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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
---
EXCHANGE ACT OF 1934
For the quarterly period ending March 31, 1998
OR
__TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________________________ to
Commission file number 1-11797
Infoseek Corporation
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0353450
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1399 MOFFETT PARK DRIVE
SUNNYVALE, CA 94089
(Address of principal executive offices)
408-543-6000
(Registrant's telephone number, including area code)
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 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
-----------
As of April 30, 1998, there were 31,317,705 shares of the registrant's common
stock outstanding.
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<TABLE>
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PART I FINANCIAL INFORMATION NUMBER
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ITEM 1: Financial Statements
Condensed Balance Sheets as of March 31, 1998
and December 31, 1997............................................. 3
Condensed Statements of Operations for the Three
Months Ended March 31, 1998 and 1997.............................. 4
Condensed Statements of Cash Flows for the Three
Months Ended March 31, 1998 and 1997.............................. 5
Notes to Condensed Financial Statements................................. 6
ITEM 2: Management's Discussion and Analysis of Financial Conditions
and Results of Operations......................................... 9
ITEM 3: Qualitative and Quantitative Disclosures about Market Risk.............. 18
PART II OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K ....................................... 30
Signatures ........................................................................ 31
</TABLE>
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PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements
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INFOSEEK CORPORATION
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31,
1998 DECEMBER 31,
ASSETS (UNAUDITED) 1997
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Current assets:
Cash and cash equivalents $ 1,053 $ 3,218
Short-term investments 71,410 28,116
Accounts receivable, net 7,434 6,918
Other current assets 633 626
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Total current assets 80,530 38,878
Property and equipment, net 11,094 10,283
Deposits and other assets 1,993 1,993
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Total assets $ 93,617 $51,154
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,921 $ 4,779
Accrued payroll and related expenses 1,293 1,618
Accrued liabilities to service providers 5,135 4,221
Other accrued liabilities 2,404 2,045
Deferred revenue 3,491 2,542
Accrued restructuring and other charges 1,416 1,877
Short-term obligations 3,033 2,475
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Total current liabilities 20,693 19,557
Long-term obligations 3,493 4,329
Shareholders' equity:
Common stock 117,084 73,565
Accumulated deficit (46,916) (45,394)
Deferred compensation (587) (753)
Notes receivable from shareholders (150) (150)
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Total shareholders' equity 69,431 27,268
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Total liabilities and shareholders' equity $ 93,617 $ 51,154
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</TABLE>
See notes to condensed financial statements.
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INFOSEEK CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
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Total revenues $14,311 $ 6,151
Cost of revenues 2,088 1,284
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Gross profit 12,223 4,867
Operating expenses:
Research and development 2,037 1,592
Sales and marketing 10,467 6,453
General and administrative 1,746 1,333
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Total operating expenses 14,250 9,378
Operating loss (2,027) (4,511)
Interest income, net 505 405
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Net loss $(1,522) $(4,106)
======= =======
Basic and diluted net loss per share $(0.05) $(0.16)
Shares used in computing basic and diluted net
loss per share 28,506 25,468
</TABLE>
See notes to condensed financial statements.
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INFOSEEK CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
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THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,522) $ (4,106)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,450 1,250
Amortization of unearned compensation 96 276
Changes in assets and liabilities:
Accounts receivable (516) (396)
Other current assets (7) (109)
Accounts payable (858) (1,026)
Accrued payroll and related expenses (325) (413)
Accrued liabilities to service providers 914 227
Other accrued liabilities 359 (69)
Accrued restructuring and other charges (461) ---
Deferred revenue 949 984
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Net cash provided (used) in operating activities 79 (3,382)
INVESTING ACTIVITIES
Purchase of available-for-sale short-term investments (58,230) (11,151)
Proceeds from sales and maturities of available-
for-sale investments 14,936 15,751
Increase in investments, deposits and other assets --- (1,626)
Purchases of property and equipment (2,261) (1,302)
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Net cash provided by (used) in investing activities (45,555) 1,672
FINANCING ACTIVITIES
Proceeds from term loan --- 2,144
Repayments of term loan (278) (237)
Proceeds from sale of common stock, net 43,589 284
-------- -------
Net cash provided by financing activities 43,311 2,191
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Net increase (decrease) in cash and cash equivalents (2,165) 481
Cash and cash equivalents at beginning of period 3,218 3,786
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Cash and cash equivalents at end of period $ 1,053 $ 4,267
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</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Cash paid for interest amounted to $166,000 and $112,000 for the three months
ended March 31, 1998 and 1997 respectively.
See notes to condensed financial statements.
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INFOSEEK CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Infoseek Corporation (the "Company") provides leading Internet search and
navigation technology, products and services that use the Web to connect its
viewers' personal, work and community lives. As a "connected" media company,
Infoseek is able to segment viewers by interest area, providing advertisers with
focused and targeted audiences. The Infoseek Service is a comprehensive Internet
gateway that combines search and navigation with directories of relevant
information sources and content sites, offers chat and instant messaging for
communicating shared interests and facilitates the purchase of related goods and
services. The Company conducts its business within one industry segment.
The financial information included herein is unaudited, except for the December
31, 1997 balance sheet which was derived from audited financial statements. The
financial information included herein has been prepared by the Company in
accordance with generally accepted accounting principles and reflects all
adjustments, consisting only of normal recurring adjustments which in the
opinion of management are necessary to state fairly the Company's financial
position, results of operations, and cash flows for the periods presented. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements as
well as the reported amounts of revenue and expenses during the reporting
period. Actual results will differ from those estimates, and such differences
may be material to the financial statements. These financial statements should
be read in conjunction with the Company's audited financial statements for the
year ended December 31, 1997 included in the Company's report Form 10-K filed
with the Securities and Exchange Commission. The results of operations for the
three month period ended March 31, 1997 are not necessarily indicative of the
results to be expected for any future periods.
2. NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share. Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary and fully diluted earnings per share, outstanding nonvested
shares are not included in the computations of basic and diluted earnings per
share until the time-based vesting restriction has lapsed. Basic earnings per
share also excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share.
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The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts):
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THREE MONTHS ENDED
MARCH 31,
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1998 1997
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Numerator:
Net loss $(1,522) $(4,106)
Numerator for basic and diluted loss per share $(1,522) $(4,106)
======= =======
Weighted average of common shares 28,506 25,468
Denominator for basic and diluted loss per share 28,506 25,468
======= =======
Basic and diluted loss per share $ (0.05) $ (0.16)
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3. NEW ACCOUNTING PRONOUNCEMENT
The Company has adopted the American Institute of Certified Public Accountants
Statement of Position, Software Revenue Recognition (SOP 97-2) effective the
first quarter of 1998. The adoption does not have material effect on the
Company's revenue recognition policy.
4. COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No. 130
(SFAS No. 130), "Reporting Comprehensive Income". SFAS No. 130 establishes new
rules for reporting and display of comprehensive income and its components;
however, the adoption of this statement has no impact on the Company's net loss
or shareholders equity. SFAS No. 130 requires unrealized gains or losses on the
Company's available-for-sale securities, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income. During the first quarter 1998, unrealized gain or losses from
available-for-sale securities were immaterial.
5. RESTRUCTURING AND OTHER CHARGES
During the second quarter of 1997, the Company recorded restructuring and other
charges of approximately $7,400,000, of which approximately $6,200,000 related
to the discontinuance of certain business arrangements, which were determined to
be non-strategic, and approximately $1,200,000 related to management changes. Of
these restructuring charges, approximately $5,000,000 involves cash outflows, of
which $3,584,000 has been completed as of March 31, 1998. Non-cash restructuring
charges of approximately $2,400,000 relate primarily to the write-down of
certain non-strategic business assets. There have been no material changes to
the restructuring plan or in the estimates of the restructuring costs. As of
March 31, 1997, the Company has approximately $1,416,000 remaining in its
restructuring reserve, which is anticipated to be fully utilized by mid 1998.
6. SUBSEQUENT EVENT
On April 17, 1998, the Company acquired WebChat Communications, Inc. ("WebChat")
in a tax-free reorganization in which WebChat was merged directly into the
Company. The Company has exchanged approximately 316,000 shares of Infoseek
Corporation common stock and has reserved
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approximately 11,000 shares for WebChat options assumed by the Company. The
shares to be exchanged represent 0.03 shares of common stock of the Company for
each share of the common, and preferred stock of WebChat. Merger related
expenses, which are not expected to be significant, will be recorded in the
second quarter of 1998. The merger has been accounted for under the pooling-of-
interests method.
The following information shows revenue and net income of the separate companies
during the periods preceding the merger (in thousands):
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Quarter ended March 31,
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1998 1997
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Net revenue:
Infoseek $14,311 $ 6,151
WebChat 142 89
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Combined $14,453 $ 6,240
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Net income:
Infoseek $(1,522) $(4,106)
WebChat (278) (399)
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Combined $(1,800) $(4,505)
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</TABLE>
7. NETSCAPE AGREEMENT
The Company's current agreement with Netscape provides for the Company to pay
an aggregate of $12,500,000 in cash and reciprocal advertising ($10,000,000 in
cash and $2,500,000 in reciprocal advertising) to be one of four non-exclusive
premier providers of navigational services (along with Excite, Lycos and
Yahoo!) which expired on April 30, 1998, but was subsequently extended through
May 31, 1998. During the three months ended March 31, 1998 and 1997, the
Company recognized $2,500,000 and $1,250,000, respectively, of expense related
to this agreement. The payments to Netscape are being recognized ratably over
the term of the agreement. At March 31, 1998, the Company has approximately
$5,968,000 of cash commitment remaining in connection with this agreement,
which includes $5,135,000 of accrued liabilities to service providers.
Recently Netscape has announced that they have signed a two-year strategic
partnership with Excite to build out content based channels jointly for
Netscape's Web site and to create co-branded search, thereby competing
directly with the Company. Under terms of this agreement, Netscape and Excite
will each serve as a premier provider, with each receiving 25 percent of the
net search rotation--the percentage of pages served to visitors who have not
selected a preferred provider. The remaining 50 percent of premier provider
rotations will be allocated or divided and sold among the remaining
navigational service providers (the allocated percent rotation of premier
provider rotations which will be shared by other navigational service
providers, decreases to 25 percent in 1999).
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ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth in "Risk
Factors" that may affect future results and other factors discussed else where
in this quarterly report.
OVERVIEW
Infoseek was formed in August 1993 to develop and provide Internet and World
Wide Web search and navigational services. From inception to March 31, 1995, the
Company's operations were limited and consisted primarily of start-up
activities, including recruiting personnel, raising capital, research and
development, and the negotiation and execution of an agreement to license an
information retrieval search engine.
The Company introduced its first products and services in 1995. Through the
second quarter of 1997, the Company's strategic focus was on developing its
capabilities as an Internet search and navigation service. In response to rapid
growth and a change in the Internet search and navigation market, the Company's
Board of Directors, in the second quarter of 1997, hired a new Chief Executive
Officer, Harry Motro, to evolve the strategic vision of the Company while
continuing to leverage the Company's core strength in search and navigation. Mr.
Motro and Founder Steven Kirsch recruited a number of new members to the
executive management team to execute the Company's strategy of building Infoseek
brand awareness; creating a richer viewer experience; maximizing value for the
Company's advertisers; providing intranet search products; and enhancing
Infoseek's search and navigation service. In June 1997, the Company took a
restructuring charge of approximately $7,400,000 related to the discontinuance
of certain non-strategic business arrangements and management changes.
In October 1997, the Company launched an enhanced version of the Infoseek
Service, with 15 easy to navigate "channels" that integrate search results with
relevant information, services, products and communities on the Web. The new
Infoseek Service provides the Company with a platform for creating content and
marketing partnerships that enrich the viewer's experience while enabling
advertisers, sponsors and partners to more effectively target viewers.
Since inception and through the first quarter of 1998, the Company has achieved
significant growth in traffic and revenues. The Company's first quarter 1998
revenues of approximately $14,311,000 represents a 133% increase as compared to
the first quarter 1997 revenues of approximately $6,151,000. The Company's
average daily page views increased 36% in March 1998 as compared to December
1997 and averaged 17.3 million during the month of March 1998. Through March
1998, the Company derived a substantial majority of its revenues from the sale
of advertisements on its Web pages. Advertising revenues accounted for
approximately 88% of total revenues during the first quarter of 1998 compared
with 96% during the first quarter of 1997. Most of the
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Company's contracts with advertising customers have terms of three months or
less, with options to cancel at any time.
Beginning with the October 1997 launch of the enhanced version of the Infoseek
Service, the Company began to sell channel sponsorships to advertisers, sponsors
and partners. Through the first quarter 1998, the Company entered into various
sponsor and partnership agreements covering certain topics within five of the
Company's 16 channels, including an exclusive relationship with Borders OnLine,
Inc. for the sale of books. The duration of the Company's sponsorship and
partnership agreements range from two months to two years and revenues are
generally recognized ratably over the term of the agreements, provided that
minimum impressions are met, and are included in advertising revenues.
Beginning in early 1997, the Company began to license its Ultraseek Server
product to corporate customers for use on their intranets and public Web sites.
Such licensing revenues represented approximately 12% and 4% of total revenues
during the first quarter of 1998 and 1997, respectively.
The Company's significant growth and limited operating history in a rapidly
evolving industry makes it difficult to manage operations and predict future
operating results. The Company has incurred significant net losses since
inception and expects to continue to incur significant losses on a quarterly and
annual basis in 1998 and may do so in subsequent fiscal periods. As of March 31,
1998, the Company had an accumulated deficit of $46,916,000. The Company and its
prospects must be considered in light of the risks, costs and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in the new and rapidly evolving Internet market. There
can be no assurance that the Company will be able to address any of these
challenges. Although the Company has experienced significant revenue growth in
1997 and in the first quarter of 1998, there can be no assurance that this
growth rate will be sustained or that revenues will continue to grow or that the
Company will achieve profitability. In 1997 and in the first quarter of 1998,
the Company significantly increased its operating expenses as a result of a
substantial increase in its sales and marketing operation, development of new
distribution channels, broadening of its customer support capabilities and
funding of greater levels of research and development. Further increases in
operating expenses are planned during fiscal 1998. To the extent that any such
expenses are not timely followed by increased revenues, the Company's business,
results of operations, financial condition and prospects would be materially
adversely affected.
As a result of the Company's limited operating history as well as the recent
emergence of both the Internet and intranet markets addressed by the Company,
the Company has neither internal nor industry-based historical financial data
for any significant period of time upon which to project revenues or base
planned operating expenses. The Company expects that its results of operations
may also fluctuate significantly in the future as a result of a variety of
factors, including: the continued rate of growth, usage and acceptance of the
Internet and intranets as information media; the rate of acceptance of the
Internet as an advertising medium and a channel of commerce; demand for the
Company's products and services; the advertising budgeting cycles of individual
advertisers; the introduction and acceptance of new, enhanced or alternative
products or services by the Company or by its competitors; the Company's ability
to anticipate and effectively adapt to a developing market and to rapidly
changing technologies; the Company's ability to attract, retain
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and motivate qualified personnel; initiation, implementation, renewal or
expiration of significant contracts with Bell Atlantic, Borders OnLine, Inc.,
Microsoft, Netscape and others; pricing changes by the Company or its
competitors; specific economic conditions in the Internet and intranet markets;
general economic conditions; and other factors. Substantially all of the
Company's revenues have been generated from the sale of advertising, and the
Company expects to continue to derive substantially all of its revenues from
selling advertising and related products for the foreseeable future.
Moreover, most of the Company's contracts with advertising customers have terms
of three months or less. Advertising revenues are tightly related to the amount
of traffic on the Company's Web site, which is inherently unpredictable.
Accordingly, future sales and operating results are difficult to forecast. The
Company's expense levels are based, in part, on its expectations as to future
revenues and, to a significant extent, are not expected to decrease, at least in
the short term. The Company may not be able to adjust spending in a timely
manner to compensate for any future revenue shortfall. Accordingly, any
significant shortfall in relation to the Company's expectations would have an
immediate material adverse impact on the Company's business, results of
operations, financial condition and prospects.
In addition, the Company may elect from time to time to make certain pricing,
service or marketing decisions or acquisitions that could have a short-term
material adverse effect on the Company's business, results of operations,
financial condition and prospects and which may not generate the long-term
benefits intended. From time to time, the Company has entered into and may
continue to enter into strategic relationships with companies for cross service
advertising, such as the Company's relationships with Bell Atlantic and United
Parcel Service of America, Inc. ("UPS"). The Company's revenues have in the past
been, and may in the future continue to be partially dependent on its
relationship with its strategic partners. Such strategic relationships have and
may continue to include substantial one-time or up front payments from the
Company's partners.
Accordingly, the Company believes that its quarterly revenues are likely to vary
significantly in the future, that period-to-period comparisons are not
necessarily meaningful and that such comparisons should not necessarily be
relied upon as an indication of the Company's future performance. Due to the
foregoing factors, it is likely that in future periods, the Company's operating
results may be below the expectations of public market analysts and investors.
In such event, the price of the Company's Common Stock would likely be
materially adversely affected. See "Risk Factors--Limited Operating History;
Historical Losses; Anticipation of Continued Losses," "--Potential Fluctuations
in Future Results," "--Relationship With Netscape" and "--Developing Market;
Unproven Acceptance of Internet Advertising and of the Company's Products and
Services."
RESULTS OF OPERATIONS
Total Revenue
For the three months ended March 31, 1998 and 1997 total revenues were
$14,311,000, and $6,151,000, respectively.
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During the first quarter of 1998 and 1997 the Company derived a substantial
majority of its revenues from the sale of advertisements on its Web pages.
Advertising revenues in the three months ended March 31, 1998 and 1997 were
$12,641,000, and $5,933,000, respectively, representing 88% and 96% of total
revenues in such periods. The growth in advertising revenues is attributable to
the increased use of the Internet for information publication, distribution and
commerce coupled with the development and acceptance of the Internet as an
advertising medium and increased viewer traffic on the Infoseek Service. The
Company expects to continue to derive a substantial majority of its revenues for
the foreseeable future from selling advertising space on its Web sites.
Advertising revenues are derived principally from short-term advertising
contracts in which the Company guarantees a minimum number of impressions
(displays of an advertisement to the viewer) for a fixed fee. Advertising
revenues are recognized ratably over the term of the contract during which
services are provided and are stated net of customer discounts. To the extent
minimum guaranteed impressions are not met, the Company defers recognition of
the corresponding revenue until the remaining guaranteed impression levels are
achieved. Deferred revenue is comprised of billings in excess of recognized
revenue related to advertising contracts.
Also included in advertising revenues is the exchange by the Company of
advertising space on the Company's Web sites for reciprocal advertising space or
traffic in other media publications or other Web sites or receipt of applicable
goods and services. Revenues from these exchange transactions are recorded as
advertising revenues at the estimated fair value of the goods and services
received and are recognized when both the Company's advertisements and
reciprocal advertisements are run or applicable goods or services are received.
Although such revenues have not exceeded 10% of total revenues in any period to
date, the Company believes these exchange transactions are of value,
particularly in the marketing of the Infoseek brand, and expects to continue to
engage in these transactions in the future.
In late 1997, the Company released a new version of its service which features
15 "channels," designed to bring together topical information, services,
products and communities on the Web. The new service provides additional
opportunities for revenue from the sale of channel sponsorships and in some
circumstances enables the Company to share in a portion of the revenue generated
by its viewers with these channel sponsors. Revenue generated by channel
sponsors is included in advertising revenues and is recognized on a straight
line basis over the terms of the agreements provided that minimum impressions
are met.
The balance of total revenues was derived from the licensing of the Ultraseek
Server product to businesses for internal use in their intranets, extranets or
public sites. This licensing revenue represented approximately 12% and 4% of
total revenue for the three month period ended March 31, 1998 and 1997,
respectively.
The Company's current business model is to generate revenues through the sale of
advertising on the Internet. There can be no assurance that current advertisers
will continue to purchase advertising space and services from the Company or
that the Company will be able to successfully attract additional advertisers.
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Cost of Revenues
For the three months ended March 31, 1998 and 1997, cost of revenues were
$2,088,000, and $1,284,000, respectively. Cost of revenues consists primarily of
expenses associated with the enhancement, maintenance and support of the
Company's Web sites, including telecommunications costs and equipment
depreciation. Cost of revenues also includes expenses associated with the
licensing of certain third-party technologies. Cost of revenues increased in the
three months ended March 31, 1998 and 1997 as the Company added additional
equipment and personnel to support its Web sites and as royalties due to certain
third parties increased. The Company expects its cost of revenues will continue
to increase in absolute dollars and possibly as a percentage of revenues as it
upgrades equipment and maintenance and support personnel and adds content
partners to meet the growing demands for Web services.
Operating Expenses
The Company's operating expenses have increased in absolute dollars during the
first quarter 1998 compared to the first quarter 1997 as the Company has
expanded its business and the marketing of its services and products. The
Company expects operating expenses to continue to increase in dollar amount in
the future as the Company continues to expand its business.
The Company recorded aggregate deferred compensation of $5,666,000 in connection
with certain stock options granted through 1997. The amortization of such
deferred compensation is being charged to operations over the vesting periods of
the options, which are typically four years. For the three months ended March
31, 1998 and 1997, the Company amortized $96,000 and $276,000, respectively,
related to stock options. The amortization of this deferred compensation will
continue to have an adverse effect on the Company's results of operations
through 1999.
Research and Development
For the three months ended March 31, 1998 and 1997 research and development
expenses were $2,037,000 and $1,592,000, respectively. Research and development
expenses consist principally of personnel costs, consulting and equipment
depreciation. Costs related to research, design and development of products and
services have been charged to research and development expense as incurred.
The increase in research and development expenses for 1998 over 1997 was
primarily the result of on-going enhancements to the Infoseek Service and the
development and implementation of new technology and products. The Company
believes that a significant level of product development expenses is required to
continue to remain competitive in its industry. Accordingly, the Company
anticipates that it will continue to devote substantial resources to product
development and that these costs are expected to continue to increase in dollar
amount in future periods.
Sales and Marketing
For the three months ended March 31, 1998 and 1997 sales and marketing expenses
were $10,467,000, and $6,453,000, respectively. Sales and marketing expenses
consist primarily of compensation of sales and marketing personnel, advertising
and promotional expenses.
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Sales and marketing expenses for the three month period ended March 31, 1998 and
1997 included payments made to Netscape pursuant to an arrangement for the
listing of the Company's service on the Netscape Web page. The original
agreement with Netscape provided for payments of up to an aggregate of
$5,000,000 in cash and reciprocal advertising ($3,500,000 in cash and $1,500,000
in reciprocal advertising) over the course of the one-year term of the
agreement. The current agreement with Netscape provides for the Company to pay
an aggregate of $12,500,000 in cash and reciprocal advertising ($10,000,000 in
cash and $2,500,000 in reciprocal advertising) to be one of four non-exclusive
premier providers of navigational services (along with Excite, Lycos and Yahoo!)
which expired on April 30, 1998, but was subsequently extended through May 31,
1998. During the three months ended March 31, 1998 and 1997, the Company
recognized $2,500,000 and $1,250,000, respectively, of expense related to this
agreement. The payments to Netscape are being recognized ratably over the term
of the agreement. At March 31, 1998, the Company has approximately $5,968,000 of
cash commitment remaining in connection with this agreement, which includes
$5,135,000 of accrued liabilities to service providers.
Recently Netscape has announced that they have signed a two-year strategic
partnership with Excite to build out content based channels jointly for
Netscape's Web site and to create co-branded search, thereby competing directly
with the Company. Under terms of this agreement, Netscape and Excite will each
serve as a premier provider, with each receiving 25 percent of the net search
rotation--the percentage of pages served to visitors who have not selected a
preferred provider. The remaining 50 percent of premier provider rotations will
be allocated or divided and sold among the remaining navigational service
providers (the allocated percent rotation of premier provider rotations, which
will be shared by other navigational service providers, decreases to 25 percent
in 1999). Although the Company is currently in discussions with Netscape about a
new agreement and continuing to purchase search traffic and to be a premier
provider who will share in the remaining available rotation, there can be no
assurance that Netscape will be willing to renew the agreement with the Company
on commercially equivalent terms or on other terms that may be satisfactory to
the Company, if at all. The failure to renew the Netscape agreement would
result, at least in the short term, and could result, in the long-term, in a
material reduction in traffic to the Infoseek Web site. This could, in turn,
result in advertisers on the Company's Web sites, including channel sponsors,
terminating their contracts with the Company as such contracts are typically of
short duration and terminable on relatively short notice, reducing the number of
impressions purchased. Furthermore, the Company's contracts with advertisers
generally guarantee a minimum number of page views, and a failure to achieve the
minimum page views could result in a reduction in payments to the Company or
compel the Company to provide "make good" impressions if such minimums are not
met. If the Company is unable to develop viable alternative distribution
channels to Netscape or is otherwise unable to offset a reduction in traffic,
advertising revenues would be substantially adversely affected, resulting in the
Company's business, results of operations, financial condition and prospects
being materially and adversely affected. See "Risk Factors--Relationship With
Netscape and Intense Competition."
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In addition, in July 1997, the Company entered into an agreement with Netscape
whereby it was designated as a premier provider of international search and
navigational guide services for the Netscape Net Search Program, for 10 Netscape
local Web sites. The Company's agreement with Netscape provides for payments of
up to a maximum aggregate of $1,219,000 in cash and reciprocal advertising over
the one-year term of the agreement. During the three months ended March 31,
1998, the Company recognized sales and marketing expenses of approximately
$100,000 under this agreement as a component of sales and marketing expense.
The increase in sales and marketing expenses for the three months ended 1998
over 1997 was also the result of hiring additional sales and marketing personnel
and an increase in promotional and advertising activity including advertising
campaigns in both 1998 and 1997, including television. The Company expects to
increase the amount of promotional and advertising expenses and anticipates
hiring additional sales representatives in future periods.
General and Administrative
For the three months ended March 31, 1998 and 1997 general and administrative
expenses were $1,746,000, and $1,333,000, respectively. General and
administrative expenses consist primarily of compensation of administrative and
executive personnel, facility costs and fees for professional services.
The increase in general and administrative expenses for the three months ended
March 31, 1998 over the comparable periods in 1997 was also the result of hiring
additional administrative and executive staff and adding infrastructure to
manage the expansion of the business. The Company anticipates that its general
and administrative expenses will continue to increase in dollar amount as the
Company continues to expand its administrative and executive staff.
Restructuring and Other Charges
During the second quarter of 1997, the Company recorded restructuring and other
charges of approximately $7,400,000, of which approximately $6,200,000 related
to the discontinuance of certain business arrangements which were determined to
be non-strategic, and approximately $1,200,000 related to management changes. Of
these restructuring charges, approximately $5,000,000 involved cash outflows, of
which $3,584,000 had been paid as of March 31, 1998. Non-cash restructuring
charges of approximately $2,400,000 related primarily to the write-down of
certain non-strategic business assets. There have been no material changes to
the restructuring plan or in the estimates of the restructuring costs. As of
March 31, 1998, the Company had approximately $1,416,000 remaining in its
restructuring reserve, which is currently expected to be fully utilized by mid
1998.
Income Taxes
Due to the Company's loss position, there was no provision for income taxes for
any of the periods presented. At December 31, 1997, the Company had federal and
state net operating loss carry forwards of approximately $42,600,000 and
$28,300,000, respectively. The federal net operating loss carry forwards will
expire beginning in 2009 through 2012, if not utilized, and the state net
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operating loss carry forwards will expire in the years 1999 through 2002.
Certain future changes in the share ownership of the Company, as defined in the
Tax Reform Act of 1986 and similar state provisions, may restrict the
utilization of carry forwards. A valuation allowance has been recorded for the
entire deferred tax asset as a result of uncertainties regarding the realization
of the asset due to the lack of earnings history of the Company.
Merger with WebChat Communications, Inc.
On April 17, 1998, the Company acquired WebChat Communications, Inc. ("WebChat")
in a tax-free reorganization in which WebChat was merged directly into the
Company. The Company has exchanged approximately 316,000 shares of Infoseek
Corporation common stock and has reserved approximately 11,000 shares for
WebChat options assumed by the Company. The shares to be exchanged represent
0.03 shares of common stock of the Company for each share of the common, and
preferred stock of WebChat. Merger related expenses, which are not expected to
be significant, will be recorded in the second quarter of 1998. The merger has
been accounted for under the pooling-of-interests method.
LIQUIDITY AND CAPITAL RESOURCES
From inception through May 1996, the Company financed its operations and met its
capital expenditure requirements primarily from proceeds derived from the
issuance of equity, convertible debt securities and equipment term loans. In
February 1998, the Company completed a follow-on public offering and received
approximately $43,015,000 net of underwriting discounts, commissions and other
offering costs.
For the first three months ended March 31, 1998, operating activities provided
cash of $79,000 due to increases in depreciation and amortization, deferred
revenue and liabilities partially offset by net loss and increase in accounts
receivable. For the three month period ended March 31, 1997, operating
activities used cash of $3,382,000 due to net losses, decreases in accounts
payable and increases in accounts receivable, partially offset by increases in
depreciation and amortization and deferred revenue. For the first three months
ended March 31, 1998, investing activities used cash of $45,555,000 primarily
related to the purchase of short-term investments. For the three months ended
March 31, 1997, investing activities provided net cash of $1,672,000, primarily
associated with sale of short-term investments. Financing activities generated
cash of $43,311,000, and $2,191,000, in the first three months of 1998 and 1997,
respectively, primarily from the follow-on public offering in March 1998 and
equipment term loans in March 1997.
The Company has commitments for its facilities under operating lease agreements
and expects to continue to incur significant capital expenditures to support
expansion of the Company's business. Furthermore, from time to time the Company
expects to evaluate the acquisition of products, businesses and technologies
that complement the Company's business. The Company does not, however, currently
have any understandings, commitments or agreements with respect to any such
acquisitions.
The Company had $72,463,000 in cash, cash equivalents and short-term investments
at March 31, 1998. Also, in March 1997, the Company entered into a four-year,
$5,000,000 equipment term loan
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facility. The Company currently anticipates that its cash, cash equivalents,
short-term investments, available funds under its equipment term loan facility
and cash flows generated from advertising revenues, will be sufficient to meet
its anticipated needs for working capital and other cash requirements through at
least March 31, 1999. Thereafter, the Company may need to raise additional
funds. The Company may need to raise additional funds sooner, however, in order
to fund more rapid expansion, to develop new or enhance existing services or
products, to respond to competitive pressures or to acquire complementary
products, businesses or technologies. If additional funds are raised through the
issuance of equity or convertible debt securities, the percentage ownership of
the shareholders of the Company will be reduced, shareholders may experience
additional dilution and such securities may have rights, preferences or
privileges senior to those of the holders of the Company's Common Stock. There
can be no assurance that additional financing will be available on terms
favorable to the Company, or at all. If adequate funds are not available or are
not available on acceptable terms, the Company's ability to fund expansion, take
advantage of acquisition opportunities, develop or enhance services or products
or respond to competitive pressures would be significantly limited. Such
limitation could have a material adverse effect on the Company's business,
results of operations, financial condition and prospects. The estimate of the
period for which the Company expects its available funds to be sufficient to
meet its capital requirements is a forward-looking statement that involves risks
and uncertainties. There can be no assurance that the Company will be able to
meet its working capital and other cash requirements for this period as a result
of a number of factors including but not limited to those described under "Risk
Factors--Future Capital Needs; Uncertainty of Additional Financing."
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ITEM 3: Qualitative and Quantitative Disclosures about Market Risk
In evaluating the Company's business, investors should carefully consider the
following risk factors in addition to the other information set forth herein or
incorporated herein by reference.
LIMITED OPERATING HISTORY; HISTORICAL LOSSES; ANTICIPATION OF CONTINUED LOSSES.
The Company's limited operating history makes it difficult to manage operations
and predict future operating results. The Company has incurred significant net
losses since inception and expects to continue to incur significant losses on a
quarterly and annual basis in 1998 and may do so in subsequent fiscal periods.
As of March 31, 1998, the Company had an accumulated deficit of $46,916,000. The
Company and its prospects must be considered in light of the risks, costs and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in the new and rapidly evolving Internet
market. There can be no assurance that the Company will be able to address any
of these challenges. Although the Company has experienced significant revenue
growth in 1997, there can be no assurance that this growth rate will be
sustained or that revenues will continue to grow or that the Company will
achieve profitability. In 1997 and the first quarter of 1998, the Company
significantly increased its operating expenses as a result of a substantial
increase in its sales and marketing efforts, development of new distribution
channels, expansion of its customer support capabilities and to fund greater
levels of research and development. Further increases in operating expenses are
planned during fiscal 1998. To the extent that any such expenses are not timely
followed by increased revenues, the Company's business, results of operations,
financial condition and prospects would be materially adversely affected.
RELATIONSHIP WITH NETSCAPE. Since March 1995, the Company has been a featured
provider of navigational services on the Web page of Netscape. In 1996 and 1997
and during the first quarter of 1998, approximately 65%, 36% and 26%,
respectively, of all page views served on the Infoseek Service came from traffic
attributable to the Netscape Web page. The current agreement with Netscape
provides for the Company to pay an aggregate of $12,500,000 in cash and
reciprocal advertising ($10,000,000 in cash and $2,500,000 in reciprocal
advertising) to be one of four non-exclusive premier providers of navigational
services (along with Excite, Lycos and Yahoo!) which expired on April 30, 1998,
but was subsequently extended through May 31, 1998. Recently, Netscape has
announced that they have signed a two-year strategic partnership with Excite to
build out content based channels jointly for Netscape's Web site and to create
co-branded search, thereby competing directly with the Company. Under terms of
this agreement, Netscape and Excite will each serve as a premier provider, with
each receiving 25 percent of the net search rotation--the percentage of pages
served to visitors who have not selected a preferred provider. The remaining 50
percent of premier provider rotations will be allocated or divided and sold
among the remaining navigational service providers (the allocated percent
rotation of premier provider rotations, which will be shared by other
navigational service providers, decreases to 25 percent in 1999). Although the
Company is currently in discussions with Netscape about a new agreement and
continuing to purchase search traffic and to be a premier provider who will
share in the remaining available rotation, there can be no assurance that
Netscape will be willing to renew the agreement with the Company on commercially
equivalent terms or on other terms that may be satisfactory to the Company, if
at all. The failure to renew the Netscape agreement would result, at least in
the short term, and could result, in the long-term, in a material reduction in
traffic to
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the Infoseek Web site. This could, in turn, result in advertisers on the
Company's Web sites, including channel sponsors and partners, terminating their
contracts with the Company as such contracts are typically of short duration and
terminable on relatively short notice, or reducing the number of impressions
purchased. Furthermore, the Company's contracts with advertisers and sponsors
generally guarantee a minimum number of page views, and a failure to achieve the
minimum page views could result in a reduction in payments to the Company or
compel the Company to provide "make good" impressions if such minimums are not
met. If the Company is unable to develop viable alternative distribution
channels to Netscape or is otherwise unable to offset a reduction in traffic,
advertising revenues would be substantially adversely affected, resulting in the
Company's business, results of operations, financial condition and prospects
being materially and adversely affected.
POTENTIAL FLUCTUATIONS IN FUTURE RESULTS. As a result of the Company's limited
operating history as well as the recent emergence of both the Internet and
intranet markets addressed by the Company, the Company has neither internal nor
industry-based historical financial data for any significant period of time upon
which to project revenues or base planned operating expenses. The Company
expects that its results of operations may also fluctuate significantly in the
future as a result of a variety of factors, including: the continued rate of
growth, usage and acceptance of the Internet and intranets as information media;
the rate of acceptance of the Internet as an advertising medium and a channel of
commerce; demand for the Company's products and services; the advertising
budgeting cycles of individual advertisers; the introduction and acceptance of
new, enhanced or alternative products or services by the Company or by its
competitors; the Company's ability to anticipate and effectively adapt to a
developing market and to rapidly changing technologies; the Company's ability to
attract, retain and motivate qualified personnel; initiation, implementation,
renewal or expiration of significant contracts with Bell Atlantic, Borders
Online, Inc , Microsoft, Netscape and others; pricing changes by the Company or
its competitors; specific economic conditions in the Internet and intranet
markets; general economic conditions; and other factors. Substantially all of
the Company's revenues have been generated from the sale of advertising, and the
Company expects to continue to derive substantially all of its revenues from
selling advertising and related products for the foreseeable future. Moreover,
most of the Company's contracts with advertising customers have terms of three
months or less. Advertising revenues are tightly related to the amount of
traffic on the Company's Web site, which is inherently unpredictable.
Accordingly, future sales and operating results are difficult to forecast. The
Company's expense levels are based, in part, on its expectations as to future
revenues and, to a significant extent, are not expected to decrease, at least in
the short term. The Company may not be able to adjust spending in a timely
manner to compensate for any future revenue shortfall. Accordingly, any
significant shortfall in relation to the Company's expectations would have an
immediate material adverse impact on the Company's business, results of
operations, financial condition and prospects.
In addition, the Company may elect from time to time to make certain pricing,
service or marketing decisions or acquisitions that could have a short-term
material adverse effect on the Company's business, results of operations,
financial condition and prospects and which may not generate the long-term
benefits intended. From time to time, the Company has entered into and may
continue to enter into strategic relationships with companies for cross service
advertising, such as the Company's relationships with Bell Atlantic and UPS. The
Company's revenues have in the past
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been, and may in the future continue to be, partially dependent on its
relationship with its strategic partners. Such strategic relationships have and
may continue to include substantial one-time or up front payments from the
Company's partners. Accordingly, the Company believes that its quarterly
revenues are likely to vary significantly in the future, that period-to-period
comparisons are not necessarily meaningful and that such comparisons should not
necessarily be relied upon as an indication of the Company's future performance.
Due to the foregoing factors, it is likely that in future periods, the Company's
operating results may be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would likely
be materially adversely affected.
DEVELOPING MARKET; UNPROVEN ACCEPTANCE OF INTERNET ADVERTISING AND OF THE
COMPANY'S PRODUCTS AND SERVICES. The Company's future success is highly
dependent upon the increased use of the Internet and intranets for information
publication, distribution and commerce. The market for the Company's products
and services has only recently begun to develop, is rapidly evolving and is
characterized by an increasing number of market entrants with products and
services for use on the Internet and intranets. In particular, because the
Company expects to derive substantially all of its revenues in the foreseeable
future from sales of Internet advertising, the future success of the Company is
highly dependent on the development of the Internet as an advertising medium. If
the market fails to continue to develop, develops more slowly than expected or
becomes saturated with competitors, or if the Company's products and services do
not achieve or sustain acceptance by Internet users or advertisers, the
Company's business, results of operations, financial condition and prospects
would be materially adversely affected.
RISKS ASSOCIATED WITH BRAND DEVELOPMENT. The Company believes that establishing
and maintaining the Infoseek brand is a critical aspect of its efforts to
attract and expand its audience and that the importance of brand recognition
will increase due to the growing number of Internet sites and the relatively low
barriers to entry. Promotion and enhancement of the Infoseek brand will depend
largely on the Company's success in providing high-quality products and services
and in designing and implementing effective media promotions, which success
cannot be assured. In order to attract and retain Internet users and to promote
and maintain the Infoseek brand in response to competitive pressures, the
Company believes it is necessary to increase substantially its financial
commitment to creating and maintaining a distinct brand loyalty among consumers.
If the Company is unable to provide high-quality products and services, design
and implement effective media promotions or otherwise fails to promote and
maintain its brand, or if the Company incurs excessive expenses in an attempt to
improve its products and services or promote and maintain its brand, the
Company's business, results of operations, financial condition and prospects
would be materially and adversely affected.
INTENSE COMPETITION. The market for Internet and intranet products and services
is highly competitive, and the Company expects that competition will continue to
intensify. The market for Internet and intranet search and navigational services
has only recently begun to develop, and the Company cannot predict with any
certainty how competition will affect the Company, its competitors or its
customers. There can be no assurance that the Company will be able to compete
successfully or that the competitive pressures faced by the Company, including
those listed below, will not have a material adverse effect on the Company's
business, results of operations, financial
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condition and prospects. The Company believes it faces numerous competitive
risks, including the following:
Competition from consolidated internet products. A number of companies offering
Internet products and services, including direct competitors of the Company,
recently have begun to integrate multiple features within the products and
services they offer to consumers. Integration of Internet products and services
is occurring through development of competing products and through acquisitions
of, or entering into joint ventures and or licensing arrangements involving,
competitors of the Company. For example, Netscape has recently announced that
they have signed a two-year strategic partnership with Excite to build out
content based channels jointly for Netscape's Web site and to create co-branded
search, thereby competing directly with the Company. The Web browser offered by
Microsoft, another widely-used browser and substantial source of traffic for the
Company, may incorporate and promote information search and retrieval
capabilities in future releases or upgrades that could make it more difficult
for Internet viewers to find and use the Company's products and services.
Microsoft recently licensed products and services from Inktomi Corporation
("Inktomi"), a direct competitor of the Company, and has announced that it will
feature and promote Inktomi services in the Microsoft Network and other
Microsoft online properties. The Company expects that such search services may
be tightly integrated into the Microsoft operating system, the Internet Explorer
browser and other software applications, and that Microsoft will promote such
services within the Microsoft Network or through other Microsoft-affiliated end-
user services such as MSNBC or WebTV. In addition, entities that sponsor or
maintain high-traffic Web sites or that provide an initial point of entry for
Internet viewers, such as the RBOCs or ISPs such as Microsoft and AOL, currently
offer and can be expected to consider further development, acquisition or
licensing of Internet search and navigation functions competitive with those
offered by the Company, or could take actions that make it more difficult for
viewers to find and use the Company's products and services. For example, AOL is
currently a significant shareholder of Excite and offers Excite's WebCrawler and
NetFind as the exclusive Internet search and retrieval services for use by AOL's
subscribers. Continued or increased competition from such consolidations,
integration and strategic relationships involving competitors of the Company
could have a material adverse effect on the Company's business, results of
operations, financial condition and prospects.
Competition from existing search and navigational competitors. Many companies
currently offer directly competitive products or services addressing Web search
and navigation, including DEC/AltaVista, Excite, HotBot, Inktomi, Lycos, CNET
and Yahoo! In addition, the Company's Ultraseek Server product competes directly
with intranet products and services offered by companies such as DEC/AltaVista,
Lycos, Open Text and Verity. The Web browsers currently offered by Netscape and
Microsoft, which are the two most widely-used browsers, incorporate prominent
search buttons and similar features, such as features based on "push"
technologies, that direct search traffic to competing services, including those
that may be developed or licensed by Microsoft or Netscape in enhancements or
later versions of these or other products. Many of the Company's existing
competitors, as well as a number of potential new competitors, have
significantly greater financial, technical, marketing and distribution resources
than the Company.
Competition from Internet and other advertising media. The Company also competes
with online services, other Web site operators and advertising networks, as well
as traditional media such as
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television, radio and print for a share of advertisers' total advertising
budgets. Additionally, a large number of Web sites and online services
(including, among others, the Microsoft Network, MSNBC, AOL and other Web
navigation companies such as Excite, Lycos and Yahoo!) offer informational and
community features, such as news, stock quotes, sports coverage, yellow pages
and e-mail listings, weather news, chat services and bulletin board listings
that are competitive with the services currently offered or proposed to be
offered by the Company. Moreover, the Company believes that the number of
companies selling Web-based advertising and the available inventory of
advertising space have recently increased substantially. Accordingly, the
Company may face increased pricing pressure for the sale of advertisements and
reductions in the Company's advertising revenues.
Low barriers to entry for new search and navigational companies. The Company
believes that the costs associated with developing technologies, products and
services that compete with those offered by the Company are relatively low. As a
result, as the market for Internet and intranet search and navigational products
develops, other companies may be expected to offer similar products and services
and directly and indirectly compete with the Company for advertising revenues.
RELIANCE ON ADVERTISING REVENUES. The Company has derived a substantial majority
of its revenues to date from the sale of advertisements and expects to continue
its dependence on advertising and related products, including channel
sponsorships and, to a lesser extent, the sale of the Ultramatch advertising
management system and the Ultraseek Server intranet product. The Company's
current business model of generating revenues through the sale of advertising on
the Internet, which is highly dependent on the amount of traffic on the
Company's Web site, is relatively unproven. The Internet as an advertising
medium has not been available for a sufficient period of time to gauge its
effectiveness as compared with traditional advertising media. In addition, most
of the Company's current advertising customers have limited or no experience
using the Internet as an advertising medium, have not devoted a significant
portion of their advertising expenditures to such advertising and may not find
such advertising to be effective for promoting their products and services
relative to advertising in traditional media. There can be no assurance that
current advertisers will continue to purchase advertising space and services
from the Company or that sufficient impressions will be achieved or available,
or that the Company will be able to successfully attract additional advertisers.
Furthermore, with the rapid growth of available inventory on the Internet and
the intense competition among sellers of advertising space, it is difficult to
project future levels of advertising revenues and pricing models that will be
adopted by the industry or individual companies. In addition, the ability to
quickly develop new business models which will generate additional revenue
sources may be vital for the Company to remain competitive in its marketplace.
Accordingly, there can be no assurance that the Company will be successful in
generating significant future advertising revenues or other source of revenues;
failure to do so could have a material adverse effect on the Company's business,
results of operations, financial condition and prospects.
TECHNOLOGICAL CHANGE AND NEW PRODUCTS AND SERVICES. The market for Internet
products and services is characterized by rapid technological change, changing
customer needs, frequent new product introductions and evolving industry
standards. These market characteristics are exacerbated by the emerging nature
of this market and the fact that many
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companies are expected to introduce new Internet products and services in the
near future. The Company's future success will depend on its ability to
continually and, on a timely basis, introduce new products, services and
technologies and to continue to improve the performance, features and
reliability of the Company's products and services in response to both evolving
demands of the marketplace and competitive product offerings.
During the fourth quarter of 1997 and the first quarter of 1998, the Company
released a new version of its service which currently features 16 "channels,"
designed to bring together topical information, services, products and
communities on the Web. The new service provides additional opportunities for
revenue from the sale of channel sponsorships as well as provides an opportunity
for the Company to share in a portion of the revenue facilitated by its viewers
with these channel sponsors. Continued market acceptance of this new version and
successful conclusion of sponsorship arrangements are integral to the Company's
competitiveness and viability. Most of the Company's additional channel
sponsorship and partnership arrangements are dependent on an increasing level of
viewer traffic. If the Company is unable to renew its relationship with
Netscape, or if viewer traffic is otherwise materially adversely affected, the
Company may be unable to retain its channel sponsorship and partnership
arrangements. In addition, there can be no assurance that this new sponsorship
service or any other new or proposed product or service will attain market
acceptance, experience technological sustainability or be free of errors that
require significant design modifications or that the business model to generate
revenues will be successful. Failure of the Company to successfully design,
develop, test, market and introduce other new and enhanced technologies and
services, or any enhancements of the Company's current search technology, or the
failure of the Company's recently introduced products and services to achieve
market acceptance could have a material adverse effect upon the Company's
business, results of operations, financial condition and prospects.
Due to rapid technological change, changing customer needs, frequent new product
and service introductions and evolving industry standards, timeliness of
introduction of these new products and services is critical. Delays in the
introduction of new products and services may result in customer dissatisfaction
and may delay or cause a loss of advertising revenue. There can be no assurance
that the Company will be successful in developing new products or services or
improving existing products and services that respond to technological changes
or evolving industry standards, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of new or improved products and services, or that its
new products and services will adequately meet the requirements of the
marketplace and achieve market acceptance. If the Company is unable to develop
and introduce new or improved products or services in a timely manner in
response to changing market conditions or customer requirements, the Company's
business, results of operations, financial condition and prospects could be
materially adversely affected.
MANAGEMENT OF GROWTH. The Company has recently experienced and may continue to
experience rapid growth, which has placed, and could continue to place, a
significant strain on the Company's limited personnel and other resources.
Competition for engineering, sales and marketing personnel is intense, and there
can be no assurance that the Company will be successful in attracting and
retaining such personnel or that the Company will be able to manage such growth
effectively. To succeed, the Company will need to continue to implement and
improve its
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operational, financial and management information systems and to hire, train,
motivate and manage its employees. In particular, the Company has experienced
difficulty in hiring and retaining the personnel necessary to support the growth
of the Company's business. The failure of the Company to successfully manage any
of these issues would have a material adverse effect on the Company's business,
results of operations, financial condition and prospects. The Company's ability
to manage its growth will require a significant investment in and upgrade to its
existing internal management information systems to support increased accounting
and other management related functions, and a new advertising inventory
management analysis system to provide enhanced internal reporting and customer
feedback on advertising. These system upgrades and replacements will impact
almost all phases of the Company's operations (i.e. planning, advertising
implementation and management, finance and accounting). These systems are
currently scheduled to become operational by the second half of 1998. There can
be no assurance that the Company will not experience problems, delays or
unanticipated additional costs in implementing these systems or in the use of
its existing system that could have a material adverse effect on the Company's
business, results of operations, financial condition and prospects, particularly
in the period or periods in which these systems are brought online.
RISKS OF THE COMPANY'S ACQUISITION STRATEGY. The Company believes that it may be
necessary to enter into joint ventures or other strategic relationships or make
acquisitions of complementary products, technologies or businesses in order to
remain competitive. The failure of the Company to execute such a strategy may
lead to decreased market share, viewer traffic or brand loyalty, which may have
a material adverse effect on the Company's business, results of operations,
financial condition and prospects. In addition, acquisition transactions are
accompanied by a number of risks, including, among other things, the difficulty
of integrating the operations and personnel of the acquired companies, the
potential disruption of the Company's ongoing business, the inability of
management to maximize the financial and strategic position of the Company
through the successful incorporation of acquired technology or content and
rights into the Company's products and media properties, expenses associated
with the transactions, additional expenses associated with amortization of
acquired intangible assets, the maintenance of uniform standards, controls,
procedures and policies, the impairment of relationships with employees and
customers as a result of any integration of new management personnel, and the
potential unknown liabilities associated with acquired businesses. There can be
no assurance that the Company would be successful in overcoming these risks or
any other problems encountered in connection with such acquisitions.
CAPACITY CONSTRAINTS AND SYSTEM FAILURE; ADVERTISING MANAGEMENT SYSTEM. A key
element of the Company's strategy is to generate a high volume of traffic to its
products and services. Accordingly, the performance of the Company's products
and services is critical to the Company's reputation, its ability to attract
advertisers to the Company's Web sites and market acceptance of these products
and services. Any system failure that causes interruptions or that increases
response time of the Company's products and services would result in less
traffic to the Company's Web sites and, if sustained or repeated, would reduce
the attractiveness of the Company's products and services to advertisers and
customers. In addition, an increase in the volume of searches conducted through
the Company's products and services could strain the capacity of the software,
hardware or telecommunications lines deployed by the Company, which could lead
to slower response time or system failures. If traffic to the Company's Web site
continues to increase, there can be no assurance that the Company's products,
services and systems
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will be able to scale appropriately. The Company is also dependent upon Web
browser companies and Internet and online service providers for access to its
products and services, and viewers have experienced and may in the future
experience difficulties due to system or software failures or incompatibilities
not within the Company's control. The Company is also dependent on hardware
suppliers for prompt delivery, installation and service of servers and other
equipment and services used to provide its products and services. Any disruption
in the Internet access and service provided by the Company or its service
providers could have a material adverse effect upon the Company's business,
results of operations, financial condition and prospects.
The process of managing advertising within large, high traffic Web sites such as
the Company's is an increasingly important and complex task. The Company is in
the process of evaluating the conversion from an internally developed
advertising inventory management analysis system to provide enhanced internal
reporting and customer feedback on advertising to a system being developed by
NetGravity. The Company currently anticipates that this new advertising
management system will be installed and become operational in the second half of
1998. To the extent that the Company encounters material difficulties in
bringing, or is unable to bring, this new system online, the Company will need
to acquire an alternative solution from a third party vendor or devote
sufficient resources to enhance its current internally developed system. Any
extended failure of, or material difficulties encountered in connection with,
the Company's advertising management system may expose the Company to "make
good" obligations with its advertising customers, which, by displacing
advertising inventory among other consequences, would reduce revenue and would
have a material adverse effect on the Company's business, results of operations,
financial condition and prospects.
In addition, the Company's operation depends upon its ability to maintain and
protect its computer systems, all of which are located at the Company's
principal offices in Sunnyvale, California. This system is vulnerable to damage
from fire, floods, earthquakes, power loss, telecommunications failures, break-
ins and similar events. The Company does not currently have a disaster recovery
plan in effect and does not have redundant systems for its service at an
alternate site. Despite the implementation of network security measures by the
Company, its servers are also vulnerable to computer viruses, break-ins and
similar disruptive problems. Computer viruses, break-ins or other problems
caused by third parties could lead to interruptions, delays in or temporary
cessation of service to users of the Company's products and services. The
occurrence of any of these events would have a material adverse effect on the
Company's business, results of operations, financial condition and prospects.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING. The Company
anticipates that its cash, cash equivalents, short-term investments, available
funds under its equipment term loan facility and cash flows generated from
advertising revenues, will be sufficient to meet its anticipated needs for
working capital and other cash requirements through at least March 31, 1999.
Thereafter, the Company may need to raise additional funds. The Company may need
to raise additional funds sooner, however, in order to fund more rapid
expansion, to develop new or enhance existing services or products, to respond
to competitive pressures or to acquire complementary products, businesses or
technologies. If additional funds are raised through the issuance of equity or
convertible debt securities, the percentage ownership of the shareholders of the
Company will be reduced, shareholders may experience additional dilution and
such securities
25
<PAGE>
may have rights, preferences or privileges senior to those of the holders of the
Company's Common Stock. There can be no assurance that additional financing will
be available on terms favorable to the Company, or at all. If adequate funds are
not available or are not available on acceptable terms, the Company's ability to
fund its expansion, take advantage of unanticipated acquisition opportunities,
develop or enhance services or products or respond to competitive pressures
would be significantly limited. Such limitation could have a material adverse
effect on the Company's business, results of operations, financial condition and
prospects. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION. As part of its business strategy,
the Company has begun to seek additional opportunities to expand its products
and services into international markets. The Company believes that such
expansion is important to the Company's ability to continue to grow and to
market its products and services. In marketing its products and services
internationally, however, the Company faces new competitors. In addition, the
Company's success in entering international markets is dependent upon the
Company's ability to create localized versions of its products and services.
There can be no assurance that the Company will be successful in creating
localized versions of its products and services or marketing or distributing its
products abroad or that, if the Company is successful, its international
revenues will be adequate to offset the expense of establishing and maintaining
international operations. To date, the Company has limited experience in
marketing and distributing its products and services internationally. In
addition to the uncertainty as to the Company's ability to establish an
international presence, there are certain difficulties and risks inherent in
doing business on an international level, such as compliance with regulatory
requirements and changes in these requirements, export restrictions, export
controls relating to technology, tariffs and other trade barriers, protection of
intellectual property rights, difficulties in staffing and managing
international operations, longer payment cycles, problems in collecting accounts
receivable, political instability, fluctuations in currency exchange rates and
potentially adverse tax consequences. There can be no assurance that one or more
of such factors would not have a material adverse effect on any international
operations established by the Company and, consequently, on the Company's
business, results of operations, financial condition and prospects.
DEPENDENCE ON KEY PERSONNEL; NEW MEMBERS OF THE EXECUTIVE MANAGEMENT TEAM.
During 1997, the Company experienced significant changes to its executive
management team. Those who joined the executive management team in 1997 include
Harry Motro, President and Chief Executive Officer; Beth Haggerty, Vice
President of Worldwide Sales; Barak Berkowitz, Vice President of Marketing; and
Leslie Wright, Vice President Finance and Chief Financial Officer. There can be
no assurance that the new members of the Company's management team will work
effectively together with the rest of the Company's executive management. In
addition, the Company has recently hired, and plans to continue to hire, a
number of engineers to design and implement improvements to the integration of
content with its search engine technology, which the Company believes will be a
significant factor in its future ability to compete favorably with other
navigational services. The Company's future performance depends in significant
part upon the contributions of its senior management personnel, including its
Chairman Steven Kirsch, who is integrally involved in the Company's research and
development efforts. Although the Company provides incentives such as salary,
benefits and option grants (which are typically subject to vesting over four
years) to attract and retain qualified employees, the loss of
26
<PAGE>
services of any of the Company's officers or other key employees would have a
material adverse effect on the Company's business, results of operations,
financial condition and prospects.
VOLATILITY OF STOCK PRICE. The price of the Company's Common Stock has been and
may continue to be subject to wide fluctuations in response to a number of
events and factors such as quarterly variations in results of operations,
announcements of new technological innovations or new products and media
properties by the Company or its competitors, changes in financial estimates and
recommendations by securities analysts, the operating and stock price
performance of other companies that investors may deem comparable to the
Company, and news relating to trends in the Company's markets. In addition, the
stock market in general, and the market prices for Internet-related companies in
particular, have experienced extreme volatility that often has been unrelated to
the operating performance of such companies. These broad market and industry
fluctuations may adversely affect the price of the Company's Common Stock,
regardless of the Company's operating performance.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. The Company's success depends
significantly upon its proprietary technology. The Company currently relies on a
combination of copyright and trademark laws, trade secrets, confidentiality
procedures and contractual provisions to protect its proprietary rights. The
Company seeks to protect its software, documentation and other written materials
under trade secret, patent and copyright laws, which afford only limited
protection. The Company holds one patent and currently has 12 United States
patent applications pending and five foreign patent applications pending. There
can be no assurance that the pending applications will be approved, or that if
issued, such patents will not be challenged, and if such challenges are brought,
that such patents will not be invalidated. There can be no assurance that the
Company will develop proprietary products or technologies that are patentable,
that any issued patent will provide the Company with any competitive advantages
or will not be challenged by third parties, or that the patents of others will
not have a material adverse effect on the Company's ability to do business. The
Company has registered and applied for registration for certain service marks
and trademarks, and will continue to evaluate the registration of additional
service marks and trademarks, as appropriate. The Company generally enters into
confidentiality agreements with its employees and with its consultants and
customers. Litigation may be necessary to protect the Company's proprietary
technology. Any such litigation may be time-consuming and costly. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or services or to obtain and
use information that the Company regards as proprietary. In addition, the laws
of some foreign countries do not protect proprietary rights to as great an
extent as do the laws of the United States. There can be no assurance that the
Company's means of protecting its proprietary rights will be adequate or that
the Company's competitors will not independently develop similar technology or
duplicate the Company's products or design around patents issued to the Company
or other intellectual property rights of the Company.
There have been substantial amounts of litigation in the computer industry
regarding intellectual property rights. There can be no assurance that third
parties will not in the future claim infringement by the Company with respect to
current or future products, trademarks or other proprietary rights, that the
Company will counterclaim against any such parties in such actions or that if
the Company makes claims against third parties with respect thereto, that any
such party will
27
<PAGE>
not counterclaim against the Company in such actions. Any such claims or
counterclaims could be time-consuming, result in costly litigation, cause
product release delays, require the Company to redesign its products or require
the Company to enter into royalty or licensing agreements, any of which could
have a material adverse effect upon the Company's business, results of
operations, financial condition and prospects. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the Company
or at all.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES. The Company is not currently
subject to direct regulation by any government agency, other than regulations
applicable to businesses, and there are currently few laws or regulations
directly applicable to access to or commerce on the Internet. A number of
legislative and regulatory proposals are under consideration by federal, state
and foreign governmental organizations, and it is possible that a number of laws
or regulations may be adopted with respect to the Internet covering issues such
as user privacy, pricing and characteristics and quality of products and
services. The adoption of any such laws or regulations may decrease the growth
of the Internet, which could in turn decrease the demand for the Company's
products, increase the Company's cost of doing business, or otherwise have an
adverse effect on the Company's business, results of operations, financial
condition and prospects. Moreover, the applicability to the Internet of existing
laws governing issues such as property ownership, copyright, trade secret, libel
and personal privacy is uncertain and developing. Any such new legislation or
regulation, or application or interpretation of existing laws, could have a
material adverse effect on the Company's business, results of operations,
financial condition and prospects.
Because materials may be downloaded by the online or Internet services operated
or facilitated by the Company and may be subsequently distributed to others,
there is a potential that claims will be made against the Company for
defamation, negligence, copyright or trademark infringement, personal injury or
other theories based on the nature, content, publication and distribution of
such materials. Such claims have been brought, and sometimes successfully
pressed, against online service providers in the past. In addition, the Company
could be exposed to liability with respect to the selection of listings that may
be accessible through content and materials that may appear in chat room,
instant messaging or other services offered by the Company. Such claims might
include, among others, that by providing hypertext links to Web sites operated
by third parties, the Company is liable for copyright or trademark infringement
or other wrongful actions by such third parties through such Web sites. It is
also possible that if any information provided through the Company's services,
such as stock quotes, analyst estimates or other trading information, contains
errors, third parties could make claims against the Company for losses incurred
in reliance on such information. The Company expects to offer Web-based e-mail
services in the near future, which may expose the Company to potential risks,
such as liabilities or claims resulting from unsolicited e-mail (spamming), lost
or misdirected messages, illegal or fraudulent use of e-mail, harassment or
interruptions or delays in e-mail service.
From time to time, the Company enters into agreements with sponsors, content
providers, service providers and merchants under which the Company is entitled
to receive a share of revenue from the purchase of goods and services by users
of the Company's online properties. Such arrangements may expose the Company to
additional legal risks and uncertainties, including (without limitation)
potential liabilities to consumers of such products and services. Although the
Company carries
28
<PAGE>
general liability insurance, the Company's insurance may not cover potential
claims of this type or may not be adequate to indemnify the Company for all
liability that may be imposed.
YEAR 2000 COMPLIANCE. The Company is aware of the issues associated with the
programming code in existing computer systems as the year 2000 approaches. The
"year 2000 problem" is pervasive and complex as virtually every computer
operation will be affected in some way by the rollover of the two digit year
value to 00. The issue is whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. Management is in the process of working with its software
vendors to assure that the Company is prepared for the year 2000. Management
does not anticipate that the Company will incur significant operating expenses
or be required to invest heavily in computer systems improvements to be year
2000 compliant. However, significant uncertainty exists concerning the potential
costs and effects associated with any year 2000 compliance. The Company is
currently implementing an upgrade to its management information system that the
Company believes is year 2000 compliant. Any year 2000 compliance problem of
either the Company or its viewers, Ultraseek Server customers or advertisers
could materially adversely affect the Company's business, results of operations,
financial condition and prospects.
29
<PAGE>
PART II: OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibit
27.1 Financial Data Schedule
b) Reports on Form 8-K
The Company filed a report on Form 8-K on January 28, 1998 reporting its
earnings, results of operations and certain other financial information for
the fourth quarter and fiscal year ended December 31, 1997.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INFOSEEK CORPORATION
By: /s/ Leslie E. Wright
Leslie E. Wright
Vice President of Finance & Chief Financial Officer
(and Principal Accounting Officer)
Dated: May 15, 1998
31
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