-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AXiIkUiHkLOc9xNv34tqHDi5NYBTSWNM5lli2nHXLIfFcDHDDHTstkyddaUuNaPv Ux7SPAhDBRqDqXvzdePscg== 0001012870-98-001346.txt : 19980518 0001012870-98-001346.hdr.sgml : 19980518 ACCESSION NUMBER: 0001012870-98-001346 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INFOSEEK CORP CENTRAL INDEX KEY: 0000920729 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770353450 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11797 FILM NUMBER: 98622955 BUSINESS ADDRESS: STREET 1: 1399 MOFFET PARK DR STREET 2: STE 250 CITY: SUNNYVALE STATE: CA ZIP: 94089 BUSINESS PHONE: 4085436000 MAIL ADDRESS: STREET 1: 2620 AUGUSTINE DR SUITE 250 STREET 2: 2620 AUGUSTINE DR SUITE 250 CITY: SANTA CLARA STATE: CA ZIP: 95054 10-Q 1 FORM 10-Q FOR PERIOD ENDED MARCH 31, 1998 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. 1
PART I FINANCIAL INFORMATION NUMBER 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
2 PART I: FINANCIAL INFORMATION ITEM 1. Financial Statements
INFOSEEK CORPORATION CONDENSED BALANCE SHEETS (IN THOUSANDS) MARCH 31, 1998 DECEMBER 31, ASSETS (UNAUDITED) 1997 ----------- ------------ 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 -------- ------- Total current assets 80,530 38,878 Property and equipment, net 11,094 10,283 Deposits and other assets 1,993 1,993 -------- ------- 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 -------- ------- 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) -------- -------- Total shareholders' equity 69,431 27,268 -------- -------- Total liabilities and shareholders' equity $ 93,617 $ 51,154 ======== ========
See notes to condensed financial statements. 3 INFOSEEK CORPORATION CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31, ----------------------- 1998 1997 ---------- ---------- Total revenues $14,311 $ 6,151 Cost of revenues 2,088 1,284 ------- ------- 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 ------- ------- Total operating expenses 14,250 9,378 Operating loss (2,027) (4,511) Interest income, net 505 405 ------- ------- 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
See notes to condensed financial statements. 4 INFOSEEK CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ---------------------- 1998 1997 --------- ---------- 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 -------- -------- 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) -------- ------- 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 -------- ------- Net increase (decrease) in cash and cash equivalents (2,165) 481 Cash and cash equivalents at beginning of period 3,218 3,786 -------- ------- Cash and cash equivalents at end of period $ 1,053 $ 4,267 ======== =======
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. 5 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. 6 The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
THREE MONTHS ENDED MARCH 31, ------------------------ 1998 1997 ---------- ---------- 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) ======= =======
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 7 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):
Quarter ended March 31, ------------------------- 1998 1997 ----------- ----------- Net revenue: Infoseek $14,311 $ 6,151 WebChat 142 89 ------- ------- Combined $14,453 $ 6,240 ======= ======= Net income: Infoseek $(1,522) $(4,106) WebChat (278) (399) ------- ------- Combined $(1,800) $(4,505) ======= =======
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). 8 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 9 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 10 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. 11 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. 12 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. 13 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." 14 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 15 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 16 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." 17 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 18 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 19 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 20 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 21 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 22 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 23 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 24 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 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 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 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 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 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 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 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 1,053 71,410 72,660 (1,250) 0 80,530 20,687 (9,593) 93,617 20,693 0 0 0 117,084 (737) 93,617 14,311 14,311 2,088 14,250 0 0 0 0 0 (1,522) 0 0 0 (1,522) (0.05) (0.05)
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