Amendment No. 1 to Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K/A

Amendment No. 1 to 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, 2010

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 000-25131

 

 

INFOSPACE, INC.

(Exact name of registrant as specified in its charter)

Delaware   91-1718107

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

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

(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code:

(425) 201-6100

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $0.0001 per share   NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

Series C Participating Preferred Stock

(Title of Class)

 

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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 Amendment No. 1 to Form 10-K/A or any amendment to this Amendment No. 1.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of the Common Stock held by non-affiliates of the registrant outstanding as of June 30, 2010, based upon the closing price of Common Stock on June 30, 2010 as reported on the NASDAQ Global Select Market, was $266.9 million. Common Stock held by each officer and director has been excluded because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of February 25, 2011, 36,425,934 shares of the registrant’s Common Stock were outstanding.

 

 

 

 

 


Table of Contents

TABLE OF CONTENTS

 

Explanatory Note

   1

Part II

    

Item 6.

  Selected Financial Data    4

Item 7.

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

Item 8.

  Financial Statements and Supplementary Data    25

Item 9A.

  Controls and Procedures    51

Part IV

    

Item 15.

  Exhibits and Financial Statement Schedules    55

Signatures

     56

 

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This report contains forward-looking statements that involve risks and uncertainties. The statements in this report that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Words such as “anticipate,” “believe,” “plan,” “expect,” “future,” “intend,” “may,” “will,” “should,” “estimate,” “predict,” “potential,” “continue,” and similar expressions identify forward-looking statements, but the absence of these words does not mean that the statement is not forward looking. These forward-looking statements include, but are not limited to, statements regarding projections of our future financial performance; trends in our businesses; our future business plans and growth strategy, including our plans to expand, develop, or acquire particular operations or businesses; and the sufficiency of our cash balances and cash generated from operating, investing, and financing activities for our future liquidity and capital resource needs.

Forward-looking statements are subject to known and unknown risks, uncertainties, and other factors that may cause our results, levels of activity, performance, achievements and prospects, and those of the Internet industries generally, to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties, and other factors include, among others, those identified under Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ending on December 31, 2010 (as originally filed on March 11, 2011), in Part II, Item 1A of our subsequently filed Quarterly Reports on Form 10-Q, and elsewhere in this report. You should not rely on forward-looking statements, which speak only as of the date of this Amendment No. 1 to the Company’s Annual Report on Form 10-K/A. We do not undertake any obligation to update publicly any forward-looking statement to reflect new information, events or circumstances after the date of this Amendment No. 1 to the Company’s Annual Report on Form 10-K/A or to reflect the occurrence of unanticipated events.

Explanatory Note

InfoSpace, Inc. (the “Company,” “InfoSpace,” “our,” or “we”) is filing this Amendment No. 1 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2010, as originally filed with the Securities and Exchange Commission (“SEC”) on March 11, 2011 (the “Original Annual Report”) for the purpose of restating its consolidated financial statements for fiscal 2010 and to report a material weakness as of December 31, 2010. As we reported in our Current Report on Form 8-K filed with the SEC on November 3, 2011, we have identified an error related to our accounting for goodwill in connection with our acquisition of the Make The Web Better assets in April 2010. As a result, we are restating our consolidated financial statements to correct this error (Item 8 of Part II of this report).

On April 1, 2010, we purchased assets consisting of internet properties and licenses for content and technology from Make The Web Better, a developer of online products used on social networking sites and a member of our search distribution network. We purchased these assets for $13.0 million and allocated $12.7 million of the purchase price to goodwill. We have determined that $12.7 million should have been allocated to an intangible asset consisting of an installed code base technology that directs Make The Web Better users to use our search services. As a result of this determination, the Company is restating all periods since the second quarter of 2010 to amortize that intangible asset. We have recorded this amortization as an expense to cost of sales. For further detail on this restatement, please see “Note 1: The Company and Basis of Presentation” of the Notes to Consolidated Financial Statements (Item 8 of Part II of this report).

This Amendment No. 1 also contains a change in presentation for discontinued operations from the Original Annual Report that is not a restatement or connected to the restatement described above, but that are appropriate changes given the re-issuance of the information contained in this report. For further detail on this presentation change, please see “Note 2: Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements (Item 8 of Part II of this report).

We are amending and restating in their entirety all of Items 6, 7, 8, 9A, and 15 in this Amendment No. 1 to reflect the restatement of the above-referenced financial statements and the other changes to presentation and classification as described herein. There have been no changes to the Original Annual Report other than those specifically described in this Amendment No. 1.

 

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PART II

 

ITEM 6. Selected 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 and the consolidated balance sheet data are derived from our audited consolidated financial statements. In the second quarter of 2010, we acquired certain assets from Mercantila, Inc. However, on June 22, 2011, we sold our Mercantila e-commerce business to Zoo Stores, Inc., and the results of operations from the Mercantila business are accordingly reflected as discontinued operations for all periods presented in this Amendment No. 1 to the Annual Report on Form 10-K/A. In addition, the tables below reflect the effects of the restatement described in Note 1 of the Notes to Consolidated Financial Statements (Item 8 of Part II of this report).

All periods presented below have been reclassified to conform to the current presentation. In 2007, we sold our mobile and directory businesses to unaffiliated third parties. Our mobile and directory businesses have been presented as discontinued operations for 2008, 2007, and 2006, and our operating results for our remaining search business are partly based on identifying and assigning costs to our search business that were initially shared by the three businesses. The process used to separately present continuing and discontinued operations relied on certain estimates and assumptions, and the historical results of operations for 2008, 2007, and 2006 presented in our selected financial data do not necessarily reflect the results of operations that would have existed had we provided our search services as a standalone business.

 

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     Years ended December 31,  
     2010 (1)     2009 (1)     2008 (1)     2007 (1)(2)     2006 (1)  
     (in thousands, except per share data)  

Consolidated Statements of Operations Data:

          

Revenues

   $ 214,343      $ 207,646      $ 156,727      $ 140,537      $ 153,800   

Cost of sales

     138,995        136,623        87,130        70,059        70,625   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     75,348        71,023        69,597        70,478        83,175   

Expenses and other income:

          

Engineering and technology

     8,471        9,129        13,846        13,940        12,545   

Sales and marketing

     28,145        25,378        24,644        29,494        16,030   

General and administrative

     32,843        23,617        24,228        105,197        35,026   

Depreciation

     3,138        3,283        3,264        2,680        1,914   

Restructuring(3)

     —          —          17        9,590        62,316   

Other, net

     —          —          (1,897     (3,248     —     

Loss on investments, net(4)

     —          4,714        28,520        2,117        —     

Other income, net(5)

     (15,247     (2,682     (7,149     (18,226     (19,581
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses and other income

     57,350        63,439        85,473        141,544        108,250   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     17,998        7,584        (15,876     (71,066     (25,075

Income tax benefit (expense)(5) (6)

     (8,725     (181     (598     (13,409     29,060   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     9,273        7,403        (16,474     (84,475     3,985   

Discontinued operations(7):

          

Loss from discontinued operations, net of taxes

     (4,593     —          (1,455     (25,246     (19,073

Gain (loss) on sale of discontinued operations, net of taxes

     —          —          (770     131,454        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 4,680      $ 7,403      $ (18,699   $ 21,733      $ (15,088
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic income (loss) per share:

          

Income (loss) from continuing operations

   $ 0.26      $ 0.21      $ (0.48   $ (2.59   $ 0.13   

Loss from discontinued operations

     (0.13     —          (0.04     (0.77     (0.61

Gain (loss) on sale of discontinued operations

     —          —          (0.02     4.03        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income (loss) per share

   $ 0.13      $ 0.21      $ (0.54   $ 0.67      $ (0.48
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing basic income (loss) per share

     35,886        34,983        34,415        32,640        31,254   

Diluted income (loss) per share:

          

Income (loss) from continuing operations

   $ 0.25      $ 0.21      $ (0.48   $ (2.59   $ 0.12   

Loss from discontinued operations

     (0.12     —          (0.04     (0.77     (0.58

Gain (loss) on sale of discontinued operations

     —          —          (0.02     4.03        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income (loss) per share

   $ 0.13      $ 0.21      $ (0.54   $ 0.67      $ (0.46
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing diluted income (loss) per share

     36,829        35,431        34,415        32,640        33,042   

 

     As of December 31,  
     2010      2009      2008      2007      2006  
     (in thousands)  

Consolidated Balance Sheet Data:

              

Cash, cash equivalents, short-term and long-term investments

   $ 253,736       $ 226,397       $ 205,444       $ 574,817       $ 400,831   

Working capital

     242,440         219,475         182,733         163,422         536,442   

Total assets

     352,720         322,216         291,133         671,424         765,839   

Total stockholders’ equity

     301,771         279,835         262,324         266,050         678,565   

 

Special dividend announced   

Special dividend

paid

  

Special dividend amount

per share

   Total dividends
(in thousands)

May 2, 2007

   May 28, 2007    $6.30    $208,203

November 14, 2007

   January 8, 2008    $9.00    $299,296

 

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(1) 

We expense the fair value of awards of equity instruments as stock-based compensation expense over the period in which the award vests. Operating expenses from continuing operations and discontinued operations include stock-based compensation expense allocated as follows (in thousands):

 

     Years ended December 31,  
     2010      2009      2008      2007      2006  

Cost of sales

   $ 461       $ 535       $ 1,043       $ 1,057       $ 345   

Engineering and technology

     1,298         1,423         3,373         2,081         1,194   

Sales and marketing

     2,631         2,038         3,934         8,171         2,495   

General and administrative

     9,528         6,572         5,954         22,749         7,235   

Restructuring

     —           —           —           670         824   

Discontinued operations

     833         —           —           15,089         5,594   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14,751       $ 10,568       $ 14,304       $ 49,817       $ 17,687   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) 

In 2007, we recorded $56.2 million of employee expenses from continuing operations related to the cash distributions to shareholders. The expense was allocated as follows: $349,000 to cost of sales, $1.8 million to engineering and technology, $6.8 million to sales and marketing, and $47.3 million to general and administrative.

 

(3) 

In 2007, we recorded restructuring charges of $9.6 million, comprised of $8.0 million of employee separation costs, $831,000 of losses on contractual commitments, and $670,000 of stock-based compensation expense. In 2006, we recorded restructuring charges of $62.3 million, comprised of $44.5 million of impairments of goodwill and other intangible assets, $8.7 million of employee separation costs, $5.7 million of losses on contractual commitments, $2.6 million in costs of abandoned facilities, and $824,000 of stock-based compensation expense.

 

(4) 

In 2009, 2008, and 2007, we recorded other-than-temporary impairment charges of $5.4 million, $24.3 million, and $2.2 million, respectively, related to available-for-sale investments that we purchased for $40.4 million, became illiquid in 2007, and were sold for net proceeds of $9.2 million in 2009.

 

(5) 

In 2010, we recorded a $19.0 million net gain on a litigation settlement. The net gain allowed us to use a portion of our net operating loss carryforwards resulting in a net income tax expense of $6.6 million.

 

(6) 

In 2007, we recorded a full valuation allowance related to our deferred tax assets. In 2006, we recognized a portion of our deferred tax assets related to goodwill, operating loss carryforwards, and equity.

 

(7) 

We completed the sale of our e-commerce business on June 22, 2011, and operating results of this business and the loss for the sale of this business has been presented as discontinued operations for 2010. We completed the sale of our directory business on October 31, 2007 and the sale of our mobile business on December 28, 2007. The operating results and gains (losses) from the sales of these businesses have been presented as discontinued operations for 2008, 2007, and 2006.

 

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

The following discussion reflects the effects of the restatement described in Note 1. You should read the following discussion and analysis in conjunction with the Selected Consolidated Financial Data and our consolidated financial statements and notes thereto included elsewhere in this report.

Restatement and Discontinued Operations Presentation

In the second quarter of 2010, we acquired certain assets from Make The Web Better. In October 2011, we determined that we made an error in accounting for those acquired assets and concluded that this error was material to the 2010 consolidated financial statements for fiscal 2010 and, therefore, we are restating our those consolidated financial statements in this Amendment No. 1 to the Company’s Annual Report on Form 10-K/A. The amounts presented below for 2010 are restated to reflect the correction of that error. On June 22, 2011, we sold our Mercantila e-commerce business to Zoo Stores, Inc., and the results of operations from the Mercantila business are reflected as discontinued operations for all periods presented in this Amendment No. 1 to the Company’s Annual Report on Form 10-K/A. For additional information on the restatement, see “Note 1: The Company and Basis of Presentation” of the Notes to Consolidated Financial Statements (Item 8 of Part II of this report). For additional information on discontinued operations presentation and reclassification see “Note 2: Summary of Significant Accounting Policies”.

Overview

InfoSpace, Inc.’s (The “Company,”InfoSpace,” “our,” or “we”) revenues are primarily generated by our search business. Using our metasearch technology and relationships with major search content providers, we offer web search products both directly to consumers and through our network of distribution partners. Our metasearch technology selects search results from several search engine content providers, including Google, Yahoo!, and Bing, among others, and aggregates, filters, and prioritizes the results. This combination provides a more relevant search results page and utilizes the investments made by our search customers to continually improve the user experience. Revenue from our search business is primarily generated when end users of our services click on paid search results from our own branded websites or those of our distribution partners. These paid search results are provided to us by some of our search content providers, primarily Google and Yahoo!, who share the revenue generated by those paid clicks with us. We refer to those providers as our search customers.

We offer search services directly to consumers through our owned and operated web properties, such as Dogpile.com, WebCrawler.com, MetaCrawler.com, and WebFetch.com, which collectively receive millions of unique visitors each month. We use the term “properties” to refer to the methods in which end users access our search services, which typically are websites and downloadable applications belonging to us or our distribution partners. In addition, we provide search services through the web properties of distribution partners. Partner versions of our web offerings are generally private-labeled and delivered with each distribution partner’s unique requirements.

We generate revenue when an end user of our services clicks on a paid search link provided by a search customer and displayed on one of our owned and operated web properties or displayed on a distribution partner’s web property. The search customer that provided the paid search link receives a fee from the advertiser who paid for the click and the search customer pays us a portion of that fee. If the click originated from one of our distribution partners’ web properties, we share a portion of the fee we receive with such partner. Revenue is recognized in the period in which such paid clicks occur and is based on the amounts earned and remitted to us by our search customers for such clicks. Revenue from Google and Yahoo! jointly accounted for over 95% of our total revenues for both 2010 and 2009.

On April 1, 2010, we purchased assets consisting of web properties and licenses for content and technology from Make The Web Better, a search distribution partner and privately-held developer of online products used on social networking sites. This purchase contributed $16.4 million (or 26%) to our search revenue generated through our owned and operated properties in 2010 and, since Make The Web Better had been a distribution partner, there was a corresponding decrease of $21.5 million in distribution revenue from 2009. As we anticipated, the revenue generated by the operation of the acquired Make The Web Better assets has steadily declined since we acquired them, and we expect that the revenue generated will be approximately $8 million in 2011, and decline by 20% to 30% in each quarter when compared to the prior quarterly period, as the end-user base of those assets continues to decrease.

In recent periods and excluding the revenue from the Make The Web Better purchased assets, we experienced an overall decline in revenue generated through our owned and operated properties. This trend is a result of fewer retained users on our metasearch engine sites and, therefore, fewer paid clicks from these sites. The impact of this trend is partially offset by higher fees earned from our search customers for these paid clicks. Our ability to increase our online search services revenue in our metasearch engine sites relies in part on our ability to attract end users to these properties and retain them by providing a satisfying search experience. Revenue from our metasearch engine sites (such as Dogpile.com) accounted for 53% and

 

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62% of overall owned and operated revenue (excluding revenue from the Make The Web Better purchased assets) for 2010 and 2009, respectively. Further offsetting the impact of the overall negative trend is the greater amount of revenue we are generating through our online direct marketing initiatives. Revenue growth for our online direct marketing initiatives is dependent on our ability execute to an expected return on our online direct marketing expenditures. Revenue from our online direct marketing initiatives accounted for 47% and 38% of owned and operated revenue (excluding revenue from the Make The Web Better purchased assets) for 2010 and 2009, respectively.

Our ability to increase our revenue generated from distribution partners depends on growth in the revenues generated by our existing distribution partners’ Web properties and the addition of new distribution partners who can successfully generate revenue. In recent periods, revenue from certain distribution partners has been adversely affected by our determination that certain search traffic did not meet our minimum standards of quality, as well as guidelines from our search customers that required certain of our distribution partners to alter the tactics they used to acquire end-users. During 2010, we discontinued traffic that was not considered to be high quality, and those discontinuations had a material negative impact on our revenues for the first half of 2010. In an effort to drive quality traffic to our search customers, we continue to invest in research and development to expand the online search services we offer on our owned and operated Web properties and those of our distribution partners.

On May 10, 2010, the Company acquired certain assets from Mercantila, Inc., an online retail company, and on June 22, 2011, we sold our Mercantila e-commerce business to Zoo Stores, Inc. after our management determined that the long-term prospects for the financial performance of Mercantila were not meeting InfoSpace’s expectations and that retaining the Mercantila business did not fit within InfoSpace’s strategy. The results of operations from the Mercantila business are reflected as discontinued operations for all periods presented in this Amendment No. 1 to the Annual Report on Form 10-K/A.

Within InfoSpace, engineering, operations, and product management personnel remain paramount to our ability to deliver high quality search services, enhance our current technology, and increase our distribution network. As a result, we expect to continue to invest in our workforce and research and development operations. Additionally, we seek to use our cash and short-term available-for-sale investments to acquire businesses and other assets, including businesses that may not be related to search.

Overview of 2010 Operating Results

The following is an overview of our operating results for the year ended December 31, 2010 compared to the prior year. A more detailed discussion of our operating results, comparing our operating results for the years ended December 31, 2010, 2009, and 2008, is included under the heading “Historical Results of Operations” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In the second quarter of 2010, we revised our presentation of our Condensed Consolidated Statements of Operations as described in “Note 1: The Company and Basis of Presentation” of the Notes to Consolidated Financial Statements (Item 8, of Part II of this report) and reclassified amounts between the new captions for prior periods. The reclassifications did not impact previously reported revenues, income (loss) before income taxes, net income (loss), total assets, total liabilities, or stockholders’ equity.

 

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Several of our key operating financial measures for the years ended December 31, 2010 and 2009 in total dollars (in thousands) and as a percentage of segment revenue are presented below.

 

     Years ended December 31,  
     2010     2009  

Revenues

     $214,343        $207,646   
        % of revenues           % of revenues   
     

 

 

      

 

 

 

Gross profit

   $ 75,348         35.2%      $ 71,023         34.2%   

Net income

   $ 4,680         2.2%      $ 7,403         3.6%   

Adjusted EBITDA(1)

   $ 32,462         15.1%      $ 27,436         13.2%   

Search Revenue:

          

Revenue from distribution partners

   $ 146,919         69%      $ 156,742         75%   

Revenue from existing distribution partners (launched prior to the then-current year)

   $ 143,731         67%      $ 137,784         66%   

Revenue from new distribution partners (launched during the then-current year)

   $ 3,188         2%      $ 18,958         9%   

Revenue from Make The Web Better – distribution partner

   $ 9,442         4%      $ 30,908         15%   

Revenue from owned and operated properties

   $ 63,384         30%      $ 49,540         24%   

Revenue from online direct marketing initiatives on owned and operated Web properties

   $ 22,146         10%      $ 18,676         9%   

Revenue from metasearch properties

   $ 24,818         12%      $ 30,864         15%   

Revenue from Make The Web Better – owned and operated

   $ 16,420         8%      $ —           0%   

 

(1) 

Adjusted EBITDA is a non-GAAP measure, defined below in “Non-GAAP Financial Measures.”

Revenue increased from 2009 to 2010 due to growth in revenue from our owned and operated properties. This growth was partially offset by declining revenue from our distribution partners. The increase in revenue from our owned and operated properties resulted from the acquisition of the Make The Web Better assets, and from increased revenue from our direct marketing initiatives. These positive trends were partially offset by the continued decline in revenue from our remaining owned and operated properties. The decrease in revenue generated through our distribution partners’ Web properties, from 2009 to 2010, was primarily due to the acquisition of the Make The Web Better assets. We generated 35% and 42% of our search revenue through our top five distribution partners for 2010 and 2009, respectively. The Web properties of our top five distribution partners for 2010 generated 40% of our online search revenue for 2009.

The increase in gross profit from 2009 to 2010 was primarily due to our acquisition of the Make The Web Better assets described above. The increase in our sales and marketing expense from 2009 to 2010 was primarily due to an increase in expense associated with direct marketing initiatives of $3.1 million. The increase in general and administrative expense from 2009 to 2010 was primarily due to an increase in severance pay of $3.5 million and an increase in stock-based compensation of $3.4 million due to accelerating the vesting of equity awards to a departed executive.

In 2010, we received proceeds from the settlement of a shareholder derivative action against current and former officers and directors of the Company and recorded a net gain in other income, net, of $19.0 million and income tax expense of $8.7 million, primarily related to the settlement. In 2010, we also recorded in other income, net, $5.0 million of expense to adjust the estimated earn-out payments to be made related to our acquisition of the Make The Web Better assets.

Historical Results of Operations

Our net income for 2010 was $4.7 million and for the years 2010, 2009, and 2008 was cumulative net loss of $6.6 million.

 

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

 

     Years ended December 31,     Years ended December 31,  
     2010     2009     2008     2010     2009     2008  
     (in thousands)     (as a percent of revenue)  

Total revenues

   $ 214,343      $ 207,646      $ 156,727        100.0     100.0     100.0

Total cost of sales

     138,995        136,623        87,130        64.8        65.8        55.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     75,348        71,023        69,597        35.2        34.2        44.4   

Operating expenses and other income:

            

Engineering and technology

     8,471        9,129        13,846        4.0        4.4        8.8   

Sales and marketing

     28,145        25,378        24,644        13.1        12.2        15.7   

General and administrative

     32,843        23,617        24,228        15.3        11.4        15.5   

Depreciation

     3,138        3,283        3,264        1.5        1.6        2.1   

Restructuring

     —          —          17        0.0        0.0        0.0   

Other, net

     —          —          (1,897     0.0        0.0        (1.2

Loss on investments, net

     —          4,714        28,520        0.0        2.3        18.2   

Other income, net

     (15,247     (2,682     (7,149     (7.1     (1.3     (4.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses and other income

     57,350        63,439        85,473        26.8        30.6        54.5   

Income (loss) from continuing operations before income taxes

     17,998        7,584        (15,876     8.4        3.7        (10.1

Income tax expense

     (8,725     (181     (598     (4.1     (0.1     (0.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     9,273        7,403        (16,474     4.3        3.6        (10.5

Loss from discontinued operations, net of taxes

     (4,593     —          (1,455     (2.1     0.0        (0.9

Loss on sale of discontinued operations, net of taxes

     —          —          (770     0.0        0.0        (0.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 4,680      $ 7,403      $ (18,699     2.2     3.6     (11.9 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Results of Operations for 2010, 2009, and 2008

Revenues. Revenues for the years ended December 31, 2010, 2009, and 2008 are presented below (in thousands):

 

     2010      Change      2009      Change      2008  

Revenues

   $ 214,343       $ 6,697       $ 207,646       $ 50,919       $ 156,727   

The increase in revenues for 2010 as compared to 2009 is due to increases in revenue from our owned and operated Web properties and partially offset by a decline in revenue generated by our distribution partners. Revenue from existing distribution partners increased in 2010 as compared to 2009 by $6.0 million, but this trend was offset by a decline of $21.5 million from existing distribution partner Make The Web Better as we acquired its search revenue generating assets on April 1, 2010. Additionally, revenue from new distribution partners (launched during the year) in 2010 as compared to 2009 declined by $15.8 million.

The increase of $13.8 million in revenue generated by our owned and operated properties for 2010 as compared to 2009 was primarily due to the operation of the acquired Make The Web Better assets, which generated $16.4 million of revenue as an owned and operated Web property in 2010, and revenue growth of $3.5 million from our online direct marketing initiatives. Partially offsetting such increases is an overall decline in revenue generated through our owned and operated metasearch engine sites, excluding the revenue from the Make The Web Better purchased assets. This trend is a result of fewer retained users on our metasearch engine sites and, therefore, fewer paid clicks from these sites, partially offset by higher fees earned from our search customers for these paid clicks.

The increase in revenues for 2009 as compared to 2008 is primarily due to an increase in revenue from search results delivered through the Web properties of new and existing distribution partners. Revenue from existing distribution partners for 2009 as compared to 2008 increased by $45.4 million, and revenue from new distribution partners (launched during the year) increased by $10.5 million. In 2009, when the Make The Web Better assets were owned by a distribution partner, they generated $30.9 million in revenue.

The decrease of $5.8 million in revenue generated by our owned and operated properties for 2009 as compared to 2008 was primarily due to an overall decline in all of our owned and operated traffic on our metasearch engine sites, partially offset by an increase of $5.9 million in revenue for traffic generated from our online direct marketing initiatives.

For 2010, 70% of our search revenue was generated through our search distribution partners’ Web properties, compared to 76% and 65% of our search services revenue, respectively, generated through our search distribution partners’ Web properties in 2009 and 2008. During the first half of 2010, we discontinued the syndication of our search results to certain distribution partners who we deemed to be delivering low quality clicks. Those discontinuations had a material negative impact on our revenues for the first half of 2010. We expect that search services revenue from searches conducted by end users on sites of our distribution partners will continue to represent a significant proportion of our online search services revenue for the foreseeable future.

Additionally, in October 2010 we suspended operations of our Haggle.com competitive shopping site, which represented the most significant portion of our development-stage business initiatives. As a result, the revenue contribution from development-stage business initiatives will be nominal in the foreseeable future. In 2010, development-stage business initiatives represented less than 2% of total revenues.

 

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Cost of sales. Cost of sales consists of distribution and content costs related to revenue sharing arrangements with our search distribution partners and usage-based content fees, amortization of acquired intangible assets, and certain costs associated with the operation of the data centers that serve our search business, which include personnel expenses (which include salaries, benefits and other employee related costs, and stock-based compensation expense) and bandwidth costs, and depreciation. Additionally, cost of sales includes costs directly identifiable to our development-stage business initiatives. Cost of sales in total dollars (in thousands) and as a percentage of associated and total revenues for the years ended December 31, 2010, 2009, and 2008 are presented below:

 

     2010     Change     2009     Change     2008  

Distribution and content

   $ 116,056      $ (9,546   $ 125,602      $ 49,678      $ 75,924   

Amortization of intangible assets

     9,197        9,086        111        111        —     

Data center operations

     6,459        336        6,123        (967     7,090   

Depreciation

     3,458        (400     3,858        (212     4,070   

Other

     3,825        2,896        929        883        46   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of sales

   $ 138,995      $ 2,372      $ 136,623      $ 49,493      $ 87,130   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total revenues

     64.8       65.8       55.6

The dollar increase in cost of sales for 2010 as compared to 2009 is primarily due to the amortization of intangible assets acquired from Make The Web Better and the cost of sales for our Haggle.com competetive shopping site, classified in other cost of sales, partially offset by the decrease in revenue sharing expense resulting from our acquisition of Make The Web Better.

The dollar increase in cost of sales for 2009 as compared to 2008 is primarily due to an increase in revenue sharing expenses related to increases in revenue generated through the Web properties of our distribution partners and increases in our revenue sharing rates.

We anticipate that revenue sharing expenses paid to our distribution partners will increase in dollars if revenue increases through growth in existing arrangements with our distribution partners or we add new distribution partners. If search revenue generated through our distribution partners’ Web properties increases at a greater rate than revenue generated through our owned and operated Web properties, revenue sharing expenses with our distribution partners as a percentage of revenue will increase. We expect that revenue from searches conducted by end users on sites of our distribution partners will continue to be a significant portion of our search revenue.

Engineering and technology expenses. Engineering and technology expenses are associated with the research, development, support, and ongoing enhancements of our offerings, including personnel expenses (which include salaries, stock-based compensation expense, and benefits and other employee related costs), software support and maintenance, and professional service fees. Engineering and technology expenses in total dollars (in thousands) and as a percentage of total revenues for 2010, 2009, and 2008 are presented below:

 

     2010     Change     2009     Change     2008  

Engineering and technology expenses

   $ 8,471      $ (658   $ 9,129      $ (4,717   $ 13,846   

Percentage of total revenues

     4.0       4.4       8.8

The dollar decrease for 2010 compared to 2009 was primarily comprised of decreases of $567,000 in employee separation costs and a decrease of $374,000 in software support and maintenance. These decreases were partially offset by an increase of $440,000 in professional services costs.

The dollar decrease for 2009 compared to 2008 was primarily comprised of a decrease of $2.0 million in stock-based compensation expense, a decrease of $1.8 million in personnel costs, exclusive of stock-based compensation expense and employee separation costs, a decrease of $1.0 million in professional service fees, and a decrease of $916,000 in the costs of contractors and temporary help to augment our staffing. These decreases were partially offset by an increase of $736,000 in facilities costs and an increase of $518,000 in employee separation costs.

Sales and marketing expenses. Sales and marketing expenses consist principally of marketing expenses associated with our owned and operated Web properties (which consist of traffic acquisition, including our online direct marketing initiatives, which involve the purchase of online advertisements that drive traffic to an owned and operated website, agency fees, brand promotion expense, and market research expense), personnel costs (which include salaries, stock-based compensation expense, and benefits and other employee related costs), the cost of temporary help and contractors to augment our staffing.

 

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Sales and marketing expenses in total dollars (in thousands) and as a percentage of total revenues for 2010, 2009, and 2008 are presented below:

 

     2010     Change      2009     Change      2008  

Sales and marketing expenses

   $ 28,145      $ 2,767       $ 25,378      $ 734       $ 24,644   

Percentage of total revenues

     13.1        12.2        15.7

The dollar increase for 2010 compared to 2009 was primarily attributable to an increase of $3.1 million in advertising costs for our marketing initiatives associated with traffic acquisition, and an increase of $592,000 in stock-based compensation expense. These increases were partially offset by a decrease of $358,000 in marketing research expenses and a decrease of $326,000 in public relations expense.

The dollar increase for 2009 compared to 2008 was primarily attributable to an increase of $4.0 million in advertising costs and an increase of $445,000 in the costs of contractors and temporary help to augment our staffing. These increases were partially offset by a decrease of $1.9 million in stock-based compensation expense, a decrease of $838,000 in marketing expenses associated with our owned and operated Web properties, and a decrease of $785,000 in salaries and employee benefits, excluding stock-based compensation expense.

We expect to continue to invest in direct marketing initiatives to drive traffic to an owned and operated web property.

General and administrative expenses. General and administrative expenses consist primarily of personnel expenses (which include salaries, stock-based compensation expense, and benefits and other employee related costs), professional service fees (which include legal, audit, and tax fees), general business development and management expenses, occupancy and general office expenses, taxes, insurance expenses, and certain legal settlements. General and administrative expenses in total dollars (in thousands) and as a percentage of total revenues for 2010, 2009, and 2008 are presented below:

 

     2010     Change      2009     Change     2008  

General and administrative expenses

   $ 32,843      $ 9,226       $ 23,617      $ (611   $ 24,228   

Percentage of total revenues

     15.3        11.4       15.5

The dollar increase for 2010 compared to 2009 was primarily attributable to an increase of $3.5 million in employee separation costs, an increase of $3.0 million in stock-based compensation expense, an increase of $770,000 in professional service fees, and an increase of $408,000 in business taxes. Additionally, in 2009 we received a $2.4 million one-time net business tax refund. These increases were partially offset by a decrease of $714,000 in personnel costs, exclusive of stock-based compensation expense and employee separation costs.

The dollar decrease for 2009 compared to 2008 was primarily attributable to a decrease of $2.5 million in personnel expenses and costs of contractors and temporary help to augment our staffing (exclusive of stock-based compensation expense and employee separation costs), a decrease of $366,000 in business insurance costs, and a decrease of $310,000 in professional service fees. Adding to these decreases was the net business tax refund of $2.4 million received in 2009. These decreases were partially offset by increases of $3.2 million in legal fees, an increase of $709,000 in employee separation costs, and an increase of $619,000 in stock-based compensation expense.

Depreciation. Depreciation of property and equipment includes depreciation of network servers and data center equipment, computers, software, office equipment and fixtures, and leasehold improvements. Depreciation expenses for 2010, 2009, and 2008 are presented below (in thousands):

 

     2010      Change     2009      Change      2008  

Depreciation expenses

   $ 3,138       $ (145   $ 3,283       $ 19       $ 3,264   

There were no material variances between the depreciation expenses recorded in 2010, 2009 and 2008.

Other, net. Other, net consists of costs, charges, refunds or gains that are not directly associated with other revenue or operating expense classifications. Other, net of $1.9 million in 2008 consisted of gains on the sale of non-core assets.

 

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Loss on investments, net. Loss on investments, net is comprised of the following for 2009 and 2008 (in thousands):

 

     2009     2008  

Other-than-temporary impairment of available-for-sale investments

   $ 5,351      $ 24,332   

Gain on sale of available-for-sale investments

     (637     —     

Impairment of convertible note from equity investee

     —          2,000   

Other-than-temporary impairment of equity investment in privately-held company

     —          2,000   

Decrease in fair value of warrants

     —          188   
  

 

 

   

 

 

 
   $ 4,714      $ 28,520   
  

 

 

   

 

 

 

In 2010, we did not record any gain or loss on investments.

In 2009, we determined that a portion of our auction rate securities (“ARS”), which we classified as long-term available-for-sale securities, was other-than-temporarily impaired, and we recorded a loss on investments of $5.4 million. Subsequently, we sold all of the investments originally purchased as ARS and recognized gains on the sales totaling $637,000.

In 2008, we determined that a portion of our ARS, which we classified as long-term available-for-sale securities, was other-than-temporarily impaired, and we recorded a loss on investments of $24.3 million. In 2008, we determined that our equity investment and related warrants in a privately-held company, as well as a convertible note from that company, were fully impaired, and we recorded a loss on investments of $4.2 million. We adjust our derivative instruments to fair value and recognize the change in the recorded fair value in earnings. We hold warrants to purchase stock in other companies, which qualify as derivatives, and therefore gains or losses are based on the fair value.

Other income, net. Other income, net, primarily consists of litigation settlements, adjustments to the fair values of contingent liabilities related to business combinations, foreign currency exchange gains or losses, gains on contingency resolutions, interest income, and gains or losses on disposals of property and equipment. Other income, net is comprised of the following for 2010, 2009, and 2008 (in thousands):

 

     2010     2009     2008  

Litigation settlement gain

   $ (18,965   $ —        $ —     

Foreign currency exchange loss (gain), net

     (1,335     66        661   

Interest income

     (331     (3,443     (7,344

Gain on contingency resolution

     —          —          (1,124

Increase in fair value of earn-out contingent liability

     5,000        —          —     

Loss on disposal of assets

     1,014        642        629   

Other

     (557     53        29   
  

 

 

   

 

 

   

 

 

 
   $ (15,247   $ (2,682   $ (7,149
  

 

 

   

 

 

   

 

 

 

Other income, net increased in 2010 compared to 2009 primarily due to a $19.0 million net gain on a litigation settlement and $1.4 million in recognition of foreign currency translation gains, primarily related to the sale or substantial liquidation of wholly-owned subsidiaries. Additionally in 2010, the financial performance of the operation of the Make The Web Better assets acquired in April 2010 was greater than expected; as a consequence, we estimated that the fair value of the related earn-out contingent consideration had increased and we recorded a charge of $5.0 million. Interest income decreased in 2010 compared to 2009 primarily due to a decline in interest rates.

Interest income decreased in 2009 compared to 2008 primarily due to a decline in interest rates, partially offset by $925,000 in interest received relating to a net business tax refund.

Income tax expense. During 2010, 2009, and 2008, we recorded an income tax expense of $8.7 million, $181,000, and $598,000, respectively. The 2010 income tax expense of $8.7 million is primarily attributable to a $6.3 million tax expense from current year operations and a $3.2 million tax expense for the net increase in the valuation allowance against the deferred tax assets. These expenses are partially offset by a $566,000 income tax benefit from the decrease in unrecognized tax benefits pertaining to state income taxes and a $516,000 tax benefit attributable to foreign exchange gains. During 2009,

 

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we further impaired and sold our portfolio of ARS, which provided a net $6.9 million income tax benefit from the net reduction of its portion of the valuation allowance. Absent the effect of the ARS, our income tax expense would have been $7.1 million, which would be primarily attributable to $2.7 million from current year operations and an increase of $4.2 million in the valuation allowance against the deferred tax assets. The 2008 income tax expense of $598,000 is primarily attributable to a $5.6 million tax benefit from current year operations, $436,000 tax expense for non-deductible compensation paid to an executive, and a $5.4 million tax expense for the net increase in the valuation allowance against the deferred tax assets.

At December 31, 2010, we had gross temporary differences representing future tax deductions of $858.7 million, primarily comprised of $788.4 million of accumulated net operating loss carryforwards, which represent deferred tax assets. During 2010, we determined that it was not more likely than not that we would realize our deferred tax assets in the foreseeable future. Accordingly, we provided a valuation allowance against our deferred tax assets. If in the future, we determine that the realization of any portion of the deferred tax assets is more likely than not to be realized, we will record a benefit to the income statement or to additional paid-in-capital, as appropriate.

Loss from discontinued operations and loss on sale of discontinued operations. On June 22, 2011, the Company sold its Mercantila e-commerce business to Zoo Stores, Inc. The results of operations from the business are reflected in the Consolidated Financial Statements as discontinued operations for all periods presented. Revenue, loss before taxes, income tax benefit, and loss from discontinued operations, net of taxes, for the year ended December 31, 2010 is presented below (in thousands):

 

$0000000.00
     Year ended
December 31,
2010
 

Revenue from discontinued operations

   $ 32,492   
  

 

 

 

Loss from discontinued operations before taxes

   $ (5,908

Income tax benefit

     1,315   
  

 

 

 

Loss from discontinued operations, net of taxes

   $ (4,593
  

 

 

 

Loss from discontinued operations includes previously unallocated depreciation, amortization, stock-based compensation expense, income taxes, and other corporate expenses that were attributable to the e-commerce business.

In 2007, we completed the sale of our directory and mobile businesses and have reflected income (loss) from those businesses as income (loss) from discontinued operations. For 2008, we recorded a gain on the sale of the directory business of $48,000 and a loss on the sale of the mobile services business of $818,000. Revenue, income (loss) before taxes, income tax expense (benefit), and income (loss) from discontinued operations for 2008 are presented below (in thousands):

 

$0000000.00
Directory       

Revenue from discontinued operations

   $ —     
  

 

 

 

Income from discontinued operations before taxes

   $ 204   

Income tax expense

     (76
  

 

 

 

Income from discontinued operations, net of taxes

   $ 128   
  

 

 

 

 

$0000000.00
Mobile       

Revenue from discontinued operations

   $ 127   
  

 

 

 

Loss from discontinued operations before taxes

   $ (2,098

Income tax benefit

     515   
  

 

 

 

Loss from discontinued operations, net of taxes

   $ (1,583
  

 

 

 

Non-GAAP Financial Measures

We define Adjusted EBITDA as net income (loss), determined in accordance with accounting principles generally accepted in the United States of America (“GAAP”), excluding the effects of discontinued operations (including loss from discontinued operations, net of taxes, and loss on sale of discontinued operations, net of taxes), income taxes, depreciation, amortization of intangible assets, stock-based compensation expense, and other loss, net (which includes such items as adjustments to the fair values of contingent liabilities related to business combinations, gains on resolution of contingencies, interest income, foreign currency gains or losses, and gains or losses from the disposal of assets).

 

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We believe that Adjusted EBITDA provides meaningful supplemental information regarding InfoSpace’s performance by excluding certain expenses and gains that we believe are not indicative of our operating results. We use this non-GAAP financial measure for internal management purposes, when publicly providing guidance on possible future results, and as a means to evaluate period-to-period comparisons. We believe that Adjusted EBITDA is a common measure used by investors and analysts to evaluate our performance, that it provides a more complete understanding of the results of operations and trends affecting our business when viewed together with GAAP results, and that management and investors benefit from referring to this non-GAAP financial measure. Items excluded from Adjusted EBITDA are significant and necessary components to the operations of our business, and, therefore, Adjusted EBITDA should be considered as a supplement to, and not as a substitute for or superior to, GAAP net income (loss). Other companies may calculate Adjusted EBITDA differently, and therefore our Adjusted EBITDA may not be comparable to similarly titled measures of other companies. A reconciliation of our Adjusted EBITDA to net income (loss), which we believe to be the most comparable GAAP measure, is presented for the years ended December 31, 2010, 2009, and 2008 below (in thousands):

 

     2010     2009     2008  

Net income (loss)

   $ 4,680      $ 7,403      $ (18,699

Discontinued operations

     4,593        —          2,225   

Depreciation and amortization of intangible assets

     15,793        7,252        7,335   

Stock-based compensation

     13,918        10,568        14,304   

Loss on investments, net

     —          4,714        28,520   

Other income, net

     (15,247     (2,682     (7,149

Income tax expense

     8,725        181        598   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 32,462      $ 27,436      $ 27,134   
  

 

 

   

 

 

   

 

 

 

Liquidity and Capital Resources

Cash, Cash Equivalents and Short-Term Investments

Our principal source of liquidity is our cash and cash equivalents and short-term investments. As of December 31, 2010, we had cash and marketable investments of $253.7 million, consisting of cash and cash equivalents of $155.6 million and available-for-sale short-term investments of $98.1 million. We generally invest our excess cash in high quality marketable investments. These investments include securities issued by U.S. government agencies, commercial paper, certificates of deposit, money market funds, and taxable municipal bonds. All of our financial instrument investments held at December 31, 2010 have minimal default risk and short-term maturities. In 2010, we received gross proceeds of $23.9 million related to a litigation settlement and, in the first quarter of 2011, we plan to pay $5.3 million in plaintiff’s fees related to that settlement, as well as $2.4 million in severance charges to a departing executive. In 2008, we paid a special dividend to our shareholders of $299.3 million.

We plan to use our cash to fund operations, develop technology, advertise, market and distribute our products and services, and continue the enhancement of our network infrastructure. An important component of our strategy for future growth is to acquire technologies and businesses, and we plan to use our cash to acquire and integrate acceptable targets that we may identify. These targets may include businesses, products, or technologies unrelated to online search. We may use a portion of our cash for special dividends or for common stock repurchases.

We believe that existing cash and cash equivalents, short-term investments, and cash generated from operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. However, the underlying levels of revenues and expenses that we project may not prove to be accurate. Our anticipated cash needs exclude any payments that may result from pending or future litigation matters. In addition, we evaluate acquisitions of businesses, products, or technologies from time to time. Any such transactions, if completed, may use a significant portion of our cash balances and marketable investments. If we are unable to liquidate our investments when we need liquidity for acquisitions or business purposes, we may need to change or postpone such acquisitions or business purposes or find alternative financing for such acquisitions or business purposes, if available. We may seek additional funding through public or private financings or other arrangements prior to such time. Our ability to raise funds may be adversely affected by a number of factors, including factors beyond our control, such as economic conditions in markets in which we operate and from which we generate revenues, and increased uncertainty in the financial, capital, and credit markets. 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 may result. If funding is insufficient at any time in the future, we may be unable, or delayed in our ability, 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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Contractual Obligations and Commitments

Our capital lease commitments are included in our Consolidated Balance Sheets. Our contractual obligations and commitments are as follows (in thousands):

 

     2011      2012      2013      2014 and
thereafter
     Total  

Operating lease commitments

   $ 1,835       $ 1,901       $ 383       $ —         $ 4,119   

Purchase commitments

     1,306         1,026         493         —           2,825   

Capital lease commitments, net of imputed interest and executory costs

     211         —           —           —           211   

Discontinued operations commitments

     1,161         31         —           —           1,192   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,513       $ 2,958       $ 876       $ —         $ 8,347   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating lease commitments. We have entered into various non-cancelable operating lease agreements for our offices that run through 2013. We are committed to pay a portion of the related operating expenses under certain of these lease agreements. These operating expenses are not included in the table above. Certain of these leases have escalating rent payment provisions and we recognize rent expense under such leases on a straight-line basis over the term of the lease.

Purchase commitments. Our purchase commitments are primarily comprised of non-cancelable service agreements for our data centers. Not included in the table above are purchase commitments of $418,000 and $418,000 due in 2011 and 2012, respectively, which are reflected as liabilities on our Consolidated Balance Sheets.

Capital lease commitments. We entered into capital lease agreements in 2008 for certain equipment used in our data centers.

Discontinued operations. We have $973,000 of purchase commitments for unshipped orders for our discontinued operations at December 31, 2010, and lease commitments comprise the remainder of the discontinued operations commitments.

We have pledged a portion of our cash as collateral for standby letters of credit and bank guaranties for certain of our property leases and banking arrangements. At December 31, 2010, the total amount of collateral pledged under these agreements was $4.2 million.

The above table does not reflect unrecognized tax benefits of approximately $1 million, the timing of which is uncertain. For additional discussion on unrecognized tax benefits see “Note 8: Income Taxes” of the Notes to Consolidated Financial Statements (Item 8 of Part II of this report.)

Cash Flows

Our net cash flows are comprised of the following for 2010, 2009, and 2008 (in thousands):

 

     2010     2009     2008  

Net cash provided (used) by operating activities

   $ 49,906      $ 30,000      $ (20,182

Net cash provided (used) by investing activities

     33,927        4,421        (111,284

Net cash provided (used) by financing activities

     206        (607     (298,926

Net cash used by discontinued operations

     (12,144     —          (17,998
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 71,895      $ 33,814      $ (448,390
  

 

 

   

 

 

   

 

 

 

Net Cash Provided (Used) by Operating Activities

Net cash provided (used) by operating activities consists of net income (loss) offset by certain adjustments not affecting current-period cash flows and the effect of changes in our operating assets and liabilities.

Net cash provided by operating activities was $49.9 million in 2010, consisting of adjustments not affecting cash flows provided by operating activities of $41.0 million (primarily consisting of depreciation and amortization, stock-based compensation, increase in the fair value of an earn-out contingent liability, loss from discontinued operations, loss on disposals of assets, and amortization of premium on investments), cash provided by changes in our operating assets and liabilities of $18.5 million (consisting of decreases in accounts receivable, increases in accrued expenses and other current and long-term liabilities, and decreases in other receivables and in prepaid expenses and other current assets), and our net income of $4.7 million. Partially offsetting the increase were adjustments not affecting cash flows used by operating activities of $10.6 million (primarily consisting of excess tax benefits from stock-based award activity, fair value of common stock retired relating to a litigation settlement, and the realized foreign currency translation gains) and cash used by changes in our operating assets and liabilities of $3.7 million (primarily consisting of decreases in accounts payable).

 

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Net cash provided by operating activities was $30.0 million in 2009, consisting of adjustments not affecting cash flows provided by operating activities of $26.4 million (primarily consisting of stock-based compensation, depreciation and amortization, loss on investments, net, and loss on disposals of assets), cash provided by changes in our operating assets and liabilities of $12.7 million (consisting of increases in accrued expenses and other current and long-term liabilities and in accounts payable and decreases in other long-term assets), and our net income of $7.4 million. Partially offsetting the increase was cash used by changes in our operating assets and liabilities of $15.9 million (primarily consisting of increases in accounts receivable, notes and other receivables and in prepaid expenses and other current assets) and adjustments not affecting cash flows used by operating activities of $607,000, consisting of deferred income taxes.

Net cash used by operating activities was $20.2 million in 2008, consisting of cash used by changes in our operating assets and liabilities of $59.3 million (consisting of decreases in accrued expenses and other current and long-term liabilities), our net loss of $18.7 million, and adjustments not affecting cash flows used by operating activities of $4.6 million (primarily consisting of decreases in deferred income taxes and the gain on sale of assets). Offsetting the decrease was cash provided by adjustments not affecting cash flows provided by operating activities of $52.9 million (primarily consisting of the loss on long-term investments, stock-based compensation, depreciation, the loss from discontinued operations and the loss on sale of discontinued operations) and changes in our operating assets and liabilities of $9.4 million (consisting of decreases in notes and other receivables, other long-term assets, accounts receivable, and prepaid expenses and other current assets and increases in accounts payable).

Net Cash Provided (Used) by Investing Activities

Net cash provided (used) by investing activities primarily consists of transactions related to our investments, purchases of property and equipment, proceeds from the sale of certain assets, and cash used in business acquisitions.

Net cash provided by investing activities was $33.9 million in 2010, primarily from the proceeds from the sale or maturity of our marketable investments of $244.8 million and proceeds from the sale of assets of $307,000. Partially offsetting cash provided by investing activities were the purchase of $200.5 million of marketable investments, $8.0 million used for business acquisitions, and $2.9 million of property and equipment purchases.

Net cash provided by investing activities was $4.4 million in 2009, primarily from the proceeds from the sale or maturity of our marketable investments of $196.9 million and proceeds from the sale of assets of $623,000. Partially offsetting cash provided by investing activities were the purchase of $190.2 million of marketable investments, $2.4 million of property and equipment purchases, and $395,000 used for a business acquisition.

Net cash used by investing activities was $111.3 million in 2008, primarily consisting of the purchase of $145.3 million of marketable investments and the purchase of $12.3 million in property and equipment. Partially offsetting cash used by investing activities were proceeds from the sale or maturity of our marketable investments of $44.0 million and proceeds from the sale of assets of $2.6 million.

Net Cash Provided (Used) by Financing Activities

Net cash provided (used) by financing activities consists of proceeds from the issuance of stock through the exercise of stock options and our employee stock purchase plan, tax payments from shares withheld upon vesting of restricted stock units, repayments of capital lease obligations, excess tax benefits from stock-based award activity, and special dividends paid to our shareholders.

Net cash provided by financing activities in 2010 was $206,000, primarily from $7.0 million in excess tax benefits generated by stock-based award activity and proceeds of $2.5 million from the exercise of stock options and the sale of shares through our employee stock purchase plan. Cash provided by financing activities was partially offset by $4.6 million of earn-out payments related to business acquisitions, $4.2 million in tax payments from shares withheld upon vesting of restricted stock units, and $589,000 used for the repayment of capital lease obligations.

Net cash used by financing activities in 2009 was $607,000, primarily from $1.1 million in tax payments from shares withheld upon vesting of restricted stock units and $564,000 used for the repayment of capital lease obligations. Cash used by financing activities was partially offset by tax benefits generated by stock-based award activity of $607,000 and proceeds of $404,000 from the exercise of stock options and the sale of shares through our employee stock purchase plan.

Net cash used by financing activities in 2008 was $298.9 million, primarily from the special dividend of $299.3 million paid in January 2008. Partially offsetting cash used in financing activities were proceeds of $603,000 from the exercise of stock options and the sale of shares through our employee stock purchase plan.

 

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Net Cash Used by Discontinued Operations

Net cash used by operating activities attributable to discontinued operations in 2010 was $12.1 million and in 2008 was $18.0 million.

Acquisitions and Dispositions

Mercantila. On May 10, 2010, we acquired certain assets from Mercantila, Inc., an internet e-commerce company, at a cost of $7.8 million in cash, plus $8.2 million in liabilities assumed, and sold our Mercantila operations to Zoo Stores, Inc. on June 22, 2011, for $250,000 upon completion of the sale, plus the Company received the right to receive additional consideration of up to $3.0 million contingent on liquidity or other events, which the Company recorded at a fair value of zero as of June 30, 2011.

Make The Web Better. On April 1, 2010, we purchased assets consisting of Web properties and licenses for content and technology from Make The Web Better, a search distribution partner and privately-held developer of online products used on social networking sites, for $13.0 million. The purchase consideration included an initial cash payment of $8.0 million, with up to $5.0 million in additional consideration payable in cash contingent on expected financial performance. The financial performance of the operation of the Make The Web Better assets in 2010 was greater than was expected when the assets were acquired. As a consequence, our estimate of the fair value of the related contingent consideration increased to $10.0 million and we recorded a charge of $5.0 million to other loss (income), net in the year ended December 31, 2010.

F-Four. On May 22, 2009, we acquired the membership interests of F-Four, LLC and the assets of its subsidiary, a provider of search engine optimization analytics software, for $1.3 million in stock and cash.

Critical Accounting Policies and Estimates

This Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as the disclosures included elsewhere in this Amendment No. 1 to the Company’s Annual Report on Form 10-K/A, is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and disclosures of contingencies. In some cases, we could have reasonably used different accounting policies and estimates.

The Securities and Exchange Commission has defined a company’s most critical accounting policies as the ones that are the most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. On an ongoing basis, we evaluate the estimates used, including those related to revenue recognition, cost of sales, impairment of goodwill, accounting for business combinations, stock-based compensation, and the valuation allowance for our deferred tax assets. We base our estimates on historical experience, current conditions, and on various other assumptions that we believe to be reasonable under the circumstances and, based on information available to us at that time, we make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources as well as identify and assess our accounting treatment with respect to commitments and contingencies. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions. We believe the following critical accounting policies involve the more significant judgments and estimates used in the preparation of our consolidated financial statements. We also have other accounting policies that involve the use of estimates, judgments, and assumptions and that are significant to understanding our results. For additional information see “Note 2: Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements (Item 8 of Part II of this report).

Revenue Recognition

Our revenues are generated primarily from our Web search services. We generate search revenue when an end user of such services clicks on a paid search link provided by a search customer and displayed on one of our owned and operated Web properties or displayed on a distribution partners’ Web property. The search customer that provided the paid search link receives a fee from the advertiser who paid for the click and the search customer pays us a portion of that fee.

For our transactions, we are the primary obligor, separately negotiate each revenue or unit pricing contract independent of any revenue sharing arrangements, and assume the credit risk for amounts invoiced to our search customers. For search services, we determine the paid search results, content, and information directed to our owned and operated Web properties and our distribution partners’ Web properties through our metasearch technology. We earn revenue from our search customers by providing paid search results generated from our owned and operated properties and from our distribution partners’ Web properties based on separately negotiated and agreed-upon terms with each distribution partner. Consequently, we record revenue on a gross basis. Revenue is recognized in the period in which the services are provided (e.g., a paid search occurs) and is based on the amounts earned by and ultimately remitted to us.

 

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Cost of Sales

We record the cost of sales when the related revenue is recognized. Cost of sales consists of costs related to revenue sharing arrangements with our distribution partners, certain costs associated with the operation of our data centers that serve our search business, including amortization of acquired intangible assets, depreciation, personnel expenses (which include salaries, benefits and other employee related costs, and stock-based compensation expense), bandwidth costs, and usage-based content fees.

Business Combinations and Intangible Assets Including Goodwill

We account for business combinations using the acquisition method and accordingly, the identifiable assets acquired and liabilities assumed are recorded at their acquisition date fair values. Goodwill is calculated as the excess of the purchase price over the fair value of net assets, including the amount assigned to identifiable intangible assets. We evaluate the carrying value of our indefinite-lived intangible assets at least annually, and evaluate all intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. Identifiable intangible assets with finite lives are amortized over their useful lives. Acquisition-related costs, including advisory, legal, accounting, valuation, and other costs, are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.

Accounting for Goodwill

Goodwill is tested for impairment on an annual basis and between annual tests whenever circumstances indicate that the carrying value of the goodwill might be impaired. Circumstances may include an adverse change in business climate or a more likely than not expectation that a reporting unit will be sold or disposed. On at least a quarterly basis, we assess whether such circumstances exist.

We test for goodwill impairment at the reporting unit level. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the estimated fair value of each reporting unit. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates, application of appropriate control premium, market conditions, and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit and may result in impairment charges in future periods.

We performed our annual impairment analysis of the goodwill on our balance sheet as of November 30, 2010, and at the time of the analysis the Company had two reporting units: Core and E-commerce. The Company has discontinued operations of its E-commerce business (and reporting unit) and is a single reporting unit but for the purposes of this disclosure, results of our impairment analysis for the E-commerce reporting unit have been included. We determined that there was no impairment as the fair values of our Core and E-commerce reporting units exceeded their respective carrying values by 21% and 30%, respectively. Our analysis took into consideration the expected discounted cash flows for each reporting unit. The principal factors used in the discounted cash flow analysis requiring judgment are the projected results of operations, the discount rate based on the weighted average cost of capital (“WACC”), and terminal value assumptions for each reporting unit.

The WACC for each reporting unit ranged from 18% to 21.5% based on review of the volatility of returns for comparable reporting units, a capital structure of 100% common equity for comparable companies, and a size risk premium based upon relevant published studies. Additionally, a non-systemic risk premium was included ranging from 2% to 5% for certain risks to each reporting unit such as the Core reporting unit’s dependence on Google and Yahoo! and recognition that the E-commerce reporting unit is in an early stage and a new business for us that has been projected to have growth in revenue and margins. The terminal value assumptions are applied to the final year of the discounted cash flow model as the reporting unit is expected to remain a viable going concern beyond the final period. The terminal value was determined using the Gordon Growth Model, which assumed long-term growth rates ranging from 1% to 4%.

A control premium ranging from 10% to 15% was added to determine each reporting unit’s enterprise value on a controlling basis. The control premiums range assumption considered the reporting unit’s business operations, control premiums of comparable recent transactions, and the current economic environment.

In the dynamic search and online retail industries, there is significant uncertainty about the future. Unforeseen events such as market disruptions and deterioration of the macroeconomic environment, or internal challenges such as reorganizations, employee and management turnover, operational cash flows, and other trends that could have material negative impacts on our key assumptions in determining fair values, could lead to a decision to impair goodwill in future periods.

 

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As of December 31, 2010 and at November 30, 2010, of our consolidated goodwill balance of $57.2 million, we had allocated $44.8 million to our Core and $12.4 million to our E-commerce reporting units. The goodwill allocated to our E-commerce reporting unit is presented as an asset in the Net assets from discontinued operations on the consolidated balance sheet as of December 31, 2010.

Stock-Based Compensation

We record stock compensation expense for equity-based awards granted, including stock options and restricted stock unit grants, over the service period of the equity-based award based on the fair value of the award at the date of grant. During 2010, 2009, and 2008, we recognized $13.9 million, $10.6 million, and $14.3 million, respectively, of stock-based compensation expense in continuing operations.

Calculating stock-based compensation expense relies upon certain assumptions, including the expected term of the stock-based awards, expected stock price volatility, expected interest rate, number and types of stock-based awards, and the pre-vesting forfeiture rate. If we use different assumptions due to changes in our business or other factors, our stock-based compensation expense could vary materially in the future.

Income Taxes

We account for income taxes under the asset and liability method, under which deferred tax assets, including net operating loss carryforwards, and liabilities are determined based on temporary differences between the book and tax bases of assets and liabilities. We periodically evaluate the likelihood of the realization of deferred tax assets, and reduce the carrying amount of the deferred tax assets by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, the carryforward periods available to us for tax reporting purposes, and other relevant factors. There is a wide range of possible judgments relating to the valuation of our deferred tax assets.

During the years ended December 31, 2010 and 2009, based on the weight of available evidence, we determined that it was not more likely than not that we would realize our deferred tax assets. Accordingly, we provided a full valuation allowance against our net deferred tax assets at December 31, 2010 and 2009. Significant judgment is required in making this assessment, and it is very difficult to predict when, if ever, we may conclude that any portion of our deferred tax assets is more likely than not realizable.

 

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Quarterly Results of Operations (Unaudited)

The following table presents a summary of our unaudited consolidated results of operations for the eight quarters ended December 31, 2010. In the second quarter of 2010, we acquired certain assets from Make The Web Better. Subsequent to filing our original Annual Report on Form 10-K for the fiscal year ended December 31, 2010, we determined that we made an error in accounting for those assets acquired from Make The Web Better. We concluded that this error was material to the 2010 consolidated financial statements, and therefore, we are restating our 2010 consolidated financial statements in this Amendment No. 1 to the Annual Report on Form 10-K/A. The amounts presented below for 2010 are restated to reflect the correction of that error. In the second quarter of 2010, upon the acquisition of certain assets from Mercantila, Inc., we changed the way our consolidated statement of operations is presented. On June 22, 2011, we sold our Mercantila e-commerce business to Zoo Stores, Inc., and the results of operations from the Mercantila business are reflected as discontinued operations for all periods presented in this Amendment No. 1 to the Annual Report on Form 10-K/A. For additional information on the restatement, discontinued operations presentation, and reclassification see “Note 1: The Company and Basis of Presentation” of the Notes to Consolidated Financial Statements (Item 8 of Part II of this report). The information for each of these quarters has been prepared on a basis consistent with our annual audited consolidated financial statements. You should read this information in conjunction with our consolidated financial statements and notes thereto. The operating results for any quarter are not necessarily indicative of results for any future period.

 

     March 31,
2009
    June 30,
2009
    September 30,
2009
    December 31,
2009
    March 31,
2010
    June 30,
2010
    September 30,
2010
    December 31,
2010
 
     (in thousands except per share data)  

Revenues

   $ 39,070      $ 43,763      $ 54,356      $ 70,457      $ 61,773      $ 52,363      $ 50,524      $ 49,683   

Cost of sales

     22,827        26,763        36,577        50,456        43,559        33,414        31,868        30,154   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     16,243        17,000        17,779        20,001        18,214        18,949        18,656        19,529   

Expenses and other income:

                

Engineering and technology

     2,316        2,454        2,231        2,128        1,906        2,540        2,197        1,828   

Sales and marketing

     6,948        5,137        6,639        6,654        6,482        7,314        7,305        7,044   

General and administrative

     6,242        6,397        6,789        4,189        6,755        6,751        9,213        10,124   

Depreciation

     827        846        813        797        820        814        804        700   

Loss (gain) on investments, net

     5,351        (335     —          (302     —          —          —          —     

Other loss (income), net

     (607     (466     (472     (1,137     137        3,522        493        (19,399
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses and other income

     21,077        14,033        16,000        12,329        16,100        20,941        20,012        297   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     (4,834     2,967        1,779        7,672        2,114        (1,992     (1,356     19,232   

Income tax benefit (expense)

     (201     (82     32        70        (570     538        (163     (8,530
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (5,035     2,885        1,811        7,742        1,544        (1,454     (1,519     10,702   

Loss from discontinued operations, net of taxes

     —          —          —          —          —          (912     (2,029     (1,652
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (5,035   $ 2,885      $ 1,811      $ 7,742      $ 1,544      $ (2,366   $ (3,548   $ 9,050   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share – Basic:

                

Income (loss) from continuing operations

   $ (0.14   $ 0.08      $ 0.05      $ 0.22      $ 0.04      $ (0.04   $ (0.04   $ 0.30   

Loss from discontinued operations

     —          —          —          —          —          (0.03     (0.06     (0.05
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share – Basic

   $ (0.14   $ 0.08      $ 0.05      $ 0.22      $ 0.04      $ (0.07   $ (0.10   $ 0.25   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     34,853        35,044        35,035        35,094        35,466        35,751        35,969        36,196   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     March 31,
2009
    June 30,
2009
     September 30,
2009
     December 31,
2009
     March 31,
2010
     June 30,
2010
    September 30,
2010
    December 31,
2010
 
     (in thousands except per share data)  

Net income (loss) per share – Diluted:

  

                 

Income from continuing operations

   $ (0.14   $ 0.08       $ 0.05       $ 0.21       $ 0.04       $ (0.04   $ (0.04   $ 0.29   

Loss from discontinued operations

     —          —           —           —           —           (0.03     (0.06     (0.04
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss) per share – Diluted

   $ (0.14   $ 0.08       $ 0.05       $ 0.21       $ 0.04       $ (0.07   $ (0.10   $ 0.25   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

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

     34,853        35,069         35,766         36,112         37,059         35,751        35,969        36,851   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     March 31,
2009
    June 30,
2009
    September 30,
2009
    December 31,
2009
    March 31,
2010
    June 30,
2010
    September 30,
2010
    December 31,
2010
 

Revenues

     100.0     100.0     100.0     100.0     100.0     100.0     100.0     100.0

Cost of sales

     58.4        61.2        67.3        71.6        70.5        63.8        63.1        60.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     41.6        38.8        32.7        28.4        29.5        36.2        36.9        39.3   

Expenses and other income:

                

Engineering and technology

     5.9        5.6        4.1        3.0        3.1        4.8        4.3        3.7   

Sales and marketing

     17.8        11.7        12.2        9.4        10.5        14.0        14.5        14.2   

General and administrative

     16.0        14.6        12.5        6.0        11.0        12.9        18.2        20.4   

Depreciation

     2.1        1.9        1.5        1.1        1.3        1.6        1.6        1.4   

Loss (gain) on investments, net

     13.7        (0.7     0.0        (0.4     0.0        0.0        0.0        0.0   

Other loss (income), net

     (1.5     (1.1     (0.9     (1.6     0.2        6.7        1.0        (39.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses and other income

     54.0        32.0        29.4        17.5        26.1        40.0        39.6        0.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     (12.4     6.8        3.3        10.9        3.4        (3.8     (2.7     38.7   

Income tax benefit (expense)

     (0.5     (0.2     0.0        0.1        (0.9     1.0        (0.3     (17.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (12.9     6.6        3.3        11.0        2.5        (2.8     (3.0     21.5   

Loss from discontinued operations, net of taxes

     —          —          —          —          —          (1.7     (4.0     (3.3

Net income (loss)

     (12.9 )%      6.6     3.3     11.0     2.5     (4.5 )%      (7.0 )%      18.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

24


Table of Contents
ITEM 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

INFOSPACE, Inc.

   Page  

Report of Independent Registered Public Accounting Firm

     26   

Consolidated Balance Sheets as of December 31, 2010 (as Restated) and 2009

     27   

Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2010 (as Restated), 2009 and 2008

     28   

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2010 (as Restated), 2009 and 2008

     29   

Consolidated Statements of Cash Flows for the years ended December 31, 2010 (as Restated), 2009 and 2008

     30   

Notes to Consolidated Financial Statements

     32   

 

25


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2010 and 2009, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, the accompanying 2010 and 2009 financial statements have been retrospectively adjusted for discontinued operations.

As discussed in Note 1 to the consolidated financial statements, the accompanying 2010 financial statements have been restated to correct certain misstatements.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 11, 2011 (November 14, 2011 as to the effects of the material weakness described in Management’s Report on Internal Control over Financial Reporting, as revised), which report expressed an adverse opinion on the Company’s internal control over financial reporting because of a material weakness.

/s/ DELOITTE & TOUCHE LLP

Seattle, Washington

March 11, 2011 (November 14, 2011 as to the effects of the restatement discussed in Note 1 and the retrospective adjustment discussed in Note 2)

 

26


Table of Contents

INFOSPACE, INC.

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

 

     December 31,  
     2010     2009  
     (as Restated)        
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 155,645      $ 83,750   

Short-term investments, available-for-sale

     98,091        142,647   

Accounts receivable, net of allowance of $15 and $23

     19,189        28,466   

Other receivables

     1,185        2,953   

Prepaid expenses and other current assets

     2,163        2,526   

Assets of discontinued operations

     16,161        —     
  

 

 

   

 

 

 

Total current assets

     292,434        260,342   

Property and equipment, net

     7,304        12,315   

Goodwill

     44,815        44,815   

Other intangible assets, net

     3,910        457   

Other long-term assets

     4,257        4,287   
  

 

 

   

 

 

 

Total assets

   $ 352,720      $ 322,216   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 2,699      $ 6,736   

Accrued expenses and other current liabilities

     39,518        34,131   

Liabilities of discontinued operations

     7,777        —     
  

 

 

   

 

 

 

Total current liabilities

     49,994        40,867   

Long-term liabilities

     955        1,514   
  

 

 

   

 

 

 

Total liabilities

     50,949        42,381   

Commitments and contingencies (Note 7)

     —          —     

Stockholders’ equity:

    

Common stock, par value $.0001—authorized, 1,800,000,000 shares; issued and outstanding, 36,088,646 and 35,391,122 shares

     4        4   

Additional paid-in capital

     1,322,265        1,303,667   

Accumulated deficit

     (1,020,496     (1,025,176

Accumulated other comprehensive income (loss)

     (2     1,340   
  

 

 

   

 

 

 

Total stockholders’ equity

     301,771        279,835   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 352,720      $ 322,216   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

INFOSPACE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(amounts in thousands, except per share data)

 

     Years ended December 31,  
     2010     2009     2008  
     (as Restated)              

Revenues

   $ 214,343      $ 207,646      $ 156,727   

Cost of sales

     138,995        136,623        87,130   
  

 

 

   

 

 

   

 

 

 

Gross Profit

     75,348        71,023        69,597   

Expenses and other income:

      

Engineering and technology

     8,471        9,129        13,846   

Sales and marketing

     28,145        25,378        24,644   

General and administrative

     32,843        23,617        24,228   

Depreciation

     3,138        3,283        3,264   

Restructuring

     —          —          17   

Other, net

     —          —          (1,897

Loss on investments, net

     —          4,714        28,520   

Other income, net

     (15,247     (2,682     (7,149
  

 

 

   

 

 

   

 

 

 

Total expenses and other income

     57,350        63,439        85,473   

Income (loss) from continuing operations before income taxes

     17,998        7,584        (15,876

Income tax expense

     (8,725     (181     (598
  

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     9,273        7,403        (16,474

Discontinued operations:

      

Loss from discontinued operations, net of taxes

     (4,593     —          (1,455

Loss on sale of discontinued operations, net of taxes

     —          —          (770
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 4,680      $ 7,403      $ (18,699
  

 

 

   

 

 

   

 

 

 

Income (loss) per share—Basic:

      

Income (loss) from continuing operations

   $ 0.26      $ 0.21      $ (0.48

Loss from discontinued operations

     (0.13     —          (0.04

Loss on sale of discontinued operations

     —          —          (0.02
  

 

 

   

 

 

   

 

 

 

Basic net income (loss) per share

   $ 0.13      $ 0.21      $ (0.54
  

 

 

   

 

 

   

 

 

 

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

     35,886        34,983        34,415   

Income (loss) per share – Diluted:

      

Income (loss) from continuing operations

   $ 0.25      $ 0.21      $ (0.48

Loss from discontinued operations

     (0.12     —          (0.04

Loss on sale of discontinued operations

     —          —          (0.02
  

 

 

   

 

 

   

 

 

 

Diluted net income (loss) per share

   $ 0.13      $ 0.21      $ (0.54
  

 

 

   

 

 

   

 

 

 

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

     36,829        35,431        34,415   

Other comprehensive income (loss):

      

Net income (loss)

   $ 4,680      $ 7,403      $ (18,699

Foreign currency translation adjustment

     (74     (108     (47

Reclassification adjustment for realized foreign currency gains, net, included in net income (loss)

     (1,362     —          —     

Unrealized gain (loss) on investments, available-for-sale

     94        (943     1,109   

Reclassification adjustment for other-than-temporary losses (gains) on investments, available-for-sale, included in net income (loss)

     —          (335     776   

Cumulative tax effect on unrealized gain on investments, available-for-sale

     —          186        —     
  

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 3,338      $ 6,203      $ (16,861
  

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

INFOSPACE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Years Ended December 31, 2010, 2009, and 2008

(in thousands)

 

     Common stock     

Additional-paid

-in

    Accumulated    

Accumulated

other

comprehensive

       
     Shares     Amount      capital     deficit     income     Total  

Balance, December 31, 2007

     34,322      $ 3       $ 1,279,225      $ (1,013,880   $ 702      $ 266,050   

Common stock issued for stock options and restricted stock units

     420        —           16        —          —          16   

Common stock issued for employee stock purchase plan

     54        —           587        —          —          587   

Unrealized gain on available-for-sale investments

     —          —           —          —          1,885        1,885   

Foreign currency translation adjustment

     —          —           —          —          (47     (47

Tax effect of equity compensation

     —          —           (1,029     —          —          (1,029

Stock-based compensation

     —          —           15,143        —          —          15,143   

Taxes paid on stock issued for equity awards

     —          —           (1,582     —          —          (1,582

Net loss

     —          —           —          (18,699     —          (18,699
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2008

     34,796        3         1,292,360        (1,032,579     2,540        262,324   

Common stock issued for stock options and restricted stock units

     366        —           5        —          —          5   

Common stock issued for employee stock purchase plan

     61        —           399        —          —          399   

Common stock issued for acquisition

     230        1         809        —          —          810   

Common stock retired

     (62     —           —          —          —          —     

Unrealized loss on available-for-sale investments

     —          —           —          —          (1,278     (1,278

Foreign currency translation adjustment

     —          —           —          —          (108     (108

Tax effect of equity compensation

     —          —           607        —          186        793   

Stock-based compensation

     —          —           10,838        —          —          10,838   

Taxes paid on stock issued for equity awards

     —          —           (1,351     —          —          (1,351

Net income

     —          —           —          7,403        —          7,403   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2009

     35,391      $ 4       $ 1,303,667      $ (1,025,176   $ 1,340      $ 279,835   

Common stock issued for stock options and restricted stock units

     962        —           2,191        —          —          2,191   

Common stock issued for employee stock purchase plan

     54        —           350        —          —          350   

Common stock retired

     (318     —           (2,099     —          —          (2,099

Unrealized loss on available-for-sale investments

     —          —           —          —          94        94   

Foreign currency transaction adjustment

     —          —           —          —          (74     (74

Foreign currency translation adjustment for disposition of foreign subsidiaries

     —          —           —          —          (1,362     (1,362

Tax effect of equity compensation

     —          —           7,032        —          —          7,032   

Stock-based compensation

     —          —           15,010        —          —          15,010   

Taxes paid on stock issued for equity awards

     —          —           (3,886     —          —          (3,886

Net income (as Restated)

     —          —           —          4,680        —          4,680   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2010 (as Restated)

     36,089      $ 4       $ 1,322,265      $ (1,020,496   $ (2   $ 301,771   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

INFOSPACE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Years ended December 31,  
     2010     2009     2008  
     (as Restated)              

Operating Activities:

      

Net income (loss)

   $ 4,680      $ 7,403      $ (18,699

Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:

      

Loss from discontinued operations

     4,593        —          1,455   

Loss on sale of discontinued operations

     —          —          770   

Stock-based compensation

     13,918        10,568        14,304   

Depreciation and amortization

     15,793        7,252        7,335   

Excess tax benefits from stock-based award activity

     (7,032     (607     —     

Earn-out contingent liability adjustments

     5,000        —          —     

Common stock retired relating to litigation settlement

     (2,099     —          —     

Amortization of premium (accretion of discount) on investments, net

     365        206        (107

Loss on disposal of assets, net

     1,262        642        629   

Foreign currency translation gains, net

     (1,436     —          —     

Deferred income taxes

     19        2,814        (2,667

Loss on investments, net

     —          4,714        28,520   

Net gain on sale of assets

     —          —          (1,897

Other

     3        171        35   

Cash provided (used) by changes in operating assets and liabilities:

      

Accounts receivable

     9,274        (13,043     1,643   

Notes and other receivables

     1,852        (2,104     5,228   

Prepaid expenses and other current assets

     636        (759     135   

Other long-term assets

     (201     712        1,784   

Accounts payable

     (3,506     641        614   

Accrued expenses and other current and long-term liabilities

     6,785        11,390        (59,264
  

 

 

   

 

 

   

 

 

 

Net cash provided (used) by operating activities

     49,906        30,000        (20,182

Investing Activities:

      

Business acquisitions, net of cash acquired

     (8,000     (395     —     

Purchases of property and equipment

     (2,894     (2,435     (12,277

Other long-term assets

     230        (50     (199

Proceeds from sale of assets

     307        623        2,550   

Proceeds from sales of investments

     52,801        9,202        —     

Proceeds from maturities of investments

     191,976        187,654        43,980   

Purchases of investments

     (200,493     (190,178     (145,338
  

 

 

   

 

 

   

 

 

 

Net cash provided (used) by investing activities

     33,927        4,421        (111,284

Financing Activities:

      

Excess tax benefits from stock-based award activity

     7,032        607        —     

Proceeds from stock option exercises

     2,191        5        16   

Proceeds from issuance of stock through employee stock purchase plan

     350        399        587   

Repayment of capital lease obligation

     (589     (564     (233

Tax payments from shares withheld upon vesting of restricted stock units

     (4,201     (1,054     —     

Earn-out payments for business acquisitions

     (4,577     —          —     

Special dividend paid

     —          —          (299,296
  

 

 

   

 

 

   

 

 

 

Net cash provided (used) by financing activities

     206        (607     (298,926

Discontinued operations:

      

Net cash used by operating activities of discontinued operations

     (4,034     —          (17,998

Net cash used by investing activities of discontinued operations

     (8,110     —          —     
  

 

 

   

 

 

   

 

 

 

Net cash used by discontinued operations

     (12,144     —          (17,998
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     71,895        33,814        (448,390

Cash and cash equivalents, beginning of period

     83,750        49,936        498,326   
  

 

 

   

 

 

   

 

 

 

 

30


Table of Contents
     Years ended December 31,  
     2010     2009     2008  
     (as Restated)              

Cash and cash equivalents, end of period

   $ 155,645      $ 83,750      $ 49,936   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosure of non-cash investing activities:

      

Liabilities assumed in purchase transaction

   $ (8,231   $ (56   $ —     

Stock issued in purchase transaction

     —          809        —     

Supplemental disclosure of non-cash financing activities:

      

Contingent earn-out consideration from acquisition

   $ (5,000   $ —        $ —     

Purchases of assets under capital leases

     —          —          1,601   

Cash paid for:

      

Income tax expense (benefit) for continuing operations

   $ (364   $ 34      $ 5,117   

See notes to consolidated financial statements.

 

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Table of Contents

INFOSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2010, 2009, and 2008

Note 1: The Company and Basis of Presentation

Description of the business: InfoSpace, Inc. (the “Company” or “InfoSpace”) develops search tools and technologies that assist consumers with finding information, merchants, individuals, products, and other content on the Internet. The Company uses its metasearch technology, which selects search results from several search engine content providers, to power its own branded websites and to provide online search services to distribution partners. Partner versions of web offerings are generally private-labeled and delivered with each distribution partner’s unique requirements. Some content providers, such as Google and Yahoo!, pay the Company to distribute their content, and those providers are referred to as search customers.

Principles of consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated.

Basis of presentation: On June 22, 2011, the Company sold its Mercantila e-commerce business to Zoo Stores, Inc., and the results of operations from the Mercantila business are reflected as discontinued operations for all periods presented in this Amendment No. 1 to the Annual Report on Form 10-K/A. The operating results of the directory and mobile businesses, which were sold to third parties in 2007, have been presented as discontinued operations for 2008.

Restatement: On April 1, 2010, the Company purchased assets consisting of internet properties and licenses for content and technology from Make The Web Better, a developer of online products used on social networking sites and a member of InfoSpace’s search distribution network. InfoSpace purchased these assets for $13.0 million, and allocated $12.7 million of the purchase price to goodwill. Subsequent to the issuance of the Company’s consolidated financial statements for the year ended December 31, 2010 in its Annual Report on Form 10-K, the Company identified an error related to its accounting for goodwill in connection with its acquisition of the Make The Web Better assets. The Company determined that $12.7 million should have been allocated to an intangible asset consisting of an installed code base technology that directs Make The Web Better users to use InfoSpace’s search services. As a result of this determination, the Company has allocated the $12.7 million initially classified as goodwill to the installed code base technology classified as other intangible assets, net and is amortizing that intangible asset ratably as a proportion of the estimated revenue generated by the installed code base technology, as adjusted by changes in the estimated total revenue expected to be generated.

The Company believes that this error was material to the 2010 financial statements and, therefore, the Company is restating its 2010 consolidated financial statements in this Amendment No. 1 to the Annual Report on Form 10-K/A.

Additionally, cash equivalents and available for sale securities previously classified as Level 1 financial assets have been corrected to be classified as Level 2 in “Note 4: Fair Value Measurements” as of December 31, 2010 and 2009.

The effects of this restatement on the condensed consolidated balance sheet as of December 31, 2010, as previously reported as a reclassification related to discontinued operations in the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 2011 are as follows (in thousands):

 

     As previously
reported
    Adjustment     As restated  

Goodwill

   $ 57,465      $ (12,650   $ 44,815   

Other intangible assets, net

   $ 282      $ 3,628      $ 3,910   

Other long-term assets, net

   $ 4,258      $ (1   $ 4,257   

Accumulated deficit

   $ (1,011,473   $ (9,023   $ (1,020,496

Total stockholders’ equity

   $ 310,794      $ (9,023   $ 301,771   

Total liabilities and stockholders’ equity

   $ 361,743      $ (9,023   $ 352,720   

The effects of this restatement on the results of operations for the year ended December 31, 2010, as previously reported as a reclassification related to discontinued operations in the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 2011, are as follows (in thousands, except per share data):

 

     As previously
reported
     Adjustment     As restated  

Cost of sales

   $ 129,972       $ 9,023      $ 138,995   

Gross profit

   $ 84,371       $ (9,023   $ 75,348   

Income from continuing operations before income taxes

   $ 27,021       $ (9,023   $ 17,998   

Income from continuing operations

   $ 18,296       $ (9,023   $ 9,273   

Net income

   $ 13,703       $ (9,023   $ 4,680   

Net income per share – Basic

       

Income from continuing operations

   $ 0.51       $ (0.25   $ 0.26   

Net income per share

   $ 0.38       $ (0.25   $ 0.13   

Net income per share –Diluted

       

Income from continuing operations

   $ 0.50       $ (0.25   $ 0.25   

Net income per share

   $ 0.37       $ (0.24   $ 0.13   

The effects of this restatement on the condensed consolidated statement of cash flows for the year ended December 31, 2010 are as follows (in thousands):

     As previously
reported and
adjusted for
discontinued
operations(1)
    Adjustment     As
restated
 

Operating activities:

      

Net income (loss)

   $ 13,703      $ (9,023   $ 4,680   

Depreciation and amortization of intangible assets

   $ 6,770      $ 9,023      $ 15,793   

Deferred income taxes

   $ 218      $ (199   $ 19   

Other long-term assets

   $ (202   $ 1      $ (201

Accrued expenses and other current and long-term liabilities

   $ 6,587      $ 198      $ 6,785   

 

  (1) All amounts shown reflect discontinued operations for 2010.

Reclassification: In the second quarter of 2010, upon the acquisition of certain assets from Mercantila, Inc., the Company revised the presentation of its Statement of Operations as outlined below. Because the Company sold its Mercantila e-commerce business to Zoo Stores, Inc., some captions used in our originally-filed Form 10-K for the year ended December 31, 2010 are no longer relevant for presenting the Company’s Statement of Operations. The below captions are still relevant for presenting the Company’s Statement of Operations:

 

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New caption:

  

Comprised of amounts from:

Cost of sales

  

Content and distribution (completely allocated to new caption)

Systems and network operations (partially allocated to new caption)

 

Sales and marketing (partially allocated to new caption)

General and administrative (partially allocated to new caption)

Depreciation (partially allocated to new caption)

Amortization of intangible assets (partially allocated to new caption)

Engineering and technology

  

Systems and network operations (partially allocated to new caption)

Product development (completely allocated to new caption)

The Company also added the caption “total expenses and other income” and eliminated the captions “total operating expenses” and “operating income.” The reclassifications did not impact previously reported revenues, income (loss) before income taxes, net income (loss), total assets, total liabilities, or stockholders’ equity.

Certain other reclassifications of prior period balances have been made for consistent presentation with the current period. These changes consisted of reclassifications within the Company’s Statement of Operations in 2008 to conform to the current year presentation and, in the consolidated statements of cash flows for 2009 and 2008, sales and maturities of investments are separately presented as components of net cash provided (used) by investing activities, and the net amortization of premium (accretion of discount) on investments is separately presented as a component of net cash provided (used) by investing activities; it was previously presented under the caption of “Other.” Those reclassifications did not impact previously reported net income (loss) in the Statement of Operations or net cash provided (used) by investing activities or net cash provided (used) by investing activities in the consolidated statements of cash flow.

Segments: Upon the sale of Mercantila e-commerce business to Zoo Stores, Inc., the Company reverted to a single reporting unit structure, as it had before the Mercantila acquisition.

The Company’s Chief Executive Officer, who is its chief operating decision maker, reviews financial information presented on a consolidated basis accompanied by disaggregated information for certain measures. This information is used for purposes of allocating resources and evaluating financial performance. The Company’s operations are not organized into components below the consolidated unit level and operating results are not reported to the Chief Executive Officer for components below the consolidated unit level. Accordingly, the Company’s management considers InfoSpace to have a single reporting segment.

Note 2: Summary of Significant Accounting Policies

Cash equivalents: The Company considers all highly liquid debt instruments with an original maturity of ninety days or less at date of acquisition to be cash equivalents, which are carried at fair value.

Accounts receivable: Accounts receivable are stated at amounts due from customers net of an allowance for doubtful accounts.

Short-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 maturities greater than ninety days up to one year from the balance sheet date are considered short-term investments. The Company periodically evaluates whether the declines in fair value of its available-for-sale investments are other than temporary. As of December 31, 2010 and 2009, the Company’s short-term investments are classified as available-for-sale and are reported at their fair value, with unrealized gains and temporary impairments reported in other comprehensive income (loss), and other-than-temporary impairments reported in loss on investments, net in the Statement of Operations.

 

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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

Data center servers

   3 years

Internally developed software

   15 months — 3 years

Office equipment

   7 years

Office furniture

   7 years

Leasehold improvements

   Shorter of lease term or economic life

The Company capitalizes certain internal use software development costs, primarily employee salaries and benefits allocated on a project or product basis. The Company capitalized $1.0 million, $1.1 million, and $1.7 million of internal-use software costs in the years ended December 31, 2010, 2009, and 2008, respectively.

Business combinations and intangible assets including goodwill: The Company accounts for business combinations using the acquisition method and, accordingly, the identifiable assets acquired and liabilities assumed are recorded at their acquisition date fair values. Goodwill is calculated as the excess of the purchase price over the fair value of net assets, including the amount assigned to identifiable intp1angible assets. Acquisition-related costs, including advisory, legal, accounting, valuation and other costs, are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.

Valuation of goodwill and intangible assets: The Company evaluates goodwill and indefinite-lived intangible assets at least annually to determine whether there has been an impairment of the value of these assets and evaluates impairment whenever events or changes in circumstances, including material changes in the fair value of the Company’s outstanding common stock, indicate that the carrying amount of the Company’s assets might not be recoverable. The Company amortizes definite-lived intangible assets over their expected useful lives, and when events or circumstances indicate that the carrying amount of a long-lived asset or asset group may not be recoverable, the Company performs a test to determine whether the carrying amount of the asset or asset group tested is not recoverable and its carrying amount exceeds its fair value. Any impairment losses relating to goodwill or other intangible assets are recognized in the Statement of Operations.

The following table provides information about activity in goodwill during the period from January 1, 2009 to December 31, 2010 (in thousands):

 

     Total  

Goodwill as of January 1, 2009

   $ 43,940   

Goodwill associated with 2009 business acquisition

     875   
  

 

 

 

Goodwill as of December 31, 2009

     44,815   

Goodwill associated with 2010 business acquisitions

     —     
  

 

 

 

Goodwill as of December 31, 2010

   $ 44,815   
  

 

 

 

Other intangible assets consisted of the following (in thousands):

 

     December 31, 2010      December 31, 2009  
     Gross  carrying
amount
     Accumulated
amortization
    Other intangible
assets, net
     Gross  carrying
amount
     Accumulated
amortization
    Other intangible
assets, net
 

Definite-lived intangible assets:

               

Installed code base technology

   $ 12,650       $ (9,023   $ 3,627       $ —         $ —        $ —     

Core technology

     1,085         (1,085     —           1,085         (911     174   

Other

     6,667         (6,667     —           6,667         (6,667     —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total definite-lived intangible assets

     20,402         (16,775     3,627         7,752         (7,578     174   

Indefinite-lived intangible assets

     283         —          283         283         —          283   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 20,685       $ (16,775   $ 3,910       $ 8,035       $ (7,578   $ 457   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

The following table provides information about expected amortization of definite-lived intangible assets held as of December 31, 2010 in future years is presented in the below table (in thousands):

 

     2011      2012      2013      2014      Total  

Expected future intangible asset amortization

   $ 2,657       $ 706       $ 205       $ 59       $ 3,627   

The weighted average amortization period for definite-lived intangible assets is 48 months.

 

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In the years ended December 31, 2010, 2009, and 2008, the Company conducted its annual impairment analyses for goodwill and indefinite-lived intangible assets as of November 30, 2010, 2009, and 2008 and determined that the carrying value of its goodwill and indefinite-lived intangible assets was not impaired. In 2009 and 2008, the Company determined that it did not operate separate reporting units; therefore, the methodology used for the Company’s 2009 and 2008 annual impairment analyses were primarily based on a comparison of the balance of its stockholders’ equity to the fair value of its outstanding common stock based on the Company’s quoted stock price. In 2010, upon the acquisition of its E-Commerce business, the Company determined that it operated two reporting units, and the 2010 annual impairment analyses was based on a valuation using a combination of the Company’s quoted stock price and projections of future discounted cash flows for each reporting unit. As of December 31, 2010 and at November 30, 2010, of the consolidated goodwill balance of $57.2 million, the Company had allocated $44.8 million to its Core and $12.4 million to its E-Commerce reporting units. The goodwill allocated to the E-Commerce reporting unit is presented as an asset in the net assets from discontinued operations on the consolidated balance sheet as of December 31, 2010.

Other investments: Included in other long-term assets are the Company’s investment in equity investments of privately-held companies for business and strategic purposes. The Company currently holds equity securities and warrants to purchase equity securities in companies whose securities are not publicly traded. The Company’s equity investments were carried at a fair value of $0 at December 31, 2010 and 2009.

Revenue recognition: The Company’s revenues are generated primarily from its Web search services. The Company generates search revenue when an end user of such services clicks on a paid search link provided by a search customer and displayed on one of the Company’s owned and operated Web properties or displayed on a distribution partners’ Web property. The search customer that provided the paid search link receives a fee from the advertiser who paid for the click and the search customer pays the Company a portion of that fee.

For the Company’s transactions, the Company is the primary obligor, separately negotiates each revenue or unit pricing contract independent of any revenue sharing arrangements, and assumes the credit risk for amounts invoiced to its search customers. For search services, the Company determines the paid search results, content, and information directed to its owned and operated websites and its distribution partners’ Web properties through its metasearch technology.

The Company earns revenue from its search customers by providing paid search results generated from its owned and operated Web properties and from its distribution partners’ Web properties based on separately negotiated and agreed-upon terms with each distribution partner. Consequently, the Company records services revenue on a gross basis. Revenue is recognized in the period in which the services are provided (e.g., a paid search occurs) and is based on the amounts earned by and ultimately remitted to the Company.

Cost of sales: The Company records the cost of sales when the related revenue is recognized. Cost of sales primarily consists of costs related to revenue sharing arrangements with the Company’s distribution partners, amortization of acquired intangible assets, certain costs associated with the operation of the Company’s data centers that serve its search business, including amortization of acquired intangible assets, depreciation, personnel expenses (which include salaries, benefits and other employee related costs, and stock-based compensation expense), usage-based content fees, and bandwidth costs. Additionally, cost of sales includes costs directly identifiable to the Company’s development-stage business initiatives.

Engineering and technology expenses: Engineering and technology expenses are associated with the research, development, support, and ongoing enhancements of the Company’s offerings, including personnel expenses (which include salaries, stock-based compensation expense, and benefits and other employee related costs), software support and maintenance, and professional service fees.

Sales and marketing expenses: Sales and marketing expenses consist primarily of marketing expenses associated with the Company’s owned and operated Web properties (which consist of traffic acquisition, including online direct marketing initiatives, which involve the purchase of online advertisements that drive traffic to an owned and operated website, agency fees, brand promotion expense, and market research expense), personnel costs (which include salaries, stock-based compensation expense, and benefits and other employee related costs), the cost of temporary help and contractors to augment the Company’s staffing. Costs for advertising are recorded as expense when the advertisement appears or electronic impressions are recorded. Advertising expense totaled $18.5 million, $15.4 million, and $11.4 million for the years ended December 31, 2010, 2009, and 2008, respectively.

General and administrative expenses: General and administrative expenses consist primarily of personnel expenses (which include salaries, stock-based compensation expense, and benefits and other employee related costs), professional service fees (which include legal, audit, and tax fees), general business development and management expenses, occupancy and general office expenses, taxes, insurance expenses, and certain legal settlements.

Stock-based compensation: The Company measures and recognizes its compensation expense for all share-based payment awards made to employees and directors, including stock option and restricted stock unit grants and purchases of stock made pursuant to the Company’s 1998 Employee Stock Purchase Plan (the “ESPP”), based on estimated fair values. Expense is recognized on a straight-line basis over the requisite vesting period for each separately vesting portion of the award.

 

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The Company estimates the fair value of share-based payment awards on the date of grant using the Black-Scholes-Merton option-pricing model. The value of the award’s portion that is ultimately expected to vest is recognized as expense over the requisite service periods in the accompanying consolidated financial statements for the years ended December 31, 2010, 2009, and 2008.

Employee benefit plan: The Company has a 401(k) savings plan covering its employees. Eligible employees may contribute through payroll deductions. The Company may match the employees’ 401(k) contributions at the discretion of the Company’s Board of Directors. During 2010, 2009, and 2008, the Company’s Board of Directors elected to match a portion of the 401(k) contributions made by employees of the Company. The amount contributed by the Company is equal to a maximum of 50% of employee contributions up to a maximum of 3% of an employee’s salary. For the years ended December 31, 2010, 2009, and 2008, the Company contributed $309,000, $326,000, and $327,000, respectively, for employees.

Other, net: Other, net consists of gains or charges that are not directly associated with other revenue or operating expense classifications. There were no other, net charges in the years ended December 31, 2010 and 2009. Other, net during the year ended December 31, 2008 of $1.9 million primarily consisted of the gains on sales of non-core assets.

Loss on investments, net: Loss on investments, net consists of changes in fair values of warrants held by the Company, realized gains and losses from the sale of equity instruments of publicly-held and privately-held companies, and the other-than-temporary impairment of such equity instruments.

Other income, net: Other income, net for the years ended December 31, 2010, 2009 and 2008, consists of the following (in thousands):

 

     Years ended December 31,  
     2010     2009     2008  

Litigation settlement gain

   $ (18,965   $ —        $ —     

Foreign currency exchange gain (loss), net

     (1,335     66        661   

Interest income

     (331     (3,443     (7,344

Gain on contingency resolution

     —          —          (1,124

Increase in fair value of earn-out contingent liability

     5,000        —          —     

Loss on disposal of property and equipment

     1,014        642        629   

Other

     (630     53        29   
  

 

 

   

 

 

   

 

 

 

Other income, net

   $ (15,247   $ (2,682   $ (7,149
  

 

 

   

 

 

   

 

 

 

In 2010, the Company recognized $19.0 million of gain related to a litigation settlement. The financial performance of the operation of Make The Web Better, acquired on April 1, 2010, was greater than expected; as a consequence, the fair value of the related contingent consideration increased and an additional charge of $5.0 million was recorded. In 2010, the Company sold or substantially liquidated its previously wholly-owned foreign subsidiaries and recognized $1.4 million of realized foreign currency translation gains. The decrease in interest income is primarily due to a decline in interest rates.

Loss from discontinued operations and loss on sale of discontinued operations: On June 22, 2011, the Company sold its Mercantila e-commerce business to Zoo Stores, Inc. The results of operations from the business are reflected as discontinued operations for all periods presented. Revenue, loss before taxes, income tax benefit, and loss from discontinued operations, net of taxes, and loss on sale of discontinued operations, net of taxes, for the years ended December 31, 2010 and 2009 are presented below (in thousands):

 

     Year ended
December 31,
2010
 

Revenue from discontinued operations

   $ 32,492   
  

 

 

 

Loss from discontinued operations before taxes

   $ (5,908

Income tax benefit

     1,315   
  

 

 

 

Loss from discontinued operations, net of taxes

   $ (4,593
  

 

 

 

Loss from discontinued operations includes previously unallocated depreciation, amortization, stock-based compensation expense, income taxes, and other corporate expenses that were attributable to the e-commerce business.

 

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Table of Contents

Assets and liabilities from discontinued operations at December 31, 2010 consist of the following (in thousands):

 

     December 31,
2010
 

Accounts receivable

   $ 365   

Other receivables

     1,101   

Prepaid expenses and other current assets

     1,015   

Property and equipment, net

     166   

Goodwill

     12,413   

Other intangible assets

     1,101   
  

 

 

 

Assets of discontinued operations

   $ 16,161   
  

 

 

 

Accounts payable

   $ 4,540   

Accrued expenses and other current liabilities

     3,237   
  

 

 

 

Liabilities of discontinued operations

   $ 7,777   
  

 

 

 

In 2007, the Company completed the sale of its directory and mobile businesses and has reflected the results of operations from these businesses as discontinued operations for all periods presented.

For the year ended December 31, 2008, the Company recorded gain (loss) from the operating results of its mobile and directory businesses. For the sale of its directory business, the Company recorded a gain on sale of $48,000, net of tax expense of $26,000 in the year ended December 31, 2008. For the sale of its mobile business, the Company recorded a loss on sale of $818,000, net of tax benefit of $780,000 in the year ended December 31, 2008. The operating results of these businesses consist of the following (in thousands):

 

     Year ended December 31, 2008  
     Directory     Mobile  

Revenue from discontinued operations

   $ —        $ 127   
  

 

 

   

 

 

 

Income (loss) from discontinued operations before taxes

     204        (2,098

Income tax expense (benefit)

     (76     515   
  

 

 

   

 

 

 

Gain (loss) from discontinued operations, net of taxes

   $ 128      $ (1,583
  

 

 

   

 

 

 

Gain (loss) on sale of discontinued operations, net of taxes

   $ 48      $ (818
  

 

 

   

 

 

 

Net income (loss) per share: Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted average number of common shares outstanding plus the number of potentially dilutive shares outstanding during the period. Potentially dilutive shares consist of the incremental common shares issuable upon the exercise of outstanding stock options and warrants using the treasury stock method. Potentially dilutive shares are excluded from the computation of earnings per share if their effect is antidilutive including for periods of net loss.

The treasury stock method calculates the dilutive effect for stock options and warrants with an exercise price less than the average stock price during the period presented.

 

     Years ended December 31,  
In thousands    2010      2009      2008  

Weighted average common shares outstanding, basic

     35,886         34,983         34,415   

Dilutive stock options and warrants

     943         448         —     
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, diluted

     36,829         35,431         34,415   

Antidilutive equity awards with an exercise price less than the average price during the applicable period excluded from dilutive share calculation

     1,199         1,721         930   

Outstanding equity awards with an exercise price more than the average price during the applicable period not included in dilutive share calculation

     4,282         4,888         4,865   

 

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Other comprehensive income (loss): Comprehensive income (loss) includes net income (loss), plus items that are recorded directly to stockholders’ equity, including foreign currency translation adjustments and the net change in unrealized gains and losses on cash equivalents, short-term and long-term investments. Included in the net change in unrealized gains and losses are realized gains or losses included in the determination of net income (loss) in the period realized. Amounts reclassified out of other comprehensive income (loss) into net income (loss) were determined on the basis of specific identification. Components of accumulated other comprehensive income (loss) included on the consolidated balance sheets at December 31, 2010 and 2009 consist of the following (in thousands):

 

     December 31,  
     2010     2009  

Unrealized gain on foreign currency translation

   $ —        $ 1,436   

Unrealized loss on available-for-sale investments

     (2     (96
  

 

 

   

 

 

 
   $ (2   $ 1,340   
  

 

 

   

 

 

 

Foreign currencies: Foreign subsidiary financial statements are denominated in foreign currencies and are translated at the exchange rate on the balance sheet date. Translation adjustments resulting from this process are charged or credited to other comprehensive income (loss). Revenue and expenses are translated at average rates of exchange prevailing during the period. Realized gains and losses on foreign currency transactions are included in other income, net. In 2010, substantially all of InfoSpace’s foreign subsidiaries were sold or liquidated.

Concentration of credit risk: Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments, and trade receivables. These instruments are generally unsecured and uninsured. The Company places its cash equivalents and investments with major financial institutions. Accounts receivable are typically unsecured and are derived from revenues earned from search customers primarily located in the United States operating in a variety of industries and geographic areas. The Company performs ongoing credit evaluations of its search customers and maintains allowances for potential credit losses.

Revenue concentration: The Company derives a significant portion of its revenues from a small number of search customers. Revenues from the top two search customers of the Company represented 95% or more of total revenues in each of the years ended December 31, 2010, 2009, and 2008, respectively. These search customers each accounted for more than 10% of total revenues in the years ended December 31, 2010, 2009, and 2008. At December 31, 2010 and 2009, these two search customers each accounted for more than 10% of the accounts receivable balance.

Fair value of financial instruments: The Company does not measure the fair value of any financial instrument other than cash equivalents, available-for-sale investments, warrants, and its investment in a privately-held company. The carrying values of other financial instruments (accounts receivable, notes and other receivables, and accounts payable), other current assets and accrued expenses, and other current liabilities are not recorded at fair value but approximate fair values primarily due to their short-term nature.

Income taxes: The Company accounts for income taxes under the asset and liability method, under which deferred tax assets, including net operating loss carryforwards, and liabilities are determined based on temporary differences between the book and tax bases of assets and liabilities. The Company evaluates the deferred tax assets for future realization and reduces them by a valuation allowance to the extent management of the Company believes that they more likely than not will not be realized. Management considers many factors when assessing the likelihood of future realization of the Company’s deferred tax assets, including recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income (which includes a consideration of expected future revenue levels, trends in the industry, and the current macroeconomic environment), the carryforward periods available for tax reporting purposes, and other relevant factors. Due to the size of the net operating loss carryforwards, their expiration beginning in 2020 and the Company’s recent level of annualized profitability, management has determined the net deferred tax assets were not more likely than not realizable and provided a valuation allowance against its deferred tax assets. At December 31, 2010 and 2009, the Company provided valuation allowances of $316.4 million and $319.1 million, respectively, against its deferred tax assets related to net operating loss carryforwards and other temporary differences. The Company will continue to evaluate the likelihood of the realization of the deferred tax assets. Significant judgment is required in making this assessment, and it is very difficult to predict when, if ever, the Company may conclude that any portion of the deferred tax assets are more likely than not realizable.

Lease accounting: The Company leases office space and computer equipment used in its data centers. These leases are classified as either capital leases or operating leases, as appropriate. The amortization of assets under capital leases is included in depreciation expense. For the years ended December 31, 2010, 2009, and 2008, $537,000, $535,000, and $341,000, respectively, of amortization for assets acquired under capital leases was included in depreciation expense.

Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of

 

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assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates include those used for impairment of goodwill and other intangible assets, useful lives of other intangible assets, purchase accounting, valuation of investments and other-than-temporary impairment of investments, revenue recognition, the estimated allowance for sales returns and doubtful accounts, internally developed software, accrued contingencies, stock option valuation, and valuation allowance for deferred tax assets. Actual amounts may differ from estimates.

Recent accounting pronouncements: The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on its results of operations, financial position, or cash flow.

Note 3: Balance Sheet Components

Short-term investments classified as available-for-sale at December 31, 2010 and 2009 consisted of the following, stated at fair value (in thousands):

 

     December 31,  
     2010      2009  

U.S. government securities

   $ 90,850       $ 106,493   

Taxable municipal bonds

     7,241         2,604   

Corporate notes

     —           33,550   
  

 

 

    

 

 

 

Total short-term investments available-for-sale

   $ 98,091       $ 142,647   
  

 

 

    

 

 

 

Maturity information was as follows for investments classified as available-for-sale at December 31, 2010 (in thousands):

 

     Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
    Fair
value
 

Within one year

   $ 98,091       $ 13       $ (13   $ 98,091   

Greater than one year

     —           —           —          —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 98,091       $ 13       $ (13   $ 98,091   
  

 

 

    

 

 

    

 

 

   

 

 

 

At December 31, 2009, there were gross unrealized gains of $4,000 and gross unrealized losses of $84,000, and all investments classified as available-for-sale had maturity dates in 2010.

 

     December 31,  
     2010     2009  

Property and equipment

     (in thousands)   

Computer equipment and data center

   $ 11,712      $ 12,310   

Purchased software

    
3,952
  
    4,909   

Internally developed software

    
4,544
  
    4,873   

Office equipment

     1,606        1,613   

Office furniture

     512        481   

Leasehold improvements and other

     3,133        3,134   
  

 

 

   

 

 

 
     25,459        27,320   

Accumulated depreciation

     (18,516     (15,053
  

 

 

   

 

 

 
     6,943        12,267   

Capital projects in progress

     361        48   
  

 

 

   

 

 

 
   $ 7,304      $ 12,315   
  

 

 

   

 

 

 

Included in computer equipment and data center was $1.6 million of assets acquired under capital lease. Accumulated depreciation related to assets acquired under capital lease was $1.4 million at December 31, 2010.

 

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Table of Contents
$000000000.00 $000000000.00
     December 31,  
     2010      2009  
     (in thousands)  

Accrued expenses and other current liabilities

  

Accrued distribution partner obligations

   $ 17,241       $ 22,480   

Salaries and related expenses

     6,425         4,049   

Business acquisition contingent liability

     5,423         —     

Accrued liabilities related to legal settlement

     5,356         —     

Deferred revenue

     84         314   

Other

     1,269         470   

Customer deposits

     1,619         1,623   

Accrued legal and other consulting expenses

     893         3,667   

Accrued rent

     679         929   

Deferred tax liability

     308         —     

Capital lease obligation

     221         599   
  

 

 

    

 

 

 
   $ 39,518       $ 34,131   
  

 

 

    

 

 

 

 

$000000000.00 $000000000.00
     December 31,  
     2010      2009  
     (in thousands)  

Long-term liabilities

     

Unrecognized tax benefit

   $ 955       $ 1,303   

Capital lease obligation

     —           211   
  

 

 

    

 

 

 
   $ 955       $ 1,514   
  

 

 

    

 

 

 

Note 4: Fair Value Measurements

The Company measures its investments at fair value under GAAP. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy of the Company’s financial assets carried at fair value and measured on a recurring basis is as follows (in thousands):

 

            Fair value measurements at the reporting date using  
     December 31, 2010      Quoted prices in
active markets
using identical assets
(Level 1)
     Significant other
observable
inputs
(Level 2)
     Significant
unobservable
inputs
(Level 3)
 

Cash equivalents

           

Money market funds

   $ 31       $ —         $ 31       $ —     

Commercial paper

     87,902         —           87,902         —     

Taxable municipal bonds

     12,096         —           12,096         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cash equivalents

     100,029         —           100,029         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

           

U.S. government securities

     90,850         —           90,850