INFORMATION CONCERNING SI
SI OVERVIEW
Silicon Investor, Inc. operates a site on the Web focused on personal finance. SI's primary focus is its discussion community, which has over 4,000,000 messages currently in its database. SI was co-founded by Brad and Jeff Dryer in August 1995 and has since attracted over 60,000 subscribers who have in certain cases paid a lifetime membership fee to participate in SI's financial discussions. In April 1997, SI established a subscription fee structure for charging an initial subscription fee for a lifetime membership. The initial subscription fee was originally set at $45 per user and was raised over the next 12 months to the current $125 subscription rate. More than 100,000 unique users visit Silicon Investor each day to discuss their stock holdings, conduct stock research, and review new investment ideas. With a current usage rate of over 100,000,000 page views per month and approximately 75,000 postings per week, SI is one of the most highly trafficked financial sites on the Web, as well as the premiere destination for investor discussions focused on technology companies. The site has successfully attracted a loyal and sophisticated user community. SI believes that this targeted demographic group is attractive to advertisers and has provided SI with the opportunity to establish meaningful advertising relationships.
SI takes pride in offering a site defined by the interests of its users. Investors desire the ability to interact online, and SI has capitalized on this demand and leveraged this concept into a unique site where the users actually create the content. The management of SI makes every effort to implement features and create message boards that promote discussion on various topics of interest.
TECHNOLOGY
SI primarily uses Pentium II and Pentium Pro based servers running Windows NT and SQL software. This highly scalable and efficient configuration handles more than 100,000,000 page views per month. The 4,000,000 messages contained within SI's databases are archived and fully searchable. SI believes that the site's speed and usability differentiate it from other related financial discussion Web sites.
SI's Internet technology consists of proprietary software which allows for interconnectivity of the various applications within SI's Web site. This interconnectivity creates a dynamic environment that allows the applications to share information with each other and offer performance and usability that is competitive with other financial discussion Web sites.
SI's relational and efficient technology is based upon a highly scalable architecture that offers the capacity to service a growing user base.
STRATEGY
Key elements in SI's strategy include:
Additional features. SI seeks to provide additional content-based features on the site to increase the utility to its users. SI plans to develop services within the site that will allow users to customize and tailor the products and services to their needs. SI also plans to offer additional communication features to its subscribers including features designed to raise switching costs for SI users relative to using competing message boards.
Greater options. SI seeks to expand upon its existing areas, which include the technology area, by extending its forums to other investment areas. SI believes that multiple niches exist within the investment community and that a properly executed strategy will provide these various communities with an avenue to communicate ideas and research companies, information and trends through its Web site.
The inability of SI to achieve any portion of its strategic goals may have a material adverse effect on its business, financial condition and operating results. There can be no assurances that SI will be able to achieve any of such goals and, if not so achieved, that it will be able to develop and implement alternative strategic goals. SI's ability to achieve any of such goals will depend in part on SI's ability to expand and improve its Internet operations, expand its advertising and marketing efforts, expand and improve its Internet user support capabilities and develop new Internet-based products and services.
STRATEGIC RELATIONSHIPS
SI intends to leverage its position as a popular Web site in the personal finance area to enter into strategic and licensing relationships with third party developers and providers of content and technologies.
REVENUE SOURCES
Advertisers. As of March 31, 1998, SI had relationships with approximately 10 cash paying advertisers, including Telescan, CBS MarketWatch, TheStreet.com, SureTrade and InvesTools. The typical advertiser for SI's Web site is a company that provides financial news and information, or offers online investing services. SI seeks to expand its advertising relationships through the use of sales representative agencies, in addition to its own sales and marketing efforts.
Memberships. As of March 31, 1998, SI had approximately 60,000 registered members. While the level of activity varies among the user base, SI has continued to experience sequential growth in the number of subscribing members. SI currently offers a lifetime membership for a one-time fee of $125. While SI will honor existing memberships, SI anticipates changing its subscription model in the future.
Transaction based revenues. Currently, SI does not have any revenue sharing agreements in existence. However, given SI's highly specific and sought after demographic, SI plans to pursue strategic relationships with companies seeking to promote the sale of their products and services through SI's site. These relationships could include revenue sharing arrangements in which SI receives a percentage of online sales made through its site.
COMPETITION
The market for financial discussion is highly competitive. SI believes the principal competitive factors in the market are brand recognition, content quality, features, performance and ease of use. Some of SI's competitors offer similar features and services to SI's Web site. SI believes that the quality of the content and the sophistication of its user community make SI's Web site a superior site.
SI competes with various companies and Internet sites, such as Yahoo!, Motley Fool, Wall Street Journal Online, CBS MarketWatch, TheStreet.com, Microsoft, and the RedHerring Direct. Many, if not all, of these competitors offer a wider range of features and services than SI and many of these competitors have significantly greater resources than SI. If SI is unable to attract and retain a significant number of users, SI's business, financial condition and operating results will be materially adversely affected.
EMPLOYEES
As of March 31, 1998, SI had a total of 3 employees of which 2 were based at SI's executive offices in Overland Park, Kansas and 1 was based in San Francisco, California. Of the total of 3 employees, 1 was in sales and marketing and 2 were in design, quality assurance, technical support, documentation and product development functions. None of SI's employees is represented by a labor union, and SI considers its employee relations to be good.
INTELLECTUAL PROPERTY
SI is dependent upon obtaining existing technology related to its operations. To the extent new technological developments are unavailable to SI on terms acceptable to it or not at all, SI may be unable to continue to implement its business plan and its business, financial condition and operating results would be materially adversely affected.
The success of SI is dependent upon its ability to protect and leverage the value, if any, of its original Internet technologies, software, content and its trademarks, trade names, service marks, domain names and other proprietary rights it either currently has or may have in the future. SI has filed a service mark application for its logo and name. In addition, given the uncertain application of existing copyright and trademark laws to the Internet, there can be no assurance that existing laws will provide adequate protection for SI's technologies, Internet sites or domain names. Policing unauthorized use of SI's technologies, content and other intellectual property rights entails significant expenses and could otherwise be difficult or impossible to do given, among other things, the global nature of the Internet.
GOVERNMENT REGULATIONS
As a publisher and a distributor of content over the Internet, SI faces potential liability for defamation, negligence, copyright, parent or trademark infringement and other claims based on the nature and content of the materials that it publishes or distributes. Such claims have been brought, and sometimes successfully pressed, against Internet service providers. In addition, SI could be exposed to liability with respect to the content or unauthorized duplication of material indexed in its search services. Although SI carries general liability insurance, SI's insurance may not cover potential claims of this type or may not be adequate to indemnify SI for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could have a material adverse effect on SI's business, financial condition and operating results.
As a provider of Internet content, SI is subject to the provisions of
existing and future United States federal legislation that can be applied to SI's undertakings. Although there are currently few laws and regulations directly applicable to the Internet, it is possible that new laws and regulations will be adopted covering issues such as, among other things, privacy, copyrights, obscene or indecent communications and the pricing, characteristics and quality of Internet-based products and services. The adoption of restrictive laws and regulations could decrease the growth of the use of the Internet or expose SI to significant liabilities associated with content available on or through SI's Internet sites or otherwise cause a material adverse effect on SI's business, financial condition and operating results. Application to the Internet of existing laws and regulations governing issues such as, among other things, property ownership, libel and personal privacy is also subject to substantial uncertainty.
The adoption of such laws and regulations and the potential adoption of new and more restrictive laws and regulations may decrease the growth of the Internet, which in turn could decrease the attractiveness of the SI's Internet sites and reduce the demand for advertising thereon. In addition, the need to monitor and comply with existing and future laws and regulations will increase SI's cost of doing business.
SI MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE MATTERS DISCUSSED IN THIS PROXY STATEMENT CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. SI'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW IN "ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS" AS WELL AS THOSE DISCUSSED IN THIS SECTION AND ELSEWHERE IN THIS PROXY STATEMENT.
OVERVIEW
Silicon Investor is a Delaware company which began operations in 1995, under the name VB-Web Partners, Inc. Silicon Investor maintains a site on the World Wide Web which provides information about stock prices and earnings for technology stocks. Silicon Investor charges a membership fee to users of the Web site who request discussion capabilities. In addition, SI earns revenue from those vendors who advertise on SI's Web site.
Silicon Investor has an extremely limited operating history upon which an evaluation of SI and its prospects can be based. Silicon Investor anticipates that advertising and membership revenue from SI's Web site will constitute substantially all of SI's revenue, if any, during the foreseeable future. Silicon Investor's ability to generate revenue is subject to substantial uncertainty. Silicon Investor's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by early stage companies in general, and specifically with respect to the new and rapidly evolving market for Internet-based products and services. To address these risks, SI must, among other things, effectively establish, develop and maintain relationships with subscribers, advertising customers, advertising agencies and other third parties, provide original and compelling products and services to Internet users, develop and upgrade its technology, respond to competitive developments, attract new qualified personnel and retain existing qualified personnel. There can be no assurance that SI will succeed in addressing such risks and the failure to do so would have a material adverse effect on SI's business, financial condition and operating results. Additionally, SI's lack of an extensive operating history makes prediction of future operating results difficult. Accordingly, there can be no assurance that SI will be able to generate significant revenue or that SI will achieve, or maintain profitability or continue to generate revenues from operations in the future. Silicon Investor currently intends to increase substantially its operating expenses in order to, among other things, expand and improve its Internet operations, fund increased advertising and marketing efforts, expand and improve its Internet user support capabilities and develop new Internet technologies, applications and other products and services.
Silicon Investor's operating results may fluctuate significantly as a
result of a variety of factors, many of which are outside of SI's control.
Factors that may adversely affect SI's operating results include the level of use of the Internet, demand for advertising, seasonal trends in both Internet use and advertising placements, the addition or loss of advertisers, advertising budgeting cycles of individual advertisers, the level of use of SI's Internet sites, the amount and timing of capital expenditures and other costs relating to the development, costs and expenses relating to acquisitions, operation and expansion of SI's Internet operations, the introduction of new sites and services by SI or its competitors, price competition or pricing changes in the industry, technical difficulties or system failures, general economic conditions and economic conditions specific to the Internet and Internet media. In seeking to effectively implement its operating strategy, SI may elect from time to time to make certain advertising and marketing or acquisition decisions that could have a material adverse effect on SI's business, financial condition and operating results. Silicon Investor believes that period to period comparisons of its operating results are not meaningful and should not be relied upon for an indication of future performance.
RESULTS OF OPERATIONS
Revenue. For the three months ended March 31, 1998, SI generated $326,355 in revenue. Silicon Investor did not generate any revenue for the three months ended March 31, 1997. For the years ended December 31, 1997 and 1996, SI generated $558,091 and $8,000 in revenue, respectively. The increase in revenue is the result of the development of SI's Web site over the last year and users subscribing to the site, along with advertisers purchasing banners on the site.
Cost of Revenue. Cost of revenue consists primarily of expenses associated with the production, enhancement, maintenance and support of Silicon Investor's online properties. These costs consist primarily compensation for technical support staff.
For the three months ended March 31, 1998, cost of revenue was $140,537. Silicon Investor did not incur any cost of revenue for the three months ended March 31, 1997, as it did not generate any revenue. For the years ended December 31, 1997 and 1996, cost of revenue was $144,343 and $0, respectively. The increase in absolute dollars is due primarily to increased costs in supporting SI's Web site, as a result of the increase in business activity.
Gross Margin. Gross margin as a percentage of revenue was 57% for the three month period ended March 31, 1998. Silicon Investor did not have a gross margin for the three months ended March 31, 1997. Gross margin as a percentage of revenue for the year ended December 31, 1997 was 74%. SI did not have a gross margin for the year ended December 31, 1996. The decrease in gross margin as a percentage of revenue for the three months ended March 31, 1998 versus the year ended December 31, 1997 is due to increased support costs.
In the future, the types of memberships and advertisements sold and revenue sharing provisions of content agreements may affect gross margins. Memberships and advertisements that target a specific audience typically have higher gross margins than those that target a broader demographic. A decrease in targeted subscriptions and advertising sold or rates could adversely affect gross margins.
Product Development. Product development expenses consist of expenses incurred by SI in its development and maintenance of its Web site. Product development expenses include compensation and related expenses, costs of computer hardware and software, and the cost of acquiring, designing and developing Internet technologies, products and services. All of the costs incurred to date in connection with the development of SI's Web site have been expensed. Product development expenses incurred by SI for the three months ended March 31, 1998 have been classified as cost of revenue. Product development expenses for the three months ended March 31, 1997 were $54,557. Product development expenses were $54,557 and $33,983 for the years ended December 31, 1997 and 1996, respectively. Silicon Investor believes that significant investments in enhancing its Web site will be necessary to be competitive. As a result, SI may continue to incur, or increase the level of, product development expenses.
General and Administrative. General and administrative expenses consist primarily of compensation not otherwise attributable to development expenses, rent expense, fees for professional services and other general corporate purposes. General and administrative expenses for the three months ended March 31, 1998 and 1997 were $49,987 and $17,580, respectively. General and administrative expenses for the years ended December 31, 1997 and 1996 were $143,262 and $101,495, respectively. The increase was primarily attributable to an increase in personnel, professional service fees, relocation to new facilities, provision for doubtful accounts and depreciation on capital equipment. Silicon Investor expects general and administrative expenses to significantly increase in future periods.
Other Expense. Other expense for the three months ended March 31, 1998 and 1997 was $7,821 and $318, respectively. Other expense for the years ended December 31, 1997 and 1996, were $46,489 and $5,185, respectively. The increase in other expenses is the result of the write off of equipment.
Income Taxes. Income tax expense for the three months ended March 31, 1998 was $42,115. Silicon Investor did not record an income tax provision for the three months ended March 31, 1997 or the years ended December 31, 1997 and 1996, as SI was in net loss position. Silicon Investor reduced its valuation allowance against its deferred tax asset, resulting in no income tax for the year.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, SI's principal source of liquidity was $127,710 in cash derived primarily from operations, compared to $55,107 as of December 31, 1997. The increase in cash is the result of the generation of income in 1998.
Capital expenditures for the three months ended March 31, 1998 were approximately $23,869. Capital expenditures for the comparable period in 1997 were $16,144. Silicon Investor has no material commitments for capital expenditures to the purchase of computer hardware and software. Silicon Investor anticipates a substantial increase in its capital expenditures through the remainder of fiscal 1998 consistent with its anticipated growth.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
Silicon Investor has an extremely limited operating history upon which an evaluation of SI and its prospects can be based. Silicon Investor and its prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new and rapidly evolving markets. To address these risks, SI must, among other things, respond to competitive developments, continue to attract, retain and motivate qualified persons and continue to upgrade its technologies and commercialize products and services incorporating such technologies. There can be no assurance that SI will be successful in addressing such risks. The limited operating history of SI makes the prediction of future results of operations difficult or impossible, and therefore there can be no assurance that SI will achieve revenue growth or profitability.
As a result of SI's extremely limited operating history, SI does not have historical financial data for any significant period of time on which to base planned operating expenses. Silicon Investor's expense levels are based in part on its expectations as to future revenues and to a large extent are fixed. Quarterly sales and operating results generally depend on membership and advertising revenues, which are difficult to forecast. Silicon Investor may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in relation to SI's expectations would have an immediate adverse impact on SI's business, results of operations and financial condition. In addition, SI plans to significantly increase its operating expenses to fund greater levels of research and development, increase its sales and marketing operations, broaden its customer support capabilities and establish brand identity and strategic alliances. To the extent that such expenses precede or are not subsequently followed by increased revenues, SI's business, results of operations and financial condition will be materially adversely affected.
Silicon Investor's operating results may fluctuate significantly in the future as a result of a variety of factors, some of which are outside of SI's control. These factors include general economic conditions, specific economic conditions in the Internet industry, usage of the Internet, demand for Internet advertising, seasonal trends in advertising sales, the advertising budgeting cycles of individual advertisers, capital expenditures and other costs relating to the expansion of operations, costs and expenses relating to acquisitions, the introduction of new products or services by SI or its competitors, the mix of services sold, the channels through which those services are sold and pricing changes. There are uncertainties with the effectiveness of banner advertising on message boards. As a strategic response to a changing competitive environment, SI may elect from time to time to make certain pricing, service or marketing decisions or acquisitions that could have a material adverse effect on SI's business, results of operations and financial condition. Silicon Investor believes that period to period comparisons of its operating results are not meaningful and should not be relied upon for an indication of future performance. In particular any changes to SI's subscription fee policies could adversely affect the number of new subscriptions and, therefore SI's results. Silicon Investor also expects that, in the future, it may experience seasonality in its business, with subscription and advertising revenues being somewhat lower during the summer and year-end vacation and holiday periods, when usage of SI's Interest sites and services may be expected to decline.
Silicon Investor has designed and tested the most current versions of its products to be year 2000 compliant. There can be no assurances that SI's current products do not contain undetected errors or defects with year 2000 date functions that may result in material costs to SI. Although SI is not aware of any material operational issues or costs associated with preparing its internal systems for the year 2000, there can be no assurances that SI will not experience serious unanticipated negative consequences and/or material costs caused by undetected errors or defects in the technology used in its internal systems, which are comprised predominantly of acquired technology and SI's own software developments.
Silicon Investor operates in a rapidly changing environment that involves a number of risks and uncertainties, some of which are beyond SI's control.
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