<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
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 ENDED JUNE 30, 1999
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER #000-26311
------------------------
QUOKKA SPORTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3250045
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
525 BRANNAN STREET, GROUND FLOOR
SAN FRANCISCO, CALIFORNIA 94107
(415) 908-3800
(ADDRESS OF REGISTRANTS PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE, AND
TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [X]
The number of shares of the Registrant's Common Stock, $.0001 par value per
share, outstanding at September 1, 1999 was 43,455,489.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which are subject to the
"safe harbor" created by those sections. The forward-looking statements include,
but are not limited to: statements related to industry trends and future growth
in the markets for broadband applications and content; Quokka Sports, Inc.'s
(the "Company's") projected programming schedule; the Company's future research
and development; business trends; and future quarter profitability. Discussions
containing such forward-looking statements may be found in "Management's
Discussion and Analysis of Financial Condition and Results of Operations." These
forward-looking statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in such forward-looking
statements. The Company disclaims any obligation to update these forward-looking
statements as a result of subsequent events. The business risks on pages 20
through 28, among other things, should be considered in evaluating the Company's
prospects and future financial performance.
2
<PAGE> 3
QUOKKA SPORTS, INC.
INDEX TO FORM 10-Q FOR QUARTER ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Consolidated Condensed Balance Sheets as of June 30, 1999
and December 31, 1998..................................... 4
Consolidated Condensed Statements of Operations for the
Three and Six Months Ended June 30, 1999 and 1998......... 5
Consolidated Condensed Statements of Cash Flows for the Six
Months Ended June 30, 1999 and 1998....................... 6
Notes to Unaudited Consolidated Condensed Financial
Statements................................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12
Item 3. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 32
Item 2. Changes in Securities and Use of Proceeds................... 32
Item 4. Submission of Matters to a Vote of Security Holders......... 33
Item 6. Exhibits and Reports on Form 8-K............................ 34
Signature............................................................ 35
</TABLE>
3
<PAGE> 4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUOKKA SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $40,579 $23,994
Accounts receivable, net.................................. 2,890 1,151
Acquired programming and distribution rights.............. 13,588 --
Prepaid expenses and other................................ 1,634 331
------- -------
Total current assets.............................. 58,691 25,476
Property and equipment, net................................. 8,913 2,736
------- -------
Total assets...................................... $67,604 $28,212
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,250 $ 289
Accrued expenses.......................................... 2,918 1,199
Current portion of long-term debt and capitalized lease
obligations............................................ 2,977 290
Deferred revenues......................................... 2,877 480
------- -------
Total current liabilities......................... 12,022 2,258
------- -------
Long term debt and capitalized lease obligations, net of
current portion........................................... 8,134 501
Commitments (Note 4)
STOCKHOLDERS' EQUITY
Convertible preferred stock................................. 3 2
Common stock, voting and non-voting......................... 1 1
Additional paid-in capital.................................. 81,297 41,019
Warrants and other.......................................... 8,290 477
Treasury stock, at cost..................................... (95) --
Accumulated deficit......................................... (42,048) (16,046)
------- -------
Total stockholders' equity........................ 47,448 25,453
------- -------
Total liabilities and stockholders' equity........ $67,604 $28,212
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements
4
<PAGE> 5
QUOKKA SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1999 1998 1999 1998
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues.......................................... $ 2,552 $ 2,454 $ 3,449 $ 7,321
Costs and Expenses:
Production costs................................ 4,050 2,072 6,342 5,503
Research and engineering........................ 4,522 722 6,654 1,307
Sales and marketing............................. 7,220 574 8,610 932
General and administrative...................... 2,606 633 4,398 1,504
Depreciation.................................... 720 86 1,150 130
Amortization of acquired programming and
distribution rights.......................... 1,662 -- 2,087 --
-------- ------- -------- -------
Total costs and expenses................ 20,780 4,087 29,241 9,376
-------- ------- -------- -------
Loss from operations.................... (18,228) (1,633) (25,792) (2,055)
Losses of associated venture...................... (615) -- (1,067) --
Minority interest in net loss of consolidated
subsidiary...................................... 645 -- 645 --
Interest income/(expense), net.................... 44 29 212 62
-------- ------- -------- -------
Net loss................................ $(18,154) $(1,604) $(26,002) $(1,993)
======== ======= ======== =======
Net loss per Share:
Basic and diluted............................... $ (1.84) $ (.17) $ (2.66) $ (.21)
Weighted average shares outstanding -- basic and
diluted...................................... 9,892 9,654 9,788 9,653
======== ======= ======== =======
Proforma net loss per share:
Basic and diluted............................... $ (.50) $ (.08) $ (.74) $ (.10)
Weighted average shares outstanding -- basic and
diluted...................................... 36,161 20,042 35,051 19,100
======== ======= ======== =======
</TABLE>
See accompanying notes to consolidated condensed financial statements
5
<PAGE> 6
QUOKKA SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1999 1998
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(26,002) $(1,993)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation........................................... 1,150 130
Minority interest amortization of programming rights... (645) --
Amortization of acquired programming and distribution
rights................................................ 2,087 --
Non-cash compensation-related charges and other........ 1,623 382
Changes in operating assets and liabilities:
Accounts receivable.................................. (1,740) (467)
Prepaid expenses and other........................... (1,148) 230
Accounts payable..................................... 2,389 (110)
Accrued expenses..................................... 1,718 807
Acquired rights...................................... (675) --
Deferred revenues.................................... 2,397 (2,204)
-------- -------
Net cash used in operating activities............. (18,846) (3,225)
-------- -------
Cash flows from investing activities:
Purchase of property and equipment........................ (4,131) (744)
-------- -------
Net cash used in investing activities............. (4,131) (744)
-------- -------
Cash flows from financing activities:
Proceeds from long term financing arrangements............ -- 520
Payments on notes, long-term capital leases and financing
arrangements........................................... (555) (19)
Proceeds from the issuance of common stock, net of
issuance cost.......................................... 292 --
Purchase of treasury stock................................ (95) --
Proceeds from the issuance of preferred stock, net of
issuance cost.......................................... 39,920 14,283
-------- -------
Net cash provided by financing activities......... 39,562 14,784
-------- -------
Net increase in cash........................................ 16,585 10,815
Cash, beginning of period................................... 23,994 4,027
-------- -------
Cash, end of period......................................... $ 40,579 $14,842
======== =======
</TABLE>
See accompanying notes to consolidated condensed financial statements
6
<PAGE> 7
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:
Description of Business
Prior to August 1996, Quokka Sports, Inc. operated as an Australian
software development and consulting company known as Ozware Developments Unit
Trust. In August 1996, Quokka adopted its current business model, incorporated
in Delaware under the name Quokka Productions, Inc. and relocated its
headquarters to San Francisco. In September 1996, Quokka Productions, Inc.
changed its name to Quokka Sports, Inc.
Quokka is an independent digital sports network providing real-time
coverage of sporting events for worldwide audiences. Utilizing digital assets
generated at a sports venue that are under-utilized by traditional media, Quokka
is building a digital sports network by creating digital programming content
that is specifically designed for interactive distribution systems.
Revenues are generated from digital entertainment sponsorships,
advertising, electronic commerce and studio services. The majority of revenues
are derived from the sale of sponsorship packages to corporations. Digital
entertainment sponsors may embed their products in Quokka's productions and
obtain site branding, access to development projects, the use of trademarks and
logos and participation in various print and media campaigns.
Basis of Presentation
The unaudited consolidated condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to such rules and
regulations. Certain prior period amounts have been reclassified to conform to
the current presentation. In the opinion of Quokka, the financial statements
reflect all adjustments, consisting only of normal recurring adjustments
necessary for a fair presentation of the financial position at June 30, 1999,
the operating results for the three and six months ended June 30, 1999 and 1998
and cash flows for the six months ended June 30, 1999 and 1998. These financial
statements and notes should be read in conjunction with Quokka's audited
financial statements and notes thereto for the year ended December 31, 1998,
included in the Company's prospectus dated July 27, 1999 comprising part of the
Company's Registration Statement on Form S-1, as amended, filed with the
Securities and Exchange Commission, SEC File No. 333-76981. The results of
operations for the six months ended June 30, 1999 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1999.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of Quokka, and
all of its wholly and majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in the consolidated financial
statements. Investments in and advances to our joint venture in which we have a
50% ownership interest are accounted for by the equity method.
7
<PAGE> 8
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Use of Estimates
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Acquired media rights
Quokka and its subsidiaries and joint venture account for acquired media
rights pursuant to Statement of Financial Accounting Standards ("SFAS") No. 63.
Under SFAS No. 63, a licensee shall report an asset and a liability for the
rights acquired and obligations incurred under a license agreement when the
license period begins and other conditions, including availability and
acceptance, have been met. The assets are amortized over their estimated useful
life.
Revenue Recognition
Quokka generates revenues from digital entertainment sponsorships,
advertising, electronic commerce and studio services. Prior to April 1999,
sponsorship revenues were recognized over the term of the sponsored event based
on the ratio of current period impressions to projected total ultimate
impressions based on a determination that no significant obligations remained
and collection of the resulting receivable was probable. Digital entertainment
sponsorships signed in the June 1999 quarter represent multi-year, multi-event
and multi-benefit sponsorships. Annual revenues from these new contracts are
recognized using the straight line method over the terms of the agreements.
Revenues from studio services are recognized in the period the service is
provided. Advertising and electronic commerce revenues, which have not been
material to date, are recognized when the commitment is met or product is
shipped and payment is assured. Quokka has accepted property and services as
payment for sponsorship. Property and services received as payment are valued at
fair market value based on the amounts normally charged to third parties for
similar property and services.
Net loss per share and pro forma net loss per share
Quokka computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share", and SEC Staff Accounting Bulletin ("SAB") No. 98. Under
the provisions of SFAS No. 128 and SAB No. 98, basic net loss per share is
computed by dividing the net loss available to common stockholders for the
period by the weighted average number of common shares outstanding during the
period. Diluted net loss per share is computed by dividing the net loss for the
period by the weighted average number of vested common and common equivalent
shares outstanding during the period. However, as Quokka generated net losses in
all periods presented, common equivalent shares, composed of incremental common
shares issuable upon the exercise of stock options and warrants and upon
conversion of preferred stock, are not included in diluted net loss per share
because such shares are anti-dilutive.
8
<PAGE> 9
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Pro forma net loss per share is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of Quokka's preferred stock and exercise of in the money warrants as
if such conversion and exercise occurred on January 1, 1998 or at the date of
original issuance, if later. The resulting pro forma adjustments result in an
increase in the weighted average shares used to compute basic and diluted net
loss per share. Pro forma common equivalent shares, composed of unvested
restricted common stock and incremental common shares issuable upon the exercise
of stock options and warrants, are not included in pro forma diluted net loss
per share because they would be anti-dilutive.
The following table sets forth the computation of historical and pro forma
basic and diluted net loss per share for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1999 1998 1999 1998
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Numerator:
Net loss available to common stockholders.......... $(18,154) $(1,604) $(26,002) $(1,993)
Denominator:
Weighted average shares............................ 9,971 9,654 9,865 9,653
Weighted average unvested common shares subject to
repurchase agreements........................... (78) -- (77) --
-------- ------- -------- -------
Denominator for basic calculation and diluted
calculation..................................... 9,893 9,654 9,788 9,653
Net loss per share:
Basic and Diluted.................................. $ (1.84) $ (.17) $ (2.66) $ (.21)
Anti-dilutive securities including options,
warrants and preferred stock not included in
historical net loss per share calculations.... 35,088 12,040 34,082 11,099
Pro forma net loss per share:
Net loss........................................... $(18,154) $(1,604) $(26,002) $(1,993)
Shares used in computing net loss per share, basic
diluted......................................... 9,892 9,654 9,788 9,653
Adjustment to reflect assumed conversion of
preferred stock and exercise of warrants........ 26,269 10,388 25,263 9,447
-------- ------- -------- -------
Shares used in computing pro forma net loss per
share, basic and diluted........................ 36,161 20,042 35,051 19,100
Pro forma net loss per share, basic and diluted.... $ (0.50) $ (0.08) $ (0.74) $ (0.10)
</TABLE>
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
130, "Reporting Comprehensive Income." SFAS 130 establishes standards for
reporting comprehensive income and its components in a financial statement.
Comprehensive income as defined includes all changes in equity (net assets)
during a period from nonowner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include foreign
currency translation adjustments and unrealized gains/losses on
available-for-sale securities. As foreign currency translation adjustments were
immaterial to the Company's consolidated financial statements, there were no
such adjustments to net loss.
9
<PAGE> 10
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
During June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 replaces SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," and changes the way
public companies report segment information. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997 and has been adopted by Quokka
for the year ended December 31, 1998. Quokka operates in one business segment.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 98-1, "Software for Internal Use,"
which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. Statement of Position No. 98-1 is
effective for financial statements for fiscal years beginning after December 15,
1998. Quokka does not expect that the adoption of Statement of Position No. 98-1
will have a material impact on its results of operations.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities." This standard requires companies to expense
the costs of start-up activities and organization costs as incurred. In general,
Statement of Position 98-5 is effective for fiscal years beginning after
December 15, 1998. Quokka believes the adoption of Statement of Position 98-5
will not have a material impact on its results of operations.
NOTE 3. INITIAL PUBLIC OFFERING ("IPO")
On July 28, 1999, Quokka issued 5,000,000 shares of its common stock at an
initial public offering price of $12.00 per share. The net proceeds to Quokka
from that offering were approximately $54.5 million after deducting the
underwriters' discount and offering expenses. Concurrent with the IPO, warrants
were exercised to purchase 452,048 shares of common stock at prices ranging from
$0.50 to $3.25 per share, resulting in additional capital proceeds to the
Company totaling $486,000. In addition, upon completion of the IPO, each
outstanding share of the Company's convertible preferred stock was automatically
converted into one share of common stock and outstanding warrants to purchase
3,115,336 shares of preferred and common stock were automatically converted into
warrants to purchase 3,113,252 shares of common stock (after consideration of
net exercises).
NOTE 4. COMMITMENTS
In May 1999, Quokka entered into a noncancelable facilities lease. Terms of
the lease call for annual lease payments of approximately $1.9 million. Terms of
the lease agreement further require a $700,000 security deposit in the form of
an irrevocable letter of credit. The lease expires in February 2002.
In May 1999, Quokka entered into a binding letter of intent with
Excite@Home to integrate and promote their sports programming on the
www.excite.com web site and the @Home broadband service. Terms of this agreement
call for semiannual payments through January 2000 and quarterly payments
thereafter through October 2002 totaling $9.6 million.
In May 1999, the Company entered into a purchase commitment for property
and equipment totaling $10.5 million through December 2001.
10
<PAGE> 11
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
In May 1999, the Company entered into an agreement to purchase software and
services totaling $3.5 million through December 2000.
NOTE 5. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Supplemental disclosure of cash:
Equipment financed through capital lease.................. $ 331 $ --
====== ====
Accounts payable related to purchase of property and
equipment.............................................. $ 572 $ --
====== ====
Issuance of Preferred warrants under joint development
agreement.............................................. $ -- $382
====== ====
Issuance of Preferred warrants for subordinated debt...... $ 421 $ --
====== ====
Issuance of Preferred warrants under programming and
distribution rights.................................... $6,104 $ --
====== ====
Issuance of Preferred warrants as services rendered....... $1,154 $ --
====== ====
Notes payable related to purchase of acquired rights...... $8,251 $ --
====== ====
Notes payable related to purchase of property and
equipment.............................................. $2,293 $ --
====== ====
Stock options issued as compensation for services
rendered............................................... $ 48 $ --
====== ====
Amortization of programming rights........................ $ 645 $ --
====== ====
</TABLE>
11
<PAGE> 12
QUOKKA SPORTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report on Form 10-Q contains forward-looking statements that involve
risks and uncertainties. The statements contained in this report that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including, without limitation, statements
regarding the Company's expectations, beliefs, intentions or strategies
regarding the future. When used in this 10-Q, the words "intend," "anticipate,"
"believe," "estimate," "plan" and "expect" and similar expressions as they
relate to us are included to identify forward-looking statements. Our actual
results could differ materially from the results discussed in the
forward-looking statements as a result of certain of the risk factors set forth
under the subheading "Factors That May Affect Results" as well as those
discussed in Quokka's registration statement on Form S-1, as amended. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements or to update the
reasons why actual results could differ from those projected in the
forward-looking statements
The following should be read in conjunction with the audited consolidated
financial statements and the notes thereto and Management's Discussion and
Analysis of Financial Condition and Results of Operations included in our
Registration Statement on Form S-1, as amended, filed with the Securities and
Exchange Commission, SEC File No. 333-76981.
OVERVIEW
Quokka Sports has pioneered a distinctive new style of global sports
entertainment programming that uses the digital information sharing and
communications power of the Internet. Our programming can be accessed over the
Internet at www.quokka.com. Our programming is designed to provide a compelling
sports entertainment experience by allowing viewers to choose from a variety of
perspectives, information and action sequences. We believe new interactive
technologies provide exciting opportunities for making information-intensive
programming also entertaining. With distinctive content designed to build on
this opportunity, we believe we are positioned to become a leading provider of
digital sports entertainment addressing the entertainment passions of a global
community of sports enthusiasts.
In August 1996, we adopted our current business model. The primary focus of
our operating activities since August 1996 has been to develop our digital
sports entertainment network. Our network development activities have included
studio services to strategic partners, including the International Olympic
Committee, Sydney Organizing Committee for the Olympic Games, News America
Digital Publishing and others. Studio services represent consulting and Web
design services.
We generate revenues from digital entertainment sponsorships, studio
services, advertising and electronic commerce. We derive the majority of our
revenues from the sale of sponsorship packages to corporations. In the past, we
have accepted property and services as payment for sponsorships, including
Internet access, computer equipment, digital cameras, hosting services, and
telecommunications equipment and services. Property and services received as
payment are valued at fair market value based on the amounts normally charged to
third parties for similar property and services. We
12
<PAGE> 13
QUOKKA SPORTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
intend to reduce the amount of property and services accepted for payment in
future periods, although we may not be successful in this regard.
Prior to 1999, our sponsorships were primarily short-term and associated
with two individual events, the Whitbread Round the World Race (the "Whitbread")
and Around Alone races. Our sponsors typically pay fees or provide in-kind
services, which we recognize as revenue ratably over the duration of the event
based upon the actual number of impressions generated to date as compared to an
estimated total number of impressions for the entire event. Sponsors may require
that we guarantee a minimum number of impressions over the term of the event. In
these instances, we will defer a portion of the sponsorship revenues until the
minimum number of impressions has been achieved. We will also defer a portion of
the revenues until other contractual obligations have been satisfied and
collection of the related receivable is probable.
In 1999, we began to configure our sponsorships as multi-year, multi-event
and multi-benefit sponsorships. These new sponsorships, which we call digital
entertainment sponsorships, may include a variety of benefits such as category
exclusivity, embedded product placement in our programming, traditional sports
sponsorship benefits and sales and marketing assistance. We plan to sell digital
entertainment sponsorships to technology and communications companies as well as
consumer retail goods and services companies. These multi-year sponsorship
agreements provide for periodic sponsorship fees that we recognize ratably as
revenues over the corresponding period during the term of the contract, provided
that no significant obligations remain and collection of the resulting
receivable is probable. Because digital entertainment sponsorships relate to our
network of events rather than a single event, we do not track the profitability
of each event. However, we do track production costs by event as well as the
visitors to our coverage of each event.
As a direct result of having only one live program at a time, revenues from
sponsorships, advertising and electronic commerce have varied on both a
quarterly and annual basis during our short operating history. Revenues may
fluctuate from period to period in the future depending upon our ability to
attract digital entertainment sponsorships, the number of live events that are
being produced and distributed simultaneously during any one period, our ability
to maintain a continuous programming calendar, our ability to attract a
worldwide audience for our sporting events, our ability to acquire long-term
digital and other intellectual property rights to global sporting events and our
ability to develop and produce sports programming which will attract a global
audience.
We also generate revenues by providing studio services that could lead to
digital sports entertainment programming opportunities. These revenues are
recognized in the period the service is provided. We intend to continue to offer
studio services; however, we expect studio services to decline substantially as
a percentage of overall revenues in future periods.
We have incurred significant net losses and negative cash flows from
operations, and as of June 30, 1999, we had an accumulated deficit of $42.0
million. This accumulated deficit resulted from the production costs of our
network programming, the costs of developing new and enhancing existing tools
and techniques that enhance our Quokka Sports Platform technology, the costs of
expanding our sales and business development efforts and other costs related to
ongoing research and design. Due to the planned expansion of our digital sports
entertainment programming, we expect to incur significant operating losses for
the foreseeable future. We may never achieve significant revenues or
profitability; or if we achieve significant revenues, they may not be sustained.
13
<PAGE> 14
QUOKKA SPORTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Quokka and its subsidiaries and joint venture account for acquired media
rights pursuant to Statement of Financial Accounting Standards No. 63. Under
SFAS No. 63, a licensee shall report an asset and a liability for the rights
acquired and obligations incurred under a license agreement when the license
period begins and other conditions, including availability and acceptance, have
been met. The assets are amortized over their estimated useful life.
As of June 30, 1999 we had 242 employees compared to 57 at June 30, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Revenues
Our revenues increased $0.1 million to $2.6 million for the June 1999
quarter from $2.5 million for the June 1998 quarter. During the June 1999
quarter, we recognized revenues from our first multi-year, multi-event and
multi-benefit digital entertainment sponsorship agreements. We also continued to
recognize sponsorship revenue associated with our coverage of Around Alone
through the conclusion of the race in May 1999 and from studio services.
Revenues for the June 1998 quarter were derived primarily from sponsorship
revenues associated with our coverage of the Whitbread, our sole event during
the period.
Production Costs
Production costs increased $2.0 million to $4.1 million for the June 1999
quarter from $2.1 million for the June 1998 quarter. Production costs include
costs of personnel and consultants, computer hardware and software, travel,
satellite transmission costs, field gear, cameras, satellite phones, marketing
and an allocation of general and administrative expenses. The $2.0 million
increase reflects costs associated with eight events produced or in
pre-production during the period as compared to one event, the Whitbread, during
the comparable 1998 period. During the June 1999 quarter, we continued to
provide coverage of the Around Alone Race and initiated coverage of the CART
FedEx Championship Series ("CART"). In addition, our sports programming during
the June 1999 quarter included three adventure events: First Ascent: The
Expedition to China's Karakoram Range; The Great Trango Tower climbing
expedition in Pakistan; and the Marathon des Sables footrace through Morocco's
Sahara Desert.
Our joint venture with NBC Olympics, Inc. continued its pre-production
activities for the U.S. digital coverage of the 2000 Summer Games in Sydney and
pre-game trial coverage of the United States Olympic trial events. The joint
venture is scheduled to launch its Web site in August 1999 with coverage of the
U.S. Gymnastics Championship. We also commenced pre-production of the FIM 500cc
Road Racing World Championship Grand Prix, which launched in July 1999, and the
America's Cup 2000 Match yacht race, which commences in February 2000 in
Auckland, New Zealand.
Production costs for each event vary based on the location and duration of
each program, the depth and breadth of our event coverage and operating
efficiencies gained from our previous experience with similar events. A
combination of these factors resulted in significantly decreased production
costs on a per-event basis during the June 1999 quarter over the comparable 1998
period.
14
<PAGE> 15
QUOKKA SPORTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Research and Engineering
Research and engineering expenses increased $3.8 million to $4.5 million
for the June 1999 quarter from $722,000 for the June 1998 quarter. Research and
engineering expenses include personnel cost, costs associated with network
operations and expenses incurred to improve and develop our Quokka Sports
Platform and broadband applications. This increase represents the cost of
additional personnel and related expenses associated with our continuing
development of our Quokka Sports Platform, broadband applications, network
operations and other engineering initiatives.
Sales and Marketing
Sales and marketing expenses increased $6.6 million to $7.2 million for the
June 1999 quarter from $574,000 for the June 1998 quarter. Sales and marketing
expenses include personnel costs, consultants and advertising. This increase is
attributable to expenses related to our marketing campaign to create brand
recognition and launch www.quokka.com as well as increases in the number of
sales and marketing personnel.
General and Administrative
General and administrative expenses increased $2.0 million to $2.6 million
for the June 1999 quarter from $633,000 for the June 1998 quarter. General and
administrative expenses include management, business and legal affairs, finance
and accounting, facilities, management information systems and human resources.
This increase is attributable to increased personnel and related facilities and
other third-party expenses associated with building our operational
infrastructure. During the June 1999 quarter, we leased additional office space
in San Francisco in support of our infrastructure.
Depreciation
Depreciation expenses increased $634,000 to $720,000 for the June 1999
quarter from $86,000 for the June 1998 quarter. The increase is primarily due to
purchases of additional equipment and amortization of leasehold improvements in
our expanded facilities.
Amortization of Acquiring Programming and Distribution Rights
Acquired programming rights to sporting events and acquired distribution
rights are amortized over their respective license period on a straight-line
basis. Total amortization of acquired programming and distribution rights were
$1.6 million for the June 1999 quarter. No such amortization costs were incurred
during the comparable 1998 period. This amortization pertains to licensing fees
paid for the acquisition of programming rights related to our joint venture with
NBC Olympics, Inc. for U.S. digital coverage of the Olympic Games, the exclusive
worldwide interactive media rights to CART, the exclusive worldwide interactive
media rights to FIM 500cc Road Racing World Championship Grand Prix and the
exclusive worldwide interactive media rights for the America's Cup 2000 Match
yacht race. Also included in amortization for the June 1999 quarter are
licensing fees paid for the rights to distribute our programming on Excite@Home.
15
<PAGE> 16
QUOKKA SPORTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Losses of Associated Venture
We incurred net losses of $615,000 in CART Digital Media Enterprises, LLC,
our joint venture with Forsythe Racing, Inc., for the June 1999 quarter. We have
accounted for our 50% interest in this joint venture under the equity method of
accounting since the inception of the venture in January 1999. Expenses incurred
during the period related primarily to production expenses for CART programming.
Minority Interest in Net Loss of Consolidated Subsidiary
During the March 1999 quarter, we formed NBC/Quokka Ventures, LLC, a joint
venture with NBC Olympics, Inc. to provide interactive digital coverage of the
Olympic Games and related pre-games events. In connection with this venture, NBC
has contributed, among other things, certain programming and content in exchange
for a 49% minority interest. The fair market value of this content is being
amortized over the initial term of the venture agreement from inception in
February 1999 through October 2004 on a straight-line basis. For the June 1999
quarter, minority interest expense of $645,000 represents amortization of NBC's
programming and content rights.
Interest Income/(Expense)
Interest income, net of interest expense, was $44,000 for the June 1999
quarter as compared to $29,000 for the comparable 1998 period. Interest income
recorded during these periods includes interest income earned on cash and cash
equivalents. Interest expense incurred during these periods relate to our
financing obligations for various equipment purchases. The $15,000 net increase
reflects higher cash balances during the June 1999 quarter.
Net Loss
Based upon the foregoing information, we had net losses of $18.2 million
for the June 1999 quarter and $1.6 million the June 1998 quarter.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Revenues
Total revenues for the six months ended June 30, 1999 were $3.4 million.
This compares to revenue for the comparable 1998 period of $7.3 million. Revenue
for the six months ended June 30, 1999 were derived primarily from two new
digital entertainment sponsorships and sponsorship revenues of Around Alone.
Revenues for the six months ended June 30, 1998 were primarily derived from
revenues associated with our coverage of the Whitbread, our sole event during
the period. The Whitbread is a better-known event than Around Alone and,
accordingly, attracted larger sponsorship revenues. In addition, revenues from
our new digital entertainment sponsorships did not commence until April 1999.
16
<PAGE> 17
QUOKKA SPORTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Production Costs
Production costs increased $0.8 million to $6.3 million for the six months
ended June 30, 1999 from $5.5 million for the six months ended June 30, 1998.
This increase reflects costs associated with eight events produced or in
pre-production during the period as compared to one event, The Whitbread, during
the comparable 1998 period. Also included in 1999 production costs are costs
associated with the launch of our www.quokka.com network in March 1999.
Research and Engineering
Research and engineering expenses increased to $6.7 million for the six
months ended June 30, 1999 from $1.3 million for the six months ended June 30,
1998. The $5.4 million increase represents the cost of additional personnel and
related expenses associated with our continuing development of our Quokka Sports
Platform, broadband applications and network operations and other engineering
initiatives. Included in research and engineering expense for the six months
ended June 30, 1999 is $1.1 million in non-cash compensation expenses related to
the issuance of 153,846 warrants to purchase common stock which were issued in
connection with certain broadband research initiatives.
Sales and Marketing
Sales and marketing expenses increased $7.7 million to $8.6 million for the
six months ended June 30, 1999 from $932,000 for the six months ended June 30,
1998. This increase is attributable to expenses related to our marketing
campaign to create brand recognition and launch www.quokka.com, as well as
increases in the number of sales and marketing personnel.
General and Administrative
General and administrative expenses increased $2.9 million to $4.4 million
for the six months ended June 30, 1999 from $1.5 million for the six months
ended June 30, 1998. This increase is attributable to increased personnel and
related facilities and other third-party expenses associated with building our
operational infrastructure. During the 1999 period, we leased additional office
space in San Francisco and new office space in London in support of our
infrastructure.
Depreciation
Depreciation and amortization expenses increased $1.0 million to $1.1
million for the six months ended June 30, 1999 from $130,000 for the six months
ended June 30, 1998. The increase is primarily due to purchases of additional
equipment and amortization of leasehold improvements in our expanded facilities.
Amortization of Acquiring Programming and Distribution Rights
Total amortization of acquired programming and distribution rights were
$2.1 million for the six months ended June 30, 1999. No such amortization costs
were incurred during the comparable 1998 period. This amortization pertains to
licensing fees paid for the acquisition of programming rights related to our
joint venture with NBC Olympics, Inc. for U.S. digital coverage of the Olympic
Games, the exclusive worldwide interactive media rights to CART, the exclusive
interactive media
17
<PAGE> 18
QUOKKA SPORTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
rights to FIM 500cc Road Racing World Championship Grand Prix and the exclusive
interactive media rights for the America's Cup 2000 Match yacht race. Also
included in amortization for the six months ended June 30, 1999 are licensing
fees paid for the rights to distribute our programming on Excite@Home.
Losses of Associated Venture
We incurred net losses of $1.1 million in CART Digital Media Enterprises,
LLC, our joint venture with Forsythe Racing, Inc., for the six months ended June
30, 1999. We have accounted for our 50% interest in this joint venture under the
equity method of accounting since the inception of the venture in January 1999.
Expenses incurred during the period related primarily to production expenses for
CART programming.
Minority Interest in Net Loss of Consolidated Subsidiary
For the six months ended June 30, 1999, minority interest expense of
$645,000 represents amortization of NBC's programming and content rights.
Interest Income/(Expense)
Interest income, net of interest expense, was $212,000 for the six months
ended June 30, 1999 as compared to $62,000 for the comparable 1998 period. The
$150,000 net increase reflects higher cash balances during the six months ended
June 30, 1999.
Net Loss
Based upon the foregoing information, we had net losses of $26.0 million
for the six months ended June 30, 1999 and $2.0 million for the six months ended
June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since August 1996, we have financed our operations primarily through
private sales of our equity securities. Total net proceeds from sales of our
equity securities since August 1996 were $81.8 million through June 30, 1999.
At June 30, 1999, we had $40.6 million in cash and cash equivalents. Net
cash used in operating activities was $18.8 million for the six months ended
June 30, 1999 and $3.2 million for the six months ended June 30, 1998. Net cash
used in operating activities resulted from our net operating losses, adjusted
for certain non-cash items including compensation expense related to the
issuance of warrants to attract key vendors and business partners. Non-cash
charges relating to the issuance of these warrants were $1.6 million for the six
months ended June 30, 1999 and $382,000 for the six months ended June 30, 1998.
Non-cash charges relating to depreciation expense were $1.2 million for the six
months ended June 30, 1999 and $130,000 for the six months ended June 30, 1998.
Net cash used in investing activities was $4.1 million for the six months
ended June 30, 1999 and $744,000 for the six months ended June 30, 1998. Net
cash used in investing activities resulted
18
<PAGE> 19
QUOKKA SPORTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
primarily from purchases of additional equipment and amortization of leasehold
improvements in our expanded facilities.
Net cash provided financing activities was $39.6 million for the six months
ended June 30, 1999 and $14.8 million for the six months ended June 30, 1998.
Net cash provided by financing activities for these periods included the
issuance of preferred stock, common stock and exercise of warrants.
We believe that the net proceeds from our initial public offering in July
1999, combined with current cash and cash equivalent balances will be sufficient
to fund our operating requirements for working capital and capital expenditures
for at least the next twelve months. Thereafter, we will need to raise
additional funds. To the extent that we encounter unanticipated opportunities,
we may seek to raise additional funds sooner, in which case we may sell
additional equity or debt securities or borrow funds from banks. No assurances
can be given that our efforts to raise these funds will be successful. In the
event we are unable to raise these funds, our operations would suffer. Sales of
additional equity or convertible debt securities would result in additional
dilution of our stockholders.
YEAR 2000 IMPLICATIONS
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. These date code fields will need to
distinguish 21st century dates from 20th century dates and, as a result, many
companies' software and computer systems may need to be upgraded or replaced to
comply with year 2000 requirements.
We are in the process of assessing the year 2000 issue and expect to
complete our assessment by August 1999. We are conducting a three-phase process
of identifying both information technology and non-information technology
systems that are not year 2000 compliant, determining their significance to
operations, and developing plans to resolve issues where necessary. We have not
incurred material costs to date in this process and we do not believe that the
cost of additional actions will have a material effect on our operations. We
currently expect that we will complete this process in September 1999.
Although we currently believe that our systems and products are year 2000
compliant in all material respects, these systems and products may contain
undetected errors or defects with year 2000 date functions that may result in
material costs. Further, although we are not aware of any material operational
issues or costs associated with preparing our internal systems for the year
2000, we may experience serious unanticipated negative consequences, such as
significant downtime for one or more programming events, or material costs
caused by undetected errors or defects in the technology used in our internal
systems.
We use third-party equipment, software and content, including
non-information technology systems such as security systems, building equipment
and non-IT systems embedded microcontrollers that may not be year 2000
compliant. We have communicated with all of our hardware and software
developers, suppliers and other third parties to determine whether these third
parties are adequately addressing the year 2000 issue and whether any of their
non-IT systems have material year 2000 compliance problems. Based on the written
representations of these third parties, we believe that the third-party hardware
and software that we use is compliant or is expected to be compliant prior to
the year 2000. Failure of third-party equipment, software or content to operate
properly with regard to the
19
<PAGE> 20
QUOKKA SPORTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
year 2000 and thereafter could cause us to incur unanticipated expenses to
remedy any problems, which could have a material adverse effect on our business,
results of operations and financial condition. We are in the process of
developing a contingency plan to address situations that may result if we, or
third parties that we rely upon, are unable to achieve year 2000 readiness. We
currently expect to complete this contingency plan by the end of the third
quarter in 1999.
We do not currently have any information about the year 2000 status of our
sponsors. Failure of our sponsors' equipment or software due to year 2000
problems may result in reduced funds available for sponsorship activities.
Further, the purchasing patterns of sports viewers may be affected by year 2000
issues as companies expend significant resources to correct their current
systems for year 2000 compliance. Finally, we are subject to external forces
that might generally affect industry and commerce, such as utility or
transportation company year 2000 compliance failures and related service
interruptions. The occurrence of any year 2000 compliance failures that affect
our sponsors, our audience or industry and commerce generally could have a
material adverse effect on our business, results of operations and financial
condition.
20
<PAGE> 21
QUOKKA SPORTS, INC. AND SUBSIDIARIES
FACTORS THAT MAY AFFECT RESULTS
WE HAVE A HISTORY OF OPERATING LOSSES, EXPECT TO INCUR LOSSES FOR AT LEAST THE
NEXT EIGHT QUARTERS AND
MAY BE UNABLE TO ACHIEVE OR SUSTAIN PROFITABILITY OR GENERATE POSITIVE CASH
FLOW.
We expect to incur losses for at least the next eight quarters, largely due
to substantial planned increases in marketing expenses and expenses associated
with our digital sports entertainment programming. We may be unable to generate
sufficient revenues or control operating expenses to achieve or sustain
profitability or generate positive cash flow. We adopted our current business
model in August 1996 and began generating revenues in connection with this model
during the first quarter of 1997. As of June 30, 1999, we had an accumulated
deficit of $42.0 million. Our net operating losses were $4.9 million for 1997,
$9.5 million for 1998 and $26.0 million for the six months ended June 30, 1999.
Cash used in operating activities was $3.9 million for 1997, $10.9 million for
1998 and $18.8 million for the six months ended June 30, 1999.
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU CAN EVALUATE OUR BUSINESS AND
PROSPECTS.
Our limited operating history makes it difficult to evaluate our business
and prospects. As a digital sports entertainment company in an early stage of
development, we face significant risks, uncertainties, expenses and
difficulties. In order to succeed, we must do most, if not all, of the
following:
- develop programming to attract and retain our audience;
- secure and retain additional sponsors and advertisers;
- acquire rights on commercially feasible terms to cover additional
sporting events;
- develop, enhance and carefully manage our brand;
- deliver multiple programming events simultaneously to one or more global
distribution networks;
- promote our name in the sports and media markets;
- respond appropriately to competitive developments;
- develop and implement a successful electronic commerce strategy;
- develop a successful line of product merchandise;
- secure additional distribution systems for our content;
- continue to develop and improve our know-how, to enhance our Web sites to
meet the needs of a changing market and to adapt to changing technology;
- successfully execute our business and marketing strategies; and
- attract, integrate, retain and motivate qualified personnel.
Our business operations and revenues will suffer if we are unable to
accomplish these things.
21
<PAGE> 22
OUR QUARTERLY OPERATING RESULTS ARE EXPECTED TO FLUCTUATE AND OUR FAILURE TO
MEET EARNINGS ESTIMATES COULD CAUSE OUR STOCK PRICE TO SUFFER.
Our quarterly operating results have varied in the past, and we expect them
to fluctuate in future periods. For example, our revenues for the six months
ended June 30, 1999 were $3.4 million compared to revenues of $7.8 million for
the six months ended June 30, 1998. These fluctuations depend on a number of
factors described below and elsewhere in this "Factors That May Affect Results"
section of this report on Form 10-Q, many of which are outside our control. We
may be unable to predict our future revenues accurately or adjust spending in a
timely manner to compensate for any unexpected revenue shortfall. In particular,
because digital entertainment sponsorships have a lengthy sales cycle, it is
difficult to predict when new digital entertainment sponsorship agreements will
be completed and, consequently, when revenue from new agreements will first be
recognized. Any significant shortfall of revenues would have a negative impact
on our results of operations. For these and other reasons, we may not meet the
earnings estimates of securities analysts or investors and our stock price could
suffer. Our revenues in any quarter depend on the sports programming we offer,
the sponsorship arrangements we have in place at that time and finalize during
the quarter and, to a lesser extent, the advertising and electronic commerce
transactions we execute. We expect that our electronic commerce revenues will be
higher leading up to and during our major sports programming. It is likely that
sponsorship deals will have a long sales cycle and may be unevenly distributed
across fiscal quarters. We expect our expenses to increase over time for
production and other operational costs. The timing of these expenses, as well as
our obligations under existing and future contracts, could fluctuate from
quarter to quarter and intensify leading up to and during significant sporting
events such as the Olympic Games.
WE NEED TO ACQUIRE RIGHTS TO KEY SPORTING EVENTS TO DEVELOP MORE PROGRAMMING AND
GROW OUR BUSINESS, BUT THE COST AND COMPETITION FOR THESE RIGHTS COULD PREVENT
US FROM DOING SO.
We need to acquire rights to key sporting events to succeed. If we are
unable to acquire these rights, our ability to broaden our programming and grow
our business will be limited. Our limited operating history makes it difficult
to assess our ability to acquire rights in the future. Holders of rights may not
be willing to enter into strategic relationships with us or sell rights to us at
prices we can afford, or at all. We expect the cost of acquiring rights to
increase significantly as competition for these rights increases. We may not be
successful in acquiring the rights we need, especially if third parties, such as
traditional media companies, which have significantly greater resources,
experience and bargaining leverage than we do, compete for those rights.
OUR LIMITED EXPERIENCE DEVELOPING AND COORDINATING A COMPREHENSIVE PROGRAMMING
SCHEDULE COULD RESULT IN DELAYS OR SETBACKS THAT REDUCE THE APPEAL OF OUR WEB
SITES.
We have limited experience developing and coordinating a comprehensive
programming schedule and may experience delays or setbacks that reduce the
appeal of our Web sites. The programming we have developed required
significantly fewer resources and technical skills than the major sports
programming we are scheduled to produce, including the Olympic Games and
coverage of motor sports. Our programming may not keep pace with technological
developments, evolving industry standards or competing programming alternatives.
We have not developed multiple large-scale programming events simultaneously and
may lack the financial and technical resources to develop content for multiple
simultaneous sporting events. Even if the resources are available, we may be
unable to coordinate a comprehensive programming schedule. To be successful, we
will need to staff and operate 24-hour production facilities that are capable of
collecting, repackaging and distributing digital coverage to a global audience.
22
<PAGE> 23
IF OUR AUDIENCE DOES NOT LIKE OUR WEB SITES OR THE INTERACTIVE NATURE OF OUR
PROGRAMMING WE MAY NOT BE ABLE TO ATTRACT AND RETAIN SPONSORS.
It is difficult to predict whether our audience will like the layout and
design of our Web sites or adapt to the interactive nature of our programming.
If our layout and design are not user-friendly in the eyes of a wide and diverse
audience, we will not be successful in attracting repeat users and our revenue
could decline. Additionally, the nature of our programming requires our audience
to actively navigate through multiple pages to experience the depth of coverage.
Sports fans who are accustomed to passive listening or viewing sports coverage
provided by traditional media may not be willing to participate in the
interactive nature of sports entertainment on our Web sites. Our audience could
reduce its viewing of our existing programming due to dissatisfaction with our
programming or greater satisfaction with programming developed by one or more of
our competitors. Additionally, the number of sporting events covered on various
media may saturate the market and reduce the likelihood a sports fan would
select our Web site. If the size of our audience or the duration of visits to
our sites decreases or fails to grow as expected, we may be unable to achieve
the audience exposure we have committed and will commit to provide to our
sponsors, which could result in lost sponsorship revenues. For example,
sponsorship revenues could be affected if audience interest in the Olympic Games
is reduced as a result of recent scandals involving the International Olympic
Committee.
OUR SPONSORSHIP MODEL IS UNPROVEN AND OUR REVENUES AND RESULTS OF OPERATIONS
WILL SUFFER IF WE ARE UNABLE TO MAINTAIN OUR EXISTING SPONSORS AND SECURE
ADDITIONAL SPONSORSHIPS.
Our revenues and results of operations will suffer if we are unable to
maintain our existing sponsors and secure additional sponsors. Our revenue model
is primarily based on securing long-term digital entertainment sponsorships that
provide each sponsor with the right to be named as the exclusive sponsor of our
network within a particular industry category. We have limited experience with
this sponsorship model and to date have entered into digital entertainment
sponsorships only with Compaq Computer Corporation and Computer Associates
International, Inc. Prospective sponsors may not be interested in entering into
these digital entertainment sponsorships at the rates we set, if at all.
Additionally, our sponsorship agreements typically require the delivery of
a specified number of brand impressions, which refers to the number of times the
sponsor's brand appears on a user's screen while the user is connected to our
Web sites. Our fulfillment of these commitments assumes that we will be able to
deliver these brand impressions on sports programming that we acquire or create.
Owners of rights to sporting events often have pre-arranged sponsor lists they
require us to honor. Pre-existing sponsorship relationships may prevent us from
meeting the minimum commitments we have to our exclusive digital entertainment
sponsors and could cause us to allocate impressions to our sponsors that were
otherwise available for additional revenue generating purposes. These
pre-existing sponsorship relationships could also negatively affect our business
by limiting our ability to attract new sponsors. We might acquire or create
additional programming that would allow us to provide our sponsors with
sufficient brand impressions for which we would incur additional expenses.
WE DEPEND ON A SMALL NUMBER OF SPONSORS, THE LOSS OF WHICH COULD HARM OUR
REVENUES.
To date, we have depended on a limited number of sponsors for a majority of
our revenues. In 1998, two sponsors accounted for 68% of our revenues. We
anticipate that our results of operations will depend to a significant extent
upon revenues from a small number of digital entertainment sponsors. The loss of
one or more digital entertainment sponsors could negatively affect our business.
Although we seek to enter into multi-year agreements with our digital
entertainment sponsors, we cannot guarantee that these sponsors will maintain
their association with us.
23
<PAGE> 24
A DISASTER OR MALFUNCTION THAT DISABLES OUR COMPUTER SYSTEMS COULD HARM OUR WEB
SITES AND REDUCE THE APPEAL OF OUR PROGRAMMING.
Substantially all of our communications hardware and computer hardware
operations are located in our facilities in San Francisco, California and at
Frontier GlobalCenter in Sunnyvale, California, where our Web sites are hosted.
Our operations depend on our ability to protect these systems against damage
from fire, earthquakes, power loss, telecommunications failures, break-ins and
similar events. Additionally, computer viruses, electronic break-ins or other
similar disruptive problems could harm our Web sites. A disaster or malfunction
that disables either our San Francisco production facility or our Sunnyvale
hosting services could cause an interruption in the production and distribution
of our programming, limit the quantity or timeliness of updates to our
productions or limit the speed at which our audience can access our content. Any
of these occurrences could reduce the appeal of our programming. Our insurance
policies may not adequately compensate us for any losses that may occur due to
any failures or interruptions in our systems. We do not presently have a formal
disaster recovery plan.
Our Web sites have experienced significant increases in traffic during
coverage of some sporting events. As we deliver additional programming, we
expect our audience base to increase significantly. This will require our Web
sites to accommodate a high volume of traffic and deliver frequently updated
information. Failure of our systems to accommodate higher volumes of traffic
could reduce the performance and appeal of our Web sites and harm our results of
operations. Our Web sites in the past have experienced slower response times or
other problems for a variety of reasons, including delays or malfunctions as a
result of third-party distributors on which we rely.
OUR BRAND MAY NOT ACHIEVE THE BROAD RECOGNITION NECESSARY TO SUCCEED.
We believe that broad recognition and a favorable audience perception of
the Quokka brand will be essential to our success. If our brand does not achieve
favorable broad recognition, our success will be limited. We intend to build
traffic and brand recognition by aggressively marketing www.quokka.com as the
first interactive network that offers sports programming that brings the
audience closer to the athlete's perspective. We plan to market www.quokka.com
through an extensive traditional media campaign employing advertising on
television, printed publications, outdoor signage and radio. We also plan to
conduct a simultaneous online advertising campaign and to seek exposure through
our co-branded initiatives. During 1998, we spent $554,000 for advertising. We
expect to significantly increase our advertising expenses in future periods as
we build the Quokka brand and awareness of our programming. We may lack the
resources necessary to accomplish these initiatives. Even if the resources are
available, we cannot be certain that our brand enhancement strategy will deliver
the brand recognition and favorable audience perception that we seek. If our
strategy is unsuccessful, these expenses may never be recovered and we may be
unable to increase future revenues. Even if we achieve greater recognition of
our brand, competitors with greater resources or a more recognizable brand could
reduce our market share of the emerging digital sports entertainment market.
THE LOSS OF ANY STRATEGIC RELATIONSHIPS WITH MEDIA ENTITIES AND SPORTS GOVERNING
BODIES COULD NEGATIVELY IMPACT THE BREADTH OF OUR SPORTS PROGRAMMING AND OUR
ABILITY TO ACQUIRE ADDITIONAL RIGHTS TO COVER SPORTS OR SECURE SPONSORSHIPS.
We depend on agreements with certain established media entities and sports
governing bodies, such as NBC Olympics, Inc. and Championship Auto Racing Teams,
Inc. The loss of any of these strategic relationships could impact the breadth
of our sports programming and affect our ability to acquire additional rights or
secure sponsorships. Our agreements with these parties enable
24
<PAGE> 25
development of certain Olympic and motor sports programming. Additionally, these
strategic relationships, among others, provide us with credibility in the
marketplace to negotiate sponsorships and acquire rights to cover additional
sports. While these strategic relationships are grounded in contractual
agreements, these parties can terminate the agreements for various reasons,
including contractual breaches and a change in control of our company. For
example, NBC Olympics, Inc. can terminate its strategic relationship with us if
a competitor of NBC acquires us. We cannot guarantee that our strategic partners
will perform their contractual obligations. Even if the contracts run for the
full term, we may not be able to renew the agreements on comparable terms, if at
all.
FAILURE BY THIRD PARTIES ON WHOM WE DEPEND FOR INTERNET ACCESS, DELIVERY OF OUR
PROGRAMMING AND GENERATION OF MULTIPLE REVENUE STREAMS COULD HARM OUR OPERATIONS
AND REVENUES.
Our audience depends on Internet service providers, online service
providers and other Web site operators for access to our Web sites. Many of them
have experienced significant outages in the past, and could experience outages,
delays and other difficulties due to system failures unrelated to our systems.
Access by our audience outside the United States could also be delayed or
interrupted due to the uncertainty of the telecommunications infrastructure in
foreign countries.
We depend on various domestic and international third parties for software,
systems and delivery of much of our programming. Many of these third parties
have limited operating histories, early generation technology and are themselves
dependent on reliable delivery from others. Any delays or malfunctions in the
distribution of our content would limit our ability to deliver our programming.
We also depend on Frontier GlobalCenter in Sunnyvale, California, which hosts
our Web sites. If the Frontier GlobalCenter hosting facility is disabled or
malfunctions, access to our Web sites would be limited or eliminated.
Our plans to generate multiple revenue streams also depend on third
parties. In particular, we depend on encryption technology provided by others to
enable secure electronic commerce transactions. In addition, our ability to
obtain sponsorship and advertising interest will depend on whether third parties
we hire can generate meaningful and accurate data to measure the demographics of
our audience and the delivery of advertisements on our Web sites. Companies may
choose not to advertise on our Web sites or may pay less if they do not perceive
these measurements made by third parties to be reliable.
OUR SPONSORSHIP MODEL COULD PREVENT US FROM ACQUIRING CRITICAL TECHNOLOGY, WHICH
COULD AFFECT THE QUALITY OF OUR PROGRAMMING.
A significant feature of our sponsorship model is the exclusive right to be
the sole sponsor of a sponsorship category, such as computing, database
software, digital distribution, consumer electronics or wireless communications.
While we expect this exclusivity feature to be central to our marketing strategy
for securing and retaining these sponsorships, it may bind us to undesirable
sponsorship arrangements and limit our ability to acquire technology we may
otherwise want or need. Exclusive sponsors acquire multi-year rights to a
sponsorship category and sometimes provide us with equipment or technical
expertise to enable us to develop and distribute our programming. We are limited
in our ability to terminate an existing sponsor relationship if a sponsor fails
to provide us with necessary equipment and expertise, or is otherwise less
desirable than a prospective sponsor in the same sponsorship category. An
existing sponsor also may prevent us from acquiring desirable technology from
competitors of the sponsor, which could harm our programming.
25
<PAGE> 26
OUR PROGRAMMING AND OPERATIONS WILL SUFFER IF WE ARE UNABLE TO ADAPT IN A TIMELY
MANNER TO TECHNOLOGICAL DEVELOPMENTS, EVOLVING INDUSTRY STANDARDS, CHANGING
MARKET CONDITIONS OR CUSTOMER REQUIREMENTS.
The market for digital sports programming is characterized by rapid
technological change. To be successful, we must adapt to this rapidly changing
market by continually improving the features we offer and developing new
features. Our programming and operations will suffer if we are unable to adapt
in a timely manner in response to technological developments, evolving industry
standards, changing market conditions or customer requirements. We may not
maintain our competitive position in the digital sports entertainment market for
a number of reasons, including the following:
- our technology infrastructure may not provide high-quality, reliable
programming or adequately scale to support multiple simultaneous events;
- we may be unable to afford substantial expenditures to adapt our service
to changing technologies;
- we may be unable to license leading technologies or develop new
proprietary technologies; and
- we may fail to use new technologies effectively or adapt to technological
changes.
OUR BUSINESS IS SUBJECT TO MANY RISKS ASSOCIATED WITH WORLDWIDE SPORTS EVENT
COVERAGE AND OTHER INTERNATIONAL ACTIVITIES, WHICH COULD PREVENT OR DELAY OUR
COVERAGE OR CAUSE US TO INCUR ADDITIONAL EXPENSES.
Our coverage of adventure sports is not limited geographically and is
therefore subject to many risks associated with worldwide sports event coverage
and other international activities that could prevent or delay our coverage. We
have developed, and expect to continue to develop, programming covering sporting
events throughout the world and across the oceans. For example, our coverage of
yachting races and of adventure sports, such as mountaineering in the Karakoram
range in China and treks across deserts in Morocco, require us to traverse
international borders. Coverage of these events requires that we deploy
production staff to locations throughout the world. Additionally, we expect to
maintain offices in several foreign countries, including Great Britain,
Switzerland and Australia. As a result, we are subject to numerous risks
associated with doing business internationally, including the following:
- regulatory requirements, including export requirements, tariffs and other
barriers, health and safety requirements and labor and immigration laws;
- difficulties in staffing and managing foreign operations;
- differences in reliability of telecommunications infrastructure and
Internet access;
- varying technological standards and capabilities;
- differences in standards of protection for intellectual property;
- political instability;
- hostile action against event participants or our employees;
- currency fluctuations;
- potentially adverse tax consequences; and
- restrictions against the repatriation of earnings from a foreign country.
26
<PAGE> 27
Additionally, regional events that we choose to cover may fail to attract a
global audience. In that case, we would incur the significant expenses inherent
in the coverage of an international event without achieving the audience
exposure we have committed or may commit to provide to our sponsors.
OUR BUSINESS WILL NOT OPERATE EFFICIENTLY AND OUR RESULTS OF OPERATIONS WILL BE
NEGATIVELY AFFECTED IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH.
We are experiencing a period of significant expansion. We had 40 employees
at December 31, 1997, compared to 118 employees at December 31, 1998 and 242
employees at June 30, 1999. This growth is placing, and we expect any further
growth to continue to place, a significant strain on our management, operational
and financial resources. This will require us to implement additional management
information systems and to develop additional operating, administrative,
financial and accounting systems and controls. If we are unable to develop these
systems and manage our growth effectively, our business will not operate
efficiently and our results of operations could be negatively affected.
Many of our senior management have only recently joined us. Seven of our
sixteen most senior officers have worked for us for less than one year. These
individuals have not previously worked together and are becoming integrated as a
management team. Our operations and personnel relations will suffer if our
senior management is unable to successfully manage our growth.
IF WE FAIL TO ATTRACT AND RETAIN KEY PERSONNEL WE WILL BE UNABLE TO EXECUTE OUR
BUSINESS STRATEGY.
Our success will depend on the continued services of our senior management
and other key personnel, as well as our ability to attract, train, retain and
motivate other highly skilled technical, managerial, marketing and customer
service personnel. The loss of the services of any of our executive officers,
particularly Alan Ramadan, our president and chief executive officer, or other
key employees could prevent us from executing our business strategy. Competition
for these personnel is intense, and we may not be able to successfully attract,
integrate or retain sufficiently qualified personnel. Our anticipated
programming schedule in the near future will require that we attract and retain
personnel who are skilled in production, computer and other technical fields.
Skilled technical personnel are in high demand and have multiple employment
opportunities, especially in the San Francisco Bay Area, where our headquarters
are located. As a matter of practice, we do not generally enter into employment
agreements with our employees.
DELAYS IN THE ACCESSIBILITY OR GROWTH OF THE INTERNET COULD ADVERSELY AFFECT OUR
PROGRAMMING AND REDUCE THE LEVEL OF TRAFFIC ON OUR WEB SITES.
Our success will depend on the continued development and growth of the
Internet. Our programming will suffer if the necessary infrastructure, standards
or protocols or complementary products, services or facilities for the Internet
are not developed in a timely manner. While Internet technologies have been
evolving rapidly in recent years, future growth may not continue at comparable
rates. As the Internet continues to experience increased numbers of users and
increased frequency of use, the Internet infrastructure may be unable to support
the demands of a global audience or the requirements of consumers for faster
access. The Internet has experienced a variety of outages and other delays as a
result of damage to portions of its infrastructure, and it could face outages
and delays in the future. This might include outages and delays resulting from
the year 2000 problem. These outages and delays could adversely affect the level
of Internet usage as well as the level of traffic on our Web sites. In addition,
the Internet could lose its viability due to delays in the
27
<PAGE> 28
development or adoption of new standards and protocols to handle increased
levels of activity or due to regulation by governments, businesses or other
organizations.
Our programming is designed to operate on today's Internet platform as well
as other interactive systems that transmit digitized data, such as cable and
satellite systems, in the future. These future systems are commonly referred to
as "broadband" systems and are expected to enable transmission of large amounts
of digitized material, such as video clips, within a relatively short time
frame. Delays in the development of broadband systems could harm our ability to
distribute our programming through subscription services and pay-per-view
events, which could adversely affect our ability to generate revenues from these
types of programming.
THE ONLINE DIGITAL SPORTS ENTERTAINMENT INDUSTRY IS INTENSELY COMPETITIVE, AND
WE MAY BE UNABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE COMPETITORS.
The market for Internet services and products is relatively new, intensely
competitive and rapidly changing. Since the Internet's commercialization in the
early 1990's, the number of Web sites on the Internet competing for consumers'
attention and spending has proliferated. We expect that competition will
continue to intensify. We may be unable to compete successfully against current
and future competitors.
Many of our current and potential competitors have significantly longer
operating histories, greater financial, technical and marketing resources,
greater name recognition and larger user or membership bases than us and,
therefore may have a significantly greater ability to attract advertisers and
users. In addition, many of these competitors may be able to respond more
quickly to new or emerging technologies and changes in Internet user
requirements and to devote greater resources to the development, promotion and
sale of their services. Our current or potential competitors may develop
products and services comparable or superior to those developed by us. Increased
competition could result in price reductions, reduced margins or loss of market
share, any of which would harm our business. In addition, as we expand
internationally, we may face new competition.
We compete, directly and indirectly, for sponsors, rights and the attention
of sports viewers with the following categories of companies:
- Web sites targeted to sports enthusiasts generally, such as
www.cbs.sportsline.com, www.cnnsi.com and www.espn.com, many of which
have been established by traditional media companies, and Web sites
targeted to enthusiasts of particular sports, such as
www.majorleaguebaseball.com, www.nascar.com, www.nba.com, www.nfl.com and
www.nhl.com;
- publishers and distributors of traditional media targeted to sports
enthusiasts, such as the ESPN networks, the FoxSports network and Sports
Illustrated;
- online services such as America Online and the Microsoft Network, which
provide access to sports-related content and services;
- vendors of sports information, merchandise, products and services
distributed through other means, including retail stores, mail, facsimile
and private bulletin board services; and
- Web search and retrieval services, such as Excite, Infoseek, Lycos and
Yahoo! and other high-traffic Web sites, such as those operated by Cnet
and Netscape.
We expect that the number of our direct and indirect competitors will
increase in the future. We anticipate that, as the Internet and other
interactive distribution systems converge with traditional
28
<PAGE> 29
television broadcasting and cable, significant competition may come from the
cable arena, including such sports-oriented cable networks as the ESPN networks.
OUR ABILITY TO GENERATE REVENUES WILL BE ADVERSELY AFFECTED IF SPONSORS AND
ADVERTISERS DO NOT ACCEPT THE INTERNET AS AN EFFECTIVE MEDIUM TO PROMOTE THEIR
PRODUCTS AND SERVICES.
Our ability to generate sponsorship and advertising revenues will depend on
many factors, including the following:
- the development of the Internet as an attractive medium for sponsors and
advertisers;
- the level of use of the Internet by consumers and the amount of traffic
on our Web sites; and
- our ability to achieve and measure demographic characteristics that are
attractive to sponsors and advertisers.
Market acceptance of the Internet as a medium for sponsorship and
advertising is highly uncertain. Most potential sponsors and advertisers have
only limited experience with the Internet as an advertising medium and have not
devoted a significant portion of their advertising expenditures to
Internet-based campaigns. Even if sponsors and advertisers are persuaded to
allocate portions of their budgets to Internet-based advertising, they may not
find the medium to be effective for promoting their products and services
relative to traditional print and broadcast media. Additionally, no standards
are widely accepted to measure the effectiveness of the Internet as a medium for
targeting consumers with particular demographics and influencing consumer
behavior. If these standards do not develop, existing sponsors or advertisers
may not continue their current level of Internet-based sponsorships or
advertising, and sponsors or advertisers who are not currently buying
sponsorships or advertising on the Internet may be reluctant to do so.
OUR COMMON STOCK PRICE IS LIKELY TO BE VOLATILE, WHICH COULD HURT INVESTORS AND
EXPOSE US TO LITIGATION.
The stock markets in general, and the Nasdaq National Market and the market
for Internet-related and technology companies in particular, have experienced
extreme price and volume fluctuations in recent months. These fluctuations often
have been unrelated or disproportionate to the operating performance of these
companies. These broad market and industry factors could harm the market price
of our common stock, regardless of our performance. Market fluctuations, as well
as general political and economic conditions such as a recession or interest or
currency rate fluctuations, also could harm the market price of our common
stock.
The trading prices of many technology company stocks, particularly Internet
company stocks, have recently been at or near historical highs, reflecting
valuations substantially above historical levels. Our stock price could be
subject to wide fluctuations in response to a variety of factors, including
factors that may be beyond our control. These include:
- actual or anticipated variations in our quarterly operating results;
- announcements of technological innovations or new sports entertainment
programming by us or our competitors;
- changes in financial estimates by securities analysts;
- conditions or trends in the Internet and online entertainment industries;
- changes in the market valuations of other Internet companies;
29
<PAGE> 30
- announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
- additions or departures of key personnel; and
- sales of substantial amounts of our common stock or other securities in
the open market.
Volatility in the market price of our common stock could result in
securities class action litigation. This type of litigation could result in
substantial costs and a diversion of management's attention and resources.
WE WILL NEED TO RAISE ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE ON
FAVORABLE TERMS AND COULD RESULT IN ADDITIONAL DILUTION
We currently anticipate that the net proceeds of this offering, together
with our available funds, will be sufficient to meet our anticipated needs for
working capital, capital expenditures and business expansion through at least
the next 12 months. Thereafter, we will need to raise additional capital.
Additional financing may not be available on favorable terms or at all. If
adequate funds are not available or are not available on acceptable terms, we
may not be able to fund our expansion, take advantage of unanticipated
opportunities or respond to competitive pressures. We may seek to raise
additional capital sooner than the next 12 months to fund unanticipated
opportunities or respond to competitive pressures. If additional funds are
raised through the issuance of equity or convertible debt securities, the
percentage ownership of our stockholders will be reduced and the securities
issued may have rights, preferences and privileges senior to those of our common
stock.
SALES OF OUR SHARES AFTER OUR JULY 1999 INITIAL PUBLIC OFFERING COULD NEGATIVELY
AFFECT THE MARKET PRICE OF OUR STOCK, IMPAIR OUR ABILITY TO RAISE CAPITAL
THROUGH THE SALE OF ADDITIONAL EQUITY SECURITIES AND RESULT IN FURTHER DILUTION.
Sales of a substantial number of shares in the public market after our July
1999 initial public offering could negatively affect the market price of our
common stock and could impair our ability to raise capital through the sale of
additional equity securities. For a full discussion of the number of shares of
our common stock subject to restrictions on trading or lock-up agreements, see
our Registration Statement filed with the SEC, SEC File No. 333-76981.
ACCEPTANCE OF PROPERTY OR SERVICES AS PAYMENT MAY PROVIDE LESS WORKING CAPITAL
FLEXIBILITY THAN A CASH PAYMENT WOULD PROVIDE.
WE MAY BE SUBJECT TO NEGATIVE PUBLICITY AND LIABILITY FOR ATHLETES OR OUR
EMPLOYEES ASSOCIATED WITH OUR EVENTS, WHICH WOULD DISRUPT OUR PROGRAMMING AND
REDUCE SPONSORSHIPS AND PARTICIPATION IN FUTURE EVENTS.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS, AND OUR EFFORTS TO DO SO COULD BE TIME-CONSUMING AND EXPENSIVE AND COULD
DIVERT MANAGEMENT ATTENTION FROM EXECUTING OUR BUSINESS STRATEGY.
PROBLEMS RELATED TO THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT OUR BUSINESS.
WE MAY BE SUBJECT TO LIABILITY FOR PUBLISHING OR DISTRIBUTING CONTENT, AND OUR
INSURANCE COVERAGE MAY BE INADEQUATE TO PROTECT US FROM THIS LIABILITY.
30
<PAGE> 31
OUR COMPETITIVE POSITION IN THE DIGITAL SPORTS ENTERTAINMENT INDUSTRY COULD
DECLINE IF WE ARE UNABLE TO ACQUIRE BUSINESSES OR TECHNOLOGY THAT ARE STRATEGIC
FOR OUR SUCCESS OR IF WE FAIL TO SUCCESSFULLY INTEGRATE ANY ACQUISITIONS WITH
OUR CURRENT BUSINESS.
REVENUES FROM SUBSCRIPTION SERVICES MAY FAIL TO DEVELOP, WHICH WOULD HARM OUR
RESULTS OF OPERATIONS.
CHANGES IN REGULATION OF THE INTERNET COULD LIMIT OUR BUSINESS PROSPECTS.
OUR INTERNET ACTIVITIES MAY BECOME SUBJECT TO ADDITIONAL TAXES, WHICH COULD
NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS.
WE HAVE LIMITED EXPERIENCE GENERATING REVENUES FROM ELECTRONIC COMMERCE, AND WE
MAY NOT BE ABLE TO DO SO IF WE ARE UNABLE TO DEVELOP AND IMPLEMENT A SUCCESSFUL
ELECTRONIC COMMERCE STRATEGY, DEVELOP A SUCCESSFUL LINE OF PRODUCT MERCHANDISE,
OVERCOME INTERNET SECURITY CONCERNS OR RESPOND TO COMPETITIVE PRICING.
Additional discussion of these and other risk factors is disclosed in our
Registration Statement on Form S-1, as amended, filed with the Securities and
Exchange Commission, SEC File No. 333-76981.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quokka considered the provisions of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments." Quokka had no
holdings of derivative financial or commodity instruments at June 30, 1999.
Quokka's revenue, capital expenditures and nearly all of its expenses are
transacted in U. S. dollars. Quokka believes it has minimal exposure to
financial market risks and risks associated with changes in foreign currency
exchange rates at this time.
31
<PAGE> 32
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time Quokka is involved in legal proceedings in the ordinary
course of business. None of such proceedings are expected to have a material
impact on our business, results of operations or financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Since April 1, 1999 Quokka has issued and sold unregistered securities as
follows:
(a) Between April 1, 1999 and June 30, 1999, an aggregate of 171,454
shares of common stock were issued to employees upon exercise of options
with exercise prices ranging from $0.50 to $1.50. The consideration
received for such shares was $137,300.
(b) In May, 1999 an aggregate of 56,800 shares of common stock were
issued upon exercise of warrants at an exercise price of $0.50. The
aggregate consideration received for such shares was $28,400.
(c) In May and June 1999, Quokka sold 4,533,223 shares of its Series D
preferred stock at $9.00 per share to eight investors for aggregate
consideration of $40.7 million.
(d) In April 1999, Quokka issued and sold warrants to purchase up to
an aggregate of 161,538 shares of Series C preferred stock at an exercise
price of $3.25 per share to two investors, one of which is a 5% stockholder
of Quokka.
(e) In May 1999, Quokka issued and sold a warrant to purchase up to
110,000 shares of its Series D preferred stock at an exercise price of
$9.00 to one investor.
All sales of common stock made pursuant to the exercise of stock options
granted under the 1997 Equity Incentive Plan to Quokka's officers, directors,
employees and consultants were made in reliance on Rule 701 under the Securities
Act of 1933, as amended ("the Securities Act") or on Section 4(2) of the
Securities Act All other sales were made in reliance on Section 4(2) of the
Securities Act and/or Regulation D promulgated under the Securities Act. These
sales were made without general solicitation or advertising. Each purchaser was
a sophisticated investor with access to all relevant information necessary to
evaluate the investment and represented to Quokka that the shares were being
acquired for investment.
Quokka's Registration Statement (SEC File No. 333-76981) for its initial
public offering became effective July 27, 1999, covering an aggregate of
5,750,000 shares of common stock, including the underwriters' over-allotment.
Commencing July 28, 1999, Quokka issued 5,000,000 shares of its common stock at
an initial public offering price of $12.00 per share. Offering proceeds net of
aggregate expenses to Quokka, were approximately $54.5 million. The managing
underwriters were Merrill Lynch & Co., Lehman Brothers and BancBoston Robertson
Stephens. The aggregate underwriting fees were approximately $4.2 million. Upon
the closing of the initial public offering in August 1999, all outstanding
shares of our preferred stock were automatically converted, on a one-for-one
basis, into shares of common stock. All warrants to purchase preferred stock
outstanding after the closing of the initial public offering, when and if
exercised, will be converted into the number of shares of common stock the
holder would have received if the warrant had been exercised and the preferred
stock received thereupon had been simultaneously converted immediately prior to
the closing of the initial public offering. Following the closing of the initial
public offering, Quokka filed an amendment to its Amended and Restated
Certificate of Incorporation with the Delaware Secretary of State that
authorizes ten million (10,000,000) shares of undesignated preferred stock. For
32
<PAGE> 33
additional information about our capital stock, please refer to "Description of
Capital Stock" in our Registration Statement (SEC File No. 333-76981) filed with
the Securities and Exchange Commission.
Quokka expects to use the net offering proceeds for capital contributions
to our joint ventures, payments under our rights and distribution agreements and
general corporate purposes, including working capital, expansion of operations,
expansion of our marketing campaign and capital expenditures. The use of
proceeds does not represent a material change in the use of proceeds as
described in our prospectus dated July 27, 1999 comprising part of our
Registration Statement on Form S-1, as amended, filed with the Securities and
Exchange Commission, SEC File No. 333-96781. Restricted cash associated with one
of our office leases aggregated $434,500 at June 30, 1999. We have not declared
or paid any cash dividends on our capital stock and do not anticipate paying any
cash dividends in the foreseeable future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In May 1999, prior to its initial public offering, we submitted the
following matters to a vote of our security holders through an action by written
consent. Each of the matters were approved by holders of the required majority
of our outstanding common stock and preferred stock as of May 21, 1999.
1. To approve an amendment and restatement of our Certificate of
Incorporation and Bylaws.
2. To approve an amendment and restatement of our 1997 Equity
Incentive Plan.
3. To approve the adoption of a 1999 Employee Stock Purchase Plan and
to reserve a total of 1,000,000 shares of common stock thereunder for
issuance to employees.
4. To approve the adoption of a 1999 Non-Employee Director Stock
Option Plan and to reserve a total of 450,000 shares of common stock
thereunder for issuance to non-employee directors.
5. To approve a form of indemnity agreement to be entered into with
each of our directors and the officers and agents of Quokka selected by the
Board of Directors.
6. To approve the election of directors until the next annual meeting
of stockholders or until their successors are elected and qualified, as
well as the classification of directors into three classes as noted below:
<TABLE>
<CAPTION>
NAME CLASS TO SERVE UNTIL ANNUAL MEETING
---- ----- -----------------------------
<S> <C> <C>
Alan Ramadan.......................................... I 2000 Annual Meeting
John Bertrand......................................... I 2000 Annual Meeting
Roel Pieper........................................... I 2000 Annual Meeting
Walter Bregman........................................ II 2001 Annual Meeting
James G. Shennan, Jr.................................. II 2001 Annual Meeting
Richard H. Williams................................... III 2002 Annual Meeting
Barry M. Weinman...................................... III 2002 Annual Meeting
</TABLE>
33
<PAGE> 34
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.03* Form of Amended and Restated Certificate of Incorporation
3.04* Form of Amended and Restated Bylaws
4.02* Amended and Restated Investors' Rights Agreement, dated May
27, 1999, among Quokka and certain investors named therein.
10.01* Form of Indemnity Agreement entered into by Quokka with each
of its directors and certain executive officers.
10.02* Amended and Restated 1997 Equity Incentive Plan.
10.03* Form of Stock Option Agreement under the Amended and
Restated 1997 Equity Incentive Plan.
10.04* 1999 Non-Employee Directors' Stock Option Plan.
10.05* Form of Nonstatutory Stock Option Agreement under the 1999
Non-Employee Directors' Stock Option Plan.
10.06* 1999 Employee Stock Purchase Plan.
10.07* Form of 1999 Employee Stock Purchase Plan Offering.
10.08* Key Employee Agreement, dated March 25, 1999, between Alvaro
Saralegui and Quokka.
10.09* Subordinated Loan and Security Agreement, dated February 12,
1999, between Quokka and Comdisco, Inc.
10.10+* Software License and Development Agreement, dated March 20,
1998, as amended, between Quokka and Intel Corporation.
10.11* Lease, dated October 1, 1996, between Brannan Street
Partners and Quokka, as amended.
10.12* Sublease, dated June 23, 1998, between San Francisco
Mercantile Company, Inc. and Quokka, as amended.
10.13* Office Lease, dated February 18, 1999, between Tiffany M.
Gin and Stanton Lowe dba Spear Street Saphire and Quokka.
10.14+* Master Venture Agreement, dated February 9, 1999, by and
among Quokka, NBC Olympics, Inc. and NBC/Quokka Ventures,
LLC.
10.15+* Agreement, dated January 1, 1999, between Championship Auto
Racing Teams, Inc. and CART Digital Media Enterprises, LLC.
10.16+* Operating Agreement of NBC/Quokka Ventures, LLC, dated
February 9, 1999, between Quokka and NBC Olympics, Inc., as
amended.
10.17+* Digital Entertainment Partnership Agreement, dated January
1, 1999, between Quokka and Compaq Computer Corporation.
10.18* Lease, dated April 23, 1999, between Quokka and 1301 Evans
Street Associates, LLC.
10.19* Office Lease Agreement, dated May 27, 1999, between Quokka
and EOP-Mission Street, L.L.C.
10.20* Lease, dated July 16, 1999, between SKS Brannan Associates,
LLC and Quokka.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated by reference to the same numbered exhibit previously filed with
the Company's Registration Statement on Form S-1 (SEC File No. 333-76981).
+ Confidential treatment granted as to portions of this exhibit.
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K
during the quarter ended June 30, 1999.
34
<PAGE> 35
SIGNATURE
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.
QUOKKA SPORTS, INC.
(Registrant)
/s/ LES SCHMIDT
--------------------------------------
Les Schmidt
Executive Vice President, Chief
Financial Officer
and Secretary
(Authorized Officer and Principal
Financial
and Accounting Officer)
September 3, 1999
35
<PAGE> 36
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.03* Form of Amended and Restated Certificate of Incorporation
3.04* Form of Amended and Restated Bylaws
4.02* Amended and Restated Investors' Rights Agreement, dated May
27, 1999, among Quokka and certain investors named therein.
10.01* Form of Indemnity Agreement entered into by Quokka with each
of its directors and certain executive officers.
10.02* Amended and Restated 1997 Equity Incentive Plan.
10.03* Form of Stock Option Agreement under the Amended and
Restated 1997 Equity Incentive Plan.
10.04* 1999 Non-Employee Directors' Stock Option Plan.
10.05* Form of Nonstatutory Stock Option Agreement under the 1999
Non-Employee Directors' Stock Option Plan.
10.06* 1999 Employee Stock Purchase Plan.
10.07* Form of 1999 Employee Stock Purchase Plan Offering.
10.08* Key Employee Agreement, dated March 25, 1999, between Alvaro
Saralegui and Quokka.
10.09* Subordinated Loan and Security Agreement, dated February 12,
1999, between Quokka and Comdisco, Inc.
10.10+* Software License and Development Agreement, dated March 20,
1998, as amended, between Quokka and Intel Corporation.
10.11* Lease, dated October 1, 1996, between Brannan Street
Partners and Quokka, as amended.
10.12* Sublease, dated June 23, 1998, between San Francisco
Mercantile Company, Inc. and Quokka, as amended.
10.13* Office Lease, dated February 18, 1999, between Tiffany M.
Gin and Stanton Lowe dba Spear Street Saphire and Quokka.
10.14+* Master Venture Agreement, dated February 9, 1999, by and
among Quokka, NBC Olympics, Inc. and NBC/Quokka Ventures,
LLC.
10.15+* Agreement, dated January 1, 1999, between Championship Auto
Racing Teams, Inc. and CART Digital Media Enterprises, LLC.
10.16+* Operating Agreement of NBC/Quokka Ventures, LLC, dated
February 9, 1999, between Quokka and NBC Olympics, Inc., as
amended.
10.17+* Digital Entertainment Partnership Agreement, dated January
1, 1999, between Quokka and Compaq Computer Corporation.
10.18* Lease, dated April 23, 1999, between Quokka and 1301 Evans
Street Associates, LLC.
10.19* Office Lease Agreement, dated May 27, 1999, between Quokka
and EOP-Mission Street, L.L.C.
10.20* Lease, dated July 16, 1999, between SKS Brannan Associates,
LLC and Quokka.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated by reference to the same numbered exhibit previously filed with
the Company's Registration Statement on Form S-1 (SEC File No. 333-76981).
+ Confidential treatment granted as to portions of this exhibit.
36
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 40,579
<SECURITIES> 0
<RECEIVABLES> 2,890
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 58,691
<PP&E> 10,063
<DEPRECIATION> 1,150
<TOTAL-ASSETS> 67,604
<CURRENT-LIABILITIES> 12,022
<BONDS> 0
0
3
<COMMON> 1
<OTHER-SE> 8,290
<TOTAL-LIABILITY-AND-EQUITY> 67,604
<SALES> 0
<TOTAL-REVENUES> 3,449
<CGS> 0
<TOTAL-COSTS> 29,241
<OTHER-EXPENSES> 422
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 156
<INCOME-PRETAX> (26,002)
<INCOME-TAX> 0
<INCOME-CONTINUING> (26,002)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,002)
<EPS-BASIC> (2.66)
<EPS-DILUTED> (2.66)
</TABLE>
