<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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)
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<CAPTION>
DELAWARE 94-3250045
<S> <C>
(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 [X] No [ ]
The number of shares of the Registrant's Common Stock, $.0001 par value
per share, outstanding at October 27, 1999 was 43,999,719.
<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: Quokka Sports, Inc.'s (the "Company's") ability to
reduce the proportion of property and services accepted as payment; statements
related to industry trends and future growth in the markets for broadband
applications and content; the amount of studio services that the Company offers;
the Company's future operating profitability; the Company's future capital
needs; the Company's year 2000 contingency plans; the Company's projected
programming schedule; the Company's future research and development; the
Company's ability to retain existing sponsors and attract and retain additional
sponsors; business trends; the Company's ability to generate revenue from
electronic commerce; the Company's ability to expand its audience base; 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 21 through 31, among other
things, should be considered in evaluating the Company's prospects and future
financial performance.
2
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QUOKKA SPORTS, INC.
INDEX TO FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1999
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Consolidated Condensed Balance Sheets as of September 30, 1999
and December 31, 1998..................................... 4
Consolidated Condensed Statements of Operations for the
Three and Nine Months Ended September 30, 1999 and 1998... 5
Consolidated Condensed Statements of Cash Flows for the Nine
Months Ended September 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 6. Exhibits and Reports on Form 8-K............................ 33
Signature............................................................ 34
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3
<PAGE> 4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUOKKA SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 80,632 $ 23,994
Accounts receivable 2,370 1,151
Acquired programming and distribution rights, net 12,200 --
Prepaid expenses and other 1,829 331
--------- ---------
Total current assets 97,031 25,476
Property and equipment, net 10,050 2,736
Other assets 629 --
--------- ---------
Total assets $ 107,710 $ 28,212
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,341 $ 289
Accrued expenses 3,964 1,199
Current portion of long-term debt and capitalized lease obligations 3,577 290
Deferred revenues 2,439 480
--------- ---------
Total current liabilities 11,321 2,258
--------- ---------
Long term debt and capitalized lease obligations, net of current portion 9,424 501
Stockholders' equity
Convertible preferred stock -- 2
Common stock, voting and non-voting 4 1
Additional paid-in capital 137,086 41,019
Warrants and other 7,831 477
Treasury stock, at cost (95) --
Accumulated deficit (57,861) (16,046)
--------- ---------
Total stockholders' equity 86,965 25,453
--------- ---------
Total liabilities and stockholders' equity $ 107,710 $ 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)
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 2,961 $ 548 $ 6,410 $ 7,869
Costs and Expenses
Production costs 6,926 955 13,269 6,458
Research and engineering 2,596 1,936 9,249 3,244
Sales and marketing 4,858 681 7,978 1,613
General and administrative 3,581 648 13,919 2,152
Depreciation 1,605 140 2,755 270
Amortization of acquired programming and distribution
rights 226 -- 1,863 --
-------- -------- -------- --------
Total costs and expenses 19,792 4,360 49,033 13,737
-------- -------- -------- --------
Loss from operations (16,831) (3,812) (42,623) (5,868)
Losses of associated venture 372 -- 1,439 --
Minority interest in net loss of consolidated subsidiary (645) -- (1,291) --
Interest income/(expense), net 745 155 957 218
-------- -------- -------- --------
Net loss $(15,813) $ (3,657) $(41,814) $ (5,650)
======== ======== ======== ========
Net loss per Share:
Basic and diluted $ (.37) $ (.38) $ (1.11) $ (.59)
Weighted average shares outstanding - basic and
diluted 42,545 9,655 37,597 9,654
======== ======== ======== ========
Proforma net loss per share:
Basic and diluted $ (.37) $ (.13) $ (1.11) $ (.26)
Weighted average shares outstanding - basic and
diluted 42,545 28,392 37,597 22,068
======== ======== ======== ========
</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)
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Nine Months Ended
September 30,
----------------------
1999 1998
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Cash flows from operating activities:
Net loss $(41,814) $ (5,650)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization of property and equipment 2,755 270
Minority interest amortization of programming rights (1,291) --
Amortization of acquired programming and distribution rights 1,863 --
Non-cash compensation-related charges and other 1,341 853
Changes in operating assets and liabilities:
Accounts receivable (1,219) (243)
Prepaid expenses and other (925) 133
Other assets (629) --
Accounts payable 654 (5)
Accrued expenses 2,765 1,724
Acquired rights (125) --
Deferred revenues 1,959 (2,289)
-------- --------
Net cash used in operating activities (34,666) (5,207)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (6,949) (1,422)
-------- --------
Net cash used in investing activities (6,949) (1,422)
-------- --------
Cash flows from financing activities:
Proceeds from long term financing arrangements 3,699 520
Payments on notes, long-term capital leases and financing arrangements (1,156) (28)
Proceeds from the issuance of common stock,
net of issuance cost 95,805 --
Purchase of treasury stock (95) --
Proceeds from the issuance of preferred stock,
net of issuance cost -- 16,082
-------- --------
Net cash provided by financing activities 98,253 16,574
-------- --------
Net increase in cash 56,638 9,945
Cash, beginning of period 23,994 4,027
-------- --------
Cash, end of period $ 80,632 $ 13,972
======== ========
</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. Using digital assets
generated at sports venues 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 and other
entertainment devices.
Revenues are generated from digital entertainment and other
sponsorships, advertising, electronic commerce, the sale of content 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 branding on the network or specific
network properties, 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 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 September 30, 1999, the operating
results for the three and nine months ended September 30, 1999 and 1998 and cash
flows for the nine months ended September 30, 1999 and 1998. These financial
statements and notes thereto 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 nine months ended September 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
programming 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 using the
greater of the ratio of rights contributed during the period in relation to the
total rights expected or on a straight-line method over their estimated useful
life.
Revenue Recognition
Quokka generates revenues from digital entertainment sponsorships,
advertising, electronic commerce, the sale of content, 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 subsequently represent multi-year,
multi-event and multi-benefit sponsorships. Annual revenues from these new
sponsorships 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 will recognize revenue from the sale of
its proprietary content in accordance with the provisions of SFAS No. 63. 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.
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.
8
<PAGE> 9
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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 Nine months ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
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NUMERATOR:
Net loss available to common stockholders $(15,813) $ (3,657) $(41,814) $ (5,650)
DENOMINATOR:
Weighted average shares 13,429 9,655 11,066 9,654
Weighted average unvested common shares subject to
repurchase agreements (138) -- (76) --
-------- -------- -------- --------
Denominator for basic calculation and diluted
calculation 13,291 9,655 10,990 9,654
======== ======== ======== ========
NET LOSS PER SHARE:
Basic and Diluted $ (1.19) $ (.38) $ (3.80) $ (.59)
Anti-dilutive securities including options, warrants
and preferred stock not included in historical
net loss per share calculations 38,657 21,244 36,011 14,922
PRO FORMA NET LOSS PER SHARE:
Net loss $(15,813) $ (3,657) $(41,814) $ (5,650)
Shares used in computing net loss per share, basic and
diluted 13,291 9,655 10,990 9,654
Adjustment to reflect assumed conversion of preferred
stock and exercise of warrants 29,254 18,737 26,608 12,412
-------- -------- -------- --------
Shares used in computing pro forma net loss per share,
basic and diluted 42,545 28,392 37,598 22,066
======== ======== ======== ========
Pro forma net loss per share, basic and diluted $ (0.37) $ (0.13) $ (1.11) $ (0.26)
</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.
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.
9
<PAGE> 10
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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. The adoption of Statement of Position No. 98-1 did not have a material
impact on our 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. The adoption of Statement of Position 98-5 did not have
a material impact on our 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 $54.4 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 AND CONTINGENCIES
Quokka, together with some of its directors and officers, may from time
to time be the subject of claims or named as a defendant or co-defendant in
various legal actions involving breach of contract and various other claims
incident to the ordinary course of business. At September 30, 1999,
approximately $1 million has been accrued for these matters. Management does not
expect Quokka to suffer any additional material liability, nor does it expect
that such matters will have a material effect on Quokka's liquidity or operating
matters.
In May 1999, we entered into a purchase commitment for property and
equipment totaling $10.5 million through December 2001.
In May 1999, we entered into an agreement to purchase software and
services totaling $3.5 million through December 2000.
10
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QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5. SUPPLEMENTAL CASH FLOW INFORMATION
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NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
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<S> <C> <C>
Supplemental disclosure of cash:
Equipment financed through capital lease $ 429 $ --
====== ======
Accounts payable related to purchase of
property and equipment $ 398 $ --
====== ======
Issuance of Preferred warrants under
joint development agreement $ -- $ 853
====== ======
Issuance of preferred warrants under
subordinated debt $ 572 $ --
====== ======
Issuance of preferred warrants under programming
and distribution rights $5,703 $ --
====== ======
Issuance of preferred warrants for services
rendered $1,555 $ --
====== ======
Notes payable related to purchase of
acquired rights $6,945 $ --
====== ======
Notes payable related to purchase of
property and equipment $2,293 $ --
====== ======
Stock options issued as compensation for
services rendered $ 263 $ --
====== ======
Amortization of programming rights $1,291 $ --
====== ======
</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 Form 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 Our Affect Results" as
well as those discussed in Quokka's Registration Statement on Form S-1, as
amended, filed with the Securities and Exchange Commission, SEC File No.
333-76981. 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.
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.
We generate revenues from digital entertainment sponsorships, studio
services, advertising, distribution of proprietary content 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
that we use in our business 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 intend to reduce the
proportion of property and services accepted for payment in future periods,
although we may not be successful in this regard.
12
<PAGE> 13
QUOKKA SPORTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
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 for these events typically
paid a fee for an exclusive sponsorship category. We recognized these fees 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. Some sponsors required that we guarantee a
minimum number of impressions over the term of the event. In these instances, we
deferred a portion of the sponsorship revenues until the minimum number of
impressions was achieved. We also deferred a portion of the revenues until other
contractual obligations were satisfied and collection of the related receivable
was 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 a small number of live programs at
any 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 and retain digital entertainment sponsors, 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, our ability to develop and produce sports programming that will attract
a global audienceour ability to select and offer the right merchandise and
services for our audience to buy, and our ability to obtain or create content
that is valuable to other media companies.
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 and ultimately we may chose
to discontinue offering these services.
We have incurred significant net losses and negative cash flows from
operations, and as of September 30, 1999, we had an accumulated deficit of $57.9
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 network, 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.
As of September 30, 1999 we had 282 employees compared to 89 at
September 30, 1998.
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QUOKKA SPORTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues
Our revenues increased $2.5 million to $3.0 million for the September
1999 quarter from $548,000 for the September 1998 quarter. During the September
1999 quarter, we recognized revenues from four multi-year, multi-event and
multi-benefit digital entertainment sponsorship agreements. We also recognized
revenues related to other sponsorships during the quarter. Revenues for the
September 1998 quarter were derived primarily from sponsorship revenues
associated with the Around Alone Race and studio services.
Production Costs
Production costs increased $6.0 million to $6.9 million for the
September 1999 quarter from $955,000 for the September 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
$6.0 million increase reflects costs associated with eight events produced or in
pre-production during the 1999 period as compared to one event, the Around Alone
Race, during the comparable 1998 period. During the September 1999 quarter, we
continued to provide coverage of the CART FedEx Championship Series ("CART") and
the FIM 500cc Racing World Championship Grand Prix motorcycle races. In
addition, our sports programming during the September 1999 quarter included the
launch of our coverage of the America's Cup and Challenger Series yacht races,
BT Global Challenge, the World Track and Field Championships in Seville,
Spain, and the US Gymnastics Championships in Sacramento, California.
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-2000 Games coverage of the United States Olympic trial events. The joint
venture launched its website in August 1999 with coverage of the World Track and
Field Championships in Seville, Spain and the US Gymnastics Championships in
Sacramento, California as part of the pre-2000 games coverage.
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 September 1999 quarter over the comparable
1998 period.
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<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 $700,000 to $2.6 million
for the September 1999 quarter from $1.9 million for the September 1998 quarter.
Research and engineering expenses include personnel costs, telecommunications
costs, and hosting costs. This increase represents the cost of additional
personnel and related expenses associated with our continuing development of our
Quokka Sports Platform, broadband applications, our expanded network operations
and other engineering initiatives.
Sales and Marketing
Sales and marketing expenses increased $4.2 million to $4.9 million for
the September 1999 quarter from $681,000 for the September 1998 quarter. Sales
and marketing expenses include personnel costs, consultants, sales sponsorships
and advertising. This increase is attributable to expenses related to our
marketing campaign, which is designed to create brand recognition and drive
Internet traffic to www.quokka.com. Expenses also increased as a result of
increases in the number of sales and marketing personnel.
General and Administrative
General and administrative expenses increased $2.9 million to $3.6
million for the September 1999 quarter from $648,000 for the September 1998
quarter. General and administrative expenses include personnel associated with
general management, business and legal affairs, finance and accounting,
facilities, management information systems and human resources. Facilities,
insurance, accounting and professional fees are also included in general and
administrative expenses. This increase is attributable to increased personnel
and related facilities and other third-party expenses associated with building
our operational infrastructure.
Depreciation
Depreciation expenses increased $1.5 million to $1.6 million for the
September 1999 quarter from $140,000 for the September 1998 quarter. The
increase is primarily due to purchases of additional equipment and amortization
of leasehold improvements in our expanded facilities. Additionally, a
non-recurring charge aggregating $439,000 was recorded in the September 1999
quarter to reflect the write-off of impaired leasehold improvements. In
connection with our expanded facilities, we anticipate deprecation expense to
increase in future periods.
Amortization of Acquiring Programming and Distribution Rights
Acquired programming rights to sporting events and acquired
distribution rights are amortized over their respective license periods on a
straight-line basis. Total amortization of acquired programming and distribution
rights were $226,000 for the September 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 and the exclusive worldwide interactive media rights to FIM 500cc Road
Racing World Championship Grand Prix.
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 $372,000 in CART Digital Media Enterprises,
LLC, our joint venture with Forsythe Racing, Inc., for the September 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 September
1999 quarter, minority interest expense of $645,000 represents the minority
interest's share of net losses for the period.
Interest Income/(Expense)
Interest income, net of interest expense, increased $590,000 to
$745,000 for the September 1999 quarter from $155,000 for the comparable
September 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 $590,000 net increase reflects higher cash balances during the
September 1999 quarter.
Net Loss
Based upon the foregoing information, we had a net loss of $15.8
million for the September 1999 quarter compared to a net loss of $3.7 million
for the September 1998 quarter.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues
Our revenues decreased $1.5 million to $6.4 million for the nine months
ended September 30, 1999 from $7.9 million for the comparable 1998 period.
Revenue for the nine months ended September 30, 1999 were derived primarily from
four digital entertainment sponsorships and sponsorship revenues from Around
Alone. Revenues for the nine months ended September 30, 1998 were primarily
derived from revenues associated with our coverage of the Whitbread and Around
Alone, the latter which commenced in June 1998. The Whitbread is an
internationally recognized event and attracted significant sponsorship revenues.
In addition, revenues from our new digital entertainment sponsorships did not
commence until April 1999.
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<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 $6.8 million to $13.2 million for the nine
months ended September 30, 1999 from $6.4 million for the nine months ended
September 30, 1998. This increase reflects costs associated with eight events
produced or in pre-production during the 1999 period as compared to two events,
the Whitbread and Around Alone during the comparable 1998 period. Also included
in 1999 production costs are costs associated with producing www.quokka.com
which launched in March 1999.
Research and Engineering
Research and engineering expenses increased $6.0 million to $9.2
million for the nine months ended September 30, 1999 from $3.2 million for the
nine months ended September 30, 1998. The 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 nine months ended September 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 $6.4 million to $8.0 million for
the nine months ended September 30, 1999 from $1.6 million for the nine months
ended September 30, 1998. This increase is attributable to expenses related to
our marketing campaign to create brand recognition, launch and drive Internet
traffic to www.quokka.com, as well as sales sponsorships and increases in the
number of sales and marketing personnel.
General and Administrative
General and administrative expenses increased $11.8 million to $13.9
million for the nine months ended September 30, 1999 from $2.1 million for the
nine months ended September 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 $2.5 million to $2.8
million for the nine months ended September 30, 1999 from $270,000 for the nine
months ended September 30, 1998. The increase is primarily due to purchases of
additional equipment and amortization of leasehold improvements in our expanded
facilities. Additionally, a non-recurring charge aggregating $439,000 was
recorded in the September 1999 quarter to reflect the write-off of impaired
leasehold improvements. In connection with our expanded facilities, we
anticipate deprecation expense to increase in future periods.
Amortization of Acquiring Programming and Distribution Rights
Total amortization of acquired programming and distribution rights was
$1.9 million for the nine months ended September 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 interactive media 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.
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<PAGE> 18
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 $1.4 million in CART Digital Media
Enterprises, LLC, our joint venture with Forsythe Racing, Inc., for the nine
months ended September 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 nine months ended September 30, 1999, minority interest expense
of $1.3 million represents the minority interest's share of net losses for the
period related to NBC/Quokka Ventures, LLC, our joint venture with NBC Olympics,
Inc.
Interest Income/(Expense)
Interest income, net of interest expense, increased $739,000 to
$957,000 for the nine months ended September 30, 1999 from $218,000 for the
comparable September 30, 1998 period. The net increase reflects higher
cash balances during the nine months ended September 30, 1999.
Net Loss
Based upon the foregoing information, we had a net loss of $41.8
million for the nine months ended September 30, 1999 compared to a net loss of
$5.7 million for the nine months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since August 1996, we have financed our operations primarily through
private sales of our equity securities. On August 2, 1999, Quokka completed its
initial public offering of common stock. Net proceeds to Quokka from that
offering were approximately $54.4 million, net of underwriters' discounts and
offering expenses. Total net proceeds from sales of our equity securities since
August 1996 were $136.9 million through September 30, 1999.
At September 30, 1999, we had $80.6 million in cash and cash
equivalents. Restricted cash associated with three office leases and the
employee stock purchase plan aggregated $1,529,000 at September 30, 1999. Net
cash used in operating activities was $34.7 million for the nine months ended
September 30, 1999 and $5.2 million for the nine months ended September 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 $1.3
million for the nine months ended September 30, 1999 and $853,000 for the nine
months ended September 30, 1998. Non-cash charges relating to depreciation
expense were $2.8 million for the nine months ended September 30, 1999 and
$270,000 for the nine months ended September 30, 1998.
Net cash used in investing activities was $6.9 million for the nine
months ended September 30, 1999 and $1.4 for the nine months ended September 30,
1998. Net cash used in investing activities resulted primarily from purchases of
additional equipment and amortization of leasehold improvements in our expanded
facilities.
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<PAGE> 19
QUOKKA SPORTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
Net cash provided by financing activities was $98.3 million for the
nine months ended September 30, 1999 and $16.6 million for the nine months ended
September 30, 1998. Net cash provided by financing activities for these periods
included the issuance of preferred stock and common stock related to our private
financing activity and our initial public offering.
We believe that our 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 have completed 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. The Company presently believes that, based
on this review, its internal programs and systems are year 2000 compliant in
all material respects.
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
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<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 currently 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 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.
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<PAGE> 21
QUOKKA SPORTS, INC. AND SUBSIDIARIES
FACTORS THAT MAY AFFECT OUR 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 September 30, 1999, we had an
accumulated deficit of $57.9 million. Our net operating losses were $4.9 million
for 1997, $9.5 million for 1998 and $41.8 million for the nine months ended
September 30, 1999. Cash used in operating activities was $3.9 million for 1997,
$10.9 million for 1998 and $34.6 million for the nine months ended September 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;
- retain existing 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.
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<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 nine
months ended September 30, 1999 were $6.4 million compared to revenues of $7.9
million for the nine months ended September 30, 1998. These fluctuations depend
on a number of factors described below and elsewhere in this "Factors That May
Affect Our 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 in the past 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 and the America's Cup. Our programming may not keep
pace with technological developments, evolving industry standards or competing
programming alternatives. We have only recently begun to develop multiple
large-scale programming events simultaneously and may lack the financial and
technical resources to develop effectively 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.
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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, Computer Associates
International, Inc. and Intel Corporation. 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. Certain of our digital
entertainment sponsors have the right to terminate our agreement with them if
they are dissatisfied with our performance, and certain digital entertainment
sponsors have the right to terminate our agreements after a specified period of
time as set forth in the applicable contract. The termination of any digital
entertainment sponsorship agreement would materially affect our sponsorship
revenue backlog, and our business and financial results would suffer.
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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 have a formal disaster
recovery plan for major disasters.
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. For example, on some weekends during which we were covering multiple
motor sports events, our servers have suffered service disruptions.
Additionally, 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. Interruptions and
malfunctions related to the access to our web sites could materially damage our
relationships with our audience and rightsholders, and our business could
suffer.
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 continue to market
www.quokka.com through extensive traditional media campaigns employing
advertising on television, printed publications, outdoor signage and radio. We
also plan to continue 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
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<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. From time to time, service of our servers
at the Frontier GlobalCenter hosting facility has been temporarily disabled or
has malfunctioned, and access to our Web sites was 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, web site hosting, 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.
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<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.
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<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 282 employees at September 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. Five 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, www.nhl.com and www.moutainzone.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
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<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;
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<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 our recently completed
initial public 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 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
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 on form S-1 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.
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<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 September 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.
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<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 July 1, 1999 Quokka has issued and sold unregistered securities
as follows:
(a) Between July 1, 1999 and September 30, 1999, an aggregate
of 126,455 shares of common stock were issued to employees upon
exercise of options with exercise prices ranging from $0.50 to $8.00.
The consideration received for such shares was $173,278.
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 $54.4 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
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. 333-76981. Restricted cash associated with
three of our office leases and the employee stock purchase plan aggregated
$1,529,000 at September 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.
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<PAGE> 33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation
10.1+ Memorandum of Agreement dated September 15, 1999 between
Registrant and Intel Corporation.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
+ Confidential treatment requested 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 September 30, 1999.
33
<PAGE> 34
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)
November 15, 1999
34
<PAGE> 35
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation
10.1+ Memorandum of Agreement dated September 15, 1999 between
Registrant and Intel Corporation.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
+ Confidential treatment requested as to portions of this exhibit.
35
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
QUOKKA SPORTS, INC.
ALAN RAMADAN hereby certifies that:
1. The name of this corporation is Quokka Sports, Inc.
2. The Certificate of Incorporation of this corporation was filed by
the Secretary of State of the State of Delaware on August 15, 1996, in the name
of Quokka Productions, Inc. The corporation's name was changed to Quokka Sports,
Inc. in an Amended and Restated Certificate of Incorporation filed by the
Secretary of State on September 16, 1996.
3. He is the duly elected and acting President and Chief Executive
Officer of this corporation.
4. The Amended and Restated Certificate of Incorporation of this
corporation is hereby amended and restated to read as follows:
I.
NAME
The name of this corporation is Quokka Sports, Inc. (the "Company").
II.
ADDRESS
The address of the registered office of the Company in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, City of Wilmington
19801, County of Newcastle, and the name of the registered agent of the Company
in the State of Delaware at such address is The Corporation Trust Company.
III.
PURPOSE
The purpose of the Company is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
the State of Delaware.
1.
<PAGE> 2
IV.
STOCK
A. The Company is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the Company is authorized to issue is One Hundred Twenty Million
(120,000,000). One Hundred Ten Million (110,000,000) shares shall be Common
Stock, each having a par value of one-hundredth of one cent ($0.0001). Ten
Million (10,000,000) shares shall be Preferred Stock, each having a par value of
one-hundredth of one cent ($0.0001).
B. The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized by filing a certificate
pursuant to the Delaware General Corporation Law, to fix or alter from time to
time the designation, powers, preferences and rights of the shares of each such
series and the qualifications, limitations or restrictions of any wholly
unissued series of Preferred Stock, and to establish from time to time the
number of shares constituting any such series or any of them; and to increase or
decrease the number of shares of any series subsequent to the issuance of shares
of that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be decreased in
accordance with the foregoing sentence, the shares constituting such decrease
shall resume the status that they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
V.
MANAGEMENT
For the management of the business and for the conduct of the affairs
of the Company, and in further definition, limitation and regulation of the
powers of the Company, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
1. The management of the business and the conduct of the affairs of
the Company shall be vested in its Board of Directors. The number of directors
which shall constitute the whole Board of Directors shall be fixed exclusively
by one or more resolutions adopted by the Board of Directors.
2. Subject to the rights of the holders of any series of Preferred
Stock to elect additional directors under specified circumstances, following the
closing of an initial public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, (the "1933 Act"),
covering the offer and sale of Common Stock to the public (the "Initial Public
Offering"), the directors shall be divided into three classes, designated as
Class I, Class II and Class III, respectively. Directors shall be assigned to
each class in accordance with a resolution or resolutions adopted by the Board
of Directors. At the first annual meeting of stockholders following the closing
of the Initial Public Offering, the term of office of the Class I directors
shall expire and Class I directors shall be elected for a full term of three
years. At the second annual meeting of stockholders following the closing of the
Initial Public Offering, the term of office of the Class II directors shall
expire and Class II directors shall be elected for a full term of three years.
At the third annual meeting of stockholders following the closing of the
2.
<PAGE> 3
Initial Public Offering, the term of office of the Class III directors shall
expire and Class III directors shall be elected for a full term of three years.
At each succeeding annual meeting of stockholders, directors shall be elected
for a full term of three years to succeed the directors of the class whose terms
expire at such annual meeting.
Notwithstanding the foregoing provisions of this Article, each director
shall serve until his successor is duly elected and qualified or until his
death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
3. a. Subject to the rights of the holders of any series of
Preferred Stock, the Board of Directors or any individual director may be
removed from office at any time (i) with cause by the affirmative vote of the
holders of a majority of the voting power of all the then-outstanding shares of
voting stock of the corporation, entitled to vote at an election of directors
(the "Voting Stock") or (ii) without cause by the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting
power of all the then-outstanding shares of the Voting Stock.
b. Subject to the rights of the holders of any series of
Preferred Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by the stockholders, except as
otherwise provided by law, be filled only by the affirmative vote of a majority
of the directors then in office, even though less than a quorum of the Board of
Directors, and not by the stockholders. Any director elected in accordance with
the preceding sentence shall hold office for the remainder of the full term of
the director for which the vacancy was created or occurred and until such
director's successor shall have been elected and qualified.
3. In the event that Section 2115(a) of the California Corporations
Code is applicable to this corporation, then the following shall apply:
a. Every stockholder entitled to vote in any election of
directors of this corporation may cumulate such stockholder's votes and give one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which the stockholder's shares are
otherwise entitled, or distribute the stockholder's votes on the same principle
among as many candidates as such stockholder thinks fit;
b. No stockholder, however, may cumulate such stockholder's
votes for one or more candidates unless (i) the names of such candidates have
been properly placed in nomination, in accordance with the Bylaws of the
corporation, prior to the voting, (ii) the stockholder has given advance notice
to the corporation of the intention to cumulative votes pursuant to the Bylaws,
and (iii) the stockholder has given proper notice to the other stockholders at
the meeting, prior to voting, of such stockholder's intention to cumulate such
stockholder's votes; and
3.
<PAGE> 4
c. If any stockholder has given proper notice, all stockholders
may cumulate their votes for any candidates who have been properly placed in
nomination. The candidates receiving the highest number of votes of the shares
entitled to be voted for them up to the number of directors to be elected by
such shares shall be declared elected.
5. Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws
may be altered or amended or new Bylaws adopted by the affirmative vote of at
least sixty-six and two-thirds percent (66-2/3%) of the Voting Stock of all of
the then-outstanding shares of the voting stock of the Company entitled to vote.
The Board of Directors shall also have the power to adopt, amend, or repeal
Bylaws.
6. The directors of the Company need not be elected by written
ballot unless the Bylaws so provide.
7. No action shall be taken by the stockholders of the Company
except at an annual or special meeting of stockholders called in accordance with
the Bylaws, and following the closing of the Initial Public Offering no action
shall be taken by the stockholders by written consent.
8. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the Company shall be given in the manner provided in the
Bylaws of the Company.
VI.
LIABILITY OF DIRECTORS
A. A director of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability (1) for any breach of the director's
duty of loyalty to the Company or its stockholders, (2) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law (3) under Section 174 of the Delaware General Corporation Law, or (4) for
any transaction from which the director derived an improper personal benefit. If
the Delaware General Corporation Law is amended after approval by the
stockholders of this Article VI to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director shall be eliminated or limited to the fullest extent permitted by
the Delaware General Corporation Law, as so amended.
B. Any repeal or modification of this Article VI shall be prospective
and shall not affect the rights under this Article VI in effect at the time of
the alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
VII.
AMENDMENT
A. The Company reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by
4.
<PAGE> 5
statute, except as provided in paragraph B. of this Article VII, and all rights
conferred upon the stockholders herein are granted subject to this reservation.
B. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the voting stock of the Company required by law,
this Certificate of Incorporation or any certificate of designation of Preferred
Stock, the affirmative vote of the holders of at least sixty-six and two-thirds
percent (66-2/3%) of the Voting Stock of all of the then-outstanding shares of
the voting stock, voting together as a single class, shall be required to alter,
amend or repeal Articles V, VI, and VII."
* * *
5.
<PAGE> 6
5. This Amended and Restated Certificate of Incorporation has been
duly approved by the Board of Directors of this corporation.
6. This Amended and Restated Certificate of Incorporation has been
duly adopted in accordance with the provisions of Sections 228, 242 and 245 of
the General Corporation Law of the State of Delaware by the stockholders of this
corporation.
IN WITNESS WHEREOF, Quokka Sports, Inc. has caused this Amended and
Restated Certificate of Incorporation to be signed by its President and Chief
Executive Officer in San Francisco, California this 2nd day of August, 1999.
QUOKKA SPORTS, INC.
By: /s/ Alan Ramadan
-------------------------------------
ALAN RAMADAN
President and Chief Executive Officer
6.
<PAGE> 1
EXHIBIT 10.1
CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. A COMPLETE COPY OF THIS EXHIBIT HAS BEEN FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION.
MEMORANDUM OF AGREEMENT
THIS MEMORANDUM OF AGREEMENT (the "MOA") is made as of September 15,
1999 (the "Effective Date") by and between QUOKKA SPORTS, INC., a corporation
organized under the laws of Delaware, with principal offices at 525 Brannan
Street, San Francisco, CA. 94107 ("Quokka") and INTEL CORPORATION, a corporation
organized under the laws of the state of Delaware, with principal offices at
2200 Mission College Blvd., Santa Clara, California 95052 ("Intel").
RECITALS
Quokka provides digital interactive media coverage of various sporting events
through, among other channels, a site on the World Wide Web located currently at
the URL "http://www.quokka.com" (the "Site"). Intel is a manufacturer of
microprocessors, software and systems, and internet services and solutions.
Intel desires to be a digital entertainment sponsor in connection with
quokka.com and the event coverage therein, and to receive the rights and
benefits as more fully described herein.
Quokka desires to secure certain promotional consideration and exposure in
connection with Intel promotional activities.
Quokka wishes to purchase and Intel wishes to provide certain Internet data
services as more fully set forth herein.
In accordance with that certain Software License and Development Agreement dated
March 20, 1998 (as amended on August 10, 1998) between Intel and Quokka (the
"Original Development Agreement"), the parties (among other things)
cooperatively participated in the development of an application and related
software for the purposes of production and delivery of multiple high bandwidth
media streams to allow end users to customize their viewing experience of a live
sporting event (the "Application"). Quokka wishes to acquire from Intel, and
Intel wishes to provide to Quokka, certain development services to further
develop the Application, as well as other projects.
NOW THEREFORE, in consideration of the mutual covenants contained herein and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties agree as follows:
1. TERM: The term of this MOA shall commence on September 15, 1999 and
conclude December 31, 2002, unless terminated sooner in accordance with
the terms of this MOA (the "Term").
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<PAGE> 2
2. OBLIGATIONS OF THE PARTIES
2.1. Development.
2.1.1. Development Resources. Intel will, upon Quokka's
request, provide to Quokka the services of
appropriate engineering resources ("Engineers"), who
will complete the Projects (as defined in Section
2.1.2 below). [*] Engineers will be charged against
Quokka's payments set forth in Section 2.1.4 at [*]
2.1.2. Identification of Projects and Development Process.
2.1.2.1. The parties agree that the first two
development projects to be undertaken
pursuant to this MOA ("Projects") will be
[*]
2.1.2.2. For additional development projects, Quokka
may request certain development projects
which will be undertaken by the parties, and
Intel will reasonably consider such
requests. The specific projects undertaken
will be by mutual agreement of the parties.
Prior to selection of a Project, Intel and
Quokka will consult regarding various
projects already under development at Intel
and/or Quokka, and the parties' selection of
Projects will take into account such
projects under development in order to
maximize the utility of the development
efforts in connection with the Projects.
2.1.2.3. The Projects may include integration of
existing third party products and
technologies, as agreed by the parties.
2.1.2.4. As part of the mutual selection of the
Projects, the parties develop an agreed
Project Requirements Document ("PRD"),
including technical specifications, staffing
requirements, development milestones,
budgets, licensing, and intellectual
property ownership and related issues within
a reasonable time after project selection.
The Engineers' time in connection with
preparing the PRD will be chargeable to
Quokka. If Intel and Quokka are unable to
agree on a PRD the parties will escalate the
disagreement to their respective senior
managements, who will attempt to
[*] Confidential treatment requested.
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<PAGE> 3
resolve the disagreement in good faith. If,
within a reasonable time of senior
management discussion, the parties are
unable to agree on a PRD, the parties are
not obligated to go forward with that
Project. Upon reaching agreement on the PRD,
the parties will undertake to develop the
Project in accordance with the PRD. All
projects will be subject to a mutually
agreed change control process.
2.1.3. Licenses and Intellectual Property Ownership.
2.1.3.1. For the [*]
2.1.3.2. For the [*] The parties anticipate that the
[*] functionality shall be provided in
conjunction with hosting or distribution
services offered by Intel, and that if such
functionality is not offered by Intel in
conjunction with such services, Intel will
license use of the [*] separately on
reasonable terms.
2.1.3.3. For additional Projects, the parties will
agree on the intellectual property licensing
terms and conditions at the time the PRD is
agreed to, as part of the agreement to
undertake the Project.
2.1.4. Development Services Payment. In consideration of the
development services to be provided by Intel, Quokka
will make the following payments in the amount of [*]
to Intel on the following schedule:
[*] Confidential treatment requested.
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<PAGE> 4
<TABLE>
<CAPTION>
Due Date Amount
-------- ------
<S> <C>
October 1, 1999 [*]
January 1, 2000 [*]
April 1, 2000 [*]
July 1, 2000 [*]
October 1, 2000 [*]
January 1, 2001 [*]
April 1, 2001 [*]
July 1, 2001 [*]
October 1, 2001 [*]
January 1, 2002 [*]
April 1, 2002 [*]
July 1, 2002 [*]
October 1, 2002 [*]
</TABLE>
Intel will invoice Quokka thirty (30) days prior to
the Due Date set forth above ("Invoice Date").
Payments received by Intel more than sixty (60) days
after the Invoice Date will bear interest at the rate
of 1.5% per month from the original Due Date to the
date the payment is received.
2.2. QPT Sponsorship. Quokka hereby designates Intel as the
exclusive "Quokka Performance Team Official Partner" ("QPT
OP") in the "Internet Services" category (the "Exclusive
Category"). The "Internet Services" category will be defined
more fully in the definitive agreement. As a QPT OP, Quokka
will provide to Intel the rights and benefits set forth on
Exhibit A. In addition, during the Term, subject to any
restrictions that may be imposed by any rightsholder, Quokka
shall utilize Intel as [*] Furthermore, Intel acknowledges
that Quokka shall not immediately utilize Intel's web hosting
services on an exclusive basis, but that there shall be a
reasonable transition period based on Quokka's existing
obligations to current service providers and any technical
issues impacting such transition.
[*] Confidential treatment requested.
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<PAGE> 5
2.2.1. Payment. In consideration of the QPT OP benefits set
forth on Exhibit A, Intel shall make payments to
Quokka in the total amount of [*] in accordance with
the following schedule:
<TABLE>
<CAPTION>
Due Date 1999 2000 2001 2002
-------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
January 15 [*] [*] [*]
April 15 [*] [*] [*]
July 15 [*] [*] [*] [*]
October 15 [*] [*] [*] [*]
</TABLE>
Promotional value will not be specified on a
quarterly basis. Quokka will invoice Intel thirty
(30) days prior to the due date ("Invoice Date").
Payments received by Quokka more than sixty (60) days
after the Invoice Date will bear interest at the rate
of 1.5% per month from the original Due Date to the
date the payment is received.
2.2.2. Program Review. To facilitate the attainment of the
Parties' goals within the context of the relationship
created by this QPT sponsorship, authorized
representatives from the Parties' product and
marketing teams will meet at least semi-annually in
order to discuss the sponsorship and promotional
plans relevant to the Parties' goals under this
sponsorship and to attempt to resolve in good faith
any issues arising from the implementation of the
sponsorship (the "Working Team Review Meetings"). The
responsible Intel and Quokka Program Managers will
confer and agree before each meeting on the
anticipated time, place, duration and number of
attendees for each meeting.
2.2.3. Executive Review. In addition to the Working Team
Review Meetings, responsible executives representing
the Parties will meet at least semi-annually to
review the success of this sponsorship in achieving
their respective goals, to review the sponsorship and
marketing performance of the sponsorship, and to
attempt in good faith to resolve any issues arising
from the implementation of the sponsorship which
could not be resolved in the Working Team Review
Meetings.
2.2.3.1. Mediation. If disputes remain after
Executive Review, the parties shall select a
neutral third party to mediate any remaining
disputes on valuation of promotional efforts
and activities. If the parties cannot agree
on a neutral third party, each party shall
nominate a mediator, and the two selected
mediators shall jointly select a third, and
the three mediators shall resolve such
disputes by a majority vote amongst
themselves.
[*] Confidential treatment requested.
5 of 25
<PAGE> 6
2.2.3.2. Corrective Action Plan; Termination. At [*]
of the Term, if Intel is unsatisfied with
the performance of the sponsorship, it may
invoke a "Corrective Action Plan" ("CAP") in
order to "make good" the value received by
Intel from the sponsorship. The CAP shall
identify deficiencies and remedies as agreed
by the parties, and set forth the criteria
which the parties agree will remedy such
deficiencies. Should the criteria agreed by
the parties not be met at the end of the CAP
period of [*], then Intel may terminate the
sponsorship. In the event of termination of
the sponsorship pursuant to this Section
2.2.3.2, neither party shall have any
further obligations to the other in
connection with the sponsorship (e.g.,
Intel's payment obligations in connection
with the sponsorship shall cease, but Intel
shall not be entitled to any refund of prior
payments in connection with the
sponsorship).
2.3. Promotion by Intel.
2.3.1. Intel will provide [*] in promotional value to Quokka
during the Term. Such value will not be specified on
a quarterly basis and is dependent on the Quokka
Programming Schedule available in any given year, the
resulting traffic and number of registrants for [*].
2.3.1.1. Intel understands that Quokka desires that
Intel's promotional efforts maximize the
amount of television advertising and retail
promotions, but Quokka acknowledges that the
[*]
2.3.2. Program Review. To facilitate the attainment of the
Parties' goals within the context of the relationship
created by this promotional commitment, authorized
representatives from the Parties' product and
marketing teams will meet at least semi-annually in
order to discuss the sponsorship and promotional
plans relevant to the Parties' goals under this
commitment and to attempt to resolve in good faith
any issues arising from the implementation of the
commitment (the "Working Team Review Meetings"). The
responsible Intel and Quokka Program Managers will
confer and agree before each meeting on the
anticipated time, place, duration and number of
attendees for each meeting.
2.3.3. Executive Review. In addition to the Working Team
Review Meetings, responsible executives representing
the Parties will meet at least semi-annually to
review the success of this commitment in
[*] Confidential treatment requested.
6 of 25
<PAGE> 7
achieving their respective goals, to review the
commitment and marketing performance of the
sponsorship, and to attempt in good faith to resolve
any issues arising from the implementation of the
commitment which could not be resolved in the Working
Team Review Meetings.
2.3.3.1. Mediation. If disputes remain after
Executive Review, the parties shall select a
neutral third party to mediate any remaining
disputes on valuation of promotional efforts
and activities. If the parties cannot agree
on a neutral third party, each party shall
nominate a mediator, and the two selected
mediators shall jointly select a third, and
the three mediators shall resolve such
disputes by a majority vote amongst
themselves.
2.3.4. Corrective Action Plan; Termination. At [*], if
Quokka is unsatisfied with the performance of the
promotional efforts, it may invoke a "Corrective
Action Plan" ("CAP") in order to "make good" the
value received by Intel from the promotion
commitment. The CAP shall identify deficiencies and
remedies as agreed by the parties, and set forth the
criteria which the parties agree will remedy such
deficiencies. Should the criteria agreed by the
parties not be met at the end of the CAP period of
[*], then Intel may terminate the promotion
commitment. In the event of termination of the
promotion commitment pursuant to this Section 2.3.4.,
neither party shall have any further obligations to
the other in connection with the promotion (e.g.,
Quokka's payment obligations in connection with the
promotion shall cease, but Quokka shall not be
entitled to any refund of prior payments in
connection with the promotion).
2.4. Internet Services.
2.4.1. SERVICE: Quokka agrees to purchase at least [*] of
services from Intel for Internet Services, from Intel
Online Services ("IOS"), Intel Content Services
("ICS"), and Intel Edge Services ("IES")
(collectively, the "Services") as set forth herein.
2.4.2. IOS
2.4.2.1. MASTER CUSTOMER AGREEMENT FOR HOSTING AND
DATA CENTER SERVICES; SERVICE LEVEL
AGREEMENTS: Quokka agrees to execute
simultaneously with this MOA, the "Intel
Online Services Master Customer Agreement"
attached hereto as Exhibit B (the "MCA").
The parties agree to negotiate in good faith
a "Service Level Agreement" ("SLA") setting
forth the service standards and other terms
[*] Confidential treatment requested.
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<PAGE> 8
applicable to the provision by Intel of the
services contemplated by the MCA. The SLA
will provide for service levels by Intel [*]
2.4.2.2. INITIATION OF HOSTING AND DATA CENTER
SERVICES: Subject to execution of a mutually
acceptable SLA, Quokka will initiate use of
Intel's hosting services in October 1999.
Quokka agrees, at a minimum, to purchase [*]
of hosting and data center services from
Intel during 1999 and 2000. The initial
configuration of servers will be hosted at
Intel's Santa Clara facility. The
anticipated number of servers, bandwidth
requirements and the associated charges are
set forth in the following table:
<TABLE>
<CAPTION>
SERVERS/B/W OCT 99 TOTAL SERVERS/B/W JAN TOTAL'00
----------- --- -------- ----------- --- --------
<S> <C> <C> <C> <C> <C> <C>
Web [*] [*] [*] [*] [*] [*]
App [*] [*] [*] [*] [*] [*]
Dbase [*] [*] [*] [*] [*] [*]
b/w [*] [*] [*] [*] [*] [*]
total monthly [*] [*] [*] [*]
Setup [*] [*] [*] [*]
Total Cost [*] [*] [*] [*]
Prepayment [*] [*]
Total Cost w/Prepayment [*] [*]
Total servers [*] [*]
</TABLE>
2.4.2.3. Additional services above and beyond this
initial setup and configuration will be
jointly forecasted between Quokka and Intel
on a monthly basis.
2.4.2.4. PRICING. Quokka has reviewed and accepts
Intel's standard pricing as set forth on
Exhibit C. Quokka understands that such
standard prices may change upon notice from
Intel, unless the parties agree otherwise in
an SLA.
[*] Confidential treatment requested.
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<PAGE> 9
2.4.2.5. LAUNCH PARTICIPATION. Upon reasonable
request, Quokka agrees to participate in
Intel's launch activities for Intel's IDS-1
data center. Quokka's reasonable
participation may include a joint
announcement mutually approved by the
parties and inclusion of Quokka on an
initial list of Intel's customer
commitments.
2.4.3. ICS AND IES: In addition to hosting and data center
services, Quokka may purchase certain services from
ICS and IES. ICS will provide [*] IES will provide
[*] Service requirements, delivery timeframes and
charge will be agreed upon as specified in a mutually
acceptable project requirements documents.
2.4.4. PAYMENT: In consideration of the services to be
provided by Intel, Quokka will make the following
payments in the amount of [*] to Intel on the
following schedule:
[*] Confidential treatment requested.
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<PAGE> 10
<TABLE>
<CAPTION>
Due Date Amount
-------- ------
<S> <C>
October 1, 1999 [*]
January 1, 2000 [*]
April 1, 2000 [*]
July 1, 2000 [*]
October 1, 2000 [*]
January 1, 2001 [*]
April 1, 2001 [*]
July 1, 2001 [*]
October 1, 2001 [*]
January 1, 2002 [*]
April 1, 2002 [*]
July 1, 2002 [*]
October 1, 2002 [*]
</TABLE>
2.4.4.1. Intel will invoice Quokka thirty (30) days
prior to the Due Date set forth above
("Invoice Date"). Payments received by Intel
more than sixty (60) days after the Invoice
Date will bear interest at the rate of 1.5%
per month from the original Due Date to the
date the payment is received.
2.4.4.2. Services will be charged against Quokka's
payments. If charges for Services utilized
by Quokka exceed in aggregate the amount
Quokka has paid to Intel hereunder in
aggregate, Intel may invoice Quokka for such
excess amount. Such excess amount will be
credited against Quokka's next payment
amount. In the event that Quokka utilizes
Services that exceed in aggregate the amount
of Quokka's payment obligations in any
calendar year Intel will charge Quokka for
such Services [*]
2.5. Quokka Proprietary Configured Systems.
2.5.1. Quokka may satisfy up to [*] of its cash payment
obligations set forth in Section 2.4.4 by [*] to
Intel.
2.5.2. The pricing, quantities, specifications and purchase
schedule are to be determined by the mutual agreement
of the parties; provided that such purchase must be
completed by [*]
[*] Confidential treatment requested.
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<PAGE> 11
3. CONFIDENTIALITY: This MOA and the terms hereof are confidential and
shall not be disclosed to any third party without the prior written
consent of the non-disclosing party. Except as expressly provided
herein, this MOA and all disclosures relating thereto shall be governed
by CDNA # 101693 executed by the parties on November 18, 1997.
4. INDEPENDENT CONTRACTORS: Notwithstanding the use of the term
"partnership" in this MOA, the relationship of the parties shall be as
independent contractors and nothing contained herein shall constitute
the creation of any partnership, agency or joint venture relationship
between the parties hereto. Neither party shall have the right to
obligate or bind the other in any manner whatsoever.
5. CONSEQUENTIAL DAMAGES: In no event shall either party be liable to the
other party or to third parties for lost profits or other
consequential, incidental, indirect, special, damages of any nature
whatsoever, including, without limitation, loss of profits, loss of
business, or anticipatory profits, even if such party has been apprised
of the likelihood of such damages.
6. ASSIGNMENT: Neither party may assign any of its rights, obligations, or
privileges (by operation of law or otherwise) hereunder without the
prior written consent of the other, except that Intel may assign its
rights and obligations under this MOA to one or more of its
majority-owned subsidiaries, and Quokka may assign its rights and
obligations to any entity that acquires all or substantially all of its
assets or a controlling interest of Quokka's outstanding equity
(subject to Intel's prior written consent, which will not be
unreasonably withheld).
7. ENTIRE AGREEMENT: The entire understanding between the parties is
incorporated herein and supersedes all prior discussions and agreements
between the parties relating to the subject matter hereto. This MOA can
be modified only by a written amendment executed by both parties.
8. SEVERABILITY: If any provision or provisions of this MOA shall be held
to be invalid or unenforceable, such provision shall be enforced to the
fullest extent permitted by applicable law and the validity, legality
and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
9. TERMINATION: Either party may terminate its performance of related
obligations under this MOA if the other party fails to cure a material
breach under a portion of this MOA within thirty (30) days of receipt
by the breaching party of written notice of such breach from the
non-breaching party. The parties agree that the failure or termination
of any portion or relevant provision of this MOA will not be
11 of 25
<PAGE> 12
a basis for terminating other severable obligations or provisions of
this MOA, unless the failure or breach is such that the entire MOA
loses substantially all of its value to the non-breaching party.
10. NOTICE: Notices required or permitted hereunder shall be in writing and
deemed given and received when properly posted by registered or
certified mail, postage prepaid, first class, in an envelope properly
addressed
(i) if to Intel, to: Intel Corporation
2200 Mission College Blvd.
Santa Clara, California 95052
ATTN: General Counsel
(ii) if to Quokka: Quokka Sports, Inc.
525 Brannan Street, Ground Floor
San Francisco, CA 94107
ATTN: General Counsel
14. WAIVER: Any waiver of any kind by either party of a breach of this MOA
shall not operate or be construed as a waiver of any subsequent breach
by the other party. Any delay or omission in exercising any right,
power or remedy pursuant to a breach or default by one party shall not
impair any right, power or remedy which the other party may have.
15. GOVERNING LAW: This MOA shall be governed exclusively by and construed
in accordance with the substantive laws of the State of Delaware,
without regard to principles of conflicts of law. The parties agree
that any legal proceedings shall be conducted in Santa Clara,
California.
16. NATURE OF AGREEMENT: This MOA constitutes a binding obligation of the
parties. Upon execution, the parties will enter into good faith
negotiations to enter into a definitive agreement that more fully sets
forth the respective rights and obligations of the parties (the
"Definitive Agreement"); provided, however, that until the parties
execute the Definitive Agreement, this MOA shall constitute a valid and
binding agreement of the parties hereto. The Definitive Agreement will
contain such additional terms and conditions as are customary in
agreements of this nature, including without limitation,
indemnification provisions, warranties and disclaimers thereof and
limitations of liability.
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<PAGE> 13
ACCEPTED AND AGREED:
INTEL CORPORATION
By: /s/ Ronald J. Whittier
----------------------------------------
Name: Ronald J. Whittier
--------------------------------------
Its: Senior Vice President
---------------------------------------
QUOKKA SPORTS, INC.
By: /s/ Alan Ramadan
----------------------------------------
Name: Alan Ramadan
--------------------------------------
Its: President and CEO
---------------------------------------
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<PAGE> 14
EXHIBIT A
RIGHTS AND BENEFITS
I. RIGHTS
1. EXCLUSIVE CATEGORY RIGHTS
Quokka will not grant any of the rights and benefits as set forth
herein to any other party in the Exclusive Category unless any event
rightsholder requires Quokka to offer another party any such rights and
benefits in connection with coverage of such rightsholder's event. [*]
2. WORLDWIDE USAGE BY INTEL OF MARKS AND OFFICIAL DESIGNATIONS
A. Worldwide use of the following marks, subject to mutually
agreeable trademark licenses and usage terms:
- Quokka Performance Team mark
- Quokka Sports mark
B. Worldwide use of the following official designations, subject
to mutually agreeable trademark licenses and usage terms:
- Official Worldwide Partner of the Quokka
Performance Team
- Official Worldwide On Line Services Partner
of the Quokka Performance Team
3. [*]
II. BENEFITS
A. MEDIA BENEFITS
[*] Confidential treatment requested.
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<PAGE> 15
1. Branded Media Impressions: Quokka Performance Team branding and
placement for Intel on or within [*] of the cumulative Projected
Branded Impressions set forth below. At least [*] of such
cumulative Projected Branded Impressions shall represent solo
branding and placement for Intel.
<TABLE>
<CAPTION>
Projected
Year Branded Impressions
---- -------------------
<S> <C>
1999 [*]
2000 [*]
2001 [*]
2002 [*]
TOTAL [*]
</TABLE>
2. Premium multimedia advertising design, strategic consulting,
creative services, and production furnished by Quokka (e.g.,
pop-ups, interstitials, distributed applications and broadband
media advertisements) to deliver Intel messaging as part of the
Quokka Brand Immersion process.
3. Monthly Network viewer/audience reports, including Branded
Impressions.
B. SPONSORSHIP/CONTENT BENEFITS
1. Intent Optimized Content: Production of [*] mutually agreed content
features for inclusion in Intel Promotional Programs during each
full year on the Term [*]
2. Hospitality programs, as mutually agreed, in connection with events
covered by Quokka, to the extent that Quokka may provide such
rights.
C. SALES BENEFITS
1. Real-time Intel and Quokka Performance Team Product Showcase within
the Site.
2. Intel Sales Tools [*]: Quokka will create a custom CD and custom
URL within quokka.com for exclusive use by Intel to showcase Intel
equipment and technology.
3. Access to Quokka content for Intel advertising and marketing
efforts, to the extent that Quokka may license such right.
[*] Confidential treatment requested.
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<PAGE> 16
4. Access to the Quokka Digital Studio for real time product
showcasing and corporate customer and employee events. In addition,
appropriate Intel branding will be present in the studio.
5. Direct Marketing: Commercial efforts to promote QPT and Intel's
role therein in online newsletters direct mail relationship
marketing efforts.
D. QPT PUBLIC RELATIONS/COMMUNICATIONS BENEFITS
1. When available, Quokka will recognize and endorse the Quokka
Performance Team partnership alliance and Intel's official
designation in off-line media relations, public announcements,
advertising and keynote addresses done by Quokka Sports.
2. Quokka will supply executive speakers (such as John Bertrand and
Alan Ramadan) to speak to Intel meetings, events and trade shows
regarding Intel's Digital Marketing initiatives. All speaker fees
shall be waived for Intel. Engagements will be subject to speaker
availability.
3. Quokka will participate in Intel promotional events, both online
and otherwise.
E. CATEGORY LEADERSHIP BENEFITS
1. Quokka will appoint a designated Intel Relationship manager to
manage and maximize to the extent possible the benefits described
in this agreement.
2. Intel Digital Entertainment Partnership Plan prepared jointly by
Quokka Sports and INTEL focused on executing against Intel's
business strategies.
3. Annual ROI-based Assessment Report.
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<PAGE> 17
EXHIBIT B
STANDARD PRICING SCHEDULE
<TABLE>
<CAPTION>
OFFERING STANDARD PRICE / SERVER
- -------- -----------------------
<S> <C>
IA Web/App Server [*]
IA DB Server [*]
10/50 bandwidth* [*]
</TABLE>
BANDWIDTH IS CHARGED AT [*] for the target usage base [*] For each incremental
mbs above the base, [*] is charged in the following fashion: IOS will
monitor the bandwidth usage [*] IOS will deduct the [*] usage base from the
total. The highest remaining data point [*] will be the basis of the charge. [*]
[*] Confidential treatment requested.
17 of 25
<PAGE> 18
EXHIBIT C
INTEL(R) ONLINE SERVICES
MASTER CUSTOMER AGREEMENT
This Master Customer Agreement ("Agreement") is between Intel Online
Services, Inc., a wholly owned subsidiary of Intel Corporation, ("Intel") and
the Customer identified below ("Customer"). This Agreement includes certain
Service Level Agreements, Attachments and Schedules to be mutually agreed in
writing and attached in the future (together the "Schedules").
1. Services. Intel will provide to Customer the internet data center services
("Services") specified in a Service Level Agreement ("SLA") Order Form attached
hereto or added by the parties in the future. All SLA's shall be effective upon
the date set forth in them or a related fee schedule. In the event of any
conflict of any SLA and this Agreement, the terms of the applicable SLA shall
control.
2. Prices and Taxes. Prices are stated in the relevant SLA or attached fee
schedule and may be changed at any time by Intel unless they are stated to be
firm for a certain period. If any of the Services are on a month-to-month basis,
Intel will give Customer at least thirty (30) days notice of a price change.
Customer is responsible for tariffs, telecommunications surcharges or other
governmental charges due in connection with providing the Services to Customer.
If Intel is required to pay or collect any local, value-added, goods and
services, or any other similar taxes or duties based on the Services provided
hereunder, then Intel shall add such taxes to the prices for Services and
Customer agrees to pay such amounts.
3. Payment. Unless otherwise stated in an SLA, Intel will invoice Customer
monthly. Customer agrees to pay Intel within thirty (30) days from receipt of
invoice. For overdue invoices, Customer will pay Intel interest on the overdue
amount at a rate of one and one-half percent (1.5%) for each month or part of a
month (or the maximum rate allowed by law, whichever is less) that the payment
is overdue. All fees payable to Intel shall be paid by check tendered or wire
transfer at the following addresses or to such other payment addresses as Intel
shall designate in writing in a notice given in accordance with Section 14.1
below:
Remittance Address: Wire Transfer Account:
Intel Corporation CITIBANK
2111 N.E. 25th Ave. New York, New York
Hillsboro, OR 97124 ABA #021000089
Attn: Post Contract Management General Account # 38385954
M/S: JF3-149
Upon the request of either party, the parties agree to negotiate in good faith
an electronic invoice and payment procedure suitable for making the payments
contemplated under this Section.
4. Term. This Agreement shall commence as of the last date of execution
("Effective Date") and shall terminate upon the later of: (i) the last to expire
of any SLA entered into hereunder, or (ii) December 31, 2002. Thereafter, the
Agreement shall automatically renew for successive one (1) year periods unless
either party gives the other written notice of intent to terminate and not renew
at least sixty (60) days' prior to the end of the initial term or any renewal
term.
5. Termination.
5.1 General Termination Rights. Either party may terminate this
Agreement for material breach by the other party upon written notice of not less
than thirty (30) days and failure to cure the breach within the notice period.
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<PAGE> 19
5.2 Intel's Additional Rights to Restrict Services. Intel reserves the
right with or without notice to modify or terminate any or all Services or
restrict Customer's use in whole or in part if, in Intel's sole judgment, use of
the Services by Customer or its end users (i) presents a material security risk
or will interfere materially with the proper continued operation of a data
center or related services; (ii) violates applicable laws or governmental
regulations, including without limitation consumer protection, securities
regulation, child pornography, obscenity, data privacy, data transfer and
telecommunications laws; (iii) violates or infringes any intellectual property
right of Intel or a third party; (iv) violates export control regulations of the
United States or other applicable countries; (y) otherwise violates Intel's
Acceptable Use Policy; or (v) is subject to an order from a court or
governmental entity stating that such use generally or for certain activities
must stop. Prior to modifying or terminating any Services for the reasons set
forth in subparagraphs (iii), Intel will provide at least forty-eight (48) hours
notice to Customer prior to taking any such action. In all other circumstances
set forth in this Section 5.2, Intel will endeavor to provide as much prior
notice as reasonably practicable before taking any such action; provided that
Customer acknowledges that Intel may not be able to give any notice in such
circumstances.
5.3 Effect of Termination. Upon termination, all rights granted to
Customer under this Agreement terminate immediately. Intel will return to
Customer all data files or other Customer property in Intel's possession so long
as Intel, in its reasonable discretion, determines that such a return would not
be a violation of any applicable law or governmental regulation. Customer
remains liable to pay Intel for the Services received through the date of
termination of this Agreement and for any periods during which Customer is still
receiving all or some portion of the Services. The following sections will
survive any expiration or termination of this Agreement: Section 6.1 (Customer's
Responsibility for Use of the Services), Section 6.5 (Customer's Indemnity of
Intel), Section 7 (Intel's Indemnity of Customer), Section 9 (Ownership of
Intellectual Property), Section 10 (Confidentiality; Data Use), Section 11
(Disclaimer of Warranties), Section 12 (Limitation of Liability; Remedies),
Section 13 (Dispute Resolution; Governing Law), and Section 14 (Miscellaneous).
6. Customer Responsibilities.
6.1 Customer's Responsibility for Use of the Services. Customer agrees
it is solely responsible for and assumes all liability relating to the
following:
A. All aspects of Customer's business;
B. All content and data provided to Intel by or through Customer
for use with the Services;
C. Decisions about Customer's computer and communications systems
needed to access the Services;
D. All results obtained from using the Services;
E. Compliance with all applicable laws and governmental
regulations regarding Customer's business or use of the
Services;
F. Use of the Services by Customer's end users;
G. Compliance with Intel's Acceptable Use Policy, established and
applicable from time to time, by Customer and its end users.
Should Intel change its Acceptable Use Policy, Customer shall
have 30 days within which to comply with the revised Policy,
except that no such compliance period shall be applicable for
categories (i), (ii), (iv), or (vi) of Section 5.2.
H. Cooperation. Customer agrees to provide Intel with all
cooperation and information necessary or desirable to
implement the Services for Customer.
6.2 End User Agreements. To protect both Customer and Intel, Customer
shall include in agreements, if any, with its end users, (i) requirements for
end users to comply with usage policies sufficient to ensure compliance with
Intel's Acceptable Use Policy; (ii) limitation of liability provisions no less
protective than those contained in Section 12.1 below; (iii) dispute resolution
and attorneys' fees
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<PAGE> 20
provisions substantially similar to those contained in Sections 13.1, 13.2, and
13.4 below. Such provisions shall protect Customer and its service provider
(i.e., Intel) to the same extent.
6.3 Resale. Unless expressly permitted by a Schedule or separate
reseller agreement, Customer shall limit the use of the Services to Customer's
purposes and those of its end users and shall not engage in the business of
reselling Intel's hosting or other data center services to third parties (other
than Quokka affiliates and joint ventures of which Quokka owns 50% or more).
6.4 Customer's Indemnity of Intel. Customer will indemnify Intel
against any claim, suit, or proceeding by any end user or third party arising
from (i) matters for which Customer has responsibility under this Section 6;
(ii) violation by Customer of any obligations under this Section 6; (iii) claims
that any content of Customer or its end users, including but not limited to
data, text, multimedia images (e.g. graphics, audio and video files) or other
materials (collectively "Content"), or the manner in which Customer or its end
users make use of the Services, constitutes an infringement of any patent,
copyright, trademark, trade secret, publicity, privacy, or other right of any
third party, or (iv) any civil or criminal violations of law or governmental
regulations occurring as a result of actions or omissions of Customer or its end
users. Customer will defend or settle any such suit or proceeding brought
against Intel and will pay all damages and costs finally awarded against Intel
relating to the foregoing matters (including any indirect or consequential
damages awarded as a result of such proceeding); provided that Intel (x)
promptly notifies Customer in writing of any such suit or proceeding, (y)
provides Customer with sole control over the defense or settlement of any such
action; and (z) provides reasonable information and assistance in the defense or
settlement of any such action. Intel may participate in any such suit or
proceeding through counsel of its choice at Intel's own expense; provided, that
the costs associated with Intel's counsel shall not be deemed damages or costs
for purposes of Customer's indemnity hereunder. Notwithstanding the foregoing
remedies, Intel reserves the right (but shall have no obligation) to delete any
Content installed on an Intel server and to modify or terminate any or all
Services or restrict Customer's use in whole or in part in the event of any suit
or proceeding, or threatened suit or proceeding, which may be subject to an
indemnity obligation under this Section; provided that Intel shall give Customer
prior notice as set forth in Section 5.2.
7 [*]
8. Announcements and Promotion. Upon execution of this Agreement, the parties
may issue a mutually approved joint press release announcing the relationship
formed by this Agreement. Thereafter, neither party will issue any press
releases or use the logo of the other party in an advertisement or other public
announcement relating to this Agreement or the relationship between the parties
without the prior written approval of the other, including any approval given in
a Schedule hereto. Notwithstanding the restrictions of the prior sentence, the
parties will cooperate in good faith to advertise the relationship created in
this Agreement on their web sites, including cross-links to their respective web
sites and to others, under appropriate, mutually-agreed linking arrangements.
Customer agrees that Intel may include Customer's name in listings of Intel's
customers.
[*] Confidential treatment requested.
20 of 25
<PAGE> 21
9. Ownership of Intellectual Property and Equipment.
9.1 Except as expressly set forth in this Agreement or any applicable
SLA, the parties do not, directly or by implication, by estoppel or otherwise,
grant to each other any rights or licenses, and neither party shall have any
ownership rights in any intellectual or tangible property of the other.
9.2 Intel shall not obtain any right, title, and/or interest in the
Content provided by Customer or its end users and installed on Intel's hardware;
however, Intel shall retain title to and all rights in all intellectual property
provided by Intel, including, but not limited to, any know-how related to
Intel-provided products or services such as hardware, software or any other
server technology.
9.3 Except as expressly set forth in this Agreement or any applicable
SLA, all equipment provided by Intel in connection with this Agreement or any
SLA shall remain the property of Intel.
9.4 Notwithstanding anything in this Agreement to the contrary, the
rights granted herein do not include any right, license, release or immunity,
directly or indirectly, express, implied or by estoppel, in or to Intel's
component-level, flash memory chips, video chips, or microprocessor or related
chipset technology, or any of Intel's process technology under any patent,
copyrights, trade secret, mask work or other intellectual property right,
including but not limited to Intel architecture processors.
10. Confidentiality; Data Use.
10.1 General Non-Disclosure. Subject to the terms of this Agreement,
each party shall maintain the confidentiality of the information it receives
from the other pursuant to the terms of the Corporate Nondisclosure Agreement
("CNDA") between Intel and Customer, which is incorporated herein by this
reference. If the parties hereafter exchange other confidential information
relating to this Agreement during the term hereof, they may exchange that
information under a CITR (Confidential Information Transmittal Record) to the
CNDA. Except as otherwise expressly provided under this Agreement, neither party
may disclose to the public or to any third party the existence of this Agreement
or the terms and conditions hereof other than with the express prior written
consent of the other party.
10.2 Data Use. Unless requested to do so by Customer, Intel will not
collect or retain for its own purposes any personally identifiable information
regarding end users who access the Services through Customer. Intel will monitor
use of the Services and gather statistical and demographic information about the
use of the Services by Intel's Customers and their end users. Such information
will be used for internal statistical and marketing reports and may be shared by
Intel with third parties in aggregate or statistical form only. Both parties
agree to comply with all applicable privacy and data transfer statutes, rules,
or regulations governing the respective activities of the parties.
11. Disclaimer of Warranties.
11.1 General Disclaimer. EXCEPT AS EXPRESSLY PROVIDED IN AN APPLICABLE
SLA, THE SERVICES ARE PROVIDED "AS IS" AND INTEL MAKES NO WARRANTIES OR
REPRESENTATIONS CONCERNING THE SERVICES OR ANY RESULTS TO BE ACHIEVED THROUGH
USE OF THE SERVICES; INTEL DISCLAIMS ALL OTHER WARRANTIES, INCLUDING THE
WARRANTIES OF MERCHANTIBILITY, QUALITY, FITNESS FOR A PARTICULAR PURPOSE,
NONINFRINGEMENT AND TITLE, AND ALL WARRANTIES ARISING FROM A COURSE OF DEALING,
USAGE, OR TRADE PRACTICE.
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<PAGE> 22
11.1 No Security Warranty. EXCEPT AS EXPRESSLY STATED IN AN APPLICABLE
SLA, INTEL DOES NOT GUARANTEE THAT ITS PROCEDURES AND SERVICES WILL PREVENT
LOSS, ALTERATIONS OR UNAUTHORIZED ACCESS TO CUSTOMER DATA HOSTED THROUGH AN
INTEL FACILITY.
11.2 Disclaimer of Actions Caused by or Under the Control of Third
Parties. INTEL DOES NOT AND CANNOT CONTROL THE PERFORMANCE OF ANY DATA,
PRODUCTS, OR SERVICES PROVIDED OR CONTROLLED BY THIRD PARTIES. AT TIMES, ACTION
OR INACTION BY THIRD PARTIES CAN IMPAIR OR DISRUPT INTEL'S SERVICES. INTEL MAKES
NO REPRESENTATIONS AND EXPRESSLY DISCLAIMS ALL WARRANTIES REGARDING THE DATA,
PRODUCTS, OR SERVICES OF ANY THIRD PARTY, INCLUDING THE PROVIDERS OF ELECTRICAL
OR TELECOMMUNICATIONS PRODUCTS OR SERVICES. SUCH DATA, PRODUCTS, AND SERVICES
ARE NOT PROMISED TO BE FREE OF ERROR OR INTERRUPTION, AND INTEL EXPRESSLY
DISCLAIMS ALL LIABILITIES ARISING FROM ANY SUCH ERROR, INTERRUPTION, OR OTHER
FAILURE.
12. Limitation of Liability; Remedies.
12.1 DAMAGES LIMITATION. LIABILITY ARISING UNDER THIS AGREEMENT SHALL
BE LIMITED TO DIRECT, OBJECTIVELY MEASURABLE DAMAGES. NEITHER PARTY OR THEIR
SUPPLIERS, INCLUDING SUPPLIERS OF TELECOMUNICATIONS SERVICES, SHALL HAVE ANY
LIABILITY TO THE OTHER PARTY OR TO ANY THIRD PARTY, FOR ANY INCIDENTAL,
PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES, INCLUDING WITHOUT LIMITATION LOST
PROFITS, LOSS OF DATA, INTERRUPTION OF BUSINESS, OR COSTS OF PROCUREMENT OF
SUBSTITUTE GOODS OR SERVICES, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES, WHETHER UNDER THEORY OF CONTRACT, TORT (INCLUDING NEGLIGENCE) STRICT
LIABILITY OR OTHERWISE. Notwithstanding anything to the contrary, the aggregate
liability of Intel and its suppliers under this Agreement shall not exceed the
lesser of (a) the total amounts paid by Customer to Intel hereunder [*] which
gave rise to the claims or (b) [*] Customer hereby agrees and acknowledges that
its remedies for interruption of Services due to outages or failures may be
further limited in an applicable SLA to receipt of an outage credit toward
payment of fees due under the SLA.
12.2 SOLE REMEDIES; MATERIALITY. INTEL AND ITS SUPPLIERS DISCLAIM ANY
AND ALL LIABILITIES OR DAMAGES OTHER THOSE EXPRESSLY PROVIDED IN THIS AGREEMENT
OR AN ATTACHED SLA. CUSTOMER ACKNOWLEDGES AND AGREES THAT THE LIABILITY OF INTEL
AND ITS SUPPLIERS ARISING UNDER THIS AGREEMENT OR IN CONNECTION WITH THE
SERVICES SHALL BE EXPRESSLY LIMITED TO THE LIABILITY AND DAMAGES PROVIDED
HEREIN. THE PARTIES ACKNOWLEDGE THAT THE LIMITATIONS REFERENCED IN THIS SECTION
12 ARE MATERIAL TERMS TO THIS AGREEMENT.
12.3 Force Majeure. In the event that either party is unable to perform
any of its obligations under this Agreement or to enjoy any of its benefits
because of any event beyond the control of the affected party, including, but
not limited to, natural disaster, acts of God, actions or decrees of
governmental bodies or failure of communication or electrical lines (a "Force
Majeure Event"), the party who has been so affected shall promptly give written
notice to the other party and shall use its best efforts to resume performance.
Upon receipt of such notice, all obligations under this Agreement shall be
immediately suspended for the duration of such Force Majeure Event.
13. Dispute Resolution; Governing Law.
13.1 With the exception of disputes involving breach of
confidentiality, infringement of a party's intellectual property, and other
types of irreparable harm for which injunctive relief through the
[*] Confidential treatment requested.
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<PAGE> 23
courts is sought by either party, all disputes arising directly under the
express terms of this Agreement or the grounds for termination thereof shall be
resolved as follows: The senior management of both parties shall meet to attempt
to resolve such disputes. If the disputes cannot be resolved by the senior
management, either party may make a written demand for formal dispute resolution
and specify therein the scope of the dispute.
13.2 If the disagreements cannot be resolved by the senior management
after thirty (30) days from the date any party made a written demand for
resolution, a binding arbitration shall be held. Subject to the provisions of
this Section, the rules of the arbitration shall be agreed upon by the parties
prior to the arbitration and based upon the nature of the disagreement. To the
extent that the Parties cannot agree on the rules of the arbitration, then the
Commercial Arbitration Rules of the American Arbitration Association ("AAA") in
effect on the Effective Date of this Agreement, or, when either of the parties
is not a U.S. entity, then the Commercial Arbitration Rules of the International
Chamber of Commerce ("ICC") in effect on the Effective Date of this Agreement,
and except as the applicable rules are modified by this Agreement, shall apply.
The proceedings shall be held in the County of Santa Clara, California, U.S.A.
under the auspices of the AAA or the International Chamber of Commerce,
whichever is applicable. As a minimum set of rules in the arbitration, the
Parties agree as follows:
A. The arbitration shall be held by single arbitrator mutually
acceptable to both parties. If the parties cannot agree on a single
arbitrator within thirty (30) days from the date written demand is
made, each Party shall identify one independent individual who shall
meet to appoint a single arbitrator. If an arbitrator still cannot be
agreed upon within an additional thirty (30) days, one shall be
appointed by the AAA or ICC as applicable. The arbitrator shall be
knowledgeable regarding the internet hosting or data services
industries.
B. Prior to a final award, the parties shall equally bear the costs and
fees of the arbitration and each party shall bear its own legal
expenses. The Parties agree that a court reporter will record the
arbitration proceedings and that the reporter's record will be the
agreed transcript of the proceedings. Prior to a final award, the
parties will share the expenses of this reporter.
C. The arbitrator shall specify the basis for his/her decision, the
basis for the damages award and a breakdown of the damages awarded, and
the basis of any other remedy authorized under Section 12. The decision
of the arbitrator shall be considered as a final and binding resolution
of the disagreement, shall not be subject to appeal and may be entered
as a judgment in any court of competent jurisdiction in the United
States in the State of California. Each Party agrees to submit to the
jurisdiction of any such court for purposes of the enforcement of any
such decision, award, order or judgment.
D. Any arbitration proceeding hereunder shall be conducted on a
confidential basis.
E. The arbitrator shall apply the substantive laws of the State of
Delaware in interpreting and resolving disputes.
F. The parties shall agree upon what, if any, discovery shall be
permitted. If the parties cannot agree on the form of discovery within
fifteen (15) days after the appointment of the Arbitrator, then there
shall be neither discovery nor the issuance of subpoenas. In no event,
however, shall any such discovery take more than three months.
G. The duty of the parties to arbitrate any dispute within the scope of
this Section shall survive the expiration or termination of this
Agreement for any reason. The parties specifically agree that any
action must be brought, if at all, within two (2) years from the
accrual of the cause of action.
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<PAGE> 24
H. The discretion of the arbitrator to fashion remedies shall be
limited as stated in this Section 13 and Section 12 hereunder, and
shall exclude any right to award a remedy based on implied rights under
the Agreement.
13.3 Other Claims. Any controversy or claim which is beyond the scope
of this Section shall be submitted by any affected party to a court of competent
jurisdiction located in Santa Clara County, California, U.S.A. and the parties
agree to be bound by any judgment of such court. Otherwise, neither Party shall
sue the other where the basis of the suit is within the scope of this Section
except for enforcement of the arbitrator's decision in the event that the other
party is not performing in accordance with the arbitrator's decision.
13.4 Governing Law. Any claim arising under or relating to this
Agreement shall be governed by the internal substantive laws of the State of
Delaware and the federal courts located in Delaware, without regard to
principles of conflict of laws. Each party hereby agrees to jurisdiction and
venue in the courts of the State of California for all disputes and litigation
arising under or relating to this Agreement. Furthermore, the parties agree that
the terms of The U.N. Convention on Contracts for the International Sale of
Goods do not apply to this Agreement.
13.5 Attorneys' Fees. In the event of any dispute or arbitration
hereunder, the prevailing party shall be entitle to recover its costs and
disbursements incurred, together with reasonable attorneys' fees to be fixed by
the arbitrator or court at trial or on appeal.
14. Miscellaneous.
14.1 Notice. Unless otherwise stated herein, written notices shall be
delivered by hand, post, fax, or email (with contemporaneous delivery by one of
the foregoing means) to the persons and at the addresses as set forth below and
shall be deemed given upon transmission in the case of fax or email or otherwise
upon delivery. Either party may change its address for receipt of notice to the
other party by delivering written notice of such change pursuant to this
Section.
If to Intel: If to Customer:
Intel Online Services, Inc. Quokka Sports, Inc.
2200 Mission College Blvd. 525 Brannan Street, Ground Floor
Santa Clara, California 95052 San Francisco, CA 94107
14.2 Invalidity. The invalidity or unenforceablity for any reason of
any provision of this Agreement shall not prejudice or affect the validity or
enforceability of its other provisions.
14.3 Assignment. Neither party may assign any of its rights,
obligations, or privileges (by operation of law or otherwise) hereunder without
the prior written consent of the other, except that Intel may assign its rights
and obligations under this Agreement to one or more of its majority-owned
subsidiaries, and Customer may assign its rights and obligations to any entity
that acquires all or substantially all of its assets or a controlling interest
of Customer's outstanding equity (subject to Intel's prior written consent,
which will not be unreasonably withheld).
14.4 Headings. The headings to the Agreement provisions are for
reference only and shall not affect their interpretation.
14.5 Independent Contractor. The parties hereto are independent
contractors. Nothing in this Agreement will be construed to make the parties
partners or joint venturers or to make either party liable for the obligations,
acts or activities of the other.
14.6 No Third-Party Beneficiaries. The provisions of this Agreement are
intended solely for
24 of 25
<PAGE> 25
the benefit of Customer and Intel and its suppliers and shall create no rights
or obligations enforceable by any other party unless such beneficiaries are
expressly set forth in a Schedule hereto.
14.7 Entire Agreement; Amendment. This Agreement, including each
Schedule, constitutes the entire agreement between the parties with respect to
matters contained herein, and all prior or contemporaneous agreements and
negotiations with respect to those matters are superseded by this Agreement. No
waiver of any breach or default shall constitute a waiver of any subsequent
breach or default. Any changes to this Agreement, or any additional or different
terms in Customer's purchase orders, acknowledgments or other documents, will
not be effective unless expressly agreed to in writing by the party against whom
enforcement is sought.
Please sign and date below to indicate your understanding and acceptance of the
terms of this Agreement.
CUSTOMER: INTEL CORPORATION:
By: By:
Print Name: Print Name:
Title: Title:
Date: Date:
25 of 25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 80,632
<SECURITIES> 0
<RECEIVABLES> 2,370
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 97,030
<PP&E> 10,050
<DEPRECIATION> 2,755
<TOTAL-ASSETS> 107,710
<CURRENT-LIABILITIES> 11,321
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 7,782
<TOTAL-LIABILITY-AND-EQUITY> 107,710
<SALES> 0
<TOTAL-REVENUES> 6,410
<CGS> 0
<TOTAL-COSTS> 49,033
<OTHER-EXPENSES> 149
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 179
<INCOME-PRETAX> (41,814)
<INCOME-TAX> 0
<INCOME-CONTINUING> (41,814)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (41,814)
<EPS-BASIC> (1.11)
<EPS-DILUTED> (1.11)
</TABLE>
