two years and will amortize them over this period.

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Locus Dialogue Inc.    On January 1, 2001, we acquired all of the stock of Locus Dialogue Inc., a developer of speech recognition-enabled applications (now called InfoSpace Speech Solutions). The acquisition was accounted for as a purchase. We issued or will issue 5,114,233 shares of our common stock (1) directly to those Locus Dialogue shareholders who elected to receive our common stock in exchange for their Locus Dialogue shares at the closing of the acquisition, (2) upon the exchange or redemption of the exchangeable shares of InfoSpace Speech Solutions Holdings Inc. (formerly Locus Holdings Inc.), an indirect subsidiary of ours, which exchangeable shares were issued to those Locus Dialogue shareholders who elected to receive exchangeable shares, or who did not make an election to receive shares of our common stock at the closing, and (3) upon the exercise of options granted to replace options of Locus Dialogue held at the closing. We issued shares with a fair value of $88.8 million, acquired $8.8 million of net assets and incurred $556,000 in acquisition costs. Included in the calculation of goodwill is $23.6 million for the fair value of options to purchase 1,173,216 shares we assumed. We also recorded $3.9 million in unearned compensation for the intrinsic value of the options assumed and for the valuation of 253,175 shares of restricted stock that vest after a one-year service period held by certain former Locus Dialogue employees.
 
On July 1, 2001, we sold certain operating assets and other rights relating to the Locus Liaison enterprise solution business for $2.7 million. We acquired the Locus Liaison enterprise solution business as part of the acquisition of Locus Dialogue in January 2001. The operating assets included certain distribution contracts, the assembled Liaison workforce, the Locus Dialogue trademarks, the enterprise solution inventory and certain fixed assets. In addition, we entered into a license agreement pursuant to which the buyer is licensing Liaison and SoftDialogue software from us. In connection with the sale of these assets, we recorded a charge in 2001 of $64.7 million related to writedowns of the assembled workforce, core technology and associated goodwill. The remaining personnel and assets of Locus Dialogue including the voice application, SpeechPortal and SoftDialogue, are now operated under the name of InfoSpace Speech Solutions.
 
The boxLot Company.    On December 7, 2000, we acquired substantially all of the assets of boxLot, including its interactive on-line variable pricing technology and dynamic pricing engine, equipment and domain names. Under the terms of the asset purchase, we issued 501,527 shares of common stock and paid cash of $2.6 million. We recorded $9.2 million in goodwill.
 
Go2Net, Inc.    On October 12, 2000, we completed our acquisition of Go2Net, Inc., a publicly held provider of applications and technology infrastructure for narrowband and broadband. Under the terms of the acquisition, which was accounted for as a pooling-of-interests, we exchanged 74,154,448 shares of our common stock for all of the preferred and common shares of Go2Net. The consolidated financial statements are presented as if Go2Net was a wholly owned subsidiary since inception.
 
iJapan Intellectual Property.    On September 13, 2000, we acquired intellectual property that translates between cHTML and other major wireless markup languages from iJapan for purchase consideration of $2 million cash. The entire purchase price was recorded as an intangible asset.
 
TDLI.com Limited.    In July 1998, we entered into a joint venture agreement with TDLI.com Limited, a subsidiary of Thomson Directories Limited to form TDL InfoSpace to replicate our content, community and consumer services in Europe. TDL InfoSpace launched content services in the United Kingdom in the third quarter of 1998. Under the Web site services agreement, Thomson provides its directory information to TDL InfoSpace and sells Internet yellow pages advertising for the joint venture through its local sales forces. We also license our technology and provide hosting services to TDL InfoSpace. Thomson and we each purchased a 50% interest in TDL InfoSpace and are required to provide reasonable working capital to TDL InfoSpace. As of December 31, 1999, we had contributed $496,000 to the joint venture. We accounted for our investment in the joint venture under the equity method. For the year ended December 31, 1999, we recorded a loss from the joint venture of $12,000. On August 31, 2000, we acquired TDLI.com Limited, a privately held company based in Hampshire, England that in turn holds approximately fifty percent of TDL InfoSpace (Europe) Limited, a joint venture originally formed by InfoSpace and Thomson Directories Limited in July 1998 to replicate InfoSpace’s services in Europe. We acquired TDLI.com for purchase consideration of 3,420,308 shares of our common stock and acquisition expenses of $2,105,304. We recorded $118.5 million in intangible assets. We now have 100% ownership and control of TDL InfoSpace.

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Orchest, Inc.    On August 4, 2000, we acquired all of the outstanding capital stock of Orchest, Inc., a privately held company based in Cupertino, California, for a purchase consideration of 255,288 shares of our common stock and acquisition expenses of $72,060. We recorded $8.4 million for intangible assets. Orchest provided online financial services that enable users to access a consolidated view of their personal financial information from multiple institutions. The acquisition was accounted for as a purchase.
 
IQorder.com, Inc.    On July 3, 2000, we acquired all of the outstanding shares, warrants and options of IQorder.com, Inc., a privately held company based in Tempe, Arizona, for a purchase consideration of 989,959 shares of our common stock for all of IQorder’s outstanding shares, warrants and options. We recorded a one-time in-process research and development charge of $6.0 million and recorded $62.5 million in intangible assets. Acquisition expenses were $132,088. IQorder’s technology allows consumers to enter a model number, UPC code, part number, barcode or ISBN, or to scan in a UPC code, in order to locate a product, compare prices and make an instant purchase with a single click. The acquisition was accounted for as a purchase.
 
Millet Software, Inc.    On March 31, 2000 we acquired all of the common stock of Millet Software, a privately held company, for a purchase consideration of 488,224 shares of our common stock and acquisition expenses of $255,000. We recorded a one-time in-process research and development charge of $2.4 million and recorded $30.9 million in intangible assets. The acquisition was accounted for as a purchase.
 
In this transaction, we acquired net assets of $5.9 million. This includes $6.0 million in purchased technology that includes in-process research and development, $170,000 of acquired workforce and $104,000 in net liabilities. We issued shares with a fair value of $24.4 million and incurred acquisition costs of $255,000. This resulted in $23.8 million of goodwill. We recorded a one-time charge of $2.4 million for in-process research and development that had not yet reached technological feasibility and had no alternative future use.
 
Saraide Inc.    On March 10, 2000 we acquired 80% of the common stock of Saraide, a privately held company, for a purchase consideration of 9,233,672 shares, valued at $334.3 million, and acquisition expenses of $374,000. The acquisition was accounted for as a purchase. The purchase includes $97.0 million in purchased technology which includes in-process research and development, $16.0 million of contract list, $2.1 million of acquired workforce, $249.6 million of goodwill and $17.4 million in net liabilities. We recorded a one-time charge of $71.7 million for in-process research and development that had not yet reached technological feasibility and had no alternative future use.
 
Net liabilities and losses applicable to the minority interest in Saraide exceed the minority interest equity capital in Saraide. The minority interest portion of the net liabilities and further losses are charged against us, the majority interest, since the minority interest is not obligated to fund these net liabilities and further losses. If Saraide has future earnings, we will recognize income to the extent of such losses previously absorbed.
 
Prio, Inc.    On February 15, 2000, we consummated the acquisition of Prio, a privately held company. The combination was accounted for as a pooling-of-interests. We issued 9,322,418 shares of our common stock in exchange for all the outstanding common and preferred stock of Prio.
 
Prio provided commerce solutions specializing in the development of strategic partnerships, technologies and programs that drive commerce in both traditional and online shopping environments and Internet commerce applications that deliver solutions designed for small and medium-sized merchants to build, manage and promote online storefronts. The consolidated financial statements and the accompanying notes reflect our financial position and the results of operations as if Prio was our wholly owned subsidiary since inception.
 
Zephyr Software Inc.    On December 29, 1999, we acquired all of the common stock of Zephyr, a privately held company, and its wholly owned subsidiary Zephyr Software (India) Private Limited for a purchase consideration of 651,392 shares of our common stock and acquisition expenses of $539,512. The acquisition was accounted for as a purchase. In this transaction, we assumed net liabilities of $20,690, issued shares with a fair value of $8.6 million and recorded $9.2 million of goodwill.

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eComLive.com, Inc.    On December 16, 1999, we acquired all of the common stock of eComLive, a privately held company, for a purchase consideration of 1,372,712 shares and acquisition expenses of $582,246. The acquisition was accounted for as a purchase.
 
In this transaction, we acquired net assets of $5.4 million. This includes $5.3 million in purchased technology which includes in-process research and development, $140,000 of acquired workforce and $925 in net liabilities. We issued shares with a fair value of $32.0 million and incurred acquisition costs of $582,246. This acquisition resulted in our recording $27.1 million of goodwill. We recorded a one-time charge of $2.0 million for in-process research and development that had not yet reached technological feasibility and had no alternative future use.
 
Free-Yellow.com, Inc.    On October 27, 1999, Go2Net acquired all of the stock of Free-Yellow, a privately held company for purchase consideration of 608,173 shares and approximately $1.0 million in cash. The total transaction was valued at approximately $20.0 million. The acquisition was accounted for as a purchase.
 
Union-Street.    On October 14, 1999 we acquired all of the common stock of Union-Street, a privately held company, for a purchase consideration of 1,746,588 shares and acquisition expenses of $395,656. The acquisition was accounted for as a purchase.
 
In this transaction, we acquired net assets of $5.4 million. This includes $5.3 million in purchased technology which includes in-process research and development, $160,000 of acquired workforce and $107,219 in net liabilities. We issued shares with a fair value of $20.5 million and recorded $15.5 million of goodwill. We recorded a one-time charge of $3.3 million for in-process research and development that had not yet reached technological feasibility and had no alternative future use.
 
INEX Corporation. On October 14, 1999, we acquired INEX Corporation, a privately held company. The combination was accounted for as a pooling-of-interests. We issued or will issue 3,600,000 shares of our common stock (1) directly to those INEX shareholders who elected to receive our common stock in exchange for their INEX shares at the closing of the combination, (2) upon the exchange or redemption of the exchangeable shares of InfoSpace.com Canada Holdings Inc., an indirect subsidiary of ours, which exchangeable shares were issued to those INEX shareholders who elected to receive exchangeable shares, or who did not make an election to receive shares of our common stock at the closing, and (3) upon the exercise of outstanding warrants and options to purchase INEX common shares, which we assumed and which will become exercisable for shares of our common stock.
 
INEX developed and marketed Internet commerce applications that deliver solutions designed for small and medium-sized merchants to build, manage and promote online storefronts. The consolidated financial statements for the year ended December 31, 1999 and the accompanying notes reflect our financial position and the results of operations as if INEX were our wholly owned subsidiary since inception.
 
Dogpile, LLC.    On August 4, 1999, Go2Net acquired Dogpile, LLC in exchange for 1,241,524 shares of common stock and $15 million in cash. The total consideration was valued at approximately $52 million. The acquisition was accounted for as a purchase. The purchase agreement also provided for additional payments of up to $15 million over the eighteen months following the closing of the transaction contingent on future revenues of Dogpile. During the year ended December 31, 2000, 262,388 additional shares were issued with a total estimated value of $10.0 million, and a $5.0 million cash payment was paid out in 2001.
 
Authorize.Net Corp.    On July 1, 1999, Go2Net acquired Authorize.Net in exchange for 1,645,076 shares of common stock and $13.5 million in cash. The total consideration was valued at approximately $98.6 million. The purchase price also included the value of outstanding stock options that were converted to options to purchase 187,317 shares of common stock. The purchase agreement also provided for additional payments to Authorize.Net of up to $55 million over two years following the transaction close contingent on future revenues and operating income of Authorize.Net.

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Table of Contents
 
MyAgent Technology.    On June 30, 1999, we acquired the MyAgent technology and related assets from Active Voice Corporation for a cash payment of $18 million. In addition, we hired six employees who comprised the MyAgent development team at Active Voice. The acquisition was accounted for as a purchase. Other than the MyAgent technology modules, no other assets or liabilities were assumed as part of this acquisition.
 
The total purchase price of the acquisition of the MyAgent technology was $18.1 million including direct acquisition expenses of $83,054. In this transaction, we acquired net assets of $4.4 million. This includes $4.3 million in purchased technology, which includes in-process research and development, and $80,000 of acquired workforce. This acquisition resulted in our recording $13.7 million of goodwill.
 
We recorded a one-time charge of $3.9 million for in-process research and development that had not yet reached technological feasibility and had no alternative future use. Separately, we recorded a one-time charge of $1.0 million for expenses related to bonus payments made to the Active Voice MyAgent team employees who accepted employment with us on the date of the MyAgent technology acquisition, but who had no obligation to continue their employment with us.
 
USAOnline, Inc.    On April 28, 1999, Go2Net acquired Virtual Avenue and USAOnline in exchange for 546,000 shares of common stock valued at approximately $24.7 million.
 
Haggle Online.    On April 16, 1999, Go2Net acquired Haggle Online in exchange for 149,356 shares of common stock valued at approximately $6.8 million.

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Table of Contents
 
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, 2001. 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.
 
The consolidated financial statements for 2000 give retroactive effect to the acquisitions of Go2Net, Inc., and Prio, Inc., which have been accounted for on a pooling-of-interests basis as described in Note 7 to our consolidated financial statements.
 
 
   
March 31, 2000

   
June 30, 2000

    
September 30, 2000

    
December 31, 2000

   
March 31, 2001

   
June 30, 2001

    
September 30, 2001

    
December 31, 2001

 
   
(in thousands except per share data)
 
Revenues
 
$
38,778
 
 
$
50,486
 
  
$
59,804
 
  
$
65,462
 
 
$
46,565
 
 
$
50,942
 
  
$
33,051
 
  
$
31,363
 
Cost of Revenues
 
 
6,134
 
 
 
8,109
 
  
 
10,293
 
  
 
11,091
 
 
 
11,721
 
 
 
10,614
 
  
 
9,460
 
  
 
10,046
 
   


 


  


  


 


 


  


  


Gross Profit
 
 
32,644
 
 
 
42,377
 
  
 
49,511
 
  
 
54,371
 
 
 
34,844
 
 
 
40,328
 
  
 
23,591
 
  
 
21,317
 
Operating expenses:
                                                                   
Product development
 
 
6,951
 
 
 
9,507
 
  
 
10,155
 
  
 
14,011
 
 
 
11,787
 
 
 
10,569
 
  
 
9,051
 
  
 
7,934
 
Sales, general and administrative
 
 
25,871
 
 
 
30,827
 
  
 
34,819
 
  
 
39,564
 
 
 
36,127
 
 
 
31,651
 
  
 
27,694
 
  
 
22,861
 
Amortization and impairment of intangibles
 
 
28,010
 
 
 
40,636
 
  
 
47,434
 
  
 
64,208
 
 
 
63,897
 
 
 
59,107
 
  
 
157,140
 
  
 
64,299
 
Acquisition and related charges
 
 
86,397
 
 
 
202
 
  
 
7,609
 
  
 
29,790
 
 
 
889
 
 
 
111
 
  
 
(4,504
)
  
 
—  
 
Other charges
 
 
—  
 
 
 
—  
 
  
 
—  
 
  
 
4,732
 
 
 
(50
)
 
 
217
 
  
 
1,660
 
  
 
9,678
 
Restructuring charges
 
 
—  
 
 
 
2,171
 
  
 
—  
 
  
 
151
 
 
 
1,717
 
 
 
(62
)
  
 
13,755
 
  
 
1,982
 
   


 


  


  


 


 


  


  


Total operating expenses
 
 
147,229
 
 
 
83,343
 
  
 
100,017
 
  
 
152,456
 
 
 
114,367
 
 
 
101,593
 
  
 
204,796
 
  
 
106,754
 
   


 


  


  


 


 


  


  


Loss from operations
 
 
(114,585
)
 
 
(40,966
)
  
 
(50,506
)
  
 
(98,085
)
 
 
(79,523
)
 
 
(61,265
)
  
 
(181,205
)
  
 
(85,437
)
Gain (loss) on investments
 
 
23,597
 
 
 
(8,447
)
  
 
(6,677
)
  
 
(9,061
)
 
 
(47,599
)
 
 
(14,099
)
  
 
(26,753
)
  
 
(19,707
)
Other income, net
 
 
7,584
 
 
 
7,123
 
  
 
7,124
 
  
 
5,851
 
 
 
5,983
 
 
 
4,580
 
  
 
3,764
 
  
 
3,035
 
Minority interest
 
 
(9,842
)
 
 
3,445
 
  
 
2,154
 
  
 
1,072
 
 
 
(17
)
 
 
—  
 
  
 
—  
 
  
 
—  
 
Income tax expense
 
 
(18
)
 
 
(6
)
  
 
(62
)
  
 
(51
)
 
 
(50
)
 
 
(137
)
  
 
(557
)
  
 
80
 
Cumulative effect of change in accounting principle
 
 
(2,056
)
 
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
(3,171
)
 
 
—  
 
  
 
—  
 
  
 
—  
 
   


 


  


  


 


 


  


  


Net loss
 
$
(95,320
)
 
$
(38,851
)
  
$
(47,967
)
  
$
(100,274
)
 
$
(124,377
)
 
$
(70,921
)
  
$
(204,751
)
  
$
(102,029
)
   


 


  


  


 


 


  


  


Basic and diluted net loss per share
 
$
(0.33
)
 
$
(0.13
)
  
$
(0.16
)
  
$
(0.32
)
 
$
(0.38
)
 
$
(0.22
)
  
$
(0.64
)
  
$
(0.33
)
   


 


  


  


 


 


  


  


Shares used in computing basic and diluted net loss per share
 
 
289,461
 
 
 
303,992
 
  
 
308,996
 
  
 
315,301
 
 
 
323,299
 
 
 
325,027
 
  
 
320,721
 
  
 
304,713
 
   


 


  


  


 


 


  


  


   
March 31, 2000

   
June 30, 2000

    
September 30, 2000

    
December 31, 2000

   
March 31, 2001

   
June 30, 2001

    
September 30, 2001

    
December 31, 2001

 
Revenues.
 
 
100.0
%
 
 
100.0
%
  
 
100.0
%
  
 
100.0
%
 
 
100.0
%
 
 
100.0
%
  
 
100.0
%
  
 
100.0
%
Cost of Revenues
 
 
15.8
 
 
 
16.1
 
  
 
17.2
 
  
 
16.9
 
 
 
25.2
 
 
 
20.8
 
  
 
28.6
 
  
 
32.0
 
   


 


  


  


 


 


  


  


Gross Profit
 
 
84.2
 
 
 
83.9
 
  
 
82.8
 
  
 
83.1
 
 
 
74.8
 
 
 
79.2
 
  
 
71.4
 
  
 
68.0
 
Operating expenses:
                                                                   
Product Development
 
 
17.9
 
 
 
18.8
 
  
 
17.0
 
  
 
21.4
 
 
 
25.3
 
 
 
20.7
 
  
 
27.4
 
  
 
25.3
 
Sales, general and administrative
 
 
66.7
 
 
 
61.1
 
  
 
58.2
 
  
 
60.4
 
 
 
77.6
 
 
 
62.1
 
  
 
83.8
 
  
 
72.9
 
Amortization and impairment of intangibles
 
 
72.2
 
 
 
80.5
 
  
 
79.3
 
  
 
98.1
 
 
 
137.2
 
 
 
116.0
 
  
 
475.4
 
  
 
205.0
 
Acquisition and related charges
 
 
222.8
 
 
 
0.4
 
  
 
12.7
 
  
 
45.5
 
 
 
1.9
 
 
 
0.2
 
  
 
(13.6
)
  
 
—  
 
Other charges
 
 
—  
 
 
 
—  
 
  
 
—  
 
  
 
7.2
 
 
 
(0.1
)
 
 
0.4
 
  
 
5.0
 
  
 
30.9
 
Restructuring charges
 
 
—  
 
 
 
4.3
 
  
 
—  
 
  
 
0.2
 
 
 
3.7
 
 
 
(0.1
)
  
 
41.6
 
  
 
6.3
 
   


 


  


  


 


 


  


  


Total operating expenses
 
 
379.7
 
 
 
165.1
 
  
 
167.2
 
  
 
232.9
 
 
 
245.6
 
 
 
199.4
 
  
 
619.6
 
  
 
340.4
 
   


 


  


  


 


 


  


  


Loss from operations
 
 
(295.5
)
 
 
(81.1
)
  
 
(84.5
)
  
 
(149.8
)
 
 
(170.8
)
 
 
(120.3
)
  
 
(548.3
)
  
 
(272.4
)
Gain (loss) on investments
 
 
60.9
 
 
 
(16.7
)
  
 
(11.2
)
  
 
(13.8
)
 
 
(102.2
)
 
 
(27.7
)
  
 
(80.9
)
  
 
(62.8
)
Other income, net
 
 
19.6
 
 
 
14.1
 
  
 
11.9
 
  
 
8.9
 
 
 
12.8
 
 
 
9.0
 
  
 
11.4
 
  
 
9.7
 
Minority interest
 
 
(25.4
)
 
 
6.8
 
  
 
3.6
 
  
 
1.6
 
 
 
0.0
 
 
 
—  
 
  
 
—  
 
  
 
—  
 
Income tax expense
 
 
0.0
 
 
 
0.0
 
  
 
(0.1
)
  
 
(0.1
)
 
 
(0.1
)
 
 
(0.3
)
  
 
(1.7
)
  
 
0.3
 
Cumulative effect of change in accounting principle
 
 
(5.3
)
 
 
  —  
 
  
 
—  
 
  
 
—  
 
 
 
(6.8
)
 
 
—  
 
  
 
—  
 
  
 
—  
 
Net loss
 
 
(245.8
)%
 
 
(77.0
)%
  
 
(80.2
)%
  
 
(153.2
)%
 
 
(267.1
)%
 
 
(139.2
)%
  
 
619.5
%
  
 
(325.3
%)
   


 


  


  


 


 


  


  


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Table of Contents
 
Recent Accounting Pronouncements
 
In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, that is applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASB’s new rules on asset impairment supersede SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and portions of Accounting Principles Bulletin Opinion 30, Reporting the Results of Operations. This standard provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value and carrying amount. This standard also requires expected future operating losses from discontinued operations to be displayed in the period(s) in which the losses are incurred, rather than as of the measurement date as presently required. The provisions of this standard are not expected to have a significant effect on our financial position or operating results.
 
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. We do not expect the adoption of SFAS No. 143 to have a material effect on our financial position or results of operations.
 
In June 2001, the FASB issued SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against these new criteria and may result in certain intangibles being subsumed into goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. SFAS No. 142 requires the use of a nonamortization approach to account for purchased goodwill and certain intangibles. Under a nonamortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead would be reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than their fair value. The provisions of each statement that apply to goodwill and intangible assets acquired prior to June 30, 2001 were adopted on January 1, 2002. As we have previously disclosed, we expect to incur a non-cash charge estimated to range from $100 million to $200 million, which will be recorded in the first quarter of 2002 for the cumulative effect of adopting SFAS No. 142 Goodwill and Other Intangible Assets. We have retained an independent valuation firm to conduct the valuation analysis pursuant to SFAS 142 and we expect to receive the results of their analysis by the end of April 2002. There can be no assurance that the results of the analysis by this independent valuation firm will not result in a non-cash charge less than or in excess, perhaps substantially, of the amount previously estimated and disclosed by us.
 
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, is effective for us for the fiscal year beginning January 1, 2001. SFAS No. 133 as amended and interpreted, established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a cash-flow hedge, changes in fair value of the derivative and the hedged item will be recorded in other comprehensive income and will be recognized on the income statement when the hedged item affects earnings. SFAS No. 133 defines new requirements for designation and documentation of hedging relationships as well as ongoing effectiveness assessments in order to use hedge accounting. For a derivative that does not qualify as a hedge, changes in fair value will be recognized in earnings.
 
We have determined that certain warrants held to purchase stock in other companies are derivative instruments under SFAS No. 133. We recorded a cumulative effect of change in accounting principle in net income of $3.2 million on January 1, 2001 to record these warrants on the balance sheet at fair value. Except as it relates to these warrants, management does not expect the adoption of SFAS No. 133 to have a significant impact on our financial position, results of operations or cash flows.

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Table of Contents
 
In March 2000, the FASB issued Interpretation No. 44 (FIN No. 44), Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25. FIN No. 44 was effective July 1, 2000. This interpretation and continuing guidance under EITF 00-23 provides guidance on valuing vested and unvested stock options of the acquired company in conjunction with recording purchase transactions. This interpretation impacted our accounting for the acquisition of IQorder resulting in an increase to the purchase price of this acquisition in the amount of $11.1 million. This interpretation also impacted the purchase price for our acquisition of Locus Dialogue with an increase to the purchase price of $23.6 million.
 
In December 1999, the Securities and Exchange Commission staff issued Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements. We adopted SAB No. 101 on January 1, 2000. Prior to January 1, 2000 and implementation of the SAB, we recorded gross revenues from customers for development fees, implementation fees and/or integration fees when the service was completed. If this revenue were recognized on a straight-line basis, in accordance with SAB No. 101, we would have deferred revenue of $2.1 million as of January 1, 2000, originally recorded in prior years. In accordance with SAB No. 101, we recorded a cumulative effect of change in accounting principle of $2.1 million. We recognized $2.0 million in revenue in the year ended December 31, 2000 related to this deferred revenue. The remaining balance was recognized in 2001.
 
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, 2001, our short-term investment balance was $80.3 million.
 
The following table provides information about our cash equivalent and marketable fixed-income securities, including principal cash flows for 2002 through 2003 and the related weighted average interest rates. Amounts are presented in U.S. dollar equivalents, which is our reporting currency.
 
Principal amounts by expected maturity in U.S. dollars as of December 31, 2001 are as follows (in thousands, except percentages):
 
 
    
2002

    
2003

    
Total

    
Fair Value

Corporate notes and bonds
  
$
40,406
 
  
$
59,453
 
  
$
99,859
 
  
$
102,231
Weighted average interest rate
  
 
4.36
%
  
 
3.34
%
  
 
3.75
%
      
U.S. Government securities
  
 
24,000
 
  
 
33,600
 
  
 
57,600
 
  
 
58,279
Weighted average interest rate
  
 
4.37
%
  
 
3.34
%
  
 
3.77
%
      
Commercial Paper
  
 
31,141
 
  
 
—  
 
  
 
31,141
 
  
 
31,105
Weighted average interest rate
  
 
1.98
%
  
 
—  
 
  
 
1.54
%
      
Taxable municipal bonds
  
 
48,250
 
  
 
—  
 
  
 
48,250
 
  
 
48,250
Weighted average interest rate
  
 
2.16
%
  
 
—  
 
  
 
2.16
%
      
Certificate of Deposit
  
 
10,500
 
  
 
—  
 
  
 
10,500
 
  
 
10,500
Weighted average interest rate
  
 
4.12
%
  
 
—  
 
  
 
4.12
%
      
Adjustable Rate Mortgage
  
 
4,000
 
  
 
—  
 
  
 
4,000
 
  
 
4,000
Weighted average interest rate
  
 
2.15
%
  
 
—  
 
  
 
2.15
%
  
 
—  
    


  


  


  

Cash equivalents and marketable fixed-income securities
  
$
158,297
 
  
$
93,053
 
  
$
251,350
 
  
$
254,365
    


  


  


  

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Table of Contents
 
Principal amounts by expected maturity in U.S. dollars as of December 31, 2000 are as follows (in thousands, except percentages):
 
    
2001

    
2002

    
2003

    
Total

    
Fair Value

Corporate notes and bonds
  
$
104,492
 
  
$
19,276
 
  
$
2,500
 
  
$
126,268
 
  
$
126,438
Weighted average interest rate
  
 
6.24
%
  
 
6.65
%
  
 
6.99
%
  
 
6.32
%
      
U.S. Government securities
  
 
29,000
 
  
 
10,500
 
  
 
—  
 
  
 
39,500
 
  
 
39,609
Weighted average interest rate
  
 
5.87
%
  
 
6.09
%
  
 
—  
 
  
 
5.93
%
      
Commercial Paper
  
 
107,520
 
  
 
—  
 
  
 
—  
 
  
 
107,520
 
  
 
106,924
Weighted average interest rate
  
 
6.58
%
  
 
—  
 
  
 
—  
 
  
 
6.58
%
      
Taxable municipal bonds
  
 
80,800
 
  
 
—  
 
  
 
—  
 
  
 
80,800
 
  
 
80,800
Weighted average interest rate
  
 
6.83
%
  
 
—  
 
  
 
—  
 
  
 
6.83
%
      
Certificate of Deposit
  
 
1,750
 
  
 
—  
 
  
 
—  
 
  
 
1,750
 
  
 
1,750
Weighted average interest rate
  
 
6.81
%
  
 
—  
 
  
 
—  
 
  
 
6.81
%
      
Adjustable Rate Mortgage
  
 
—  
 
  
 
—  
 
           
 
—  
 
      
Weighted average interest rate
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
—  
    


  


  


  


  

Cash equivalents and marketable fixed-income securities
  
$
323,562
 
  
$
29,776
 
  
$
2,500
 
  
$
355,838
 
  
$
355,521
    


  


  


  


  

 
Equity Investment Risk.     We have invested in equity instruments of public and privately held technology companies for business and strategic purposes. These investments are recorded as long-term assets. For the privately held investments, our policy is to regularly review the valuation of the company and assumptions underlying the operating performance and cash flow forecasts in assessing the carrying value. If the carrying value of the privately held investment has decreased, an other-than-temporary decline in market value is deemed to have occurred and an impairment on the investment is recorded in the statement of operations. For our publicly held investments, we are subject to significant fluctuations in fair market value due to the volatility of the stock market. Changes in fair market value for our publicly held investments are recorded as a component of other comprehensive income and do not effect net income until the securities are sold and a realized gain or loss is incurred or if an other-than-temporary decline in market value has occurred and an impairment on the investment is recorded. During 2000 and the first quarter of 2001, a portion of our public and private investments were held in the InfoSpace Venture Fund. Changes in fair market value for investments held by the Venture Fund, prior to dissolution as of March 31, 2001, were recorded through the statement of operations and had material effects on net income in 2000 and 2001. The closure of the Venture Fund in the first quarter of 2001 affected the accounting for these investments as they reverted back to InfoSpace and the accounting for gains and losses are as noted above. As of January 1, 2001, changes in the market value of warrants that qualify as derivatives are recorded through the Statement of Operations. The Company recorded a charge of $3.2 million as of January 1, 2001 to adopt SFAS No. 133, which requires that these warrants be presented at fair value, and recorded additional charges of $5.4 million during 2001 for further declines in the fair value of warrants held.
 
As of December 31, 2001, the fair value of our publicly held and privately held investments was $8.7 million and $38.4 million, respectively. As of December 31, 2000, the fair value of our publicly held and privately held investments was $24.0 million and $97.6 million, respectively. Included in the December 31, 2001 investment balance is $7.8 million of warrant investments. Included in the December 31, 2000 investment balance is $18.5 million of warrant investments. All of these investments are in companies involved in Internet-related businesses and their fair values are subject to significant fluctuations due to changes in general economic conditions. The fair values of our publicly held investments are also subject to fluctuations in the stock market. Based on the fair value of the publicly traded securities that we held at December 31, 2001, an assumed 15%, 25% or 50% adverse change to market prices would result in corresponding declines in total fair value of approximately $1.3 million, $2.2 million or $4.4 million, respectively.
 
Foreign Currency Risk:     We have offices in Canada, the United Kingdom, The Netherlands, Australia and Brazil. Historically, the foreign currency exchange rate exposure has had a minimal impact on our financial results. We do not expect this exposure to be material in the future.
 

52


Table of Contents
 
ITEM 8.    Financial Statements and Supplementary Data
 
INDEX TO FINANCIAL STATEMENTS
 
InfoSpace, Inc.

  
Page

  
54
  
55
  
56
  
57
  
58
  
59

53


Table of Contents
 
INDEPENDENT AUDITORS’ REPORT
 
To the Board of Directors and Stockholders of InfoSpace, Inc.
Bellevue, Washington
 
We have audited the accompanying consolidated balance sheets of InfoSpace, Inc. and subsidiaries (the Company) as of December 31, 2001 and 2000, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
 
As discussed in Note 1 in the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, effective January 1, 2001 and adopted SAB No. 101, Revenue Recognition in Financial Statements, effective January 1, 2000.
 
 
/S/    DELOITTE & TOUCHE LLP
 
DELOITTE & TOUCHE LLP
 
 
Seattle, Washington
March 15, 2002

54


Table of Contents
 
INFOSPACE, INC.
 
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
 
    
December 31,

 
    
2001

    
2000

 
ASSETS
                 
Current assets:
                 
Cash and cash equivalents
  
$
118,561
 
  
$
153,913
 
Short-term investments, available-for-sale
  
 
80,319
 
  
 
216,235
 
Accounts receivable, net of allowance of $3,840 and $4,898
  
 
16,305
 
  
 
33,881
 
Notes and other receivables, net of allowance of $9,350 and $3,624
  
 
27,197
 
  
 
22,321
 
Prepaid expenses and other assets
  
 
8,239
 
  
 
14,491
 
    


  


Total current assets
  
 
250,621
 
  
 
440,841
 
Long-term investments, available-for-sale
  
 
94,891
 
  
 
32,451
 
Property and equipment, net
  
 
39,443
 
  
 
51,137
 
Other long-term assets
  
 
1,403
 
  
 
5,075
 
Other investments
  
 
47,087
 
  
 
121,574
 
Intangible assets, net
  
 
403,560
 
  
 
621,032
 
    


  


Total assets
  
$
837,005
 
  
$
1,272,110
 
    


  


LIABILITIES AND STOCKHOLDERS’ EQUITY
                 
Current liabilities:
                 
Accounts payable
  
$
9,139
 
  
$
4,537
 
Accrued expenses and other current liabilities
  
 
25,791
 
  
 
37,999
 
Deferred revenues
  
 
15,794
 
  
 
31,430
 
    


  


Total current liabilities
  
 
50,724
 
  
 
73,966
 
Long-term deferred revenue
  
 
3,693
 
  
 
7,973
 
Minority interest
  
 
—  
 
  
 
21,599
 
    


  


Total liabilities
  
 
54,417
 
  
 
103,538
 
Commitments and contingencies (Note 8)
                 
Stockholders’ equity:
                 
Preferred stock, par value $.0001—authorized, 15,000,000 shares; issued and outstanding, 2 and 1 share
  
 
—  
 
  
 
—  
 
Common stock, par value $.0001—authorized, 900,000,000 shares; issued and outstanding, 307,789,299 and 316,669,408 shares
  
 
31
 
  
 
32
 
Additional paid-in capital
  
 
1,702,522
 
  
 
1,596,213
 
Accumulated deficit
  
 
(910,725
)
  
 
(408,646
)
Deferred expense—warrants
  
 
(680
)
  
 
(1,495
)
Unearned compensation
  
 
(7,881
)
  
 
(1,500
)
Accumulated other comprehensive income (loss)
  
 
(679
)
  
 
(16,032
)
    


  


Total stockholders’ equity
  
 
782,588
 
  
 
1,168,572
 
    


  


Total liabilities and stockholders’ equity
  
$
837,005
 
  
$
1,272,110
 
    


  


 
See notes to consolidated financial statements.

55


Table of Contents
 
INFOSPACE, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Amounts in thousands, except per share data)
 
    
Years Ended December 31,

 
    
2001

    
2000

    
1999

 
Revenues (including related party revenues of $31,372, $32,095, and $2,921)
  
$
161,921
 
  
$
214,530
 
  
$
71,980
 
Cost of revenues
  
 
41,841
 
  
 
35,627
 
  
 
13,472
 
    


  


  


Gross profit
  
 
120,080
 
  
 
178,903
 
  
 
58,508
 
Operating expenses:
                          
Product development
  
 
39,341
 
  
 
40,624
 
  
 
15,580
 
Sales, general and administrative
  
 
118,333
 
  
 
131,081
 
  
 
77,777
 
Amortization of intangibles
  
 
236,714
 
  
 
171,336
 
  
 
42,761
 
Impairment of intangibles
  
 
107,729
 
  
 
8,952
 
  
 
—  
 
Acquisition and related charges
  
 
(3,504
)
  
 
123,998
 
  
 
13,574
 
Other charges
  
 
11,505
 
  
 
4,732
 
  
 
11,360
 
Restructuring charges
  
 
17,392
 
  
 
2,322
 
  
 
—  
 
    


  


  


Total operating expenses
  
 
527,510
 
  
 
483,045
 
  
 
161,052
 
    


  


  


Loss from operations
  
 
(407,430
)
  
 
(304,142
)
  
 
(102,544
)
Loss on investments, net
  
 
(108,158
)
  
 
(588
)
  
 
—  
 
Other income, net
  
 
17,361
 
  
 
27,682
 
  
 
22,342
 
    


  


  


Loss from operations before income tax expense, minority interest, cumulative effect of a change in accounting principle and preferred stock dividend
  
 
(498,227
)
  
 
(277,048
)
  
 
(80,202
)
Minority interest
  
 
(17
)
  
 
(3,171
)
  
 
—  
 
Income tax expense
  
 
(664
)
  
 
(137
)
  
 
—  
 
    


  


  


Loss from operations before cumulative effect of change in accounting principle and preferred stock dividend
  
 
(498,908
)
  
 
(280,356
)
  
 
(80,202
)
Cumulative effect of changes in accounting principle
  
 
(3,171
)
  
 
(2,056
)
  
 
—  
 
    


  


  


Net loss
  
 
(502,079
)
  
 
(282,412
)
  
 
(80,202
)
Preferred stock dividend
  
 
—  
 
  
 
—  
 
  
 
(159,931
)
    


  


  


Net loss applicable to common stockholders
  
$
(502,079
)
  
$
(282,412
)
  
$
(240,133
)
    


  


  


Basic and diluted net loss per share
                          
Loss per share before accounting changes
  
$
(1.57
)
  
$
(0.92
)
  
$
(0.93
)
Accounting changes
  
 
(0.01
)
  
 
(0.01
)
  
 
—  
 
    


  


  


Loss per share
  
$
(1.58
)
  
$
(0.93
)
  
$
(0.93
)
    


  


  


Shares used in computing basic and diluted net loss per share
  
 
318,395
 
  
 
304,480
 
  
 
257,752
 
    


  


  


Other comprehensive loss:
                          
Net loss applicable to common stockholders
  
$
(502,079
)
  
$
(282,412
)
  
$
(240,133
)
Foreign currency translation adjustment
  
 
(2,116
)
  
 
(316
)
  
 
36
 
Unrealized gain (loss) on equity investments
  
 
17,469
 
  
 
(95,279
)
  
 
79,570
 
    


  


  


Comprehensive loss
  
$
(486,726
)
  
$
(378,007
)
  
$
(160,527
)
    


  


  


 
See notes to consolidated financial statements.

56


Table of Contents
 
INFOSPACE, INC.
 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years Ended December 31, 2001, 2000 and 1999
(in thousands)
 
    
Common Stock

   
Paid-In Capital

    
Accumulated deficit

      
Deferred Expense-warrants

    
Unearned compensation

    
Accumulated other comprehensive income

   
Total

 
                      
    
Shares

    
Amount

                   
Balance, January 1, 1999
  
224,911
 
  
$
23
 
 
$
180,181
 
  
$
(46,032
)
    
$
(3,127
)
  
$
(669
)
  
$
(43
)
 
$
130,333
 
Common stock issued
  
18,427
 
  
 
2
 
 
 
185,103
 
  
 
—  
 
    
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
185,105
 
Common stock issued for acquisitions
  
8,373
 
  
 
1
 
 
 
253,137
 
  
 
—  
 
    
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
253,138
 
Common stock issued for stock options
  
14,041
 
  
 
1
 
 
 
16,946
 
  
 
—  
 
    
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
16,947
 
Common stock issued for warrants, exchange and preferred shares
  
17,418
 
  
 
1
 
 
 
297,669
 
  
 
—  
 
    
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
297,670
 
Common stock for conversion of special shares and debentures
  
85
 
  
 
 
 
 
170
 
  
 
—  
 
    
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
170
 
Common stock issued for employee stock purchase plan
  
156
 
  
 
 
 
 
394
 
  
 
—  
 
    
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
394
 
Unearned compensation—stock options
  
—  
 
  
 
 
 
 
3,881
 
  
 
—  
 
    
 
—  
 
  
 
(3,881
)
  
 
—  
 
 
 
—  
 
Compensation expense
  
—  
 
  
 
 
 
 
—  
 
  
 
—  
 
    
 
—  
 
  
 
2,865
 
  
 
—  
 
 
 
2,865
 
Cancelled options for deferred services
  
—  
 
  
 
 
 
 
(167
)
  
 
—  
 
    
 
—  
 
  
 
167
 
  
 
—  
 
 
 
—  
 
Non-qualified stock option tax benefit
  
—  
 
  
 
 
 
 
4,526
 
  
 
—  
 
    
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
4,526
 
Deferred expense—warrants
  
—  
 
  
 
 
 
 
17,652
 
  
 
—  
 
    
 
(17,652
)
  
 
—  
 
  
 
—  
 
 
 
—  
 
Warrant expense
  
—  
 
  
 
 
 
 
—  
 
  
 
—  
 
    
 
18,468
 
  
 
—  
 
  
 
—  
 
 
 
18,468
 
Unrealized gain on equity investments
  
—  
 
  
 
 
 
 
—  
 
  
 
—  
 
    
 
—  
 
  
 
—  
 
  
 
79,570
 
 
 
79,570
 
Foreign currency translation adjustment
  
—  
 
  
 
 
 
 
—  
 
  
 
—  
 
    
 
—  
 
  
 
—  
 
  
 
36
 
 
 
36
 
Net loss
  
—  
 
  
 
 
 
 
—  
 
  
 
(80,202
)
    
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
(80,202
)
    

  


 


  


    


  


  


 


Balance, December 31, 1999
  
283,411
 
  
 
28
 
 
 
959,492
 
  
 
(126,234
)
    
 
(2,311
)
  
 
(1,518
)
  
 
79,563
 
 
 
909,020
 
Common stock issued
  
20
 
  
 
 
 
 
9,912
 
  
 
—  
 
    
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
9,912
 
Common stock issued for acquisitions
  
14,851
 
  
 
2
 
 
 
573,017
 
  
 
—  
 
    
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
573,019
 
Common stock issued for stock options
  
14,057
 
  
 
1
 
 
 
27,769
 
  
 
—  
 
    
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
27,770
 
Common stock issued for warrants, exchange and preferred shares
  
4,266
 
  
 
1
 
 
 
9,840
 
  
 
—  
 
    
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
9,841
 
Common stock issued for employee stock purchase plan
  
64
 
  
 
 
 
 
1,512
 
  
 
—  
 
    
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
1,512
 
Unearned compensation—stock options
  
—  
 
  
 
 
 
 
1,695
 
  
 
—  
 
    
 
—  
 
  
 
(1,695
)
  
 
—  
 
 
 
—  
 
Compensation expense
  
—  
 
  
 
 
 
 
—  
 
  
 
—  
 
    
 
—  
 
  
 
1,713
 
  
 
—  
 
 
 
1,713
 
Non-qualified stock option tax benefit
  
—  
 
  
 
 
 
 
10,089
 
  
 
—  
 
    
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
10,089
 
Deferred expense—warrants
  
—  
 
  
 
 
 
 
2,887
 
  
 
—  
 
    
 
(2,887
)
  
 
—  
 
  
 
—  
 
 
 
—  
 
Warrant expense
  
—  
 
  
 
 
 
 
—  
 
  
 
—  
 
    
 
3,703
 
  
 
—  
 
  
 
—  
 
 
 
3,703
 
Unrealized loss on equity investments
  
—  
 
  
 
 
 
 
—  
 
  
 
—  
 
    
 
—  
 
  
 
—  
 
  
 
(95,279
)
 
 
(95,279
)
Foreign currency translation adjustment
  
—  
 
  
 
 
 
 
—  
 
  
 
—  
 
    
 
—  
 
  
 
—  
 
  
 
(316
)
 
 
(316
)
Net loss
  
—  
 
  
 
 
 
 
—  
 
  
 
(282,412
)
    
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
(282,412
)
    

  


 


  


    


  


  


 


Balance, December 31, 2000
  
316,669
 
  
 
32
 
 
 
1,596,213
 
  
 
(408,646
)
    
 
(1,495
)
  
 
(1,500
)
  
 
(16,032
)
 
 
1,168,572
 
Common stock issued for acquisitions
  
3,740
 
  
 
 
 
 
110,121
 
  
 
—  
 
    
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
110,121
 
Common stock issued for stock options and/or restricted stock
  
8,816
 
  
 
1
 
 
 
8,036
 
  
 
—  
 
    
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
8,037
 
Common stock issued for employee stock purchase plan
  
500
 
  
 
 
 
 
1,563
 
  
 
—  
 
    
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
1,563
 
Common stock repurchased and/or retired
  
(21,936
)
  
 
(2
)
 
 
(23,194
)
  
 
—  
 
    
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
(23,196
)
Unearned compensation—stock options/restricted stock
  
—  
 
  
 
 
 
 
9,783
 
  
 
—  
 
    
 
—  
 
  
 
(9,783
)
  
 
—  
 
 
 
—  
 
Compensation expense
  
—  
 
  
 
 
 
 
—  
 
  
 
—  
 
    
 
—  
 
  
 
3,402
 
  
 
—  
 
 
 
3,402
 
Warrant expense
  
—  
 
  
 
 
 
 
—  
 
  
 
—  
 
    
 
815
 
  
 
—  
 
  
 
—  
 
 
 
815
 
Unrealized gain on equity investments
  
—  
 
  
 
 
 
 
—  
 
  
 
—  
 
    
 
—  
 
  
 
—  
 
  
 
17,469
 
 
 
17,469
 
Foreign currency translation adjustment
  
—  
 
  
 
 
 
 
—  
 
  
 
—  
 
    
 
—  
 
  
 
—  
 
  
 
(2,116
)
 
 
(2,116
)
Net loss
  
—  
 
  
 
 
 
 
—  
 
  
 
(502,079
)
    
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
(502,079
)
    

  


 


  


    


  


  


 


Balance, December 31, 2001
  
307,789
 
  
$
31
 
 
$
1,702,522
 
  
$
(910,725
)
    
$
(680
)
  
$
(7,881
)
  
$
(679
)
 
$
782,588
 
    

  


 


  


    


  


  


 


 
See notes to consolidated financial statements.

57


Table of Contents
 
INFOSPACE, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
    
Years Ended December 31,

 
    
2001

    
2000

    
1999

 
OPERATING ACTIVITIES:
                          
Net loss
  
$
(502,079
)
  
$
(282,412
)
  
$
(240,133
)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
                          
Depreciation and amortization
  
 
256,067
 
  
 
183,526
 
  
 
47,707
 
Impairment of intangibles
  
 
107,729
 
  
 
8,952
 
  
 
—  
 
Warrant and stock-related revenue
  
 
(14,024
)
  
 
(22,075
)
  
 
(3,168
)
Preferred stock dividend
  
 
—  
 
  
 
—  
 
  
 
159,931
 
Warrants expense
  
 
815
 
  
 
3,703
 
  
 
18,468
 
Stock-based compensation expense
  
 
3,402
 
  
 
1,713
 
  
 
2,865
 
Minority interest in venture fund
  
 
(17
)
  
 
3,171
 
  
 
—  
 
Loss on disposal of fixed assets
  
 
323
 
  
 
324
 
  
 
13
 
Noncash services exchanged
  
 
—  
 
  
 
—  
 
  
 
1,414
 
Noncash loss on investments
  
 
108,157
 
  
 
858
 
  
 
26
 
Bad debt expense
  
 
4,395
 
  
 
7,376
 
  
 
1,326
 
Tax benefit from stock options
  
 
—  
 
  
 
—  
 
  
 
4,525
 
Non-cash restructuring
  
 
12,283
 
                 
Write-off of in-process research and development
  
 
600
 
  
 
80,100
 
  
 
9,200
 
Noncash other charges
  
 
9,352
 
  
 
—  
 
  
 
—  
 
Business acquisition costs
  
 
—  
 
  
 
43,898
 
  
 
4,374
 
Cumulative effect of change in accounting principle
  
 
3,171
 
  
 
2,056
 
  
 
—  
 
Cash provided (used) by changes in operating assets and liabilities, net of assets acquired in business combinations:
                          
Accounts receivable
  
 
12,887
 
  
 
(28,762
)
  
 
(12,053
)
Other receivable
  
 
(16,947
)
  
 
7,832
 
  
 
(14,626
)
Prepaid expenses and other current assets
  
 
4,161
 
  
 
261
 
  
 
(9,267
)
Other long-term assets
  
 
2,394
 
  
 
(782
)
  
 
(91
)
Accounts payable
  
 
3,713
 
  
 
2,495
 
  
 
860
 
Accrued expenses and other liabilities
  
 
(19,929
)
  
 
(14,572
)
  
 
10,135
 
Deferred revenue
  
 
(17,426
)
  
 
19,116
 
  
 
6,683
 
    


  


  


Net cash provided (used) by operating activities
  
 
(40,973
)
  
 
16,778
 
  
 
(11,811
)
INVESTING ACTIVITIES:
                          
Business and asset acquisitions, net of cash acquired
  
 
(16,586
)
  
 
(45,680
)
  
 
(52,577
)
Minority interest contribution (purchase) in venture fund
  
 
(16,365
)
  
 
16,365
 
  
 
—  
 
Asset sale
  
 
2,707
 
  
 
—  
 
  
 
—  
 
Purchase of intangible asset
  
 
—  
 
  
 
—  
 
  
 
(110
)
Notes receivable
  
 
100
 
  
 
(20,850
)
  
 
—  
 
Purchase of other investments
  
 
(10,971
)
  
 
(41,270
)
  
 
(13,202
)
Purchase of property and equipment
  
 
(12,007
)
  
 
(44,370
)
  
 
(9,079
)
Short and long-term investments
  
 
75,005
 
  
 
130,244
 
  
 
(348,299
)
    


  


  


Net cash provided (used) by investing activities
  
 
21,883
 
  
 
(5,561
)
  
 
(423,267
)
FINANCING ACTIVITIES:
                          
Proceeds from stock options and warrants
  
 
8,036
 
  
 
37,471
 
  
 
22,284
 
Proceeds from issuance of ESPP shares
  
 
1,563
 
  
 
1,512
 
  
 
394
 
Proceeds (payments) from issuance of common stock, net
  
 
—  
 
  
 
(24
)
  
 
476,042
 
Payment for repurchase of common stock
  
 
(22,786
)
  
 
—  
 
  
 
—  
 
Payments on debt assumed from acquisitions
  
 
(3,075
)
  
 
(613
)
  
 
(460
)
    


  


  


Net cash provided (used) by financing activities
  
 
(16,262
)
  
 
38,346
 
  
 
498,260
 
    


  


  


Net increase (decrease) in cash and cash equivalents
  
 
(35,352
)
  
 
49,563
 
  
 
63,182
 
Cash and cash equivalents, beginning of period
  
 
153,913
 
  
 
104,350
 
  
 
41,168
 
    


  


  


Cash and cash equivalents, end of period
  
$
118,561
 
  
$
153,913
 
  
$
104,350
 
    


  


  


SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING
ACTIVITIES:
                          
Acquisitions from purchase transactions:
                          
Stock issued
  
$
92,473
 
  
$
572,938
 
  
$
253,137
 
Net assets acquired
  
 
(2,731
)
  
 
(21,877
)
  
 
(150
)
Property and equipment acquired under equipment financing and capital lease obligations
  
 
—  
 
  
 
—  
 
  
 
308
 
Common stock received for employee note receivable
  
 
410
 
  
 
—  
 
  
 
—  
 
Issuance of warrants and options for deferred services and abandoned financing
  
 
—  
 
  
 
—  
 
  
 
2,665
 
Compensation expense for Prio warrants
  
 
—  
 
  
 
2,888
 
  
 
17,652
 
Stock issued in exchange transaction
  
 
—  
 
  
 
—  
 
  
 
169
 
Stock issued for retirement of debentures
  
 
—  
 
  
 
—  
 
  
 
170
 
Preferred stock dividend
  
 
—  
 
  
 
—  
 
  
 
159,931
 
Interest paid
  
 
—  
 
  
 
—  
 
  
 
132
 
See notes to consolidated financial statements.

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Table of Contents
INFOSPACE, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Years Ended December 31, 2001, 2000 and 1999
 
Note 1:  Summary of Significant Accounting Policies
 
Description of business:    InfoSpace, Inc. (the Company or InfoSpace) is a provider of wireless and Internet software and application services. The Company delivers a wireless and Internet platform of software and application services that enable companies to offer network-based services under their own brands. The Company provides its services across multiple platforms simultaneously. The Company develops and delivers its products and application services to a broad range of customers that span each of its business areas of wireline and broadband, merchant and wireless.
 
Principles of consolidation:    The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.
 
Basis of Presentation:    The InfoSpace Venture Fund 2000, LLC (the Venture Fund) was in existence from January 1, 2000 through March 31, 2001. The Venture Fund’s financial statements are consolidated in the Company’s financial statements, as the Company held the majority interest in the Venture Fund. In accordance with accounting for investment companies, the Venture Fund accounted for its investments at fair value, which is carried forward in consolidation pursuant to Emerging Issues Task Force (EITF) Issue No. 85-12, Retention of Specialized Accounting for Investments in Consolidation.
 
Business combinations:    Business combinations accounted for under the purchase method of accounting include the results of operations of the acquired business from the date of acquisition. Net assets of the company acquired are recorded at their fair value at the date of acquisition. Amounts allocated to in-process research and development are expensed in the period of acquisition. The valuation of the shares issued is based on a seven-day stock price average using the measurement date and three days prior to and after this date. If the company issued a public announcement of the acquisition, the measurement date is the date of such announcement. If the purchase consideration is based on a formula, the measurement date is based on the requirements in EITF Issue No. 99-12. If no public announcement was made and a formula is not used in determining the purchase consideration, then the measurement date is the date of purchase.
 
Prior to June 30, 2001, business combinations accounted for under the pooling-of-interests method of accounting include the financial position and results of operations as if the acquired company had been a wholly owned subsidiary since inception. In such cases, the assets, liabilities and stockholders’ equity of the acquired entity was combined with the Company’s respective amounts at their recorded values. The equity of the acquired entity is reflected on an as-if-converted basis to InfoSpace equity at the time of issuance. Prior period financial statements have been recast to give effect to the pooling-of-interests mergers with Go2Net, Prio and INEX. Certain reclassifications have been made to the financial statements of the pooled entities to conform to the Company’s presentation.
 
Cash and cash equivalents:    The Company considers all highly liquid debt instruments with an original maturity of 90 days or less to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates market. Included in cash and cash equivalents at December 31, 2001 is $1.8 million of cash restricted for use in clearing merchant transactions.
 
Short-term and long-term investments:    The Company principally invests its available cash in investment-grade debt instruments of corporate issuers and in debt instruments of the U.S. Government and its agencies. All debt instruments with original maturities greater than three months up to one year from the balance sheet date are considered short-term investments. Investments maturing after twelve months from the balance sheet date are considered long-term. The Company accounts for investments in accordance with Statement of Financial

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INFOSPACE, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
Years Ended December 31, 2001, 2000 and 1999

Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. As of December 31, 2001 the Company’s short-term and long-term investments are classified as available-for-sale and are reported at their fair market value. During 2000, all held-to-maturity investments were reclassified to available-for-sale based on the Company’s re-evaluation of its investment strategy.
 
Property and equipment:    Property and equipment are stated at cost. Depreciation is computed under the straight-line method over the following estimated useful lives:
 
Computer equipment and software
  
3 years
Internally developed software
  
5 years
Office equipment
  
5 years
Office furniture
  
7 years
Leasehold improvements
  
Shorter of lease term or economic life
 
Intangible assets:    Through December 31, 2001, goodwill, purchased technology and other intangibles are amortized on a straight-line basis over their estimated useful lives. Goodwill and purchased technology are generally amortized over three to five years. Other intangibles, primarily consisting of purchased trademarks and domain name licenses are amortized over an estimated useful life of three years.
 
Other investments:    The Company has invested in equity investments of public and privately held companies for business and strategic purposes. These investments are included in long-term assets. Investments in companies whose securities are not publicly traded are recorded at cost. Investments in companies whose securities are publicly traded, are recorded at fair value, with unrealized gains or losses recorded in accumulated other comprehensive income in the Company’s stockholders’ equity. As of January 1, 2001, warrants held by the Company to purchase equity securities are included in other investments at their fair value with changes in fair value recorded as gains or losses on investments in the Statement of Operations.
 
Realized gains or losses are recorded based on the identified specific cost of the investment sold. Investments held by the Venture Fund were recorded at their fair value prior to the Venture Fund’s dissolution on March 31, 2001. Realized and unrealized gains or losses on the investments held by the Venture Fund were recorded as gains or losses on investments in the statement of operations.
 
The Company periodically evaluates whether the decline in fair value of other investments are other-than-temporary. This evaluation consists of a review by members of senior management in finance and treasury. For investments with publicly quoted market prices, the Company compares the market price to the Company’s accounting basis and, if the quoted market price is less than the Company’s accounting basis for an extended period of time, the Company then considers additional factors to determine whether the decline in fair value is other-than-temporary, such as the financial condition, results of operations and operating trends for the company. The Company also reviews publicly available information regarding the investee companies, including reports from investment analysts. The Company also evaluates whether: 1) the Company has both the intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value; 2) the decline in fair value is attributable to specific adverse conditions affecting a particular investment; 3) the decline is attributable to more general conditions in an industry or geographic area; 4) the decline in fair value is attributable to seasonal factors; 5) a debt security has been downgraded by a rating agency; 6) the financial condition of the issuer has deteriorated; and 7) if applicable, dividends have been reduced or eliminated or scheduled interest payments on debt securities have not been made. For investments in private companies with no quoted market price, the Company considers similar qualitative factors and also considers the implied value

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INFOSPACE, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
Years Ended December 31, 2001, 2000 and 1999

from any recent rounds of financing completed by the investee as well as market prices of comparable public companies. The Company requests from the Company’s private investees the annual and quarterly financial statements to assist the Company in reviewing relevant financial data and to assist the Company in determining whether such data may indicate other-than temporary declines in fair value below the Company’s accounting basis.
 
Valuation of long-lived assets:    Management periodically evaluates long-lived assets, consisting primarily of purchased technology, goodwill, property and equipment, to determine whether there has been any impairment of the value of these assets and the appropriateness of their estimated remaining life. The Company evaluates impairment whenever events or changes in circumstances indicate that the carrying amount of the Company’s assets might not be recoverable. Impairment losses on intangible assets of $107.7 million and $9.0 million were recognized in the years ended December 31, 2001 and 2000, respectively. No impairment loss was recognized in the year ended December 31, 1999.
 
Unearned compensation:    In accordance with Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 44, Accounting for Certain Transactions Involving Stock Compensation, unearned compensation includes the unamortized intrinsic value of options assumed in acquisitions since July 1, 2000. In addition, unearned compensation includes the unamortized compensation expense from the Company’s restricted stock grant in December 2001 (Note 6). The amortization of unearned compensation is charged to operations and is amortized over the vesting period of the options or stock under the accelerated amortization method in FIN 28. The Company recorded $3.4 million, $1.7 million and $2.9 million in compensation expense related to stock options and restricted stock grants for the years ended December 31, 2001, 2000 and 1999, respectively.
 
Deferred expense-warrants:    Deferred expense-warrants represents the fair value of the warrants that were issued to America Online, Inc. (AOL) (Note 6) and is expensed ratably over the four year vesting period. The amortization of deferred warrant expense is charged to sales, general and administrative expense.
 
Revenue recognition:    The Company’s revenues are derived from its products and application services, which are delivered to users and subscribers on wireline, wireless and broadband platforms, and to merchants via merchant aggregators including merchant banks. The Company derives revenue from its three business areas of wireline and broadband, merchant and wireless. Multi-element revenue agreements are recognized based on the evidence of fair value of individual components or as one element if no evidence exists. The Company records deferred revenue for amounts received from customers in advance of the performance of services.
 
Subscription fees:    Merchant agreements generate subscription fees on a per month basis. Subscription fees are recognized in the period the services are provided.
 
Payment transaction fees:    Transaction fees are generated as a percentage of the completed transaction from the Company’s shopping and payment authorization services. Transaction fees are recognized in the period the transaction occurs.
 
Licensing fees:    Licensing fees are generated from the access and utilization of the Company’s products and application services. Because the Company’s customers do not have the contractual right to take possession of the Company’s software, these contracts are considered service agreements pursuant to EITF Issue No. 00-3. License fee revenue is recognized ratably over the term of the agreement.

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INFOSPACE, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
Years Ended December 31, 2001, 2000 and 1999

 
Development and integration fees:    Development fees are charged for the development of private-labeled solutions for customers. Integration fees are charged for the integration of the Company’s products and application services into these private-labeled solutions. Although these fees are generally paid to the Company at the commencement of the agreement, they are recognized ratably over the term of the agreement.
 
Advertising:    Revenues from contracts based on the number of impressions displayed or click throughs provided are recognized as services are rendered. In some cases, the Company shares revenues that it earns from banner advertising with content providers and customers with co-branded Web pages. Some of the Company’s arrangements provide for an equal sharing of revenue from advertising sold by customers with co-branded Web pages after deducting selling costs. In cases where the customer is responsible for the sale of advertising under a revenue sharing arrangement and the Company receives only a net amount from the customer, the Company records the net amount received as revenue. In cases where the Company acts as a principal and is responsible for the sale of advertising, it records the gross amount earned as revenue.
 
Also included in revenues are revenues generated from non-cash transactions. Revenue is recognized when the Company completes all of its obligations under the agreement. In accordance with EITF 99-17 for barter agreements, which generally relate to the exchange of advertising, the Company records a receivable or liability at the end of the reporting period for the difference in the fair value of the services provided or received. Barter revenue is recorded based on comparable cash transactions. The Company recognized $14.0 million, $9.8 million and $948,000 as revenue from barter agreements for the years ended December 31, 2001, 2000 and 1999, respectively.
 
The Company also recognizes revenue associated with providing services in exchange for warrants. For warrants that vest based on the Company’s future performance, the amount recorded in revenue is based on the fair value of the warrant. For warrants that are fully vested upon execution of a contract, the fair value of the warrant is determined on the date of the contract execution and the revenue is recognized on a straight-line basis over the life of the contract. The Company measures the fair value of the equity instruments using the stock price and other measurement assumptions including a review of current financial information and recent rounds of financing, on the earlier of (i) the date the terms of the warrant compensation arrangement and a commitment for performance is reached or (ii) the date at which the Company’s performance to earn the warrants is complete (vesting date). The Company’s agreements rarely include performance commitments pursuant to which performance is assured because of sufficiently large disincentives for non-performance. Accordingly, most of the Company’s arrangements are valued on the vesting date. At December 31, 2001, deferred revenue included $2.6 million from the unamortized portion of fully vested warrants.
 
Cost of revenues:    Cost of revenues consists of expenses associated with the delivery, maintenance and support of the Company’s products and application services, including direct personnel expenses, communication costs such as high-speed Internet access, server equipment depreciation, and content license fees.
 
Product development expenses:    Product development expenses consist principally of personnel costs for research, design, maintenance and on-going enhancements of the Company’s patented and patent pending technology.
 
Sales, general and administrative expenses:    Sales, general and administrative expenses (SGA) consist primarily of salaries and related benefits for sales, general and administrative personnel, advertising and promotion expenses, carriage fees, professional service fees, occupancy and general office expenses and travel expenses for sales and management personnel.

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INFOSPACE, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
Years Ended December 31, 2001, 2000 and 1999

Advertising costs:    Costs for print advertising are recorded as expense when the advertisement appears. Advertising costs related to electronic impressions are recorded as expense as impressions are provided. Cash advertising expense totaled approximately $645,000, $5.8 million and $5.1 million for the years ended December 31, 2001, 2000 and 1999, respectively. In addition, the Company recorded approximately $13.2 million, $8.7 million, and $878,000 in non-cash advertising expense relating to barter arrangements for the years ended December 31, 2001, 2000 and 1999, respectively.
 
Acquisition and other related charges:    Acquisition and other related charges consist of in-process research and development for acquisitions accounted for under the purchase method and one-time charges related directly to the acquisitions, such as investment banking, legal and accounting fees for acquisitions accounted for under the pooling method prior to July 1, 2001.
 
Other charges:    Other charges consist of one-time costs and/or charges that are not directly associated with other operating expense classifications. Other charges for the year ended December 31, 2001 of $11.6 million, includes an allowance for notes receivable and employee loans in the amount of $10.6 million, settlement charges on seven litigation matters of $2.4 million, and $848,000 for prepaid licensing fees for software no longer being utilized. These amounts are partially offset by a reduction of $2.4 million to the estimated liability for past overtime worked (Note 8). Other charges for the year ended December 31, 2000 includes settlement charges on two litigation matters of $1.7 million (Note 8) and $3.0 million for an estimated liability for past overtime worked (Note 8). Other charges for the year ended December 31, 1999 consist of charges associated with litigation settlements.
 
Restructuring charges:    Restructuring charges reflect actual and estimated costs associated with the reductions in workforce and costs associated with the closures of certain Company facilities (Note 10).
 
Loss on Investments:    Loss on investments consists of recognized gains and losses on investment in accordance with SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities, recognized gains and losses on investments marked to fair value in the Venture Fund, which was active from January 1, 2000 through March 31, 2001, realized gains and losses on investments and impairment on investments.
 
Minority interest:    The minority interest reflected on the balance sheet and the statement of operations consists of the employee-owned portion of the Venture Fund (Note 4).
 
Cumulative effects of change in accounting principles:    On January 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value and changes in fair value are recognized in earnings unless certain hedge criteria are met. As a result of adopting SFAS No. 133, the Company recorded a charge of $3.2 million to record warrants held to purchase stock in other companies at their fair value as of January 1, 2001. This amount was recorded as a cumulative effect of change in accounting principle. As of December 31, 2000, warrants to purchase stock in public companies were held at fair value, with unrealized gains and losses included in accumulated other comprehensive loss, and warrants to purchase stock in private companies were held at cost. If SFAS No. 133 had not been adopted on January 1, 2001, the Company’s 2001 net loss would not have been materially different from the reported 2001 net loss.
 
On January 1, 2000, the Company adopted SAB No. 101, Revenue Recognition in Financial Statements. Prior to January 1, 2000, the Company recorded revenues from customers for development fees, implementation

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Table of Contents

INFOSPACE, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
Years Ended December 31, 2001, 2000 and 1999

fees and/or integration fees when the service was completed. If this revenue were recognized on a straight-lined basis over the term of the related service agreements, in accordance with SAB No. 101, the Company would have deferred revenue of $2.1 million as of January 1, 2000 originally recorded in prior years. In accordance with SAB No. 101, the Company recorded a cumulative effect of change in accounting principle of $2.1 million. The Company recognized $100,000 and $2.0 million in revenue in the year ended December 31, 2001 and the year ended December 31, 2000, respectively, related to this deferred revenue.
 
Pro forma amounts assuming SAB No. 101 is applied retroactively (amounts in thousands, except per share data):
 
    
Year ended December 31,

 
    
2000

    
1999

 
Net loss applicable to common stockholders