<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 11, 2000
REGISTRATION NO. 333-44774
--------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
QUOKKA SPORTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7999 94-3250045
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
QUOKKA SPORTS, INC.
525 BRANNAN STREET, GROUND FLOOR
SAN FRANCISCO, CA 94107
(415) 908-3800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ALAN S. RAMADAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
QUOKKA SPORTS, INC.
525 BRANNAN STREET, GROUND FLOOR
SAN FRANCISCO, CA 94107
(415) 908-3800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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KENNETH L. GUERNSEY LARRY E. ROBBINS STEVEN A. HOBBS
ISOBEL A. JONES DONALD R. REYNOLDS CLIFFORD CHANCE ROGERS & WELLS LLP
STEVE R. DAETZ WYRICK ROBBINS YATES & PONTON LLP 200 PARK AVENUE
JASON S. THRONE 4101 LAKE BOONE TRAIL, SUITE 300 NEW YORK, NEW YORK 10166
COOLEY GODWARD LLP RALEIGH, NORTH CAROLINA 27607 (212) 878-8000
ONE MARITIME PLAZA, 20TH FLOOR (919) 781-4000
SAN FRANCISCO, CALIFORNIA 94111
(415) 693-2000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Securities Act"), check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SEC, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
[QUOKKA LOGO] [TOTAL SPORTS LOGO]
SPECIAL MEETINGS OF STOCKHOLDERS
MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT
To the stockholders of Quokka Sports, Inc. and Total Sports Inc.:
The boards of directors of Quokka Sports, Inc. and Total Sports Inc. have
approved a merger agreement between Quokka and Total Sports.
If the merger is completed, holders of Total Sports common stock and
preferred stock will receive a number of shares of Quokka common stock for each
share of Total Sports common stock and preferred stock they own based on the
exchange ratios defined in the merger agreement. Holders of warrants to purchase
Total Sports common stock and preferred stock will receive warrants to purchase
a number of shares of Quokka common stock and holders of options to purchase
Total Sports preferred stock and common stock will receive options to receive
Quokka common stock, each based upon the exchange ratios defined in the merger
agreement. The exchange ratios are based on the value of the Quokka common stock
at the time of the closing of the merger and will fluctuate with the price of
the Quokka common stock. Immediately after the merger, based upon shares of
Quokka common stock outstanding as of the record date, former securityholders of
Total Sports will own or have a right to own up to approximately 24.4% of the
outstanding shares of Quokka, and persons who were stockholders of Quokka
immediately before the merger will own approximately 75.6% of the outstanding
shares of Quokka common stock immediately after the merger.
Quokka common stock is listed on the Nasdaq National Market under the
symbol "QKKA," and on October 9, 2000, Quokka common stock closed at $2.875 per
share.
Stockholders of Quokka will be asked at Quokka's special meeting of
stockholders to: (1) approve the merger agreement, which will constitute
approval of the merger and the other transactions contemplated by the merger
agreement, including the issuance of Quokka common stock in the merger, and (2)
approve the issuance of common stock upon conversion of Quokka's 7.0%
convertible promissory notes and upon exercise of the related warrants that were
issued in a private placement on September 15, 2000. Stockholders of Total
Sports will be asked at Total Sports' special meeting of stockholders to approve
the merger agreement. After careful consideration, Quokka's board of directors
and Total Sports' board of directors have determined that the merger and the
merger agreement are in your best interests. Quokka's board of directors and
Total Sports' board of directors have approved the merger and the merger
agreement and recommend its approval by you. Quokka's board of directors has
approved the issuance of common stock upon conversion of Quokka's 7.0%
convertible promissory notes and upon exercise of the related warrants and
recommends its approval by you.
The date, time and place of the special meetings are as follows:
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For Quokka stockholders: For Total Sports stockholders:
November 7, 2000 November 6, 2000
9:00 a.m. P.S.T. 9:00 a.m. E.S.T.
Quokka Sports, Inc. Total Sports Inc.
525 Brannan Street, Ground Floor 234 Fayetteville Street
San Francisco, California Raleigh, North Carolina
</TABLE>
The joint proxy statement/prospectus attached to this letter provides you
with information about Quokka, Total Sports and the proposed merger. In
addition, you may obtain other information about Quokka and Total Sports from
documents filed with the Securities and Exchange Commission. We encourage you to
read the entire joint proxy statement/prospectus carefully. IN PARTICULAR,
BEFORE VOTING AT THE SPECIAL MEETING, YOU SHOULD CAREFULLY CONSIDER THE
DISCUSSION IN THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 27 OF THIS
JOINT PROXY STATEMENT/PROSPECTUS.
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/s/ Alan S. Ramadan /s/ Frank A. Daniels, III
Alan S. Ramadan Frank A. Daniels, III
President and Chief Executive Officer Chairman of the Board
Quokka Sports, Inc. Total Sports Inc.
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED THE QUOKKA COMMON STOCK TO BE ISSUED IN THE MERGER OR
DETERMINED WHETHER THE JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The joint proxy statement/prospectus is dated October 11, 2000, and is
first being mailed to stockholders of Quokka on or about October 17, 2000 and to
stockholders of Total Sports on or about October 13, 2000.
<PAGE> 3
QUOKKA SPORTS, INC.
525 BRANNAN STREET, GROUND FLOOR
SAN FRANCISCO, CALIFORNIA 94107
(415) 908-3800
-------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 7, 2000
To the stockholders of Quokka Sports, Inc.:
A special meeting of stockholders of Quokka Sports, Inc., a Delaware
corporation, will be held on November 7, 2000 at 9:00 a.m., local time, at the
principal executive offices of Quokka located at 525 Brannan Street, Ground
Floor, San Francisco, California for the following purposes:
1. To consider and vote upon approval of the Agreement and Plan of Merger
and Reorganization dated as of July 20, 2000, as amended, among Quokka
Sports, Inc. and Total Sports Inc., pursuant to which Total Sports will
be merged with and into Quokka and all of the outstanding shares of
capital stock, options and warrants of Total Sports will be exchanged
for up to 15,000,000 shares of Quokka common stock, which will
constitute approval of the merger and the other transactions
contemplated by the merger agreement, including the issuance of Quokka
common stock in the merger.
2. To approve the issuance of common stock upon conversion of Quokka's 7.0%
convertible promissory notes and upon exercise of the related warrants
that were issued in a private placement on September 15, 2000.
3. To transact such other business as may properly come before the special
meeting or any adjournment thereof.
Only holders of record of Quokka common stock at the close of business on
September 15, 2000, the record date, are entitled to notice of, and to vote at,
the special meeting. At the close of business on the record date, Quokka had
outstanding and entitled to vote 46,383,304 shares of common stock.
YOUR VOTE IS IMPORTANT. THE MERGER CANNOT BE COMPLETED UNLESS THE HOLDERS
OF A MAJORITY OF THE VOTES CAST IN PERSON OR BY PROXY AT THE SPECIAL MEETING
APPROVE THE MERGER AGREEMENT. THE ISSUANCE OF COMMON STOCK UPON CONVERSION OF
QUOKKA'S 7.0% CONVERTIBLE PROMISSORY NOTES AND UPON EXERCISE OF THE RELATED
WARRANTS IN EXCESS OF REGULATORY LIMITATIONS CANNOT BE COMPLETED UNLESS THE
AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE VOTES CAST IN PERSON OR BY
PROXY AT THE SPECIAL MEETING APPROVE THE ISSUANCE. EVEN IF YOU PLAN TO ATTEND
THE SPECIAL MEETING IN PERSON, WE REQUEST THAT YOU SIGN AND RETURN THE ENCLOSED
PROXY CARD AND THUS ENSURE THAT YOUR SHARES WILL BE REPRESENTED AT THE SPECIAL
MEETING IF YOU ARE UNABLE TO ATTEND. IF YOU SIGN, DATE AND MAIL YOUR PROXY CARD
WITHOUT INDICATING HOW YOU WISH TO VOTE, YOUR PROXY WILL BE COUNTED AS A VOTE IN
FAVOR OF APPROVAL OF THE MERGER AGREEMENT AND IN FAVOR OF THE ISSUANCE OF COMMON
STOCK UPON CONVERSION OF QUOKKA'S 7.0% CONVERTIBLE PROMISSORY NOTES AND UPON
EXERCISE OF THE RELATED WARRANTS. IF YOU FAIL TO RETURN YOUR PROXY CARD, THE
EFFECT WILL BE THAT YOUR SHARES WILL NOT BE COUNTED FOR PURPOSES OF DETERMINING
WHETHER A QUORUM IS PRESENT AT THE SPECIAL MEETING. IF YOU DO ATTEND THE SPECIAL
MEETING AND WISH TO VOTE IN PERSON, YOU MAY WITHDRAW YOUR PROXY AND VOTE IN
PERSON.
By Order of the Board of Directors of
Quokka Sports, Inc.
/s/ ALAN S. RAMADAN
---------------------------------------
Alan S. Ramadan
President and Chief Executive Officer
San Francisco, California
October 11, 2000
QUOKKA'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT QUOKKA STOCKHOLDERS
VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT AND "FOR" APPROVAL OF THE ISSUANCE
OF COMMON STOCK UPON CONVERSION OF QUOKKA'S 7.0% CONVERTIBLE PROMISSORY NOTES
AND UPON EXERCISE OF THE RELATED WARRANTS.
<PAGE> 4
TOTAL SPORTS INC.
234 FAYETTEVILLE STREET
RALEIGH, NORTH CAROLINA 27601
(919) 573-8020
-------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 6, 2000
To the stockholders of Total Sports Inc.:
A special meeting of stockholders of Total Sports Inc., a Delaware
corporation, will be held on November 6, 2000 at 9:00 a.m., local time, at the
principal executive offices of Total Sports located at 234 Fayetteville Street,
Raleigh, North Carolina for the following purposes:
1. To consider and vote upon approval of the Agreement and Plan of Merger
and Reorganization dated as of July 20, 2000, as amended, among Quokka
Sports, Inc. and Total Sports Inc., pursuant to which Total Sports will
be merged with and into Quokka and all of the outstanding shares of
capital stock, options and warrants of Total Sports will be exchanged
for up to 15,000,000 shares of Quokka common stock.
2. To transact such other business as may properly come before the special
meeting or any adjournment thereof.
Only holders of record of Total Sports common stock and preferred stock at
the close of business on September 22, 2000, the record date, are entitled to
notice of, and to vote at, the special meeting. At the close of business on the
record date, Total Sports had outstanding and entitled to vote 2,891,546 shares
of common stock, 125,000 shares of series A preferred stock, 518,841 shares of
series B preferred stock, 1,418,200 shares of series C preferred stock, 630,756
shares of series C1 preferred stock, 2,140,873 shares of series D preferred
stock and no shares of series D1 preferred stock. Holders of series A preferred
stock and series E preferred stock are not entitled to vote at the special
meeting. Holders of Total Sports common stock and preferred stock are entitled
to appraisal rights under the Delaware General Corporation Law under certain
circumstances in connection with the merger.
YOUR VOTE IS IMPORTANT. THE MERGER CANNOT BE COMPLETED UNLESS THE HOLDERS
OF A MAJORITY OF THE OUTSTANDING SHARES OF TOTAL SPORTS COMMON STOCK ENTITLED TO
VOTE AND PREFERRED STOCK ENTITLED TO VOTE, ON AN AS-CONVERTED TO COMMON STOCK
BASIS, OTHER THAN THE SERIES A PREFERRED STOCK AND SERIES E PREFERRED STOCK,
APPROVE THE MERGER AGREEMENT. EVEN IF YOU PLAN TO ATTEND THE SPECIAL MEETING IN
PERSON, WE REQUEST THAT YOU SIGN AND RETURN THE ENCLOSED PROXY CARD AND THUS
ENSURE THAT YOUR SHARES WILL BE REPRESENTED AT THE SPECIAL MEETING IF YOU ARE
UNABLE TO ATTEND. IF YOU SIGN, DATE AND MAIL YOUR PROXY CARD WITHOUT INDICATING
HOW YOU WISH TO VOTE, YOUR PROXY WILL BE COUNTED AS A VOTE IN FAVOR OF APPROVAL
OF THE MERGER AGREEMENT. IF YOU FAIL TO RETURN YOUR PROXY CARD, THE EFFECT WILL
BE THAT YOUR SHARES WILL NOT BE COUNTED FOR PURPOSES OF DETERMINING WHETHER A
QUORUM IS PRESENT AT THE SPECIAL MEETING. IF YOU DO ATTEND THE SPECIAL MEETING
AND WISH TO VOTE IN PERSON, YOU MAY WITHDRAW YOUR PROXY AND VOTE IN PERSON.
By Order of the Board of Directors
of Total Sports Inc.
/s/ FRANK A. DANIELS, III
-----------------------------------
Frank A. Daniels, III
Chairman of the Board
Raleigh, North Carolina
October 11, 2000
TOTAL SPORTS' BOARD OF DIRECTORS RECOMMENDS THAT TOTAL SPORTS STOCKHOLDERS
VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
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PAGE
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QUESTIONS AND ANSWERS
Questions And Answers About The Quokka/Total Sports
Merger................................................. 1
Questions And Answers About The Quokka Common Stock To Be
Issued Upon Conversion Of Notes And Exercise Of
Warrants Issued In Quokka's Private Placement On
September 15, 2000..................................... 1
Questions and Answers About My Proxy Card And The Special
Meetings............................................... 2
SUMMARY..................................................... 4
RISK FACTORS................................................ 27
Risks Relating To The Merger.............................. 27
Risks Relating To Quokka.................................. 29
Risks Relating To The Private Placement................... 41
THE COMPANIES............................................... 45
Quokka Sports, Inc. ...................................... 45
Management's Discussion And Analysis Of Financial
Condition And Results Of Operations Of Quokka Sports,
Inc. .................................................. 59
Total Sports Inc. ........................................ 67
Management's Discussion And Analysis Of Financial
Condition And Results Of Operations Of Total Sports
Inc. .................................................. 79
THE SPECIAL MEETING OF QUOKKA STOCKHOLDERS.................. 95
Joint Proxy Statement/Prospectus.......................... 95
Date, Time And Place Of The Special Meeting............... 95
Purpose Of The Special Meeting............................ 95
Recommendation Of Quokka's Board Of Directors............. 95
Record Date And Voting Powers............................. 96
Voting And Revocation Of Proxies.......................... 96
Required Vote............................................. 96
Voting; Proxies........................................... 96
Voting Via The Internet Or By Telephone................... 97
THE SPECIAL MEETING OF TOTAL SPORTS STOCKHOLDERS............ 98
Joint Proxy Statement/Prospectus.......................... 98
Date, Time And Place Of The Special Meeting............... 98
Purpose Of The Special Meeting............................ 98
Recommendation Of Total Sports' Board Of Directors........ 98
Record Date And Voting Powers............................. 98
Voting And Revocation Of Proxies.......................... 98
Required Vote............................................. 99
Voting; Proxies........................................... 99
THE MERGER.................................................. 101
General Description Of The Merger......................... 101
Background................................................ 101
The Proposed Management Buy-Out Of Total Sports' Print
Publishing Division.................................... 103
The Proposed Public Offering.............................. 103
Reasons For The Merger.................................... 103
Recommendation Of Total Sports' Board Of Directors........ 105
Recommendation Of Quokka's Board Of Directors............. 105
Opinion Of Total Sports' Financial Advisor................ 105
Interests Of Total Sports' Officers And Directors In The
Merger................................................. 106
Indemnification Of Officers And Directors................. 108
Change Of Control Severance Plan.......................... 108
Material U.S. Federal Income Tax Consequences............. 109
</TABLE>
i
<PAGE> 6
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Anticipated Accounting Treatment.......................... 111
Governmental Approvals.................................... 111
Escrow; Restrictions On Resales........................... 111
CERTAIN TERMS OF THE MERGER AGREEMENT....................... 113
The Merger................................................ 113
Effective Time Of The Merger.............................. 113
Manner And Basis Of Converting Shares..................... 113
The Escrow Fund........................................... 123
Total Sports Stock Options And Warrants................... 123
Representations And Warranties............................ 124
Covenants; Conduct Of Business Prior To The Merger........ 124
Limitation On Considering Other Acquisition Proposals..... 127
Conditions To The Merger.................................. 127
Termination Of The Merger Agreement....................... 130
Expenses And Termination Fees............................. 130
VOTING AGREEMENTS........................................... 131
MANAGEMENT AND OTHER INFORMATION............................ 132
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 136
EXECUTIVE COMPENSATION...................................... 140
STOCK OPTION GRANTS AND EXERCISES........................... 142
EMPLOYMENT, SEVERANCE AND CHANGE OF CONTROL AGREEMENTS...... 143
CERTAIN TRANSACTIONS........................................ 144
DISSENTERS' RIGHTS.......................................... 147
DESCRIPTION OF QUOKKA CAPITAL STOCK......................... 149
Registration Rights....................................... 149
Transfer Agent And Registrar.............................. 151
COMPARATIVE RIGHTS OF QUOKKA STOCKHOLDERS AND TOTAL SPORTS
STOCKHOLDERS.............................................. 152
Classes Of Directors...................................... 152
Removal Of Directors...................................... 152
Indemnification And Limitation Of Liability............... 152
Elimination Of Actions By Written Consent Of
Stockholders........................................... 152
Power To Call Special Meetings Of Stockholders............ 152
Amendment Of Bylaws....................................... 153
APPROVAL OF THE ISSUANCE OF COMMON STOCK UPON CONVERSION OF
QUOKKA'S 7.0% CONVERTIBLE PROMISSORY NOTES AND UPON
EXERCISE OF THE RELATED WARRANTS.......................... 154
Overview Of The Private Placement And Stockholder Vote.... 154
Risk Factors.............................................. 154
Additional Information.................................... 154
Basis For Seeking Stockholder Approval.................... 154
Use Of Proceeds........................................... 155
Description Of The Notes.................................. 155
Description Of The Warrants............................... 158
Registration Rights Of Common Stock Underlying Notes And
Warrants............................................... 159
Change Of Control......................................... 159
Related Parties........................................... 160
INDEPENDENT ACCOUNTANTS..................................... 161
</TABLE>
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LEGAL MATTERS............................................... 161
EXPERTS..................................................... 161
WHERE YOU CAN FIND MORE INFORMATION......................... 161
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
ANNEXES:
A-1 -- Agreement and Plan of Merger and Reorganization
A-2 -- Amendment No. 1 to Agreement and Plan of Merger and Reorganization
B-1 -- Form of Voting Agreement with MediaOne Interactive Services, Inc.
B-2 -- Form of Voting Agreement of certain Quokka stockholders
C -- Form of Voting Agreement of certain Total Sports stockholders
D -- Opinion of Allen & Company Incorporated
E -- Section 262 of the Delaware General Corporation Law (Dissenters' Rights)
iii
<PAGE> 8
QUESTIONS AND ANSWERS
QUESTIONS AND ANSWERS ABOUT THE QUOKKA/TOTAL SPORTS MERGER
Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE? (SEE PAGE 103)
A: Quokka and Total Sports are proposing to merge because we believe the
resulting combination will create a stronger, more competitive company
capable of achieving greater financial strength, market share, operational
efficiencies, technology development, earning power and growth potential than
either company would have on its own.
Q: WHAT WILL TOTAL SPORTS STOCKHOLDERS RECEIVE IN THE MERGER? (SEE PAGE 113)
A: If the merger is completed, Total Sports stockholders, option holders and
warrant holders collectively will receive up to 15,000,000 shares of Quokka
common stock for all of the outstanding common stock, preferred stock, stock
options and warrants of Total Sports based on the exchange ratios defined in
the merger agreement. These exchange ratios take into account various
liquidation preferences, dividend rights and other privileges for some of the
classes of capital stock of Total Sports. Accordingly, the number of shares
of Quokka common stock to be issued for each share of Total Sports common
stock and preferred stock, and the number of shares of Quokka common stock to
be reserved for issuance for each outstanding Total Sports option and warrant
depends upon the aggregate value of the Quokka common stock to be received in
accordance with the merger agreement. As a result, the value of the Quokka
common stock you will receive in the merger will not be known before the
merger is completed and will fluctuate as the market price of Quokka common
stock goes up or down. We encourage you to obtain current market quotations
for the Quokka common stock, which is listed under "QKKA" on the Nasdaq
National Market.
Q. SHOULD I SEND IN MY TOTAL SPORTS STOCK CERTIFICATES NOW?
A. Yes. In order to receive any shares of Quokka stock to which you may be
entitled, you must exchange your original Total Sports stock certificates.
Please send your original Total Sports stock certificates to Drue Moore,
Esq., Vice President, Corporate Development and General Counsel of Total
Sports Inc. at 234 Fayetteville Street, Raleigh, North Carolina 27601, (919)
573 5431. In the event that the merger is not completed, your original stock
certificates will be returned to you. If the merger is completed, you will
receive written instructions regarding the exchange of your shares of Total
Sports common stock for shares of Quokka common stock and a cash payment for
any fractional share of Quokka common stock to which you otherwise should be
entitled.
Q. AM I ENTITLED TO DISSENTERS' RIGHTS?
A: Total Sports stockholders will be entitled to dissenters' rights in certain
instances. Quokka stockholders will not be entitled to dissenters' rights.
QUESTIONS AND ANSWERS ABOUT THE QUOKKA COMMON STOCK TO BE ISSUED UPON CONVERSION
OF NOTES AND EXERCISE OF WARRANTS ISSUED IN QUOKKA'S PRIVATE PLACEMENT ON
SEPTEMBER 15, 2000
As described in greater detail beginning on page 154 and the risk factors
under the heading "Risk Factors Relating to the Private Placement" starting on
page 41, in addition to the merger, Quokka stockholders are being asked to
approve the issuance of Quokka common stock upon conversion of Quokka's 7.0%
convertible promissory notes and upon exercise of the related warrants that
Quokka issued on September 15, 2000.
1
<PAGE> 9
Q: WHY ARE QUOKKA STOCKHOLDERS BEING ASKED TO APPROVE THIS MATTER?
A: Quokka stockholders are being asked to approve this matter in order to comply
with the rules and regulations of the Nasdaq Stock Market on which the Quokka
common stock trades and to enable the full conversion of the notes and the
full exercise of the warrants that Quokka issued on September 15, 2000.
Q: HOW MANY SHARES OF QUOKKA COMMON STOCK WILL BE ISSUED UPON CONVERSION OF THE
NOTES AND EXERCISE OF THE WARRANTS?
A: Based on the $77.4 million face amount of notes issued on September 15, 2000
and the current $5.415 conversion price, the notes are now convertible into
an aggregate of approximately 14.3 million shares of Quokka common stock. The
warrants are now convertible into approximately 2.8 million shares of Quokka
commons stock. Therefore, Quokka expects that at least 17.1 million shares of
its common stock will be issued in exchange for outstanding notes and
warrants. However, as described in greater detail beginning on page 154, the
number of shares of Quokka common stock that are issuable could increase if
the conversion price of the notes is adjusted downward, if there are any
future stock issuances that result in an anti-dilution adjustment and if
Quokka elects to pay interest on the notes with payments-in-kind rather than
cash. Payments-in-kind allow Quokka to avoid an immediate cash outlay on each
interest payment date but have the effect of increasing the face amount of
the notes. Assuming (1) Quokka pays all interest payments on the notes for
the full five year term of the notes with payments-in-kind rather than cash,
(2) the conversion price remains at $5.415 throughout the five years and (3)
no notes are converted during the five year term of the notes, then the
payments-in-kind would increase the face amount of the notes by approximately
$32.1 million, which would be convertible into approximately 5.9 million
shares of Quokka common stock.
Q: WHAT HAPPENS IF QUOKKA IS UNABLE TO OBTAIN THE STOCKHOLDER APPROVAL REQUIRED
BY NASDAQ?
A: If Quokka fails to obtain stockholder approval by November 15, 2000, the
noteholders have the right to contractually cause Quokka to repurchase all
outstanding notes at a premium redemption price equal to the greater of (1)
115% of the sum of the face value of the notes, which Quokka expects would be
at least $89.0 million, accrued but unpaid interest on the notes and unpaid
delay or default amounts on the notes, or (2) the value the noteholder would
be entitled to receive upon conversion of the note into common stock at the
applicable conversion price followed by the sale of the common stock at the
greater market value at either the closing of the redemption or the event
triggering the right to redemption.
QUESTIONS AND ANSWERS ABOUT MY PROXY CARD AND THE SPECIAL MEETINGS
Q: WHAT DO I NEED TO DO NOW?
A: We urge you to read this joint proxy statement/prospectus carefully,
including its annexes. Quokka stockholders and Total Sports stockholders
should consider how the merger affects you and Quokka stockholders should
also separately consider how the issuance of Quokka common stock upon
conversion of the notes and exercise of the warrants affect you. Then, mail
your completed and signed proxy card in the enclosed return envelope as soon
as possible so that your shares can be voted at the special meeting of Quokka
stockholders or the special meeting of Total Sports stockholders, as
appropriate.
Q: WHAT HAPPENS IF I DO NOT RETURN A PROXY CARD?
A: For both Quokka stockholders and Total Sports stockholders, the failure to
return your proxy card could be a factor in establishing a quorum for each
company's special meeting.
2
<PAGE> 10
Q: MAY I VOTE IN PERSON?
A: Yes. You may attend the special meeting of Quokka stockholders or the special
meeting of Total Sports stockholders, as appropriate, and vote your shares in
person, rather than, or in addition to, signing and returning your proxy
card.
Q: MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. You may change your vote at any time before your proxy card is voted at
your special meeting. You can do this in one of three ways. First, you can
send a written notice to the applicable company stating that you would like
to revoke your proxy. Second, you can complete and submit a new proxy card.
Third, you can attend the meeting and vote in person. Your attendance alone
will not revoke your proxy. If you have instructed a broker to vote your
shares, you must follow directions received from your broker to change those
instructions.
Q: IF MY QUOKKA SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER
VOTE MY SHARES FOR ME?
A: Your broker will not be able to vote your Quokka shares without instructions
from you. You should instruct your broker to vote your shares, following the
procedure provided by your broker.
Q. WHO CAN HELP ANSWER MY QUESTIONS?
A: If you would like additional copies, without charge, of this joint proxy
statement/prospectus or if you have questions about the merger, including the
procedures for voting your shares, you should contact:
TOTAL SPORTS INC.
Attn: Investor Relations
234 Fayetteville Street
Raleigh, North Carolina 27601
Telephone: (919) 573-8020
or
QUOKKA SPORTS, INC.
Attn: Investor Relations
525 Brannan Street, Ground Floor
San Francisco, California 94107
Telephone: (415) 908-3800
If you have questions about the shares of Quokka common stock to be issued
upon conversion of the notes and exercise of the warrants issued in Quokka's
private placement on September 15, 2000, you should contact Quokka Sports at the
address above.
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<PAGE> 11
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS JOINT PROXY
STATEMENT/PROSPECTUS AND MAY NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT
TO YOU. FOR A MORE COMPLETE UNDERSTANDING OF THE MERGER, YOU SHOULD CAREFULLY
READ THIS ENTIRE DOCUMENT AND THE DOCUMENTS TO WHICH WE REFER. IN PARTICULAR,
YOU SHOULD READ THE DOCUMENTS ATTACHED TO THIS JOINT PROXY STATEMENT/PROSPECTUS,
INCLUDING THE MERGER AGREEMENT ATTACHED AS ANNEX A-1, AMENDMENT TO THE MERGER
AGREEMENT ATTACHED AS ANNEX A-2 AND THE FORMS OF VOTING AGREEMENT ATTACHED AS
ANNEXES B-1, B-2 AND C. WE HAVE INCLUDED PAGE REFERENCES IN PARENTHESES AT
VARIOUS POINTS IN THIS SUMMARY TO DIRECT YOU TO A MORE DETAILED DESCRIPTION OF
THE TOPICS PRESENTED.
THE COMPANIES (PAGE 45)
QUOKKA SPORTS, INC.
525 Brannan Street, Ground Floor
San Francisco, California 94107
Telephone: (415) 908-3800
Quokka Sports, Inc. is a leading provider of sports entertainment for the
digital world. Quokka's web sites currently cover motor racing, sailing, action
sports such as skiing, climbing, hiking, snowboarding, adventure racing and
mountain biking, and key Olympic summer sports along with specific sporting
events like the biennial Olympic Games, the America's Cup yacht match, FedEx
Championship Auto Racing Series and the Moto Grand Prix championship. Quokka
offers live event coverage, race viewers, news and information, analysis, audio
and text dispatches, and content created by fans as well as the ability to
purchase premium content and products and services. Quokka seeks to generate
revenues from sponsorship and advertising from business customers, content
syndication from media companies, and sales of content, sports memorabilia,
merchandise and services from consumers.
TOTAL SPORTS INC.
234 Fayetteville Street
Raleigh, North Carolina 27601
Telephone: (919) 573-8020
Total Sports is an online sports media company engaged in real time
sporting event coverage for mainstream sports. Total Sports owns and operates
the Total Sports Network that features TotalCast(TM) live-event coverage of
Major League Baseball, NCAA basketball and NCAA football as well as every major
college sports championship, including the College World Series. In addition to
live event coverage, the Total Sports Network offers proprietary historical
databases, data analysis and news for their fan communities.
DESCRIPTION OF THE MERGER (PAGE 101)
Under the merger agreement, Total Sports will merge with and into Quokka.
Total Sports securityholders will receive an aggregate of up to 15,000,000
shares of Quokka common stock in exchange for all of their outstanding Total
Sports common stock, preferred stock, options and warrants.
MERGER CONSIDERATION; EXCHANGE RATIO (PAGE 113)
As a Total Sports stockholder, you will receive a number of shares of
Quokka common stock in exchange for each share of Total Sports common stock or
preferred stock that you own based on the exchange ratios defined in the merger
agreement. You will receive cash for any fractional share of Quokka common stock
that you otherwise would be entitled to receive.
The exchange ratios are dependent upon the value of the Quokka stock to be
received in the merger and the rights, preferences and privileges of the various
classes of Total Sports capital stock, and will vary based upon fluctuations in
the market price of Quokka common stock between now and the date the
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<PAGE> 12
merger is completed. Neither Quokka nor Total Sports has the right to terminate
the merger agreement or renegotiate the exchange ratios as a result of market
price fluctuations.
COMPARATIVE PER COMMON SHARE MARKET PRICE INFORMATION (PAGE 26)
Quokka common stock is listed on the Nasdaq National Market under the
symbol "QKKA." On July 20, 2000, the last full trading day prior to the public
announcement of the proposed merger, Quokka common stock closed at $9.00 per
share. On October 9, 2000, Quokka common stock closed at $2.875 per share.
Total Sports' capital stock is not publicly traded.
TAX MATTERS (PAGE 109)
It is a condition to the respective obligations of Quokka and Total Sports
to consummate the merger that each company receive an opinion from its legal
counsel substantially to the effect that the exchange of shares of Total Sports
common stock for shares of Quokka common stock in the merger will be tax-free to
Total Sports stockholders for federal income tax purposes. Cash received by you
instead of fractional shares of Quokka common stock or in exchange for Total
Sports stock pursuant to the exercise of dissenters' rights under the Delaware
General Corporation Law will result in the recognition of gain or loss for
federal income tax purposes. Your tax basis in the shares of Quokka common stock
that you receive in the merger will generally equal your current tax basis in
your shares of Total Sports common stock or preferred stock, reduced by the
basis allocable to any fractional share interest for which you receive cash.
TAX MATTERS CAN BE COMPLICATED, AND THE TAX CONSEQUENCES OF THE MERGER TO
YOU WILL DEPEND ON THE FACTS OF YOUR OWN SITUATION. YOU SHOULD CONSULT YOUR OWN
TAX ADVISOR TO FULLY UNDERSTAND THE TAX CONSEQUENCES OF THE MERGER TO YOU.
REASONS FOR THE MERGER
Quokka (Page 103). Quokka's board of directors believes that Quokka and its
stockholders would realize a number of benefits from the merger, including,
among other benefits, the following:
- access to an estimated 42 million potential U.S. major league baseball
enthusiasts, an estimated 43 million potential U.S. college football
enthusiasts and an estimated 43 million potential U.S. college basketball
enthusiasts;
- access to Total Sports' publishing technology and know-how;
- entry into traditional sports coverage;
- the strategic benefits of combining Quokka's immersive coverage with
Total Sports' strong editorial content;
- the opportunity to strengthen the relationship with National Broadcasting
Company, Inc. or "NBC"; and
- the opportunity to shorten the expected time for Quokka to achieve
profitability.
Total Sports (Page 104). The Total Sports board of directors believes that
Total Sports and its stockholders would realize a number of benefits from the
merger, including, among other benefits, the following:
- Total Sports' prospects as an independent company, and the increased
likelihood of obtaining funding for its business as a result of the
merger;
- the liquidity of Quokka's common stock;
- the opportunity for Total Sports stockholders to participate in a company
with broader sports coverage and greater financial resources;
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<PAGE> 13
- the strength of Quokka's senior management, and in particular the ability
of Alan Ramadan, Quokka's current president and chief executive officer,
and Alvaro Saralegui, Quokka's current chief operating officer, to lead
the combined operations of Quokka and Total Sports;
- the strategic benefits of combining Quokka's immersive coverage with
Total Sports' strong editorial content;
- the opportunity to strengthen the relationship with NBC; and
- the opportunity to shorten the expected time for Total Sports to achieve
profitability.
RECOMMENDATION OF QUOKKA'S BOARD OF DIRECTORS AND TOTAL SPORTS' BOARD OF
DIRECTORS (PAGES 95 AND 98)
Quokka's board of directors and Total Sports' board of directors believe
that the merger and the merger agreement are in your best interests. Quokka's
board of directors and Total Sports' board of directors have approved the merger
agreement and recommend that you vote "FOR" approval of the merger agreement and
the other transactions contemplated by the merger agreement, including the
issuance of Quokka common stock in the merger.
OPINION OF TOTAL SPORTS' FINANCIAL ADVISOR (PAGE 105)
Total Sports engaged Allen & Company Incorporated to act as its financial
advisor in connection with a sale of Total Sports. Based on its analysis, Allen
& Company rendered its opinion as of July 20, 2000, the date of the merger
agreement, that the aggregate consideration to be received by the
securityholders of Total Sports in the merger is fair from a financial point of
view.
THE TOTAL SPORTS SPECIAL MEETING OF STOCKHOLDERS (PAGE 98)
Time, Date And Place. A special meeting of the stockholders of Total Sports
will be held on November 6, 2000, at the principal executive offices of Total
Sports located at 234 Fayetteville Street, Raleigh, North Carolina at 9:00 a.m.
local time, to consider and approve the merger agreement.
Record Date And Voting Power For Total Sports. You are entitled to vote at
the special meeting if you owned shares of Total Sports common stock or the
Total Sports preferred stock identified in this paragraph at the close of
business on September 22, 2000, which is the record date for the special
meeting. You will have one vote at the special meeting for each share of Total
Sports common stock you owned at the close of business on the record date and
one vote for each share of series B preferred stock, series C preferred stock,
series C1 preferred stock, series D preferred stock and series D1 preferred
stock you owned at the close of business on the record date. On the record date,
there were 2,891,546 shares of Total Sports common stock, 518,841 shares of
series B preferred stock, 1,418,200 shares of series C preferred stock, 630,756
shares of series C1 preferred stock, 2,140,873 shares of series D preferred
stock and no shares of series D1 preferred stock entitled to be voted at the
special meeting. Holders of Total Sports series A preferred stock and series E
preferred stock are not entitled to vote at the meeting under the Delaware
General Corporation Law, although some of these holders must consent to the
merger in accordance with stockholder agreements with Total Sports and other
Total Sports stockholders, as discussed below.
Total Sports Required Vote. Under the Delaware General Corporation Law, the
approval of the merger agreement requires the affirmative vote of holders of a
majority of the shares of Total Sports common stock and preferred stock, that
are entitled to vote and are outstanding at the close of business on the record
date, on an as-converted to common stock basis.
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<PAGE> 14
In addition, in accordance with existing stockholder rights agreements with
Total Sports and other Total Sports stockholders, the merger requires the
affirmative vote by the following Total Sports stockholders:
- holders of a majority of shares of series A preferred stock outstanding
as of the record date;
- holders of 80% of the shares of series B preferred stock outstanding as
of the record date;
- holders of 80% of the shares of series C preferred stock and series C1
preferred stock outstanding as of the record date, voting together as a
single class; and
- 40% of the holders of the shares of series D preferred stock, series D1
preferred stock, if any, and NBC based on the dollar value of such
holders' investment in Total Sports.
Share Ownership Of Management. The directors and executive officers of
Total Sports beneficially owned approximately 77% of the shares of Total Sports
common stock, 100% of the shares of series A preferred stock, 95% of the series
B preferred stock, 82% of the series C preferred stock and series C1 preferred
stock, collectively as a single class, and 56% of the series D preferred stock,
each as outstanding at the close of business on the record date. Directors,
executive officers and other stockholders of Total Sports holding 1,342,588
shares of common stock, 125,000 shares of series A preferred stock, 423,000
shares of series B preferred stock, 1,676,451 shares of series C and C1
preferred stock and 1,208,228 shares of series D preferred stock, have agreed to
vote their shares of common stock and preferred stock in favor of the approval
of the merger agreement.
THE QUOKKA SPECIAL MEETING OF STOCKHOLDERS (PAGE 95)
Time, Date And Place. A special meeting of the stockholders of Quokka will
be held on November 7, 2000, at the principal executive offices of Quokka
located at 525 Brannan Street, Ground Floor, San Francisco, California at 9:00
a.m. local time, to consider and approve:
- the merger agreement, which will constitute approval of the merger and
the other transactions contemplated by the merger agreement, including
the issuance of Quokka common stock in the merger; and
- the issuance of Quokka common stock upon conversion of Quokka's 7.0%
convertible promissory notes and upon exercise of the related warrants
that were issued in a private placement on September 15, 2000.
Record Date And Voting Power For Quokka. You are entitled to vote at the
special meeting if you owned shares of Quokka common stock at the close of
business on September 15, 2000, which is the record date for the special
meeting. You will have one vote at the special meeting for each share of Quokka
common stock you owned at the close of business on the record date. On the
record date, there were 46,383,304 shares of Quokka common stock entitled to be
voted at the special meeting.
Quokka Required Vote. The approval of the merger agreement requires the
affirmative vote of holders of a majority of the votes cast in person or by
proxy at the special meeting. The approval of the issuance of Quokka common
stock upon conversion of Quokka's 7.0% convertible promissory notes and upon
exercise of the related warrants requires the affirmative vote of holders of a
majority of the votes cast in person or by proxy at the special meeting.
Share Ownership Of Management. Ten stockholders, including entities
affiliated with directors of Quokka and other major Quokka stockholders, owned
approximately 57.6% of the shares of Quokka common stock outstanding at the
close of business on the record date. Each of these Quokka stockholders has
agreed to vote their shares in favor of the approval of the merger agreement and
the issuance of Quokka common stock in the merger. Ten stockholders, including
entities affiliated with directors of Quokka and other major Quokka
stockholders, owned approximately 41.8% of the shares of Quokka common stock
outstanding as of the close of business on the record date. Each of these Quokka
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<PAGE> 15
stockholders has agreed to vote their shares in favor of the approval of the
issuance of Quokka common stock upon conversion of the notes and upon exercise
of the related warrants.
INTERESTS OF TOTAL SPORTS' OFFICERS AND DIRECTORS IN THE MERGER (PAGE 106)
When considering the recommendation of Total Sports' board of directors
that you vote for approval of the merger agreement, you should be aware that a
number of Total Sports' officers and directors have interests in the merger that
are different from, or in addition to, yours.
For example, depending upon the value of the Quokka common stock to be
received at the time of the closing of the merger, some classes of Total Sports
preferred stock will receive disproportionate amounts of the aggregate
consideration received by Total Sports stockholders, based on the various
rights, preferences and privileges of each class of Total Sports capital stock.
In addition, a portion of the options granted to officers of Total Sports under
current Total Sports stock plans will accelerate upon the completion of the
merger. The shares subject to options under the Total Sports Inc. 2000 Stock
Plan will be senior in rights to the other capital stock of Total Sports.
Further, Gary Stevenson, president, chief executive officer and a director of
Total Sports, will receive between 8% and 11% of the aggregate Quokka common
stock to be received in the merger, depending upon the value of the total amount
of Quokka stock to be issued via the merger.
LIMITATION ON CONSIDERING OTHER ACQUISITION PROPOSALS (PAGE 127)
Total Sports has agreed not to consider a business combination or other
similar transaction with another party prior to the closing of the merger.
CONDITIONS TO THE MERGER (PAGE 127)
Conditions To The Obligations Of Each Party. The obligations of Quokka and
Total Sports to complete the merger are subject to the satisfaction of certain
conditions, including the following:
- Total Sports stockholders and Quokka stockholders must approve the merger
agreement;
- the Nasdaq Stock Market must approve the shares of Quokka common stock to
be issued in the merger for listing on the Nasdaq National Market;
- the registration statement on Form S-4, of which this joint proxy
statement/prospectus is a part, shall have become effective;
- the waiting period applicable to the consummation of the merger under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 shall have expired
or been terminated; and
- no order shall be in effect, and no governmental action or proceeding
shall be pending or threatened, that prohibits the consummation of the
merger.
Conditions To The Obligation Of Quokka. The obligation of Quokka to
complete the merger is subject to the satisfaction of additional conditions,
including the following:
- Total Sports' representations and warranties in the merger agreement must
be true and correct, subject to certain materiality qualifiers;
- Total Sports must have complied in all material respects with its
covenants and obligations in the merger agreement;
- Quokka shall have received:
-- all third-party consents required to be obtained by Total Sports as set
forth in the merger agreement;
-- a tax opinion that the merger will constitute a reorganization for
federal income tax purposes;
-- a legal opinion of Wyrick Robbins Yates & Ponton LLP;
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<PAGE> 16
-- a certificate from the chief executive officer and chief financial
officer of Total Sports confirming that certain conditions have been
satisfied; and
-- the written resignations of each officer and director of Total Sports
and its subsidiaries effective as of completion of the merger;
- certain employees of Total Sports must remain employed by Total Sports
through the closing of the merger;
- the holders of Total Sports capital stock representing the right to
receive 90% of the Quokka common stock to be issued upon the consummation
of the merger shall have approved the merger or withdrawn or lost the
right to exercise dissenters' or appraisal rights in connection with the
merger;
- no legal proceeding by any governmental entity shall exist with respect
to the merger; and
- no event shall have occurred that is deemed to have a material adverse
effect on Total Sports.
Conditions To The Obligation Of Total Sports. The obligation of Total
Sports to complete the merger is subject to the satisfaction of additional
conditions, including the following:
- Quokka's representations and warranties in the merger agreement must be
true and correct, subject to certain materiality qualifiers;
- Quokka must have complied in all material respects with its covenants and
obligations in the merger agreement;
- Total Sports shall have received:
-- a tax opinion that the merger will constitute a reorganization for
federal income tax purposes;
-- a legal opinion of Cooley Godward LLP; and
-- a certificate from an executive officer of Quokka confirming that
certain conditions have been satisfied;
- no event shall have occurred that is deemed to have a material adverse
effect on Quokka;
- an individual who is mutually acceptable to Quokka and Total Sports shall
have been elected to Quokka's board of directors; and
- Quokka shall have completed one or more financing transactions in which
it shall have received cash proceeds of at least $27,500,000.
TERMINATION OF THE MERGER AGREEMENT (PAGE 130)
Quokka and Total Sports may agree by mutual written consent to terminate
the merger agreement at any time before the merger is completed. In addition,
either company may terminate the merger agreement if:
- the merger is not completed on or before December 31, 2000;
- a court or government entity issues a final order prohibiting the merger;
- the Quokka stockholders or Total Sports stockholders do not approve the
merger agreement; or
- the other company materially breaches its representations, warranties or
covenants in the merger agreement and the breach is not curable through
the exercise of reasonable efforts or the other company is not using
reasonable efforts to cure the breach.
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<PAGE> 17
EXPENSES AND TERMINATION FEES (PAGE 130)
The merger agreement provides that all expenses will be paid by the party
incurring them, except in connection with the termination of the merger
agreement as discussed below.
Total Sports will pay Quokka a termination fee of $7.5 million if the
merger agreement is terminated because Total Sports stockholders did not approve
the merger agreement.
Quokka will pay Total Sports a termination fee of $7.5 million if the
merger agreement is terminated because Quokka stockholders did not approve the
merger agreement.
If the merger is consummated, Total Sports' fees and expenses will be paid
by Quokka as the surviving corporation in the merger.
GOVERNMENTAL APPROVALS (PAGE 111)
Transactions such as the merger are subject to review by governmental
agencies like the Department of Justice and the Federal Trade Commission. The
appropriate reports and requests were filed with the Department of Justice and
the Federal Trade Commission on September 18, 2000.
ESCROW; RESTRICTION ON RESALES (PAGE 111)
Approximately ten percent of the Quokka common stock issued in the merger
will be placed in escrow for a period of one year after the closing of the
merger to satisfy any indemnification claims and the Quokka common stock issued
to the securityholders of Total Sports in the merger will be subject to a
variety of restrictions affecting the resale and transfer of the Quokka common
stock.
ANTICIPATED ACCOUNTING TREATMENT (PAGE 111)
The merger will be accounted for using the purchase method of accounting
under which the total consideration paid in the merger will be allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed of
Total Sports on the basis of their estimated fair values on the effective date
of the merger. The excess of the total consideration paid in the merger over
tangible and identifiable intangible assets acquired and liabilities assumed
will be recorded as goodwill.
DISSENTERS' RIGHTS (PAGE 147)
Total Sports stockholders will be entitled to dissenters' rights if the
stockholders satisfy all applicable legal procedures and requirements set forth
in the Delaware General Corporation Law.
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FORWARD-LOOKING INFORMATION
ALL STATEMENTS INCLUDED OR INCORPORATED BY REFERENCE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS OR MADE BY MANAGEMENT OF QUOKKA OR TOTAL SPORTS OTHER THAN
STATEMENTS OF HISTORICAL FACT REGARDING QUOKKA, TOTAL SPORTS OR THE COMBINED
COMPANY ARE FORWARD-LOOKING STATEMENTS. EXAMPLES OF FORWARD-LOOKING STATEMENTS
INCLUDE STATEMENTS REGARDING QUOKKA'S, TOTAL SPORTS' OR THE COMBINED COMPANY'S
FUTURE FINANCIAL RESULTS, OPERATING RESULTS, AUDIENCE GROWTH, PRODUCT SUCCESSES,
BUSINESS STRATEGIES, PROJECTED COSTS, FUTURE PRODUCTS, COMPETITIVE POSITIONS AND
PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS. IN SOME CASES, YOU CAN
IDENTIFY FORWARD-LOOKING STATEMENTS BY WORDS SUCH AS "MAY," "WILL," "SHOULD,"
"WOULD," "EXPECTS," "PLANS," "ANTICIPATES," "BELIEVES," "ESTIMATES," "PREDICTS,"
"POTENTIAL" OR "CONTINUE," OR THE NEGATIVE OF THESE OR OTHER COMPARABLE WORDS.
THESE FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND
ARE SUBJECT TO RISKS AND UNCERTAINTIES AND OTHER IMPORTANT FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM EXPECTATIONS CONTEMPLATED BY
FORWARD-LOOKING STATEMENTS MADE IN THIS DOCUMENT OR ELSEWHERE BY OR ON BEHALF OF
QUOKKA, TOTAL SPORTS OR THE COMBINED COMPANY. IN EVALUATING THE MERGER, YOU
SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DISCUSSED IN THE SECTION
OF THIS JOINT PROXY STATEMENT/PROSPECTUS ENTITLED "RISK FACTORS."
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MARKET PRICE AND DIVIDEND DATA
Quokka common stock is included in the National Association of Securities
Dealers Automated Quotations System, known as "Nasdaq," and designated on the
Nasdaq National Market under the symbol "QKKA". This table sets forth, for the
periods indicated, the range of high and low per share sales prices for Quokka
common stock as reported on the Nasdaq National Market. Quokka's fiscal year
ends on December 31.
<TABLE>
<CAPTION>
QUOKKA
COMMON STOCK
-----------------
LOW HIGH
------ -------
<S> <C> <C>
FISCAL YEAR 1999
Third quarter (July 27 to September 30, 1999)............. $6.000 $15.875
Fourth quarter............................................ $6.675 $18.750
FISCAL YEAR 2000
First quarter............................................. $9.250 $18.000
Second quarter............................................ $2.750 $10.688
Third quarter............................................. $3.750 $10.000
Fourth quarter (through October 9, 2000).................. $2.750 $ 3.984
</TABLE>
On July 20, 2000, the last full trading day prior to the public
announcement of the proposed merger, Quokka common stock sold for a high and low
per share sales price of $9.00 and $8.75, respectively and closed at $9.00. On
October 9, 2000, Quokka common stock closed at $2.875.
As of September 15, 2000, there were 46,383,304 shares of common stock
outstanding held of record by 542 stockholders.
Total Sports capital stock is not publicly-traded.
Neither Quokka nor Total Sports has ever declared or paid cash dividends on
its common stock. The policies of each are to retain earnings for use in its
business. Following the merger, Quokka common stock will continue to be listed
on the Nasdaq National Market and there will be no market for the Total Sports
common stock or preferred stock. Some classes of Total Sports preferred stock
are entitled to cumulative dividends, which will affect the exchange ratios in
the merger. See "-- Total Sports Estimated Per Share Prices Liquidation
Preferences Exchange Ratios and Dividend Rights."
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<PAGE> 20
TOTAL SPORTS ESTIMATED PER SHARE PRICES, LIQUIDATION PREFERENCES, EXCHANGE
RATIOS AND DIVIDEND RIGHTS
Estimated Equivalent Per Share Prices. The following table sets forth the
per share closing price of Quokka common stock as reported on the Nasdaq
National Market and the estimated equivalent per share price, as described
below, of Total Sports common stock outstanding and each class of Total Sports
preferred stock outstanding on July 20, 2000, the last full trading day before
the public announcement of the proposed merger, and on October 9, 2000:
<TABLE>
<CAPTION>
ESTIMATED EQUIVALENT
-------------------------------------
AS OF AS OF
JULY 20, 2000 OCTOBER 9, 2000
------------- --------------------
<S> <C> <C>
Quokka Common Stock......................................... $ 9.00 $ 2.875
Total Sports Common Stock................................... -- --
Total Sports Series A Redeemable Preferred Stock............ $13.82 $ 0
Total Sports Series A-Prime Redeemable Preferred Stock...... -- $ 14.09
Total Sports Series B Convertible Preferred Stock........... $ 5.53 $ 0
Total Sports Series B-Prime Convertible Preferred Stock..... -- $ 1.17
Total Sports Series C Convertible Preferred Stock........... $ 8.14 $ 0
Total Sports Series C-Prime Convertible Preferred Stock..... -- $ 1.73
Total Sports Series C1 Convertible Preferred Stock.......... $10.35 $ 0
Total Sports Series C1-Prime Convertible Preferred Stock.... -- $ 2.20
Total Sports Series D Convertible Preferred Stock........... $31.85 $ 0
Total Sports Series D-Prime Convertible Preferred Stock..... -- $ 6.71
Total Sports Series D1 Convertible Preferred Stock.......... $15.33 $ 0
Total Sports Series D1-Prime Convertible Preferred Stock.... -- $ 3.19
Total Sports Series E Convertible Preferred Stock........... -- --
Total Sports Series E-Prime Convertible Preferred Stock..... -- --
Total Sports Series F Convertible Preferred Stock........... -- $ 41.48
Total Sports Series G Convertible Preferred Stock........... -- --
Total Sports Series H Convertible Preferred Stock........... -- --
</TABLE>
For the table above, the estimated equivalent per share values expressed as
of October 9, 2000 reflect the reclassification of certain shares of Total
Sports capital stock in connection with the closing of a bridge financing
transaction whereby Total Sports raised $12.7 million. The estimated equivalent
per share values expressed as of October 9, 2000 also reflect the issuance of an
additional 554,217 shares of series D-prime preferred stock, 211,294 shares of
series F preferred stock and additional warrants to purchase 110,794 shares of
series D-prime preferred stock and 42,235 shares of series F preferred stock in
connection with the closing of such $12.7 million bridge financing.
The foregoing information in the table above assumes that, for information
expressed as of July 20, 2000, 590,146 shares subject to stock options valued at
approximately $5,311,314, based on the closing price of Quokka common stock on
that date, are reserved for issuance to Total Sports employees and consultants
pursuant to the Total Sports Inc. 2000 Stock Plan. For information in that table
expressed as of October 9, 2000, 574,564 shares subject to stock options valued
at approximately $1,651,872, based on the closing price of Quokka common stock
on that date, are reserved for issuance to Total Sports employees and
consultants pursuant to the 2000 Stock Plan. The stock options for these shares
represent 50% of the shares reserved for issuance under the 2000 Stock Plan,
which will accelerate upon the completion of the merger. The remaining 50% of
the stock options reserved under the 2000 Stock Plan will be immediately
canceled upon the occurrence of the merger. For more information regarding the
terms of the 2000 Stock Plan, see "The Merger--Interests of Total Sports
Officers and Directors in the Merger."
In addition, the information in the above table of estimated equivalent per
share prices for Total Sports stock assumes that, for information as of July 20,
2000, 1,650,000 shares of Quokka common stock
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<PAGE> 21
valued at $14,850,000, based on the closing price of Quokka stock as of that
date, are reserved for Gary Stevenson, president, chief executive officer and a
director of Total Sports, pursuant to a Compensation and Equity Rights Agreement
dated July 20, 2000 between Mr. Stevenson and Total Sports. For information
expressed as of October 9, 2000, the above table assumes the reservation of the
1,200,000 shares of Quokka stock valued at $3,450,000, based on the closing
price of Quokka common stock as of that date, which is reserved for Mr.
Stevenson pursuant to the July 20, 2000 compensation agreement. For more
information regarding Total Sports' agreement with Mr. Stevenson, see "The
Merger--Interests of Total Sports' Officers and Directors in the Merger."
Liquidation Preferences and Dividends. The estimated equivalent per share
price of a share of Total Sports capital stock outstanding depends in part upon
the various liquidation preferences and dividend rights of the Total Sports
preferred stock. The following table sets forth the per share liquidation
preferences and dividend rights of each class of preferred stock and the common
stock of Total Sports as of July 20, 2000 and on October 9, 2000:
<TABLE>
<CAPTION>
AS OF JULY 20, 2000 OCTOBER 9, 2000
----------------------- -----------------------
LIQUIDATION TOTAL LIQUIDATION TOTAL
CLASS OF TOTAL SPORTS STOCK PREFERENCE DIVIDEND PREFERENCE DIVIDEND
--------------------------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Common Stock...................................... -- -- -- --
Series A Redeemable Preferred Stock............... $10.00 $3.82 $10.00 $4.09
Series A-Prime Redeemable Preferred Stock......... -- -- $10.00 $4.09
Series B Convertible Preferred Stock.............. $ 4.49 $1.49 $ 4.49 $1.61
Series B-Prime Convertible Preferred Stock........ -- -- $ 4.49 $1.61
Series C Convertible Preferred Stock.............. $ 7.11 $1.69 $ 7.11 $1.89
Series C-Prime Convertible Preferred Stock........ -- -- $ 7.11 $1.89
Series C1 Convertible Preferred Stock............. $ 9.49 $1.79 $ 9.49 $1.95
Series C1-Prime Convertible Preferred Stock....... -- -- $ 9.49 $1.95
Series D Convertible Preferred Stock.............. $33.18 $1.28 $33.18 $1.73
Series D-Prime Convertible Preferred Stock........ -- -- $33.18 $1.73
Series D1 Convertible Preferred Stock............. $16.59 -- $16.59 --
Series D1-Prime Convertible Preferred Stock....... -- -- $16.59 --
Series E Convertible Preferred Stock.............. -- -- -- --
Series E-Prime Convertible Preferred Stock........ -- -- -- --
Series F Convertible Preferred Stock.............. -- -- $41.48 --
Series G Convertible Preferred Stock.............. -- -- $ 1.00 --
Series H Convertible Preferred Stock.............. -- -- $66.36 --
</TABLE>
In accordance with the Total Sports certificate of incorporation, as
amended in connection with the $12.7 million financing which closed on October
9, 2000, depending upon the value of the Quokka common stock at the time of the
merger, the holders of Total Sports capital stock may not receive the entire
liquidation preferences and accrued cumulative dividends as set forth in the
table above. For a more detailed discussion of the rights, preferences and
privileges of the respective classes of common stock and preferred stock of
Total Sports, see "Certain Terms of the Merger Agreement--Manner and Basis of
Converting Shares."
Estimated Exchange Ratios. If the merger had occurred on July 20, 2000,
based upon Quokka's $9.00 share price as of that date, you would have received:
- No shares of Quokka common stock, for the Total Sports common stock you
owned;
- 1.54 shares of Quokka common stock, worth a total of $13.82 for each
share of Total Sports series A preferred stock you owned;
- 0.61 shares of Quokka common stock, worth a total of $5.53 for each share
of Total Sports series B preferred stock you owned;
14
<PAGE> 22
- 0.90 shares of Quokka common stock, worth a total of $8.14 for each share
of Total Sports series C preferred stock you owned;
- 1.15 shares of Quokka common stock, worth a total of $10.35 for each
share of Total Sports series C1 preferred stock you owned;
- 3.54 shares of Quokka common stock, worth a total of $31.85 for each
share of Total Sports series D preferred stock you owned;
- 1.70 shares of Quokka common stock, worth a total of $15.33 for each
share of Total Sports series D1 preferred stock you owned;
- No shares of Quokka common stock, for each share of Total Sports series E
preferred stock you owned;
If the merger had occurred on October 9, 2000, based upon Quokka's $2.875
share price as of that date, you would have received:
- No shares of Quokka common stock for the Total Sports common stock you
owned;
- No shares of Quokka common stock for each share of Total Sports series A
preferred stock you owned;
- 4.90 shares of Quokka common stock, worth a total of $14.09 for each
share of Total Sports series A-prime preferred stock you owned;
- No shares of Quokka common stock for each share of Total Sports series B
preferred stock you owned;
- 0.41 shares of Quokka common stock, worth a total of $1.17 for each share
of Total Sports series B-prime preferred stock you owned;
- No shares of Quokka common stock for each share of Total Sports series C
preferred stock you owned;
- 0.60 shares of Quokka common stock, worth a total of $1.73 for each share
of Total Sports series C-prime preferred stock you owned;
- No shares of Quokka common stock for each share of Total Sports series C1
preferred stock you owned;
- 0.76 shares of Quokka common stock, worth a total of $2.20 for each share
of Total Sports series C1-prime preferred stock you owned;
- No shares of Quokka common stock for each share of Total Sports series D
preferred stock you owned;
- 2.33 shares of Quokka common stock, worth a total of $6.71 for each share
of Total Sports series D-prime preferred stock you owned;
- No shares of Quokka common stock for each share of Total Sports series D1
preferred stock you owned;
- 1.11 shares of Quokka common stock, worth a total of $3.19 for each share
of Total Sports series D1-prime preferred stock you owned;
- No shares of Quokka common stock, for each share of Total Sports series E
preferred stock you owned;
- No shares of Quokka common stock, for each share of Total Sports series
E-prime preferred stock you owned;
15
<PAGE> 23
- 14.43 shares of Quokka common stock, worth a total of $41.48 for each
share of Total Sports series F preferred stock you owned;
- No shares of Quokka common stock for each share of Total Sports series G
preferred stock you owned;
The actual equivalent per share price of a share of Total Sports common
stock or preferred stock that you will receive if the merger closes may be
different from the price listed above because the per share price of Quokka
common stock fluctuates. The equivalent per share prices referenced if the
merger had occurred on October 9, 2000 reflect the additional capital raised by
Total Sports through a bridge financing offered to its existing stockholders, in
which Total Sports issued $12.7 million in convertible promissory notes and
warrants exercisable for its preferred stock in connection with such financing.
The issuance of new securities in connection with such financing would affect
the equivalent per share price of a share of Total Sports common stock or
preferred stock that you will receive in the merger.
Cumulative Dividends. Pursuant to the certificate of incorporation of Total
Sports, holders of the following Total Sports preferred stock are entitled to
cumulative dividends, as follows:
- As of October 9, 2000, each share of series A preferred stock and series
A-prime preferred stock was entitled to cumulative dividends of $4.09;
- As of October 9, 2000, each share of series B preferred stock and series
B-prime preferred stock was entitled to cumulative dividends of $1.61;
- As of October 9, 2000, each share of series C preferred stock and series
C-prime preferred stock was entitled to cumulative dividends of $1.89;
- As of October 9, 2000, each share of series C1 preferred stock and series
C1-prime preferred stock was entitled to cumulative dividends of $1.95;
and
- As of October 9, 2000, each share of series D preferred stock and series
D-prime preferred stock was entitled to cumulative dividends of $1.73.
Holders of Total Sports common stock, series G preferred stock, series E
preferred stock and series E-prime preferred stock are not entitled to any
dividends. In addition, no shares of Total Sports series D1 preferred stock,
series F preferred stock or series H preferred stock were outstanding as of
October 9, 2000. Therefore, no dividends with respect to shares of series D1
preferred stock, series F preferred stock or series H preferred stock have
accrued as of that date, and dividends will begin to accrue only upon the
issuance of any such shares.
16
<PAGE> 24
QUOKKA SPORTS, INC. AND SUBSIDIARIES
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
------ ------- ------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues.......................... $ 82 $ 39 $ 4,000 $ 8,635 $ 13,070 $ 3,449 $ 22,097
------ ------- ------- ------- -------- -------- --------
Cost of revenues:
Production and other............ 21 611 5,130 7,780 20,070 6,342 17,278
Amortization of acquired
rights........................ -- -- -- -- 3,441 2,087 3,618
------ ------- ------- ------- -------- -------- --------
Total cost of revenues........ 21 611 5,130 7,780 23,511 8,429 20,896
------ ------- ------- ------- -------- -------- --------
Gross profit (loss)........... 61 (572) (1,130) 855 (10,441) (4,980) 1,201
------ ------- ------- ------- -------- -------- --------
Operating expenses:
Research and engineering........ 18 423 1,030 4,480 13,094 6,654 11,425
Sales and marketing............. 5 53 816 2,519 19,525 8,610 15,642
General and administrative...... 56 508 1,827 3,184 11,069 4,398 7,279
Restructuring costs............. -- -- -- -- -- -- 588
Depreciation.................... -- -- 68 530 4,217 1,150 7,673
------ ------- ------- ------- -------- -------- --------
Total operating expenses...... 79 984 3,741 10,713 47,905 20,812 42,607
------ ------- ------- ------- -------- -------- --------
Losses of associated venture...... -- -- -- -- 2,176 1,067 --
Minority interest in net loss of
consolidated sub................ -- -- -- -- (1,936) (645) (1,291)
Other income/(expense)............ 12 (4) (71) 320 1,702 212 352
------ ------- ------- ------- -------- -------- --------
Net loss...................... $ (6) $(1,560) $(4,942) $(9,538) $(56,884) $(26,002) $(39,763)
====== ======= ======= ======= ======== ======== ========
Basic and diluted net loss per
share........................... $(0.00) $ (0.41) $ (0.73) $ (.99) $ (1.45) $ (2.66) $ (0.88)
Shares used in computation of
basic and diluted net loss per
share........................... 3,800 3,800 6,792 9,656 39,366 9,788 45,019
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
---------------------------------------------- --------------------
1995 1996 1997 1998 1999 1999 2000
---- ------- ------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
marketable securities........... $ -- $ 65 $ 4,027 $ 23,994 $ 68,757 $ 40,579 $ 8,009
Working capital (deficit)......... (8) (1,566) 1,444 23,218 72,560 46,669 23,212
Total assets...................... -- 113 4,651 28,212 99,880 67,604 95,026
Debt and capital leases, long-term
portion......................... -- -- 83 501 11,493 8,134 8,956
Accumulated deficit............... (8) (1,566) (6,508) (16,046) (72,930) (42,048) (112,695)
Total stockholders'
equity/(deficit)................ (8) (1,566) 1,663 25,453 72,258 47,448 59,680
</TABLE>
17
<PAGE> 25
GOLF.COM, L.L.C.
SELECTED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
INCEPTION (JUNE 6) YEARS ENDED DECEMBER 31, JUNE 30,
TO DECEMBER 31, ---------------------------- -----------------
1996 1997 1998 1999 1999 2000
------------------ ------ ------- ------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues............................ $129 $ 475 $ 891 $ 1,354 $ 573 $ 951
---- ------ ------- ------- ----- ------
Cost of revenues:
Production and other.............. 4 54 581 611 303 339
---- ------ ------- ------- ----- ------
Total cost of revenues.......... 4 54 581 611 303 339
---- ------ ------- ------- ----- ------
Gross profit.................... 125 421 310 743 270 612
---- ------ ------- ------- ----- ------
Operating expenses:
Operating expenses................ -- 1,338 1,341 1,937 611 1,317
Depreciation and amortization..... -- 52 56 14 7 4
---- ------ ------- ------- ----- ------
Total operating expenses........ -- 1,390 1,396 1,951 618 1,321
---- ------ ------- ------- ----- ------
Other income/(expense).............. -- 34 (8) 7 -- 21
---- ------ ------- ------- ----- ------
Net income/(loss)............... $125 $ (935) $(1,094) $(1,201) $(348) $ (688)
==== ====== ======= ======= ===== ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
---------------------------------------- ------------------
1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................ $ 896 $ 11 $ 36 $ 728 $ 68 $ 800
Working capital (deficit)................ 976 150 51 679 261 1,108
Total assets............................. 1,165 375 303 984 496 1,631
Accumulated deficit...................... (1,072) (2,040) (3,134) (4,140) (3,483) (4,827)
Total members' equity.................... 1,142 304 109 691 312 1,117
</TABLE>
18
<PAGE> 26
TOTAL SPORTS INC. AND SUBSIDIARIES
SELECTED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
FEBRUARY 20, 1997 YEARS ENDED SIX MONTHS ENDED
(INCEPTION) DECEMBER 31, JUNE 30,
TO ------------------- -------------------
DECEMBER 31, 1997 1998 1999 1999 2000
----------------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Digital publishing........................ $ 920 $ 1,930 $ 5,397 $ 2,627 $ 4,516
E-commerce................................ 14 435 1,356 701 821
------- -------- -------- ------- --------
Total revenues.......................... 934 2,365 6,753 3,328 5,337
Cost of Revenues:
Digital publishing........................ 1,379 3,570 8,765 3,866 7,945
E-commerce................................ 1 332 1,192 543 778
------- -------- -------- ------- --------
Total cost of revenues.................. 1,380 3,902 9,957 4,409 8,723
Gross loss.................................. (446) (1,537) (3,204) (1,081) (3,386)
Operating Expenses:
Product development....................... 1,310 2,550 4,033 1,953 3,063
Sales and marketing....................... 577 2,729 5,217 1,607 7,741
General and administrative................ 356 1,880 3,745 1,210 4,642
Amortization.............................. 322 572 1,907 515 1,285
------- -------- -------- ------- --------
Total operating expenses................ 2,565 7,731 14,902 5,285 16,731
Operating loss.............................. (3,011) (9,268) (18,106) (6,366) (20,117)
Other income (expense), net................. (234) (440) (419) (140) 122
------- -------- -------- ------- --------
Loss from continuing operations............. (3,244) (9,707) (18,525) (6,507) (19,995)
Net loss.................................... $(4,147) $(11,837) $(21,827) $(7,639) $(26,658)
Dividends on Series A preferred stock....... (144) (198) (194) (97) (97)
------- -------- -------- ------- --------
Net loss applicable to common
stockholders.............................. $(4,291) $(12,035) $(22,021) $(7,736) $(26,755)
======= ======== ======== ======= ========
Basic and diluted loss from continuing
operations per common share............... $ (2.79) $ (6.35) $ (10.52) $ (3.73) $ (10.23)
Basic and diluted loss per common share..... $ (3.53) $ (7.71) $ (12.38) $ (4.37) $ (13.62)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
--------------------------- ------------------
1997 1998 1999 1999 2000
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents............................. $ 237 $ 685 $17,671 $ 59 $ 1,861
Working capital (deficit)............................. (2,763) (3,802) 14,377 (6,097) (11,228)
Property and equipment, net........................... 742 1,307 3,438 2,267 5,507
Total assets.......................................... 2,190 5,939 28,438 9,589 15,010
Line of credit, notes payable and capital lease
obligations......................................... 2,414 3,623 963 5,178 6,089
Redeemable preferred stock............................ 1,145 1,343 1,537 1,440 1,634
Stockholders' equity (deficit)........................ (2,538) (1,834) 19,586 (6,106) (5,896)
</TABLE>
19
<PAGE> 27
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
Effective March 31, 2000, Quokka Sports acquired all the outstanding common
stock and stock rights of ZoneNetwork.com, Inc. through the issuance of
1,411,639 shares of Quokka common stock. On June 8, 2000, Quokka signed a
definitive agreement to obtain a 71% ownership interest of Golf.com, L.L.C.
through the issuance of approximately 3,900,000 shares of Quokka common stock.
The acquisition was completed on October 3, 2000. On July 20, 2000, Quokka
signed a definitive agreement to acquire all the outstanding preferred and
common stock, options and warrants to Total Sports Inc. through the issuance of
up to 15,000,000 shares of Quokka common stock. All of these transactions have
been or will be accounted for using the purchase method of accounting.
The accompanying unaudited pro forma condensed combined financial data
gives effect to the consummated and probable acquisitions as if they had
occurred on June 30, 2000, and combines the Quokka historical consolidated
balance sheet at June 30, 2000, with the respective historical consolidated
balance sheets of ZoneNetwork.com, Golf.com and Total Sports. The acquisition of
ZoneNetwork.com was consummated on March 31, 2000; therefore, Quokka's
historical consolidated balance sheet at June 30, 2000 includes the allocated
purchase price for this transaction. The accompanying unaudited pro forma
condensed combined statements of operations data assume that the consummated and
probable acquisitions took place as of January 1, 1999.
The selected unaudited pro forma condensed combined financial data are
presented for illustrative purposes only and is not necessarily indicative of
the operating results that would have been achieved had the transactions been in
effect as of the beginning of the periods presented and should not be construed
as being representative of future operating results. The selected unaudited pro
forma condensed combined financial data as of June 30, 2000 and for the year
ended December 31, 1999 and for the six months ended June 30, 2000 should be
read in conjunction with the respective financial statements and the related
notes.
20
<PAGE> 28
QUOKKA SPORTS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 2000
---------------------------------------------------------------------------------------------------
HISTORICAL
------------------------ COMBINED HISTORICAL COMBINED
QUOKKA TOTAL SPORTS ADJUSTMENTS PRO FORMA GOLF.COM ADJUSTMENTS PRO FORMA
--------- ------------ ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash
equivalents............. $ 4,269 $ 1,861 $ -- $ 6,130 $ 800 $ -- $ 6,930
Restricted cash........... 3,740 -- -- 3,740 -- -- 3,740
Investments in marketable
securities.............. 15,285 -- -- 15,285 -- -- 15,285
Accounts receivable,
net..................... 11,285 1,247 -- 12,532 747 -- 13,279
Due from related party.... -- -- -- -- 75 (75)(F) --
Inventory, net............ 249 441 -- 690 -- -- 690
Deferred publishing costs,
net..................... -- 375 -- 375 -- -- 375
Acquired programming and
distribution rights,
net..................... 10,239 -- -- 10,239 -- -- 10,239
Prepaid expenses and other
current assets.......... 4,535 2,406 -- 6,941 -- -- 6,941
--------- -------- -------- --------- ------- ------- ---------
Total Current Assets.... 49,602 6,330 -- 55,932 1,622 (75) 57,479
--------- -------- -------- --------- ------- ------- ---------
Investment in affiliate... -- 153 -- 153 -- (153)(G) --
Deferred publishing costs,
net..................... -- 1,299 -- 1,299 -- -- 1,299
Property and equipment,
net..................... 14,470 5,507 -- 19,977 2 -- 19,979
Intangible assets, net.... 30,529 1,299 141,267(E) 173,095 6 23,943(E) 197,044
Other assets.............. 425 422 -- 847 -- -- 847
--------- -------- -------- --------- ------- ------- ---------
Total Assets............ $ 95,026 $ 15,010 $141,267 $251,303 $ 1,630 $23,715 $ 276,648
========= ======== ======== ========= ======= ======= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......... $ 3,715 $ 4,367 $ 8,700(D) $ 16,782 $ -- $ 350(D) $ 17,132
Accrued expenses.......... 11,599 7,071 -- 18,670 56 -- 18,726
Current portion of
long-term debt and
capitalized lease
obligations............. 6,343 4,375 -- 10,718 -- -- 10,718
Due to related party...... -- 1,134 -- 1,134 -- (75)(F) 1,059
Deferred revenues......... 4,733 611 -- 5,344 458 -- 5,802
--------- -------- -------- --------- ------- ------- ---------
Total Current
Liabilities........... 26,390 17,558 8,700 52,648 514 275 53,437
--------- -------- -------- --------- ------- ------- ---------
Notes Payable............. -- 279 -- 279 -- -- 279
Long-term debt and
capitalized lease
obligations, net of
current portion......... 8,956 1,435 -- 10,391 -- -- 10,391
--------- -------- -------- --------- ------- ------- ---------
Total Liabilities....... 35,346 19,272 8,700 63,318 514 275 64,107
--------- -------- -------- --------- ------- ------- ---------
Minority interest in
consolidated
subsidiary.............. -- -- -- -- -- 324(C) 324
STOCKHOLDERS' EQUITY
Preferred stock........... -- 3,576 (3,576)(B) -- -- -- --
Common stock.............. 5 3 (2)(A)(B) 6 -- -- 6
Additional paid-in
capital................. 164,646 56,772 71,532(A)(B) 292,950 5,540 18,692(A)(B)(G) 317,182
Warrants and other........ 7,831 -- --(B) 7,831 404 (404)(B) 7,831
Treasury stock, at cost... (107) -- -- (107) -- -- (107)
Accumulated deficit....... (112,695) (64,613) 64,613(B) (112,695) (4,828) 4,828(B) (112,695)
--------- -------- -------- --------- ------- ------- ---------
Total stockholders'
equity................ 59,680 (4,262) 132,567 187,985 1,116 23,116 212,217
--------- -------- -------- --------- ------- ------- ---------
Total liabilities and
stockholders'
equity................ $ 95,026 $ 15,010 $141,267 $251,303 $ 1,630 $23,715 $ 276,648
========= ======== ======== ========= ======= ======= =========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
financial statements.
21
<PAGE> 29
QUOKKA SPORTS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------- HISTORICAL
SIX MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, MARCH 31, JUNE 30, JUNE 30,
2000 2000 2000 COMBINED 2000
QUOKKA ZONE NETWORK TOTAL SPORTS ADJUSTMENTS PRO FORMA GOLF.COM ADJUSTMENTS
----------- ------------ ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES.................... $ 22,097 $ 1,939 $ 5,337 $ -- $ 29,373 $ 951 $ (951)(I)
COST OF REVENUE
Production and other
costs................... 17,278 2,802 8,723 -- 28,803 339 (339)(I)
Amortization of
programming and
distribution rights..... 3,618 -- -- -- 3,618 -- --
----------- ------- -------- ----------- ----------- ------ ----------
Total cost of
revenue............. 20,896 2,802 8,723 -- 32,421 339 (339)
----------- ------- -------- ----------- ----------- ------ ----------
Gross profit (loss)..... 1,201 (863) (3,386) -- (3,048) 612 (612)
----------- ------- -------- ----------- ----------- ------ ----------
OPERATING EXPENSES
Research and
engineering............. 11,425 622 3,063 -- 15,110 1,319 (1,064)(I)
Sales and marketing....... 15,642 2,494 7,741 -- 25,877 -- --
General and
administrative.......... 7,279 1,966 4,642 -- 13,887 -- --
Restructuring costs....... 588 -- -- -- 588 -- --
Depreciation and
amortization............ 7,673 201 1,285 27,813(H) 36,972 3 5,986(H)
----------- ------- -------- ----------- ----------- ------ ----------
Total operating
expenses............ 42,607 5,283 16,731 27,813 92,434 1,322 4,922
----------- ------- -------- ----------- ----------- ------ ----------
Loss from operations.... (41,406) (6,146) (20,117) (27,813) (95,482) (710) (5,534)
Minority interest in net
loss of consolidated
subsidiary................ 1,291 -- 62 -- 1,353 -- (200)(J)
Other income/(expense),
net....................... -- (19) 5 -- (14) -- --
Interest income/(expense),
net....................... 352 (123) 55 -- 284 21 --
----------- ------- -------- ----------- ----------- ------ ----------
Net loss from continuing
operations............ $ (39,763) $(6,288) $(19,995) $ (27,813) $ (93,859) $ (689) $ (5,734)
=========== ======= ======== =========== =========== ====== ==========
Pro forma net loss per
share:
Net loss per share --
basic and diluted....... $ (0.88) $ (1.54)
Weighted average shares --
basic and diluted....... 45,019,000 15,776,401 60,795,401 3,900,000
<CAPTION>
COMBINED
PRO FORMA
-----------
<S> <C>
REVENUES.................... $ 29,373
COST OF REVENUE
Production and other
costs................... 28,803
Amortization of
programming and
distribution rights..... 3,618
-----------
Total cost of
revenue............. 32,421
-----------
Gross profit (loss)..... (3,048)
-----------
OPERATING EXPENSES
Research and
engineering............. 15,365
Sales and marketing....... 25,877
General and
administrative.......... 13,887
Restructuring costs....... 588
Depreciation and
amortization............ 42,961
-----------
Total operating
expenses............ 98,678
-----------
Loss from operations.... (101,726)
Minority interest in net
loss of consolidated
subsidiary................ 1,153
Other income/(expense),
net....................... (14)
Interest income/(expense),
net....................... 305
-----------
Net loss from continuing
operations............ $ (100,282)
===========
Pro forma net loss per
share:
Net loss per share --
basic and diluted....... $ (1.55)
Weighted average shares --
basic and diluted....... 64,695,401
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
financial statements.
22
<PAGE> 30
QUOKKA SPORTS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------------------------
HISTORICAL
----------------------------------------- COMBINED
QUOKKA ZONE NETWORK TOTAL SPORTS ADJUSTMENTS PRO FORMA
----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES..................... $ 13,070 $ 4,627 $ 6,753 $ -- $ 24,450
COST OF REVENUE:
Production and other
costs.................... 20,070 4,356 9,957 -- 34,383
Amortization of programming
and distribution
rights................... 3,441 -- -- -- 3,441
----------- -------- -------- ----------- -----------
Total cost of
revenue.............. 23,511 4,356 9,957 -- 37,824
----------- -------- -------- ----------- -----------
Gross (loss) profit...... (10,441) 271 (3,204) -- (13,374)
----------- -------- -------- ----------- -----------
OPERATING EXPENSES:
Research and engineering... 13,094 3,070 4,033 -- 20,197
Sales and marketing........ 19,525 8,177 5,217 -- 32,919
General and
administrative........... 11,069 2,280 3,745 -- 17,094
Depreciation and
amortization............. 4,217 -- 1,906 64,164(H) 70,287
----------- -------- -------- ----------- -----------
Total operating
expenses............. 47,905 13,527 14,901 64,164 140,497
----------- -------- -------- ----------- -----------
Gain (loss) from
operations............. (58,346) (13,256) (18,105) (64,164) (153,871)
Loss of associated venture... (2,176) -- -- -- (2,176)
Minority interest in net loss
of consolidated
subsidiary................. 1,936 -- -- -- 1,936
Other income/(expense) net... -- (11) 131 -- 120
Interest income/(expense),
net........................ 1,702 (206) (550) -- 946
----------- -------- -------- ----------- -----------
Net loss from continuing
operations............. $ (56,884) $(13,473) $(18,524) $ (64,164) $ (153,045)
=========== ======== ======== =========== ===========
Pro forma net loss per share:
Net loss per share -- basic
and diluted.............. $ (1.45) $ (2.83)
Weighted average shares --
basic and diluted........ 39,366,000 14,770,475 54,136,475
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
---------------------------------------
HISTORICAL COMBINED
GOLF.COM ADJUSTMENTS PRO FORMA
---------- ----------- -----------
<S> <C> <C> <C>
REVENUES..................... $ 1,354 $ (1,354)(I) $ 24,450
COST OF REVENUE:
Production and other
costs.................... 611 (611)(I) 34,383
Amortization of programming
and distribution
rights................... -- -- 3,441
------- ---------- -----------
Total cost of
revenue.............. 611 (611) 37,824
------- ---------- -----------
Gross (loss) profit...... 743 (743) (13,374)
------- ---------- -----------
OPERATING EXPENSES:
Research and engineering... 1,741 (1,507)(I) 20,431
Sales and marketing........ -- -- 32,919
General and
administrative........... -- -- 17,094
Depreciation and
amortization............. 14 11,972(H) 82,273
------- ---------- -----------
Total operating
expenses............. 1,755 10,465 152,717
------- ---------- -----------
Gain (loss) from
operations............. (1,012) (11,208) (166,091)
Loss of associated venture... -- -- (2,176)
Minority interest in net loss
of consolidated
subsidiary................. -- (291)(J) 1,645
Other income/(expense) net... -- -- 120
Interest income/(expense),
net........................ 7 -- 953
------- ---------- -----------
Net loss from continuing
operations............. $(1,005) $ (11,499) $ (165,549)
======= ========== ===========
Pro forma net loss per share:
Net loss per share -- basic
and diluted.............. $ (2.87)
Weighted average shares --
basic and diluted........ 3,510,000 57,646,475
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
financial statements.
23
<PAGE> 31
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(UNAUDITED)
Effective March 31, 2000, Quokka Sports acquired all the outstanding
capital stock and stock rights of ZoneNetwork.com, Inc. through the issuance of
1,411,639 shares of Quokka common stock for a total purchase price of
approximately $25.9 million including acquisition costs. ZoneNetwork.com
produces and operates web sites that offer digital content, products and
services targeted to enthusiasts of skiing, climbing, hiking, snowboarding,
adventure racing and mountain biking. As consideration for the transaction,
0.07193 of a share of Quokka common stock was issued for each outstanding share
of the common stock and preferred stock of ZoneNetwork.com; Quokka paid cash in
lieu of fractional shares. Outstanding options and warrants for ZoneNetwork.com
capital stock were assumed by Quokka and were automatically converted into
options and warrants for Quokka common stock at the same exchange ratio, except
an outstanding warrant to purchase 169,503 shares of the series B preferred
stock of ZoneNetwork.com was automatically converted into a warrant to purchase
23,849 shares of Quokka common stock. Approximately ten percent of such shares
were placed in escrow to secure certain indemnification obligations contained in
the agreement. Subject to outstanding claims, the escrow will terminate upon the
earlier of (a) the date 30 days following the receipt by Quokka of four full
fiscal quarters of audited financial statements of ZoneNetwork.com and (b) May
15, 2001. Of the total purchase price, approximately $34.2 million was allocated
to intangible assets, including assembled workforce, customer base and goodwill.
The intangible assets are being amortized over their estimated useful lives of
two years.
On June 8, 2000, the Company signed a definitive agreement to obtain a 71%
ownership interest of Golf.com, L.L.C. through the issuance of approximately
3,900,000 shares of Quokka common stock for a total purchase price of
approximately $24.6 million including acquisition costs. The acquisition was
completed on October 3, 2000. Golf.com is in the business of developing,
marketing and distributing a golf related electronic on-line service to be
accessed via the Internet. Of the purchase price, approximately $1.1 million
will be allocated to net assets, and the remainder will be allocated to
identified intangible assets with any remaining purchase price allocated to
goodwill. The acquired intangible assets will be amortized over their estimated
useful life of two years.
On July 20, 2000, Quokka signed a definitive agreement to acquire all the
outstanding preferred and common stock, options and warrants of Total Sports
Inc. through the issuance of up to 15,000,000 shares of the Quokka common stock.
The purchase price using an average stock price around the date the transaction
was announced was approximately $138.0 million including acquisition costs. Of
the purchase price, approximately $4.3 million will be allocated to net
liabilities assumed, and the remainder will be allocated to identified
intangible assets with any remaining purchase price allocated to goodwill. The
acquired intangible assets will be amortized over their estimated useful life of
three years. Total Sports is an event-centered online sports media company.
Quokka's management believes that the pending acquisition of Total Sports is a
probable acquisition.
These consummated and probable acquisitions have been or will be accounted
for using the purchase method of accounting and accordingly the purchase price
has been or will be allocated to the tangible and intangible assets acquired and
the liabilities assumed on the basis of their respective fair values on the
acquisition date. The purchase price assumed for the Total Sports acquisition is
an initial estimate of the purchase price and is subject to change. The purchase
price allocation for the Total Sports acquisition is based upon a preliminary
valuation. These valuations could change when finalized upon closing of the
acquisitions, based upon the facts and circumstances at that time. A change in
the purchase price or the allocation of the purchase price would effect the
value assigned to the tangible and intangible assets and therefore could have a
material effect on actual future results of Quokka.
24
<PAGE> 32
The following pro forma adjustments have been made to the historical
financial statements of Quokka, ZoneNetwork.com, Golf.com and Total Sports based
upon assumptions made by management for the purpose of preparing the unaudited
pro forma condensed combined financial statements:
(A) Record common stock issued for the acquisitions.
(B) Eliminate the members' and shareholders' equity accounts of Golf.com
and Total Sports.
(C) Record the minority interest in Golf.com.
(D) Record estimated transaction costs.
(E) Record the excess of acquisition costs over the fair value of net
assets acquired (goodwill) at June 30, 2000 associated with the
acquisitions of Golf.com and Total Sports. Approximately $23.9 million
and $141.3 million will be allocated to intangible assets, including
assembled workforce, customer base and goodwill in connection with the
Golf.com and Total Sports acquisitions respectively.
(F) Eliminate the intercompany payables/receivables, which were between
Golf.com and Total Sports.
(G) Eliminate Total Sports' investment in Golf.com.
(H) Reflect amortization of goodwill and other purchased intangibles
associated with the acquisitions of ZoneNetwork.com, Golf.com and Total
Sports over the following periods:
ZoneNetwork.com -- Two years
Golf.com -- Two years
Total Sports -- Three years
(I) Eliminate the revenue and expenses recorded on the books of both
Golf.com and Total Sports, due to Total Sports' recording of such items
in accordance with the related operating agreement.
(J) Eliminate the minority interest in net loss of Golf.com.
The proforma financial statements were not tax affected since Quokka,
Golf.com and Total Sports are in net operating loss positions and accordingly, a
full valuation allowance would be recorded.
The pro forma combined basic net loss per share is based on the combined
historical weighted average number of common shares of Quokka's common stock for
each period, adjusted for the issuance of 1,411,639 shares of Quokka's common
stock for 100% ownership of ZoneNetwork.com, 3,900,000 shares of Quokka's common
stock for 71% ownership interest of Golf.com, and 15,000,000 shares of Quokka's
common stock for 100% ownership of Total Sports. The adjustment to historical
weighted average shares outstanding results from inclusion of actual shares
issued or estimated shares to be issued in conjunction with the consummated or
pending acquisitions, respectively, as if such shares were outstanding from
January 1, 1999. In accordance with the definitive agreements, approximately 10%
of the stock consideration to ZoneNetwork.com, Golf.com and Total Sports
(approximately 141,164, 390,000 and 1,500,000 shares, respectively) will be held
in a time-lapsing escrow account and have been excluded from the pro forma basic
and diluted net loss per share for the year ended December 31, 1999.
25
<PAGE> 33
COMPARATIVE PER SHARE DATA
The following tabulation reflects (a) the historical net income and book
value per share of Quokka common stock in comparison with the pro forma net
income and book value per share after giving effect to the completed acquisition
of 71% of the ownership of Golf.com and proposed merger with Total Sports and
(b) the historical net income and book value per unit of Golf.com membership
interest and per share of Total Sports common stock in comparison with the
equivalent pro forma net income and book value per share attributable to
3,890,150 shares of Quokka common stock that will be received for each unit of
Golf.com to be purchased in the Golf.com acquisition, and 15,000,000 shares of
Quokka common stock for each share of Total Sports capital stock and each option
and warrant to acquire Total Sports capital stock. The information presented in
this tabulation should be read in conjunction with the pro forma combined
financial statements and the separate financial statements of the respective
companies and the notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1999 2000
------------ ----------------
<S> <C> <C>
QUOKKA SPORTS
Net loss from continuing operations:
Historical................................................ $ (1.45) $ (0.88)
Pro forma................................................. $ (2.87) $ (1.55)
Book value:
Historical................................................ $ 1.30
Pro forma................................................. $ 3.36
GOLF.COM
Net loss from continuing operations:
Historical................................................ $ (6,205.06) $ (4,219.80)
Equivalent pro forma(1)................................... $ 96,307.93 $(51,982.50)
Book value:
Historical................................................ $ 6,810.24
Equivalent pro forma(1)................................... $112,825.04
TOTAL SPORTS
Net loss from continuing operations:
Historical................................................ $ (10.52) $ (10.23)
Equivalent pro forma(2)................................... $ (5.08) $ (2.74)
Book value:
Historical(3)............................................. $ (1.47)
Equivalent pro forma(2)................................... $ 5.95
</TABLE>
-------------------------
(1) Pro forma amounts for Quokka Sports multiplied by 33,535.78:1 (the ratio of
exchange).
(2) Pro forma amounts for Quokka Sports multiplied by 1.77:1 (the ratio of
exchange).
(3) Book value per share for Total Sports has been calculated as assets less
liabilities excluding series A redemption value, divided by the number of
common stock outstanding at June 30, 2000. Book value per share including
the series A redemption value is $2.04.
26
<PAGE> 34
RISK FACTORS
By voting to approve the merger agreement, Total Sports stockholders will
be choosing to invest in Quokka common stock. When you decide whether to vote
for approval of the merger agreement, you should consider the following factors
in conjunction with the other information included in this joint proxy
statement/prospectus. Quokka stockholders should consider the factors identified
under "-- Risks Relating To The Private Placement" in conjunction with the other
information about the private placement included in this joint proxy
statement/prospectus when deciding whether to vote for approval of the issuance
of common stock upon conversion of Quokka's 7.0% convertible promissory notes
and upon exercise of the related warrants that were issued in a private
placement on September 15, 2000.
RISKS RELATING TO THE MERGER
TOTAL SPORTS' SECURITYHOLDERS WILL RECEIVE A FIXED AGGREGATE NUMBER OF SHARES OF
QUOKKA COMMON STOCK IN THE MERGER, NOT A FIXED VALUE AND YOUR PORTION OF THOSE
SHARES MAY VARY.
Upon completion of the merger, each of your Total Sports shares will be
converted into a number of shares of Quokka common stock based on the exchange
ratios defined in the merger agreement. These exchange ratios depend upon the
value of the Quokka common stock to be received in the merger and the rights,
preferences and privileges of the various classes of Total Sports capital stock.
For example, the share price of Quokka common stock on July 20, 2000, the last
full trading day prior to the announcement of the merger, was $9.00. If the
share price of Quokka stock is $9.00 at the time the merger is completed,
holders of Total Sports common stock and series E preferred stock would not
receive any shares of Quokka common stock in the merger, and holders of options
and warrants to purchase Total Sports common stock and series E preferred stock
would not be entitled to receive any options or warrants to purchase Quokka
common stock. These and other classes of Total Sports capital stock may be
similarly affected at varying price levels of Quokka stock. Accordingly, the
number of shares that Total Sports stockholders will receive in the merger will
fluctuate as the market price of Quokka common stock changes. The merger
agreement neither provides for any adjustments in the exchange ratios nor
affords any termination rights to either Total Sports or Quokka based solely on
fluctuations in the market price of Quokka common stock. Recently, the stock
market and, in particular, the securities of Internet companies have experienced
extreme price and volume fluctuations. These market fluctuations may adversely
affect the market price of Quokka common stock. The market price of Quokka
common stock upon and after completion of the merger could be lower than the
market price on the date of the merger agreement or the current market price.
You should obtain recent market quotations for Quokka common stock before you
vote on the merger.
IF QUOKKA AND TOTAL SPORTS ARE NOT SUCCESSFUL IN INTEGRATING THEIR
ORGANIZATIONS, THE COMBINED COMPANY MAY BE UNABLE TO OPERATE EFFICIENTLY AFTER
THE MERGER.
The combined company's ability to operate efficiently after the merger will
depend in part on the integration of Quokka's and Total Sports's operations and
personnel in a timely and efficient manner. In order for the combined company to
provide enhanced and more valuable content and services to its customers after
the merger, the combined company will need to integrate its operations,
technology and content. This integration may be difficult and unpredictable
because Quokka's web sites and Total Sports' web sites have been developed
independently and were designed without regard to integration. Successful
integration of the two companies' operations, technology and content also
requires coordination of different development and engineering teams, as well as
sales and marketing efforts and personnel. This, too, may be difficult and
unpredictable because of possible cultural conflicts between Quokka and Total
Sports as well as difficulties related to the geographical separation of the two
companies' primary operations. If the two companies cannot successfully
integrate their operations, technology and personnel, the combined company may
not be able to operate efficiently or realize the expected benefits of the
merger.
27
<PAGE> 35
EFFORTS TO INTEGRATE QUOKKA AND TOTAL SPORTS MAY DIVERT MANAGEMENT'S ATTENTION
AWAY FROM DAY-TO-DAY OPERATIONS.
The integration of Quokka's and Total Sports's operations and personnel may
place a significant burden on the combined company's management and other
internal resources. The diversion of management attention and any difficulties
encountered in the transition and integration process could prevent the combined
company from operating efficiently.
QUOKKA EXPECTS TO INCUR SIGNIFICANT COSTS TO INTEGRATE THE COMPANIES INTO A
SINGLE BUSINESS.
Quokka expects to incur costs from integrating Total Sports' operations,
technology and personnel. These costs may be significant and may include
expenses and other liabilities for:
- employee redeployment, relocation or severance;
- conversion of information systems;
- increased travel and communications systems;
- combining teams and processes in various functional areas; and
- reorganization or closures of facilities.
The integration costs incurred by Quokka may negatively impact the
financial condition of the combined company and the market price of Quokka
common stock.
FAILURE TO RETAIN KEY EMPLOYEES COULD DIMINISH THE ANTICIPATED BENEFITS OF THE
MERGER.
The successful combination of Quokka and Total Sports will depend in part
on the retention of personnel critical to the business and operations of the
combined company due to, for example, unique technical skills or management
expertise. The combined company may be unable to retain Quokka and Total Sports
management, technical, production, sales and marketing personnel that are
critical to the successful integration of Quokka and Total Sports, resulting in
disruption of operations, loss of key information, expertise or know-how and
unanticipated additional recruitment and training costs and otherwise
diminishing anticipated benefits of the merger.
FAILURE TO COMPLETE THE MERGER COULD CAUSE A DECREASE IN THE VALUE OF TOTAL
SPORTS STOCK.
If the merger is not completed for any reason, the value of Total Sports
stock may decline due to any or all of the following potential consequences:
- Total Sports may become obligated to pay Quokka a termination fee of $7.5
million;
- costs related to the merger, such as legal, accounting and financial
advisor fees, must be paid even if the merger is not completed; and
- Total Sports may have difficulty in retaining its key management,
technical and sales personnel.
In addition, if the merger is not completed and Total Sports' board of
directors determines to seek another business combination, Total Sports may be
unable to find a partner willing to pay an equivalent or more attractive price
than that which Quokka has agreed to pay in the merger, which could further
depress the value of Total Sports stock.
CERTAIN REGULATORY AGENCIES MUST APPROVE THE MERGER AND COULD IMPOSE CONDITIONS
ON, DELAY OR REFUSE TO APPROVE THE MERGER.
To complete the merger, Quokka and Total Sports must obtain approvals or
consents from certain federal regulatory commissions and other government
agencies. These agencies may seek to impose conditions on Quokka or Total Sports
before giving their approval or consent, and those conditions could harm the
combined company's business. In addition, a delay in obtaining the requisite
regulatory approvals
28
<PAGE> 36
will delay the completion of the merger. The companies may be unable to obtain
the required regulatory approvals, or obtain them within the time frame
contemplated in the merger agreement.
RISKS RELATING TO QUOKKA
WE HAVE A HISTORY OF OPERATING LOSSES, EXPECT TO INCUR LOSSES FOR AT LEAST THE
NEXT EIGHT QUARTERS AND MAY BE UNABLE TO ACHIEVE OR SUSTAIN PROFITABILITY OR
GENERATE POSITIVE CASH FLOW.
We expect to incur losses for at least the next eight quarters, largely due
to substantial planned increases in marketing expenses and expenses associated
with our digital sports entertainment programming. We may be unable to generate
sufficient revenues or control operating expenses to achieve or sustain
profitability or generate positive cash flow. We adopted our current business
model in August 1996 and began generating revenues in connection with this model
during the first quarter of 1997. As of June 30, 2000, we had an accumulated
deficit of $112.7 million. Our net operating losses were $39.8 million for the
six months ended June 30, 2000, $56.9 million for the year ended December 31,
1999 and $9.5 million for the year ended December 31, 1998. Cash used in
operating activities was $34.0 million for the six months ended June 30, 2000,
$48.3 million for the year ended December 31, 1999 and $10.9 million for the
year ended December 31, 1998.
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;
- acquire and integrate other media and technology companies;
- 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.
29
<PAGE> 37
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 quarter ended
June 30, 2000 were $12.6 million compared to revenues of $2.6 million for the
quarter ended June 30, 1999 and revenues of $9.5 million for the prior quarter
ended March 31, 2000. These fluctuations depend on a number of factors described
below and elsewhere in this "Risk Factors" section of this document, 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
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, content syndication and consumer revenue
transactions we execute. We expect that our consumer 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.
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. As of June 30, 2000, two sponsors accounted for 38% of our
revenues. In 1999, three sponsors accounted for 65% of our revenues. In 1998,
two sponsors accounted for 68% of our revenues. We anticipate that our results
of operations will continue to depend, to a significant extent, upon revenues
from a small number of digital entertainment sponsors. The loss of one or more
sponsors could negatively affect our business. Although we seek to enter into
multi-year agreements with sponsors, we cannot guarantee that these sponsors
will maintain their association with us. Certain of our 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 sponsorship agreement could
materially affect our sponsorship revenue backlog, and our business and
financial results would suffer. For example, we recently agreed with Compaq
Computer Corporation to terminate its sponsorship agreement with us at the end
of 2000. If we are unable to obtain additional sponsors to replace the revenue
forecasted for 2001 and 2002 under the Compaq digital entertainment partnership
agreement, our financial results would be adversely affected.
30
<PAGE> 38
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
Intel Online Services in Santa Clara, California and Frontier Global Center in
Sunnyvale, California, where our web sites are hosted. Our Olympics web site is
hosted by IBM at their facilities located in Redwood City, California, Bethesda,
Maryland and Schaumburg, Illinois. 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 any of our hosting services facilities 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 formally documented 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 the Quokka Sports
Network brand as well as the brands of individual sport verticals within our
network. We plan to continue to market each of these brands 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 the three months ended June 30, 2000, we spent
$3.9 million for advertising and $7.7 million for the year ended December 31,
1999. We expect to significantly increase our advertising expenses in future
periods as we build the Quokka brands and awareness of our properties in our
network. We may lack the resources necessary to accomplish these initiatives.
Even if the resources are available, we cannot be certain that our multi-brand
enhancement strategy will deliver the brand recognition and favorable audience
perception that we seek for any of our brands. 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 brands, 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
31
<PAGE> 39
additional rights or secure sponsorships. Our agreements with these parties
enable 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. Recently, we amended our agreement with Dorna Promocion del
Deporte, S.A. to expire at the end of December 2000. If we are unable to
conclude an agreement with Dorna to extend our rights beyond 2000, the breadth
of the programming on the Quokka Sports Network may suffer.
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.
If appropriate opportunities arise, we intend to acquire businesses,
technologies, services or products that we believe are strategic for our
success. For example, we recently acquired a majority of the ownership interests
in Golf.com. L.L.C. We also recently signed an agreement to acquire all of the
capital interests of Total Sports Inc. We may be unable to complete the Total
Sports transaction if any of the conditions set forth in that agreement, such as
the approval of that transaction by Quokka's stockholders, are not met. The
digital sports entertainment industry is new, highly competitive and rapidly
changing. We believe these industry dynamics could result in a high level of
acquisition activity as companies seek to gain competitive advantage.
Competitive forces could require us to acquire companies or technology. Our
competitive position in the 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. We may be
unable to identify, negotiate or finance future acquisitions successfully, or to
integrate successfully any acquisitions with our current business. The process
of integrating an acquired business, technology, service or product into our
business and operations may result in unforeseen operating difficulties and
expenditures, including the allocation of significant management time and
company resources that would otherwise be available for ongoing development of
our business. Moreover, the anticipated benefits of any acquisition may not be
realized.
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 IBM, Intel Online Services and Frontier GlobalCenter, each of
which hosts some of 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
history with the IBM and Intel Online Services facilities is very short and we
cannot be certain that similar problems will be avoided at these other
facilities.
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 consumer revenue transactions. In addition,
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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. Also, our ability to generate content syndication revenue depends on
whether other media companies value our content and are willing to pay for that
content.
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. 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.
In addition, the size and scope of the 2000 Olympics in Sydney, Australia will
require us to devote a substantial amount of our resources to that programming.
We may be unable to effectively cover our other properties during our Olympics
coverage and our operating results may be adversely affected.
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. 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 other sponsors and advertisers, 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.
OUR SPONSORSHIP MODEL COULD PREVENT US FROM ACQUIRING CRITICAL TECHNOLOGY, WHICH
COULD AFFECT THE QUALITY OF OUR PROGRAMMING.
As a significant feature of some of our sponsorships we offer 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 particular
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
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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.
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 sports events, particularly 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, expeditions to Mount
Everest 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 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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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 382 employees
at June 30, 2000, compared to 284 employees at December 31, 1999 and 118
employees at December 31, 1998. 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.
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 DIGITAL MEDIA NETWORKS 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 digital
media networks, including the Internet and broadband networks. 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 digital media 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, hacker attacks 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 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.
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THE ONLINE DIGITAL SPORTS ENTERTAINMENT INDUSTRY IS INTENSELY COMPETITIVE, AND
WE MAY BE UNABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE COMPETITORS.
The market for Internet services and products is relatively new, intensely
competitive and rapidly changing. Since the Internet's commercialization in the
early 1990's, the number of web sites on the Internet competing for consumers'
attention and spending has proliferated. We expect that competition will
continue to intensify. We may be unable to compete successfully against current
and future competitors.
Many of our current and potential competitors have significantly longer
operating histories, greater financial, technical and marketing resources,
greater name recognition and larger user or membership bases than us and,
therefore may have a significantly greater ability to attract advertisers and
users. In addition, many of these competitors may be able to respond more
quickly to new or emerging technologies and changes in Internet user
requirements and to devote greater resources to the development, promotion and
sale of their services. Our current or potential competitors may develop
products and services comparable or superior to those developed by us. Increased
competition could result in price reductions, reduced margins or loss of market
share, any of which would harm our business. In addition, as we expand
internationally, we may face new competition.
We compete, directly and indirectly, for sponsors, rights and the attention
of sports viewers with the following categories of companies:
- web sites targeted to sports enthusiasts generally, such as
www.cbs.sportsline.com, www.cnnsi.com and www.espn.com, many of which
have been established by traditional media companies, and web sites
targeted to enthusiasts of particular sports, such as
www.majorleaguebaseball.com, www.nascar.com, www.nba.com, www.nfl.com and
www.nhl.com;
- publishers and distributors of traditional media targeted to sports
enthusiasts, such as the ESPN networks, the FoxSports network and Sports
Illustrated;
- online services such as America Online and the Microsoft Network, which
provide access to sports-related content and services;
- vendors of sports information, merchandise, products and services
distributed through other means, including retail stores, mail, facsimile
and private bulletin board services; and
- web search and retrieval services, such as Excite, Infoseek, Lycos and
Yahoo! and other high-traffic web sites, such as those operated by Cnet
and Netscape.
We expect that the number of our direct and indirect competitors will
increase in the future. We anticipate that, as the Internet and other
interactive distribution systems converge with traditional television
broadcasting and cable, significant competition may come from the cable arena,
including such sports-oriented cable networks as the ESPN networks.
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
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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;
- 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.
SALES OF OUR SHARES 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 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.
Stockholders beneficially owing in the aggregate approximately 26.7 million
shares of our common stock have entered into voting agreements and proxies in
connection with our merger agreement with Total Sports to vote in favor of our
pending merger with Total Sports at our special stockholders meeting to approve
that merger transaction. Under the terms of those voting agreements with Total
Sports, those Quokka stockholders have agreed not to sell or otherwise transfer
their shares of Quokka stock unless that merger agreement is terminated or
unless Total Sports agrees to release those stockholders from the obligations of
the Total Sports voting agreements and proxies. Any shares subject to these
voting agreements may be released at any time by Total Sports with or without
notice. Upon the closing of our pending merger with Total Sports, or the earlier
termination of the voting agreements, the stock held by those stockholders will
be released from those contractual obligations restricting transfer and sale.
In addition, we recently completed two transactions in which we issued
instruments which are convertible into or exercisable for Quokka common stock.
In August 2000, we issued to National Broadcasting Company, Inc. a warrant to
purchase up to 10.0 million shares of our common stock at varying prices from
$8.89 to $20.00 per share. The warrant expires at the end of December 2004 and
the first portion of the warrant is exercisable in June 2001. If NBC elects to
exercise this warrant, your ownership in Quokka will be diluted. If NBC
subsequently sells its shares, the market price for our stock could be adversely
affected. On September 15, 2000, we closed a private placement of 7.0%
convertible promissory notes in an aggregate face amount of $77.4 million and
warrants to purchase an aggregate of 2,805,750 shares of Quokka common stock. If
the noteholders convert their notes or exercise their warrants, your ownership
in Quokka will be diluted. If these holders subsequently sell their shares, the
market price for our stock could be adversely affected. The private placement is
discussed in more detail in the section of this joint proxy statement/prospectus
entitled "Approval Of The Issuance Of Common Stock Upon Conversion Of Quokka's
7.0% Convertible Promissory Notes And Upon Exercise Of The Related Warrants."
For a further discussion see "-- Risks Relating to the Private Placement -- You
will experience dilution upon the conversion of notes and exercise of warrants
issued in the private placement and may experience additional dilution if the
conversion price of the notes is adjusted downward or if we elect to pay
interest on the notes with payments-in-kind rather than cash."
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WE MAY NEED TO RAISE ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE ON FAVORABLE
TERMS AND COULD RESULT IN ADDITIONAL DILUTION.
We believe that our current capital reserves will be sufficient to fund our
operating requirements for at least the next 12 months. Thereafter, we may 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. If
additional funds are raised through the issuance of equity or convertible debt
securities, the percentage ownership of our stockholders will be diluted and the
securities issued may have rights, preferences and privileges senior to those of
our common stock.
ACCEPTANCE OF PROPERTY OR SERVICES AS PAYMENT MAY PROVIDE LESS WORKING CAPITAL
FLEXIBILITY THAN A CASH PAYMENT WOULD PROVIDE.
We have received property or services, including computer equipment,
Internet access, digital cameras and telecommunications equipment and services
as payment for some of our sponsorships. While these property and services allow
us to develop and distribute our programming content, they do not provide us
with the same working capital flexibility that a cash payment would provide. We
expect to reduce the amount of property and services accepted as payment in
future periods, but may not be successful in doing so.
WE HAVE LIMITED EXPERIENCE GENERATING CONSUMER REVENUES FROM THE SALE OF
PRODUCTS AND SERVICES, AND WE MAY NOT BE ABLE TO DO SO IF WE ARE UNABLE TO
DEVELOP AND IMPLEMENT A SUCCESSFUL STRATEGY, DEVELOP A SUCCESSFUL LINE OF
PRODUCT MERCHANDISE, OVERCOME INTERNET SECURITY CONCERNS OR RESPOND TO
COMPETITIVE PRICING.
A key component of our business model includes selling products associated
with our sports entertainment programming. We have only recently begun
generating revenues from the sale of products and services. If we are unable to
develop and implement a successful strategy, develop a successful line of
product merchandise that appeals to a broad audience, overcome Internet security
concerns or respond to competitive pricing, we may be unable to generate
consumer revenues.
The need to securely transmit confidential information over the Internet
has been a significant barrier to electronic commerce and communications over
the Internet. Any compromise of security could deter people from using the
Internet and our web sites to conduct transactions that involve transmitting
confidential information. We may need to expend significant resources to protect
against security breaches or to address problems caused by such breaches. Even
if we are able to overcome Internet security concerns, individuals may not buy
our products, resulting in revenues from consumer that fall short of the cost of
our strategy. Many Internet companies engaged in electronic commerce are losing
money. Additionally, many of our current and potential competitors may have
significantly greater resources and more favorable cost structures than we do
and may be able to price comparable products at levels we are unable to match
without incurring unacceptable operating losses.
We recently decided to enter into a relationship with a service provider
for the back-end infrastructure, inventory and customer care processes for a
portion of our electronic commerce business. We have no experience managing this
type of relationship and may be unable to realize the anticipated cost savings
and increased consumer revenues. After becoming familiar with our service
provider, individuals may decide to purchase products directly from them and we
may lose consumer revenues. We may experience lower viewing time on our web
sites if viewers are diverted from our web sites to our service provider's web
site.
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.
Many of our events, including sailing, motor sports and mountain climbing,
involve significant risks to athletes and our employees that participate in or
document the events. Additionally, many of our events
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take place in regions of the world where there may be increased danger of
external threats such as terrorism. We will experience adverse publicity, and
may be subject to liability claims by athletes, employees or their relatives,
for injuries or deaths that occur as a result of our events. Any incidents like
this during our events could disrupt our programming and reduce sponsorships and
athlete and employee participation in future events. Liability claims,
regardless of merit, could require us to expend significant resources.
Additionally, while we obtain insurance coverage with respect to each event
based on the risks and exposure we face in that event, our insurance coverage
may be inadequate to protect us against any claims.
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.
We regard the protection of our copyrights, service marks, trademarks,
trade dress and trade secrets as critical to our success. We rely on a
combination of copyright, trademark, service mark, patent and trade secret laws
and contractual restrictions to protect our proprietary rights in products and
services. While we actively protect and enforce our intellectual property
rights, we may be unable to prevent others from misappropriating our technology
and may be subject to claims of infringement by others. The enforcement of our
intellectual property rights could be time-consuming, result in costly
litigation and the diversion of technical and management personnel. We have
entered into confidentiality and invention assignment agreements with our
employees and contractors and nondisclosure agreements with parties with which
we conduct significant business to limit access to and disclosure of our
proprietary information. These contractual arrangements and the other measures
taken by us to protect our intellectual property may not prevent
misappropriation of our technology or deter independent third-party development
of similar technologies. In addition, we may need to engage in litigation to
enforce our intellectual property rights in the future or to determine the
validity and scope of the proprietary rights of others. This litigation could
result in substantial costs and diversion of management and other resources.
We pursue the registration of our trademarks and service marks in the
United States and internationally. We have also filed four patent applications
in the United States Patent and Trademark Office. Effective trademark, service
mark, copyright, patent and trade secret protection may not be available in
every country in which our programming is accessible online. We have licensed in
the past, and expect to license in the future, some of our proprietary rights,
including trademarks or copyrighted material, to third parties. These licensees
may take actions that might adversely affect the value of our proprietary rights
or reputation. We also rely on off-the-shelf technologies that we license from
third parties. "Off-the-shelf" technology refers to generally commercially
available software that is not customized for a particular user. These
third-party licenses may not continue to be available to us on commercially
reasonable terms or at all. The inability to use licensed technology important
to our business could require us to obtain substitute technology of lower
quality or performance standards or at greater cost. In the future, we may seek
to license additional technology or content to enhance our current programming
or to introduce new content. We cannot be certain that any such licenses will be
available on commercially reasonable terms or at all. The loss of or inability
to obtain or maintain any of these technology licenses could result in delays in
providing our programming until equivalent technology, if available, is
identified, licensed and integrated.
Because we license some data and content from third parties, we must rely
upon these third parties for information as to the origin and ownership of the
licensed content and our exposure to copyright infringement actions may
increase. We generally obtain representations as to the origins and ownership of
licensed content and obtain indemnification to cover any breach of any
representations. However, we cannot be certain that these representations are
accurate or that any indemnification amounts will be sufficient to provide
adequate compensation for any breach of representations.
We cannot guarantee that infringement or other claims will not be asserted
or prosecuted against us in the future whether resulting from our internally
developed intellectual property or licenses or content from third parties. Any
future assertions or prosecutions could be time-consuming, result in costly
litigation
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and diversion of technical and management personnel or require us to introduce
new content or trademarks, develop non-infringing technology or enter into
royalty or licensing agreements. These royalty or licensing agreements, if
required, may not be available on acceptable terms, if at all. Our ability to
execute on our business strategy will suffer if a successful claim of
infringement is brought against us and we are unable to introduce new content or
trademarks, develop non-infringing technology or license the infringed or
similar technology on a timely basis.
REVENUES FROM SUBSCRIPTION SERVICES MAY FAIL TO DEVELOP, WHICH WOULD HARM OUR
RESULTS OF OPERATIONS.
While we intend to generate revenues through subscription services that
provide access to premium content and pay-per-view events, we have no experience
in doing so and our failure to generate revenues from these sources would harm
our results of operations. While subscription services are a viable business
alternative to cover sporting events on television, subscription services for
our programming may not develop for a variety of reasons. These include:
- our failure to develop and implement a successful strategy for
subscription services;
- delays in the development of broadband systems that enable increased
bandwidth for content and provide faster access for consumers;
- consumers' unwillingness to pay for the programming offered through
subscription services;
- prohibitive costs of producing higher quality programming for
subscription services; and
- security concerns in transmitting payment information for the
subscription services.
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 are subject to the same federal, state and local laws as other
businesses on the Internet. Today there are relatively few laws directed towards
online services. However, due to the increasing popularity and use of the
Internet and other online services, it is possible that a number of laws and
regulations may be adopted with respect to the Internet or other online
services. Changes in regulation of the Internet could affect our results of
operations. These laws and regulations could cover issues such as user privacy,
freedom of expression, pricing, fraud, content and quality of products and
services, taxation, advertising, intellectual property rights and information
security. Applicability to the Internet of existing laws governing issues such
as property ownership, copyrights and other intellectual property issues,
taxation, libel, obscenity and personal privacy is uncertain. The vast majority
of these laws were adopted prior to the advent of the Internet and related
technologies and, as a result, do not contemplate or address the unique issues
of the Internet and related technologies. Those laws that do reference the
Internet, such as the recently passed Digital Millennium Copyright Act, have not
yet been interpreted by the courts and their applicability and reach are
therefore uncertain.
Several states have also proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has also initiated
action against at least one online service regarding the manner in which
personal information is collected from users and provided to third parties.
While we do not sell information about users on our sites, we have historically
collected demographic data about our users to assist us in marketing our
sponsorship arrangements. Changes to existing laws or the passage of new laws
intended to address these issues, including some recently proposed changes,
could directly affect the way we do business or could create uncertainty in the
marketplace.
In addition to government regulation of the Internet, businesses and other
organizations may restrict access to the Internet at work. Many users access the
Internet through computer terminals at work, either because they do not have
access at home or because the networks at work provide faster and more reliable
access. Access at work may increase if employers upgrade their technology more
quickly than individual consumers in response to the development of broadband
solutions. In response to Internet use by
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employees or consultants at work, employers may impose regulations limiting or
eliminating Internet or broadband access on their equipment. To the extent that
many of our users access our web sites at work, our audience could diminish if
businesses and other organizations restrict Internet access at work.
RISKS RELATING TO THE PRIVATE PLACEMENT
THE NOTES AND RELATED PAYMENT OBLIGATIONS COULD RESTRICT OUR FINANCIAL
FLEXIBILITY AND FUTURE PROSPECTS.
We have incurred significant leverage as a result of the issuance on
September 15, 2000 of our 7.0% convertible subordinated notes due September 2005
in the aggregate principal amount of approximately $77.4 million. If the notes
have not been converted into our common stock prior to their maturity and if
other financing has not been obtained to refinance the notes prior to that time,
a substantial portion of our cash flows would be required to repay the
outstanding principal of the notes at that time. In addition, some holders of
the notes may require that quarterly interest payments on the notes be made in
cash, and any such cash payments would reduce the funds available for other
corporate purposes. Furthermore, our ability to obtain additional financing for
working capital, capital expenditures, acquisitions, general corporate purposes
or other purposes may be impaired in the future because of the outstanding
notes. Finally, our substantial degree of leverage may limit our flexibility to
adjust to changing market conditions, place us at a disadvantage relative to our
competitors, reduce our ability to withstand competitive pressures and make us
more vulnerable to a downturn in general economic conditions or our business.
OUR COMMON STOCK IS SUBORDINATE TO THE NOTES UPON ANY LIQUIDATION OR BANKRUPTCY
AND WILL ONLY BE PAID IF FUNDS OR ASSETS REMAIN AFTER FULL PAYMENT TO THE
NOTEHOLDERS.
In the event of a liquidation or bankruptcy or other similar event, the
notes will rank senior to the common stock upon any distribution. Accordingly,
upon such a distribution event, the holders of our outstanding common stock will
receive a smaller amount of the distribution than their ownership percentage in
the company may suggest and will only receive a payment if funds or assets
remain after full payment to the noteholders.
IF WE FAIL TO OBTAIN STOCKHOLDER APPROVAL BY NOVEMBER 15, 2000, WE MAY BE
REQUIRED TO REDEEM THE NOTES AT A PREMIUM REDEMPTION PRICE.
To satisfy Nasdaq rules and regulations, we have agreed to obtain the
approval of our stockholders for the issuance of the common stock underlying the
notes and warrants that may exceed 19.99% of our outstanding common stock on
September 15, 2000 and that could result in a change of control of Quokka. If we
do not obtain the stockholder approval by November 15, 2000, then the
noteholders will be restricted by Nasdaq rules and regulations from converting
their notes in full and exercising their warrants in full, and may request that
we redeem their notes at the premium redemption price identified below in the
risk factor entitled "If an event occurs that interferes with a noteholder's
liquidity, we may be required to pay a monthly delay payment and redeem the
notes at a premium." If we were required to redeem the notes because of our
failure to obtain the stockholder approval, we anticipate that the premium
redemption price would be at least $89.0 million plus the accrued interest on
the notes and could be greater if our common stock is trading significantly
above the then applicable conversion price.
WE ARE SUBJECT TO COVENANTS WHILE ANY NOTES REMAIN OUTSTANDING THAT COULD LIMIT
OUR OPERATIONAL FLEXIBILITY AND IF WE FAIL TO COMPLY WITH THESE COVENANTS WE
WILL BE IN DEFAULT ON THE NOTES.
As is customary in debt transactions, the investment by the noteholders was
contingent on our agreement to comply with various covenants while any notes
remain outstanding. These covenants include both affirmative covenants and
negative covenants.
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The affirmative covenants require us, among other things, to do the
following:
- pay principal of and interest on the notes;
- make SEC and other regulatory filings;
- pay taxes;
- maintain minimum levels of insurance;
- comply with applicable laws;
- deliver to the noteholders annual compliance certificates and notice of
any events of default;
- achieve minimum revenue and operating income thresholds; and
- control maximum operating losses.
The negative covenants restrict us and any subsidiaries from, among other
things, taking the following actions without the consent of the noteholders:
- incurring or assuming additional indebtedness in excess of $25.0 million;
- declaring dividends, purchasing or redeeming capital stock or otherwise
incurring any liability to make any other payment or distribution of cash
or other property;
- selling assets or properties outside the ordinary course of business in
excess of $3.0 million in any calendar year;
- liquidating the company;
- entering into transactions with affiliates outside the ordinary course of
business;
- transferring any voting stock of any subsidiary outside the company and
its affiliates;
- creating or incurring any liens on its properties or assets other than
certain permitted liens;
- acquiring or investing in any assets or business of any person for cash
in excess of 20% of the sum of available cash and cash equivalents;
- acquiring or investing in any assets or business of any person other than
asset acquisitions in the ordinary course of business, intercompany
acquisitions or Board-approved acquisitions where the sole consideration
is our capital stock; and
- engaging in any business other than one that is the same or reasonably
related or complementary to our existing businesses.
Complying with these covenants could restrict our operating flexibility. If
we fail to comply with these covenants within the prescribed time periods, an
event of default will result, triggering remedies in favor of the noteholders.
Among these remedies is the acceleration of the maturity of the notes at a
premium of 115% of the sum of the face value of the notes, accrued but unpaid
interest on the notes and unpaid delay or default amounts on the notes.
IF AN EVENT OCCURS THAT INTERFERES WITH A NOTEHOLDER'S LIQUIDITY, WE MAY BE
REQUIRED TO PAY A MONTHLY DELAY PAYMENT AND REDEEM THE NOTES AT A PREMIUM.
We have agreed to use our best efforts to provide for the liquidity of the
common stock underlying the notes and warrants acquired by the noteholders,
including registering for re-sale by the noteholders the common stock issuable
upon conversion of the notes and exercise of the warrants, listing those shares
with the Nasdaq National Market, avoiding the suspension of trading in our
common stock in excess of 45 days in any 12 months and maintaining enough
authorized shares of common stock to enable the conversion of the notes and the
exercise of the warrants. If any of these interfering events occurs and is
continuing, we may be required to pay to the noteholders a monthly delay payment
equal to one percent of the face
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amount of the notes, all accrued and unpaid interest on the notes and all unpaid
penalties payable on the notes, for each 30 day period (or portion thereof) of
the interfering event. In addition, under some circumstances, if the interfering
event continues we may be required to redeem the notes at a premium redemption
price equal to the greater of (1) 115% of the sum of the face value of the
notes, accrued but unpaid interest on the notes and unpaid delay or default
amounts on the notes, or (2) the value the noteholder would be entitled to
receive upon conversion of the note into common stock at the applicable
conversion price followed by the sale of the common stock at the greater of
market value at either the closing of the redemption or the event triggering the
right to redemption. If a monthly delay payment or a redemption were to occur,
the cash outlays for such purposes would not be available for other general
corporate purposes.
IF AN EVENT OF DEFAULT OCCURS UNDER THE NOTES, THE NOTEHOLDERS WILL BE ABLE TO
REQUEST IMMEDIATE PAYMENT OF A PREMIUM REDEMPTION PRICE ON THE NOTES, WHICH CASH
PAYMENTS, IF AVAILABLE, WOULD NOT BE AVAILABLE FOR OTHER GENERAL CORPORATE
PURPOSES.
If an event of default identified under the notes occurs, then the
noteholders may declare the notes and any accrued but unpaid interest and
payments on the notes to be immediately due and payable and demand immediate
payment of a premium price equal to 115% of the sum of the face value of the
notes, accrued but unpaid interest and unpaid delay or default amounts on the
notes. These events of default include: (1) failure to pay the principal on any
note when due; (2) an assignment for the benefit of creditors or other
bankruptcy or insolvency event; (3) the rendering of a judgment against us in
excess of $1 million (net of any insurance coverage) that is not discharged
within 60 days; (4) defaults under any mortgage, indenture, agreement or
instrument evidencing indebtedness in excess of $4 million; and (5) the breach
of covenants or representations or warranties made to the noteholders. The
premium redemption price payable upon other events of default -- including (a)
our failure to redeem all unconverted notes if we elect to exercise our optional
redemption rights or (b) the occurrence of an interfering event that restricts
the liquidity of the common stock underlying the notes and warrants -- may also
include the value the noteholder would be entitled to receive upon conversion of
the note into common stock at the applicable conversion price followed by the
sale of the common stock at the greater market value at either the closing of
the redemption or the event triggering the right to redemption. If an event of
default occurs for which a noteholder demands immediate payment at a premium
redemption price, the cash outlays for such purposes would not be available for
other general corporate purposes and if we are unable to pay the premium
redemption price on the notes our viability as an independent corporate entity
would be jeopardized.
YOU WILL EXPERIENCE DILUTION UPON THE CONVERSION OF NOTES AND EXERCISE OF
WARRANTS ISSUED IN THE PRIVATE PLACEMENT AND MAY EXPERIENCE ADDITIONAL DILUTION
IF THE CONVERSION PRICE OF THE NOTES IS ADJUSTED DOWNWARD OR IF WE ELECT TO PAY
INTEREST ON THE NOTES WITH PAYMENTS-IN-KIND RATHER THAN CASH.
The notes we issued on September 15, 2000 in the principal amount of $77.4
million have a conversion price of $5.415. Accordingly, if all the notes are
converted at that conversion price, there will be dilution of approximately 14.3
million shares of common stock. In addition, we issued warrants to acquire
approximately 2.8 million shares of our common stock and these warrants are
exercisable at any time. Accordingly, the private placement is expected to
result in dilution of approximately 17.1 million shares of common stock, or
approximately 36.6% of the 46.4 million shares of common stock outstanding on
September 15, 2000. In addition, for a period of at least 75 trading days
beginning February 15, 2001, the conversion price of the notes may be reset
downward depending on the trading price of our common stock. If the conversion
price is reset downward, there will be dilution upon conversion of the notes in
excess of the 14.3 million shares identified above. There is no limit on how low
the conversion price may be reset. Additionally, you may experience dilution if
we elect to pay interest on the notes with payments-in-kind rather than cash.
Payments-in-kind allow us to avoid an immediate cash outlay on each interest
payment date but have the effect of increasing the face amount of the notes.
Assuming (1) we pay all interest payments on the notes for the full five year
term of the notes with payments-in-kind rather than cash, (2) the conversion
price remains at $5.415 throughout the five years and (3) no notes are converted
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during the five year term of the notes, then the payments-in-kind would increase
the face amount of the notes by approximately $32.1 million, which would be
convertible into approximately 5.9 million additional shares of our common
stock. Depending on the applicable conversion price and the payments-in-kind we
elect to make, as well as the number of shares of our common stock outstanding
at that time, the number of shares of our common stock issuable upon conversion
of the notes and exercise of the warrants could result in a change of control of
Quokka.
THE MARKET PRICE OF OUR COMMON STOCK MAY BE SUBJECT TO SIGNIFICANT DOWNWARD
PRESSURE IF THE PRICE OF OUR COMMON STOCK FALLS, THE CONVERSION PRICE OF THE
NOTES IS RESET DOWNWARD, NOTEHOLDERS CONVERT AND SELL MATERIAL AMOUNTS OF OUR
COMMON STOCK AND/OR NOTEHOLDERS PARTICIPATE IN SHORT SALES OF OUR COMMON STOCK.
The common stock issuable upon conversion of the notes is presently
indeterminable and could fluctuate significantly, resulting in substantial
dilution. See the risk factor entitled "You will experience dilution upon the
conversion of notes and exercise of warrants issued in the private placement and
may experience additional dilution if the conversion price of the notes is
adjusted downward or if we elect to pay interest on the notes with
payments-in-kind rather than cash". In addition, significant downward pressure
on the market price of our common stock could develop as noteholders convert and
sell material amounts of common stock. Any such sales could encourage short
sales by noteholders or others, placing further downward pressure on the market
price of our common stock. The downward pressure could lead to a further
reduction of the conversion price of the notes, resulting in additional dilution
as notes are converted. The sale of these additional shares in the market could
place further downward pressure on the market price with the effect of a still
lower conversion price. This spiral effect could result in additional dilution
and downward pressure on our market price.
WE HAVE LIMITED RIGHTS TO REDEEM THE NOTES PRIOR TO MATURITY AND MAY THEREFORE
BE SUBJECT TO THE DEBT AND RELATED COVENANTS LONGER THAN WE WOULD PREFER.
Our ability to pay off the debt by redeeming the notes prior to maturity is
limited. We will only be able to redeem the notes after March 15, 2002 and only
if the following apply:
- our common stock has traded, for at least 30 consecutive trading days, at
a closing price of at least $10.830 (as adjusted for any stock splits and
related adjustments);
- the noteholders have been able to sell their shares under an effective
registration statement on each of those 30 trading days;
- the noteholders have been able to convert all their notes under the rules
of the applicable securities exchange on which our common stock is
traded; and
- we have the financial resources and ability to repurchase all the notes.
If we are unable to redeem the notes when we would like, we will be
required to continue to comply with the affirmative and negative covenants we
made to the noteholders and could therefore be restricted from making the
financial and operational decisions we might prefer.
OUR CURRENT OPERATING CASH FLOWS ARE NOT SUFFICIENT TO REDEEM THE NOTES AT
MATURITY ON SEPTEMBER 15, 2005.
While we have sufficient cash available to meet our payment obligations
under the notes prior to their maturity, if our operating cash flows do not grow
as expected today and if the noteholders have not elected to convert their notes
prior to their maturity, we may not have sufficient cash available to redeem the
notes at maturity, in which case we would need to refinance the notes by
incurring replacement indebtedness. There can be no assurance that we would be
able to obtain such replacement indebtedness.
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THE COMPANIES
QUOKKA SPORTS, INC.
Note: References in this "The Companies -- Quokka Sports, Inc." section to
"we," "us," "our" and similar expressions refer to Quokka Sports, Inc. and its
subsidiaries.
OVERVIEW
Quokka Sports is a leading provider of sports entertainment for the digital
world.
Around the world, sports enthusiasts immerse themselves in their favorite
sports, both as spectators and as participants. This passion for sports
translates into billions of dollars of spending on sports entertainment and
related sporting products and services. We believe that this market will
continue to expand as advances in technology create more opportunities to fuel
the passions of sports enthusiasts.
We use the power of emerging digital media to bring sports enthusiasts
closer to their favorite sports. We leverage our digital technology to offer
live event coverage, race viewers, news and information, audio and text
dispatches from athletes, games, community forums and content created by fans,
as well as opportunities for the fan to purchase premium content and products
and services in order to provide our audience a complete sports experience. We
believe that media coverage is most effective when it allows the viewer to feel
a real connection to other individuals, events and venues. As a result, the
sports experiences on the Quokka Sports Network and for our distribution
partners are intended to allow our viewers to reach halfway around the world in
real time to experience all of the excitement of a major sporting event direct
from wherever they happen to be.
Through this immersive approach, we seek to win the "hearts and minds" of
enthusiasts of the sports we offer and create ongoing communities around these
sports. The properties of the Quokka Sports Network are designed to become the
destinations for followers of these sports. We call these destinations for
specific sport communities "sport verticals."
The Quokka Sports Network is designed to appeal to a global audience. We
currently cover motor racing, sailing, action sports such as skiing, climbing,
hiking, snowboarding, adventure racing and mountain biking, and key Olympic
summer sports, such as track and field, swimming and gymnastics. The Quokka
Sports Network also includes coverage of some of the world's largest sporting
events like the biennial Olympic Games, the America's Cup yacht match, FedEx
Championship Auto Racing (CART) Series and the Moto Grand Prix championship as a
result of our relationships with our strategic partners like NBC Olympics, Inc.,
CART, Dorna Promocion del Deporte, S.A. and Volvo Event Management (UK) Limited.
The properties of the Quokka Sports Network have attracted a community of sports
enthusiasts that averaged approximately 1.6 million unique visitors per month
during the June 2000 quarter, according to our internal tracking systems.
We recognize that sports enthusiasts are tribal in nature and we seek to
deliver content that reflects the fan's zeal for coverage of their favorite
event, sport, nation, team or athlete. For example, in addition to targeting the
English-speaking audience, we are beginning to localize content for non-English
speaking fans of the sports that we cover in order to most effectively engage a
global audience. We also understand that sports enthusiasts often want an
individualized experience. We are therefore focusing on methods of customizing
our content to further satisfy the individual needs of the members of our
growing community.
Since our inception, we have sought to lead our industry with innovations
that allow for the delivery of this content across a wide variety digital
platforms, from wireless to narrowband Internet to broadband Internet to true
converged media. We call this "allband." To help us achieve this multi-platform
approach, we have entered into strategic relationships with some major players
in the media and communications industries. Our strategic investors include
MediaOne Interactive Services, Intel Corporation, British Telecom Holdings,
B.V., DirecTV, Inc., At Home Corporation, Hearst Communications, Inc. and
Liberty QS, Inc. and our distribution partners include Microsoft Corporation,
Road Runner, Terra Networks, S.A., and Yahoo!.
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We seek to generate revenue from three sets of customers, each of which is
described in greater detail below:
- from business customers through sales of sponsorships and advertising;
- from media companies through revenue from content syndication; and
- from consumers through sales of premium content, sports memorabilia,
officially-licensed merchandise and other products and services.
Sponsorship and Advertising. We believe sponsors and advertisers are
attracted to our passionate sports audiences for several reasons. First, this
audience comprises an attractive demographic, including male professionals who
are often a difficult segment to reach. Second, our sports fan base tends to be
emotionally attached to the content that we offer. Finally, we believe the rich
interactive media environment allows for compelling brand messaging
opportunities. As a result of these and other factors, large multi-national
advertisers account for the majority of our sponsorship and advertising revenue.
Content Syndication. Content syndication is also emerging as a significant
source of revenue for us. Our exclusive rights allow us to create content that
is attractive to our media customers as these media companies seek unique and
engaging content for their users. Currently, we are syndicating content to
narrowband Internet and broadband Internet.
Revenue from Consumers. The impassioned sports fan is likely to spend money
on a variety of products and services to become further connected to a favorite
sport, event, team or athlete. For example, a fan may purchase a hat or print
autographed by a favorite America's Cup skipper, purchase a pay-per-view
experience or travel to a destination to meet a famous athlete or experience an
event from the front row. We integrate opportunities to purchase these types of
products and services into the Quokka Sports Network.
Finally, we are developing an adaptable technology and business
infrastructure that will support a fully localized global network. We believe
that our technology platform, our distribution network and our business
infrastructure will permit us to rapidly achieve economies of scale as we build
out new sport verticals.
In August 1996, we adopted our current business model and incorporated in
Delaware under the name Quokka Productions, Inc. Shortly thereafter in September
1996, we changed our name to Quokka Sports, Inc.
INDUSTRY BACKGROUND
The Sports Enthusiast
Sports enthusiasts are found in a myriad of shapes and sizes and live in
every corner of the world -- men and women, young and old, spectators and
participants. A 23 year-old "petrol head" from Milan who lives to know
everything there is to know about "air-to-fuel ratios" is quite different from a
38 year-old businesswoman from Seattle who does technical big-wall climbing on
the weekends. However, these people share a common passion for achievement in
sport. This primal zeal for achievement, whether in the form of competition or
inspiration, is at the core of all sport and it drives the sports enthusiast to
great lengths to fulfill this passion for a particular sport, team, event or
national interest.
This enthusiasm for sports is an almost universal phenomenon. It seems that
almost everyone has a strong attachment to at least one sport. For example, the
ESPN Chilton Sports Poll estimates that 86.6% of the general United States
population 12 years of age or older are sports fans. They further estimate that
currently 19.7% of this population accesses sports information with their
computer.
The Global Sports Industry
A huge industry has emerged to serve the passions of sports enthusiasts.
Sports broadcasting and publishing, athletic and outdoor gear, team apparel,
travel services, training, and venue access comprise
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several billion-dollar industry segments. The Georgia Institute of Technology
estimates that revenue streams derived from spectator sports, sporting goods and
sporting publications in the United States alone exceeded $130 billion in 1995.
The industry continues to grow at a robust rate. For example, Paul Kagan
Associates Inc. estimates that U.S. advertisers will increase their investment
in sports-related TV advertising by 38% between 1998 and 2003.
The emergence of the Internet has added to the expansion of the sports
entertainment industry. Jupiter Communications, Inc. estimates that global
consumers will spend approximately $3.0 billion per year online on sporting
goods, apparel, footwear and tickets by 2003. In addition, Forrester Research,
Inc. projects that total U.S. online ad spending on advertisements will grow to
$22 billion in 2004.
Advance Of Digital Media Platforms
We believe that the world is currently undergoing a revolution in the way
it enjoys entertainment. The growth of the Internet is well documented, but
broadband delivery of content is also advancing quickly. Forrester Research
projects that 22 million U.S. households will have high-speed broadband access
by 2003. Other digital media platforms are also emerging. Jupiter Communications
estimates that the total user base of mobile personal Internet appliances such
as "smart" phones, pagers and PDAs will reach almost 26 million by 2002.
Converged media devices are starting to develop as well. Forrester Research
projects that so-called "Interactive TV" applications like enhanced broadcast TV
and web on TV will reach a total of 37 million households by 2004. Advances in
digital media platforms will someday allow sports enthusiasts to follow their
favorite sports 24 hours a day, 7 days per week, whether they are on the road,
at the office, on the golf course or at home in the living room.
Need For A Centralized Source Of Entertainment For The Sports Enthusiast
We believe sports enthusiasts seek to fully immerse themselves in their
sport of choice. The sports fan that travels to a sports venue often desires the
most complete experience possible. Of course, he will watch the live
competition -- but the experience does not end there. The fan also might buy a
program to learn which athletes are competing, watch replays on the "big
screen," talk to other fans about the competition, pick-up a magazine for more
in-depth stories, buy an official event jacket and try to get "behind the
scenes" to meet the athletes. This multi-faceted experience could describe a
motor racing track, a soccer match, a golf tournament, a sailing regatta or
almost any sports experience. Similarly, a climber on a rock face can check out
the weather conditions, take in the view, gauge the progress of the climb or
share stories with fellow climbers. When the climber leaves the mountain, she is
likely to continue to seek out ways to replicate this "complete" experience.
While there are numerous traditional and on-line sources of sports
information, products and services, we believe that sports enthusiasts do not
have a single location that fulfills all of their needs for experiencing a
particular sport. Currently, a sports fan must weave together a patchwork of
media and experiences by doing all or most of the following: subscribe to
magazines, newspapers or newsletters to get the latest news and information; be
near a TV at the right time to catch the live coverage of their sport or event
(if it's being covered at all); head to the local bar to debate the latest
events in their sport; get to the store to grab the latest gear; and ask someone
who's going to the venue to pick up an event souvenir. Furthermore, there are
some experiences that are extremely difficult to replicate via traditional
outlets, such as: getting the inside story directly from the athlete during
competition; enjoying real-time coverage of events that are not covered in a
particular region or at all; or having an individual question directly answered
by an athlete, expert or another fan who is located halfway around the world.
QUOKKA SPORTS -- THE COMPLETE SPORTS EXPERIENCE
Since our inception, we have had a simple goal: to bring the sports
enthusiast the most complete sports experience possible -- regardless of where
he or she is located. This effort began with our coverage of the Whitbread Race
for the Volvo Trophy in 1997, an around-the-world yacht race, and continues
today for the tribal followers of a number of sports. We strive to leverage the
power of digital media to bring a
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24x7, 360-degree experience to sports enthusiasts. This complete experience is
designed to utilize virtually every aspect of emerging media, combining live
event coverage, new narrative techniques, rich content, community functions,
audio and text dispatches from athletes, games, opportunities to purchase
premium content, travel services and official event merchandise. We employ a
variety of techniques to achieve what we call "Quokka Sports Immersion."
We start with the individual sports enthusiast. We give fans the
opportunity to create their own experience by tailoring our interactive media to
their own interests and level of understanding. If the sports enthusiast wants
to watch live coverage of an event, she can launch a Quokka RaceViewer that
delivers images, audio, telemetry, and results data. If a fan wants to learn
more about a sport, he can access that information. He can also follow related
human-interest stories through in-depth features or strike up an argument with
other fans about some controversy through our often-intense bulletin-board
forums. An enthusiast can get to know the athletes through biographies, and more
intimately through regular diary-entries and live chats. She can experience
competition by joining a fantasy league or competing in a virtual race.
Furthermore, fans can bring a tangible piece of their sport home by purchasing
licensed merchandise in our online stores or by bidding for one-of-a-kind gear
and memorabilia through our auction services. We also provide updates on where
to participate in a sport and how to get there. Finally, we provide information
on gear and create an opportunity for fans to buy it. Enthusiasts can share "war
stories" or recommendations on locations, gear, and training. They can take
advantage of the unique perspectives provided by our sports coverage that
leverages the available assets to create a complete and compelling view of the
action.
We seek to do more than just attain the "eyeballs" of sports enthusiasts.
Rather, we want to win their "hearts and minds." Our properties in the Quokka
Sports Network are designed to be the destinations for fans of those sports, and
we intend to leverage the value of this engaged audience. We call these
destinations for specific sports communities "sport verticals."
The Quokka Sports Network
At the core of our business is a commitment to strive for deep coverage of
specific sports in each of our sport verticals, including key events, teams and
athletes associated with those sports. This approach forms the basis for our
scalable network strategy to build a network of sports communities. It is
designed to form the deepest -- and most valuable -- relationship with the
tribal communities that follow these sports. With this approach, we believe that
we will be well positioned to leverage the entire value chain associated with
these passionate communities -- from sponsorship and advertising to merchandise
to travel services, and more.
The Quokka Sports Network has been created to extend the value of each of
our sport verticals by implementing the following strategies:
- Aggregation of the best of the Quokka Sports Network at Quokka.com,
- Localization of content for regional fan-bases throughout the world, and
- Multi-platform delivery of content across various digital media devices.
Sport Verticals -- Events, Teams And Athletes
We have created a network of discreet sport verticals that focus on the
interests and passions of specific sports communities. Since the beginning of
1999, the Quokka Sports Network has grown from two properties, the Whitbread
Race and the Around Alone yacht race, to over a dozen properties as of June
2000, including the 2000 America's Cup, the BT Global Challenge, the CART racing
series, Climbing Cameroon, Everest 2000, Great Trango Tower, Key West Race Week,
Marathon des Sables, NBCOlympics.com, Surfing Antarctica and the 100th U.S. Open
at Pebble Beach. We are pursuing three primary strategies to build out our
network. First, we seek to secure official rights to particular events or
circuits, such as the 2000 America's Cup Match, the CART racing series and the
Volvo Ocean Race. Additionally, we look for opportunities to add to our existing
sport verticals by acquiring other companies,
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such as our recent acquisitions of ZoneNetwork.com and Golf.com. Finally, we
intend to leverage our expertise from our coverage of Olympic sports by
developing some of the 35 sports sites and Wired Athlete(TM) sites in our
Olympic Games property. Currently, the Quokka Sports Network includes:
- Destinations for a number of sports with truly global fan-bases such as
motor racing, sailing, skiing, climbing, hiking, snowboarding, adventure
racing, mountainbiking and Olympic summer sports like track and field,
swimming, and gymnastics;
- Live coverage of some of the world's largest sporting events, including
the biennial Olympic Games, the America's Cup 2000 yacht match, the CART
racing series, and the Moto Grand Prix motorcycle championships; and
- Relationships with some of the world's top athletes, including Michael
Johnson, Dan O'Brien, Amy Van Dyken, Dominique Moceaneau and Karch
Kiraly.
Quokka.com
The most engaging stories and features from the Quokka Sports Network are
aggregated at Quokka.com. Quokka.com also provides a sampler of "broadband"
content for those visitors with high-speed connections who want to explore our
most innovative presentation techniques. Community, gaming, and shopping
experiences are also unified at Quokka.com. For example, fans who enjoy virtual
games in one sport, for example, often look for similar opportunities in other
events. We believe Quokka.com provides an effective way to cross-promote our
varied sports coverage to fans with multiple interests.
International Network
We are working to localize some of our content into multiple languages. We
also work with athletes and local writers from various countries to tell their
own stories in their own language with their local perspective. We believe that
this capability makes our global sports and event properties more valuable
because they are being made relevant for regional audiences around the world,
including Europe and Latin America. A localized global strategy is critical for
our goal of becoming the leading provider of sports entertainment for the
digital world because we recognize that the tribal nature of sports fans across
the globe requires that the story be relevant and engaging for this diverse
audience.
Advancements in new media platforms and communications bandwidth capacity
have presented us with the opportunity to distribute these experiences in a
variety of ways to our diverse audience. We are creating our products with this
"all band" environment in mind because we believe that digital distribution
platforms will continue to evolve and afford richer entertainment experiences
and far greater accessibility across multiple platforms. We have established a
diverse group of distribution partners to execute this vision, including:
Yahoo!, Excite@Home, Roadrunner, Microsoft and Terra Networks.
Multiple Entry Points To The Network
A fan can become immersed in his passion for sports by accessing the Quokka
Sports Network from a variety of different entry points. For example, a senior
executive in London can access the Quokka RaceViewer for race coverage of the
America's Cup finals over her office LAN. An 18-year old gymnastics fan can
check out the gymnastics Olympic coverage over her DSL service from her bedroom
while her friend with Roadrunner broadband service can relive a climb in the
Himalayas. A CART fan from Gary, Indiana will someday experience true
interactive broadcast coverage of a race through a new set-top device. A
stay-at-home mother from White Plains, New York can follow our most compelling
"360 degree" sports story of the day at Quokka.com over her AOL dial-up service.
In the future, we intend to provide access to our coverage via hand-held
wireless devices such as PDAs and cell phones.
Once on the network, sports enthusiasts have the opportunity to go deeper
into their favorite sport or explore other sports. We aggressively cross-promote
our properties through targeted e-mails, on-site promotion and contests.
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We believe that a "network effect" will create great leverage for us
because every new visitor to one of our properties will immediately be exposed
to all of our other properties on the Quokka Sports Network, and is a potential
visitor of another of our sport verticals.
Compelling Content
We combine our deep coverage for the passionate fan and our network of
sport verticals in order to try to capture the hearts and minds of an engaged
audience. Our sailing vertical represents one example of our commitment to
provide a complete experience that contains immersive and engaging content.
Sailing enthusiasts can follow live coverage of the BT Global Challenge and the
Volvo Ocean Race, keep up with smaller scale events like the Sydney to Hobart
race or Key West Race Week, debate the strategies of the America's Cup skippers
on our forums, bid for one-of-a-kind America's Cup memorabilia in our sailing
auctions, build a virtual boat, compete in a fantasy challenge to guess the
America's Cup winners, or find out what's going on in-and-around Auckland, New
Zealand, the site of the 2000 America's Cup. The result is a deeply engaged
sports enthusiast that can obtain the complete sports experience.
Multiple Revenue Streams
We have identified three distinct sets of customers for our 360-degree
sports experience. These customers include advertisers looking to connect with
our highly valued audience, media companies seeking compelling and unique
content, and the individual fans who seek out premium gear, memorabilia and
services to complete their experience with their favorite sport. As our business
matures over time, we expect about 85% to 90% of our revenues to be split evenly
between sponsorship and advertising revenue and content syndication revenue,
with the remaining 10% to 15% to come from consumer revenue.
Sponsorship and Advertising Revenue. In 1999, sponsors and advertisers
provided approximately 90% of our revenue. We have established multi-year
sponsorship arrangements with Compaq, Computer Associates and Intel Corporation
as "Quokka Performance Team" members. We offer these sponsors multi-dimensional
marketing opportunities across the Quokka Sports Network. In addition, we also
have sponsors and advertisers that are interested in particular sport verticals
in our network, such as IBM, Ford Motor Corporation, Qwest Communications, Visa
International, Adidas America and Anheuser Busch.
We believe these advertisers find our primary audience, the hard-to-reach
male professional, to be extremely attractive. This audience enjoys our rich
content at home, and even in the office, one of the toughest places to get the
attention of these professionals. Because of their passion for sport, we believe
the audience is also emotionally engaged in the content. The emergence of the
sports media and sponsorship industry demonstrates the value that marketers see
in these intense relationships.
We present our sponsors' and advertisers' brands and products as an
integral part of the sports content, and rich media presentations of these
messages to help bring their brands to life. Some of our sponsors leverage our
content on their own web sites. In addition, some technology sponsors also work
with us to develop new infrastructure solutions that enable our coverage. These
"custom solutions" then become marketing tools for the technology providers as
they look to expand their presence in the new digital media marketplace.
Three customers accounted for approximately 65% of our revenues in 1999,
three customers accounted for approximately 81% of our revenues in 1998 and
three customers accounted for 91% of our revenues in 1997. In 1999 our
relationship with Compaq accounted for 27% of our revenues, our relationship
with Computer Associates accounted for 23% of our revenues, and our relationship
with Intel Corporation accounted for 15% of our revenues. In 1998 our
relationship with Compaq (through Tandem Computer) accounted for 52% of our
revenues, our relationship with CompuServe accounted for 16% of our revenues and
our work for the International Olympic Committee accounted for 13% of our
revenues. In 1997 our relationship with Tandem Computer accounted for 48% of our
revenues, our relationship with CompuServe accounted for 14% of our revenues and
our work for the International Olympics Committee accounted for 29% of our
revenue.
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Content Syndication. Media companies are emerging as significant customers
of ours. Our primary media customers today are Internet companies, but wireless
and converged media customers are also emerging. The Internet content
providers -- often portals -- are interested in our content, because they
believe it will help them create longer user visits. Our exclusive access to
event properties and our rich media presentations have attracted these
companies. Current narrowband "portal" customers include Excite and Terra
Networks. In February 2000, we produced content for wireless devices with Nokia,
our initial development partner for this product. In March 2000, we partnered
with WebTV Networks, Inc. to develop content for their interactive television
platform. Broadband partners, including Microsoft, Roadrunner and Excite@Home,
have also presented our content on their networks.
As proprietary digital entertainment content becomes available to new media
companies, we expect this trend toward content syndication to continue. The
historical growth of the cable television industry is an example of how content
syndication models develop. For instance, ESPN commanded subscription fees from
cable providers as the ESPN television business matured. We believe that a
similar business model will progress as the Internet evolves from a pure news
and information medium to one that also provides exclusive entertainment
experiences.
Revenue from Consumers. One of the characteristics of a tribal culture is
that the tribe's members often follow the same rituals, value the same objects
and wear the same clothing. We believe sports enthusiasts are no different. They
go to great lengths to wear the uniforms and use the gear authentic to their
sports, and wear the marking and colors of their favorite teams or athletes.
Further, many fans want to obtain an authentic artifact from a memorable sports
event, which may be passed down from generation to generation.
We have developed several features in the properties of the Quokka Sports
Network to fulfill the needs of this tribe-like dynamic of our audience. We seek
to leverage our relationships with event owners to establish exclusive
partnerships with the merchandise partners for these events. We offer
exclusively licensed event merchandise, high-end sports equipment, venue-based
travel services, fantasy sports experiences, and one-of-a-kind sports
collectibles and memorabilia. Commerce-focused businesses like Adidas and
Boatscape.com, Inc. have purchased tenancies in the electronic shopping areas of
our network in order to capitalize on our fans' desire for products and services
related to our sport verticals. In August 2000, we partnered with Planet
Outdoors to provide our MountainZone.com property with electronic commerce
services.
We also auction unique merchandise and experiences on the Quokka Sports
Network to allow rabid fans the opportunity to fulfill their need for a complete
sports experience. On our QuokkaAuctions.com site, we auction one-of-a-kind
autographed memorabilia from athletes, event art, fantasy sports experiences,
equipment and limited edition team uniforms. For example, during the America's
Cup 2000, we offered for auction the 17th seat on the America One boat, which
allows a fan to sit on an America's Cup yacht during a race and watch the action
first hand, a fantasy trip to watch the finals from the water with former
America's Cup champion skipper (and Quokka co-founder) John Bertrand, a jade
replica of the actual America's Cup trophy, which was offered for bid for tens
of thousands of dollars, and a number of autographed items from Paul Cayard, the
renowned skipper from the America One syndicate.
Furthermore, we use contextual selling opportunities to maximize our
ability to offer our products and services to a highly qualified and targeted
audience. For example, when a team or driver in the CART series wins a race, we
often juxtapose the story about that victory with links to the merchandise of
that athlete or team. Excited fans can make immediate purchases while still
focused on the thrill of the latest race or match. Consumer purchasing
opportunities are presented throughout relevant content on our properties such
as athlete's pages, relevant news items, and team pages.
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Scalable Network Infrastructure
We are developing a scalable technology and business infrastructure with
global capabilities.
We are building a common "chassis" for all our properties across all
possible media platforms. This chassis provides the technological framework for
each of our properties. This chassis will incorporate common user interfaces,
publishing tools, live event viewers, asset management systems, ad servers,
community functionality, commerce engines and game engines that are functional
across the Quokka Sports Network properties. As an early innovator in the
digital entertainment space, we will continue to place great emphasis on
evolving its chassis to maximize the power of the digital medium as new
platforms emerge. Each new property will be outfitted with this chassis to best
leverage our innovations, create a common user experience, and afford
efficiencies in production.
We have developed a localization strategy in order to derive the greatest
value from our global sporting events. Once we have invested in the production
of a global sporting event or sport site, we can leverage that investment by
making that content accessible and relevant to sports enthusiasts around the
world. Local relevance for our content is created through diaries from athletes
and stories from local writers. Every new property that we add to our network
can be made readily available to each of these audiences, which we believe will
increase the audience size and lower the production cost per unique visitor.
Joint Ventures And Rights Agreements
We plan to secure rights to cover sporting events through a variety of
methods, including direct acquisition and the formation of joint ventures with
rights holders or other entities having established relationships with rights
holders. We have experience with both methods. To date, we have acquired the
rights to events such as FIM Motorcycle racing and the Volvo Ocean Race directly
from the rights holders and we have entered into a joint venture with NBC
Olympics, Inc. in connection with the Olympic Games. We originally created a
joint venture with Forsythe Racing, Inc. in connection with CART, but
subsequently dissolved the joint venture and derive our right to our coverage of
CART racing directly from CART.
Joint Venture with NBC. In February 1999, we formed NBC/Quokka Ventures,
LLC with NBC Olympics, Inc., a wholly owned subsidiary of National Broadcasting
Company, Inc. In connection with the formation of the joint venture, we
contracted with the joint venture to provide the services necessary for the
joint venture to provide interactive digital coverage. Consequently, we expect
that the joint venture's interactive digital coverage of the Olympics on its web
site will showcase Quokka's distinctive style of programming and will complement
NBC's television coverage.
NBC Olympics, Inc. granted the joint venture the following interactive
media rights, subject to limitations, in connection with the Olympic Games and
certain United States qualifying events through 2004:
- United States interactive rights to incorporate limited highlights of NBC
video into its coverage;
- an exclusive license to produce the official NBC interactive media
coverage of the Games;
- a license to incorporate still photographs and sequential still
photographs taken from video produced from the Games by NBC Olympics into
the joint venture's coverage;
- a license to incorporate into the joint venture's coverage historical
Games footage, non-competition video and all research and other
materials, whether text, audio, video, still footage, written or fixed in
any other medium relating to the Games produced by NBC Olympics;
- the right to distribute the joint venture's coverage in interactive media
throughout the United States; and
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- a license to use the composite NBC/Olympic logo on the joint venture's
web site in connection with the production, operation, promotion,
marketing and distribution of the joint venture's coverage of the Games.
In order to protect its broadcast rights and brand, however, NBC Olympics,
Inc. can restrict the joint venture's use of any of the foregoing interactive
media rights if:
- NBC lacks the ability to grant such rights to the joint venture as a
result of contractual limitations or restrictions imposed by, or
conflicts with any legal rights held by the International Olympic
Committee or any other person or entity possessing intellectual property
or other rights in the still photographs, sequential still photographs or
video, whether Games, non-competition or historical;
- a use conflicts with NBC's current sponsors or advertisers or the
sponsors or advertisers of the International Olympic Committee, United
States Olympic Committee, Sydney Organizing Committee of the Olympic
Games, Salt Lake Olympic Organizing Committee or the 2004 Games
Organizing Committee;
- the digital assets are involved in any transaction by us or the joint
venture with any NBC Competitor, as defined below;
- a use competes with NBC's broadcast, cable or direct broadcast satellite
coverage of the Games; or
- a use violates NBC's, NBC Sports', the International Olympic Committee's,
the United States Olympic Committee's or other Olympic organizations'
editorial policies and practices.
NBC/Quokka Ventures, LLC is owned 51% by Quokka and 49% by NBC Olympics,
Inc., and management is vested in a board of directors, three of whom are
currently appointed by Quokka and two of whom are currently appointed by NBC
Olympics, Inc. Under the terms of the venture's operating agreement, Quokka is
solely responsible for making cash capital contributions to the venture. The
terms of the operating agreement for the venture require Quokka to make
quarterly capital contributions in amounts necessary to fund the venture's
operations on an ongoing basis in accordance with the annual operating plan.
Accordingly, the amounts and timing of these capital contributions will be based
on the actual activities of the venture and are unknown at this time.
Additionally, we issued warrants to purchase 2,100,000 shares of Quokka common
stock. Based on the Noreen-Wolfson fair value model with a volatility of 70%,
these warrants have a fair value of $4.9 million. NBC Olympics, Inc.'s
obligation to the joint venture is to contribute interactive media rights as
described above as well as on-air promotion of the site, access to NBC
personalities and research.
NBC Olympics, Inc. has the right to terminate the joint venture in the
event an NBC Competitor:
- merges or otherwise consolidates with us in a transaction where we are
not the surviving entity;
- becomes the beneficial owner of 15% or more of Quokka outstanding equity
securities;
- becomes entitled to elect, appoint or replace a member or members of our
board of directors unless NBC Olympics, Inc. is also granted the same
right; or
- acquires all or substantially all of Quokka's assets.
For these purposes, an "NBC Competitor" includes any media company that is
significantly engaged in any of the primary businesses of NBC Olympics, Inc.,
National Broadcasting Company, Inc. or its subsidiaries or any
telecommunications, Internet or similar company that is significantly engaged in
any of the primary businesses of NBC Olympics, Inc., National Broadcasting
Company, Inc., its subsidiaries or Snap! LLC or successor entities. However, an
NBC Competitor shall not include any entity identified by Quokka in writing to
NBC Olympics, Inc. that NBC Olympics, Inc. does not designate as an NBC
Competitor in writing to Quokka within 30 days of our written notice.
CART Digital Media Enterprises, LLC. In January 1999, we established CART
Digital Media Enterprises, LLC or "CDME," a joint venture with Forsythe Racing,
Inc. Forsythe owns two of the teams that compete as part of the Championship
Auto Racing Teams circuit.
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In March 1999, CDME secured the exclusive worldwide interactive media
rights for all CART events through December 31, 2003 with a right of first
negotiation beyond that date. In connection with this digital coverage, the
joint venture also secured exclusive worldwide rights to:
- use CART's marks in its digital coverage as well as in connection with
any derivative products;
- use data and content from the events;
- syndicate content; and
- sell commercial partnerships, advertising, official merchandise,
electronic commerce products and services, official photographs and
derivative products.
The right to sell advertising and commercial partnerships is subject to
obligations to honor category exclusivity rights of current CART sponsors or to
first negotiate with those sponsors and the right to sell derivative products
and syndicate content is subject to CART's reasonable approval. The right to
sell official merchandise, official photographs and other electronic commerce
products and services is subject to receiving approval of other third parties.
CART has the ability to terminate the agreement if:
- the joint venture materially breaches any term of the agreement,
including failure to pay amounts owing under the agreement, subject to
notice and an opportunity to cure;
- the joint venture fails to maintain state of the art quality and
technological enhancements, subject to notice and an opportunity to cure;
- the web site fails to achieve certain minimum levels of traffic, subject
to notice and an opportunity to cure;
- if the joint venture or we provide similar services to an open wheel
professional auto racing sanctioning body, league or series currently
domiciled in the United States that promotes products or services
competitive with those of CART; or
- if more than 49% of the ownership or beneficial interest in the joint
venture or in Quokka is transferred, sold or assigned to an entity whose
products or services are competitive to or in conflict with those of
CART.
We issued to Championship Auto Racing Teams, Inc. warrants to purchase
76,366 shares of our common stock. Based on the Noreen-Wolfson fair value model
with a volatility of 70%, these warrants have a fair value of $400,841.
In December 1999, we dissolved our joint venture with Forsythe. As a
result, we now own 100% of CDME.
FIM Motorcycle Racing. In 1999, we acquired from Dorna Promocion del
Deporte, S.A. the exclusive, worldwide interactive media rights for all FIM Road
Racing World Championship Grand Prix events from January 1, 2000 through
December 31, 2003. In connection with our coverage rights, we have secured the
exclusive worldwide rights to:
- use FIM Motorcycling World Championships' trademarks as part of our
coverage as well as in connection with any derivative products;
- use data and content from the events;
- syndicate content; and
- sell sponsorships, advertising, official merchandise, electronic commerce
products and services and derivative products.
Our right to sell advertising and sponsorships is subject to obligations to
honor category exclusivity rights of current FIM Motorcycling World
Championships sponsors or to first negotiate with those
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sponsors and our right to sell derivative products is subject to Dorna's
reasonable approval. Our right to syndicate content is subject to a restriction
that certain assets may not be syndicated alone without Dorna's consent. Our
right to sell official merchandise and other electronic commerce products and
services is subject to receiving approval of certain other third parties. Dorna
has the ability to terminate the agreement if we fail to pay the required rights
fee.
In July 2000 we reached an agreement with Dorna to amend our original
agreement for exclusive, worldwide interactive media rights for all FIM Road
Racing World Championship Grand Prix events. The amended agreement will expire
on December 31, 2000. Under the amended agreement we will not be required to
make any further rights payments and are relieved of offline sponsorship
payments. For the rest of the shortened term, Dorna will pay us production and
operation fees relating to our coverage and will also receive a portion of
revenues attributable to our coverage. In the event that we are unable to
conclude an agreement with Dorna for continuation of our rights after the
expiration of the term, we will continue to provide predetermined amounts of
services to Dorna free of charge during 2001.
Volvo Ocean Race. In July 2000, we acquired from Volvo Event Management
exclusive, worldwide Internet rights and became the official provider of
Internet coverage for the 2001-2002 and 2005-2006 Volvo Ocean Races (formerly
The Whitbread Round the World Race). The Volvo Ocean Race continues for nine
months as sailors circumnavigate the globe, stopping in nine countries on five
continents. In connection with these rights, we have secured the rights to:
- create and host the official Internet web sites for The Volvo Ocean Race
in 2001-2002 and 2005-2006;
- use marks and logos of The Volvo Ocean Race on the web sites;
- collect and use data and content from the races;
- sell sponsorship and advertising on the sites in cooperation with Volvo;
and
- sell official event merchandise on the sites in cooperation with official
licensees.
Our rights are specific to the Internet and may only be exercised in other
media with Volvo's consent. The agreement contains a provision under which
either party can request that the agreement be renegotiated in good faith as a
result of technological changes after the 2001-2002 race ends. The agreement may
be terminated by either party in the event such a renegotiation fails, or if
either party breaches its terms, including, in our case, a failure to pay to
Volvo any revenue sharing earned.
Commitments Relating to Rights Acquisition
In connection with securing the rights to cover various events, we agree to
pay rights holders minimum annual guaranteed amounts, profit participation or
up-front fees, or a combination of these payments. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations of Quokka Sports,
Inc. -- Liquidity and Capital Resources" for a discussion of our future
aggregate financial obligations relating to existing rights agreements.
COMPETITION
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 believe that our programming does not compete directly with traditional
media, primarily because traditional media frequently do not provide substantial
coverage of the sports that we cover and because we believe our programming can
substantially enhance coverage provided by traditional media.
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 systems, such as cable and satellite systems, converge
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with traditional television broadcasting and traditional cable networks,
significant competition may come from the cable arena, including such
sports-oriented cable networks as the ESPN networks.
We believe that the principal competitive factors in attracting and
retaining audience are the ability to offer compelling and entertaining sports
programming, the depth, breadth and timeliness of coverage, the completeness of
the experience, and brand recognition. We believe that the principal competitive
factors in securing and retaining long-term digital rights to cover sporting
events include the ability to do the following:
- offer high-quality coverage;
- establish and maintain relationships with rights holders;
- deliver an audience with attractive demographics;
- maintain credibility as a leading and enduring company; and
- pay substantial rights fees.
We may be unable to compete successfully with respect to one or all of
these factors. To review the risks we face from competitors, see "Risk
Factors -- The online digital sports entertainment industry is intensely
competitive, and we may be unable to compete successfully against current and
future competitors."
INFRASTRUCTURE, OPERATIONS AND TECHNOLOGY
The properties of the Quokka Sports Network are hosted by Intel's Online
Services group in Santa Clara, California and with Frontier GlobalCenter in
Sunnyvale, California, except that our NBCOlympics.com web site is hosted by IBM
in Redwood City, California, Bethesda, Maryland and Schaumburg, Illinois. In the
next few months we intend to host our content, other than the Olympics site,
with two Intel hosting facilities. All of our network operations are controlled
from our headquarters in San Francisco, California with the ability to operate
from remote facilities. We provide multiple web servers that run the Microsoft
Internet Information Server on the Microsoft Windows NT Server operating system
upon Compaq server hardware that we own, as well as hardware that our
distribution channels use. Currently, Internet access is maintained by Intel and
Frontier GlobalCenter.
Our network infrastructure is composed of Cisco Systems, Inc. products in
fully redundant configurations. Network connectivity is provided through
multiple routes through redundant providers from our headquarters in San
Francisco. The computer and networking equipment used to operate our properties
is configured with redundant network interfaces, disk configurations, and power
supplies. Both Intel and Frontier GlobalCenter provide generator backup power
for at least two weeks.
Our operations depend upon our ability to protect systems against damage
from fire, earthquakes, power loss, telecommunications failure, break-ins,
computer viruses, hacker attacks and other events beyond our control. A disaster
or malfunction that disables either our San Francisco production facility or the
Intel facility or the Frontier GlobalCenter facility could significantly
interrupt our programming, limit the quantity or timeliness of updates to our
productions or limit the speed at which our audience can access our content.
Although we do not currently have the disaster recovery plan completely
documented, we are working to finalize this documentation to reflect the
on-going alterations in our configuration.
The market for digital media is characterized by rapid growth, rapidly
changing technology, evolving industry standards and frequent announcements of
new developments. To be successful, we must adapt to our rapidly changing
environment by continually improving the performance, features and reliability
of our services as well as adapting to new technologies. We may also incur
substantial costs if we need to modify our programming or distribution processes
to adapt to these changes. Our business could be adversely affected if we incur
significant costs without adequate results or cannot adapt to these changes.
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INTELLECTUAL PROPERTY
We regard the protection of our copyrights, service marks, trademarks,
trade dress and trade secrets as critical to our success. We rely on a
combination of copyright, trademark, service mark, patent and trade secret laws
and contractual restrictions to protect our proprietary rights in products and
services. The measures taken by us to protect our intellectual property may not
prevent misappropriation of our technology or deter independent third-party
development of similar technologies.
We also cannot guarantee that infringement or other claims will not be
asserted or prosecuted against us in the future whether resulting from our
internally developed intellectual property or licenses or content from third
parties. For a description of our intellectual property practices and potential
risks, see "Risk Factors -- 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."
GOVERNMENT REGULATION
We are subject to the same federal, state and local laws as other
businesses on the Internet. Today there are relatively few laws directed towards
online services. However, due to the increasing popularity and use of the
Internet and other online services, it is possible that a number of laws and
regulations may be adopted with respect to the Internet or other online
services. For a description of risks we face from regulation of the Internet,
see "Risk Factors -- Changes in regulation of the Internet could limit our
business prospects."
We are qualified to do business in eight states in the United States, and
failure by us to comply with foreign laws or to qualify as a foreign corporation
in a jurisdiction where we are required to do so could subject us to taxes and
penalties for the failure to qualify and could result in the inability to
enforce contracts in such jurisdictions. Any such new legislation or regulation,
or the application of laws or regulations from jurisdictions whose laws do not
currently apply to our business, could have a negative effect on our business.
EMPLOYEES
As of June 30, 2000, we had 382 employees, including 131 in production and
programming, 104 in engineering, software development and network operations, 93
in marketing, sales and e-commerce and 54 in administration. We consider our
relations with our employees to be good. We believe that our future success will
depend in part on our continued ability to attract, integrate, retain and
motivate highly qualified technical and managerial personnel and upon the
continued service of our senior management and key creative personnel, none of
whom is bound by an employment agreement except for Messrs. Gough and Saralegui.
Our growth has required us to continually hire, train and manage new employees
at a rapid rate, although competition for qualified personnel in our industry
and geographical location is intense. There can be no assurance that we will be
successful in attracting, integrating, retaining and motivating a sufficient
number of qualified personnel to conduct our business in the future.
RECENT DEVELOPMENTS
On August 22, 2000, we signed a warrant issuance agreement with National
Broadcasting Company, Inc. whereby we issued to NBC a warrant to purchase an
aggregate of up to 10.0 million shares of our common stock. Of the shares
issuable under this warrant, 3.3 million shares can be purchased by NBC in June
2001 at $8.89 per share, 3.3 million additional shares can be purchased by NBC
in June 2002 at $13.39 per share, and the remaining 3.4 million shares can be
purchased by NBC in June 2003 at $20.00 per share. The warrant expires in
December 2004. NBC also received the right to appoint one member to our board of
directors or, at NBC's election, exercise board observer rights.
On September 15, 2000, we closed a private placement of 7.0% convertible
promissory notes in an aggregate face amount of $77.4 million and warrants to
purchase an aggregate of 2,805,750 shares of
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Quokka common stock. The private placement is discussed in more detail in the
section of this joint proxy statement/prospectus entitled "Approval Of The
Issuance Of Common Stock Upon Conversion Of Quokka's 7.0% Convertible Promissory
Notes And Upon Exercise Of The Related Warrants."
On October 3, 2000, we closed a transaction wherein we acquired 71% of the
outstanding membership interests of Golf.com, L.L.C. through the issuance of
3,890,150 shares of Quokka common stock. The selling members included Total
Sports, MediaOne Interactive Services, a greater than 5% stockholder of Quokka,
GolfData Corporation, The New York Times Magazine Group, Inc. and Otto Candies
L.L.C. The remaining 29% of membership interests of Golf.com are owned by NBC.
Golf.com is an award-winning Internet property dedicated to the golf community.
Golf.com's site offers premium content, original storyline features, near real
time scores and statistics, community products, and services such as tee time
reservations, travel and pro shop. Golf.com is the primary golf coverage vehicle
for MSNBC Sports. Golf.com generates revenue primarily through advertising sales
and sales of golf-related products and services.
PROPERTIES
Our principal administrative, marketing, production and research and
engineering facilities are located in approximately 40,000 square feet of office
space in San Francisco, California under a lease that expires in March 2006. We
have options to renew this lease for two successive five-year terms. We have
entered into two additional office leases in San Francisco, California covering
an aggregate of approximately 120,000 square feet at two additional sites to
accommodate additional personnel. Approximately 88,000 square feet of this space
is not expected to be available until the end of 2000. We have additional office
space of approximately 44,000 square feet in Seattle, Washington under a lease
that expires in December 2003. We have an option to renew this lease for an
additional five years. We also have small sales offices located in Troy,
Michigan; La Jolla, California; Schaumburg, Illinois; Bethesda, Maryland and
Norwalk, Connecticut for local sales activities. Finally, we have entered into a
long-term lease covering approximately 5,000 square feet of office space in
London, England that serves as the center for our European operations. We
believe that our existing facilities are adequate to meet our current and near-
term needs.
LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings. We may from
time to time become a party to various legal proceedings arising in the ordinary
course of our business.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF QUOKKA SPORTS, INC.
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto included elsewhere in
this report. This discussion contains certain forward-looking statements that
involve risks and uncertainties. Our actual results and the timing of certain
events could differ materially from those discussed in these forward-looking
statements as a result of certain factors, including, but not limited to, those
set forth herein and elsewhere in this statement.
OVERVIEW
Quokka Sports is a leading provider of sports entertainment for the digital
world.
We use the power of emerging digital media to bring sports enthusiasts
closer to their favorite sports. We leverage our digital technology to offer
live event coverage, race viewers, news and information, audio and text
dispatches from athletes, games, community forums and content created by fans,
as well as opportunities for the fan to purchase premium content, products and
services in order to provide our audience a complete sports experience. The
Quokka Sports Network is designed to appeal to a global audience. We currently
cover motor racing, sailing, action sports such as climbing, hiking, skiing,
snow boarding, adventure racing and mountain biking, and key Olympic summer
sports, such as track and field, swimming and gymnastics. The Quokka Sports
Network also includes coverage of some of the world's largest sporting events
like the biennial Olympic Games, FedEx Championship Auto Racing (CART) Series
and the Motor Grand Prix championship as a result of our relationships with our
strategic partners like NBC Olympics, Inc., CART and Dorna Promocion del
Deporte, S.A.
We generate revenue from three sets of customers: from business customers
through sales of sponsorships and advertising; from media companies through
revenue from content syndication; and from consumers through sales of premium
content, sports memorabilia, officially-licensed merchandise and other products
and services. We currently derive the majority of our revenues from the sale of
sponsorship and advertising 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.
Several of our contracts are multi-year, multi-event and multi-benefit
sponsorships. These broader, long-term 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. In
addition, we sell shorter-term, more narrowly focused sponsorships and
advertising packages, depending upon the needs and demands of our corporate
customers. Our 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 some of our sponsorship
revenues 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 consumer revenues 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 sponsors and advertisers, 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 audience, our ability to acquire and integrate other
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companies, our 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 and long-term sponsorship
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 choose to discontinue offering these
services.
We have incurred significant net losses and negative cash flows from
operations, and as of June 30, 2000, we had an accumulated deficit of $112.7
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 the Quokka Sports
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 or profitability, they may not be sustained.
As of June 30, 2000 we had 382 employees compared to 242 at June 30, 1999.
ACQUISITIONS
On March 1, 2000, we entered into an Agreement and Plan of Merger and
Reorganization to acquire ZoneNetwork.com, Inc., a Washington corporation for a
total purchase price of approximately $25.9 million including acquisition cost.
ZoneNetwork.com produces and operates web sites that offer digital content,
products and services targeted to enthusiasts of skiing, climbing, hiking,
snowboarding, adventure racing and mountain biking. The ZoneNetwork.com
acquisition was completed on March 31, 2000 and was accounted for under the
purchase method of accounting.
On June 8, 2000, we signed a definitive agreement to acquire a controlling
interest in Golf.com, L.L.C., a privately-held company that is in the business
of developing, marketing and distributing golf related online services via the
Internet. The Golf.com acquisition was completed on October 3, 2000, whereupon
Quokka issued approximately 3.89 million shares of common stock in exchange for
71% of the ownership interest in Golf.com, L.L.C. for a total purchase price of
approximately $24.6 million including acquisition costs.
On July 20, 2000, we signed a definitive agreement to acquire Total Sports
Inc., an event-centered, online sports media company. Quokka will issue
approximately 15.0 million shares of common stock in exchange for all of the
outstanding capital stock, options and warrants of Total Sports. The purchase
price using an average stock price around the date the transaction was announced
was approximately $138.0 million, including acquisition costs and charges. The
transaction is currently expected to close by the end of November 2000, subject
to various conditions, including approval by Quokka's stockholders and Total
Sports' stockholders.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Revenues
Our revenues increased $18.7 million to $22.1 million for the six months
ended June 30, 2000 from $3.4 million for the comparable 1999 period. This
increase was due to an increase in the number of digital entertainment sponsors
for the six month period. Revenue for the six months ended June 30, 2000 were
derived primarily from our digital entertainment sponsorship agreements, other
sponsorship and advertising, content distribution, consumer revenue and other
sources. Revenue for the six months ended June 30, 1999 were derived primarily
from our digital entertainment sponsorship agreements and sponsorship revenue
from the Around Alone sailing event.
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Production Costs
Production costs increased $11.0 million to $17.3 million for the six
months ended June 30, 2000 from $6.3 million for the six months ended June 30,
1999. The increase in production costs from 1999 to 2000 is due to increased
sports programming including our sports coverage of the FedEx CART Championship
Series, the FIM Road Racing World Championship Grand Prix motorcycle races, the
America's Cup 2000 and Challenger Series yacht races, the BT Global Challenge,
coverage of Everest 2000, the 100th U.S. Open at Pebble Beach, GM Experience at
Le Mans and the 2000 North American International Auto Show. This increase
reflects costs associated with eight events produced or in pre-production during
the period as compared to one event, the Around Alone Race, during the
comparable 1999 period. Also included in 1999 production costs are costs
associated with the launch of the Quokka Sports Network in March 1999.
Amortization of Acquired 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. Amortization of acquired programming and distribution rights increased
$1.5 million to $3.6 million for the six months ended June 2000 from $2.1
million for the six months ended June 1999 quarter. 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, for the exclusive worldwide interactive media rights to FIM Road Racing
World Championship Grand Prix and for the America's Cup 2000 Yacht Race.
Acquired distribution rights represents licensing fees paid for the rights to
distribute our programming on Excite@Home and Terra Networks, S.A.
Gross Profit/Loss
Based upon the foregoing information, we had positive gross margin of $1.2
million for the six months ended June 30, 2000 compared to a negative gross
margin of $5.0 million for the six months ended June 30, 1999.
Research and Engineering
Research and engineering expenses increased to $4.7 million for the six
months ended June 30, 2000 to $11.4 million from $6.7 million for the six months
ended June 30, 1999. 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.
Sales and Marketing
Sales and marketing expenses increased $7.0 million to $15.6 million for
the six months ended June 30, 2000 from $8.6 million for the six months ended
June 30, 1999. Sales and marketing expenses include personnel costs,
consultants, partnership marketing and advertising. This increase is
attributable to partnership marketing and off-line advertising, which is
designed to create brand recognition and drive Internet traffic to
www.quokka.com and the other properties on the Quokka Sports Network. 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 $7.3 million
for the six months ended June 30, 2000 from $4.4 million for the six months
ended June 30, 1999. General and administrative expenses include personnel
associated with general management, business and legal affairs, finance and
accounting, facilities, and human resources. The increase is attributable to
increased personnel and related facilities and other third-party expenses
associated with building our operational infrastructure.
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Restructuring Costs
Restructuring costs for the six months ended June 30, 2000 were $588,000.
These costs are associated with a change in our e-commerce operational model
from in-house to outsource fulfillment. As a result, 22 employees associated
with the in-house fulfillment were identified and terminated prior to June 30,
2000. Included in the restructuring costs are severance expenses as well as the
write-off of related in-house software that managed the e-commerce function that
has been taken out of service. All restructuring costs have been expensed within
operating expenses. At June 30, 2000, a remaining accrual of $118,105 was
included in accrued liabilities and is expected to be relieved by September 30,
2000.
Depreciation
Depreciation and amortization expenses increased $2.2 million to $3.4
million for the six months ended June 30, 2000 from $1.2 million for the six
months ended June 30, 1999. The increase is primarily due to purchases of
additional equipment and amortization of leasehold improvements in our expanded
facilities associated with the scaling up of our operations in connection with
the upcoming Olympics.
Goodwill
Goodwill amortization for the six months ended June 30, 2000 was $4.2
million. Goodwill is associated with the purchase of ZoneNetwork.com, Inc. on
March 31, 2000 and is being amortized on a straight-line basis over 24 months.
Losses of Associated Venture
In December 1999, we dissolved our joint venture with Forsythe Racing, Inc.
Accordingly, we did not record any losses related to the associated venture for
the six months ended June 30, 2000. Prior to December 1999, we had accounted for
our 50% interest in this joint venture under the equity method of accounting.
For the six months ended June 30, 1999, losses of associated venture were $1.1
million.
Minority Interest in Net Loss of Consolidated Subsidiary
For the six months ended June 30, 2000, minority interest was $1.3 million
compared to $645,000 for the six months ended June 30, 1999 and represents the
minority interest's share of net losses for the period.
Interest Income/(Expense)
Interest income, net of interest expense, was $352,000 for the six months
ended June 30, 2000 as compared to $212,000 for the comparable 1999 period. The
$149,000 net increase reflects higher cash balances during the six months ended
June 30, 2000.
Net Loss
Based upon the foregoing information, we had net losses of $39.8 million
for the six months ended June 30, 2000 and $26.0 million for the six months
ended June 30, 1999.
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Revenues
Revenues increased to $13.1 million in 1999 from $8.6 million in 1998 and
$4.0 million in 1997. In 1999, we recognized revenues for the first time from
our multi-year, multi-event and multi-benefit digital entertainment
sponsorships, other sponsorships and advertising, content distribution, consumer
revenues and other. Revenues increased from 1998 to 1999 primarily as a result
of sponsorship sales totaling $11.7 million during 1999 as compared to
sponsorship sales of $7.0 million in 1998. The increase in revenues from 1998 to
1997 is primarily attributable to a $4.3 million increase in sponsorship
revenues.
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Production Costs
Production costs increased to $20.1 million in 1999 from $7.8 million in
1998 and $5.1 million in 1997. Production costs include costs of personnel and
consultants, software, travel, satellite transmission costs, field gear, event
marketing and an allocation of general and administrative expenses. The $12.3
million increase in production costs from 1998 to 1999 is due to increased
programming of our sports coverage of FedEx CART Championship Series and the FIM
Road Racing World Championship Grand Prix motorcycle races, America's Cup and
Challenger Series yacht races, BT Global Challenge, the World Track and Field
Championships in Seville, Spain, the U.S. Gymnastics Championships in
Sacramento, California and the 2000 North American International Auto Show. Also
included in 1999 production costs are costs associated with producing
www.quokka.com, which was launched in March 1999. The $2.7 million increase from
1997 to 1998 is attributable to an increase in the number of programming events
from September 1997 when we launched our first digital sports entertainment
program, the Whitbread Race.
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
$3.4 million for 1999. No such amortization costs were incurred during the
comparable 1998 or 1997 periods. 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 Road Racing World Championship Grand
Prix and for the America's Cup 2000 Yacht Race. Acquired distribution rights
represent licensing fees paid for the rights to distribute our programming on
Excite@Home and Terra Networks.
Research and Engineering
Research and engineering expenses increased to $13.1 million in 1999 from
$4.5 million in 1998 and $1.0 million in 1997. The increases represents the
costs of additional personnel, costs associated with network operations and
expenses incurred to improve and develop our Quokka Sports Platform and
broadband applications. Included in research and engineering expensed during
1999 is $1.2 million in non-cash compensation expenses related to the issuance
of 153,846 warrants to purchase common stock that were issued in connection with
certain broadband research initiatives. Research and engineering costs are
expensed as incurred.
Sales and Marketing
Sales and marketing expenses increased to $19.5 million in 1999 from $2.5
million in 1998 and $816,000 in 1997. Sales and marketing expenses include
personnel costs, consultants, sales sponsorships and advertising. During 1999,
we spent $7.7 million for advertising related to our marketing campaign, which
was 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. During 1998, we spent $554,000 for advertising
and $320,000 in 1997. We may significantly increase our advertising expenses in
future periods as we build the Quokka brand and awareness of our programming.
General and Administrative
General and administrative expenses increased to $11.1 million in 1999 from
$3.2 million in 1998 and $1.8 million in 1997. General and administrative
expenses include personnel associated with general management, business and
legal affairs, finance and accounting, facilities and human resources. The
increase in general and administrative expenses is attributable to increased
personnel and related facilities and other third-party expenses associated with
building our operational infrastructure.
Depreciation and Amortization
Depreciation and amortization expenses increased to $4.2 million in 1999
from $530,000 in 1998 and $68,000 in 1997. Depreciation and amortization
expenses consist of depreciation of computers,
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telecommunications equipment, software, and furniture and fixtures associated
with our operational infrastructure. Amortization expense relates to leasehold
improvements of our facilities in San Francisco. The increase in depreciation
and amortization expenses is primarily due to increased purchases of equipment
and amortization of leasehold improvements in our expanded facilities.
Losses of Associated Venture
We incurred net losses of $2.2 million in CART Digital Media Enterprises,
LLC, our joint venture with Forsythe Racing, Inc. for the year ended December
31, 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. In December 1999, we dissolved our joint venture with
Forsythe. As a result, we own 100% of CDME.
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 1999, minority
interest expense of $1.9 million represents the minority interest's share of net
losses for the period.
Interest Income and Expense, Net
Net interest income was $1.7 million in 1999 and $320,000 in 1998. Net
interest expense was $71,000 in 1997. The increase from 1999 to 1998 was
primarily due to a higher investment balance throughout 1999 due to the issuance
of preferred stock and our initial public offering. Interest income in 1999 was
partially offset by increased interest expense due to borrowings under a line of
credit. Interest income recorded during these periods includes interest income
earned on cash and cash equivalents.
Net Losses
Based upon the foregoing information, we had net losses of $56.9 million
for the year ended December 31, 1999, $9.6 million for the year ended December
31, 1998 and $4.9 million for the year ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since August 1996, we have financed our operations primarily through sales
of our equity and debt securities. On August 2, 1999, Quokka completed its
initial public offering of common stock. Net proceeds to Quokka from that
offering were approximately $54.5 million, net of underwriters' discounts and
offering expenses. Total net proceeds from sales of our equity securities since
August 1996 were $164.6 million through June 30, 2000.
On September 15, 2000, the Company closed the sale of convertible
promissory notes and warrants for total consideration of $77.4 million before
transaction fees and expenses.
At June 30, 2000, we had $23.3 million in cash and cash equivalents and
marketable securities. Restricted cash associated with three office leases and
the employee stock purchase plan and cash funding requirements under the
NBC/Quokka Ventures, LLC operating agreement aggregated $10.7 million at June
30, 2000. Net cash used in operating activities was $34.0 million for the six
months ended June 30, 2000, $48.3 million for the year ended December 31, 1999,
$10.9 million for the year ended December 31, 1998, $3.8 million for the year
ended December 31, 1997 and $18.8 million for the six months ended June 30,
1999. Net cash used in operating activities resulted from our net operating
losses, adjusted for
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certain non-cash items including compensation expense related to the issuance of
warrants and options to attract key vendors and business partners. Non-cash
charges were $2.2 million for the six months ended June 30, 2000, $4.2 million
for the year ended December 31, 1999, $530,000 for the year ended December 31,
1998, $68,000 for the year ended December 31, 1997 and $1.6 million for the six
months ended June 30, 1999. Non-cash charges relating to depreciation expense
were $3.4 million for the six months ended June 30, 2000 and $1.2 million for
the six months ended June 30, 1999. Non-cash charges related to the amortization
of programming and distribution rights were $3.6 million for the six months
ended June 30, 2000 and $2.1 million for the six months ended June 30, 1999.
Non-cash charges related to the amortization of goodwill was $4.2 million for
the six months ended June 30, 2000 and zero for the six months ended June 30,
1999.
Net cash provided by investing activities was $43.3 million for the six
months ended June 30, 2000 resulting primarily from net sales of marketable
securities offset by purchases of additional equipment and leasehold
improvements in our expanded facilities. Net cash used in investing activities
was $74.2 million for the year ended December 31, 1999, $2.7 million for the
year ended December 31, 1998 and $295,000 for the year ended December 31, 1997
and $4.1 million for the six months ended June 30, 1999 resulting primarily from
purchases of additional equipment and leasehold improvements in our expanded
facilities.
Net cash used in financing activities was $5.1 million for the six months
ended June 30, 2000 resulting primarily from payments on long-term financing
arrangements offset by proceeds from the issuance of common stock. Net cash
provided by financing activities was $102.4 million for the year ended December
31, 1999, $33.6 million for the year ended December 31, 1998 and $8.1 million
for the year ended December 31, 1997 and $39.6 million for the six months ended
June 30, 1999 resulting primarily from net proceeds from long term financing
arrangements and the issuance of preferred and common stock.
We were not in compliance with certain covenants related to our $2.0
million equipment financing loan at September 30, 2000. Since October 1, 2000,
we are in default of certain covenants. The noteholder can call the note at any
time. At June 30, 2000, $554,000 of the outstanding loan was classified as a
current liability and $1.446 million was classified as a long term liability. We
are in the process of working with the noteholder to amend the covenants,
however no assurance can be given that the covenants will be amended or a waiver
will be obtained.
We believe that our cash and cash equivalent balance of $78.9 million as of
September 26, 2000 will be sufficient to fund our operating requirements for
working capital and capital expenditures for at least the next 12 months.
Thereafter, we may 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 convertible debt
securities or borrow funds from banks. If this were to occur, the percentage
ownership of our stockholders could be reduced and our stockholders may
experience additional dilution. 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 may be materially adversely affected.
On August 22, 2000, we issued a warrant to purchase 10.0 million shares of
Quokka common stock to NBC for cash consideration of $500,000 and NBC's
continued relationship with Quokka. These warrants are exercisable at prices
ranging from $8.89 to $20.00 through 2004. The estimated fair value of the
warrants of $23.2 million has been determined based on the Noreen-Wolfson fair
value model with a volatility of 65% and risk free interest rate of 6.10% and
will be reported as a component of stockholder's equity. The warrant will be
amortized ratably over the terms of the warrant, which expires on December 31,
2004.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments and hedging activities. The Statement, which is
effective for the Company in 2000, requires that an entity recognize all
derivatives as either assets or
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liabilities in the balance sheet and measures those instruments at fair value.
The Company is assessing the requirements of SFAS No. 133 and the effects, if
any, on the Company's financial position, results of operations and cash flows.
In July 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting with Derivative Instruments
and Hedging Activities Deferral of the Effective Date of FASB Statement No.
133," which deferred the effective date until the first fiscal quarter ending
June 30, 2000. The Company will adopt SFAS No. 133 in its quarter ending June
30, 2000. The Company has not engaged in hedging activities or invested in
derivative instruments.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB
No. 101 summarizes certain of the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company does not believe that the adoption of SAB No. 101 will have a material
effect on the Company's financial statements.
In April 2000, FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation -- an interpretation of APB Opinion
No. 25" was issued. FIN No. 44 clarifies the application of APB No. 25 for only
certain issues. Among other issues, FIN No. 44 clarifies the definition of
employee for purposes of applying APB No. 25, the criteria for determining
whether a plan qualifies as a non-compensatory plan, the accounting consequences
of various modifications to the terms of a previously fixed stock option or
award, and the accounting for an exchange of stock compensation awards in a
business combination. FIN No. 44 is effective July 1, 2000, but certain
conclusions in this interpretation cover specific events that occur after either
December 15, 1998 or January 12, 2000. The adoption of certain of the
conclusions of FIN No. 44 covering events occurring during the period after
December 15, 1998 or January 12, 2000 did not have a material impact on the
Company's financial position and results of operations. The Company does not
expect that the adoption of the remaining conclusions will have a material
effect on the financial statements.
In January 2000, the Emerging Issues Task Force, or "EITF", reached a
consensus on EITF 99-17, "Accounting for Advertising Barter Transactions", which
is referred to as the "Issue." This Issue states that revenue and expense should
be recognized at fair value from an advertising barter transaction only if the
fair value of the advertising surrendered in the transaction is determinable
within the limits of this Issue. If the fair value of the advertising
surrendered in the barter transaction is not determinable within the limits of
this Issue, the barter transaction should be recorded based on the carrying
amount of the advertising surrendered, which likely would be zero. The adoption
of this consensus did not have a material impact on the Company's accounting and
business practices.
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THE COMPANIES
TOTAL SPORTS INC.
Note: References in this "The Companies -- Total Sports Inc." section to
"we," "us," "our" and similar expressions refer to Total Sports Inc. and its
subsidiaries.
OVERVIEW
Total Sports is an event-centered, online sports media company. We use our
digital technology to provide sports fans and enthusiasts with live Internet
broadcasts of graphical representations of events in eight collegiate and
professional sports. We call these broadcasts real-time simulcasts. We also
provide game summaries, in-depth statistical analyses, breaking news and
opportunities to purchase sports-related merchandise. In 1999, we provided
coverage of over 4,000 sporting events using our TotalCast system and other
real-time simulcast technologies. We believe we are differentiated by our
business architecture, which consists of our combination of proprietary
technology and people who cover live events and provide other sports content.
Our business architecture enables us to provide statistically detailed real-time
coverage and to continually update and customize content.
We have five sports networks, which are groups of our web sites, organized
by sport, league, school or team, and linked for easy navigation:
- Total Sports Network;
- Total Sports College Network;
- Total Baseball Network;
- Total Golf Network; and
- Total Sports Fishing Network.
Our contractual relationships with the National Collegiate Athletic
Association through Host Communications, Inc., Major League Baseball and major
college conferences provide us with the majority of our content. We derive
revenues by selling advertising on our simulcasts of NCAA and Major League
Baseball events. Our contractual relationship with NBC Sports, a Total Sports
stockholder, provides us with the majority of our promotion on television.
The total number of our web pages our users access, referred to as page
views, increased from approximately 38 million in 1997 to approximately 696
million in 1999, while the number of our sponsors and advertisers increased from
two in 1997 to 99 in 1999.
THE TOTAL SPORTS EXPERIENCE
Total Sports provides an interactive, event-centered online sports
experience, which enables users to access and select real-time and other
information specific to events, teams, and athletes. Our Total Sports networks
consist of over 100 web sites that provide real-time event coverage, historical
databases, expert analyses and breaking news of many collegiate and professional
sports. Our business architecture, which combines technology and business
processes, enables us to integrate interactive real-time event coverage, sports
content and e-commerce capabilities into our Total Sports networks and the web
sites of our customers.
Benefits to Users. We have designed our event-centered sports coverage to
meet the needs of sports fans. Key benefits include:
- Real-Time Event Coverage. TotalCast coverage allows our users to
experience interactive, play-by-play, real-time coverage over the
Internet. Our TotalCast features provide real-time graphical and textual
presentations of sporting events that enhance a user's experience by
offering a variety of charts, graphs and statistical analyses. Our
statistical content allows users to monitor and analyze
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the performance of teams and individual players at any point during a
sporting event. Our TotalCast programming also offer users real-time
coverage of events that might not be broadcast locally.
- Extensive and Authoritative Sports Content. Our real-time event coverage
is enriched by our sports-related news and information, including our
historical databases and archives, breaking news, expert analyses and web
sites targeted to particular teams or conferences. We maintain databases
with statistical information on many sports. For example, we have a
searchable online baseball database with the complete records of the over
15,000 current and former Major League Baseball players. Users can access
and query this online repository of sports-related information and
statistics to follow their favorite teams and players.
- Online Shopping Opportunity. We provide users with the opportunity to
purchase sports merchandise online. We integrate specific team, school
and conference sport store fronts and other e-commerce offerings into our
TotalCast programming and Total Sports networks. We also offer
merchandise specifically related to sporting events for which we provide
TotalCast coverage. Our users can select, order and purchase merchandise
before, during and after an event.
Benefits to Customers. Our customers include online news and entertainment
companies, broadcasters, leagues, athletic conferences and teams. Key benefits
to these partners include:
- Sports Content. We have designed our event-centered sports coverage to be
compelling to users. We believe that our content attracts and retains
users for our customers, creating additional advertising and e-commerce
opportunities. In particular, we believe that our TotalCast coverage,
which typically last between two and three hours, retains users longer
per visit than other online live event coverage.
- Outsourced Sports Content. Our business architecture enables us to
provide outsourced online sports content in a cost-effective manner while
maintaining our customers' brand integrity and the look and feel of their
web sites. We use a series of internally developed templates designed to
help us quickly and efficiently tailor our sports content to our
customers' specific needs and preferences. By providing sports content,
we offer an alternative to maintaining a large staff of reporters and
editors and technology infrastructure.
Benefits to Sponsors, Advertisers and Merchants. Key benefits include:
- Large and Targeted User Base. We provide sponsors, advertisers and
merchants a channel to reach a large and demographically attractive user
base. Furthermore, our Total Sports networks enable them to target users
by sport, region and other demographic categories, allowing sponsors,
advertisers and merchants to segment their target audience.
- Focused and Event-Centered Advertising and E-Commerce. We allow sponsors,
advertisers and merchants to tailor the scope and duration of a
particular campaign by enabling them to focus on specific sports,
leagues, teams or events. Merchants can capitalize on a fan's
event-specific interests by selling related merchandise directly during
our event coverage. We also design custom campaigns and programs for
maximizing marketing and e-commerce opportunities on the web for our
sponsors, advertisers and merchants.
BUSINESS STRATEGY
Enhance and Generate Revenue From Our Content. We intend to grow our user
base and increase traffic to generate additional revenue by adding new sports
web sites and networks of web sites, expanding our existing sports networks and
enhancing user functionality. We plan to increase the content available on our
five current sports networks. We will continue to enhance user functionality on
our Total Sports networks and use our databases to create enhanced content to
make the user experience broader and richer.
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Capitalize on Our Technology. We believe our technology infrastructure and
business processes provide us with an advantage as we enter new sports
categories, expand our strategic relationships, increase the syndication of our
content and capitalize on convergence opportunities. We believe that our
capability to provide detailed, real-time sporting event coverage offers sports,
leagues and teams an attractive means to expand online coverage and promotion of
their events. In addition, by allowing rapid collection, customization and
distribution of sports content, our business architecture enables other
customers to access our sports content. Our technology also positions us to
expand our service offerings and become a leader in integrating video, audio,
text and digital sports programming on a real-time basis over the Internet. We
believe that doing so will give us a competitive advantage. As technologies that
integrate television, wireless and Internet broadcasts develop, we will be able
to disseminate the data we collect through our TotalCast system, as well as the
related analyses and graphical presentations, using these convergent
technologies. In addition, we can deliver our content to a variety of devices
that provide Internet access, including personal computers, hand-held devices,
pagers, cellular telephones and interactive television. We intend to deliver our
content to other devices as they develop.
Expand Strategic Relationships. We intend to expand our current and enter
into new strategic relationships to obtain additional content and distribution.
We plan to expand the scope of our existing relationships with major media
companies, such as NBC Sports, and with professional and collegiate sports
teams, leagues and other sports organizations, such as Major League Baseball and
the NCAA, to broaden the reach of our online networks and gain access to
additional content. We will also seek to establish additional relationships with
other sports organizations and traditional and new media companies to secure
rights to additional content and events, both in the U.S. and internationally.
Strengthen Our Brand Recognition. We intend to make Total Sports synonymous
with authoritative, real-time, comprehensive sports content. We also will
promote our other brands and trademarks, such as our TotalCast mark, our brand
for real-time graphical and textual presentation of sporting events, and
"Powered by Total Sports," our brand for syndicated content. We intend to build
our brands through online and offline advertising, strategic relationships, and
other promotional activities. We will also continue to co-brand our content with
leading syndication media partners.
TOTAL SPORTS BUSINESS ARCHITECTURE
Our proprietary technology infrastructure and business processes enable us
to collect sports statistics and information and distribute them in customized
formats on our Total Sports networks and to multiple distribution customers.
This business architecture allows us to rapidly collect sports content from a
wide variety of sources, convert the content into one master format, and then
customize and distribute that content quickly and efficiently.
Our distribution of content allows users to access our content in a number
of ways, including:
- through our Total Sports Network, anchored by www.totalsports.net and
www.totalsports.com, which help them find our specific site covering the
sport, league or team in which they are interested;
- through our other four sports networks, which consist of groups of our
individual sites, organized by sport, league, school or team, and linked
together for easy navigation;
- directly through one of our over 100 individual web sites for sports,
leagues, schools or teams; and
- through the over 250 web sites of our distribution customers to whom we
distribute sports content.
Our business architecture consists of two primary components, the TotalCast
system and the Total Sports publishing system. The primary difference between
the two systems is the source and nature of the content initially flowing into
the systems.
TotalCast System
The TotalCast system receives data real-time from a sports event, processes
the information, so that it can be stored and manipulated in our databases, and
then, using that data, creates graphical and textual
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descriptions and analyses of the event. Our business architecture is comprised
of three primary processes that create the ability to reuse and redistribute
Total Sports statistics and information across many different platforms in many
different ways.
Collecting Real-Time Data. At the sports venue, our operators input data
relating to the sporting event into a computer that relays the information to us
over the Internet. The computers used by our operators have software featuring
an easy-to-use graphical display, immediate quality control feedback and
artificial intelligence that knows the rules and situations of each sport. The
data is sent real-time to our servers in a format ready for conversion.
Converting the Data. The TotalCast system receives and immediately converts
the data into a format that can be stored in our databases and used to create
new content. The data conversion process manages problems during an event. For
instance, if there is an interruption in service, once communications are
re-established, the data conversion process will synchronize all missing
information and create new content. This enables us to deliver accurate and
complete coverage to our users and to make available complete archives of
events.
Creating the Content. The content creation process immediately takes
information from the TotalCast database and creates multiple graphs, statistical
presentations and text pages per play during a sporting event. The system can
create many different presentations of each discrete event like a pitch in
baseball or a pass play in football. We believe that it typically takes
approximately ten seconds from the time the operator enters the information into
the computer at the sport venue to when all the different presentations are
available on the Internet.
The TotalCast system also can integrate audio files, video files and still
photographs or deliver that content separately to our network of web sites,
those of our syndication partners and a variety of other access devices.
Total Sports Publishing System
The Total Sports publishing system enables us to receive data and
information from many sources in multiple formats and convert, manipulate and
distribute this data in different forms on the Total Sports network or the web
sites of our distribution customers. The system also allows us to rapidly
repackage content into one of more than 100 different templates, each with a
different look, feel and presentation.
Collecting Data. The publishing system receives news, statistics and other
content from multiple sources in different formats, including email, computer
files, facsimiles, proprietary data formats, news or sports wire transmissions,
photographs and satellite data streams. The system can process tens of thousands
of data files per day.
Converting the Data. The publishing system converts this diverse stream of
information into a format that can be stored in our databases and used to create
new content. As part of this process, the system knows the contractual rules for
each source of information. For instance, some wire services will allow web
sites to display stories for a certain period of time before they must be
removed. The data conversion process automatically ensures that all content is
used consistently with any relevant contractual provisions.
Creating the Content. Editors, either from Total Sports or our distribution
customers, can adjust the display, change headlines or change the display
priority of any content on their respective web sites. The system creates web
pages to conform to the look and feel of each Total Sports distribution
customer. The content creation process can display a story in more than 100
different formats.
Both the TotalCast system and our publishing system are designed to handle
rapid changes in design and load. The architecture can accommodate new
distribution customers and increased traffic levels without slowing down our
ability to update web sites, limiting our customers' ability to change their
sites or changing the user's experience. The architecture is also designed to
distribute our content to various non-Internet devices such as in-venue
displays, pagers, mobile computers, cellular phones and hand-held
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computing devices. For example, in early 2000, we began offering detailed,
customized updates of ongoing sporting events via cellular phones.
PRODUCTS AND SERVICES
We provide users access to our TotalCast coverage and other real-time event
simulcasts, our searchable archives of sports-related news, statistics and
analysis and merchandise related to their favorite teams, players and events
throughout our Total Sports networks and on the web sites of our distribution
customers.
Total Sports Networks
Our five Total Sports networks provide users with extensive online sports
programming encompassing both collegiate and professional sports. Our Total
Sports networks are centered around our real-time event coverage. These networks
consist of more than 100 web sites, which users can access directly or through
our navigational sites, www.totalsports.net and www.totalsports.com. Our
networks feature:
- interactive real-time event coverage;
- up-to-date general sporting news and editorials;
- streaming audio and video;
- constantly updated scoreboards; and
- e-commerce storefronts.
The following chart identifies our five Total Sports networks, including
selected web sites and content features:
<TABLE>
<CAPTION>
SPORTS NETWORKS SELECTED WEB SITES CONTENT FEATURES
----------------------------------------------------------------------------------------------
<S> <C> <C>
Total Sports Network TotalSports.com - Sports news and editorials
TotalSports.net - TotalCast coverage of various sporting
TotalHockey.com events
----------------------------------------------------------------------------------------------
Total Sports College TotalCollegeSports.com - Official web sites and TotalCast coverage
Network FinalFour.net for NCAA championships, including the Final
NCAA Football.net Four and the College World Series
NCAA Baseball.net
SECSports.com - TotalCast coverage of conference and
Big10Championships.com university sporting events
GoDuke.com
Ricebowls.com - University and conference web sites
- Official university and conference online
stores
----------------------------------------------------------------------------------------------
Total Baseball Network TotalBaseball.com - TotalCast coverage of all spring
TotalWorldSeries.com training, regular season, playoff and World
Series games
- Searchable database for statistics on
approximately 15,000 current and former
MLB players
- Standings, schedules, statistics, news
----------------------------------------------------------------------------------------------
Total Golf Network Golf.com - TotalCast coverage of tournaments
Pinehurst99.com
- Instruction, news, schedules
- Equipment sales
----------------------------------------------------------------------------------------------
Total Sports Fishing worldbillfishseries.com - Simulcast of World Billfish Series
Network Fishska.com
- General sportfishing information
----------------------------------------------------------------------------------------------
</TABLE>
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Real-Time Event Coverage
We provide real-time event coverage on our Total Sports networks and the
web sites of our distribution customers in the form of TotalCast programming and
other simulcasts.
Our TotalCast coverage is a graphical and textual real-time presentation of
sporting events over the Internet that simulates a spectator's experience. Our
TotalCast coverage incorporates real-time scoring updates, detailed textual
play-by-play descriptions and statistical updates in an integrated, interactive
format. The TotalCast programming functionality allows a user to search for and
analyze statistics for teams or individual athletes throughout the event. Our
proprietary data collection system enables us to capture a significant number of
discrete events for the user. Our TotalCast navigational system enables users to
access statistics, graphical depictions of real-time events, rosters and general
sporting news.
Our TotalCast coverage of collegiate and professional sports includes:
- Baseball. Our baseball TotalCast programming collects approximately 210
categories of statistical information, compared to a standard 18-category
box score. We offer our users a graphical representation of a player
at-bat and the location of each pitch. We also allow users to track each
player's at-bats by inning. In addition, we provide a graphical
representation of the baseball field and categorize each ball in play,
such as grounders, line drives, pop-ups, fly balls and home runs.
- Basketball. Our basketball TotalCast programming collects over 50
categories of statistical information, including every shot made or
missed, assist, rebound, steal, turnover, blocked shot and foul. Each of
these discrete events is recorded in both a play-by-play textual summary
and charted by location on the court. Our basketball TotalCast coverage
includes photographs from cameras in various locations, including a "Slam
Cam" located above the backboard.
- Football. Our football TotalCast programming tracks over 110 statistics,
including passing yardage, rushing yardage, first downs, points scored,
touchdowns, field goals, turnovers, penalties and kick returns. We
graphically display each possession, and summarize possessions in each
quarter. Our system-generated text provides a description of each play
that includes information such as players' full names, commentary on
passing styles and plays, and game summaries.
- Golf. Our golf TotalCast coverage collects information on each player in
a tournament, including every shot, the distance traveled, the club used,
information about greens, fairways, putts, sandsaves and the x and y
coordinates of every shot hit. This allows the TotalCast system to
display the beginning and ending point of every shot in real-time. We
also provide information about the course, including full statistical and
pictorial descriptions of each hole. Throughout the tournament, users can
track the complete statistics on each individual player's round. Users
can compare different players' performance on the same hole. After each
round, a statistical summary is created, combining highlights and
statistics. A continuously updated leader board keeps track of all
individual rounds in progress.
Since our inception, we have provided real-time event coverage through both
our TotalCast coverage and other simulcasts for over 7,000 live sporting events
including the following: Major League Baseball games; the NCAA Championship
men's and women's basketball tournaments; and NASCAR races. We covered over 240
live events in 1997, over 3,000 in 1998 and over 4,000 in 1999. We estimate that
over three million users viewed our TotalCast programming of 2000 NCAA
Championship men's basketball tournament games.
Distribution
We license, or syndicate, content to the web sites of both traditional and
Internet distribution customers under our "Powered by Total Sports" brand.
Syndication ranges from basic distribution of content to the creation,
maintenance and management of web sites. Our scalable, flexible business
architecture efficiently integrates our content with that of our distribution
customers to provide
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continuously updated, dynamic content. Our different types of syndication and
our customers are described below:
<TABLE>
<CAPTION>
TYPE OF DISTRIBUTION DISTRIBUTION CUSTOMERS DESCRIPTION
------------------------------------------------------------------------------------------------
<S> <C> <C>
Basic distribution of - Associated Press Syndicate Total Sports content
content to over 250 web sites through
the AP's "The Wire" service
------------------------------------------------------------------------------------------------
TotalCast syndication - Regional and local newspapers Provide links to TotalCast
- MSNBC programming
- Houston Astros
- San Diego Padres
------------------------------------------------------------------------------------------------
Site creation, maintenance - AOL.com Design, provide and manage the
and management - Wall Street Journal content for the sports sections
- Los Angeles Times of web sites
------------------------------------------------------------------------------------------------
</TABLE>
E-Commerce
Our event-focused programming and Total Sports networks generate a
demographically attractive audience that provides e-commerce opportunities to
sponsors, advertisers and merchants. As of June 30, 2000, we operated 38 online
stores offering a range of sporting goods and merchandise, including the
Golf.com pro shop, and web sites for the NCAA Final Four, the SEC, Duke
University, the University of Texas and University of Arizona. Our event-focused
programming offers a targeted channel for online marketing and sales. For
example, the moment the 2000 NCAA Championship men's basketball tournament
ended, we promoted and sold national champion merchandise featuring the winning
team. Total Sports customers can place and track orders through our web sites as
well as through our customer service, which can be reached by email or by
calling our toll free customer service number 1-877-I AM A FAN.
We do not maintain significant amounts of e-commerce inventory. During 1998
and 1999, approximately 75% of our e-commerce transactions were purchased by us
from third-party manufacturers or distributors after we received orders from
customers. We expect this percentage to remain constant in future periods. For
sales of merchandise, we are responsible for pricing, processing orders,
arranging or authorizing delivery, processing all merchandise returns, providing
all customer support related to the transaction, and resolving customer
disputes. In the event goods are lost or damage during shipment from or return
to the distributor and coverage is denied by the commercial shipping company, we
bear the risk of loss. We generally do not extend credit to e-commerce
customers, except through third-party credit cards. Credit card sales account
for approximately 100% of total e-commerce sales in 1998 and 1999. Our
agreements with third-party credit companies provide for the electronic
processing of credit approvals and the electronic submission of transactions.
Upon the submission of these transactions to the credit card companies, they
transmit payment to our bank account. Payment from the credit card companies
usually occurs within one to two days.
Total Sports uses its technology and business architecture to create custom
Internet sports solutions for sports rights holders, sports media companies and
companies invested in sports as a core part of their marketing strategy. For
example, in 1997 Host Communications engaged Total Sports to design, build and
manage a Internet sports solution for the NCAA. That solution has grown to more
than 12 sites covering many of the NCAA Championship events, including the NCAA
Basketball Championships. Total Sports collects revenues for these services in
several ways, including consulting fees for design and strategy, service fees
for building and managing systems, and advertising revenue splits with clients
and e-commerce revenue splits with clients.
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STRATEGIC RELATIONSHIPS
We have entered into strategic relationships that enhance our content,
distribution and promotion, including the following:
- NBC Sports. Our relationship with NBC Sports, a division of National
Broadcasting Company, Inc., encompasses promotion and distribution
arrangements as well as an equity investment. NBC Sports has agreed to
provide us $17.4 million worth of promotion. If we have rights to offer
TotalCast coverage of an NBC-televised sporting event other than the
Olympics, then NBC Sports will promote our TotalCast programming and no
other similar service during its broadcast of the event. NBC Sports will
promote our TotalCast coverage in a variety of ways, which may include
announcer-read, in-context, promotional mentions and in-broadcast
graphics. NBC Sports will direct users to web sites owned, co-owned or
controlled by NBC Sports from which users can access our live event
coverage. We believe that the NBC Sports on-air promotion will
significantly increase traffic to our web sites and awareness of our
TotalCast brand. NBC Sports also has agreed to use commercially
reasonable efforts to assist us in securing advantageous promotion and
distribution on NBC Sports' affiliated web site properties, including
MSNBC.com and any dedicated NBC Sports web site other than its Olympics
sites. Our agreement with NBC Sports is for 51 months beginning in
November 1999, subject to earlier termination for breach or upon an
acquisition of control of Total Sports by a competitor of NBC Sports. In
the case of a termination upon such a change of control, NBC Sports would
not have to pay us any money or return the stock we issued to NBC Sports.
In addition, NBC Sports has the right to pay us cash or return stock we
issued to them instead of providing us promotion under the agreement. NBC
is also an equity investor, along with Total Sports, in Golf.com.
- National College Athletic Association and Collegiate Athletic
Conferences. Our relationships with both the NCAA and collegiate
conferences provide us with content for our college sports and NCAA
championship networks. Through our contract with Host Communications, we
have the exclusive rights, through June 30, 2001, to host web sites for
and to provide TotalCast coverage of all 81 championship tournament
events for the NCAA. We have separate relationships with several
collegiate conferences and organizations, including the Southeastern
Conference, the Big Ten, the Big 12, the Big East and the National
Association of Intercollegiate Athletics. Typically for such entities,
Total Sports has the exclusive rights to host their web site, to provide
TotalCast coverage of all conference tournament or championship events,
host an online store selling conference merchandise and to access to all
conference photograph, video, audio, statistical and print libraries.
- Major League Baseball. Major League Baseball has licensed online and
print publishing rights to us. We hold a license to provide TotalCast
coverage of the over 2,400 major league games played each year, including
spring training exhibition games, the All-Star game, the playoffs and the
World Series. This license runs through 2001 and includes the right to
use and display statistics.
SALES AND MARKETING
Sales. Our Total Sports networks and event-focus enable advertisers to
target their audience on multiple levels, including by sport, region, team,
event or other parameters. In addition, we design custom advertising solutions
for clients seeking to extend marketing campaigns and merchandising
opportunities across offline and online media.
During 1999, 99 sponsors and advertisers, an increase of approximately 111%
over 1998, sponsored events or placed advertisements on the Total Sports
networks. No single customer accounted for more than five percent of our
revenues for 1999. The following is a list, in alphabetical order, of our top
ten sponsors and advertisers by revenues to us in 1999:
- American Express Company
- Compaq Computer Corporation
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- Continental Airlines, Inc.
- General Motors Corporation
- GTE Corporation
- Mastercard International Corporation
- Myrtle Beach Golf Holiday
- NBC Sports
- Nokia
- PepsiCo, Inc.
In June 2000, Total Sports elected to have its advertising revenue sales
functions handled by Winstar Interactive Media Sales. Winstar, an investor in
Total Sports, sells to advertising agencies and other advertising buyers,
advertising inventory available on Total Sports sites as well as sites managed
by Total Sports for its clients, such as www.GoDuke.com. By outsourcing the
advertising sales functions, Total Sports reduced its fixed selling expenses and
focused its sales resources on selling technology and marketing solutions. The
shift allowed Total Sports to close its offices in New York, Chicago, Toronto
and Los Angeles, further reducing fixed expenses.
Marketing. We employ a variety of online and offline advertising campaigns
to promote our brands, generate additional traffic and attract new users to our
Total Sports networks. NBC Sports provides us with on-air promotion on NBC
Sports television broadcasts. We have primarily relied upon promoting and
marketing Total Sports through our online syndication relationships with
AOL.com, the Wall Street Journal, the Associated Press and the Los Angeles
Times. These relationships have allowed us to establish our "Powered by Total
Sports" brand and reach a mass consumer market. Our branded content is also
promoted by links on major search engines such as Yahoo!, Altavista and Excite.
We will continue to pursue relationships that will expand our audience and
enhance our brand awareness.
COMPETITION
We compete for users, advertisers and rights to sporting events with many
other entities. Our direct competitors are other online sports media companies
and web sites. Some of these competitors target sports enthusiasts generally.
Others target fans of a particular team, league or sport. Our most significant
direct competitors are ESPN.com, CBSSportsline.com, CNNSI.com and foxsports.com.
Based on our market research conducted in 1999, we believe that approximately
20% of the people who visit sports-related web sites visit one of our sites,
while over 60% visit ESPN.com.
We also compete indirectly with companies and web sites in different
business sectors, such as:
- web search and retrieval services and other high traffic web sites that
provide access to sports-related content and services, many of which have
been established by traditional media companies;
- vendors of sports information, merchandise, products and services
distributed through other means, including retail stores, mail, facsimile
and private bulletin board services; and
- television, radio and other established media entities that broadcast
sporting events.
We believe that the principal competitive factors in attracting and
retaining users are:
- the depth, breadth, and timeliness of sports content;
- brand recognition; and
- ease of use and quality of services.
We anticipate that, as the Internet and other interactive distribution
systems converge with traditional television broadcasting and cable, significant
competition might come from the providers of broadband
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networks, including sports-oriented cable networks. Some of our existing
competitors, as well as a number of potential new competitors, have longer
operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than we do.
Others might develop technologies and services that are similar or superior to
ours. We expect that the number of our direct and indirect competitors will
increase in the future and this might adversely affect our business, operating
results and financial condition. Increased competition could result in lower
advertising rates and loss of users, market share and advertising opportunities,
any of which could materially and adversely affect our business, operating
results and financial condition.
INFRASTRUCTURE, OPERATIONS AND TECHNOLOGY
Our operating infrastructure is designed to provide timely, efficient and
reliable delivery of our content for the benefit of our users, syndication
partners and advertisers. We use Solaris as an operating system and Enterprise
and Apache Webserver and Netscape Fast Track as web server software. Total
Sports' technology infrastructure integrates commercial and internally-developed
software. All of our internally developed applications utilize Java Enterprise
and interact with various third-party applications licensed by Total Sports,
including Oracle's database software. We intend to add capacity and
functionality as required to meet usage demands.
Frontier Global Center hosts our production servers at its Herndon,
Virginia facility. Frontier Global Center provides comprehensive facilities
management services, including human and technical monitoring of all production
servers 24 hours per day, seven days per week. Frontier provides the means of
connectivity for Total Sports' servers to end-users via the Internet through
high capacity transmission wires. These connections link to many different parts
of the Internet via a combination of public and private peering agreements. The
facility has at least two independent uninterruptible power supplies, which are
battery-powered, as well as at least two independent diesel generators designed
to provide power to these systems within seconds of a power outage. The diesel
generators can supply the data center's power for nine days before refueling is
required. Any disruption in the Internet access provided by Frontier could
materially adversely affect our business, results of operations and financial
condition.
Our product development expenses were $1,467,000 for the period from
February 20, 1997, the date of our inception, through December 31, 1997,
$2,672,000 in 1998 and $4,171,000 in 1999. We intend to continue to invest
significantly in enhancing our technology.
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES
The laws governing the Internet remain largely unsettled, even in areas
where there has been some legislative action. It might take years to determine
whether and how existing laws, including those governing intellectual property,
privacy, libel and taxation, apply to the Internet generally and the electronic
distribution of business information in particular. Legislation could reduce the
growth in the use of the Internet generally and decrease the acceptance of the
Internet as a communications and commercial medium, which could materially
adversely affect our business, operating results and financial condition. In
addition, the growing popularity and use of the Internet has burdened the
existing telecommunications infrastructure and many areas with high Internet
usage have begun to experience interruptions in phone service. As a result, some
local telephone carriers have petitioned governmental agencies to regulate
Internet service providers and online service providers in a manner similar to
long distance telephone carriers and to impose access fees on Internet service
providers and online service providers. If any of these petitions or the relief
that they seek is granted, the costs of communicating on the Internet could
increase substantially, potentially adversely affecting the growth in the
Internet.
Tax authorities in a number of states are currently reviewing the
appropriate tax treatment of companies engaged in electronic commerce.
Therefore, we might become subject to additional state sales and income taxes.
Because our content is available over the Internet in multiple states and
foreign countries, these jurisdictions might claim that we are required to
qualify to do business as a foreign corporation in each such state and foreign
country. Failure by us to comply with foreign laws or to qualify
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as a foreign corporation in a jurisdiction where we are required to do so could
subject us to taxes and penalties for the failure to qualify and could result in
our inability to enforce contracts in such jurisdictions. Any such new
legislation or regulation, or the application of laws or regulations from
jurisdictions whose laws do not currently apply to our business, could subject
us to additional taxes or penalties.
INTELLECTUAL PROPERTY
The intellectual property that is important to our business is our
proprietary data collection software and systems, and our sports content,
including statistical databases and copyrighted material. Trademarks are also
important to our success because we rely on brand recognition to increase user
traffic on our web sites. We also license and receive a substantial amount of
our data and content from third parties. These licenses generally have terms
equal to or longer than the period of time we intend to use the data or content.
Copyright protection on our own content lasts 75 years from first publication.
Trademarks are protected by law as long as we are using the trademark.
We rely primarily on a combination of copyrights, trademarks, trade secret
laws, our user policy, licensing agreements and restrictions on disclosure to
protect our intellectual property. Despite these precautions, it might be
possible for a third party to copy or otherwise obtain and use the content on
our web sites or our other intellectual property without authorization. Our
precautions might not prevent misappropriation or infringement of our
intellectual property. Failure to protect our intellectual property in a
meaningful manner could materially adversely affect our business, operating
results and financial condition. In addition, we might need to engage in
litigation in order to enforce our intellectual property rights in the future or
to determine the validity and scope of the proprietary rights of others. Any
litigation could result in substantial costs and diversion of management and
other resources, either of which could materially adversely affect our business,
operating results and financial condition.
Because we license and receive a substantial amount of our data and content
from third parties, our exposure to copyright infringement actions might
increase. We rely upon these third parties as to the origin and ownership of
licensed content. We generally obtain representations as to the origins and
ownership of licensed content and generally obtain indemnification to cover any
breach of any representations. However, these representations might not be
accurate and indemnification might not be sufficient to provide adequate
compensation for any breach of these representations.
Others might assert infringement or other claims against us, whether
resulting from our internally developed intellectual property or licenses or
content from third parties. For example, in late 1999, DDB Technologies
contacted us to solicit a license under three patents held by DDB Technologies.
Likewise, in July 2000 we received a letter from Geoworks Corporation explaining
its position that any service using wireless application protocol requires a
license from Geoworks. We are considering these matters and have retained patent
counsel to assist in evaluating the patents and determining our strategy
relating to this request. Any future assertions or prosecutions could materially
adversely affect our business, operating results and financial condition. Any
claims, with or without merit, could be time-consuming, result in costly
litigation and diversion of technical and management personnel or require us to
introduce new content or trademarks, develop non-infringing technology or enter
into royalty or licensing agreements. These royalty or licensing agreements, if
required, might not be available on acceptable terms, if at all. In the event a
claim of infringement is successful and we fail or are unable to introduce new
content, develop non-infringing technology or license the infringed or similar
technology on a timely basis, our business, operating results and financial
condition could be materially and adversely affected.
EMPLOYEES
On June 30, 2000, we employed 134 full-time employees (excluding employees
in our print division, which is not part of the proposed merger with Quokka),
comprised of 14 in finance and administration, 71 in production and operations,
32 in engineering, nine in e-commerce and eight in sales and marketing. In
addition, we engage as independent contractors free-lance reporters,
statisticians, photographers, camera
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operators and editors. We do not have employment agreements with any of our
employees except the employment agreement dated July 20, 2000, with Gary
Stevenson, our president and chief executive officer, for a term extending until
May 8, 2001. None of our current employees are represented by a labor union. We
believe that our relationship with our employees is good. Competition for
qualified personnel in our industry is intense.
PROPERTIES
We are headquartered in Raleigh, North Carolina. Our facility, into which
we relocated in August 1999, consists of approximately 27,000 square feet. The
lease for this facility will expire in June 2009.
LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings. We may from
time to time become a party to various legal proceedings arising in the ordinary
course of our business.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF TOTAL SPORTS INC.
You should read the following discussion of Total Sports, also referred to
in this section as "the company," financial condition and results of operations
with the company's consolidated financial statements and the related notes
appearing elsewhere in this prospectus. This discussion contains forward-
looking statements which involve risks and uncertainties. Total Sports' actual
results could differ materially from those anticipated in these forward-looking
statements.
OVERVIEW
Total Sports is an event-centered, online sports media company. It provides
sports fans and enthusiasts with live, or real-time, simulcasts of events in
eight collegiate and professional sports, game summaries, in-depth statistical
analyses, breaking news and opportunities to purchase sports-related
merchandise.
REVENUES
Total Sports derives its revenues from three primary sources:
- digital publishing;
- print publishing; and
- e-commerce.
Digital publishing revenues result from the selling of sponsorships and
banner advertisements, licensing of statistical data and content, and providing
web site development services for third-parties. During 1998, 81.6% of Total
Sports' revenues came from digital publishing. During 1999, 79.9% of the
company's revenues came from digital publishing.
Total Sports' sponsorships generally relate to specific sporting events,
such as the NCAA men's basketball championships. The company derives advertising
revenues from sales of banner advertisements on its web sites. Total Sports
recognizes sponsorship revenues in the period that the sponsored event occurs
and the sponsorship is displayed, provided that no significant obligations
remain, such as unmet commitments for guaranteed minimum impressions, which are
also known as "page views" or "hits." Total Sports recognizes advertising
revenues ratably over the period in which the advertisement is displayed,
provided that no significant obligations remain. In the event that the company's
sponsorships or advertising arrangements contain minimum impressions guarantees,
Total Sports recognizes revenue incrementally as progress is made toward the
minimum impression commitments or using the straight-line method, whichever is
less. During 1999, sponsorships accounted for 30.1% and advertising 54.5% of
total digital publishing revenues.
Total Sports recognizes licensing revenue for statistical data when the
statistical data has been delivered and the company has no significant
obligations. Total Sports recognizes content licensing revenue over the period
of the license agreement as the company delivers the content. Total Sports
recognizes web site development revenue as the services are performed, provided
that no significant obligations remain. If web site development fees relate to
or come from an agreement to license content, Total Sports recognizes the
development fees revenue over the content license period. Total Sports records
amounts billed or received for which services have not yet been provided as
deferred revenue on its balance sheets.
Total Sports derives print publishing revenues from the sale of sports
encyclopedias, fan guides and other sports-related books. For titles the company
publishes, Total Sports recognizes print publishing revenue upon the sale of the
company's publications by a third-party distributor, which has historically been
its primary distribution channel. In connection with these sales, Total Sports
establishes a reserve for right of returns of approximately 37.0% at the time
revenue is recognized. For titles that Total Sports co-publishes, the company
recognizes revenues as it earns fixed advances that are paid to the company by
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the co-publisher. Print publishing revenues has been included in loss from
discontinued operations for all periods presented.
As discussed below in "-- Recent Developments," in March 2000, Total Sports
adopted a plan to dispose of its print publishing segment.
Total Sports derives e-commerce revenues from the sale of sports equipment,
apparel, and memorabilia through the company's online stores and through its
live event merchandising. During 1999, 20.1% of Total Sports' revenues came from
e-commerce sales. Total Sports recognizes e-commerce revenue upon delivery of
goods to its customers, which occurs only after credit card authorization. Total
Sports does not maintain significant amounts of e-commerce inventory. During
1998 and 1999, approximately 75% of Total Sports' e-commerce transactions were
purchased by the company from third-party manufacturers or distributors after
the company received orders from customers. Total Sports expects this percentage
to remain generally constant in future periods. For sales of merchandise, Total
Sports is responsible for pricing and processing orders, arranging or
authorizing delivery, processing merchandise returns, providing all customer
support related to the transaction, and resolving customer disputes. Title to
goods held on hand at Total Sports' offices transfers to the company at the time
the goods are received by Total Sports from its suppliers. Title to goods
purchased from distributors and shipped directly to customers transfers to Total
Sports at the time the goods are shipped from the distributor. Title transfers
from Total Sports to the final customer at the time the goods are delivered to
and accepted by the customer. In the event goods are lost or damaged during
shipment from or return to the distributor and coverage is denied by the
commercial shipping company, Total Sports bears the risk of loss. Total Sports
generally does not extend credit to e-commerce customers, except through
third-party credit cards. Credit card sales account for approximately 100% of
total e-commerce sales in 1998 and 1999. Total Sports bears no financial risk
under these agreements except in the case of credit card fraud or merchandise
return fraud. Total Sports' agreements with third-party credit companies provide
for the electronic processing of credit approvals and the electronic submission
of transactions. Upon the submission of these transactions to the credit card
companies, they transmit payment to Total Sports' bank account. Accordingly, the
company records the amounts as cash upon the electronic submission of the
transaction to the appropriate processing agency. Payment from the credit card
companies usually occurs within one to two days.
Total Sports generally allows returns of e-commerce merchandise for any
reason within 30 days of the sale. Accordingly, Total Sports provides for
allowances for estimated future returns at the time of shipment based on
historical data. During 1999, the company's rate of e-commerce product returns
averaged 7.6% of total e-commerce revenues, but the future return rates could
differ significantly from the company's historical averages.
Sponsorship and advertising revenues are seasonal and event-driven, and are
expected to constitute the majority of the company's future revenue growth as
Total Sports focuses its efforts on adding new sponsors and increasing the
volume of sponsorships with existing sponsors, as well as increasing the number
and types of live events Total Sports covers and expanding the company's Total
Sports networks. E-commerce revenues are expected to increase in absolute
dollars in future periods but to decrease as a percentage of total revenues.
BARTER TRANSACTIONS
In the past, Total Sports has entered into barter transactions in which the
company accepted property and services, including computer equipment,
advertising and promotional consideration, as payment for sponsorships and
advertising sales. Total Sports records property and services received in barter
transactions at fair market value based on the amounts normally charged by the
company's partners or customers to third parties for similar property and
services. Revenues from barter transactions represented 24.2% of the company's
total revenues in 1998 and 18.0% of its total revenues in 1999. Total Sports
intends to continue to enter into barter arrangements but expects to reduce
bartering as a percentage of total revenues in future periods.
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During 1999, Total Sports entered into an agreement with NBC Sports for
promotional and advertising services. Under the agreement, NBC Sports will
provide $17.4 million in on-air promotion and marketing of all Total Sports'
TotalCast programming for which it has broadcast rights over a 51-month period.
The promotion and advertising received by Total Sports under this agreement will
be recognized as sales and marketing expense in the consolidated financial
statements as the services are provided by NBC Sports. The $17.4 million of
promotion and advertising is expected to be received by Total Sports in the
following periods: 1999 -- 6%; 2000 -- 20%; 2001 -- 30%; 2002 -- 22%; and
2003 -- 22%.
REVENUES DEPENDENT ON EXISTING MATERIAL RELATIONSHIPS
Total Sports has secured rights with the NCAA through Host Communications
to provide TotalCast coverage of NCAA championship events. During 1999,
approximately 15% of the company's total revenues were from sponsorships of the
NCAA men's basketball championships. No other single sporting event constituted
a material portion of Total Sports' total revenues. The loss of the company's
relationship with the NCAA could have material adverse effects on Total Sports'
financial condition and results of operations.
COST OF REVENUES
Digital publishing cost of revenues consists primarily of compensation and
benefits for the editorial and operations staff, contract labor, commissions,
royalty and license payments, content fees, and allocations of facilities and
other shared costs such as depreciation, telecommunications and computer-
related expenses.
Print publishing cost of revenues consists primarily of the direct costs of
Total Sports' print publications sold to customers, product fulfillment,
amortization of deferred publishing costs such as author fees and royalty
payments, license fees, and allocations of facilities and other shared costs.
Print publishing cost of revenues has been included in loss from discontinued
operations for all periods presented.
E-commerce cost of revenues consists primarily of the direct costs of Total
Sports' merchandise sold to customers, costs associated with credit cards and
other commissions, outbound shipping and handling costs, and allocations of
facilities and other shared costs.
OPERATING EXPENSES
Product development expenses consist primarily of compensation and benefits
for Total Sports' operations staff that support the development of new product
offerings and product enhancements, as well as allocations of facilities and
other shared costs.
Sales and marketing expenses consist primarily of compensation and benefits
for Total Sports' sales, marketing and public relations staff, advertising,
allocations of facilities and other shared costs, and the value of the
advertising the company receives in barter transactions in exchange for content
or advertising on the company's Total Sports networks.
General and administrative expenses consist primarily of compensation and
benefits for general management, finance and administrative staff, professional
fees for legal and accounting services, insurance, other office expenses, and
allocations of facilities and other shared costs.
Amortization expense consists of amortization of goodwill resulting from
acquisitions, which is amortized over its useful life.
OTHER INCOME (EXPENSE), NET
Other income (expense), net, consists of minority interest in joint venture
losses (earnings), equity in earnings (loss) of affiliate, interest income,
interest expense and other income.
Since inception, Total Sports has devoted a substantial portion of its
resources to the development of the company's proprietary publishing and
TotalCast technologies and the development of key corporate
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relationships. Total Sports has been dependent on funding from debt and equity
financing and strategic corporate alliances. The company has not been profitable
since inception, and had an accumulated deficit of approximately $64,613,000 as
of June 30, 2000. Total Sports expects to incur additional operating losses in
connection with its continued technology development, increased marketing
efforts, and expansion of the company's workforce.
RESTATEMENT
The financial statements of Total Sports have been restated. Total Sports
restated these financial statements in response to comments made by the staff of
the Securities and Exchange Commission during the recent initial public offering
process and to conform the financial statement presentation to that of peer
companies in the sports Internet industry.
RECENT DEVELOPMENTS
Subsequent to December 31, 1999, Total Sports terminated 88 employees. The
annual salary and benefits of these employees was approximately $1,653,000.
On June 8, 2000, Total Sports entered into an agreement with Quokka Sports,
Inc. to sell the company's 25.0% investment in Golf.com, L.L.C. to Quokka for
1.375 million shares of Quokka's common stock, valued at approximately $7.4
million based on the closing price of Quokka stock on the date of the agreement.
Total Sports will continue to operate the Golf.com web site in connection with
its existing operating agreement with Golf.com. The sale was completed on
October 3, 2000.
On July 20, 2000, Total Sports entered into a definitive agreement with
Quokka to exchange all outstanding shares of the company's common stock and
preferred stock and rights to purchase Total Sports common and preferred stock
for up to 15,000,000 shares of Quokka's common stock, valued at $129.0 million,
based on an average stock price around the date the transaction was announced,
not including acquisition costs and charges. Under the terms of the definitive
agreement, Quokka will acquire the net assets and operations of Total Sports'
digital and e-commerce segments. Quokka will not acquire the net assets or
operations of the company's print publishing segment. The definitive agreement
expires on December 31, 2000. In the event the merger is not consummated by
December 31, 2000 due to the failure of to obtain approval of the merger by
stockholders of Quokka or Total Sports or either company's violation of
requirements of the of the agreement, a penalty of $7.5 million is payable to
the breached party. The final purchase price is subject to net deficit
requirements and other adjustments resulting from a closing balance sheet audit
to be performed within 45 days of the closing of the merger.
On August 18, 2000, and amended on August 31, 2000, Total Sports signed a
definitive agreement to sell its print publishing segment to a management buyout
group, Thorn Media, Inc., for one dollar and the assumption of liabilities. In
conjunction with the sale, Total Sports entered into a license agreement with
Thorn Media for certain uses of Total Sports' trademarks for three years.
Closing of the sale of the print division occurred on August 31, 2000.
On October 9, 2000, Total Sports completed a recapitalization and bridge
financing agreement pursuant to which the stockholders participating in the
bridge financing agreement received shares of new series of preferred stock and
warrants exercisable for new series of preferred stock in exchange for the
cancellation of certain shares of existing preferred stock and warrants
exercisable for capital stock of Total Sports held by such stockholders. The
newly authorized series of preferred stock consist of series A-prime preferred
stock, series B-prime preferred stock, series C-prime preferred stock, series
C1-prime preferred stock, series D-prime preferred stock, series D1-prime
preferred stock, series E-prime preferred stock, series F-preferred stock,
series G-preferred stock and series H preferred stock. The bridge financing
consisted of the issuance of an aggregate of $12.7 million of convertible
promissory notes and stock purchase warrants exercisable for an aggregate of up
to 110,794 shares of series D-prime and 42,235 shares of series F preferred
stock of Total Sports. The convertible promissory notes bear interest at 9.0%
per annum and are due in full on or before December 31, 2000. Upon the
effectiveness of the merger, the unpaid principal and interest of these notes
shall automatically be converted into shares of series D,
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series D-prime, series F, and series H Preferred Stock of Total Sports. The
warrants are immediately vested, have an exercise price of $16.59 per share for
either series of preferred stock, and have a term of ten years. The $12.7
million bridge financing agreement replaces the $4.2 million bridge financing
received prior to June 30, 2000. See Notes 7 and 18 to the "Notes to
Consolidated Financial Statements for Total Sports." All outstanding warrants
associated with the $4.2 million bridge financing were terminated. Winstar
Interactive Ventures, Piedmont Venture Partners, Frank Daniels, Jr., Frank
Daniels III, Bull Run Corporation, Zilkha Capital Partners, TCV III (GP), TCV
III, L.P., TCV III (Q), L.P. and TCV III Strategic Partners, L.P., all Total
Sports stockholders, and other existing stockholders participated in the $12.7
million bridge financing agreement.
ACQUISITION HISTORY
Total Sports has made a series of acquisitions of and investments in sports
information and sports technology companies. The table below provides
information about the five acquisitions and the one equity investment Total
Sports has completed through December 31, 1999. All of the company's
acquisitions have been accounted for under the purchase method of accounting,
with resulting goodwill amortized over periods ranging from 19 months to 5
years.
<TABLE>
<CAPTION>
PURCHASE PRIMARY TECHNOLOGY/
DATE ACQUIRED NAME OF COMPANY PRODUCT ACQUIRED PURCHASE PRICE
------------- --------------- ---------------------------- --------------
<S> <C> <C> <C>
March 31, 1997....... KOZ Inc. Internet sports content platform $1,414,240
Print publishing and statistical
March 31, 1997....... Sports Extra, Inc. Databases 233,548
December 22, 1997.... DesignNet, Inc. Electronic commerce platform 16,571
June 2, 1998......... Total College Communications Co. Collegiate marketing licenses 314,228
July 29, 1998........ Golf.Com, L.L.C. Golf content and merchandising 250,000
NASCAR(TM) content and
June 4, 1999......... Long Distance Technologies, Inc. broadcasting 3,640,333
</TABLE>
Prior to the KOZ acquisition, Total Sports had no operations. The KOZ
acquisition provided the nucleus for the development of both the company's
TotalCast technology and sports networks. Subsequent to the Sports Extra
acquisition, Total Sports formed the print publishing segment, which uses
statistical data derived from the company's digital publishing activities to
publish statistical encyclopedias and guides, as well as develops original
sports-related books. The Total College Communications acquisition allowed Total
Sports to secure licensing rights for providing TotalCast coverage of NCAA
championship events, including the men's NCAA basketball championships. The
Golf.com investment and Long Distance Technologies acquisition provided the
technology and content for the development of Total Sports' Total Golf and Total
Motor Racing networks, which were both new markets in which Total Sports had no
prior exposure. With the exception of the Golf.com investment and the Long
Distance Technologies acquisition, all of Total Sports' businesses acquired
since inception have been incorporated into the company's general operations.
Long Distance Technologies was merged into Total Motorsports Inc., a
wholly-owned subsidiary of Total Sports.
Total Sports' acquisitions have resulted in significant amounts of
goodwill, which is amortized over periods ranging from three to five years. The
company expects amortization of goodwill outstanding at June 30, 2000, will
reduce its future earnings as follows:
<TABLE>
<CAPTION>
AMORTIZATION
EXPENSE
------------
<S> <C>
2000............................................. $1,176,000
2001............................................. 116,000
2002............................................. 7,000
----------
$1,299,000
==========
</TABLE>
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The following table summarizes the number of employees acquired from
acquisitions, the method of payment and the nature of primary liabilities
assumed.
<TABLE>
<CAPTION>
NUMBER OF
NAME OF COMPANY EMPLOYEES PRIMARY LIABILITIES ASSUMED METHOD OF PAYMENT
--------------- --------- --------------------------- -----------------
<S> <C> <C> <C>
KOZ Inc. ........................ 36 Accounts payable Proceeds from line of credit
Sports Extra, Inc. .............. 6 Accounts and notes payable Issuance of 290,323 shares of
common stock and forgiveness of
$100,000 note receivable
DesignNet, Inc. ................. 3 Accounts payable Issuance of 33,142 shares of
common stock
Total College Communications -- Accounts payable Issuance of 418,971 shares of
Co. ........................... common stock
Golf.Com, L.L.C.................. -- None Cash on hand
Long Distance Technologies, 1 Accounts and notes payable Issuance of 284,401 shares of
Inc. .......................... common stock
</TABLE>
None of Total Sports' acquisitions had contingent payment terms except the
Long Distance Technologies acquisition. The shares of Total Sports' common stock
issued as consideration in the Long Distance Technologies acquisition were
placed in escrow until any and all indemnification claims or disputed claims
notices have been satisfied. In accordance with the escrow agreement, 94,800
shares were released from escrow effective June 4, 2000. Additional shares will
be released upon the effectiveness of a registration statement for the sale of
the shares held in escrow in a underwritten public offering registered under the
Securities Act of 1933, or the consummation of a transaction or series of events
that result in the escrowed shares becoming publicly traded. The number of
shares to be released in this event will be such that $4.0 million worth will
remain in escrow. The remainder of the escrowed shares shall be released
December 4, 2000, to the extent the escrowed shares are not required to be
forfeited in satisfaction of indemnification claims or disputed claims notices.
Total Sports believes that its acquisitions and equity investments have
afforded the company opportunities to both integrate new sports-related
technologies into its services and provide access to sectors of the sports
entertainment market not previously available to the company.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
Total Revenues. Total revenues for the six months ended June 30, 2000 were
$5,337,000 compared to $3,328,000 for the six months ended June 30, 1999, an
increase of $2,009,000. The increase in total revenues is primarily attributable
to increased sales of sponsorships and an increase in advertising campaigns.
Digital Publishing Revenues. Digital publishing revenues increased to
$4,516,000 for the six months ended June 30, 2000 from $2,627,000 for the six
months ended June 30, 1999, an increase of $1,889,000. The increase in digital
publishing revenues is primarily attributable to increases in sales of
sponsorships and advertising. Total Sports expects digital publishing revenues
to increase in future periods in both absolute dollars and as a percentage of
total revenues due to the company's efforts to add new sponsors and increase the
volume of sponsorships with existing sponsors, as well as its effort to increase
the number and types of live events it covers. Total Sports anticipates the
majority of its future growth will be derived from sales of sponsorships and
advertising related to the company's Total Sports networks. Also, barter
transactions for sponsorship and advertising for the six months ended June 30,
2000 were $77,000 compared to $554,000 for the six months ended June 30, 1999, a
decrease of $477,000. The decrease is due primarily to the change in accounting
treatment due to the adoption of EITF 99-17, Accounting for Advertising Barter
Transactions.
E-commerce Revenues. E-commerce revenues increased to $821,000 for the six
months ended June 30, 2000 from approximately $701,000 for the six months ended
June 30, 1999, an increase of
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approximately $120,000. The increase in e-commerce revenues is primarily
attributable to increases in merchandise sales from the Total College Sports
Network and Golf.com on-line stores.
Total Cost of Revenues. Total cost of revenues for the six months ended
June 30, 2000 was $8,723,000 compared to $4,409,000 for the six months ended
June 30, 1999, an increase of $4,314,000. The increase in total cost of revenues
is primarily attributable to increased volume of sponsorship, advertising and
e-commerce sales.
Digital Publishing Cost of Revenues. Digital publishing costs of revenues
increased to $7,945,000 for the six months ended June 30, 2000 from $3,866,000
for the six months ended June 30, 1999, an increase of $4,079,000. This increase
is due primarily to the increased volume of sponsorship and advertising as
discussed above.
E-commerce Cost of Revenues. E-commerce cost of revenues increased to
$778,000 for the six months ended June 30, 2000 from $543,000 for the six months
ended June 30, 1999, an increase of $235,000. The increase in e-commerce cost of
revenues is due primarily to the direct costs of merchandise associated with the
increased volume of sales of golf merchandise from the Golf.com on-line store,
which generate lower margins than the company's other e-commerce merchandise.
Product Development Expenses. Product development expenses increased to
$3,063,000 for the six months ended June 30, 2000 from approximately $1,953,000
for the six months ended June 30, 1999, an increase of $1,110,000. The increase
in product development expenses is due primarily to planned increases in
expenditures related to improving the company's TotalCast technology for
existing sports and adding TotalCast coverage of additional sports, as well as
planned increases in the number of employees performing product development
projects. Total Sports expects product development expenses to increase in
absolute dollars as the company continues to enhance its TotalCast technology
and develop new service offerings.
Sales and Marketing Expenses. Sales and marketing expenses increased to
$7,741,000 for the six months ended June 30, 2000 from approximately $1,607,000
for the six months ended June 30, 1999, an increase of $6,134,000. The increase
in sales and marketing expenses is due primarily to continued efforts to build a
dedicated sales force, increased advertising, including $3,500,000 of expense
related to "Total Devotion" advertising campaign, and $687,000 of expense
related to the company's promotion and advertising agreement with NBC Sports.
Total Sports expects sales and marketing expenses to increase in absolute
dollars in future periods as the company continues to hire additional sales and
marketing personnel and to expand its marketing and promotional activities.
General and Administrative Expenses. General and administrative expenses
increased to $4,642,000 for the six months ended June 30, 2000 from $1,210,000
for the six months ended June 30, 1999, an increase of $3,432,000. The increase
in general and administrative expenses is primarily due to planned increases in
administrative and financial personnel, professional fees related to the
company's intended initial public offering, which was withdrawn in May 2000,
travel expenses and rent for office facilities.
Amortization Expense. Amortization expense consists of amortization of
goodwill resulting from acquisitions. Amortization expense increased to
$1,285,000 for the six months ended June 30, 2000 from approximately $515,000
for the six months ended June 30, 1999, an increase of $770,000. The increase in
amortization expense is primarily due to six months of amortization of goodwill
resulting from the acquisition of Long Distance Technologies, Inc. totaling
$525,000. The Long Distance Technologies acquisition occurred on June 4, 1999.
Included in amortization expense is the amortization of capitalized computer
software costs.
Other Income (Expense), Net. Other income (expense), net, increased to
income of $122,000 for the six months ended June 30, 2000 from expense of
$140,000 for the six months ended June 30, 1999, an increase of $262,000.
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Income Taxes. No benefit for federal and state income taxes is reported in
the financial statements for the six months ended June 30, 2000 or 1999 because
the net deferred tax assets generated, consisting primarily of operating and
economic loss carryforwards, were offset by a full valuation allowance.
Loss From Continuing Operations. Total Sports had a loss from continuing
operations of $19,995,000 for the six months ended June 30, 2000 as compared to
$6,507,000 for the six months ended June 30, 1999, an increase of $13,488,000.
The company expects to incur losses from continuing operations for the
foreseeable future as Total Sports incurs expenses to enhance its current
product offerings, develop new products and services, and pursue new strategic
partnerships to grow its business.
Loss From Discontinued Operations. On March 21, 2000, Total Sports adopted
a plan to sell its print publishing segment. Total Sports has entered into a
Bill of Sale and Assumption of Liabilities Agreement with Thorn Media, Inc. to
sell substantially all its assets used in its print publishing division to Thorn
Media in exchange for one dollar and Thorn Media's assumption of liabilities
related to the print division. The sale is currently expected to be completed in
the third quarter of 2000. Accordingly, the operations of the discontinued print
publishing business have been segregated in the accompanying consolidated
statements of operations. Net revenues, cost of sales and operating expenses
associated with the discontinued operations have been reclassified for all
periods presented. No allocation of interest income or interest expense has been
attributed to the discontinued operations.
Loss from the operations of the discontinued segment for the six months
ended June 30, 2000 increased to $1,242,000 from $1,133,000 for the six months
ended June 30, 1999, an increase of $109,000. The increase in the loss from the
operations of the discontinued segment is due primarily to a decrease in sales.
Total revenues from the print publishing segment were $773,000 for the six
months ended June 30, 2000, and $1,041,000 for the six months ended June 30,
1999, a decrease of $268,000. The decrease in revenues was due primarily to the
timing of the release of the spring 2000 book titles, the majority of which were
not released until late March 2000.
Loss On Disposal of Discontinued Operations. In addition to the $1,242,000
loss from the operations of the discontinued segment for the six months ended
June 30, 2000, Total Sports had a loss on disposal of the discontinued segment
of $5,400,000. This loss includes a charge for estimated losses of the print
publishing segment during the phase-out period of $1,000,000, a write-down of
the print publishing segment's assets to net realizable value of $3,200,000 and
estimated costs to terminate certain contractual obligations of $1,100,000.
Net Loss. Total Sports had a net loss of $26,658,000 for the six months
ended June 30, 2000 as compared to $7,639,000 for the six months ended June 30,
1999, an increase of $19,019,000. The company expects to incur net losses for
the foreseeable future as Total Sports incurs expenses to enhance its current
product offerings, develops new products and services, and pursues new strategic
partnerships to grow its business.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Total Revenues. Total revenues for 1999 were $6,752,000 compared to
$2,366,000 for 1998, an increase of $4,386,000. The increase in total revenues
is primarily attributable to increased sales of sponsorships, advertising and
e-commerce merchandise. Barter transactions, in which Total Sports received
advertising or other goods and services in exchange for content or advertising
on the company's Total Sports networks, accounted for approximately 18.0% of
Total Sports' total revenues in 1999. Barter transactions in exchange for
advertising on the Total Sports networks and the company's print publications
accounted for approximately 24.2% of the company's total revenues in 1998. In
future periods, Total Sports intends to maximize cash digital publishing
revenue, although the company will continue to enter into barter relationships
as appropriate.
Digital Publishing Revenues. Digital publishing revenues increased to
$5,397,000 in 1999 from $1,930,000 in 1998, an increase of $3,467,000. The
increase in digital publishing revenues is primarily attributable to increases
in sales of sponsorships and advertising, including sales from Golf.com, in
which
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Total Sports acquired an interest in mid-1998. Sales from Golf.Com were
$1,074,000 in 1999. Total Sports had no sales of sponsorships or advertising
from Golf.Com in 1998. In addition, the company had sales of $296,000 related to
broadcasts of NASCAR races, the rights to which Total Sports acquired in its
acquisition of Long Distance Technologies in June 1999. Total Sports also had
sales of $535,000 related to Beer.com, a web site the company developed for
Labatt Brewing Company, which launched in October 1999. Also, barter
transactions for sponsorships and advertising in 1999 were $1,210,000 as
compared to $572,000 in 1998.
Total Sports expects digital publishing revenues to increase in future
periods in both absolute dollars and as a percentage of total revenues due to
the company's efforts to add new sponsors and increase the volume of
sponsorships with existing sponsors, as well as its effort to increase the
number and types of live events it covers. Total Sports anticipates the majority
of its future growth will be derived from sales of sponsorships and advertising
related to the company's Total Sports networks.
E-commerce Revenues. E-commerce revenues increased to $1,356,000 in 1999
from approximately $435,000 in 1998, an increase of approximately $921,000. The
increase in e-commerce revenues is primarily attributable to increases in
merchandise sales from the Total Sports College Network stores and a full year
of sales from the Golf.com on-line store. Sales from Golf.com were $479,000 in
1999 compared to $240,000 in 1998, an increase of $239,000.
Total Cost of Revenues. Total cost of revenues for 1999 was $9,957,000
compared to $3,902,000 in 1998, an increase of $6,055,000. The increase in total
cost of revenues is primarily attributable to the increased volume of
sponsorship, advertising and e-commerce sales, increased staffing levels and
costs associated with increased sales of print publications.
Digital Publishing Cost of Revenues. Digital publishing costs of revenues
increased to $8,765,000 in 1999 from $3,570,000 for 1998, an increase of
$5,195,000. This increase is due primarily to planned increases in the number of
employees in the company's editorial and operations staff over prior periods
totaling approximately $1,200,000, increases in contract labor, travel costs and
other outside services due to expanded coverage of sporting events totaling
approximately $2,400,000, and increases in commissions relating to sponsorships
of NCAA championships and other advertising of approximately $1,000,000.
E-commerce Cost of Revenues. E-commerce cost of revenues increased to
$1,191,000 in 1999 from $332,000 in 1998, an increase of $859,000. The increase
in e-commerce cost of revenues is due primarily to the direct costs of
merchandise associated with the increased volume of sales and increased sales of
golf merchandise from the Golf.com on-line store, which generate lower margins
than the company's other e-commerce merchandise.
Product Development Expenses. Product development expenses increased to
$4,033,000 in 1999 from approximately $2,550,000 for 1998, an increase of
$1,483,000. The increase in product development expenses is due primarily to
planned increases in expenditures related to improving TotalCast technology for
existing sports and adding TotalCast coverage of additional sports and planned
increases in the number of employees performing product development projects.
Total Sports expects product development expenses to increase in absolute
dollars as the company continues to enhance its TotalCast technology and develop
new service offerings.
Sales and Marketing Expenses. Sales and marketing expenses increased to
$5,217,000 in 1999 from approximately $2,729,000 in 1998, an increase of
$2,488,000. The increase in sales and marketing expenses is due primarily to
continued efforts to build a dedicated sales force and increased advertising,
including $1,110,000 of expense related to barter transactions and $876,000 of
expense related to the company's promotion and advertising agreement with NBC
Sports. Total Sports expects sales and marketing expenses to increase in
absolute dollars in future periods as the company continues to hire additional
sales and marketing personnel and to expand its marketing and promotional
activities.
General and Administrative Expenses. General and administrative expenses
increased to $3,745,000 in 1999 from $1,880,000 in 1998, an increase of
$1,865,000. The increase in general and administrative
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expenses is primarily due to planned increases in administrative and financial
personnel, increases in professional fees, and increases in rent for office
facilities.
Amortization Expense. Amortization expense consists of amortization of
goodwill resulting from acquisitions. Amortization expense increased to
$1,906,000 in 1999 from approximately $572,000 in 1998, an increase of
$1,334,000. The increase in amortization expense is primarily due to seven
months of amortization of goodwill resulting from the company's acquisition of
Long Distance Technologies totaling $1,226,000. The Long Distance Technologies
acquisition occurred on June 4, 1999.
Other Income (Expense), Net. Other income(expense), net decreased to
expense of $419,000 in 1999 from expense of $440,000 in 1998, a decrease of
$21,000. This decrease was primarily attributable to the change in equity in
earnings of Golf.com from a loss of $24,000 in 1998 to income of $100,000 in
1999, a difference of $124,000. In addition, results of operations for 1998
reflects an expense of $42,000 from Total Sports' interest in the earnings of
the company's Total College Communications joint venture. Total Sports acquired
the remaining 50% of Total College Communications on June 2, 1998 and,
consequently, its entire operating results are a part of the company's
consolidated results for 1999.
Income Taxes. No benefit for federal and state income taxes is reported in
the financial statements in 1999 or 1998 because the net deferred tax assets
generated, consisting primarily of operating and economic loss carryforwards,
were offset by a full valuation allowance.
Loss From Continuing Operations. Total Sports had a loss from continuing
operations of $18,525,000 in 1999 as compared to $9,707,000 for 1998, an
increase of $8,818,000. Total Sports expects to incur losses from continuing
operations for the foreseeable future as the company incurs expenses to enhance
its current product offerings, develop new products and services, and pursue new
strategic partnerships to grow its business.
Loss From Discontinued Operations. Loss from discontinued operations
increased to $3,302,000 in 1999 from $2,130,000 in 1998, an increase of
$1,172,000. Total revenues from the print publishing segment were $1,831,000 in
1999, and $1,315,000 in 1998, an increase of $516,000. The increase in print
publishing revenue is due primarily to 26 titles being available for sale during
1999 as compared to seven titles available during 1998. The increase in revenues
was offset by increased cost of revenues resulting from the new titles and
increased salary costs, product development costs, and general and
administrative expenses related to Total Sports' print facility.
Net Loss. Total Sports had a net loss of $21,827,000 in 1999 as compared to
$11,837,000 in 1998, an increase of $9,990,000. Total Sports expects to incur
net losses for the foreseeable future as the company incurs expenses to enhance
its current product offerings, develop new products and services, and pursue new
strategic relationships to grow its business.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE PERIOD FROM FEBRUARY 20, 1997 TO
DECEMBER 31, 1997
Total Revenues. Total revenues for the year ended December 31, 1998 were
$2,366,000 compared to $934,000 for the period from February 20, 1997 to
December 31, 1997, an increase of $1,432,000. The increase in total revenues is
primarily attributable to increased sales of sponsorships and print publications
as discussed below and a full year of operations in 1998 versus 1997. Total
Sports' principal operations during 1997 did not begin until after the
acquisition of its sports content business from KOZ Inc. on March 31, 1997.
Barter transactions in which Total Sports received advertising or other
goods and services in exchange for content or advertising on the company's Total
Sports networks accounted for approximately 17.5% of the company's total
revenues in 1998. Total Sports had no barter revenues during 1997.
Digital Publishing Revenues. Digital publishing revenues increased to
$1,930,000 in 1998 from $921,000 in 1997, an increase of $1,009,000. The
increase in digital publishing revenues is primarily attributable to increases
in sales of sponsorships and advertising and $572,000 in barter transactions for
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sponsorships and advertising in 1998. Total Sports had no barter transactions
for sponsorships and advertising in 1997.
E-commerce Revenues. E-commerce revenues increased to $435,000 in 1998 from
$14,000 in 1997, an increase of approximately $421,000. The increase in
e-commerce revenues is primarily attributable to the increase in the number of
online e-commerce stores from two as of December 31, 1997 to 13 as of December
31, 1998.
Total Cost of Revenues. Total cost of revenues in 1998 was $3,902,000
compared to $1,380,000 in 1997, an increase of $2,522,000. The increase in total
cost of revenues is primarily attributable to increases in staffing, sales of
print publications and e-commerce activities, and a full year of operations in
1998 versus 1997.
Digital Publishing Cost of Revenues. Digital publishing cost of revenues
increased to $3,570,000 in 1998 from $1,379,000 in 1997, an increase of
$2,191,000. The increase is due primarily to planned increases in the editorial
and operations staff over the prior year totaling approximately $744,000,
increases in contract labor and other outside services due to the company's
expanded coverage of sporting events totaling approximately $1,194,000, and
increases in commissions relating to sponsorships of NCAA championships of
approximately $164,000.
E-commerce Cost of Revenues. E-commerce cost of revenues increased to
$332,000 in 1998 from $1,000 in 1997, an increase of $331,000. The increase in
e-commerce cost of revenues is due primarily to the direct costs of merchandise
associated with the increased volume of e-commerce sales.
Product Development Expenses. Product development expenses increased to
$2,550,000 in 1998 from approximately $1,311,000 in 1997, an increase of
$1,239,000. The increase in product development expenses is due primarily to
planned increases in expenditures related to improving TotalCast technology and
adding TotalCast coverage of additional sports, including increased usage of
contract labor and other outside services, and planned increases in the number
of employees performing product development projects.
Sales and Marketing Expenses. Sales and marketing expenses increased to
$2,729,000 in 1998 from approximately $577,000 in 1997, an increase of
$2,152,000. The increase in sales and marketing expenses is due primarily to
increases in marketing salaries and benefits, travel expenses and advertising
resulting from efforts to build a dedicated sales force and to expand the
company's marketing activities. In 1998, Total Sports had $572,000 of expense
related to barter transactions. Total Sports had no barter transactions in 1997.
General and Administrative Expenses. General and administrative expenses
increased to $1,880,000 in 1998 from $356,000 in 1997, an increase of
$1,524,000. The increase in general and administrative expenses is primarily due
to planned increases in administrative and financial staff, increased
professional fees, increased rent for office facilities and a full year of
operations in 1998 compared to 1997.
Amortization Expense. Amortization expense increased to $572,000 in 1998
from approximately $322,000 in 1997, an increase of $250,000. The increase in
amortization expense is primarily due to a full year of amortization of goodwill
resulting from the KOZ and Sports Extra acquisitions, which occurred on March
31, 1997.
Other Income (Expense), Net. Other income (expense), net, increased to
expense of $440,000 in 1998 from expense of $234,000 in 1997, an increase of
$206,000. This increase was primarily attributable to an increase in interest
expense to $507,000 in 1998 from $100,000 in 1997, an increase of $407,000. The
increase in interest expense is due primarily to increased borrowings on,
interest on four convertible notes payable issued in 1998 for proceeds of $3.6
million, and amortization of the discount related to warrants issued in
connection with the four convertible notes. Because all four notes payable were
converted into series C preferred stock in 1998, the entire discount
attributable to the warrants, totaling $146,000, was charged to interest expense
during 1998. In addition, minority interest in joint venture earnings and losses
changed from a loss of $138,000 in 1997 to earnings of $42,000 in 1998, a
difference of $180,000. This
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change is due to the increase in Total College Communications' reported earnings
of $83,000 in 1998 as compared to losses of $276,000 in 1997. Total Sports
acquired the remaining 50% interest in Total College Communications on June 2,
1998.
Income Taxes. No benefit for federal and state income taxes is reported in
the financial statements for 1998 or 1997 because the net deferred tax assets
generated, consisting primarily of operating and economic loss carryforwards,
were offset by a full valuation allowance.
Loss From Continuing Operations. Total Sports had a loss from continuing
operations of $9,707,000 in 1998 as compared to $3,244,000 for 1997, an increase
of $6,463,000. Total Sports expects to incur losses from continuing operations
for the foreseeable future as the company incurs expenses to enhance its current
product offerings, develop new products and services, and pursue new strategic
partnerships to grow its business.
Loss From Discontinued Operations. Loss from discontinued operations
increased to $2,130,000 in 1999 from $903,000 in 1997, an increase of
$1,227,000. Total revenues from the print publishing segment were $1,315,000 in
1998, and $257,000 in 1997, an increase of $1,058,000. The increase in print
publishing revenues is due to the fact that our publishing operations did not
commence until the summer of 1997, as compared to a full year of operations in
1998. Seven titles were available for sale during 1998 as compared to three
titles during 1997. During 1998, Total Sports recognized $699,000 in net
revenues from the company's publication, Total Hockey, and $97,000 in barter
transactions for print publications. Total Sports had no sales of Total Hockey
or barter transactions for print publications in 1997. The increase in print
publishing revenues was offset by increased cost of revenues due to the fact
that publishing operations did not commence until the summer of 1997 as compared
to a full year of operations in 1998, and the increased number of titles
available in 1998 over 1997.
Net Loss. Total Sports had a net loss of $11,837,000 in 1998 as compared to
$4,147,000 in 1997, an increase of $7,690,000. Total Sports expects to incur net
losses for the foreseeable future as the company incurs expenses to enhance its
current product offerings, develop new products and services, and pursue new
strategic relationships to grow its business.
LIQUIDITY AND CAPITAL RESOURCES
Total Sports' capital requirements have been and will continue to be
significant, and to date, the company's cash requirements have exceeded its cash
flow from operations. Since inception in 1997, the company has satisfied cash
requirements and financed its operations primarily through borrowings, capital
lease financings, convertible bridge loans and private sales of its equity
securities.
From the company's inception in February 1997 through June 1997, Total
Sports funded operations with $750,000 in equity contributions from its
founders. In June 1997, Total Sports completed a private placement of the
company's series A preferred stock and common stock warrants with net proceeds
of $1,180,000. In November 1997, Total Sports completed a private placement of
its series B preferred stock with net proceeds of $1,937,000. In August 1998 and
January and April 1999, Total Sports completed private placements of the
company's series C and C1 preferred stocks with net proceeds totaling
$15,617,000. In November 1999, Total Sports completed an approximately
$35,500,000 private placement of the company's series D preferred stock.
Included in the proceeds of this placement is $6,500,000 from previously issued
convertible notes that were converted into series D preferred stock.
In addition to funding ongoing operations and capital expenditures, Total
Sports' principal commitments consist of various obligations under short and
long-term borrowings, notes payable, operating leases and capital leases. On
February 24, 1999, Total Sports issued a note payable for $114,921 to First
Raleigh Telex, LLC, a related entity controlled by Frank A. Daniels, Jr., a
director and stockholder of Total Sports. The note is due on February 24, 2002,
bears interest at 9.0% per annum, and is collateralized by computer equipment.
In November 1999, Total Sports paid off its outstanding $3,966,000 line of
credit with First Union National Bank from the proceeds from the offering of the
company's series D preferred stock. Between June and November 1999, Total Sports
entered into convertible bridge loans for
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$6.5 million. In November 1999, the $6.5 million aggregate principal amount of
these loans was converted into 391,802 shares of Total Sports' series D
preferred stock. In June 2000, Total Sports entered into convertible bridge
loans with certain preferred shareholders for approximately $4.2 million. The
convertible bridge loans bear interest at 9.0% per annum and are payable on
December 31, 2000.
On August 13, 1999, Total Sports entered into a ten-year operating lease
for office space with First Raleigh Telex. This lease requires monthly payments
of $24,923. As of December 31, 1999, total rent expense for all outstanding
operating leases was approximately $83,575 per month. During 1999, Total Sports
entered into capital leases for the use of certain computer and
telecommunications equipment with purchase prices totaling approximately
$502,000. These 1999 capital leases require total monthly payments of
approximately $22,000 through June 2002. Total payments for all outstanding
capital leases as of December 31, 1999 were approximately $31,000 per month.
As of December 31, 1999, Total Sports had $17,671,000 in cash and cash
equivalents. Net cash used in operating activities was $3,825,000 for 1997,
$9,860,000 for 1998, $16,674,000 for 1999, and $6,622,000 for the six months
ended June 30, 1999 and $18,162,000 for the six months ended June 30, 2000. Net
cash used in operating activities resulted from Total Sports' net operating
losses, adjusted for certain non-cash items including compensation and interest
expense related to the issuance of options and warrants to key employees and
business partners. Non-cash charges relating to the issuance of these options
and warrants were $212,000 for 1998 and $240,000 in 1999. Non-cash charges
relating to depreciation and amortization expense were $703,000 for 1997,
$1,358,000 for 1998 and $4,014,000 for 1999.
Net cash used in investing activities was $1,772,000 for 1997, $964,000 for
1998, $2,118,000 for 1999, $376,000 for the six months ended June 30, 1999 and
$1,510,000 for the six months ended June 30, 2000, respectively. Net cash used
in investing activities resulted primarily from capital expenditures relating to
purchases of computer and office equipment and acquisitions of and investments
in related businesses.
Net cash provided by financing activities was $5,834,000 for 1997,
$11,272,000 for 1998, $35,778,000 for 1999, $6,373,000 for the six months ended
June 30, 1999 and $3,861,000 for the six months ended June 30, 2000. Net cash
provided by financing activities for these periods included the issuance of
short and long-term borrowings and notes payable, long-term capital lease
obligations and preferred stock, common stock and warrants.
No provision for federal or state income taxes has been recorded because
Total Sports incurred net operating losses for all periods. However, the company
has paid state franchise taxes during 1997, 1998 and 1999. As of December 31,
2000, Total Sports had approximately $32,000,000 of net operating and economic
loss carryforwards available to offset future federal and state taxable income.
These carryforwards expire in years 2011 through 2019. As a result of various
equity transactions during 1997, 1998 and 1999, Total Sports believes it has
undergone an "ownership change" as defined by Section 382 of the Internal
Revenue Code. Accordingly, the use of a portion of the net operating and
economic loss carryforwards may be limited. Due to this limitation, and the
uncertainty regarding the ultimate use of the net loss carryforwards, Total
Sports has not recorded any net tax benefit for losses by the provision of a
valuation allowance for the entire amount of the company's net deferred tax
assets. In addition, future sales by Total Sports of shares of its capital stock
might further restrict the company's ability to use its net operating loss
carryforwards.
Total Sports has experienced a substantial increase in operating expenses
since inception in connection with the growth of the company's operations and
staffing and the expansion of its service offerings. From the company's
inception, Total Sports has incurred net losses of more than $64,500,000,
including losses of approximately $21,827,000 in 1999 and $26,658,000 during the
six months ended June 30, 2000. Total Sports' capital requirements for the year
ending December 31, 2000 depend on numerous factors, including the amount of
resources to be devoted to:
- improving and extending services offerings;
- expanding strategic relationships;
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- making investments in or acquisitions of businesses, products and
technologies; and
- expanding sales and marketing programs and conducting more aggressive
campaigns to strengthen brand recognition.
As of June 30, 2000, Total Sports had approximately $1,900,000 in cash and
cash equivalents. The company has determined that it must raise additional funds
to support operations and implement its business strategy over the next 12
months, and is undertaking efforts to raise additional capital. These efforts
include obtaining bridge financing and additional capital contributions from
existing stockholders. Total Sports believes that the net proceeds from these
sources, along with cash and cash equivalents on hand, will be sufficient to
fund the company's cash requirements for operations, working capital, and
capital expenditures for at least the next 12 months. Thereafter, Total Sports
might need to raise additional funds. Although no assurances can be given that
the efforts to raise additional capital will be successful, based on the
company's history of raising equity, Total Sports believes that it can
successfully raise the funds necessary to support the company's plans for the
next 12 months. In the event that Total Sports is unable to raise such
additional funds, management has prepared a contingency operating plan that
consists of reduction in personnel and marketing expenditures which, in the
opinion of management, could be implemented and would allow Total Sports to
continue its operations for a reasonable period of time. However, the full
implementation of this contingency plan could have material adverse effects on
long-term operations. This discussion is neither an offer to sell nor a
solicitation of an offer to buy any of the securities mentioned above.
NEWLY ADOPTED ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use. Statement of Position 98-1 is effective
for financial statements for years beginning after December 15, 1998. Statement
of Position 98-1 provides guidance over accounting for computer software
development or obtained for internal use including the requirement to capitalize
specified costs and amortization of such costs. The adoption of this statement
by Total Sports did not have a significant effect on the company's
capitalization policy or on its financial statements during the year ended
December 31, 1999.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities. Statement of Position 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start up
activities and organization costs to be expensed as incurred. As Total Sports
has expensed these costs historically, the adoption of this standard did not
have an impact on the company's results of operations, financial position, or
cash flows for the year ended December 31, 1999.
In January 2000, the Emerging Issues Task Force, or "EITF", reached a
consensus on EITF 99-17, Accounting for Advertising Barter Transactions, which
is referred to as the "Issue". This Issue states that revenue and expense should
be recognized at fair value from an advertising barter transaction only if the
fair value of the advertising surrendered in the transaction is determinable
based on the entity's own historical practice of receiving cash, marketable
securities, or other consideration that is readily convertible to a known amount
of cash for similar advertising from buyers unrelated to the counterparty in the
barter transaction. If the fair value of the advertising surrendered in the
barter transaction is not determinable within the limits of this Issue, the
barter transaction should be recorded based on the carrying amount of the
advertising surrendered, which will likely be zero. This Issue should be applied
either prospectively to transactions after January 20, 2000, or as a change in
accounting principle. Total Sports has elected to adopt the provisions of the
Issue prospectively. Had Total Sports adopted the previous of EITF 99-17 as of
February 20, 1997, the company's date of inception, reported barter revenues
would not have decreased in 1997 and would have decreased by $427,000 in 1998
and $1,110,000 in 1999.
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101. SAB No. 101 summarizes certain of the SEC staff's
views in applying generally accepted
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accounting principles to revenue recognition in financial statements. The SEC
issued Staff Accounting Bulletin No. 101B on June 26, 2000, which delays the
implementation date of SAB No. 101 until no later than the fourth fiscal quarter
of fiscal years beginning after December 15, 1999. Total Sports adopted SAB No.
101 as of January 1, 2000; however, this bulletin does not have a significant
impact on Total Sports' revenues.
RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. Statement of Financial Accounting Standards No. 133
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. Statement of Financial Accounting Standards No. 133,
as amended by Nos. 137 and 138, is effective for the first fiscal quarter of
fiscal 2001; earlier application is encouraged. As of December 31, 1999, Total
Sports has not determined the effect of Statement of Financial Accounting
Standards No. 133 on the company's consolidated financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Total Sports is exposed to minimal market risks. Total Sports manages
sensitivity of the company's results of operations to these risks by maintaining
a conservative investment portfolio, which consists of money market funds and
other highly liquid investments, and entering into long-term debt obligations
with appropriate pricing and terms. Total Sports does not hold or issue
derivative, derivative commodity or other financial instruments held for trading
purposes. Financial instruments for other than trading purposes do not impose a
material market risk on the company.
Total Sports is exposed to interest rate risk, because additional debt
financing is periodically needed due to the large operating losses and capital
expenditures associated with establishing and expanding the company's network
coverage. The interest rate that Total Sports will be able to obtain on debt
financing will depend on market conditions at that time, and might differ from
the rates the company has secured on its current debt.
While all of Total Sports' long-term debt bears fixed interest rates, the
fair market value of the company's fixed rate long-term debt is sensitive to
changes in interest rates. Total Sports has no cash flow or earnings exposure
due to market interest rate changes for its fixed long-term obligations. The
table below provides additional information about the company's long-term debt
obligations as of June 30, 2000. For additional information about Total Sports'
long-term debt obligations, see Note 7 to the Consolidated Financial Statements.
As of June 30, 2000:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
FIXED INTEREST
EXPECTED MATURITY DEBT RATE
----------------- ---------- --------
<S> <C> <C>
2000.......................................... $3,817,522 8.98%
2001.......................................... 71,222 7.91
2002.......................................... 45,555 7.18
2003.......................................... 73,839 7.18
2004.......................................... 79,153 7.18
Thereafter.................................... 4,856 7.18
---------- ----
$4,092,147 8.87%
========== ====
Fair market value........................... $4,441,000 --
========== ====
</TABLE>
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Total Sports operates primarily in the United States, and all sales to date
have been made in U.S. dollars. Accordingly, Total Sports has had no material
exposure to foreign currency rate fluctuations.
INFLATION
Total Sports does not expect inflation to have a significant impact on the
company's operations.
SEASONALITY
Total Sports expects that its revenues will be higher leading up to and
during major U.S. sports seasons and lower at other times of the year,
particularly during the summer months. The effect of such seasonal fluctuations
in revenues could be enhanced or offset by revenues associated with major sports
that do not occur every year. Total Sports believes that advertising sales in
traditional media, such as television, generally are lower in the first and
third calendar quarters of each year, and that advertising expenditures
fluctuate significantly with economic cycles. Depending on the extent to which
these factors apply to Internet advertising, the seasonality and cyclicality in
the level of Total Sports' advertising revenues could become more pronounced.
These factors could have a material adverse affect on the company's business,
results of operations and financial condition. The following table summarizes by
sports group Total Sports' advertising revenues included in 1999 digital
publishing revenues, and the quarters in which the majority of the advertising
revenues are recognized:
<TABLE>
<CAPTION>
ADVERTISING PRIMARY TIMING
SPORTS GROUP REVENUES OF EVENTS QUARTERS
------------ ----------- ----------------------- -------------
<S> <C> <C> <C>
Collegiate athletics................... $1,591,281 Spring and fall Q1 and Q4
Golf................................... 1,226,853 Various Various
Auto racing............................ 288,461 Spring and summer Q2 and Q3
Baseball............................... 916,236 Spring, summer and fall Q2 through Q4
Fishing................................ 81,441 Various Various
Other.................................. 45,722 Various Various
----------
$4,149,994
==========
</TABLE>
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<PAGE> 102
THE SPECIAL MEETING OF QUOKKA STOCKHOLDERS
JOINT PROXY STATEMENT/PROSPECTUS
This joint proxy statement/prospectus is being furnished to you in
connection with the solicitation of proxies by Quokka's board of directors with
respect to the proposed merger between Quokka and Total Sports and the issuance
of common stock upon conversion of Quokka's 7.0% convertible promissory notes
and upon exercise of the related warrants that were issued in a private
placement on September 15, 2000. This joint proxy statement/prospectus is first
being mailed to stockholders of Quokka on or about October 17, 2000.
DATE, TIME AND PLACE OF THE SPECIAL MEETING
The special meeting of stockholders of Quokka is scheduled to be held as
follows:
November 7, 2000
9:00 a.m. P.S.T.
Quokka Sports, Inc.
525 Brannan Street, Ground Floor
San Francisco, California
One or more officers of Quokka will attend the special meeting and be
available to answer appropriate questions from Quokka stockholders. We
anticipate that one or more representatives from PricewaterhouseCoopers, LLP,
Quokka's independent auditors, will attend the special meeting, have an
opportunity to make a statement and be available to answer appropriate
questions.
PURPOSE OF THE SPECIAL MEETING
The special meeting is being held so that stockholders of Quokka may
consider and vote upon proposals to: (1) approve the Agreement and Plan of
Merger and Reorganization dated as of July 20, 2000, as amended, by and between
Quokka and Total Sports and (2) approve the issuance of common stock upon
conversion of Quokka's 7.0% convertible promissory notes and upon exercise of
the related warrants that were issued in a private placement on September 15,
2000, and to transact any other business that properly comes before the special
meeting or any adjournment thereof. Approval of the merger agreement will
constitute approval of the merger and the other transactions contemplated by the
merger agreement, including the issuance of Quokka common stock in the merger.
If the stockholders of both Quokka and Total Sports approve the merger
agreement, Total Sports will merge with and into Quokka, with Quokka remaining
as the surviving corporation. Up to 15,000,000 shares of Quokka common stock
will be exchanged for all of the outstanding common stock, preferred stock,
options and warrants of Total Sports.
RECOMMENDATION OF QUOKKA'S BOARD OF DIRECTORS
AFTER CAREFUL CONSIDERATION, QUOKKA'S BOARD OF DIRECTORS HAS UNANIMOUSLY
DETERMINED THAT THE MERGER AND THE MERGER AGREEMENT, AND THE ISSUANCE OF QUOKKA
COMMON STOCK IN THE MERGER ARE IN THE BEST INTERESTS OF QUOKKA STOCKHOLDERS.
QUOKKA'S BOARD OF DIRECTORS HAS APPROVED THE MERGER AGREEMENT AND THE ISSUANCE
OF QUOKKA COMMON STOCK IN THE MERGER AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE
FOR APPROVAL OF THE MERGER AGREEMENT AND THE OTHER TRANSACTIONS CONTEMPLATED BY
THE MERGER AGREEMENT, INCLUDING THE ISSUANCE OF QUOKKA COMMON STOCK IN THE
MERGER.
IN ADDITION, AFTER CAREFUL CONSIDERATION, QUOKKA'S BOARD OF DIRECTORS HAS
UNANIMOUSLY DETERMINED THAT THE ISSUANCE OF QUOKKA COMMON STOCK UPON CONVERSION
OF QUOKKA'S 7.0% CONVERTIBLE PROMISSORY NOTES AND UPON EXERCISE OF THE RELATED
WARRANTS IS IN THE BEST INTERESTS OF QUOKKA STOCKHOLDERS. QUOKKA'S BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE ISSUANCE OF
QUOKKA COMMON STOCK UPON CONVERSION OF THE NOTES AND UPON EXERCISE OF THE
RELATED WARRANTS.
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RECORD DATE AND VOTING POWERS
Quokka's board of directors has fixed the close of business on September
15, 2000 as the record date for determination of Quokka stockholders entitled to
notice of and entitled to vote at the special meeting. On the record date, there
were 46,383,304 shares of Quokka common stock outstanding held by approximately
542 holders of record. Each holder of Quokka common stock is entitled to one
vote for each share of Quokka common stock held on the record date.
VOTING AND REVOCATION OF PROXIES
The shares represented by the enclosed proxy card, if the proxy card is
completed, executed and returned, will be voted in accordance with your
instructions or, if no choice is specified, the proxy will be voted in favor of
the proposals to be approved. If any other matters properly come before the
special meeting, the proxy will vote the shares represented by the enclosed
proxy card in accordance with his best judgment, unless authority to do so is
withheld by you in your proxy. You may revoke your proxy at any time prior to
its exercise at the special meeting by:
- notifying in writing the Secretary of Quokka at 525 Brannan Street,
Ground Floor, San Francisco, California 94107;
- completing and submitting a new proxy card; or
- appearing in person and voting at the special meeting. Attendance at the
special meeting will not in and of itself constitute revocation of a
proxy.
REQUIRED VOTE
A majority of the outstanding shares of Quokka common stock entitled to
vote at the special meeting, represented in person or by proxy, constitutes a
quorum at the special meeting. The affirmative vote of the holders of a majority
of the votes cast in person or by proxy at the special meeting is required to
approve the merger agreement. The affirmative vote of the holders of a majority
of the votes cast in person or by proxy at the special meeting is required to
approve the issuance of common stock upon conversion of Quokka's 7.0%
convertible promissory notes and upon exercise of the related warrants.
As of the record date for the special meeting, ten stockholders, including
entities affiliated with directors of Quokka and other major Quokka
stockholders, beneficially owned an aggregate of approximately 26.7 million
shares of Quokka common stock, which represented approximately 57.6% of all
outstanding shares of Quokka common stock entitled to vote at the special
meeting. Each of these stockholders of Quokka have agreed to vote their shares
in favor of the approval of the merger agreement and the issuance of Quokka
common stock in the merger.
As of the record date for the special meeting, ten stockholders, including
entities affiliated with directors of Quokka and other major Quokka
stockholders, beneficially owned an aggregate of approximately 19.4 million
shares of Quokka common stock, which represented approximately 41.8% of all
outstanding shares of Quokka common stock entitled to vote at the special
meeting. Each of these stockholders of Quokka have agreed to vote their shares
in favor of the approval of the issuance of common stock upon conversion of the
notes and exercise of the related warrants that were issued in the private
placement on September 15, 2000.
VOTING; PROXIES
All shares of Quokka common stock represented by properly executed proxy
cards received before or at the special meeting will, unless the proxy cards are
revoked, be voted in accordance with the instructions indicated on the proxy
cards. If no instructions are indicated on a properly executed proxy card, the
shares will be voted FOR adoption of the merger agreement. You are urged to mark
the box on the proxy card to indicate how to vote your shares.
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If a properly executed proxy card is returned and the stockholder has
abstained from voting on the proposals, the Quokka common stock represented by
the proxy will be considered present at the special meeting for the purposes of
determining a quorum but will not be considered to have been voted in favor of
the proposals. Similarly, if an executed proxy card is returned by a broker
holding shares of Quokka common stock in street name that indicates the broker
does not have discretionary authority to vote for approval of the proposals, the
shares will be considered present at the meeting for purposes of determining the
presence of a quorum but will not be considered to have been voted in favor of
the proposals. Your broker will vote your shares only if you indicate how you
want the broker to vote by following the instructions provided to you by your
broker.
Because approval of each proposal requires the affirmative vote of holders
of at least a majority of the votes cast in person or by proxy at the special
meeting, abstentions, failures to vote and broker non-votes all will have the
same effect as votes against approval of the proposals.
Quokka has retained EquiServe LLP to assist in the mailing of the Quokka
special meeting materials. Quokka and Equiserve also will request banks, brokers
and other intermediaries holding shares beneficially owned by others to send
this joint proxy statement/prospectus and related materials to and obtain voting
instructions from the beneficial owners and will reimburse the holders for their
reasonable expenses in so doing.
VOTING VIA THE INTERNET OR BY TELEPHONE
For Shares Registered in the Name of a Broker or Bank
A number of brokers and banks are participating in a program provided
through ADP Investor Communication Services that offers telephone and Internet
voting options. If your shares are held in an account with a broker or bank
participating in the ADP Investor Communication Services program, you may vote
those share telephonically by calling the telephone number shown on the voting
form received from your broker or bank, or via the Internet at ADP Investor
Communication Services' voting web site (www.eproxyvote.com/qkka).
General Information for All Shares Voted Via the Internet or by Telephone
Votes submitted via the Internet or by telephone must be received by 11:59
p.m., Eastern Standard time on Monday, November 6, 2000. Submitting your proxy
via the Internet or by telephone will not affect your right to vote in person
should you decide to attend the Special Meeting.
THE TELEPHONE AND INTERNET VOTING PROCEDURES ARE DESIGNED TO AUTHENTICATE
STOCKHOLDERS' IDENTITIES, TO ALLOW STOCKHOLDERS TO GIVE THEIR VOTING
INSTRUCTIONS AND TO CONFIRM THAT STOCKHOLDERS' INSTRUCTIONS HAVE BEEN RECORDED
PROPERLY. STOCKHOLDERS VOTING VIA THE INTERNET SHOULD UNDERSTAND THAT THERE MAY
BE COSTS ASSOCIATED WITH ELECTRONIC ACCESS, SUCH AS USAGE CHARGES FROM INTERNET
ACCESS PROVIDERS AND TELEPHONE COMPANIES, THAT MUST BE BORNE BY THE STOCKHOLDER.
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THE SPECIAL MEETING OF TOTAL SPORTS STOCKHOLDERS
JOINT PROXY STATEMENT/PROSPECTUS
This joint proxy statement/prospectus is being furnished to you in
connection with the solicitation of proxies by Total Sports' board of directors
with respect to our proposed merger. This joint proxy statement/prospectus is
first being mailed to stockholders of Total Sports on or about October 13, 2000.
DATE, TIME AND PLACE OF THE SPECIAL MEETING
The special meeting of stockholders of Total Sports is scheduled to be held
as follows:
November 6, 2000
9:00 a.m. E.S.T.
Total Sports Inc.
234 Fayetteville Street
Raleigh, North Carolina
PURPOSE OF THE SPECIAL MEETING
The special meeting is being held so that stockholders of Total Sports may
consider and vote upon a proposal to approve the Agreement and Plan of Merger
and Reorganization dated as of July 20, 2000, as amended, by and between Quokka
and Total Sports and to transact any other business that properly comes before
the special meeting or any adjournment thereof. Approval of the merger agreement
will constitute approval of the merger and the other transactions contemplated
by the merger agreement.
If the stockholders of Total Sports and Quokka approve the merger
agreement, Total Sports will merge with and into Quokka with Quokka as the
surviving corporation. Quokka would issue up to 15,000,000 shares of common
stock for all of the outstanding shares of common stock, preferred stock,
options and warrants of Total Sports.
RECOMMENDATION OF TOTAL SPORTS' BOARD OF DIRECTORS
AFTER CAREFUL CONSIDERATION, TOTAL SPORTS' BOARD OF DIRECTORS HAS
DETERMINED THAT THE MERGER AND THE MERGER AGREEMENT ARE IN YOUR BEST INTERESTS.
TOTAL SPORTS' BOARD OF DIRECTORS HAS APPROVED THE MERGER AGREEMENT AND
RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
RECORD DATE AND VOTING POWERS
Total Sports' board of directors has fixed the close of business on
September 22, 2000 as the record date for determination of Total Sports
stockholders entitled to notice of and entitled to vote at the special meeting.
On the record date, there were 2,891,546 shares of Total Sports common stock,
125,000 shares of series A preferred stock, 518,841 shares of series B preferred
stock, 1,418,200 shares of series C preferred stock, 630,756 shares of series C1
preferred stock, 2,140,873 shares of series D preferred stock, no shares of
series D1 preferred stock and 811,423 shares of series E preferred stock
outstanding, held in aggregate by approximately 186 holders of record. Each
holder of Total Sports common stock, series B preferred stock, series C
preferred stock, series C1 preferred stock, series D preferred stock and series
D1 preferred stock, if any, is entitled to one vote for each share of Total
Sports common stock or aforementioned preferred stock held on the record date.
Holders of series A preferred stock and series E preferred stock are not
entitled to vote at the special meeting. To approve the merger, additional
consents by groups of Total Sports stockholders are required. See "-- Required
Vote" below.
VOTING AND REVOCATION OF PROXIES
The shares represented by the enclosed proxy card, if the proxy card is
completed, executed and returned, will be voted in accordance with your
instructions or, if no choice is specified, the proxy will be voted in favor of
approval of the merger agreement. If any other matters properly come before the
special
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meeting, the proxy will vote the shares represented by the enclosed proxy card
in accordance with his best judgment, unless authority to do so is withheld by
you in your proxy. You may revoke your proxy at any time prior to its exercise
at the special meeting by:
- notifying in writing the Secretary of Total Sports Inc. at 234
Fayetteville Street, Sixth Floor, Raleigh, North Carolina 27601;
- completing and submitting a new proxy card; or
- appearing in person and voting at the special meeting. Attendance at the
special meeting will not in and of itself constitute revocation of a
proxy.
REQUIRED VOTE
A majority of the outstanding shares of Total Sports capital stock, on an
as-converted to common stock basis, entitled to vote at the special meeting,
represented in person or by proxy, constitutes a quorum at the special meeting.
The affirmative vote of the holders of at least a majority of Total Sports
common stock and preferred stock other than the series A preferred stock and the
series E preferred stock outstanding and entitled to vote on an as-converted to
common stock basis at the special meeting is required to approve the merger
agreement. In addition, in accordance with existing stockholder rights
agreements with Total Sports and other Total Sports stockholders, the merger
requires the affirmative vote by the following Total Sports stockholders:
- holders of a majority of shares of series A preferred stock outstanding
as of the record date;
- holders of 80% of the shares of series B preferred stock outstanding as
of the record date;
- holders of 80% of the shares of series C preferred stock and series C1
preferred stock outstanding as of the record date, voting together as a
single class; and
- 40% of the holders of the shares of series D preferred stock, series D1
preferred stock, if any, and National Broadcasting Company, Inc., based
on the dollar value of such holders' investment in Total Sports.
In addition, it is a condition to Quokka being required to close the merger
that the holders of Total Sports capital stock representing the right to receive
90% of the Quokka common stock to be issued upon the consummation of the merger
shall have approved the merger or withdrawn or lost the right to exercise
dissenters' or appraisal rights in connection with the merger. As of the record
date for the special meeting, directors and executive officers of Total Sports
beneficially owned approximately 2,212,390 shares of Total Sports common stock,
423,000 shares of series B preferred stock, 1,268,127 shares of series C
preferred stock, 411,849 shares of series C1 preferred stock and 1,208,228
shares of series D preferred stock, which in the aggregate represented
approximately 73.4% of all outstanding shares of Total Sports common stock and
preferred stock entitled to vote at the special meeting, on an
as-converted-to-common basis. In addition, Total Sports directors and executive
officers beneficially owned approximately 125,000 shares of Total Sports series
A preferred stock, which represented 100% of the series A preferred stock
outstanding as of September 22, 2000 and 811,423 shares of Total Sports series E
preferred stock, which represented 100% of the series E preferred stock
outstanding as of September 22, 2000. Directors, executive officers and other
stockholders of Total Sports holding 1,400,967 shares of common stock, 125,000
shares of series A preferred stock, 423,000 shares of series B preferred Stock,
1,680,679 shares of series C and C1 preferred stock, and 1,208,228 shares of
series D preferred stock, have agreed to vote their shares in favor of the
approval of the merger agreement pursuant to voting agreements and irrevocable
proxies.
VOTING; PROXIES
All shares of Total Sports common stock represented by properly executed
proxy cards received before or at the special meeting will, unless the proxy
cards are revoked, be voted in accordance with the instructions indicated on the
proxy cards. If no instructions are indicated on a properly executed proxy
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card, the shares will be voted FOR adoption of the merger agreement. You are
urged to mark the box on the proxy card to indicate how to vote your shares.
If a properly executed proxy card is returned and the stockholder has
abstained from voting on adoption of the merger agreement, the Total Sports
common stock or preferred stock represented by the proxy will be considered
present at the special meeting for the purposes of determining a quorum but will
not be considered to have been voted in favor of the merger agreement.
Because approval of the merger agreement requires the affirmative vote of
holders of at least a majority of Total Sports common stock outstanding and
preferred stock entitled to vote and outstanding as of the record date,
abstentions, and failures to vote all will have the same effect as votes against
approval of the merger agreement.
YOU SHOULD SEND IN ANY ORIGINAL TOTAL SPORTS STOCK CERTIFICATES AS SOON AS
POSSIBLE TO DRUE MOORE, ESQ., VICE PRESIDENT, CORPORATE DEVELOPMENT AND GENERAL
COUNSEL OF TOTAL SPORTS AT 234 FAYETTEVILLE STREET, RALEIGH, NORTH CAROLINA
27601, (919) 573-5431. IN THE EVENT THAT THE MERGER IS NOT COMPLETED, YOUR
ORIGINAL STOCK CERTIFICATES WILL BE RETURNED TO YOU. IF THE MERGER IS COMPLETED,
YOU WILL RECEIVE WRITTEN INSTRUCTIONS REGARDING THE EXCHANGE OF YOUR SHARES OF
TOTAL SPORTS COMMON STOCK FOR SHARES OF QUOKKA COMMON STOCK AND A CASH PAYMENT
FOR ANY FRACTIONAL SHARE OF QUOKKA COMMON STOCK TO WHICH YOU OTHERWISE WOULD BE
ENTITLED.
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THE MERGER
THIS SECTION OF THE JOINT PROXY STATEMENT/PROSPECTUS DESCRIBES MATERIAL
ASPECTS OF THE PROPOSED MERGER AND THE RELATED TRANSACTIONS, BUT IT MAY NOT
CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT FOR YOU TO KNOW. FOR A MORE
COMPLETE UNDERSTANDING OF THE MERGER, YOU SHOULD CAREFULLY READ THIS ENTIRE
JOINT PROXY STATEMENT/PROSPECTUS, INCLUDING THE ANNEXES, AND THE OTHER DOCUMENTS
TO WHICH WE REFER.
GENERAL DESCRIPTION OF THE MERGER
At the effective time, Total Sports will be merged with and into Quokka.
Total Sports will cease to exist and Quokka will be the surviving corporation.
Total Sports stockholders will receive up to 15,000,000 shares of Quokka common
stock in exchange for their shares of all outstanding common stock, preferred
stock, options and warrants of Total Sports.
BACKGROUND
The terms and conditions of the merger agreement are the result of
arms-length negotiations between the representatives of Quokka and the
representatives of Total Sports. Set forth below is a summary of the background
of these negotiations.
Quokka has identified and pursued as one of its strategies growth through
the acquisition of, or combination with, complementary businesses.
In February 1999, Quokka and NBC Olympics, Inc. entered into a joint
venture to provide interactive digital coverage of the Olympics. See "The
Companies -- Quokka Sports, Inc. -- Joint Ventures and Rights Agreements." NBC
Olympics, is a wholly-owned subsidiary of National Broadcasting Company, Inc. or
"NBC". NBC owns 811,423 shares of series E preferred stock and 811,423 shares of
common stock of Total Sports and is represented on the Total Sports' board of
directors.
On February 10, 2000, members of Quokka's senior management visited the
offices of Total Sports in Raleigh, North Carolina to review the operations,
technology and facilities of Total Sports. On February 23, 2000, members of
Total Sports management and representatives of J.P. Morgan, Total Sports'
financial advisors, visited with members of Quokka's management to discuss the
financial terms of a possible acquisition of Total Sports by Quokka.
On March 10, 2000, at a special telephonic board meeting, the management of
Quokka updated the Quokka board of directors as to the financial analysis and
strategic synergies of a potential merger transaction. At the meeting, the
Quokka board approved a resolution approving the proposal of an offer to the
board of directors of Total Sports.
On March 13, 2000, senior executives of Quokka presented a proposal to the
board of directors of Total Sports. Following that board meeting, Total Sports
informed Quokka that it had rejected the proposed offer by Quokka to acquire
Total Sports and had accepted a proposed offer from a competing bidder.
On April 5, 2000, following notice that Total Sports' proposed transaction
with the competing bidder had been terminated, members of Quokka senior
management met with executives from Total Sports at Quokka's offices in San
Francisco, California regarding a potential acquisition of Total Sports by
Quokka. Additionally, Quokka and Total Sports signed a mutual confidential
evaluation agreement as of April 5, 2000 to allow both companies to perform
detailed due diligence reviews of the other company.
On March 7, 2000, Total Sports engaged Allen & Company Incorporated as its
financial advisor on any transaction involving the sale of its business.
On April 12, 2000, Quokka and Golf.com, L.L.C. entered into a letter
agreement that included "no-shop" provisions and a non-binding term sheet
outlining the principal terms of a possible transaction for Quokka to purchase a
majority interest in Golf.com from members owning up to 71% of the equity
interest in Golf.com. Total Sports owns approximately 25% of the membership
interests of Golf.com and has contracted for the exclusive right to operate the
Golf.com web site through June 2003.
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On May 2, 2000 and May 3, 2000, members of Quokka management met at Total
Sports' offices in Raleigh, North Carolina with executives from Golf.com and
Total Sports to review the books, records and operations of Golf.com.
On May 23, 2000, executives and financial advisors of Total Sports met with
Quokka executives at Quokka's offices in San Francisco, California to continue
to discuss a possible acquisition of Total Sports by Quokka.
On June 8, 2000, Quokka executed and delivered a purchase agreement with
Total Sports and other members of Golf.com to acquire 71% of the membership
interests of Golf.com. Also on June 8, Quokka, Golf.com and Total Sports entered
into an event coverage agreement relating to joint coverage of specific golf
events such as the 2000 U.S. Open.
On June 9, 2000, Quokka engaged Prudential Volpe Technology Group as its
financial advisor for the proposed transaction with Total Sports.
On June 22, 2000, NBC-Golf.com Holding, Inc., a wholly-owned subsidiary of
NBC, and Quokka executed an amended operating agreement for Golf.com, L.L.C.,
which will become effective upon the closing of the transactions contemplated in
the Golf.com purchase agreement.
From June 13, 2000 to June 16, 2000, members of Quokka management met at
the offices of Total Sports in Raleigh, North Carolina with Total Sports
executives to review the books, records and operations of Total Sports.
On June 16, 2000, outside legal counsel for Quokka delivered a first draft
of a merger agreement to outside legal counsel to Total Sports.
From June 19, 2000 to July 20, 2000, Total Sports, Quokka and their
respective counsel and financial advisors held daily telephone conferences to
prepare definitive documents and to resolve remaining issues.
On July 14, 2000, Quokka held a regular meeting of its board of directors.
At that meeting, the Quokka board of directors, members of management and
representatives of Quokka's outside legal counsel discussed the proposed
acquisition. The Quokka board of directors voted unanimously to approve the
merger agreement, the related agreements and the transactions contemplated by
the merger agreement and the related agreements and authorized the officers to
finalize and execute the merger agreement and the related agreements.
On July 19, 2000, the board of directors of Total Sports held a special
meeting to discuss the proposed merger transaction with Quokka. Members of Total
Sports executive management, Total Sports' outside counsel and Total Sports
financial advisors were present to update the board of directors on the status
of due diligence review of Quokka, the negotiations relating to the merger
agreement and other related matters.
On July 20, 2000, the board of directors of Total Sports held another
special meeting to discuss the proposed merger transaction with Quokka. Members
of Total Sports' executive management, Total Sports' outside counsel and Total
Sports' financial advisors were present to update the board of directors on the
status of the due diligence review of Quokka, the negotiations relating to the
merger agreement and other related matters. At this meeting, the board of
directors of Total Sports voted to approve the merger agreement, the related
agreements and the transactions contemplated by the merger agreement and related
agreements, and authorized the officers of Total Sports to finalize and execute
the merger agreement and related agreements.
On July 20, 2000, Quokka and Total Sports signed a merger agreement whereby
Total Sports would merge into Quokka. On July 21, 2000, Quokka issued a press
release announcing the execution of the merger agreement.
On August 22, 2000, NBC and Quokka signed a warrant issuance agreement
whereby NBC purchased a warrant that provided NBC the right to acquire up to
10.0 million shares of Quokka common
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stock at prices ranging from $8.89 to $20.00 between June 2001 and December
2004. See "The Companies -- Quokka Sports, Inc. -- Recent Developments."
On September 15, 2000, Quokka entered into a note purchase agreement with a
group of investors, including NBC, whereby Quokka issued to NBC a 7.0%
convertible promissory note with a face amount of $2.5 million and issued a
related warrant to purchase 90,625 shares of Quokka common stock.
On October 10, 2000, Quokka and Total Sports signed an amendment to the
merger agreement that included, among other changes, an update to the merger
consideration and exchange ratios set forth in exhibit B to reflect the changes
in Total Sports' capitalization due to its bridge financing that closed on
October 9, 2000.
THE PROPOSED MANAGEMENT BUY-OUT OF TOTAL SPORTS' PRINT PUBLISHING DIVISION
Total Sports has entered into a Bill of Sale and Assumption of Liabilities
Agreement dated August 18, 2000 and amended on August 31, 2000 with Thorn Media,
Inc. to sell substantially all its assets used in its print publishing division
to Thorn Media in exchange for one dollar and Thorn Media's assumption of
liabilities related to the print division. Thorn Media is affiliated with John
Thorn, who has been an executive officer of Total Sports in the role of
publisher since 1997. Closing of the sale of the print division occurred on
August 31, 2000. In connection with the sale of the print division, Total Sports
entered into a license agreement with Thorn Media granting Thorn Media a
three-year, exclusive, royalty-free right to use several trademarks of Total
Sports in connection with specified printed books, and to exploit the data
contained in Total Sports' proprietary baseball database in print media and,
subject to certain restrictions, in digital media.
THE PROPOSED PUBLIC OFFERING
On November 12, 1999, Total Sports filed a registration statement on Form
S-1 for its proposed initial public offering of $50 million worth of common
stock. On May 15, 2000, Total Sports withdrew its Form S-1 and terminated its
initial public offering because of unfavorable market conditions in its
industry, as indicated by the reductions in the stock prices of comparable
public companies over the prior few months.
REASONS FOR THE MERGER
The following discussion of the parties' reasons for the merger contains a
number of forward-looking statements that reflect the current views of Quokka
and Total Sports with respect to future events that may have an effect on the
future financial performance of each of them or the combined company.
Forward-looking statements are subject to risks and uncertainties. Actual
results and outcomes may differ materially from the results and outcomes
discussed in the forward-looking statements. Cautionary statements that identify
important factors that could cause or contribute to differences in results and
outcomes include those discussed in the sections of this joint proxy
statement/prospectus entitled "Forward-Looking Information" and "Risk Factors."
Quokka's Reasons For The Merger
Quokka's board of directors believes that the following are reasons that a
business combination with Total Sports would be beneficial to Quokka and its
stockholders:
- access to an estimated 42 million potential U.S. major league baseball
enthusiasts, an estimated 43 million potential U.S. college football
enthusiasts and an estimated 43 million potential U.S. college basketball
enthusiasts;
- access to Total Sports' publishing technology and know-how;
- entry into traditional sports coverage;
- the strategic benefits of combining Quokka's immersive coverage with
Total Sports' strong editorial content;
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- the opportunity to strengthen the relationship with NBC;
- the opportunity to shorten the expected time for Quokka to achieve
profitability;
- management's favorable recommendation of the merger, based in part on the
business, financial and legal due diligence investigations performed with
respect to Total Sports;
- the anticipated accretive effect of the merger on Quokka common stock;
and
- the terms of the merger agreement and related agreements, including price
and structure, which were considered by both the board of directors and
management of Quokka to provide an equitable basis for the acquisition.
The Quokka board of directors also considered a number of potentially
negative factors in its deliberations concerning the acquisition. The negative
factors considered by the Quokka board of directors included:
- the risk that the acquisition might not be completed in a timely manner
or at all;
- the potential dilutive effect on Quokka's common stock;
- the general difficulties of integrating cross-country operations;
- the possibility that the acquisition might limit other company
transactions; and
- the other risks and uncertainties discussed above under "Risk Factors."
The foregoing discussion is not exhaustive of all factors considered by
Quokka's board of directors. Moreover, in view of the variety of factors
considered in connection with its evaluation of the merger and the merger
agreement, Quokka's board of directors considered the factors as a whole and did
not find it practicable to, and did not, quantify or otherwise assign relative
weight to the specific factors considered in reaching its determination to
approve the merger and the merger agreement. In addition, each member of
Quokka's board of directors may have considered other factors on an individual
basis, including factors unknown to Quokka, or given different weight to
different factors considered.
Total Sports' Reasons For The Merger
Total Sports' board of directors believes that the following are reasons
that the merger will be beneficial to Total Sports and its stockholders and that
stockholders of Total Sports should vote FOR approval of the merger agreement:
- Total Sports' prospects as an independent company, and the increased
likelihood of obtaining funding for its business as a result of the
merger;
- the liquidity of Quokka's common stock;
- the opportunity for Total Sports stockholders to participate in a company
with broader sports coverage and greater financial resources;
- the strength of Quokka's senior management, and in particular the ability
of Alan Ramadan, Quokka's current president and chief executive officer,
and Alvaro Saralegui, Quokka's current chief operating officer, to lead
the combined operations of Quokka and Total Sports;
- the strategic benefits of combining Quokka's immersive coverage with
Total Sports' strong editorial content;
- the opportunity to strengthen the relationship with NBC;
- the opportunity to shorten the expected time for Total Sports to achieve
profitability;
- management's favorable recommendation of the merger, based in part on the
business, financial and legal due diligence investigations performed with
respect to Quokka;
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- the fact that the merger is expected to be treated as a tax-free
reorganization under Section 368(a) of the Internal Revenue Code of 1986,
as amended;
- the oral opinion of Allen & Company Incorporated, subsequently confirmed
in writing, to the board of directors of Total Sports to the effect that
the merger consideration was fair, from a financial point of view, to the
securityholders of Total Sports; and
- the terms of the merger agreement and related agreements, including price
and structure, which were considered by both the board of directors and
management of Total Sports to provide a fair and equitable basis for the
acquisition.
In the course of its deliberations, Total Sports' board of directors
reviewed with Total Sports management and outside advisors a number of
additional factors relevant to the merger, including:
- the risk that the acquisition might not be completed in a timely manner
or at all;
- the historical financial performance of Quokka and its stock;
- the general difficulties of integrating cross-country operations;
- the possibility that the acquisition might limit other company
transactions; and
- the other risks and uncertainties discussed above under "Risk Factors."
Total Sports' board of directors believed that these factors, together with
its review of the merger agreement, supported its recommendation of the merger.
The foregoing discussion is not exhaustive of all factors considered by
Total Sports' board of directors. Moreover, in view of the variety of factors
considered in connection with its evaluation of the merger and the merger
agreement, Total Sports' board of directors considered the factors as a whole
and did not find it practicable to, and did not, quantify or otherwise assign
relative weight to the specific factors considered in reaching its determination
to approve the merger and the merger agreement. In addition, each member of
Total Sports' board of directors may have considered other factors on an
individual basis, including factors unknown to Total Sports, or given different
weight to different factors considered.
RECOMMENDATION OF TOTAL SPORTS' BOARD OF DIRECTORS
AFTER CAREFUL CONSIDERATION, TOTAL SPORTS' BOARD OF DIRECTORS BELIEVES THAT
THE MERGER AND THE MERGER AGREEMENT ARE IN YOUR BEST INTERESTS. TOTAL SPORTS'
BOARD OF DIRECTORS HAS APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT YOU
VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
In considering the recommendation of Total Sports' board of directors with
respect to the merger and the merger agreement, you should be aware that certain
directors and officers of Total Sports have certain interests in the merger that
may be different from, or are in addition to, yours. For a more complete
discussion of the interests of certain officers and directors of Total Sports,
we refer you to the section of this joint proxy statement/prospectus entitled
"Interests of Officers and Directors in the Merger."
RECOMMENDATION OF QUOKKA'S BOARD OF DIRECTORS
AFTER CAREFUL CONSIDERATION, QUOKKA'S BOARD OF DIRECTORS BELIEVES THAT THE
MERGER AND THE MERGER AGREEMENT ARE IN YOUR BEST INTERESTS. QUOKKA'S BOARD OF
DIRECTORS HAS APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT YOU
VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
OPINION OF TOTAL SPORTS' FINANCIAL ADVISOR
Total Sports entered into an engagement letter agreement with Allen &
Company as of March 7, 2000, under which Allen & Company agreed to act as Total
Sports' financial advisor in connection with a sale of the company. Allen &
Company was asked to render its opinion as to the fairness from a financial
point of view of the aggregate consideration to be received by Total Sports
securityholders. In arriving at
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the conclusion that the aggregate consideration was fair from a financial point
of view, Allen & Company considered, among other factors it deemed relevant:
- the terms of the merger agreement and related documentation;
- the nature of the operations and financial history of Total Sports,
including discussions with senior management regarding the business and
prospects of Total Sports relating to, among other things, Total Sports'
operating budget and financial outlook;
- the pro forma cash position and operating projections for the combined
company which were developed by both management teams;
- the financing alternatives available to support the development of Total
Sports;
- Quokka's filings with the Securities and Exchange Commission, including
audited and unaudited financial statements;
- the historical trading information for the common stock of Quokka; and
- financial and stock market information for other companies in businesses
related to those of Total Sports and Quokka.
Based upon its analysis, Allen & Company rendered its opinion as of July
20, 2000, the date of the merger agreement, that the aggregate consideration to
be received by the securityholders of Total Sports in the merger is fair from a
financial point of view. Allen & Company will receive a fee for its services
equal to one percent of the total consideration received by Total Sports in the
merger.
INTERESTS OF TOTAL SPORTS' OFFICERS AND DIRECTORS IN THE MERGER
When considering the recommendation of Total Sports' board of directors to
approve the merger agreement, you should be aware that certain Total Sports
directors and officers have interests in the merger that are different from, or
are in addition to, yours. For example, as a result of the rights, preferences
and privileges of the various classes of Total Sports preferred stock, in some
instances where the value of the Quokka common stock to be received in exchange
for the outstanding securities of Total Sports is less than approximately $190.0
million in the aggregate, the holders of Total Sports common stock, and holders
of options and warrants to purchase Total Sports common stock would not receive
any consideration in the merger. In addition, if the value of the Quokka common
stock does not exceed $155.0 million in the aggregate, holders of series E
preferred stock would not receive any consideration in the merger. Entities
affiliated with directors and executive officers of Total Sports beneficially
own 72.1% of the Total Sports series A preferred stock, series A-prime preferred
stock, series B preferred stock, series B-prime preferred stock, series C
preferred stock, series C-prime preferred stock, series C1 preferred stock,
series C1-prime preferred stock, series D preferred stock and series D-prime
preferred stock, and warrants to purchase 968,835 shares of preferred stock.
Compensation of Gary Stevenson
Also, Gary Stevenson, the president, chief executive officer and a director
of Total Sports, will receive between 8% and 11% of the Quokka common stock
received in the merger, depending upon the value of the Quokka stock at the
closing of the merger. In accordance with a Compensation and Equity Rights
Agreement dated July 20, 2000 between Mr. Stevenson and Total Sports, Mr.
Stevenson will receive an amount equal to a percentage between 8% and 11%
multiplied by the gross consideration paid in connection with one or more of the
following capital transactions closed during, or in some cases after termination
of, his employment: (a) a merger, consolidation or other business combination
pursuant to which the business of Total Sports is combined with that of another
party; (b) any sale, transfer, exchange or other disposition of a line of
business or material asset of Total Sports, or of a direct or indirect equity
interest in a subsidiary of Total Sports or a third party; (c) any lease or
license of any asset or line of business that is outside the ordinary course of
business; (d) any sale, transfer, exchange or other disposition of securities of
Total Sports or any of its subsidiaries by Total Sports or any stockholder,
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whether pursuant to an effective registration statement under the Securities Act
of 1933, as amended, or an exemption therefrom, except for transfers to
affiliates or family members or family trusts; (e) any borrowing that results in
a distribution by Total Sports to any stockholder or the acquisition of any
asset or line of business; or (f) any other transaction that results in the
receipt by a stockholder of Total Sports of such gross consideration with
respect to its interest in Total Sports or by Total Sports with respect to its
interest in any subsidiary or third party. Mr. Stevenson will not receive a
percentage of capital contributions to Total Sports made by its stockholders
that do not materially affect their percentage equity interests in Total Sports
or securities issued pursuant to the exercise of currently outstanding options,
warrants, or convertible preferred stock rights.
Stock Plans
All outstanding options to purchase Total Sports common stock granted
pursuant to the Total Sports 1997 Stock Plan at the effective time of the
merger, including those held by executive officers and directors of Total
Sports, shall be converted into the right to receive the number of shares of
Quokka common stock calculated in accordance with the exchange ratio applicable
to the Total Sports common stock. Pursuant to the terms of the 1997 Stock Plan,
all these shares will vest immediately upon consummation of the merger.
All outstanding options to purchase senior employee preferred stock of
Total Sports granted pursuant to the Total Sports 2000 Stock Plan at the
effective time of the merger, including those held by executive officers of
Total Sports, shall be converted into the right to receive the number of shares
of Quokka common stock calculated in accordance with the exchange ratio
applicable to the Total Sports senior employee preferred stock. Pursuant to the
terms of the 2000 Stock Plan and option agreements executed in connection
therewith, 50% of the unvested options to purchase senior employee preferred
stock exercisable pursuant to the outstanding options shall terminate upon the
consummation of a change in control of Total Sports, defined as (a) a sale of
all or substantially all the assets of Total Sports or a merger or consolidation
involving Total Sports in which the stockholders of Total Sports prior to such
transaction own less than a majority of the voting securities of the entity
surviving such transaction, or (b) any transaction or series of related
transactions pursuant to which a person, entity or persons or entities under
common control or acting as a group within the meaning of Section 13(d) of the
Securities Exchange Act of 1934, acquired securities constituting at least a
majority of the voting power of Total Sports. The remaining 50% of the unvested
options to purchase senior employee preferred stock shall become fully vested
and exercisable upon the consummation of a change in control.
The following table sets forth the options held by the executive officers
and directors of Total Sports that will be vested at the effective time of the
merger.
<TABLE>
<CAPTION>
1997 2000
NAME OFFICE PLAN OPTIONS PLAN OPTIONS
---- ------ ------------ ------------
<S> <C> <C> <C>
Gary R. Stevenson................. President, Chief Executive Officer 24,500 --
and Director
Frank A. Daniels, III............. Chairman and Director 13,745 40,000
Colin Boatwright.................. Chief Technology Officer 126,436 183,333
Petra Weishaupt................... Vice President, Finance 81,269 102,000
Ezra Kucharz...................... Vice President, Business 25,015 130,000
Development
Drue Moore........................ Vice President, Corporate 39,450 102,000
Development and General Counsel
Frank A. Daniels, Jr.............. Director 4,500 --
William W. Neal, III.............. Director 4,500 --
Robert S. Prather, Jr. ........... Director 3,000 --
William E. Ray.................... Director 4,200 --
Stuart B. Rekant.................. Director 3,000 --
John Rigas........................ Director 300 --
C. Toms Newby, III................ Director 300 --
</TABLE>
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INDEMNIFICATION OF OFFICERS AND DIRECTORS
If the merger is consummated, Quokka has agreed that, for a period of six
years after the effective time, Quokka will indemnify each former or current
officer or director of Total Sports or any of its subsidiaries in respect to
claims arising from or in respect to their acts or omissions on or prior to the
effective time, including claims arising out of or in connection with the
merger. Quokka has also agreed for a period of six years after the effective
time to pay for and maintain in effect the directors' and officers' liability
insurance coverage in favor of former or current Total Sports officers and
directors with respect to claims arising from facts or events which occurred on
or before the effective time, provided that Quokka may reduce the coverage if
necessary to maintain the annual premiums at no more than $60,000 in the
aggregate.
The Total Sports certificate of incorporation contains provisions permitted
under Delaware law relating to the liability of officers and directors. These
provisions eliminate an officer's or director's personal liability for monetary
damages resulting from a breach of fiduciary duty, except in circumstances
involving wrongful acts, such as:
- any breach of the duty of loyalty;
- acts or omissions which involve a lack of good faith, intentional
misconduct or a knowing violation of the law;
- payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law; or
- any transaction from which the officer or director derives an improper
personal benefit.
These provisions do not limit or eliminate the rights of Total Sports or
any stockholder to seek non-monetary relief, such as an injunction or
rescission, in the event of a breach of an officer or director's fiduciary duty.
These provisions will not alter an officer or director's liability under federal
securities laws.
The Total Sports bylaws require Total Sports to indemnify officers and
directors to the fullest extent not prohibited by the Delaware law. Total Sports
may limit the extent of such indemnification by individual contracts with
officers or directors. Further, Total Sports may decline to indemnify any
officer or director in connection with any proceeding initiated by such person
or any proceeding by such person against Total Sports or its directors,
officers, employees or other agents, unless such indemnification is expressly
required to be made by law or the proceeding was authorized by Total Sport's
board of directors.
At present, there is no pending litigation or proceeding involving a
director, officer or employee of Total Sports for which indemnification is
sought, nor is Total Sports aware of any threatened litigation that might result
in claims for indemnification.
Total Sports has the power to indemnify its employees and other agents, as
permitted by Delaware law, but is not required to do so.
CHANGE OF CONTROL SEVERANCE PLAN
As of October 9, 2000, 113 employees of Total Sports who remain employed by
Total Sports through December 15, 2000 are entitled to specified retention
bonuses of $389,665 in the aggregate. If the merger is completed prior to
December 15, 2000 Quokka will assume the obligation to pay these bonuses. If,
following the completion of the merger prior to December 15, 2000, these
employees are terminated by Quokka, other than for cause, prior to December 15,
2000, Quokka will pay or provide to such employee:
- the retention bonus;
- severance in the amount of three weeks of salary in the case of an
employee whose combined continuous service with Total Sports and Quokka
is more than two years or two weeks salary in all other cases; and
- outplacement services in accordance with Quokka's customary practice.
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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material U.S. federal income tax
consequences of the merger that are expected to apply generally to Total Sports
stockholders upon an exchange of their Total Sports capital stock for Quokka
common stock in the merger. This summary is based upon current provisions of the
Internal Revenue Code, existing Treasury regulations and current administrative
rulings and court decisions, all of which are subject to change. Any change,
which may or may not be retroactive, could alter the tax consequences to Quokka,
Total Sports or the stockholders of Total Sports as described in this summary.
No attempt has been made to comment on all federal income tax consequences of
the merger that may be relevant to particular holders, including holders:
- who do not hold their shares as capital assets;
- who are subject to special tax rules such as financial institutions,
dealers in securities, foreign persons, mutual funds, insurance companies
or tax-exempt entities;
- who are subject to the alternative minimum tax provisions of the Internal
Revenue Code;
- who acquired their shares in connection with stock option or stock
purchase plans or in other compensatory transactions;
- who hold their shares as a hedge or as part of a hedging, straddle or
other risk reduction strategy; or
- whose shares are qualified small business stock for purposes of Section
1202 of the Internal Revenue Code.
In addition, the following discussion does not address the tax consequences
of the merger under state, local or foreign tax laws. Furthermore, the following
discussion does not address (i) the tax consequences of transactions effectuated
before, after or at the same time as the merger, whether or not they are in
connection with the merger, including, without limitation, transactions in which
Total Sports shares are acquired or Quokka shares are disposed of, (ii) the tax
consequences to holders of options or warrants issued by Total Sports that are
assumed, exercised or converted, as the case may be, in connection with the
merger or (iii) the tax consequences of the receipt of Quokka shares other than
in exchange for Total Sports shares.
ACCORDINGLY, HOLDERS OF TOTAL SPORTS CAPITAL STOCK ARE ADVISED AND EXPECTED
TO CONSULT THEIR OWN TAX ADVISERS REGARDING THE U.S. FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER IN LIGHT OF THEIR PERSONAL CIRCUMSTANCES AND THE
CONSEQUENCES UNDER STATE, LOCAL AND FOREIGN TAX LAWS.
As a condition to the consummation of the merger, Cooley Godward LLP, tax
counsel to Quokka, and Clifford Chance Rogers & Wells LLP, tax counsel to Total
Sports, must render tax opinions that the merger will constitute a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code, referred to as a "Reorganization." The tax opinions discussed in this
section assume and are conditioned upon the following:
- that all representations, warranties and statements made or agreed to by
Quokka and Total Sports and their managements, employees, officers,
directors and stockholders in connection with the merger, including, but
not limited to, those set forth in the merger agreement and the tax
representation letters delivered to such counsel by Quokka and Total
Sports are true and accurate at all relevant times;
- that signed original documents submitted to such counsel are authentic,
documents submitted to such counsel as copies conform to the original
documents, and that all of these documents have been, or will be by the
effective time of the merger, duly and validly executed and delivered
where due execution and delivery are a prerequisite to the effectiveness
of these documents;
- that all covenants contained in the merger agreement and the tax
representation letters described above are performed without waiver or
breach of any material provision of these covenants;
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- that the merger will be reported by Quokka and Total Sports on their
respective U.S. federal income tax returns in a manner consistent with
the opinions rendered by such counsel; and
- that any representation or statement made "to the knowledge of" or
similarly qualified is correct without that qualification.
No ruling from the Internal Revenue Service has been or will be requested
in connection with the merger. In addition, stockholders of Total Sports should
be aware that the tax opinions discussed in this section are not binding on the
IRS, the IRS could adopt a contrary position and a contrary position could be
sustained by a court.
Subject to the assumptions and limitations discussed above, it is the
opinion of each of Cooley Godward and Clifford Chance Rogers & Wells that:
- the merger will be treated for federal income tax purposes as a
Reorganization;
- Quokka and Total Sports will each be a party to the Reorganization;
- Quokka and Total Sports will not recognize any gain or loss solely as a
result of the merger;
- stockholders of Total Sports will not recognize any gain or loss upon the
receipt of solely Quokka common stock for their Total Sports capital
stock, other than with respect to cash received in lieu of fractional
shares of Quokka common stock;
- the aggregate basis of the shares of Quokka common stock received by a
Total Sports stockholder in the merger, including any fractional share
deemed received, will be the same as the aggregate basis of the shares of
Total Sports capital stock surrendered in exchange therefor;
- the holding period of the shares of Quokka common stock received by a
Total Sports stockholder in the merger will include the holding period of
the shares of Total Sports capital stock surrendered in exchange
therefor; and
Other Consideration. Even if the merger qualifies as a Reorganization, a
recipient of Quokka common stock would recognize income to the extent that, for
example, any such shares were determined to have been received in exchange for
services, to satisfy obligations or in consideration for anything other than the
Total Sports capital stock surrendered. Generally, such income is taxable as
ordinary income upon receipt. In addition, to the extent that Total Sports
stockholders were treated as receiving, directly or indirectly, consideration
other than Quokka common stock in exchange for such stockholder's Total Sports
capital stock, gain or loss would have to be recognized.
Backup Withholding. With respect to a cash payment received by a Total
Sports stockholder in lieu of a fractional share of Quokka common stock, a
noncorporate stockholder of Total Sports may be subject to backup withholding at
a rate of 31%. However, backup withholding will not apply to a stockholder who
either (i) furnishes a correct taxpayer identification number and certifies that
he or she is not subject to backup withholding by completing the substitute Form
W-9 that will be included as part of the transmittal letter or (ii) otherwise
proves to Quokka and its exchange agent that the stockholder is exempt from
backup withholding.
Reporting Requirements. Each Total Sports stockholder that receives Quokka
common stock in the merger will be required to file a statement with his or her
federal income tax return setting forth his or her basis in the Total Sports
capital stock surrendered and the fair market value of the Quokka common stock
and cash, if any, received in the merger, and to retain permanent records of
these facts relating to the merger.
Dissenting Stockholders. A dissenting stockholder of Total Sports capital
stock who perfects appraisal rights will generally be treated as having received
a distribution in redemption of his or her stock subject to the provisions and
limitations of Sections 302 and 356(a)(2) of the Internal Revenue Code. While
the tax consequences of such a redemption depend on a stockholder's particular
circumstances, a dissenting stockholder who, after the merger, does not own,
actually or constructively, any capital stock of either
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Total Sports or Quokka will generally recognize gain or loss with respect to a
share of Total Sports capital stock equal to the difference between the amount
of cash received and his or her basis in such share. This gain or loss should be
capital gain or loss, provided such share is held as a capital asset.
Cash In Lieu of Fractional Shares. The payment of cash in lieu of
fractional shares will be treated as if the fractional shares were distributed
as part of the exchange and then redeemed by Quokka. While the tax consequences
of a redemption depend on a stockholder's particular circumstances, gain or loss
will generally be recognized as a result of the receipt of such cash measured by
the difference between the amount received and the portion of the tax basis
allocable to the fractional share interests. Such gain or loss should be capital
gain or loss, provided such share was held as a capital asset.
Consequences of IRS Challenge. A successful challenge by the IRS to the
Reorganization status of the merger would result in significant adverse tax
consequences to both Total Sports (and Quokka, as its successor) and the Total
Sports stockholders. Under these circumstances, Total Sports would be treated as
though it had sold its assets in a taxable sale and then liquidated. Total
Sports stockholders would recognize taxable gain or loss with respect to each
share of Total Sports capital stock surrendered equal to the difference between
each stockholder's basis in such share and the fair market value, as of the
effective time of the merger, of the Quokka common stock received in exchange
therefor. In such event, a Total Sports stockholder's aggregate basis in the
Quokka common stock so received would equal its fair market value, and the
holding period of such stock would begin the day after the effective date of
merger.
ANTICIPATED ACCOUNTING TREATMENT
The merger will be accounted for using the purchase method of accounting
under which the total consideration paid in the merger will be allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed of
Total Sports on the basis of their estimated fair values on the effective date
of the merger. The excess of the total consideration paid in the merger over
tangible and identifiable intangible assets acquired and liabilities assumed
will be recorded as goodwill.
GOVERNMENTAL APPROVALS
Transactions such as the merger are subject to review by the Department of
Justice and the Federal Trade Commission to determine whether they comply with
applicable antitrust laws. Under the provisions of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended or "HSR Act", the merger may not
be consummated until the specified waiting period requirements of the HSR Act
have been satisfied. Quokka and Total Sports filed notification reports,
together with requests for early termination for the waiting period, with the
Department of Justice and the Federal Trade Commission under the HSR Act on
September 18, 2000. Total Sports and Quokka received notice of early termination
of the waiting period on September 29, 2000.
ESCROW; RESTRICTIONS ON RESALES
Upon the completion of the merger, 1,500,000 shares of Quokka common stock
to be issued in the merger will be placed in escrow with State Street Bank, N.A.
as the escrow agent. These escrowed shares of Quokka common stock will be held
in an escrow fund for a one-year period to satisfy indemnification claims. See
"Certain Terms of the Merger Agreement -- The Escrow Fund." The Quokka common
stock issued to the securityholders of Total Sports in the merger will be
subject to a variety of restrictions affecting the resale and transfer of the
common stock.
In addition, except for the escrowed shares of Quokka stock, the remaining
Quokka common stock issued in exchange for Total Sports capital stock, or
reserved for issuance under Total Sports' warrants that are assumed or exchanged
for warrants to purchase Quokka common stock, are subject to transfer and resale
restrictions during the year following the completion of the merger. Except as
noted below, on an
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aggregate basis, the shares of Quokka common stock issued or reserved for
issuance via the merger may be sold or otherwise transferred only upon the
following schedule:
- up to an aggregate of 10% of the Quokka common stock (excluding the
escrowed shares) may be sold immediately upon the completion of the
merger;
- up to an aggregate of 22% of the Quokka common stock (excluding the
escrowed shares) may be sold 90 days following the completion of the
merger;
- up to an aggregate of 47% of the Quokka common stock (excluding the
escrowed shares) may be sold 180 days following the completion of the
merger;
- up to an aggregate of 72% of the Quokka common stock (excluding the
escrowed shares) may be sold 270 days following completion of the merger;
and
- all of the Quokka common stock may be sold one year following the
completion of the merger.
Within the foregoing aggregate limits relating to resale and transfer, Gary
Stevenson, the president, chief executive officer and a director of Total
Sports, may sell the shares of Quokka common stock to be issued to him in the
merger upon the following schedule:
- up to an aggregate of 60% of Mr. Stevenson's Quokka common stock
(excluding the escrowed shares) may be sold immediately upon the
completion of the merger;
- up to an aggregate of 65% of Mr. Stevenson's Quokka common stock
(excluding the escrowed shares) may be sold 90 days following the
completion of the merger;
- up to an aggregate of 75% of Mr. Stevenson's Quokka common stock
(excluding the escrowed shares) may be sold 180 days following the
completion of the merger;
- up to an aggregate of 85% of Mr. Stevenson's Quokka common stock
(excluding the escrowed shares) may be sold 270 days following completion
of the merger; and
- all of Mr. Stevenson's Quokka common stock may be sold one year following
the completion of the merger.
The greater number of shares of Quokka common stock that Mr. Stevenson
elects to sell or otherwise transfer during any time period indicated above, the
fewer number of shares of Quokka common stock that other Total Sports
stockholders would be able to sell or otherwise transfer during that same
period. Based on the $9.00 share price of the Quokka common stock on July 20,
2000, Mr. Stevenson would receive 1,650,000 shares of Quokka stock via the
merger, in accordance with an agreement with Total Sports. For a more detailed
discussion of the rights and interests of Mr. Stevenson in the merger, see
"Interests of Total Sports Officers and Directors in the Merger."
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CERTAIN TERMS OF THE MERGER AGREEMENT
THE FOLLOWING SUMMARY DESCRIBES THE MATERIAL TERMS OF THE AGREEMENT AND
PLAN OF MERGER AND REORGANIZATION, DATED AS OF JULY 20, 2000, AS AMENDED, AMONG
QUOKKA AND TOTAL SPORTS. THE FULL TEXT OF THE MERGER AGREEMENT AND AN AMENDMENT
THERETO ARE ATTACHED AS ANNEXES A-1 AND A-2 TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AND ARE INCORPORATED HEREIN BY REFERENCE. WE ENCOURAGE YOU
TO READ THE ENTIRE MERGER AGREEMENT, AS AMENDED.
THE MERGER
The merger agreement provides that at the effective time, Total Sports will
be merged with and into Quokka. Upon completion of the merger, Quokka will
continue as the surviving corporation and Total Sports will cease to exist as a
separate corporation.
EFFECTIVE TIME OF THE MERGER
The merger will become effective when a certificate of merger is filed with
the Secretary of State of the State of Delaware. If all of the conditions of the
merger contained in the merger agreement are satisfied or waived, we anticipate
that the effective time will occur on the date of the Quokka and Total Sports
special meetings or as soon as practicable following the special meetings.
MANNER AND BASIS OF CONVERTING SHARES
The merger agreement provides that at the effective time of the merger,
each share of capital stock of Total Sports then outstanding (other than
dissenting shares) will be converted into the right to receive that number of
shares of Quokka common stock calculated in accordance with the exchange ratio
applicable for each such class or series of Total Sports capital stock as
follows.
- The series H preferred stock exchange ratio equals the quotient of (a)
the amount of merger consideration shares in an amount of Quokka common
stock equal to the quotient of (i) the product of (A) the number of
shares of series H preferred stock issued and outstanding and the number
of shares of series H preferred stock issuable upon exercise of options
or warrants outstanding as of the effective date, collectively referred
to in this section as the "series H preferred stock," and (B) the
aggregate amount equal to $66.36 for each share of series H preferred
stock outstanding, plus accrued but unpaid dividends at the rate of $1.99
per share per annum accruing each year beginning on the date of issuance
of such shares of series H preferred stock, also known as the "series H
liquidation preference" and (ii) the average of the last sales price of
Quokka common stock quoted on the Nasdaq National Market for the five
consecutive business days ending on the day immediately prior to the
effective date, referred to in this section as the "effective date
value," divided by (b) the aggregate number determined by taking the
quotient of (i) the series H liquidation preference for each share of
series H preferred stock and (ii) $66.36, such number referred to in this
section as the "series H units," allocated among the holders of series H
preferred stock by reference to the number of series H units held by each
such holder in relation to the total number of series H units.
- The senior employee preferred stock exchange ratio equals the quotient of
(a) the product of (i) the merger consideration shares, if any, remaining
after payment of the merger consideration shares issuable upon exchange
of the series H preferred stock, (ii) 8% and (iii) the fraction
(expressed as a percentage) of which the numerator is the number of
shares of senior employee preferred stock that may be acquired pursuant
to options granted and vested under the Total Sports 2000 stock plan
which remain outstanding as of the effective date, referred to in this
section as the "senior employee preferred stock," and the denominator is
3,200,000, divided by (b) the senior employee preferred stock.
- The series F preferred stock exchange ratio equals the quotient of (a)
the amount of merger consideration shares, if any, remaining after
payment of the compensation payable to Gary Steven-
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son, referred to in this section as the "Stevenson compensation shares,"
and the merger consideration shares issuable upon exchange of the series
H preferred stock and senior employee preferred stock, in an amount of
Quokka common stock equal to the quotient of (i) the product of (A) the
number of shares of series F preferred stock issued and outstanding and
the number of shares of series F preferred stock issuable upon exercise
of options or warrants outstanding as of the effective date, collectively
referred to in this section as the "series F preferred stock," and (B)
the aggregate amount equal to $41.48 for each share of series F preferred
stock outstanding, plus accrued but unpaid dividends at the rate of $1.99
per share per annum accruing each year beginning on the date of issuance
of such shares of series F preferred stock, also known as the "series F
liquidation preference" and (ii) the effective date value, divided by (b)
the aggregate number determined by taking the quotient of (i) the series
F liquidation preference for each share of series F preferred stock and
(ii) $41.48, such number referred to in this section as the "series F
units," allocated among the holders of series F preferred stock by
reference to the number of series F units held by each such holder in
relation to the total number of series F units.
- The series A-prime preferred stock exchange ratio equals the quotient of
(a) the amount of merger consideration shares, if any, remaining after
payment of the Stevenson compensation shares and the merger consideration
shares issuable upon exchange of the series H preferred stock, senior
employee preferred stock and series F preferred stock, in an amount of
shares of Quokka common stock equal to the quotient of (i) the product of
(A) the number of shares of series A-prime preferred stock issued and
outstanding and the number of shares of the series A-prime preferred
stock issuable upon exercise of options or warrants outstanding as of the
effective date, collectively referred to in this section as the "series
A-prime preferred stock" and (B) the aggregate amount equal to $10.00 for
each share of series A-prime preferred stock outstanding, plus accrued
but unpaid dividends at the rate of $1.20 per share per annum accruing
each year beginning on the date of issuance of either (x) shares of
series A preferred stock, defined below, exchanged for such shares of
series A-prime preferred stock or (y) such shares of series A-prime
preferred stock if not issued in exchange for series A preferred stock,
also known as the "series A-prime liquidation preference" and (ii) the
effective date value, divided by (b) the aggregate number determined by
taking the quotient of (i) the series A-prime liquidation preference for
each share of series A-prime preferred stock and (ii) $10.00, such number
is referred to in this section as the "series A-prime units," allocated
among the holders of series A-prime preferred stock by reference to the
number of series A-prime units held by each such holder in relation to
the total number of series A-prime units.
- The series B-prime preferred stock exchange ratio equals the quotient of
(a) the amount of merger consideration shares, if any, remaining after
payment of the Stevenson compensation shares and the merger consideration
shares issuable upon exchange of the series H preferred stock, senior
employee preferred stock, series F preferred stock and series A-prime
preferred stock, in an amount equal to the quotient of (i) the amount to
be distributed to the holders of the number of shares of series B-prime
preferred stock issued and outstanding and the number of shares of series
B-prime preferred stock issuable upon exercise of options or warrants
outstanding as of the effective date, collectively referred to in this
section as the "series B-prime preferred stock" calculated under the
senior-prime preferred stock amount, as described below, and designated
as the series B-prime liquidation amount, also described below, and
assuming the exercise in full of all warrants to purchase series B-prime
preferred stock which remain outstanding as of the effective date and
(ii) the effective date value, divided by (b) the aggregate number
determined by taking the quotient of (A) the aggregate amount equal to
$4.492 for each share of series B-prime preferred stock, plus accrued but
unpaid dividends at the rate of $0.54 per share per annum accruing each
year beginning on the date of issuance of either (x) shares of series B
preferred stock, defined below, exchanged for such shares of series
B-prime preferred stock or (y) such shares of series B-prime preferred
stock if not issued in exchange for series B preferred stock, also known
as the "series B-prime liquidation preference," for each share of series
B-prime preferred stock and (B) $4.492, such number is referred to in
this section as the "series B-prime units;" provided, however
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if a holder of series B-prime preferred stock receives the value of the
portion of merger consideration shares based upon the effective date
value which would have been paid with respect to the aggregate number of
shares of common stock issuable upon conversion of the series B-prime
preferred stock, assuming the conversion on a one-to-one basis of all
senior-prime preferred stock, as described below, immediately prior to
the effective date, this amount is referred to in this section as the
"series B-prime conversion amount" in lieu of the series B-prime
liquidation preference for its series B-prime preferred stock, and the
number of series B-prime units held by such holder shall be equal to the
number of shares of series B-prime preferred stock held by such holder,
allocated among the holders of series B-prime preferred stock by
reference to the number of series B-prime units held by each such holder
in relation to the total number of series B-prime units.
- The series C-prime preferred stock exchange ratio equals the quotient of
(a) the amount of merger consideration shares, if any, remaining after
payment of the Stevenson compensation shares and the merger consideration
shares issuable upon exchange of the series H preferred stock, senior
employee preferred stock, series F preferred stock and series A-prime
preferred stock, in an amount equal to the quotient of (i) the amount to
be distributed to the holders of the number of shares of series C-prime
preferred stock issued and outstanding and the number of shares of series
C-prime preferred stock issuable upon exercise of options or warrants
outstanding as of the effective date, collectively referred to in this
section as the "series C-prime preferred stock" calculated under the
senior-prime preferred stock amount and designated as the series C-prime
liquidation amount, as described below, and (ii) the effective date
value, divided by (b) the aggregate number determined by taking the
quotient of (A) the aggregate amount equal to $7.106 for each share of
series C-prime preferred stock, plus accrued but unpaid dividends at the
rate of $0.85 per share per annum accruing each year beginning on the
date of issuance of either (x) shares of series C preferred stock,
defined below, exchanged for such shares of series C-prime preferred
stock or (y) such shares of series C-prime preferred stock if not issued
in exchange for series C preferred stock, also known as the "series
C-prime liquidation preference" for each share of series C-prime
preferred stock and (B) $7.106, such number is referred to in this
section as the "series C-prime units;" provided, however if a holder of
series C-prime preferred stock receives the value of the portion of
merger consideration shares based upon the effective date value which
would have been paid with respect to the aggregate number of shares of
common stock issuable upon conversion of the series C-prime preferred
stock, assuming the conversion on a one-to-one basis of all senior
preferred stock immediately prior to the effective date, this amount is
referred to in this section as the "series C-prime conversion amount" in
lieu of the series C-prime liquidation preference for its series C-prime
preferred stock, and the number of series C-prime units held by such
holder shall be equal to the number of shares of series C-prime preferred
stock held by such holder, allocated among the holders of series C-prime
preferred stock by reference to the number of series C-prime units held
by each such holder in relation to the total number of series C-prime
units.
- The series C1-prime preferred stock exchange ratio equals the quotient of
(a) the amount of merger consideration shares, if any, remaining after
payment of the Stevenson compensation shares and the merger consideration
shares issuable upon exchange of the series H preferred stock, senior
employee preferred stock, series F preferred stock and series A-prime
preferred stock, in an amount equal to the quotient of (i) the amount to
be distributed to the holders of the number of shares of series C1-prime
preferred stock issued and outstanding and the number of shares of series
C1-prime preferred stock issuable upon exercise of options or warrants
outstanding as of the effective date, collectively referred to in this
section as the "series C1-prime preferred stock" calculated under the
senior-prime preferred stock amount and designated as the series C1-prime
liquidation amount, as described below, and (ii) the effective date
value, divided by (b) the aggregate number determined by taking the
quotient of (A) the aggregate amount equal to $9.49 for each share of
series C1-prime preferred stock, plus accrued but unpaid dividends at the
rate of $1.14 per share per annum accruing each year beginning on the
date of issuance of either (x) shares of series C1 preferred stock,
defined below, exchanged for such shares of series C1-prime preferred
stock or (y) such shares of series C1-prime preferred stock if not issued
in exchange for series C preferred
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stock, also known as the "series C1-prime liquidation preference" for
each share of series C1-prime preferred stock and (B) $9.49, such number
is referred to in this section as the "series C1-prime units;" provided,
however if a holder of series C1-prime preferred stock receives the value
of the portion of merger consideration shares based upon the effective
date value which would have been paid with respect to the aggregate
number of shares of common stock issuable upon conversion of the series
C1-prime preferred stock, assuming the conversion on a one-to-one basis
of all senior-prime preferred stock immediately prior to the effective
date, this amount is referred to in this section as the "series C1-prime
conversion amount" in lieu of the series C1-prime liquidation preference
for its series C1-prime preferred stock, and the number of series
C1-prime units held by such holder shall be equal to the number of shares
of series C1-prime preferred stock held by such holder, allocated among
the holders of series C1-prime preferred stock by reference to the number
of series C1-prime units held by each such holder in relation to the
total number of series C1-prime units.
- The series D-prime preferred stock exchange ratio equals the quotient of
(a) the amount of merger consideration shares, if any, remaining after
payment of the Stevenson compensation shares and the merger consideration
shares issuable upon exchange of the series H preferred stock, senior
employee preferred stock, series F preferred stock and series A-prime
preferred stock, in an amount equal to the quotient of (i) the amount to
be distributed to the holders of the number of shares of series D-prime
preferred stock issued and outstanding and the number of shares of series
D-prime preferred stock issuable upon exercise of options or warrants
outstanding as of the effective date, collectively referred to in this
section as the "series D-prime preferred stock" calculated under the
senior-prime preferred stock amount and designated as the series D-prime
liquidation amount, as described below, and assuming the exercise in full
of all warrants to purchase series D-prime preferred stock which remain
outstanding as of the effective date and (ii) the effective date value,
divided by (b) the aggregate number determined by taking the quotient of
(A) the aggregate amount equal to $33.18 for each share of series D-prime
preferred stock, plus accrued but unpaid dividends at the rate of $1.99
per share per annum accruing each year beginning on the date of issuance
of either (x) shares of series D preferred stock, defined below,
exchanged for such shares of series D-prime preferred stock or (y) such
shares of series D-prime preferred stock if not issued in exchange for
series D preferred stock, also known as the "series D-prime liquidation
preference," for each share of series D-prime preferred stock and (B)
$33.18, such number is referred to in this section as the "series D-prime
units;" provided, however if a holder of series D-prime preferred stock
receives the value of the portion of merger consideration shares based
upon the effective date value which would have been paid with respect to
the aggregate number of shares of common stock issuable upon conversion
of the series D-prime preferred stock, assuming the conversion on a one-
to-one basis of all senior-prime preferred stock immediately prior to the
effective date, this amount is referred to in this section as the "series
D-prime conversion amount" in lieu of the series D-prime liquidation
preference for its series D-prime preferred stock, and the number of
series D-prime units held by such holder shall be equal to the number of
shares of series D-prime preferred stock held by such holder, allocated
among the holders of series D-prime preferred stock by reference to the
number of series D-prime units held by each such holder in relation to
the total number of series D-prime units.
- The series D1-prime preferred stock exchange ratio equals the quotient of
(a) the amount of merger consideration shares, if any, remaining after
payment of the Stevenson compensation shares and the merger consideration
shares issuable upon exchange of the series H preferred stock, senior
employee preferred stock, series F preferred stock and series A preferred
stock, in an amount equal to the quotient of (i) the amount to be
distributed to the holders of the number of shares of series D1-prime
preferred stock issued and outstanding and the number of shares of series
D1-prime preferred stock issuable upon exercise of options or warrants
outstanding as of the effective date, collectively referred to in this
section as the "series D1-prime preferred stock" calculated under the
senior-prime preferred stock amount and designated as the series D1-prime
liquidation amount, as defined below, and assuming the exercise in full
of all warrants to purchase series D1-prime
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preferred stock which remain outstanding as of the effective date and
(ii) the effective date value, divided by (b) the aggregate number
determined by taking the quotient of (A) the aggregate amount equal to
$16.59 for each share of series D1-prime preferred stock, plus accrued
but unpaid dividends at the rate of $1.99 per share per annum accruing
each year beginning on the date of issuance of either (x) shares of
series D1 preferred stock, defined below, exchanged for such shares of
series D1-prime preferred stock or (y) such shares of series D1-prime
preferred stock if not issued in exchange for series D preferred stock,
also known as the "series D1-prime liquidation preference," for each
share of series D1-prime preferred stock and (B) $16.59, such number is
referred to in this section as the "series D1-prime units"; provided,
however if a holder of series D1-prime preferred stock receives the value
of the portion of merger consideration shares based upon the effective
date value which would have been paid with respect to the aggregate
number of shares of common stock issuable upon conversion of the series
D1-prime preferred stock, assuming the conversion on a one-to-one basis
of all senior-prime preferred stock immediately prior to the effective
date, this amount is referred to in this section as the "series D1-prime
conversion amount" in lieu of the series D1-prime liquidation preference
for its series D1-prime preferred stock, and the number of series
D1-prime units held by such holder shall be equal to the number of shares
of series D1-prime preferred stock held by such holder, allocated among
the holders of series D1-prime preferred stock by reference to the number
of series D1-prime units held by each such holder in relation to the
total number of series D1-prime units.
- The series E-prime preferred stock exchange ratio equals the quotient of
(a) the amount of merger consideration shares, if any, remaining after
payment of the Stevenson compensation shares and the merger consideration
shares issuable upon exchange of the series H preferred stock, senior
employee preferred stock, series F preferred stock, series A-prime
preferred stock and senior-prime preferred stock, in an amount equal to
the quotient of (i) the product of (A) the amount, if any, by which
$32.11 exceeds the per share amount, if any, distributable on each share
of common stock and (B) the number of shares of series E-prime preferred
stock issued and outstanding and the number of shares of series E-prime
preferred stock issuable upon exercise of options or warrants outstanding
as of the effective date, collectively referred to in this section as the
"series E-prime preferred stock;" and (ii) the effective date value
(where the common stock amount, as described below, is calculated by
assuming the value of the merger consideration shares distributable on
the series E-prime preferred stock to be the quotient of (i) the product
of (A) $32.11 and (B) the series E-prime preferred stock and (ii) the
effective date value), divided by (b) the series E-prime preferred stock.
- The series E-prime unit exchange ratio equals the quotient of (a) the
amount of merger consideration shares, if any, remaining after payment of
the Stevenson compensation shares and the merger consideration shares
issuable upon exchange of the series H preferred stock, senior employee
preferred stock, series F preferred stock, series A-prime preferred
stock, senior-prime preferred stock and series E-prime preferred stock,
in an amount equal to the quotient of (i) the product of (A) $32.11,
minus any amounts distributed with respect to the series E-prime
preferred stock or the per share amount distributable on each share of
common stock, and (B) the number of shares of series E-prime preferred
stock held by the holders of common stock, referred to in this section as
the "series E-prime units" and (ii) the effective date value, divided by
(b) the series E-prime units.
- The series G preferred stock exchange ratio equals the quotient of (a)
the amount of merger consideration shares, if any, remaining after
payment of the Stevenson compensation shares and the merger consideration
shares issuable upon exchange of the series H preferred stock, senior
employee preferred stock, series F preferred stock, series A-prime
preferred stock, senior-prime preferred stock, series E-prime preferred
stock and series E-prime units, in an amount of shares of Quokka common
stock equal to the quotient of (i) the product of (A) the number of
shares of series G preferred stock issued and outstanding and the number
of shares of the series G preferred stock issuable upon exercise of
options or warrants outstanding as of the effective date, collectively
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referred to in this section as the "series G preferred stock" and (B) the
quotient of (x) the aggregate sum for all holders of series G preferred
stock of the amount, if any, by which the product of $1.00 multiplied by
the shares of series G preferred stock held by each individual holder
exceeds the aggregate amount, if any, distributable on shares of common
stock held by such individual holder of series G preferred stock, and (y)
the series G preferred stock (where the common stock amount is calculated
by assuming the series G liquidation preference equals $1.00), also known
as the "series G liquidation preference," and (ii) the effective date
value, divided by (b) the aggregate number determined by taking the
quotient of (i) the series G liquidation preference for each individual
holder of series G preferred stock and (ii) the product of (A) the series
G liquidation preference and (B) the series G preferred stock, such
number is referred to in this section as the "series G units," allocated
among the holders of series G preferred stock by reference to the number
of series G units held by each such holder in relation to the total
number of series G units.
- The series A preferred stock exchange ratio equals the quotient of (a)
the amount of merger consideration shares, if any, remaining after
payment of the Stevenson compensation shares and the merger consideration
shares issuable upon exchange of the series H preferred stock, senior
employee preferred stock, series F preferred stock, series A-prime
preferred stock, senior-prime preferred stock, series E-prime preferred
stock, series E-prime units and series G preferred stock, in an amount of
shares of Quokka common stock equal to the quotient of (i) the product of
(A) the number of shares of series A preferred stock issued and
outstanding and the number of shares of the series A preferred stock
issuable upon exercise of options or warrants outstanding as of the
effective date, collectively referred to in this section as the "series A
preferred stock" and (B) the aggregate amount equal to $10.00 for each
share of series A preferred stock outstanding, plus accrued but unpaid
dividends at the rate of $1.20 per share per annum accruing each year
beginning on the date of issuance of such shares of series A preferred
stock, also known as the "series A liquidation preference," and (ii) the
effective date value, divided by (b) the aggregate number determined by
taking the quotient of (i) the series A liquidation preference for each
share of series A preferred stock and (ii) $10.00, such number is
referred to in this section as the "series A units," allocated among the
holders of series A preferred stock by reference to the number of series
A units held by each such holder in relation to the total number of
series A units.
- The series B preferred stock exchange ratio equals the quotient of (a)
the amount of merger consideration shares, if any, remaining after
payment of the Stevenson compensation shares and the merger consideration
shares issuable upon exchange of the series H preferred stock, senior
employee preferred stock, series F preferred stock, series A-prime
preferred stock, senior-prime preferred stock,series E-prime preferred
stock, series E-prime units, series G preferred stock and series A
preferred stock, in an amount equal to the quotient of (i) the amount to
be distributed to the holders of the number of shares of series B
preferred stock issued and outstanding and the number of shares of series
B preferred stock issuable upon exercise of options or warrants
outstanding as of the effective date, collectively referred to in this
section as the "series B preferred stock" calculated under the senior
preferred stock amount, as described below, and designated as the series
B liquidation amount, also described below, and assuming the exercise in
full of all warrants to purchase series B preferred stock which remain
outstanding as of the effective date and (ii) the effective date value,
divided by (b) the aggregate number determined by taking the quotient of
(A) the aggregate amount equal to $4.492 for each share of series B
preferred stock, plus accrued but unpaid dividends at the rate of $0.54
per share per annum accruing each year beginning on the date of issuance
of such shares of series B preferred stock, also known as the "series B
liquidation preference," for each share of series B preferred stock and
(B) $4.492, such number is referred to in this section as the "series B
units;" provided, however if a holder of series B preferred stock
receives the value of the portion of merger consideration shares based
upon the effective date value which would have been paid with respect to
the aggregate number of shares of common stock issuable upon conversion
of the series B preferred stock, assuming the conversion on a one-to-one
basis of all senior preferred stock, as described below, immediately
prior to the
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effective date, this amount is referred to in this section as the "series
B conversion amount" in lieu of the series B liquidation preference for
its series B preferred stock, and the number of series B units held by
such holder shall be equal to the number of shares of series B preferred
stock held by such holder, allocated among the holders of series B
preferred stock by reference to the number of series B units held by each
such holder in relation to the total number of series B units.
- The series C preferred stock exchange ratio equals the quotient of (a)
the amount of merger consideration shares, if any, remaining after
payment of the Stevenson compensation shares and the merger consideration
shares issuable upon exchange of the series H preferred stock, senior
employee preferred stock, series F preferred stock, series A-prime
preferred stock, senior-prime preferred stock, series E-prime preferred
stock, series E-prime units, series G preferred stock and series A
preferred stock, in an amount equal to the quotient of (i) the amount to
be distributed to the holders of the number of shares of series C
preferred stock issued and outstanding and the number of shares of series
C preferred stock issuable upon exercise of options or warrants
outstanding as of the effective date, collectively referred to in this
section as the "series C preferred stock" calculated under the senior
preferred stock amount and designated as the series C liquidation amount,
as described below, and (ii) the effective date value, divided by (b) the
aggregate number determined by taking the quotient of (A) the aggregate
amount equal to $7.106 for each share of series C preferred stock, plus
accrued but unpaid dividends at the rate of $0.85 per share per annum
accruing each year beginning on the date of issuance of such shares of
series C preferred stock, also known as the "series C liquidation
preference," for each share of series C preferred stock and (B) $7.106,
such number is referred to in this section as the "series C units;"
provided, however if a holder of series C preferred stock receives the
value of the portion of merger consideration shares based upon the
effective date value which would have been paid with respect to the
aggregate number of shares of common stock issuable upon conversion of
the series C preferred stock, assuming the conversion on a one-to-one
basis of all senior preferred stock immediately prior to the effective
date, this amount is referred to in this section as the "series C
conversion amount" in lieu of the series C liquidation preference for its
series C preferred stock, and the number of series C units held by such
holder shall be equal to the number of shares of series C preferred stock
held by such holder, allocated among the holders of series C preferred
stock by reference to the number of series C units held by each such
holder in relation to the total number of series C units.
- The series C1 preferred stock exchange ratio equals the quotient of (a)
the amount of merger consideration shares, if any, remaining after
payment of the Stevenson compensation shares and the merger consideration
shares issuable upon exchange of the series H preferred stock, senior
employee preferred stock, series F preferred stock, series A-prime
preferred stock, senior-prime preferred stock, Series E-prime preferred
stock, series E-prime units, series G preferred stock and series A
preferred stock, in an amount equal to the quotient of (i) the amount to
be distributed to the holders of the number of shares of series C1
preferred stock issued and outstanding and the number of shares of series
C1 preferred stock issuable upon exercise of options or warrants
outstanding as of the effective date, collectively referred to in this
section as the "series C1 preferred stock" calculated under the senior
preferred stock amount and designated as the series C1 liquidation
amount, as described below, and (ii) the effective date value, divided by
(b) the aggregate number determined by taking the quotient of (A) the
aggregate amount equal to $9.49 for each share of series C1 preferred
stock, plus accrued but unpaid dividends at the rate of $1.14 per share
per annum accruing each year beginning on the date of issuance of such
shares of Series C1 Preferred Stock, also known as the "series C
liquidation preference," for each share of series C1 preferred stock and
(B) $9.49, such number is referred to in this section as the "series C1
units;" provided, however if a holder of series C1 preferred stock
receives the value of the portion of merger consideration shares based
upon the effective date value which would have been paid with respect to
the aggregate number of shares of common stock issuable upon conversion
of the series C1 preferred stock, assuming the conversion on a one-to-one
basis of all senior preferred stock immediately prior to the effective
date, this amount is referred to in this
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section as the "series C1 conversion amount" in lieu of the series C1
liquidation preference for its series C1 preferred stock, and the number
of series C1 units held by such holder shall be equal to the number of
shares of series C1 preferred stock held by such holder, allocated among
the holders of series C1 preferred stock by reference to the number of
series C1 units held by each such holder in relation to the total number
of series C1 units.
- The series D preferred stock exchange ratio equals the quotient of (a)
the amount of merger consideration shares, if any, remaining after
payment of the Stevenson compensation shares and the merger consideration
shares issuable upon exchange of the series H preferred stock, senior
employee preferred stock, series F preferred stock, series A-prime
preferred stock, senior-prime preferred stock, Series E-prime preferred
stock, series E-prime units, series G preferred stock and series A
preferred stock, in an amount equal to the quotient of (i) the amount to
be distributed to the holders of the number of shares of series D
preferred stock issued and outstanding and the number of shares of series
D preferred stock issuable upon exercise of options or warrants
outstanding as of the effective date, collectively referred to in this
section as the "series D preferred stock" calculated under the senior
preferred stock amount and designated as the series D liquidation amount,
as described below, and assuming the exercise in full of all warrants to
purchase series D preferred stock which remain outstanding as of the
effective date and (ii) the effective date value, divided by (b) the
aggregate number determined by taking the quotient of (A) the aggregate
amount equal to $33.18 for each share of series D preferred stock, plus
accrued but unpaid dividends at the rate of $1.99 per share per annum
accruing each year beginning on the date of issuance of such shares of
series D preferred stock, this amount is referred to in this section as
the "series D liquidation preference," for each share of series D
preferred stock and (B) $33.18, such number is referred to in this
section as the "series D units;" provided, however if a holder of series
D preferred stock receives the value of the portion of merger
consideration shares based upon the effective date value which would have
been paid with respect to the aggregate number of shares of common stock
issuable upon conversion of the series D preferred stock, assuming the
conversion on a one-to-one basis of all senior preferred stock
immediately prior to the effective date, this amount is referred to in
this section as the "series D conversion amount" in lieu of the series D
liquidation preference for its series D preferred stock, and the number
of series D units held by such holder shall be equal to the number of
shares of series D preferred stock held by such holder, allocated among
the holders of series D preferred stock by reference to the number of
series D units held by each such holder in relation to the total number
of series D units.
- The series D1 preferred stock exchange ratio equals the quotient of (a)
the amount of merger consideration shares, if any, remaining after
payment of the Stevenson compensation shares and the merger consideration
shares issuable upon exchange of the series H preferred stock, senior
employee preferred stock, series F preferred stock, series A-prime
preferred stock, senior-prime preferred stock, Series E-prime preferred
stock, series E-prime units, series G preferred stock and series A
preferred stock, in an amount equal to the quotient of (i) the amount to
be distributed to the holders of the number of shares of series D1
preferred stock issued and outstanding and the number of shares of series
D1 preferred stock issuable upon exercise of options or warrants
outstanding as of the effective date, collectively referred to in this
section as the "series D1 preferred stock" calculated under the senior
preferred stock amount and designated as the series D1 liquidation
amount, as defined below,and assuming the exercise in full of all
warrants to purchase series D1 preferred stock which remain outstanding
as of the effective date and (ii) the effective date value, divided by
(b) the aggregate number determined by taking the quotient of (A) the
aggregate amount equal to $16.59 for each share of series D1 preferred
stock, plus accrued but unpaid dividends at the rate of $1.99 per share
per annum accruing each year beginning on the date of issuance of such
shares of series D1 preferred stock, also know as the "series D1
liquidation preference" for each share of series D1 preferred stock and
(B) $16.59, such number is referred to in this section as the "series D1
units;" provided, however if a holder of series D1 preferred stock
receives the value of the portion of merger consideration shares based
upon the effective date value which would have been paid with respect to
the aggregate number of shares of common stock
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issuable upon conversion of the series D1 preferred stock, assuming the
conversion on a one-to-one basis of all senior preferred stock
immediately prior to the effective date, this amount is referred to in
this section as the "series D1 conversion amount" in lieu of the series
D1 liquidation preference for its series D1 preferred stock, and the
number of series D1 units held by such holder shall be equal to the
number of shares of series D1 preferred stock held by such holder,
allocated among the holders of series D1 preferred stock by reference to
the number of series D1 units held by each such holder in relation to the
total number of series D1 units.
- The series E preferred stock exchange ratio equals the quotient of (a)
the amount of merger consideration shares, if any, remaining after
payment of the Stevenson compensation shares and the merger consideration
shares issuable upon exchange of the series H preferred stock, senior
employee preferred stock, series F preferred stock, series A-prime
preferred stock, senior-prime preferred stock, Series E-prime preferred
stock, series E-prime units, series G preferred stock, series A preferred
stock and senior preferred stock, in an amount equal to the quotient of
(i) the product of (A) the amount, if any, by which $32.11 exceeds the
per share amount, if any, distributable on each share of common stock and
(B) the number of shares of series E preferred stock issued and
outstanding and the number of shares of series E preferred stock issuable
upon exercise of options or warrants outstanding as of the effective
date, collectively referred to in this section as the "series E preferred
stock," and (ii) the effective date value (where the common stock amount,
as described below, is calculated by assuming the value of the merger
consideration shares distributable on the series E preferred stock to be
the quotient of (i) the product of (A) $32.11 and (B) the series E
preferred stock and (ii) the effective date value), divided by (b) the
series E preferred stock.
- The series E unit exchange ratio equals the quotient of (a) the amount of
merger consideration shares, if any, remaining after payment of the
Stevenson compensation shares and the merger consideration shares
issuable upon exchange of the series H preferred stock, senior employee
preferred stock, series F preferred stock, series A-prime preferred
stock, senior-prime preferred stock, Series E-prime preferred stock,
series E-prime units, series G preferred stock, series A preferred stock
and senior preferred stock, in an amount equal to the quotient of (i) the
product of (A) $32.11, minus any amounts distributed with respect to the
series E preferred stock or the per share amount distributable on each
share of common stock, and (B) the number of shares of Series E Preferred
Stock held by the holders of common stock, referred to in this section as
the "series E units," and (ii) the effective date value, divided by (b)
the series E units.
- The common stock exchange ratio equals the quotient of (a) the amount of
merger consideration shares, if any, remaining after payment of the
Stevenson compensation shares and the merger consideration shares
issuable upon exchange of the series H preferred stock, senior employee
preferred stock, series F preferred stock, series A-prime preferred
stock, senior-prime preferred stock, Series E-prime preferred stock,
series E-prime units, series G preferred stock, series A preferred stock,
senior preferred stock, series E preferred stock and series E units, the
amount referred to in this section as the "common stock amount," divided
by (b) the number of shares of common stock issued and outstanding and
the number of shares of common stock issuable upon the exercise of
options and warrants outstanding as of the effective date, collectively
referred to in this section as the "common stock."
The following definitions are used in calculating the above-referenced
exchange ratios:
- "senior-prime preferred stock" means collectively the series B-prime
preferred stock, the series C-prime preferred stock the series C1-prime
preferred stock, the series D-prime preferred stock and the series
D1-prime preferred stock.
- "senior-prime preferred stock amount" means the number of merger
consideration shares, if any, remaining after payment of the Stevenson
compensation shares, the merger consideration shares issuable upon
exchange of series H preferred stock, senior employee preferred stock,
series A-prime preferred stock and all senior-prime preferred stock, in
an amount equal to the greater of the
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quotient of (a) (i) the sum of the series B-prime liquidation preference,
the series C-prime liquidation preference, the series C1-prime
liquidation preference, the series D-prime liquidation preference and the
series D1-prime liquidation preference, all of the aforementioned
liquidation preferences are referred to in this section as the
"senior-prime preferred stock liquidation preference," or (ii) the sum of
the series B-prime conversion amount, the series C-prime conversion
amount, the series C1-prime conversion amount, the series D-prime
conversion amount and the series D1-prime conversion amount, collectively
the conversation amounts are referred to in this section as the
"senior-prime conversion amount" and (b) the effective date value;
provided, however, that if (i) the amount of the senior-prime preferred
stock liquidation preference is greater than the amount of the
senior-prime conversion amount, and (ii) the effective date value of the
merger consideration shares distributable to the holders of senior-prime
preferred stock is less than the senior-prime preferred stock liquidation
preference, then the amount of merger consideration shares available to
be distributed to the holders of senior-prime preferred stock shall be
distributed ratably among the holders of senior-prime preferred stock in
proportion to the series B-prime liquidation preference, series C-prime
liquidation preference, series C1-prime liquidation preference, series
D-prime liquidation preference and series D1-prime liquidation
preference. Notwithstanding the foregoing, in the event that the
senior-prime conversion amount exceeds the senior-prime preferred stock
liquidation preference, but the per share amount determined with respect
to the senior-prime conversion amount is less than the per share amount
payable under the series B-prime liquidation preference, the series
C-prime liquidation preference, the series C1-prime liquidation
preference, the series D-prime liquidation preference or the series
D1-prime liquidation preference, individually, then any holder of
senior-prime preferred stock may elect to receive its respective
liquidation preference for such holder's senior-prime preferred stock in
lieu of the senior-prime conversion amount and the amount payable with
respect to any non-electing holders of senior-prime preferred stock shall
be adjusted to reflect the priority of such payment. (For example, if the
senior-prime conversion amount equates to a series D-prime conversion
amount equal to $28.00 per share, the series D-prime liquidation
preference per share would be greater than this value. In this scenario,
the holder of series D-prime preferred stock could elect to receive the
series D-prime liquidation preference in lieu of the series D-prime
conversion amount; if the holders so elected, the senior-prime conversion
amount would be reduced by the value of the series D-prime liquidation
preference.) Each amount calculated under this definition with respect to
the series B-prime preferred stock, the series C-prime preferred stock,
the series C1-prime preferred stock, the series D-prime preferred stock,
and the series D1-prime preferred stock and included in this senior-prime
preferred stock amount shall be designated respectively as the series
B-prime liquidation amount, the series C-prime liquidation amount, the
series C1-prime liquidation amount, the series D-prime liquidation amount
and the series D1-prime liquidation amount.
- "senior preferred stock" means collectively the series B preferred stock,
the series C preferred stock, the series C1 preferred stock, the series D
preferred stock and the series D1 preferred stock.
- "senior preferred stock amount" means the number of merger consideration
shares, if any, remaining after payment of the Stevenson compensation
shares, the merger consideration shares issuable upon exchange of series
H preferred stock, senior employee preferred stock, series F preferred
stock, series A-prime preferred stock, senior-prime preferred stock,
series E-prime preferred stock, series E-prime units, series G preferred
stock, series A preferred stock and all senior preferred stock, in an
amount equal to the greater of the quotient of (a) (i) the sum of the
series B liquidation preference, the series C liquidation preference, the
series C1 liquidation preference, the series D liquidation preference and
the series D1 liquidation preference, all of the aforementioned
liquidation preferences are referred to in this section as the "senior
preferred stock liquidation preference," or (ii) the sum of the series B
conversion amount, the series C conversion amount, the series C1
conversion amount, the series D conversion amount and the series D1
conversion amount, collectively the conversation amounts are referred to
in this section as the "senior conversion amount," and (b) the effective
date value; provided, however, that if (i) the amount of the senior
preferred stock liquidation preference is greater than the amount of the
senior
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conversion amount, and (ii) the effective date value of the merger
consideration shares distributable to the holders of senior preferred
stock is less than the senior preferred stock liquidation preference,
then the amount of merger consideration shares available to be
distributed to the holders of senior preferred stock shall be distributed
ratably among the holders of senior preferred stock in proportion to the
series B liquidation preference, series C liquidation preference, series
C1 liquidation preference, series D liquidation preference and series D1
liquidation preference. Notwithstanding the foregoing, in the event that
the senior conversion amount exceeds the senior preferred stock
liquidation preference, but the per share amount determined with respect
to the senior conversion amount is less than the per share amount payable
under the series B liquidation preference, the series C liquidation
preference, the series C1 liquidation preference, the series D
liquidation preference or the series D1 liquidation preference,
individually, then any holder of senior preferred stock may elect to
receive its respective liquidation preference for such holder's senior
preferred stock in lieu of the senior conversion amount and the amount
payable with respect to any non-electing holders of senior preferred
stock shall be adjusted to reflect the priority of such payment. (For
example, if the senior conversion amount equates to a series D conversion
amount equal to $28.00 per share, the series D liquidation preference per
share would be greater than this value. In this scenario, the holder of
series D preferred stock could elect to receive the series D liquidation
preference in lieu of the series D conversion amount; if the holders so
elected, the senior conversion amount would be reduced by the value of
the series D liquidation preference.) Each amount calculated under this
definition with respect to the series B preferred stock, the series C
preferred stock, the series C1 preferred stock, the series D preferred
stock, and the series D1 preferred stock and included in this senior
preferred stock amount shall be designated respectively as the series B
liquidation amount, the series C liquidation amount, the series C1
liquidation amount, the series D liquidation amount and the series D1
liquidation amount.
THE ESCROW FUND
Upon the completion of the merger, 1,500,000 shares of the Quokka common
stock issued in the merger will be placed in escrow with State Street Bank,
N.A., which will serve as the escrow agent. At the effective time of the merger,
each holder of Total Sports' common stock and preferred stock and Mr. Stevenson
will be deemed, without any act by such stockholder, to have received and
deposited with the escrow agent a number of Quokka common stock representing
such stockholder's proportionate interest in the total amount of Quokka common
stock being placed in escrow. These escrowed shares of Quokka common stock will
be held in an escrow fund for a one-year period to satisfy indemnification
claims.
TOTAL SPORTS STOCK OPTIONS AND WARRANTS
At the effective time of the merger, Quokka will assume each outstanding
Total Sports stock option, and each outstanding Total Sports stock option will
become an option to purchase that number of shares of Quokka common stock equal
to the number of shares of Total Sports common stock subject to that Total
Sports stock option immediately before the effective time, multiplied by the
exchange ratio and rounded down to the nearest whole share. The exercise price
per share of Quokka common stock subject to each assumed stock option will be
equal to the exercise price per share of the Total Sports common stock subject
to the corresponding Total Sports stock option divided by the exchange ratio and
rounded up to the nearest cent. All other terms and conditions of the Total
Sports stock options will not change. The Quokka common stock received upon
exercise of assumed or substituted Total Sports options will be subject to
certain disposition restrictions for one year following the consummation of the
merger.
Based on the Total Sports stock options outstanding at the record date, and
assuming no Total Sports stock options are exercised prior to the effective
time, Quokka will be required at the effective time to reserve shares of Quokka
common stock for issuance upon exercise of the Total Sports stock options
assumed by Quokka.
At the effective time of the merger, Quokka will assume Total Sports
warrants to purchase 907,782 shares of common stock, 4,283 shares of series B
preferred stock, 69,295 shares of series B-prime preferred
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stock, 110,794 shares of series D-prime preferred stock, 1,416 shares of series
D1 preferred stock, 961,954 shares of series D1-prime preferred stock, 42,235
shares of series F preferred stock and 1,336,123 shares of series G preferred
stock outstanding on October 9, 2000. Each warrant will become a warrant to
purchase that number of shares of Quokka common stock equal to the number of
shares of Total Sports capital stock subject to that Total Sports warrant
immediately before the effective time, multiplied by the exchange ratio and
rounded down to the nearest whole share. The exercise price per share of Quokka
common stock subject to each assumed warrant will be equal to the exercise price
per share of the Total Sports capital stock subject to the corresponding Total
Sports warrant divided by the exchange ratio and rounded up to the nearest cent.
All other terms and conditions of the Total Sports warrants will not change.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains customary representations and warranties of
Total Sports and Quokka relating to, among other things, certain aspects of
their respective businesses and assets and other matters. The representations
and warranties of Quokka expire at the effective time. The representations and
warranties of Total Sports expire one year after the closing of the merger.
COVENANTS; CONDUCT OF BUSINESS PRIOR TO THE MERGER
Affirmative Covenants Of Total Sports. Total Sports has agreed that prior
to the effective time of the merger it will:
- conduct its business and operations in the ordinary course and consistent
with past practices, use all reasonable efforts to preserve intact its
current business organization, keep available the services of its current
officers and employees and maintain its relations and goodwill with all
suppliers, customers, landlords, creditors, licensors, licensees,
employees and other persons having business relationships with it,
provide all contractually required notices, assurances and support
relating to any of its proprietary assets to ensure that no contractual
condition arises that could reasonably be expected to increase the
likelihood of any transfer, disclosure or release from escrow of any
source code and promptly notify Quokka of any notice or other
communication from any person alleging that consent is or may be required
in connection with the merger and any legal proceeding commenced or, to
its knowledge, threatened against it relating to the merger;
- provide Quokka with access to its personnel, assets, books, records, tax
returns and other documents;
- deliver to Quokka certain financial statements and reports, any written
materials sent by Total Sports to its stockholders, any material notices
or other communications relating to any material contracts and any
material notice, reports or other documents received from any
governmental agency;
- promptly notify Quokka of the discovery of anything that would constitute
a material inaccuracy in any representation or warranty made by Total
Sports, a material breach of any covenant or obligation of Total Sports
and anything that would make the timely satisfaction of any of the
closing conditions impossible or unlikely or that could be deemed to have
a material adverse effect on Total Sports;
- use all reasonable efforts to file all notices, reports and other
documents required to be filed with any governmental agency with respect
to the merger, including the notifications required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and any
applicable foreign antitrust laws or regulations;
- call and hold a meeting of its stockholders to vote on a proposal to
approve the merger agreement; and
- use reasonable efforts to take, or cause to be taken, all actions
necessary to consummate the merger.
Total Sports' board of directors has agreed to recommend that the Total
Sports stockholders vote for approval the merger agreement. However, at any time
before the Total Sports' special meeting, Total
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Sports' board of directors is entitled to withdraw or modify its recommendation
that the Total Sports' stockholders vote to approve the merger agreement if the
Total Sports' board of directors determines in good faith, after taking into
account the written advice of outside legal counsel, that withdrawal or
modification of its recommendation is required for the board of directors to
comply with its fiduciary obligations to Total Sports' stockholders under
applicable law.
Negative Covenants Of Total Sports. Total Sports has agreed that, before
the effective time, except as otherwise agreed to in writing by Quokka, it will
not, will not agree to and will not permit any of its subsidiaries to:
- declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any shares of capital stock or repurchase,
redeem or otherwise reacquire any shares of capital stock or other
securities except for the cancellation of options or warrants without
payment of any consideration by Total Sports;
- subject to exceptions, sell, issue, grant or authorize any capital stock
or any option or right to acquire any capital stock or other security;
- amend or waive any of its material rights under, or accelerate the
vesting under, any provision of any of the Total Sports stock option
plans or any agreement evidencing any outstanding stock option or any
restricted stock purchase agreement;
- amend its certificate of incorporation or bylaws;
- effect or become a party to any merger, consolidation, share exchange,
business combination, recapitalization, reclassification of shares, stock
split, reverse stock split or similar transaction, except as permitted in
the event of a superior offer;
- form any subsidiary or acquire any equity interest or other interest in
any other entity;
- make capital expenditures exceeding $200,000 in the aggregate;
- enter into, become bound by, amend or terminate any material contract,
other than in the ordinary course of business and consistent with past
practices or waive or exercise any material right or remedy under any
material contract;
- acquire, lease or license any right or other asset from any other person
or sell or otherwise dispose of, or lease or license, any right or other
asset to any other person, other than in the ordinary course of business
and consistent with past practices, or waive or relinquish any material
right of Total Sports or its subsidiaries;
- subject to exceptions, incur or guarantee any indebtedness;
- subject to exceptions, establish, adopt or amend any employee benefit
plan, pay any bonus, make any profit-sharing payment or increase the
amount of the wages, salary, commissions, fringe benefits or other
compensation payable to any of its directors, officers or employees;
- hire any new employee at the level of director or above or with an annual
base salary in excess of $100,000, promote any employee except in order
to fill a position vacated after the date of the merger agreement or
engage any consultant or independent contractor who cannot be terminated
without penalty within 30 days;
- change, in any material respect that is adverse to Total Sports and its
subsidiaries, any of its pricing policies, product return policies,
product maintenance polices, service policies, product modification or
upgrade policies, personnel policies or other business policies, or any
of its methods of accounting or accounting practices;
- make any material tax election;
- subject to exceptions, settle any legal proceeding; or
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- take any other material action outside the ordinary course of business.
Notwithstanding the foregoing covenants, Total Sports will still be
permitted to:
- discontinue or dispose of its offline publishing business;
- amend its certificate of incorporation as set forth in the merger
agreement; and
- pay bonuses to its employees to the extent such bonuses do not exceed an
aggregate of $20,000 to any individual employee prior to the closing of
the merger.
Affirmative Covenants Of Quokka. Quokka has agreed that, prior to the
effective time, it will:
- call and hold a meeting of its stockholders to vote on a proposal to
approve the merger agreement;
- promptly notify Total Sports of the discovery of anything that would
constitute a material inaccuracy in any representation or warranty made
by Quokka, any material breach of any covenant or obligation of Quokka
and anything that would make the timely satisfaction of any of the
closing conditions impossible or unlikely or that could be deemed to have
a material adverse effect on Quokka;
- provide Total Sports with access to its books, records, tax returns and
other documents;
- register on a Form S-4 registration statement under the Securities Act
the issuance of shares of Quokka common stock in the merger and, subject
to exceptions, use reasonable efforts to register or qualify these shares
under the securities laws of every applicable jurisdiction of the United
States;
- file a registration statement on Form S-3 to register the resale of
Quokka common stock to be received by the affiliates of Total Sports in
the merger;
- use all reasonable efforts to cause the shares of Quokka common stock to
be issued in the merger to be approved for listing on the Nasdaq National
Market;
- use all commercially reasonable efforts to file all notices, reports and
other documents required to be filed with any governmental agency with
respect to the merger, including the notifications required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and any
applicable foreign antitrust laws or regulations in connection with the
merger; and
- use reasonable efforts to take, or cause to be taken, all actions
necessary to consummate the merger.
Negative Covenants Of Quokka. Quokka has agreed that, before the effective
time, except as otherwise agreed to in writing by Total Sports, it will not and
will not agree to:
- declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any shares of capital stock or purchase,
redeem or otherwise reacquire any shares of capital stock or other
securities other than repurchases of Quokka common stock from former
employees or consultant pursuant to contractual rights to do so;
- issue, or permit its subsidiaries to issue, any capital stock at less
than fair market value other than pursuant to any Quokka employee stock
option plans, upon conversion or exercise of convertible securities
outstanding as of the date of the merger agreement or pursuant to rights
to acquire capital stock as of the date of the merger agreement;
- effect any split of capital stock;
- subject to exceptions, issue any capital stock if the effect of such
issuance would be that the Quokka stockholders that have executed voting
agreements with Total Sports would not hold sufficient shares of Quokka
common stock to approve the merger; or
- amend its certificate of incorporation or bylaws.
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LIMITATION ON CONSIDERING OTHER ACQUISITION PROPOSALS
As an inducement to Quokka's execution and delivery of the merger
agreement, Total Sports has agreed that it will not and that it will not
authorize or permit any of its representatives to:
- solicit, initiate, encourage, induce or facilitate the making, submission
or announcement of any offer, proposal, inquiry or indication of interest
contemplating or otherwise relating to any of the following, each of
which are referred to as an acquisition proposal:
- any merger, consolidation, share exchange, business combination,
issuance of securities, acquisition of securities, tender offer,
exchange offer or other similar transaction:
- involving Total Sports or any of its subsidiaries;
- in which a person directly or indirectly acquires ownership of
securities representing more than 20% of the outstanding securities
of any class of voting securities of Total Sports or any of its
subsidiaries; or
- in which Total Sports or any of its subsidiaries issues securities
representing more than 20% of the outstanding securities of any
class of voting securities of Total Sports or any of its
subsidiaries;
- any sale, lease, exchange, transfer, license, acquisition or
disposition of any business or assets that account for 20% or more of
the consolidated net revenues, net income or assets of Total Sports or
any of its subsidiaries; or
- any liquidation or dissolution of Total Sports or any of its
subsidiaries;
- furnish any information to any person in connection with or in response
to an acquisition proposal or an inquiry or indication of interest that
could lead to an acquisition proposal;
- engage in discussions or negotiations with any person with respect to any
acquisition proposal;
- approve, endorse or recommend any acquisition proposal; or
- enter into any letter of intent or similar agreement contemplating or
relating to any acquisition proposal.
- However, the foregoing restrictions will not prohibit Total Sports from
obtaining interim financing through the sale and issuance of securities
constituting common stock or preferred stock of Total Sports.
If Total Sports' board of directors receives an acquisition proposal or any
inquiry, indication of interest or request for nonpublic information that could
lead to or relate to an acquisition proposal, then Total Sports must promptly
inform Quokka of the identity of the person making the acquisition proposal,
inquiry, indication of interest or request, and of the terms thereof. Total
Sports must keep Quokka fully informed of the status and details of any
acquisition proposal, inquiry, indication of interest or request.
Total Sports also agreed to immediately cease and terminate any existing
discussions with any person relating to any acquisition proposal and agreed not
to release any person from any provision of any confidentiality, "standstill" or
similar agreement to which Total Sports or any of its subsidiaries is a party
and to use its best efforts to enforce these agreements at the request of
Quokka.
CONDITIONS TO THE MERGER
Conditions To The Obligations Of Each Party. The obligations of Quokka and
Total Sports to complete the merger are subject to the satisfaction of certain
conditions, including the following:
- Total Sports stockholders and Quokka stockholders must approve the merger
agreement;
- the Nasdaq Stock Market must approve the shares of Quokka common stock to
be issued in the merger for listing on the Nasdaq National Market;
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- the registration statement on Form S-4, of which this joint proxy
statement/prospectus is a part, shall have become effective in accordance
with the provisions of the Securities Act and no stop order shall have
been issued and no proceeding for that purpose shall have been initiated
or threatened;
- no order or injunction shall be in effect that prohibits the consummation
of the merger and there shall not be any legal requirement enacted or
deemed applicable to the merger that makes consummation of the merger
illegal;
- there shall not be pending or threatened any action or legal proceeding
involving any governmental entity that challenges or prohibits the
consummation of the merger; and
- the applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, shall have expired or been
terminated and any consent required under any applicable foreign
antitrust law or regulation shall have been obtained. Total Sports and
Quokka received notice of early termination of the waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, on
September 29, 2000.
Conditions To The Obligation Of Quokka. The obligation of Quokka to
complete the merger is subject to the satisfaction of the following conditions:
- Total Sports' representations and warranties in the merger agreement must
be true and accurate in all respects as of the date of the merger
agreement and as of the closing date as if made on the closing date,
disregarding any inaccuracies that, considered collectively, are deemed
to have a material adverse effect on Total Sports;
- Total Sports must have complied in all material respects with all
covenants and obligations required to be complied with by it under the
merger agreement at or prior to the closing date;
- Quokka shall have received:
- all third-party consents required to be obtained by Total Sports as set
forth in the merger agreement;
- a legal opinion of Wyrick Robbins Yates & Ponton LLP as set forth in
exhibit D to the merger agreement;
- a tax opinion that the merger will constitute a reorganization for
federal income tax purposes;
- a certificate from the chief executive officer and chief financial
officer of Total Sports confirming that certain conditions have been
satisfied; and
- the written resignations of each officer and director of Total Sports
and its subsidiaries effective as of completion of the merger;
- none of four specified employees of Total Sports shall have ceased to be
employed by Total Sports or shall have expressed an intention to Quokka
to terminate his employment with Total Sports;
- Total Sports will not have any liability or obligation after the
effective time of the merger with respect to certain employment
agreements;
- the holders of Total Sports capital stock representing the right to
receive 90% of the Quokka common stock to be issued upon the consummation
of the merger shall have approved the merger or withdrawn or lost the
right to exercise dissenters' or appraisal rights in connection with the
merger; and
- there shall not have occurred anything that is deemed to have a material
adverse effect on Total Sports.
As used in the merger agreement, "material adverse effect" means, with
respect to Total Sports, any event, violation, inaccuracy, circumstance or other
matter that individually, or when considered with all
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other events, circumstances or other matters, had or could reasonably expected
to have a material adverse effect on the business, financial condition,
capitalization, assets, liabilities, operations or results of operations of
Total Sports and its subsidiaries taken as a whole or the ability of Total
Sports to consummate the merger or any of the other transactions contemplated by
the merger agreement or to perform any of its obligations under the merger
agreement. For purposes of determining whether there has been a material adverse
effect, neither of the following, in and of itself, or in combination with the
other will be deemed to have a material adverse effect on Total Sports or its
subsidiaries:
- the disposition or discontinuation of Total Sports' offline publishing
business; or
- the depletion of Total Sports' and its subsidiaries' liquidity and
capital resources through the incurrence of continued operating losses
consistent with past experience.
Conditions To The Obligation Of Total Sports. The obligation of Total
Sports to complete the merger is subject to the satisfaction of the following
conditions:
- Quokka's representations and warranties in the merger agreement must be
true and accurate in all respects as of the date of the merger agreement
and as of the closing date as if made on the closing date, disregarding
any inaccuracies that, considered collectively, are deemed to have a
material adverse effect on Quokka;
- Quokka must have complied in all material respects with all covenants and
obligations required to be complied with by it under the merger agreement
at or prior to the closing date;
- Total Sports shall have received:
- a legal opinion of Cooley Godward LLP as set forth in exhibit E to the
merger agreement;
- a tax opinion that the merger will constitute a reorganization for
federal income tax purposes; and
- a certificate from an executive officer of Quokka confirming that
certain conditions have been satisfied;
- an individual who is mutually acceptable to Quokka and Total Sports shall
have been elected to Quokka's board of directors;
- Quokka shall have completed one or more financing transactions in which
it shall have received cash proceeds of at least $27,500,000; and
- there shall not have occurred anything that is deemed to have a material
adverse effect on Quokka.
As used in the merger agreement, "material adverse effect" means, with
respect to Quokka, any event, violation, inaccuracy, circumstance or other
matter that individually, or when considered with all other events,
circumstances or other matters, had or could reasonably expected to have a
material adverse effect on the business, financial condition, capitalization,
assets, liabilities, operations or results of operations of Quokka and its
subsidiaries taken as a whole or the ability of Quokka to consummate the merger
or any of the other transactions contemplated by the merger agreement or to
perform any of its obligations under the merger agreement. A decline in Quokka's
stock price, in and of itself, shall not be deemed to have a material adverse
effect. In addition, for purposes of determining whether there has been a
material adverse effect, one shall disregard any change, effect, event or
occurrence relating to:
- the merger agreement or the merger or the announcement of the merger;
- the economy or securities markets in general;
- the new media industry in general, and not specifically related to Quokka
or any of its subsidiaries; and
- the failure to meet the predictions of equity analysts.
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TERMINATION OF THE MERGER AGREEMENT
Quokka and Total Sports may agree by mutual written consent to terminate
the merger agreement at any time before the merger is completed. In addition,
either company may terminate the merger agreement if:
- the merger is not completed on or before December 31, 2000, unless the
failure to consummate the merger is attributable to a failure on the part
of the party seeking to terminate the merger agreement to perform any
material obligation or a failure to obtain the required stockholder vote
by breach of any of the voting agreements entered into in connection with
the merger;
- a court or government entity issues a final order prohibiting the merger;
- the Total Sports stockholders or the Quokka stockholders do not approve
the merger agreement, unless the failure to obtain their approval is
attributable to a failure on the part of the party seeking to terminate
the merger agreement to perform any material obligation; or
- breaches of the other company's representations and warranties are deemed
to have a material adverse effect on that company, the other company
materially breaches the covenants in the merger agreement and these
breaches are not curable through the exercise of reasonable efforts, or
the other company is not using reasonable efforts to cure these breaches.
Subject to limited exceptions, including the survival of any obligations to
pay a termination fee, if the merger agreement is terminated, then it is void.
Except as otherwise provided, there will be no liability on the part of Quokka
or Total Sports to the other, and all rights and obligations of the parties will
cease. However, no party will be relieved from its obligations with respect to
any material breach of the merger agreement.
EXPENSES AND TERMINATION FEES
If the merger is abandoned because the merger agreement is terminated, all
expenses will be paid by the party incurring them. If the merger is consummated
Quokka, as the surviving corporation, will bear the fees and expenses incurred
by Total Sports.
If the merger agreement is terminated by Total Sports or Quokka because the
Total Sports stockholders do not approve the merger agreement, then Total Sports
will pay to Quokka a termination fee in the amount of $7.5 million. If the
merger agreement is terminated by Total Sports or Quokka because the Quokka
stockholders do not approve the merger agreement, then Quokka will pay to Total
Sports a termination fee in the amount of $7.5 million.
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VOTING AGREEMENTS
THE FOLLOWING "VOTING AGREEMENTS" SECTION DESCRIBES THE MATERIAL TERMS OF
THE VOTING AGREEMENTS SIGNED BY AFFILIATES OF TOTAL SPORTS AND THE VOTING
AGREEMENTS SIGNED BY TEN MAJOR STOCKHOLDERS OF QUOKKA. THE FORMS OF VOTING
AGREEMENTS ARE ATTACHED AS ANNEXES B-1, B-2 AND C TO THIS JOINT PROXY
STATEMENT/PROSPECTUS. WE ENCOURAGE YOU TO READ THE ENTIRE FORM OF EACH OF THE
VOTING AGREEMENTS.
VOTING AGREEMENTS WITH HOLDERS OF QUOKKA COMMON STOCK
Accel VI L.P., John Bertrand, Quokka's Vice Chairman, Media Technology
Ventures, L.P., Media Technology Equity Partners, L.P., MediaOne Interactive
Services, Inc., Intel Corporation, Pogmohane Partners L.P., Trinity Ventures V,
L.P., Wakefield Group II, L.L.C., and Richard H. Williams, Quokka's Chairman,
have each entered into a voting agreement with Total Sports dated as of July 20,
2000. Each has agreed to vote all shares of Quokka common stock owned by them as
of the record date in favor of the approval of the merger agreement. Pursuant to
the voting agreements, each of them has granted Total Sports an irrevocable
proxy to vote his or her shares of Quokka common stock for approval of the
merger agreement, except that MediaOne Interactive Services has signed a proxy
that is revocable after December 31, 2000. Approximately 26,738,580 shares, or
57.6% of the Quokka common stock outstanding on the record date, are subject to
voting agreements and proxies. Each of the aforementioned Quokka stockholders
has agreed prior to the termination of the voting agreements not to transfer,
assign, convey or dispose of any shares of Quokka common stock, or any option or
warrant to purchase shares of Quokka common stock, owned by him, her or it
unless each person to whom any of the shares or option is transferred executes a
voting agreement and proxy and agrees to hold the shares subject to all of the
terms and provisions of the voting agreement and proxy.
VOTING AGREEMENTS WITH HOLDERS OF TOTAL SPORTS CAPITAL STOCK
Bull Run Corporation, Frank A. Daniels, III, Total Sports' Chairman, Frank
A. Daniels, Jr., a director of Total Sports, Nuray Telluride Properties L.P.,
Piedmont Venture Partners II, L.P., Piedmont Venture Partners, L.P., Gary R.
Stevenson, President, Chief Executive Officer and a director of Total Sports,
TCV III (GP), TCV III (Q), L.P., TCV III Strategic Partners, L.P., TCV III,
L.P., WinStar Interactive Venture I, Inc., Zilkha Capital Partners, L.P. and
Zilkha Guernsey Capital Partners, L.P. have each entered into a voting agreement
with Quokka dated as of July 20, 2000. Each has agreed to vote all shares of
Total Sports common stock owned by them as of the record date in favor of the
approval of the merger agreement. Pursuant to the voting agreements, each of
them has granted Quokka an irrevocable proxy to vote his or her shares of Total
Sports capital stock for approval of the merger agreement. As of the record
date, 1,342,588 shares of common stock, or 46% of the Total Sports common stock
outstanding; 125,000 shares of series A preferred stock, or 100% of the Total
Sports series A preferred outstanding; 423,000 shares of series B preferred
stock, or 82% of the Total Sports series B preferred stock out standing;
1,268,127 shares of series C preferred stock, or 89% of the Total Sports series
C preferred outstanding; 408,324 shares of series C1 preferred stock, or 65% of
the Total Sports series C1 preferred stock outstanding; 1,208,228 shares of
series D preferred stock, or 56% of the Total Sports series D preferred
outstanding; and 811,423 shares of series E preferred stock, or 100% of the
Total Sports series E preferred stock outstanding, are subject to voting
agreements and irrevocable proxies. Each of these stockholders of Total Sports
has agreed prior to the termination of the voting agreements not to transfer,
assign, convey or dispose of any shares of Total Sports capital stock, or any
option or warrant to purchase shares of Total Sports capital stock, owned by
him, her or it unless each person to whom any of the shares, option or warrant
is transferred executes a voting agreement and irrevocable proxy and agrees to
hold the shares or options subject to all of the terms and provisions of the
voting agreement and irrevocable proxy.
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MANAGEMENT AND OTHER INFORMATION
DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN KEY EMPLOYEES
The following table sets forth certain information regarding Quokka's
directors, executive officers and certain other key employees as of September
15, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Alan S. Ramadan........................... 42 President, Chief Executive Officer and
Director
Richard H. Williams(1).................... 57 Chairman of the Board of Directors
John Bertrand............................. 53 Vice Chairman of the Board of Directors
Alvaro J. Saralegui....................... 44 Chief Operating Officer
Les Schmidt............................... 46 Executive Vice President, Chief Financial
Officer and Secretary
Michael W. Gough.......................... 44 Chief Creative Officer and Executive
Producer
Thomas P. Newell.......................... 43 Senior Vice President, Olympics
David A. Riemer........................... 42 Senior Vice President, Marketing
Pascal Wattiaux........................... 40 Senior Vice President, Engineering
Mark J. Ellis............................. 41 Senior Vice President, Worldwide Sales
Walter W. Bregman(1)(2)................... 67 Director
James G. Shennan, Jr.(1)(2)(3)............ 59 Director
Barry M. Weinman(2)(3).................... 61 Director
</TABLE>
---------------
(1) Member of the nominating committee
(2) Member of the compensation committee
(3) Member of the audit committee
Alan S. Ramadan has served as our President and Chief Executive Officer and
as a director since August 1996, when we incorporated in Delaware under the name
Quokka Productions, Inc. Additionally, Mr. Ramadan served as Managing Director
of our Company from 1990 to August 1996, during which period we were known as
Ozware Developments Unit Trust and operated in Australia. In January 1993, Mr.
Ramadan joined Fluid Thinking, Pty. Ltd. in Melbourne, Australia as that
company's Chief Executive Officer until June 1995. As Chief Executive Officer of
Fluid Thinking, Pty. Ltd., Mr. Ramadan was responsible for drawing together a
team of specialists that, together with the Technology Foundation, developed key
technology used by oneAustralia in the America's Cup challenge. Mr. Ramadan also
founded Best Knowledge Systems, a consulting company, and worked as a research
scientist at BHP Steel and as a computer scientist at Monash University in
Melbourne, Australia. Mr. Ramadan holds a B.Sc. in Computer Science and Applied
Mathematics from Monash University and is a 1995 graduate of the Stanford
Business School's Executive Program for Growing Companies.
Richard H. Williams has served as a director since August 1996, when the
Company incorporated in Delaware under the name Quokka Productions, Inc. Since
April 1997, Mr. Williams has served as our Chairman of the Board. From December
1993 to February 1996, Mr. Williams was President and Chief Executive Officer of
Illustra Information Technologies, Inc. In February 1996, Illustra Information
Technologies, Inc. was acquired by Informix Software, Inc., where Mr. Williams
served as Senior Vice President until August 1996. From October 1991 to May
1992, Mr. Williams was Executive Vice President of Sales for Novell, Inc., and
General Manager of that company's Digital Research Systems Group. Prior to that
time, Mr. Williams served as President and Chief Executive Officer of Digital
Research, Inc. Before joining Digital Research, Inc., Mr. Williams was employed
by IBM for twenty-two years, where he served as Vice President of Plans,
Controls and Product Management for the General Products Division from May 1984
to December 1986. Mr. Williams holds a B.S. in Mathematics from the University
of North Dakota and conducted graduate studies at the University of Minnesota in
numerical analysis and statistics.
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John Bertrand A.M. has served as a director since August 1996 when we
incorporated in Delaware under the name Quokka Productions, Inc. Since April
1997, Mr. Bertrand has served as our Vice Chairman of the Board. From September
1992 to June 1995, Mr. Bertrand was the Chairman of the Board of Fluid Thinking,
Pty. Ltd. and the skipper of oneAustralia, the 1995 America's Cup Challenge team
that received technological support from Fluid Thinking, Pty. Ltd. From
September 1995 to October 1998, Mr. Bertrand was Chairman of the Australian
Government's Industry Research and Development Board. From June 1993 to the
present, Mr. Bertrand has been the Chairman of the Southern Cross Foundation, an
Australian scholarship foundation for engineering and applied science students.
Mr. Bertrand holds a B.S. in Mechanical Engineering from Monash University and a
M.S. in Naval Architecture from M.I.T. During his twenty-nine year international
sailing career, from 1970 to the present, Mr. Bertrand has represented Australia
in five America's Cups and two Olympic Games. Mr. Bertrand won the America's Cup
for Australia in September 1983 and is a life member of the Australia's Sports
Hall of Fame as well as the International America's Cup Hall of Fame.
Alvaro J. Saralegui joined Quokka in April 1999 as our Chief Operating
Officer. From March 1998 to April 1999, Mr. Saralegui was employed by the People
Magazine Group where he initially served as Vice President of People Weekly
until he was promoted to Group Publisher in January 1999. From September 1983 to
March 1998, Mr. Saralegui was employed at Sports Illustrated, Inc., where he
served as General Manager from November 1992 to March 1998. During his fifteen
years at Sports Illustrated, Inc., Mr. Saralegui also served as that company's
Business Manager, Director of Marketing and Sales Development and Advertising
Sales Director. Mr. Saralegui holds a B.A. in History and Economics from
Dartmouth and an M.B.A. from Columbia University.
Les Schmidt joined Quokka in February 1998 as our Senior Vice President,
Quokka Productions, Chief Financial Officer and Secretary and was promoted to
Executive Vice President, Chief Financial Officer and Secretary in February
1999. From September 1996 to June 1997, Mr. Schmidt served as the Chief
Executive Officer of MECON, a healthcare benchmarking company. Mr. Schmidt
joined The Learning Company in 1987 and served as that company's Chief Financial
Officer until September 1994 when he was promoted to Chief Operating Officer. He
served as Chief Operating Officer of The Learning Company and its successor, The
Learning Company, Inc., a publicly traded developer and publisher of
educational, foreign language and home office productivity software, until
September 1996. Prior to that, Mr. Schmidt served as the Controller for Applied
ImmuneSciences, Inc., a venture-backed biotech start-up. Before joining Applied
ImmuneSciences, Inc., Mr. Schmidt was employed by Coopers & Lybrand, an
accounting firm, during which time he became a CPA. Mr. Schmidt holds a B.A. in
Political Economics from Antioch College and an M.S. in Taxation from Golden
Gate University.
Michael W. Gough joined Quokka in July 1997 as our Vice President, Design
and Creative Director and was promoted to Chief Creative Officer and Executive
Producer in September 1998. In August 1995, Mr. Gough co-founded Construct
Internet Design, a digital media design firm, where he served as Creative
Director until July 1997. Prior to that, Mr. Gough co-founded Jones, Partners:
Architecture, a design-focused architecture firm, where he served as Managing
Partner from December 1994 to August 1995. Earlier in his career, Mr. Gough was
an architect for Holt Hinshaw Pfau Jones and, before that, an architect for the
San Jose Redevelopment Agency. Mr. Gough studied Architecture at California
Polytechnic State University.
Thomas P. Newell joined Quokka in March 1998 as Vice President of Business
Affairs and was promoted to Senior Vice President, Business and Legal Affairs in
October 1998. In October 1999, he was promoted to Senior Vice President,
Olympics and General Manager, NBC/Quokka Ventures, LLC, our joint venture with
NBC Olympics, Inc. From May 1994 to August 1997, Mr. Newell served as Executive
Vice President and General Counsel for GGP Productions, LP, an independent
sports television production, syndication and sports marketing company. There,
he handled the company's financial and business operations for three and a half
years until its sale to International Management Group, a sports marketing,
event management and television company. From April 1992 to April 1994, Mr.
Newell served as Vice President, Business Affairs and Operations of CBS
Enterprises for CBS, Inc. During his seven years at CBS, Inc., Mr. Newell also
served as Litigation Counsel, then as Broadcast Counsel and as
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Director of Business Affairs of CBS Sports, in which capacity he conducted
negotiations that resulted in CBS Sports' opportunity to cover the 1992 Olympic
Winter Games. Mr. Newell holds a B.A. from Stanford University and a J.D. from
USC Law School.
David A. Riemer joined Quokka in November 1998 as our Senior Vice
President, Marketing. Prior to joining us, Mr. Riemer spent 13 years at J.
Walter Thompson, where he served as President, JWT/West from May 1997 to
September 1998. While serving as President, JWT/West, Mr. Riemer oversaw the
JWT/Digital Unit and developed an agency specialization in telecommunications,
technology, retail and service marketing. Over the course of his career, Mr.
Riemer has written two musical comedies, two books and directed various
theatrical productions. Mr. Riemer holds a B.A. in Urban Studies and History
from Brown University and an M.B.A. from Columbia University.
Pascal Wattiaux joined Quokka in June 1999 as our Senior Vice President,
Engineering. From August 1996 to June 1999, Mr. Wattiaux served as Director of
Technology at the International Olympic Committee in Lausanne, Switzerland,
where he was responsible for all Olympic technology functions, including timing,
scoring, telecommunications and information systems, as well as managing
relationships with strategic technology partners. From January 1996 until August
1996, he served as senior manager at Price Waterhouse LLP, which has been
renamed PricewaterhouseCoopers LLP, and was responsible for developing a systems
integration practice in Europe. From August 1993 until January 1996, Mr.
Wattiaux served as Information Technology Director for International Operations
at Reebok International Ltd., having previously served as Management Information
Systems Director for Reebok France since January 1993. Prior to that, Mr.
Wattiaux worked at Andersen Consulting for nine years in Paris, France, first as
a consultant and then as a director. Mr. Wattiaux holds a Diplome d'Ingenieur
from Ecole Nationale Superieure des Telecommunications.
Mark J. Ellis joined Quokka in May 1999 as our Vice President, Sales and
has served as our Senior Vice President, Worldwide Sales since April 2000. From
March 1998 to April 1999, Mr. Ellis served as a Vice President/Publisher for
Time Inc. New Media. From November 1997 to March 1998, Mr. Ellis served as the
Publishing Director for Sports Illustrated Presents. From July 1991 to November
1997, Mr. Ellis served as the Detroit Advertising Director for Sports
Illustrated. Mr. Ellis holds a B.A. in Marketing from the University of Notre
Dame and an M.B.A. from the University of Detroit.
Walter W. Bregman became a director of Quokka in October 1997. From January
1988 to the present, Mr. Bregman has served as Chairman and Joint Chief
Executive Officer of S&B Enterprises, a marketing and consulting company. In
1985, Mr. Bregman co-founded Cormorant Beach Club in St. Croix USVI and served
as its Chief Executive Officer and Manager from 1985 to 1987. Prior to that
time, Mr. Bregman was President of International Playtex, Inc. a manufacturer of
intimate apparel, toiletries, pantyhose and baby nursers. Before joining
International Playtex, Inc., Mr. Bregman served as Vice President of Marketing
and Advertising for E&J Gallo Winery and as President of NCK, Inc., a worldwide
advertising agency. Mr. Bregman also serves on the boards of directors for
Symantec, Inc. and Sento, Inc. Mr. Bregman holds an A.B. in English Literature
from Harvard College.
James G. Shennan, Jr. became a director of Quokka in December 1997. From
June 1989 to the present, Mr. Shennan has been a General Partner of Trinity
Ventures, a venture capital firm. Mr. Shennan has over 25 years experience in
consumer products and services marketing. Mr. Shennan also serves on the boards
of directors of the Starbucks Coffee Company and P. F. Chang's China Bistro,
Inc., as well as several private consumer and e-commerce companies in which
Trinity Ventures is an investor. Mr. Shennan holds a B.A. in International
Politics from Princeton University and an M.B.A. from the Stanford Graduate
School of Business.
Barry M. Weinman became a director of Quokka in December 1997. From May
1993 to the present, Mr. Weinman has been a General Partner at Media Technology
Ventures/AVI Management and has been making high tech venture capital
investments in Silicon Valley since 1980. AVI Management and its new media fund,
Media Technology Ventures, had approximately $300 million under management as of
March 31, 1999. Mr. Weinman is also on the boards of directors of Women.com
Networks (Women's Wire), Be, Inc., InfoGear, Inc. and TalkCity, Inc. Mr. Weinman
holds a B.S. in Industrial Engineering
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from Clarkson College of Technology and an M.A. in International Relations from
the London School of Economics/University of Southern California.
BOARD COMPOSITION
Quokka's board of directors is divided into three classes, Class I, Class
II and Class III, with each class serving staggered three-year terms. At each
annual meeting of stockholders after the initial classification, the successors
to directors whose terms will then expire will be selected to serve from the
time of election and qualification until the third annual meeting following the
election or special meeting held in lieu thereof. Pursuant to the merger
agreement between Quokka and Total Sports, the parties will elect a mutually
acceptable individual to Quokka's board of directors and pursuant to a Warrant
Issuance Agreement dated August 22, 2000, NBC, at its sole election, may either
elect a board member to Quokka's board of directors or exercise board observer
rights. As of September 15, 2000, Quokka had authorized seven directors, with
one vacancy on its board of directors. Quokka's certificate of incorporation
provides that the authorized number of directors may be changed only by
resolution of the board of directors.
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SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of Quokka's common stock as of September 15, 2000 by: (i) each director; (ii)
each of the executive officers of Quokka; (iii) all executive officers and
directors of Quokka as a group; and (iv) all those known by Quokka to be
beneficial owners of more than five percent of its common stock. Unless
otherwise indicated, the address is Quokka Sports, Inc., 525 Brannan Street, San
Francisco, CA 94107.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
-----------------------
NUMBER PERCENT
BENEFICIAL OWNER OF SHARES OF TOTAL
---------------- ------------ --------
<S> <C> <C>
Entities associated with Media Technology Ventures(2)....... 5,116,854 11.0%
One First Street, Suite 2
Los Altos, CA 94022
Intel Corporation(3)........................................ 4,405,015 9.5%
2200 Mission College Blvd
Santa Clara, CA 95052
MediaOne Interactive Services, Inc.(4)...................... 4,051,283 8.7%
9000 E. Nichols Avenue, Suite 100
Englewood, CO 80112
Entities associated with Accel VI LP(5)..................... 3,725,951 8.0%
428 University Avenue
Palo Alto, CA 94301
Entities associated with GE Capital Equity Investments,
Inc.(6)................................................... 3,367,048 6.8%
120 Long Ridge Road
Stanford, CT 06927
Entities associated with Trinity Ventures(7)................ 2,920,033 6.3%
3000 Sand Hill Road, Building 1, Suite 240
Menlo Park, CA 94025
Alan S. Ramadan(8).......................................... 2,370,572 5.1%
Richard H. Williams(9)...................................... 2,965,623 6.4%
P.O. Box 4281
Incline Village, NV 89450
John Bertrand(10)........................................... 2,067,704 4.4%
32 Murphy Street
South Yarra 3141
Victoria, Australia
Walter W. Bregman(11)....................................... 464,874 1.0%
James G. Shennan, Jr.(12)................................... 3,032,699 6.5%
c/o Trinity Ventures V L.P.
Barry M. Weinman(13)........................................ 5,173,354 11.0%
c/o Media Technology Ventures
Les Schmidt(14)............................................. 756,923 1.6%
Alvaro Saralegui(15)........................................ 1,025,000 2.2%
Mark J. Ellis(16)........................................... 300,000 *
Michael W. Gough(17)........................................ 323,125 *
All directors and executive officers as a group (10
persons)(18).............................................. 18,479,874 37.3%
</TABLE>
-------------------------
* Less than one percent.
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G, if any, filed with the
Securities and Exchange Commission. Unless otherwise indicated in the
footnotes to this table and subject to community property laws where
applicable, Quokka believes that each of the stockholders named in this
table has sole voting and
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investment power with respect to the shares indicated as beneficially
owned. Applicable percentages are based on 46,383,304 shares outstanding on
September 15, 2000, adjusted as required by rules promulgated by the SEC.
(2) Includes 3,654,794 shares held by Media Technology Ventures, LP, 696,290
shares held by Media Technology Equity Partners, LP, 471,907 shares held by
Media Technology Ventures Entrepreneurs Fund, LP, 48,464 shares held by
Media Technology Entrepreneurs Fund II, LP and 24,477 shares held by
Thomson Management Growth Fund, LP. Includes approximately 89,425 shares,
17,036 shares, 11,546 shares, 1,185 shares and 598 shares of common stock
issuable upon conversion of notes and exercise of warrants acquired by
Media Technology Ventures, LP, Media Technology Equity Partners, LP, Media
Technology Ventures Entrepreneurs Fund, LP, Media Technology Ventures
Entrepreneurs Fund II, LP and Thomson Management Growth Fund, LP.,
collectively referred to hereinafter as the "MT Funds," respectively, in a
private placement on September 15, 2000. Once Quokka obtains stockholder
approval required by the Nasdaq stock market, the MT Funds will have the
right to acquire approximately an additional 75,493 shares, 14,383 shares,
9,748 shares, 1,002 shares and 506 shares, respectively, of common stock
upon conversion of notes and exercise of warrants, subject to adjustment.
Mr. Weinman, a director of Quokka, is a general partner of each of the MT
Funds and, as such, may be deemed to have an indirect pecuniary interest
(within the meaning of Rule 16a-1 under the Securities Exchange Act of
1934, as amended, which is referred to as the "Exchange Act") in an
indeterminate portion of the shares beneficially owned by the MT Funds. Mr.
Weinman disclaims beneficial ownership of these shares within the meaning
of Rule 13d-3 under the Exchange Act.
(3) Includes approximately 119,793 shares of common stock issuable upon
conversion of notes and exercise of warrants acquired by an entity
affiliated with Intel Corporation, in a private placement on September 15,
2000. Once Quokka obtains stockholder approval required by the Nasdaq stock
market, this entity will have the right to acquire approximately an
additional 101,129 shares of common stock upon conversion of notes and
exercise of warrants, subject to adjustment.
(4) Includes warrants to purchase 153,846 shares that are currently
exercisable.
(5) Includes 2,839,875 shares held by Accel VI LP, 362,834 shares held by Accel
Internet Fund II LP, 240,726 shares held by Accel Investors '98 LP, 45,354
shares held by Accel Keiretsu VI LP and 16,240 shares owned by Accel
Investors '99 LP. Includes approximately 97,511 shares, 12,458 shares,
8,265 shares and 1,557 shares of common stock issuable upon conversion of
notes and exercise of warrants acquired by Accel VI LP, Accel Internet Fund
II, LP, Accel Investors '98 LP and Accel Kereitsu VI LP in a private
placement on September 15, 2000. Once Quokka obtains stockholder approval
required by the Nasdaq stock market, these entities will have the right to
acquire approximately an additional 82,320 shares, 10,518 shares, 6,978
shares and 1,315 shares, respectively, of common stock upon conversion of
notes and exercise of warrants, subject to adjustment.
(6) Includes 5,521 shares owned by Union Fidelity Life Insurance Company.
Includes approximately 1,197,935 shares and 299,484 shares of common stock
issuable upon conversion of notes and exercise of warrants acquired by GE
Capital Equity Investments, Inc. and National Broadcasting Company, Inc.,
respectively, in a private placement on September 15, 2000. Once Quokka
obtains stockholder approval required by the Nasdaq stock market, these
entities will have the right to acquire approximately an additional
1,011,287 shares and 252,922 shares, respectively, of common stock upon
conversion of notes and exercise of warrants, subject to adjustment.
(7) Includes 2,759,534 shares held by Trinity Ventures V, LP and 160,499 shares
held by Trinity V, Side-by-Side Fund, LP. Mr. Shennan, a director of
Quokka, is a general partner of Trinity Ventures V, LP and Trinity V,
Side-by-Side Fund, LP. As such, Mr. Shennan may be deemed to have an
indirect pecuniary interest (within the meaning of Rule 16a-1 under the
Exchange Act) in an indeterminate portion of the shares beneficially owned
by Trinity Ventures V, LP and Trinity V,
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<PAGE> 145
Side-by-Side Fund, LP. Mr. Shennan disclaims beneficial ownership of these
shares within the meaning of Rule 13d-3 under the Exchange Act.
(8) Includes 1,900,000 shares held by Pogmohane Partners, L.P. Mr. Ramadan, a
director of Quokka, is a general partner of Pogmohane Partners, L.P. As
such, Mr. Ramadan may be deemed to have an indirect pecuniary interest
(within the meaning of Rule 16a-1 under the Exchange Act) in an
indeterminate portion of the shares beneficially owned by Pogmohane
Partners, L.P. Mr. Ramadan disclaims beneficial ownership of these shares
within the meaning of Rule 13d-3 under the Exchange Act. Includes 300,000
shares underlying currently exercisable stock options. If exercised in full
within 60 days of the date of this table, 205,001 of the shares subject to
the options would be subject to a repurchase right in favor of Quokka.
(9) Includes 200,000 shares underlying currently exercisable stock options. If
exercised in full within 60 days of the date of this table, 102,503 of the
shares subject to the option would be subject to a repurchase right in
favor of Quokka.
(10) Includes 150,000 shares underlying currently exercisable stock options. If
exercised in full within 60 days of the date of this table, 102,501 of the
shares subject to the option would be subject to a repurchase right in
favor of Quokka. Includes an aggregate of 1,500 shares owned by Mr.
Bertrand's three children.
(11) Includes 348,208 shares held in the Bregman Revocable Trust u/a/d 8/21/92,
for which Mr. Bregman, a director of Quokka, serves as a trustee. Includes
116,666 shares underlying currently exercisable stock options.
(12) Includes 2,759,534 shares held by Trinity Ventures V, LP and 160,499 shares
held by Trinity V, Side-by-Side Fund, LP. See footnote (5) above regarding
Mr. Shennan's indirect pecuniary interest in these shares. Includes 50,000
shares underlying currently exercisable stock options. Includes
approximately 23,958 shares of common stock issuable upon conversion of
notes and exercise of warrants acquired by The Shennan 1995 Trust in a
private placement on September 15, 2000. Once Quokka obtains stockholder
approval required by the Nasdaq stock market, The Shennan 1995 Trust will
have the right to acquire approximately an additional 20,226 shares of
common stock upon conversion of notes and exercise of warrants, subject to
adjustment.
(13) Includes 5,080,604 shares held by MT Funds. See footnote (2) above
regarding Mr. Weinman's indirect pecuniary interest in these shares.
Includes 50,000 shares underlying currently exercisable stock options.
(14) Includes 299,423 shares held in The Les Schmidt and Joanne P. Hattum Family
Trust u/t/d 4/8/92, for which Mr. Schmidt, an executive officer of Quokka,
serves as a trustee. Includes 439,500 shares underlying currently
exercisable stock options. If exercised in full within 60 days of the date
of this table, 270,417 shares would be subject to a right of repurchase in
favor of Quokka. Includes an aggregate of 18,000 shares owned in trust for
the benefit of Mr. Schmidt's three children. Mr. Schmidt disclaims
beneficial ownership of these shares within the meaning of Rule 13d-3 under
the Exchange Act.
(15) Includes 1,001,472 shares underlying currently exercisable stock options.
If exercised in full within 60 days of the date of this table, 702,084
shares would be subject to right of repurchase in favor of Quokka.
(16) Includes 300,000 shares underlying currently exercisable stock options. If
exercised in full within 60 days of the date of this table, 248,750 shares
would be subject to right of repurchase in favor of Quokka.
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<PAGE> 146
(17) Includes 323,125 shares underlying currently exercisable stock options. If
exercised in full within 60 days of the date of this table, 189,251 shares
would be subject to right of repurchase in favor of Quokka.
(18) See footnotes (1) through (17) above, as applicable.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires Quokka's directors and executive
officers, and persons who own more than ten percent of a registered class of
Quokka's equity securities, to file with the SEC initial reports of ownership
and reports of changes in ownership of common stock and other equity securities
of Quokka. Officers, directors and greater than ten percent stockholders are
required by SEC regulation to furnish Quokka with copies of all Section 16(a)
forms they file.
To Quokka's knowledge, based solely on a review of the copies of such
reports furnished to Quokka and written representations that no other reports
were required, during the fiscal year ended December 31, 1999, all Section 16(a)
filing requirements applicable to its officers, directors and greater than ten
percent beneficial owners were complied with, except that one report covering
one transaction was filed late by our 10% stockholder, Media Technology
Ventures.
During fiscal 1999, Mr. Bertrand timely reported all transactions but
reported an incorrect number of shares owned due to a clerical error. This error
was corrected on a Form 4 report and by amending a previous Form 4 report.
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EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Except for Mr. Bregman, Quokka has not provided cash compensation to
non-employee directors solely for their services as directors. The members of
the Board of Directors are eligible for reimbursement for their expenses
incurred in connection with attendance at Board meetings in accordance with
Company policy.
Each non-employee director of Quokka receives stock option grants under the
1999 Non-Employee Directors' Stock Option Plan. Only non-employee directors of
Quokka or an affiliate of such directors (as defined in the Code) are eligible
to receive options under the Directors' Plan. Options granted under the
Directors' Plan are intended by Quokka not to qualify as incentive stock options
under the Code.
Option grants under the Directors' Plan are non-discretionary. Upon the
closing of Quokka's July 1999 initial public offering, each non-employee
director was automatically granted an option to purchase 25,000 shares of common
stock at an exercise price of $12.00 per share. Any individual who becomes a
non-employee director after this offering will automatically receive this
initial grant upon being elected to the board of directors. On June 1 of each
year (or the next business day should such date be a legal holiday), each
non-employee director or, where specified by the non-employee director, an
affiliate of such director, is automatically granted under the Directors' Plan,
without further action by Quokka, the board of directors or the stockholders of
Quokka, an option to purchase 25,000 shares of common stock of Quokka; provided
that if any non-employee that had not served in that capacity for the entire
period since the preceding June 1, then the number of shares subject to the
annual grant will be reduced, pro rata, for each full quarter the person did not
serve during the previous period. No other options may be granted at any time
under the Directors' Plan. The exercise price of options granted under the
Directors' Plan is equal to the fair market value of the common stock subject to
the option on the date of the option grant. Options granted under the Directors'
Plan are immediately exercisable upon grant. No option may be exercised after
the expiration of three years from the date it was granted.
In October 1997, Quokka entered into an agreement with Mr. Bregman, under
which Mr. Bregman was paid $33,500 in fiscal year 1999 and an aggregate of
$65,000 through December 31, 1999. Mr. Bregman is compensated under the
agreement at a rate of $2,000 for every board meeting attended and $500 for
every committee meeting attended, if the committee meeting was held in
conjunction with a board meeting. For each committee meeting not held in
conjunction with a board meeting, Mr. Bregman received $1,500. Additionally,
under the agreement, Mr. Bregman received an initial option grant as well as
option grants in the amount of 16,000 shares each year. As of December 31, 1999,
Mr. Bregman had been granted an aggregate of 112,000 shares of Quokka's stock
outside of the 1997 Equity Incentive Plan with a weighted average exercise price
of $0.80 per share.
Since August 1999, Quokka has been paying to Mr. Williams, Quokka's
chairman and a holder of greater than five percent of Quokka's common stock,
$11,250 per month pursuant to a consulting agreement. In 1999, Quokka paid less
than $60,000 to Mr. Williams under the arrangement.
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<PAGE> 148
COMPENSATION OF EXECUTIVE OFFICERS
As permitted by the rules promulgated by the SEC, the following table shows
for the fiscal years ended December 31, 1998 and 1999, compensation awarded or
paid to, or earned by, Quokka's Chief Executive Officer and its other four most
highly compensated executive officers at December 31, 1999, collectively
referred to as the "Named Executive Officers":
SUMMARY COMPENSATION TABLE(1)(2)
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------------------
AWARDS
ANNUAL COMPENSATION ------------------------------------------
-------------------------------------- RESTRICTED SECURITIES
OTHER STOCK UNDERLYING
SALARY BONUS ANNUAL AWARDS OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($) ($) COMPENSATION($) ($) SARS(#) COMPENSATION($)
--------------------------- ---- -------- -------- ---------------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Alan Ramadan......................... 1999 $250,000 -- -- -- 300,000 --
President and Chief Executive
Officer 1998 $214,583 -- -- -- -- --
Alvaro Saralegui(3).................. 1999 $206,250 -- -- -- 1,000,000 --
Chief Operating Officer 1998 -- -- -- -- -- --
Les Schmidt.......................... 1999 $234,256 $ 25,000 -- -- 250,000 --
Executive Vice President and 1998 $172,051 -- -- -- 200,000 --
Chief Financial Officer
Michael W. Gough(4).................. 1999 $300,521 -- -- -- 200,000 --
Chief Creative Officer and 1998 $162,083 $ 15,500 -- -- -- --
Executive Producer
Mark J. Ellis(5)..................... 1999 $100,000 $100,220 -- -- 150,000 --
Senior Vice President, Worldwide
Sales 1998 -- -- -- -- -- --
</TABLE>
------------------------
(1) In accordance with the rules of the Securities and Exchange Commission, the
compensation described in this table does not include medical, group life
insurance or other benefits received by the Named Executive Officers that
are available generally to all salaried employees and various perquisites
and other personal benefits received by the Named Executive Officers that do
not exceed the lesser of $50,000 or 10% of any officer's salary and bonus
disclosed in this table.
(2) See the table under "Option/SAR Grants in Last Fiscal Year" for a detailed
description of the 1999 option grants. All option grants in this table were
granted under Quokka's 1997 Equity Incentive Plan, have a term of 10 years
and vest as to 20% of the shares on the first anniversary of the grant, and
1/48 of the shares on a monthly basis thereafter. The exercise price per
share of each option was equal to the fair market value of the common stock
as determined by the board of directors on the date of grant.
(3) Mr. Saralegui joined Quokka in April 1999 in his current position.
(4) Mr. Gough joined Quokka in July 1997 as Vice President, Design and Creative
Director and was promoted to his current position in September 1998.
(5) Mr. Ellis joined Quokka in May 1999 and was promoted to his current position
in April 2000.
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<PAGE> 149
STOCK OPTION GRANTS AND EXERCISES
Quokka grants options to its executive officers under its 1997 Equity
Incentive Plan. As of September 15, 2000, options to purchase a total of
9,965,428 shares were outstanding under the 1997 Plan and options to purchase
3,798,665 shares remained available for grant thereunder.
In the event of certain changes in control, all outstanding options under
the incentive plan either will be assumed or substituted for by any surviving
entity. If the surviving entity determines not to assume or substitute for these
awards, the vesting provisions of these stock awards will be accelerated and
these stock awards will be terminated upon the change in control if not
previously exercised. In the event of an acquisition under Section 13(d) or
14(d) of the Securities Exchange Act of 1934 of securities representing at least
50% of Quokka's combined voting power, the vesting provisions of stock awards
will either be assumed, continued or substituted by Quokka (or a controlling
affiliate of Quokka) or accelerated immediately upon the occurrence of such
event and such stock awards will be terminated upon such acquisition if not
previously exercised.
The following tables show for the fiscal year ended December 31, 1999,
certain information regarding options granted to, exercised by, and held at year
end by, the Named Executive Officers:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------
NUMBER OF % OF TOTAL POTENTIAL REALIZABLE VALUE
SECURITIES OPTIONS/SARS AT ASSUMED ANNUAL RATES
UNDERLYING GRANTED TO OF STOCK PRICE APPRECIATION
OPTIONS/SARS EMPLOYEES EXERCISE FOR OPTION TERM(4)
GRANTED IN FISCAL OR BASE PRICE EXPIRATION ---------------------------
NAME (#)(1) YEAR(2) ($/SH)(3) DATE 5%($) 10%($)
---- ------------ ------------ ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Alan Ramadan.................. 300,000 4.1% $8.00 03/16/09 2,792,102 5,867,554
Alvaro Saralegui.............. 1,000,000 13.6% $8.50 04/02/09 8,807,005 19,058,514
Les Schmidt................... 250,000 3.4% $7.00 02/26/09 2,576,751 5,139,628
Michael W. Gough.............. 200,000 2.7% $7.00 02/26/09 2,061,401 4,111,703
Mark J. Ellis................. 150,000 2.0% $8.50 05/17/09 1,321,051 2,858,777
</TABLE>
-------------------------
(1) Each of the options was granted under Quokka's 1997 Equity Incentive Plan
ten years before the expiration date referenced and terminates on the
expiration date, subject to earlier termination upon the occurrence of
events related to termination of employment. All options referenced in this
table are immediately exercisable to the extent permitted under applicable
regulations of the Internal Revenue Service and any unvested shares issued
pursuant to early exercise provisions are subject to a repurchase option in
favor of Quokka at the original exercise price upon the termination of
employment. The options granted to Messrs. Ramadan, Saralegui and Ellis vest
as to 1/5 of the shares one year from the date of grant and 1/48 of the
shares on a monthly basis thereafter. The options granted to Messrs. Schmidt
and Gough vested as to 1/6 of the shares on October 1, 1999 and as to 1/50
of the shares on a monthly basis thereafter.
(2) Based on an aggregate of 7,354,500 shares subject to options granted to
Quokka's employees in 1999, including the Named Executive Officers.
(3) The exercise price per share of each option was equal to the fair market
value of the common stock as determined by the board on the date of grant.
(4) The potential realizable values are computed by (a) multiplying the number
of shares of common stock subject to a given option by the closing price of
Quokka's common stock on August 24, 2000 of $7.344, (b) assuming that the
aggregate stock value derived from that calculation compounds at the annual
5% or 10% rate shown in the table for the entire ten-year term of the option
and (c) subtracting from that result the aggregate option exercise price.
The 5% and 10% assumed annual rates of stock price appreciation are mandated
by the rules of the SEC and do not represent Quokka's estimate or projection
of future common stock prices.
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<PAGE> 150
AGGREGATED OPTION/SAR EXERCISES IN 1999, AND YEAR-END OPTION VALUES AT
DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED VALUE DECEMBER 31, 1999(1) DECEMBER 31, 1999(2)
ON EXERCISE REALIZED --------------------------- ---------------------------
NAME (#)(3) ($)(4) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alan S. Ramadan............. -- -- 300,000 -- $1,537,500 --
Alvaro J. Saralegui......... 23,528 $108,817 976,472 -- $4,516,183 --
Les Schmidt................. 3,500 $ 3,500 414,500 -- $3,630,813 --
Michael W. Gough............ 11,875 $ 89,063 288,125 -- $2,337,578 --
Mark J. Ellis............... -- -- 150,000 -- $ 693,750 --
</TABLE>
-------------------------
(1) Options may be exercised immediately under early exercise provisions
contained in option agreements. Any unvested shares issued under such early
exercise provisions are subject to a repurchase option in favor of the
company upon termination of employment. Such repurchase option terminates at
a rate reflecting the vesting schedule of the underlying option.
(2) Based on the difference between the exercise price and the fair market value
of the common stock at close of market on December 31, 1999, which was
$13.125.
(3) Mr. Schmidt exercised his shares on March 15, 1999 at a strike price of
$7.00 per share (with a fair market value of $7.00 at the time of exercise),
Mr. Saralegui exercised his shares on December 31, 1999 at a strike price of
$8.50 per share (with a fair market value of $13.125 at the time of
exercise) and Mr. Gough exercised his shares on March 25, 1999 at a strike
price of $0.50 per share (with a fair market value of $8.00 at the time of
exercise).
(4) Based on the fair market value of the common stock at the time of exercise,
minus the per share exercise price, multiplied by the number of shares
issued upon exercise of the option.
EMPLOYMENT, SEVERANCE AND CHANGE OF CONTROL AGREEMENTS
In April 1999, Quokka entered into a key employee agreement with Mr.
Saralegui, under which Mr. Saralegui is compensated at a rate of $275,000 per
year, paid on a semi-monthly basis. The agreement also provides for a stock
option grant, pursuant to Quokka's 1997 Equity Incentive Plan, for the purchase
of 1,000,000 shares Quokka's common stock at an exercise price of $8.50 per
share. To the extent permissible under applicable IRS rules, this grant will be
an incentive stock option grant. In the event Mr. Saralegui is terminated
without cause, he is entitled to receive from us an amount equal to twelve
months of his base salary as well as acceleration of a portion of his unvested
options under certain circumstances.
In January 2000, Quokka entered into an employee agreement with Mr. Gough,
under which Mr. Gough is compensated as a rate of $250,000 per year, paid on a
semi-monthly basis. Mr. Gough's employment with Quokka is on an at-will basis.
In the event Mr. Gough is terminated by Quokka at any time, he is not entitled
to receive severance pay.
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<PAGE> 151
CERTAIN TRANSACTIONS
The sales of preferred stock described and identified in the table below
were converted into Quokka's common stock in July 1999, on a one-to-one basis,
in connection with Quokka's initial public offering.
In January 1997, Quokka issued and sold an aggregate of 3,800,000 shares of
common stock in exchange for all of the properties, rights, interests and other
tangible and intangible assets of Ozware Developments Unit Trust, an Australian
unit trust. From March 1997 to August 1997, Quokka issued and sold an aggregate
of 5,851,566 shares of common stock at $0.50 per share. In October 1997, Quokka
issued warrants to purchase an aggregate of 212,800 shares of common stock at an
exercise price of $0.50 per share that expired upon the closing of our initial
public offering. In December 1997, Quokka issued and sold an aggregate of
7,720,590 shares of series A preferred stock at $0.68 per share. Between March
1998 and December 1998, Quokka issued and sold warrants to purchase up to
245,098 shares of series A preferred stock at an exercise price of $1.02 per
share, 245,098 shares of series B preferred stock at an exercise price of $1.02
per share, 72,727 shares of series B preferred stock at an exercise price of
$1.50 per share and 72,727 shares of series C preferred stock at an exercise
price of $3.25 per share. The warrants were amended and partially exercised in
December 1998 for 145,559 shares of series A preferred stock, 145,559 shares of
series B preferred stock, 24,242 shares of series B preferred stock and 24,242
shares of series C preferred stock. The warrants, as amended, are currently
exercisable for 99,539 shares of series A preferred stock at an exercise price
of $1.02 per share, 99,539 shares of series B preferred stock at an exercise
price of $1.02 per share, 48,485 shares of series B preferred stock at an
exercise price of $1.50 per share and 48,485 shares of series C preferred stock
at an exercise price of $3.25 per share and expired upon the closing of Quokka's
initial public offering. From June to August 1998, Quokka issued and sold an
aggregate of 10,737,068 shares of series B preferred stock at $1.50 per share.
In December 1998, Quokka issued and sold an aggregate of 4,938,756 shares of
series C preferred stock at $3.25 per share.
From February 1999 to March 1999, Quokka issued and sold warrants to
purchase up to an aggregate of 2,391,750 shares of series C preferred stock at a
weighted average per share price of $5.33. In April 1999, Quokka issued and sold
warrants to purchase up to an aggregate of 161,538 shares of series C preferred
stock at an exercise price of $3.25 per share. In May and June 1999, Quokka
issued and sold an aggregate of 4,522,223 shares of series D preferred stock at
$9.00 per share. In May 1999, Quokka issued and sold a warrant to purchase up to
110,000 shares of series D preferred stock at an exercise price of $9.00 per
share. In July 1999, Quokka issued and sold warrants to purchase up to an
aggregate of 30,000 shares of common stock at an exercise price of $9.00 per
share.
The following table identifies the directors, executive officers and five
percent stockholders who have made equity investments in Quokka to purchase
shares of Quokka's capital stock. See "Security Ownership of Certain Beneficial
Owners and Management" for additional information relating to the beneficial
ownership of these stockholders.
<TABLE>
<CAPTION>
SHARES OF SERIES A SERIES B SERIES C SERIES D
COMMON PREFERRED PREFERRED PREFERRED PREFERRED
INVESTOR STOCK STOCK STOCK STOCK STOCK
-------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Alan S. Ramadan(1)......................... 2,090,572 -- -- -- --
Richard H. Williams(2)..................... 2,500,000 208,823 -- -- --
John Bertrand A.M. ........................ 2,116,204 -- -- -- --
Walter W. Bregman(3)....................... 200,000 22,058 89,381 30,769 --
Les Schmidt(4)............................. 35,500 -- 200,000 76,923 --
Media Technology Ventures, LP(5)........... -- 2,941,177 1,185,524 769,231 --
MediaOne Interactive Services, Inc.(6)..... -- -- 2,666,667 1,230,770 --
Intel Corporation(7)....................... -- 1,322,030 1,311,003 1,255,012 --
Accel VI LP(8)............................. -- -- 3,333,333 153,846 --
Trinity Ventures V, LP(9).................. -- 2,205,883 884,752 153,846 --
Wakefield Group II LLC(10)................. 800,000 577,942 555,791 92,308 --
</TABLE>
144
<PAGE> 152
-------------------------
(1) Includes 1,900,000 shares of common stock held by Pogmohane Partners, LP,
an entity for which Mr. Ramadan serves as a general partner.
(2) Excludes warrants to purchase 56,800 shares of common stock issued to Mr.
Williams in October 1997.
(3) Includes 200,000 shares of common stock, 22,058 shares of series A
preferred stock, 89,381 shares of series B preferred stock and 30,769
shares of series C preferred stock held in the Bregman Revocable Trust
u/a/d 8/21/92, for which Mr. Bregman, a director of Quokka, serves as a
trustee. Does not include warrants to purchase 6,000 shares of common stock
issued to the Bregman Revocable Trust u/a/d 8/21/92 in October 1997.
Excludes options to purchase 112,000 shares of common stock granted to Mr.
Bregman outside of the 1997 Equity Incentive Plan.
(4) Includes 182,000 shares of series B preferred stock and 76,923 shares of
series C preferred stock held in The Les Schmidt and Joanne P. Hattum
Family Trust u/t/d 4/8/92, for which Mr. Schmidt, an executive officer of
Quokka, serves as a trustee. Also includes 6,000 shares of series B
preferred stock held by each of The Schmidt Family Irrevocable Trust, dated
12/27/95, FBO Caryn H. Schmidt, The Schmidt Family Irrevocable Trust, dated
12/27/95, FBO Bryan P. Schmidt and The Schmidt Family Irrevocable Trust,
dated 12/27/95, FBO Taylor G. Schmidt.
(5) Includes 696,290 shares of series C preferred stock held by Media
Technology Equity Partners, LP, 48,464 shares of series C preferred stock
held by Media Technology Entrepreneurs Fund II, LP and 24,477 shares of
series C preferred stock held by Thomson Management Growth Fund, LP, and
336,337 shares of series A preferred stock and 135,570 shares of series B
preferred stock held by Media Technology Ventures Entrepreneurs Fund, L.P.
Mr. Weinman, a director of Quokka, is affiliated with the Media Technology
entities.
(6) Excludes warrants to purchase 153,846 shares of series C preferred stock
issued to MediaOne Interactive Services, Inc. in April 1999.
(7) Excludes warrants to purchase 99,539 shares of Series A preferred stock,
warrants to purchase 148,024 shares of series B preferred stock and
warrants to purchase 48,485 shares of Series C preferred stock issued to
Intel Corporation in December 1998. These warrants represent the balance of
warrants issued upon the amendment and partial exercise of the original
warrants issued between March 1998 and December 1998.
(8) Includes 346,667 shares of series B preferred stock and 16,000 shares of
series C preferred stock held by Accel Internet Fund II LP, 230,000 shares
of Series B preferred stock and 10,615 shares of series C preferred stock
held by Accel Investors '98 LP, and 43,333 shares of series B preferred
stock and 2,000 shares of series C preferred stock held by Accel Keiretsu
VI LP.
(9) Includes 121,791 shares of series A preferred stock, 48,849 shares of
series B preferred stock and 7,692 shares of series C preferred stock held
by Trinity V, Side-by-Side Fund, LP. Mr. Shennan, a director of Quokka, is
affiliated with Trinity Ventures V, LP and Trinity V, Side-by-Side Fund,
LP.
(10) Excludes warrants to purchase 100,000 shares of common stock issued to
Wakefield Group LLC in October 1997.
Pursuant to an investors' rights agreement dated May 27, 1999 between
Quokka and certain investors, the investors have certain registration rights for
the shares of common stock held by them, or subject to acquisition upon exercise
of certain warrants. See "Description of Capital Stock -- Registration Rights"
for a description of these registration rights.
In April 1999, Quokka entered into a trial agreement with MediaOne
Interactive Services, Inc., a holder of more than five percent of Quokka's
outstanding capital stock. Under this agreement, Quokka and MediaOne are working
together to implement and test streaming media over the MediaOne cable modem
infrastructure. In connection with this agreement, Quokka has issued warrants to
MediaOne to purchase
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<PAGE> 153
153,846 shares of Quokka's preferred stock at an exercise price of $3.25 per
share. These warrants will expire in April 2009 if not earlier exercised.
In September 1999, Quokka entered into a Memorandum of Agreement with
Intel, a holder of more than five percent of Quokka's outstanding capital stock,
relating to the provision of $25.0 million of sponsorship and advertising
services by Quokka to Intel, and the provision of an aggregate of $35.0 million
of development, promotional and hosting services by Intel to Quokka.
Since August 1999, Quokka has been paying to Mr. Williams, Quokka's
chairman and a holder of greater than five percent of Quokka's common stock,
$11,250 per month pursuant to a consulting arrangement. In 1999, Quokka paid
less than $60,000 to Mr. Williams under the arrangement.
In June 2000, Quokka entered into a Purchase Agreement and Plan or
Reorganization with members holding approximately 71% of Golf.com, L.L.C., which
includes MediaOne Interactive Services, Inc., a holder of more than five percent
of Quokka's outstanding common stock. See "The Companies -- Quokka Sports,
Inc. -- Recent Developments" for a description of this transaction.
In September 2000, Quokka entered into a Note Purchase Agreement with
investors, including the following entities who are affiliated with holders of
more than five percent of Quokka common stock: entities affiliated with Accel VI
L.P., an entity affiliated with Intel Corporation, entities affiliated with
Media Technology Ventures and entities affiliated with Trinity Ventures. See
"Approval Of The Issuance Of Common Stock Upon Conversion Of Quokka's 7.0%
Convertible Promissory Notes And Upon Exercise Of The Related Warrants" for a
description of this transaction. Entities affiliated with Accel VI L.P. acquired
$1.0 million face amount of notes and warrants to acquire 36,250 shares of our
common stock. The entity affiliated with Intel Corporation acquired a note with
a face amount of $1.0 million and a warrant to acquire 36,250 shares of our
common stock. Entities affiliated with Media Technology Ventures acquired $1.0
million face amount of notes and warrants to acquire 36,250 shares of our common
stock. Entities affiliated with Trinity Ventures acquired $500,000 face amount
of notes and warrants to acquire 18,125 shares of our common stock. Two of our
members of our board of directors are also affiliated with investors who are
parties to the Note Purchase Agreement. Barry M. Weinman is affiliated with
Media Technology Ventures and its affiliates which acquired $1.0 million face
amount of notes and warrants to acquire 36,250 shares of our common stock. James
G. Shennan, Jr. is affiliated with The Shennan 1995 Trust which acquired
$200,000 face amount of notes and warrants to acquire 7,250 shares of our common
stock.
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DISSENTERS' RIGHTS
If the merger is consummated, dissenting stockholders of Total Sports will
be entitled to have the "fair value" of their shares at the effective time of
the merger, exclusive of any element of value arising from the accomplishment or
expectation of the merger, judicially determined and paid to them provided they
comply with the provisions of Section 262 of the Delaware General Corporation
Law, referred to as the DGCL. The rights to this determination and payment are
commonly referred to as appraisal rights or dissenters' rights.
The following is a brief summary of the provisions of the DGCL that set
forth the procedures for dissenting from the merger and demanding statutory
appraisal rights. This summary does not purport to be a complete statement of
the provisions of Delaware law relating to the rights of stockholders of Total
Sports to an appraisal of the value of their shares and is qualified in its
entirety by reference to Section 262 of the DGCL, the text of which is attached
to this joint proxy statement/prospectus as Annex E.
Stockholders of Total Sports electing to exercise their appraisal rights
under the DGCL must file with Total Sports, before the vote to approve the
merger agreement, a written objection to the merger stating that they intend to
demand payment for their Total Sports common stock if the merger is consummated,
and they must not vote for adoption of the merger agreement. A proxy or vote
against the adoption of the merger agreement will not, by itself, be sufficient
to permit a stockholder to exercise their appraisal right.
A stockholder who elects to exercise appraisal rights should mail or
deliver his or her written demand to the Secretary of Total Sports at 234
Fayetteville Street, Raleigh, North Carolina 27601. The written demand for
appraisal should specify the stockholder's name and mailing address and that the
stockholder is demanding appraisal of his or her or its shares.
If the merger agreement is approved at the special meeting, then within 10
days after the effective date of the merger, Total Sports must provide written
notice of the event to all stockholders who have complied with the dissenters'
rights provisions of the DGCL and have not voted for approval of the merger
agreement.
Within 120 days after the effective date of the merger, any stockholder who
has satisfied the statutory dissenters' rights requirements may file a petition
in the Court of Chancery demanding a determination of the value of the stock of
all such stockholders. Upon the filing of any such petition by a stockholder,
service of a copy thereof shall be made upon Total Sports which shall, within 20
days after such service, file in the office of the Register in Chancery a duly
verified list containing the names of all stockholders who have demanded payment
for their shares and with whom agreements as to the value of their shares have
not been reached by Total Sports. If the petition be filed by Total Sports, the
petition shall be accompanied by such a duly verified list.
Notwithstanding the foregoing, at any time within 60 days of the effective
date of the merger, any stockholder shall have the right to withdraw its demand
for appraisal and accept the terms of the merger.
If a petition for an appraisal is filed in a timely fashion, after a
hearing on the petition, the court will determine which stockholders are
entitled to appraisal rights and will appraise the shares owned by those
stockholders, determining the fair value of these shares exclusive of any
element of value arising from the consummation or expectation of consummation of
the merger, together with a fair rate of interest to be paid on the amount
determined to be the fair value. The fair value may be more or less than the
value of Quokka common stock to be paid to other Total Sports stockholders in
the merger. The costs of the appraisal proceeding may be determined by the court
and taxed against the parties as the court deems equitable under the
circumstances.
Under the DGCL, the appraisal remedy is an exclusive remedy and a
stockholder who does not perfect his or her appraisal rights through compliance
with the DGCL will be bound by the terms of the merger agreement, unless the
merger agreement is unlawful or fraudulent as to the stockholder. Any
stockholder contemplating the exercise of the right to demand appraisal is urged
to review carefully the
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text of Section 262 of the DGCL attached to this joint proxy
statement/prospectus as Annex E, particularly with respect to procedural steps
required to perfect the right to appraisal. Appraisal rights may be lost if the
procedural requirements of the DGCL are not followed exactly. Stockholders
wishing to exercise their right to demand appraisal are urged to consult legal
counsel.
Stockholders considering seeking appraisal of their shares should have in
mind that the fair value of their shares determined under the DGCL could be
more, the same or less than the consideration they would receive pursuant to the
merger agreement if they did not seek appraisal of their shares. Any stockholder
of Total Sports who has duly demanded appraisal in compliance with the DGCL will
not, after the closing of the merger, be entitled to vote for any purpose the
shares of Total Sports common stock subject to that demand or to receive payment
of dividends or other distributions on those shares, except for dividends or
distributions payable to stockholders of record at a date prior to the closing
of the merger. Any stockholder of Total Sports who has demanded appraisal, but
subsequently waives or forfeits appraisal rights, or who properly withdraws his
or her objection to the corporate action, shall have the rights of a stockholder
who did not demand appraisal of his or her shares.
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DESCRIPTION OF QUOKKA CAPITAL STOCK
As of September 15, 2000, there were 46,383,304 shares of common stock
outstanding held of record by approximately 542 stockholders. The holders of
common stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders. The holders of common stock are
not entitled to cumulative voting rights with respect to the election of
directors, and as a consequence, minority stockholders will not be able to elect
directors on the basis of their votes alone. Subject to preferences that may
apply to any then outstanding preferred stock, holders of common stock are
entitled to receive ratably such dividends as may be declared by the board of
directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of Quokka, holders of the common stock
are entitled to share ratably in all assets remaining after payment of
liabilities, amounts owing to any noteholders and the liquidation preference of
any then outstanding preferred stock. Holders of common stock have no preemptive
rights and no right to convert their common stock into any other securities. No
redemption or sinking fund provisions apply to the common stock. All outstanding
shares of common stock are fully paid and nonassessable. The rights, preferences
and privileges of holders of Quokka common stock are subject to those of holders
of Quokka preferred stock and any outstanding debt instruments.
CONVERTIBLE SUBORDINATED NOTES
On September 15, 2000, we issued 7.0% convertible subordinated notes in an
aggregate face amount of $77.4 million and warrants to acquire 2,805,750 shares
of our common stock. For a description of these notes and warrants, see the
section of this joint proxy statement/prospectus entitled "Approval of the
Issuance of Common Stock Upon Conversion of Quokka's 7.0% Convertible
Subordinated Notes and Upon Exercise of the Related Warrants."
REGISTRATION RIGHTS
Pursuant to an investors' rights agreement dated September 15, 2000 among
Quokka and some holders of Quokka's capital stock, we have extended registration
rights to those holders. The holders with registration rights include those
owning approximately 37.1 million shares of our common stock as of September 15,
2000 and those owning warrants to purchase an additional 15.2 million shares of
our common stock. Upon the closing of our acquisition of 71% of the outstanding
membership interests in Golf.com on October 3, 2000, the selling members of
Golf.com acquired approximately 3.9 million shares of our common stock with
registration rights under the investors' rights agreement. We refer to the group
of holders described above as the "investors". In addition, the entities that
acquired notes and warrants in our private placement on September 15, 2000
received registration rights under the investors' rights agreement and we refer
to these entities as the "noteholders."
Under the investors' rights agreement, the investors may demand, by written
request from holders of more than 50% of the then outstanding investors'
registrable securities, that we file a registration statement under the
Securities Act covering all or a portion of the investors' registrable
securities, provided that, in the case of a registration on a form other than a
Form S-3, there is a reasonably anticipated aggregate offering price to the
public of more than $10.0 million, or in the case of a registration of Form S-3,
there is a reasonably anticipated aggregate offering price to the public of at
least $1.0 million. These registration rights are subject to our right to delay
the filing of a registration statement, in the case of a registration on a form
other than a Form S-3, for a period not to exceed 60 days, and, in the case of a
registration on a Form S-3, for a period not to exceed 90 days. In the case of a
registration on a form other than a Form S-3, we cannot delay more than twice in
a 12-month period after receiving the registration demand. In the case of a
registration on a Form S-3, we cannot delay more than once in a 12-month period
after receiving the registration demand. In the case of a registration on a form
other than a Form S-3, the managing underwriter, if any, of any such offering
has certain rights to limit the number of the Registrable Securities proposed to
be included in such registration.
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In connection with our acquisition of ZoneNetwork.com, we provided the
former shareholders of ZoneNetwork.com with stand-alone demand registration
rights on a Form S-3 registration statement, which stand-alone demand is subject
to the same conditions discussed in the preceding paragraph. Of the
approximately 1,411,569 shares of Quokka common stock held by the former
ZoneNetwork.com shareholders as of September 15, 2000, 50% of those shares may
not be part of any demand registration on Form S-3 prior to April 2001.
In connection with our acquisition of 71% of the membership interests in
Golf.com, the former Golf.com members and GolfData shareholders received
stand-alone demand registration rights on a Form S-3 registration statement,
which stand-alone registration is subject to the same conditions discussed above
for Form S-3 registration statements. Of the approximately 3.9 million shares of
Quokka common stock acquired by the Golf.com members and GolfData shareholders
on the closing of the acquisition, 50% of those shares may be part of a demand
registration on Form S-3 only after the six month anniversary of the closing of
the acquisition and the remaining 50% of those shares may be part of a demand
registration on Form S-3 only after the 12 month anniversary of the closing of
the acquisition.
The noteholders, in addition to the "piggyback" registration rights
described below, received stand-alone registration rights under the investors'
rights agreement different from the investors. We agreed to file a registration
statement on Form S-3 within 35 days of the September 15, 2000 closing of the
private placement, to register the underlying common stock that is issuable upon
conversion of the notes and exercise of the warrants. Subject to some
limitations, we also agreed to use our best efforts to maintain the liquidity of
the common stock underlying the notes and warrants. In particular, we agreed to
the following: (1) register the shares of common stock underlying the notes and
warrants and have the registration statement declared effective by January 15,
2001; (2) list the common stock underlying the notes and warrants with the
Nasdaq National Market and avoid any delisting of the shares; (3) avoid the
suspension of trading in our common stock in excess of 45 days in any 12 months;
and (4) maintain enough authorized shares of common stock to enable the
conversion of the notes and the exercise of the warrants. The failure to
accomplish any of these four events would be deemed an "interfering event." If
an interfering event occurs and is continuing, we may be required to pay to the
noteholders a monthly delay payment equal to one percent (1%) of the face amount
of the notes, all accrued and unpaid interest on the notes and all unpaid
penalties payable on the notes, for each 30 day period (or portion thereof) of
the interfering event. In addition, under some circumstances, we may be required
to redeem the notes if the interfering event continues at a premium redemption
price equal to the greater of (1) 115% of the sum of the face value of the
notes, accrued but unpaid interest on the notes and unpaid delay or default
amounts on the notes, or (2) the value the noteholder would be entitled to
receive upon conversion of the note into common stock at the applicable
conversion price followed by the sale of the common stock at the greater market
value at either the closing of the redemption or the event triggering the right
to redemption.
In addition, all of the investors and noteholders have "piggyback"
registration rights. If we propose to register any of our securities under the
Securities Act of 1933 (other than pursuant to the investors' demand
registration rights or the noteholders' registration rights identified above),
the investors and noteholders may require us to include all or a portion of
their registrable securities in such registration. The managing underwriter, if
any, of any such offering will have the right to limit the number of the
registrable securities to no less than 25% of the total number of securities
proposed to be included in such registration. The "piggyback" registration
rights of former Golf.com members and GolfData shareholders take effect with
respect to 50% of the Quokka common stock received in the acquisition upon the
closing of the acquisition. On the six-month anniversary of the closing of the
acquisition the "piggyback" registration rights become effective with respect to
the remaining 50% of the shares of Quokka common stock received in the
acquisition.
On March 30, 2000, we entered into an agreement with KLAS, Inc. in
connection with the extension of a loan that we assumed as part of our
acquisition of ZoneNetwork.com. Under the agreement, we agreed to provide
piggyback registration rights to KLAS with respect to shares underlying a
warrant held by KLAS to purchase approximately 23,849 shares of Quokka common
stock.
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Except for noteholders, all registration rights described above will
terminate ten years after the date of our August 1999 initial public offering.
The rights of each investor holding less than 1% of our outstanding common stock
under the investors' rights agreement will terminate when that investor may sell
all of its or his shares under Rule 144(k) of the Securities Act or during any
90-day period under Rule 144 of the Securities Act. A noteholder will have
registration rights as long as it owns notes or warrants.
All registration expenses incurred in connection with the above
registrations would be borne by us. Each selling investor would pay all
underwriting discounts and selling commissions applicable to the sale of his or
its registrable securities.
TRANSFER AGENT AND REGISTRAR
EquiServe LLP is the transfer agent and registrar for the Quokka common
stock. Its telephone number in the United States is (781) 575-3400.
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COMPARATIVE RIGHTS OF QUOKKA STOCKHOLDERS
AND TOTAL SPORTS' STOCKHOLDERS
THIS SUMMARY OF THE MATERIAL DIFFERENCES IN THE TOTAL SPORTS CERTIFICATE OF
INCORPORATION, THE QUOKKA CERTIFICATE OF INCORPORATION, THE TOTAL SPORTS BY-LAWS
AND THE QUOKKA BYLAWS DOES NOT PURPORT TO BE A COMPLETE LISTING OF DIFFERENCES
IN THE RIGHTS AND REMEDIES OF STOCKHOLDERS OF TOTAL SPORTS AND STOCKHOLDERS OF
QUOKKA. THE DIFFERENCES CAN BE DETERMINED IN FULL BY REFERENCE TO THE TOTAL
SPORTS CERTIFICATE OF INCORPORATION, THE QUOKKA CERTIFICATE OF INCORPORATION,
THE TOTAL SPORTS BY-LAWS AND THE QUOKKA BYLAWS.
After the merger, Total Sports' stockholders will become stockholders of
Quokka. Total Sports stockholders' rights will continue to be defined and
governed by the DGCL but will no longer be defined and governed by Total Sports'
restated certificate of incorporation, as amended, and by-laws, as amended.
Instead, each stockholder will become a new stockholder of Quokka whose rights
as a stockholder will be defined and governed by Quokka's certificate of
incorporation and bylaws. The following is a summary of the material differences
between the rights of holders of Total Sports common stock and preferred stock
and the rights of holders of Quokka common stock at the date of this joint proxy
statement/prospectus. These differences arise from differences between the
Quokka certificate and the Quokka bylaws, on the one hand, and the Total Sports
certificate and the Total Sports by-laws, on the other hand.
CLASSES OF DIRECTORS
Total Sports' bylaws provide that the directors of the company shall be
elected at each annual meeting of the stockholders of Total Sports. Quokka's
bylaws provide for three classes of directors, with three year terms for each
director so that a different class of directors is elected at each annual
meeting of the stockholders of Quokka.
REMOVAL OF DIRECTORS
Total Sports' bylaws provide for removal of directors with or without cause
by a majority vote of the holders of shares entitled to vote for the director.
Quokka's certificate and bylaws require a vote of holders of 66 2/3% of the
outstanding shares to remove directors without cause and a vote of the holders
of a majority of the outstanding shares to remove directors with cause.
INDEMNIFICATION AND LIMITATION OF LIABILITY
Total Sports' bylaws require the indemnification of directors and officers
of the company against monetary damages in connection with their service to
Total Sports, and permits indemnification of employees and agents (other than
directors and officers) of Total Sports. Quokka's bylaws require the
indemnification of directors and executive officers of Quokka against monetary
damages in connection with their service to Quokka, and permits indemnification
of officers, employees and agents (other than directors and executive officers)
of Quokka.
ELIMINATION OF ACTIONS BY WRITTEN CONSENT OF STOCKHOLDERS
Total Sports' bylaws provide that stockholder actions may be taken without
a meeting by written consent of the stockholders. Quokka's certificate
eliminates the ability for stockholder actions to be taken by written consent
and requires that all stockholder actions must be taken at an annual or special
meeting of the stockholders.
POWER TO CALL SPECIAL MEETINGS OF STOCKHOLDERS
Total Sports' bylaws provide that special meetings of the stockholders may
be called only by the board of directors or individuals designated by the board
of directors. Quokka's bylaws provide that special meetings of the stockholders
may be called by the chairman of the board, the president of Quokka, a majority
of the directors, or the holders of a majority of Quokka's outstanding stock.
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AMENDMENT OF BYLAWS
Total Sports' bylaws and certificate provide that the bylaws may be amended
by a majority vote of the board of directors or by a majority of the
stockholders entitled to vote. Quokka's bylaws and certificate provide that the
bylaws may be amended by 66 2/3% of the outstanding voting stock.
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APPROVAL OF THE ISSUANCE OF COMMON STOCK UPON CONVERSION OF
QUOKKA'S 7.0% CONVERTIBLE PROMISSORY NOTES AND
UPON EXERCISE OF THE RELATED WARRANTS.
OVERVIEW OF THE PRIVATE PLACEMENT AND STOCKHOLDER VOTE
On September 15, 2000, we closed a private placement in which we issued
7.0% convertible subordinated promissory notes in an aggregate face amount of
$77.4 million to institutional and other accredited investors and also issued
warrants to purchase an aggregate of 2,805,750 shares of our common stock to
those investors.
In order to comply with the rules and regulations of the Nasdaq Stock
Market on which our common stock trades (described below) and to enable the full
conversion of the notes and the full exercise of the warrants, you are being
asked to approve the issuance of the common stock upon conversion of the notes
and exercise of the warrants.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF THE
ISSUANCE OF COMMON STOCK UPON CONVERSION OF THE NOTES AND UPON EXERCISE OF THE
RELATED WARRANTS.
RISK FACTORS
Please review the section entitled "Risks Relating to the Private
Placement" in the "Risk Factors" section of this joint proxy
statement/prospectus for a description of some of the risks relating to the
private placement.
ADDITIONAL INFORMATION
The terms of the notes and warrants are complex and only briefly summarized
in this joint proxy statement/prospectus. To understand all of the terms of the
notes and warrants, you should review the note purchase agreement (and its
exhibits) filed as Exhibit 4.04 to this joint proxy statement/prospectus. You
will also find a copy of the note purchase agreement (and its exhibits) filed
with the Current Report on Form 8-K filed with the Securities and Exchange
Commission on September 19, 2000 and may also request a copy of the note
purchase agreement from Quokka's corporate secretary at (415) 908-3800.
BASIS FOR SEEKING STOCKHOLDER APPROVAL
Nasdaq Rule 4310. The Nasdaq Stock Market has adopted rules and regulations
that apply to companies listed on the Nasdaq, including Quokka. Specifically,
Nasdaq Marketplace Rule 4310(c)(25)(H) identifies the circumstances under which
listed companies are required to obtain stockholder approval. Subsection of
(i)(d.) of that rule requires that stockholder approval be obtained prior to the
issuance of common stock (or securities convertible into or exercisable for
common stock) that equals 20% or more of a listed company's outstanding common
stock at the time of the issuance. This rule, as applied to a convertible note
issuance, requires that stockholder approval be obtained prior to the conversion
of notes into common stock that would equal or exceed of 20% of the common stock
that was outstanding when the notes were issued. We refer to this limitation as
the "Nasdaq 20% Cap." Subsection (i)(b.) of Nasdaq Marketplace Rule
4310(c)(25)(H) requires stockholder approval when an issuance of capital stock
will result in a change of control of the company.
Number Of Shares Of Common Stock Issuable Under The Notes And Warrants Is
Expected To Exceed The Nasdaq 20% Cap. Based on the initial $5.415 conversion
price of the notes, the notes can be converted into approximately 14.3 million
shares of our common stock. When added to the approximately 2.8 million shares
of common stock underlying the warrants, the private placement is expected to
result in the issuance of approximately 17.1 million shares of common stock.
This represents approximately 36.86% of the 46,383,304 shares of our outstanding
common stock on September 15, 2000. Additional shares of common stock may be
issued if the conversion price of the notes is reset downward (as described
below). Additional shares of common stock may also be issued if we elect to pay
interest on the notes with
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payments-in-kind rather than cash (as described below). We are seeking
stockholder approval for the issuance of the common stock upon conversion of the
notes and exercise of the warrants for three reasons: (1) we have contractually
agreed to do so; (2) we expect to issue common stock in excess of the Nasdaq 20%
Cap; and (3) depending on the applicable conversion price and the
payments-in-kind we elect to make, sufficient shares of common stock may be
required to be issued upon conversion of the notes and exercise of the warrant
to result in a change of control of Quokka.
Until Stockholder Approval Is Obtained, Noteholders Are Limited From
Converting Notes And Exercising Warrants In Excess Of The Nasdaq 20% Cap. Until
stockholder approval is obtained, each noteholder is contractually restricted
from converting their notes and warrants into more than its pro rata share of
19.99% of the 46,383,304 shares outstanding on September 15, 2000. This
restriction ensures that under no circumstance will the Nasdaq 20% Cap be
exceeded prior to stockholder approval.
Consequence Of Obtaining Stockholder Approval. If stockholder approval is
obtained prior to November 15, 2000, we will have met our contractual obligation
with the noteholders and we will not be restricted by the Nasdaq rules and
regulations or other applicable laws from issuing the number of shares of common
stock that may be necessary to enable the full conversion of the notes and full
exercise of the warrants.
Consequence Of Failure To Obtain Stockholder Approval. If we fail to obtain
stockholder approval by November 15, 2000, the noteholders have the right to
contractually cause us to repurchase all outstanding notes at a premium
redemption price equal to the greater of (1) 115% of the sum of the face value
of the notes, which we expect would be at least $89.0 million, accrued but
unpaid interest on the notes and unpaid delay or default amounts on the notes,
or (2) the value the noteholder would be entitled to receive upon conversion of
the note into common stock at the applicable conversion price followed by the
sale of the common stock at the greater market value at either the closing of
the redemption or the event triggering the right to redemption.
Voting Agreements. A group of ten Quokka stockholders, including some
directors and executive officers of Quokka as well as other significant owners,
representing an aggregate of approximately 19.4 million shares of common stock,
or 41.8% of the outstanding common stock as of September 15, 2000, have entered
into an agreement with the noteholders to vote in favor of this proposal 2.
USE OF PROCEEDS
The net proceeds of the offering, after commissions and other transaction
expenses, were approximately $72.3 million. We intend to use these proceeds
primarily to fund the growth and expansion of our business, for debt refinancing
and other general corporate purposes, including working capital.
DESCRIPTION OF THE NOTES
Payment Of Principal And Interest On The Notes
Principal Payment At Maturity. The notes mature on September 15, 2005, at
which time we must pay in cash the face amount of the notes, together with all
accrued and unpaid interest and payments on the notes.
Interest Payments. Starting December 31, 2000 and ending September 15,
2005, we must pay interest on the notes quarterly. We may elect to pay interest
either in cash or by a "payment-in-kind", which means adding an amount equal to
the interest payable to the then outstanding face amount of the note. If we
elect to pay interest with payments-in-kind, the number of shares of common
stock issuable upon conversion of the notes will increase because the face
amount of the notes will increase. For example, assuming (1) no notes were
converted during their 5-year term, (2) the conversion price remains at $5.415,
and (3) all interest payments were payments-in-kind, then the aggregate face
amount of the notes would increase approximately $32.1 million, which would be
convertible into approximately 5.9 million shares of common stock as interest;
in aggregate, including payments-in-kind, the face amount
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of the notes on September 15, 2005 would be approximately $109.5 million, which
would be convertible into an aggregate of approximately 20.2 million shares of
common stock.
Events Of Default And Consequences
Events of default under the notes include: (1) failure to pay the principal
on any note when due; (2) an assignment for the benefit of creditors or other
bankruptcy or insolvency event; (3) the rendering of a judgment against us in
excess of $1 million (net of any insurance coverage) that is not discharged
within 60 days; (4) defaults under any mortgage, indenture, agreement or
instrument evidencing indebtedness in excess of $4 million; (5) failure to
redeem all unconverted notes if we elect to exercise our optional redemption
rights; (6) an interfering event (as described below under "Registration Rights
of Common Stock Underlying Notes and Warrants"); and (7) the breach of covenants
or representations or warranties made to the noteholders.
If an event of default identified in items (1), (2), (3), (4) and (7) above
occurs, then the noteholders may declare the notes and any accrued but unpaid
interest and payments on the notes to be immediately due and payable and demand
immediate payment of a premium redemption price equal to 115% of the sum of the
face value of the notes, accrued but unpaid interest on the notes and unpaid
delay or default amounts on the notes. If an event of default identified in
items (5) and (6) occurs, then the premium redemption price is calculated as
described below under "Registration Rights of Common Stock Underlying Notes and
Warrants -- Monthly Delay Payments and Redemption at a Premium". If the event of
default in subsection (2) above occurs all of the notes will automatically
become immediately due and payable at the premium redemption price.
Conversion Of Notes Into Common Stock
Initial Conversion Price. The notes are convertible into shares of our
common stock at each noteholder's option at an initial conversion price of
$5.415. Accordingly, the notes that we issued on September 15, 2000 are
currently convertible into an aggregate of approximately 14.3 shares of common
stock. The conversion price of the notes is subject to adjustment in specific
situations.
Adjustments To Conversion Price For Stock Splits And Diluting
Issuances. The initial conversion price will be adjusted for stock splits,
combinations, certain dividends and distributions and other similar events. In
addition, the initial conversion price will also be adjusted on a weighted
average basis in the event we issue additional securities below the then
applicable conversion price or the then market price of Quokka's stock. There
will be no anti-dilution adjustment if we issue options or warrants to
employees, directors or bona fide consultants pursuant to plans approved by our
Board of Directors or the number of shares equal to 10% of the number of shares
we issue as consideration in any acquisition approved by our Board of Directors
and otherwise allowed under the terms of the agreements entered into with the
noteholders.
Reset Adjustment. For a period of at least 75 trading days beginning
February 15, 2001, which is referred to as the "reset period," the holders of
the notes may convert the notes at a price equal to the seven lowest daily
volume weighted average prices in the 25 trading days next preceding the date of
conversion. This seven-day average is known as a "reset price." After the reset
period ends, the holders may convert the notes at a price equal to an average of
the three lowest reset prices during the reset period if lower than $5.415.
Dilution. The table below illustrates the number of shares of common stock
we would be required to issue upon exercise of the warrants and conversion of
all of the notes issued on September 15, 2000 at an assumed conversion price of
$5.415 per share, and the resulting percentage of our total shares of common
stock outstanding after such a conversion. The table also illustrates the number
of shares of common stock
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we would be required to issue assuming the conversion price is reset downward to
$5.00, $4.00 and $3.00 and no notes are converted prior to the reset adjustment.
<TABLE>
<CAPTION>
SHARES OF AGGREGATE
COMMON STOCK SHARES OF
UNDERLYING SHARES OF COMMON STOCK
$77.4 MILLION COMMON STOCK UNDERLYING PERCENTAGE OF
CONVERSION PRICE/ FACE AMOUNT OF UNDERLYING NOTES AND COMMON STOCK
RESET PRICE NOTES(1) WARRANTS WARRANTS OUTSTANDING(2)
----------------- ------------------- ---------------- ------------------- ---------------
<S> <C> <C> <C> <C>
$5.415 14,293,628 2,805,750 17,099,378 36.87%
$5.000 15,480,000 2,805,750 18,285,750 39.42%
$4.000 19,350,000 2,805,750 22,155,750 47.77%
$3.000 25,800,000 2,805,750 28,605,750 61.67%
</TABLE>
-------------------------
(1) The number of shares of common stock issuable upon conversion of the notes
and the percentage of outstanding common stock after such conversion set
forth above do not take into account any shares of common stock that may be
converted under payments-in-kind issuable as interest on the notes (as
described above). The table also assumes that no weighted average
anti-dilution adjustments are made to the notes and warrants.
(2) The table assumes that the number of outstanding shares of common stock
remains constant at the 46,383,304 shares outstanding on September 15, 2000,
even though we issued approximately 3.9 million shares upon the closing of
the Golf.com acquisition on October 3, 2000 and anticipate issuing 15
million shares upon the closing of the merger with Total Sports. We may also
issue additional shares for other corporate purposes. As the table
illustrates, if the conversion price is reset low enough and the noteholders
seek to convert all outstanding notes and exercise all outstanding warrants,
then the number of shares of common stock issued thereby could result in a
change of control of Quokka depending on the number of shares of common
stock outstanding at the time of the conversion.
Covenants. As is customary in debt transactions, the investment by the
noteholders was contingent on our agreement to comply with various covenants
while any notes remain outstanding. These covenants include both affirmative
covenants and negative covenants.
Affirmative Covenants. The affirmative covenants require us, among other
things, to do the following:
- pay principal of and interest on the notes;
- make SEC and other regulatory filings;
- pay taxes;
- maintain minimum levels of insurance;
- comply with applicable laws;
- deliver to the noteholders annual compliance certificates and notice of
any events of default;
- achieve minimum revenue and operating income thresholds; and
- control maximum operating losses.
Negative Covenants. The negative covenants restrict us and any subsidiaries
from, among other things, taking the following actions without the consent of
the noteholders:
- incurring or assuming additional indebtedness in excess of $25.0 million;
- declaring dividends, purchasing or redeeming capital stock or otherwise
incurring any liability to make any other payment or distribution of cash
or other property;
- selling assets or properties outside the ordinary course of business in
excess of $3.0 million in any calendar year;
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<PAGE> 165
- liquidating the company;
- entering into transactions with affiliates outside the ordinary course of
business;
- transferring any voting stock of any subsidiary outside the company and
its affiliates;
- creating or incurring any liens on its properties or assets other than
certain permitted liens;
- acquiring or investing in any assets or business of any person for cash
in excess of 20% of the sum of available cash and cash equivalents;
- acquiring or investing in any assets or business of any person other than
asset acquisitions in the ordinary course of business, intercompany
acquisitions or Board-approved acquisitions where the sole consideration
is our capital stock; and
- engaging in any business other than one that is the same or reasonably
related or complementary to our existing businesses.
If we fail to comply with these covenants within the prescribed time
periods, an event of default will result, triggering remedies in favor of the
noteholders. Among these remedies is the acceleration of the maturity of the
notes at a premium of 115% of the sum of the face value of the notes, accrued
but unpaid interest on the notes and unpaid delay or default amounts on the
notes.
Optional Redemption. We have the right after March 15, 2002, provided
certain conditions are satisfied, to redeem all (but not less than all) of the
notes for cash equal to 100% of the face amount of the notes plus accrued and
unpaid interest on the notes and any payments on the notes. We will only be able
to redeem the notes if the following apply:
- our common stock has traded, for at least 30 consecutive trading days, at
a closing price of $10.830 (as adjusted for any stock splits and related
adjustments);
- the noteholders have been able to sell their shares under an effective
registration statement on each of those 30 trading days;
- the noteholders have been able to convert all their notes under the rules
of the applicable securities exchange on which our common stock is
traded; and
- we have the financial resources and ability to repurchase all the notes.
Voting Rights. The holders of the notes have no voting rights. Upon
conversion of any notes, the shares of common stock issued thereunder will have
the same voting rights as holders of our outstanding common stock.
Right Of First Refusal. If we propose to issue any additional equity
securities, convertible securities or equity credit lines, the noteholders have
a right to be notified of these future offerings and have a right of first
refusal to acquire their pro rata interest of the future offering. This right of
first refusal terminates 180 days after the effectiveness of the registration
statement we file to register the common stock underlying the notes and
warrants. This right of first refusal does not apply to: (1) transactions (the
primary purpose of which is not to raise equity capital) involving issuing our
securities as consideration in mergers, in connection with strategic partners or
as consideration for the acquisition of a business, product or other assets; (2)
the issuance of common stock in an underwritten public offering at not less than
90% of the prevailing market price; (3) the issuance of common stock upon
conversion or exercise of outstanding options and warrants; or (4) the issuance
of options or common stock to employees, directors or bona fide consultants if
approved by a majority of our independent, outside directors.
DESCRIPTION OF THE WARRANTS
In connection with the sale of the notes, we issued warrants to purchase up
to 2,805,750 shares of our common stock. These warrants expire on September 15,
2005 and have an exercise price of $8.00 per
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<PAGE> 166
share. If all of these warrants were exercised at $8.00, we would receive
proceeds of approximately $22.4 million.
Adjustments For Stock Splits And Diluting Issuances. The number of shares
issuable upon exercise of the warrants will be adjusted for stock splits,
combinations other distributions and other similar events. In addition, the
exercise price of the warrants will also be adjusted on a weighted average basis
in the event we issue additional securities below the then applicable conversion
price or the then market price of our stock. There will be no anti-dilution
adjustment if (1) we issue options or warrants to employees, directors or bona
fide consultants, (2) we issue shares in strategic corporate alliances not
undertaken principally for financing purposes, or (3) we issue shares in
acquisitions.
Voting Rights. The holders of the warrants have no voting rights. Upon
exercise of any warrants, the shares of common stock issued thereunder will have
the same voting rights as holders of our outstanding common stock.
REGISTRATION RIGHTS OF COMMON STOCK UNDERLYING NOTES AND WARRANTS
Registration Rights. We have amended our investors' rights agreement to
provide registration rights to the noteholders. In particular, the noteholders
have piggyback rights on our registration statements (subject to underwriter
cutbacks). We have also agreed to file a registration statement on Form S-3 with
the Securities and Exchange Commission within 35 days of September 15, 2000 to
register for re-sale by the noteholders the common stock that is issuable upon
conversion of the notes and exercise of the warrants.
Interfering Events: Maintaining Liquidity For Noteholders. Subject to some
limitations, we agreed to use our best efforts to maintain the liquidity of the
common stock underlying the notes and warrants. In particular, we agreed to the
following: (1) register for re-sale by the noteholders the common stock issuable
upon conversion of the notes and exercise of the warrants and have the
registration statement declared effective by January 15, 2001; (2) list the
common stock underlying the notes and warrants with the Nasdaq National Market
and avoid any delisting of the shares; (3) avoid the suspension of trading in
our common stock in excess of 45 days in any 12 months; and (4) maintain enough
authorized shares of common stock to enable the conversion of the notes and the
exercise of the warrants. The failure to accomplish any of these four events
would be deemed an "interfering event."
Monthly Delay Payments And Redemption At A Premium. If an interfering event
occurs (as described above) and is continuing, we may be required to pay to the
noteholders a monthly delay payment equal to one percent (1%) of the face amount
of the notes, all accrued and unpaid interest on the notes and all unpaid
penalties payable on the notes, for each 30 day period (or portion thereof) of
the interfering event. In addition, under some circumstances, we may be required
to redeem the notes if the interfering event continues at a premium redemption
price equal to the greater of (1) 115% of the sum of the face value of the
notes, accrued but unpaid interest on the notes and unpaid delay or default
amounts on the notes, or (2) the value the noteholder would be entitled to
receive upon conversion of the note into common stock at the applicable
conversion price followed by the sale of the common stock at the greater market
value at either the closing of the redemption or the event triggering the right
to redemption.
CHANGE OF CONTROL
In the event of a change of control, the noteholders have the option to (1)
convert their notes to common stock and receive their pro rata distribution in
connection with the change of control or (2) require a prepayment of the debt at
the premium redemption price described above under "Registration Rights of
Common Stock Underlying Notes and Warrants -- Monthly Delay Payments and
Redemption at a Premium."
A "change of control" is defined to mean: (1) the acquisition of beneficial
ownership of shares representing a majority of the voting power; (2) any
transaction or series of related transactions resulting in the exchange or
conversion of outstanding shares for securities which represent less than 51% of
the voting securities of the surviving entity; (3) any transaction or series of
related transactions in which our
159
<PAGE> 167
stockholders immediately prior to the transaction own less than 51% of the
voting power of the surviving entity; (4) the sale of all or substantially all
of our assets; or (5) the occupation of a majority of the seats on our Board of
Directors by persons who were neither nominated by the Board of Directors nor
appointed by directors so nominated.
RELATED PARTIES
Entities affiliated with two of our members of our board of directors
acquired notes in the private placement: (1) Barry M. Weinman is affiliated with
Media Technology Ventures and its affiliates which acquired $1.0 million face
amount of notes and warrants to acquire 36,250 shares of our common stock; and
(2) James G. Shennan, Jr. is affiliated with The Shennan 1995 Trust which
acquired $200,000 face amount of notes and warrants to acquire 7,250 shares of
our common stock.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF THE
ISSUANCE OF COMMON STOCK UPON CONVERSION OF THE NOTES AND UPON EXERCISE OF THE
RELATED WARRANTS.
160
<PAGE> 168
INDEPENDENT ACCOUNTANTS
It is expected that representatives of PricewaterhouseCoopers LLP will be
present at the special meeting of the stockholders of Quokka and to respond to
appropriate questions of stockholders and to make a statement if they so desire.
It is expected that representatives of Deloitte & Touche LLP will be present at
the special meeting of the stockholders of Total Sports and to respond to
appropriate questions of stockholders and to make a statement if they so desire.
LEGAL MATTERS
The validity of the Quokka common stock to be issued in the merger will be
passed upon for Quokka by Cooley Godward LLP, San Francisco, California. Certain
tax consequences of the merger will be passed upon for Quokka by Cooley Godward
LLP and for Total Sports by Clifford Chance Rogers & Wells LLP, New York, New
York.
EXPERTS
The consolidated financial statements of Quokka Sports, Inc. as of December
31, 1999 and 1998 and for each of the three years in the period ended December
31, 1999 included in this joint proxy statement/ prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of Golf.com, L.L.C. as of December 31, 1999 and
for the year in the period ended December 31, 1999 included in this registration
statement have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The consolidated financial statements of Total Sports Inc. as of December
31, 1999 and 1998, and for the two years ended December 31, 1999 and 1998, and
for the period from February 20, 1997 (date of inception) to December 31, 1997,
included in this prospectus and the related financial statement schedule
included elsewhere in the registration statement have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein
and elsewhere in the registration statement. Such reports express an unqualified
opinion and include explanatory paragraphs referring to the uncertainty of Total
Sports Inc.'s ability to continue as a going concern and the restatement
described in Note 19, and have been so included in reliance upon the reports of
such firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Quokka files annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any reports, statements or other information that Quokka files at the
Securities and Exchange Commission's public reference rooms in Washington, D.C.,
New York, New York and Chicago, Illinois. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information on the public
reference rooms. Quokka's public filings also are available to the public from
commercial document retrieval services and at the Internet web site maintained
by the Securities and Exchange Commission at http://www.sec.gov. Reports, proxy
statements and other information concerning Quokka also may be inspected at the
offices of the National Association of Securities Dealers, Inc., Listing
Section, 1735 K Street, Washington, D.C. 20006.
Quokka has filed a Form S-4 registration statement to register with the
Securities and Exchange Commission the offering and sale of the shares of Quokka
common stock to be issued to Total Sports stockholders in the merger. This joint
proxy statement/prospectus is a part of the registration statement and
constitutes a prospectus of Quokka and a proxy statement of Total Sports for the
special meeting.
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<PAGE> 169
As allowed by Securities and Exchange Commission rules, this joint proxy
statement/prospectus does not contain all the information that stockholders can
find in the registration statement or the exhibits to the registration
statement.
The Securities and Exchange Commission allows Quokka and Total Sports to
incorporate information into this joint proxy statement/prospectus "by
reference," which means that the companies can disclose important information to
you by referring you to another document filed separately with the Securities
and Exchange Commission. This joint proxy statement/prospectus incorporates by
reference the documents set forth below that Quokka has previously filed with
the Securities and Exchange Commission. These documents contain important
information about Quokka and its financial conditions. The information
incorporated by reference is deemed to be part of this joint proxy
statement/prospectus, except for any information superseded by information
contained directly in this joint proxy statement/prospectus.
QUOKKA FILINGS (FILE NO. 000-26311):
Quokka hereby incorporates by reference additional documents that it may
file with the Securities and Exchange Commission between the date of this joint
proxy statement/prospectus and the date of the special meetings. These include
periodic reports, such as annual reports on Form 10-K, quarterly reports on Form
10-Q and current reports on Form 8-K, as well as proxy statements.
Quokka has supplied all information contained or incorporated by reference
in this joint proxy statement/prospectus relating to Quokka. Total Sports has
supplied all information relating to Total Sports.
If you are a Quokka stockholder, you may have received some of the
documents incorporated by reference. You also may obtain any of these documents
from Quokka or the Securities and Exchange Commission or the Securities and
Exchange Commission's Internet web site described above. Stockholders may
obtain, without charge, documents incorporated by reference in this proxy
statement/prospectus, except exhibits, unless those exhibits are specifically
incorporated by reference into this joint proxy statement/prospectus. Requests
for these documents should be made in writing or by telephone from the
appropriate company at the following addresses:
QUOKKA SPORTS, INC.
525 Brannan Street, Ground Floor
San Francisco, California 94107
Attention: Investor Relations
Tel: (415) 908-3800
TOTAL SPORTS INC.
234 Fayetteville Street
Raleigh, North Carolina 27601
Attention: Investor Relations
Tel: (919) 573-8020
IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO BY OCTOBER 31, 2000 TO
RECEIVE THEM BEFORE THE SPECIAL MEETING. If you request any incorporated
documents, the appropriate company will mail them to you by first-class mail, or
others equally prompt means, within one business day of receipt of your request.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS JOINT PROXY STATEMENT/PROSPECTUS TO VOTE YOUR SHARES AT THE
SPECIAL MEETING. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION
THAT DIFFERS FROM THAT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS. THIS
PROXY STATEMENT/PROSPECTUS IS DATED OCTOBER 11, 2000. YOU SHOULD NOT ASSUME THAT
THE INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE
AS OF ANY DATE OTHER THAN THAT DATE, AND NEITHER THE MAILING OF THIS PROXY
STATEMENT/PROSPECTUS TO STOCKHOLDERS NOR THE ISSUANCE OF SHARES OF QUOKKA COMMON
STOCK IN THE MERGER SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
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<PAGE> 170
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUOKKA SPORTS, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements.................. F-2
Report of Independent Accountants........................... F-3
Consolidated Balance Sheets................................. F-4
Consolidated Statements of Operations....................... F-5
Consolidated Statements of Stockholders' Equity............. F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
GOLF.COM, L.L.C.
Index to Consolidated Financial Statements.................. F-23
Report of Independent Accountants........................... F-24
Balance Sheets.............................................. F-25
Statements of Operations.................................... F-26
Statements of Members' Equity............................... F-27
Statements of Cash Flows.................................... F-28
Notes to Financial Statements............................... F-29
TOTAL SPORTS INC. AND SUBSIDIARIES
Index to Financial Statements............................... F-35
Independent Auditors' Report................................ F-36
Consolidated Balance Sheets................................. F-37
Consolidated Statements of Operations....................... F-38
Consolidated Statements of Stockholders' Equity
(Deficiency).............................................. F-39
Consolidated Statements of Cash Flows....................... F-41
Notes to Consolidated Financial Statements.................. F-43
</TABLE>
F-1
<PAGE> 171
QUOKKA SPORTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-3
Consolidated Balance Sheets................................. F-4
Consolidated Statements of Operations....................... F-5
Consolidated Statements of Stockholders' Equity............. F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-2
<PAGE> 172
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Quokka Sports, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Quokka Sports, Inc. and its subsidiaries, at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
January 19, 2000, except for note 14,
which is as of March 1, 2000 and
the convertible debt financing in
note 1, which is as of September 15, 2000
F-3
<PAGE> 173
QUOKKA SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 23,994 $ 3,855 $ 4,269
Restricted cash........................................... -- 3,200 3,740
Investments in marketable securities...................... -- 61,702 15,285
Accounts receivable, net.................................. 1,151 6,067 11,285
Inventory, net............................................ -- -- 249
Acquired programming and distribution rights.............. -- 12,042 10,239
Prepaid and other expenses................................ 331 1,823 4,535
-------- -------- ---------
Total current assets.................................... 25,476 88,689 49,602
Property and equipment, net................................. 2,736 10,551 14,470
Other assets................................................ -- 640 425
Goodwill.................................................... -- -- 30,529
-------- -------- ---------
Total assets............................................ $ 28,212 $ 99,880 $ 95,026
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 289 $ 2,427 $ 3,715
Accrued expenses.......................................... 1,199 3,797 11,599
Current portion of long-term debt and capitalized lease
obligations............................................. 290 6,041 6,343
Deferred revenues......................................... 480 3,864 4,733
-------- -------- ---------
Total current liabilities............................... 2,258 16,129 26,390
-------- -------- ---------
Long term debt and capitalized lease obligations, net of
current portion........................................... 501 11,493 8,956
-------- -------- ---------
Stockholders' equity
Preferred stock, $0.0001 par value; authorized: 10,000,000
at December 31, 1999, issued and outstanding: none at
December 31, 1999; authorized: 26,700,000 at December 31,
1998; issued and outstanding: 23,736,016 at December 31,
1998; authorized: 10,000,000 at June 30, 2000; issued and
outstanding: none at June 30, 2000........................ 2 -- --
Common stock, voting, $0.0001 par value; authorized
120,000,000 at December 31, 1999 and 45,400,000 at
December 31, 1998; issued and outstanding: 44,041,376 at
December 31, 1999 and 9,400,365 at December 31, 1998;
authorized 120,000,000 at June 30, 2000; issued and
outstanding: 46,068,743 at June 30, 2000 and non-voting,
$0.0001 par value; authorized: 300,000 at December 31,
1999 and 1998 and June 30, 2000; issued and outstanding:
300,000 at December 31, 1999 and 1998 and June 30, 2000... 1 4 5
December 31, 1999 and 45,400,000 at December 31, 1998;
issued and outstanding:
Additional paid-in capital.............................. 41,019 137,460 164,644
Warrants and other...................................... 477 7,831 7,831
Treasury stock, at cost 23,244 shares at December 31,
1999 and at June 30, 2000 and none at December 31,
1998.................................................. -- (107) (107)
Accumulated deficit......................................... (16,046) (72,930) (112,693)
-------- -------- ---------
Total stockholders' equity............................ 25,453 72,258 59,680
-------- -------- ---------
Total liabilities and stockholders' equity......... $ 28,212 $ 99,880 $ 95,026
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 174
QUOKKA SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------ --------------------------
1997 1998 1999 1999 2000
------- ------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................. $ 4,000 $ 8,635 $ 13,070 $ 3,449 $ 22,097
Cost of revenues
Production and other costs......... 5,130 7,780 20,070 6,342 17,278
Amortization of programming and
distribution rights............. -- -- 3,441 2,087 3,618
------- ------- -------- -------- --------
Total cost of revenues........ 5,130 7,780 23,511 8,429 20,896
------- ------- -------- -------- --------
Gross profit/(loss)........ (1,130) 855 (10,441) (4,980) 1,201
Operating expenses
Research and engineering........... 1,030 4,480 13,094 6,654 11,425
Sales and marketing................ 816 2,519 19,525 8,610 15,642
General and administrative......... 1,827 3,184 11,069 4,398 7,279
Restructuring costs................ -- -- -- -- 588
Depreciation....................... 68 530 4,217 1,150 3,426
Amortization of goodwill........... -- -- -- -- 4,247
------- ------- -------- -------- --------
Total operating expenses...... 3,741 10,713 47,905 20,812 42,607
------- ------- -------- -------- --------
Loss from operations....... (4,871) (9,858) (58,346) (25,792) (41,406)
Losses of associated venture......... -- -- 2,176 1,067 --
Minority interest in net loss of
consolidated subsidiary............ -- -- (1,936) (645) (1,291)
Interest income/(expense), net....... (71) 320 1,702 212 352
------- ------- -------- -------- --------
Net loss................... $(4,942) $(9,538) $(56,884) $(26,002) $(39,763)
======= ======= ======== ======== ========
Net loss per Share:
Basic and diluted.................. $ (.73) $ (.99) $ (1.45) $ (2.66) $ (.88)
Weighted average shares
outstanding -- basic and
diluted......................... 6,792 9,656 39,366 9,788 45,019
======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 175
QUOKKA SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
--------------- ---------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997.................................... -- $-- -- $-- -- $--
Issuance of common stock to founder for cash net of issuance
costs......................................................
Issuance of common stock to founder for cash net of issuance
costs of $31,401...........................................
Issuance of common stock for cash at $.50 per share of
issuance costs of $17,591..................................
Issuance of warrants in connection with promissory notes....
Issuance of Series A Preferred Stock for cash of $0.68 per
share, net of issuance costs of $18,141.................... 7,721 1
Net Loss....................................................
------ --- ------- --- ------ ---
Balance, December 31, 1997.................................. 7,721 1 -- -- -- --
Issuance of Series B Preferred Stock for cash of $1.50 per
share, net of issuance costs of $75,543.................... 10,737 1
Issuance of warrants........................................
Issuance of options for services rendered...................
Issuance of options for services rendered...................
Exercise of voting common stock options to employees for
cash of $0.50 per share....................................
Issuance of Series C Preferred stock for cash of $3.25 per
share, net of issuance costs of $36,031.................... 4,939 0
Issuance of warrants under joint development agreement......
Exercise of warrants........................................ 145 0 170 0 24 0
Net Loss....................................................
------ --- ------- --- ------ ---
Balance as of December 31, 1998............................. 7,866 1 10,907 1 4,963 0
Exercise of voting common stock options to employees for
cash of $0.50 per share....................................
Exercise of voting common stock warrants at $.50 per
share......................................................
Purchase of Treasury Stock..................................
Issuance of common stock for services rendered..............
Issuance of warrants for Subordinated-Debt agreement........
Issuance of warrants for CART Rights agreement..............
Issuance of warrants for Media One Broadband agreement......
Issuance of warrants for Excite agreement...................
Issuance of warrants for NBC JV agreement...................
Issuance of options for services rendered...................
Issuance of Series D Preferred Shares at $9.00 per share
less issuance cost accrual of $790,344.....................
Exercise of warrants........................................ 100 0 148 0 48 0
Initial Public Offering net of issuance costs of
$5,560,611.................................................
Conversion of Preferred Stock to Common Stock............... (7,966) (1) (11,055) (1) (5,011) (0)
Cumulative Translation Adjustment...........................
Unrealized gain/(loss) on available-for-sale securities.....
Net Loss....................................................
------ --- ------- --- ------ ---
Balance as of December 31, 1999............................. -- -- -- -- -- --
Exercise of voting common stock options to employees for
cash of $0.50 per share (unaudited)........................
Issuance of options for services rendered (unaudited).......
Issuance of stock for net assets acquired (unaudited).......
Cumulative Translation Adjustment (unaudited)...............
Unrealized gain/(loss) on available-for-sale securities
(unaudited)................................................
Net Loss (unaudited)........................................
------ --- ------- --- ------ ---
Balance as of June 30, 2000 (unaudited)..................... -- $-- -- $-- -- $--
====== === ======= === ====== ===
<CAPTION>
SERIES D
CONVERTIBLE VOTING NON-VOTING
PREFERRED STOCK COMMON STOCK COMMON STOCK
--------------- --------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997.................................... -- $-- 3,800 $ 0 -- $--
Issuance of common stock to founder for cash net of issuance
costs...................................................... 200 0
Issuance of common stock to founder for cash net of issuance
costs of $31,401........................................... 1,900 0 100 0
Issuance of common stock for cash at $.50 per share of
issuance costs of $17,591.................................. 3,652 0
Issuance of warrants in connection with promissory notes....
Issuance of Series A Preferred Stock for cash of $0.68 per
share, net of issuance costs of $18,141....................
Net Loss....................................................
------ --- ------ --- ------ ---
Balance, December 31, 1997.................................. -- -- 9,352 1 300 0
Issuance of Series B Preferred Stock for cash of $1.50 per
share, net of issuance costs of $75,543....................
Issuance of warrants........................................
Issuance of options for services rendered...................
Issuance of options for services rendered...................
Exercise of voting common stock options to employees for
cash of $0.50 per share.................................... 48 0
Issuance of Series C Preferred stock for cash of $3.25 per
share, net of issuance costs of $36,031....................
Issuance of warrants under joint development agreement......
Exercise of warrants........................................
Net Loss....................................................
------ --- ------ --- ------ ---
Balance as of December 31, 1998............................. -- -- 9,400 1 300 0
Exercise of voting common stock options to employees for
cash of $0.50 per share.................................... 600 0
Exercise of voting common stock warrants at $.50 per
share...................................................... 163 0
Purchase of Treasury Stock.................................. (12) (0)
Issuance of common stock for services rendered.............. 3 0
Issuance of warrants for Subordinated-Debt agreement........
Issuance of warrants for CART Rights agreement..............
Issuance of warrants for Media One Broadband agreement......
Issuance of warrants for Excite agreement...................
Issuance of warrants for NBC JV agreement...................
Issuance of options for services rendered...................
Issuance of Series D Preferred Shares at $9.00 per share
less issuance cost accrual of $790,344..................... 4,520 0
Exercise of warrants........................................
Initial Public Offering net of issuance costs of
$5,560,611................................................. 5,000 1
Conversion of Preferred Stock to Common Stock............... (4,520) (0) 28,552 3
Cumulative Translation Adjustment...........................
Unrealized gain/(loss) on available-for-sale securities.....
Net Loss....................................................
------ --- ------ --- ------ ---
Balance as of December 31, 1999............................. -- -- 43,706 5 300 0
Exercise of voting common stock options to employees for
cash of $0.50 per share (unaudited)........................ 261 0
Issuance of options for services rendered (unaudited).......
Issuance of stock for net assets acquired (unaudited)....... 0 0
Cumulative Translation Adjustment (unaudited)...............
Unrealized gain/(loss) on available-for-sale securities
(unaudited)................................................
Net Loss (unaudited)........................................
------ --- ------ --- ------ ---
Balance as of June 30, 2000 (unaudited)..................... -- $-- 43,967 $ 5 300 $ 0
====== === ====== === ====== ===
<CAPTION>
TOTAL
ADDITIONAL WARRANTS STOCKHOLDERS'
PAID-IN TREASURY AND ACCUMULATED EQUITY/
CAPITAL STOCK OTHER DEFICIT (DEFICIT)
---------- -------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997.................................... $ -- $ -- $ -- $ (1,566) $ (1,566)
Issuance of common stock to founder for cash net of issuance
costs...................................................... 100 100
Issuance of common stock to founder for cash net of issuance
costs of $31,401........................................... 968 969
Issuance of common stock for cash at $.50 per share of
issuance costs of $17,591.................................. 1,808 1,808
Issuance of warrants in connection with promissory notes.... 62 62
Issuance of Series A Preferred Stock for cash of $0.68 per
share, net of issuance costs of $18,141.................... 5,231 5,232
Net Loss.................................................... (4,942) (4,942)
-------- ----- ------ --------- --------
Balance, December 31, 1997.................................. 8,107 -- 62 (6,508) 1,663
Issuance of Series B Preferred Stock for cash of $1.50 per
share, net of issuance costs of $75,543.................... 15,988 15,989
Issuance of warrants........................................ 589 589
Issuance of options for services rendered................... 5 5
Issuance of options for services rendered................... 30 30
Exercise of voting common stock options to employees for
cash of $0.50 per share.................................... 24 24
Issuance of Series C Preferred stock for cash of $3.25 per
share, net of issuance costs of $36,031.................... 16,015 16,015
Issuance of warrants under joint development agreement...... 264 264
Exercise of warrants........................................ 850 (438) 412
Net Loss.................................................... (9,538) (9,538)
-------- ----- ------ --------- --------
Balance as of December 31, 1998............................. 41,019 -- 477 (16,046) 25,453
Exercise of voting common stock options to employees for
cash of $0.50 per share.................................... 850 850
Exercise of voting common stock warrants at $.50 per
share...................................................... 143 (62) 81
Purchase of Treasury Stock.................................. (107) (107)
Issuance of common stock for services rendered.............. 10 10
Issuance of warrants for Subordinated-Debt agreement........ 572 572
Issuance of warrants for CART Rights agreement.............. 401 401
Issuance of warrants for Media One Broadband agreement...... 1,154 1,154
Issuance of warrants for Excite agreement................... 702 702
Issuance of warrants for NBC JV agreement................... 5,002 5,002
Issuance of options for services rendered................... 345 345
Issuance of Series D Preferred Shares at $9.00 per share
less issuance cost accrual of $790,344..................... 39,959 39,959
Exercise of warrants........................................ 848 (415) 433
Initial Public Offering net of issuance costs of
$5,560,611................................................. 54,396 54,397
Conversion of Preferred Stock to Common Stock............... --
Cumulative Translation Adjustment........................... (52) (52)
Unrealized gain/(loss) on available-for-sale securities..... (58) (58)
Net Loss.................................................... (56,884) (56,884)
-------- ----- ------ --------- --------
Balance as of December 31, 1999............................. 137,460 (107) 7,831 (72,930) 72,258
Exercise of voting common stock options to employees for
cash of $0.50 per share (unaudited)........................ 2,587 2,587
Issuance of options for services rendered (unaudited)....... 2,222 2,222
Issuance of stock for net assets acquired (unaudited)....... 22,389 22,390
Cumulative Translation Adjustment (unaudited)............... (26) (26)
Unrealized gain/(loss) on available-for-sale securities
(unaudited)................................................ 12 12
Net Loss (unaudited)........................................ (39,763) (39,763)
-------- ----- ------ --------- --------
Balance as of June 30, 2000 (unaudited)..................... $164,644 $(107) $7,831 $(112,693) $ 59,680
======== ===== ====== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 176
QUOKKA SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------- -------------------------
1997 1998 1999 1999 2000
------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................... $(4,942) $ (9,538) $(56,884) $(26,002) $(39,763)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on disposal of fixed assets.............. -- -- -- -- 171
Depreciation and amortization of property and
equipment................................... 68 530 4,217 1,150 3,426
Amortization of acquired programming and
distribution rights......................... -- -- 3,441 2,087 3,618
Amortization of goodwill...................... -- -- -- -- 4,247
Minority interest amortization of programming
rights...................................... -- -- (1,936) (645) (1,291)
Non-cash compensation-related charges and
other....................................... 106 450 1,433 1,623 2,222
Changes in operating assets and liabilities:
Inventory................................... -- -- -- -- 754
Accounts receivable......................... (76) (1,074) (4,916) (1,740) (4,633)
Acquired rights............................. -- -- (200) (675) (525)
Prepaid expenses and other expenses......... (199) (85) (920) (1,148) (2,604)
Other assets................................ -- -- (640) -- 236
Accounts payable............................ 410 (433) 2,138 2,389 (5,777)
Accrued expenses............................ (1) 1,117 2,598 1,718 5,017
Deferred revenues........................... 781 (1,826) 3,385 2,397 869
------- -------- -------- -------- --------
Net cash used in operating activities..... (3,853) (10,859) (48,286) (18,846) (34,033)
------- -------- -------- -------- --------
Cash flows from investing activities:
Increase in restricted cash................... -- -- -- -- (540)
Net sale/(purchases) of marketable
securities.................................. -- -- (64,902) -- 46,417
Business acquisitions, net of cash acquired... -- -- -- -- 130
Purchase of property and equipment............ (295) (2,723) (9,310) (4,131) (6,457)
------- -------- -------- -------- --------
Net cash used in investing activities..... (295) (2,723) (74,212) (4,131) 39,550
------- -------- -------- -------- --------
Cash flows from financing activities:
Proceeds from long term financing
arrangements................................ -- 750 8,700 -- --
Proceeds from bridge loan..................... 532 -- -- -- --
Payments on notes, long-term capital leases
and financing arrangements.................. -- (79) (2,322) (555) (6,776)
Proceeds from the issuance of common stock,
net of issuance cost........................ 2,877 24 56,167 292 1,673
Purchase of treasury stock.................... -- -- (107) (95) --
Proceeds from the issuance of preferred stock,
net of issuance cost........................ 4,700 32,854 39,920 39,920 --
------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities............................. 8,109 33,550 102,358 39,562 (5,103)
------- -------- -------- -------- --------
Net increase/(decrease) in cash and cash
equivalents................................... 3,961 19,968 (20,139) 16,586 414
Cash and cash equivalents, beginning of
period........................................ 65 4,027 23,994 23,994 3,855
------- -------- -------- -------- --------
Cash and cash equivalents, end of period........ $ 4,027 $ 23,994 $ 3,855 $ 40,580 $ 4,269
======= ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 177
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
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. Quokka operates as a single segment business.
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.
CONVERTIBLE DEBT FINANCING
On September 15, 2000, the Company closed a round of convertible promissory
notes and warrants for a total consideration of $77.4 million. (See note 15 for
further discussion.)
The Company was not in compliance with certain covenants related to its $2
million equipment financing loan at June 30, 2000, but has received the
appropriate waivers for the six months ended June 30, 2000 and through September
29, 2000.
Over the past few years, the Company has been successful in completing
several rounds of financing. During the same period, the Company has incurred
substantial losses and negative cash flows from operations in every fiscal
period since inception. For the year ended December 31, 1999, the Company
incurred a loss from operations of approximately $58.3 million and negative cash
flows from operations of $48.3 million. For the six months ended June 30, 2000,
the Company incurred a loss from operations of approximately $41.4 million and
negative cash flows from operations of $34.0 million. As of June 30, 2000, the
Company had an accumulated deficit of approximately $112.7 million. Management
expects operating losses and negative cash flows to continue for the foreseeable
future because of additional costs and expenses related to brand development,
marketing and other promotional activities, continued development of the
Company's web site and information technology infrastructure, expansion of
product offerings and integration of recent acquisitions. Certain of these costs
could be reduced if working capital decreased significantly. Failure to generate
sufficient revenues, raise additional capital or reduce certain discretionary
spending could have a material adverse effect on the Company's ability to
continue as a going concern and to achieve its intended business objectives.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying 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.
CASH AND CASH EQUIVALENTS
Quokka includes in cash and cash equivalents all highly liquid investments
that mature within three months of their purchase date. Cash equivalents consist
primarily of money market funds.
F-8
<PAGE> 178
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARKETABLE SECURITIES
Marketable securities consist of municipal bonds and notes, corporate
bonds, commercial paper and money market funds. Marketable securities are stated
at market value as determined by the most recently traded price of each security
at the balance sheet date. All marketable securities are defined as available-
for-sale securities in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Any unrealized gains or losses are excluded from earnings
and are reported as a separate component of stockholders' equity until realized.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated on a
straight-line basis over the estimated useful lives of the related assets that
range from three to five years. Leased assets are amortized on a straight-line
basis over the lesser of the estimated useful life or the lease term.
Maintenance and repairs are charged to operations as incurred. When assets are
retired or otherwise disposed of, the cost and accumulated depreciation are
removed from the accounts, and any resulting gain or loss is reflected in
operations in the period realized.
INCOME TAXES
Income taxes are accounted for in accordance with SFAS No. 109, "Accounting
for Income Taxes", which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statements and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
ACQUIRED MEDIA RIGHTS
Quokka and its subsidiaries and joint venture account for acquired
programming rights pursuant to 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.
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.
FOREIGN CURRENCY TRANSLATION
The functional currency of Quokka's subsidiaries is the local currency.
Accordingly, Quokka applies the current rate method to translate the
subsidiaries' financial statements into United States dollars. 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 non-owner sources. Examples of items to
be included in comprehensive income, which are excluded
F-9
<PAGE> 179
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
from net income, include foreign currency translation adjustments and unrealized
gains/losses on available-for-sale securities. Translation adjustments are
deemed immaterial and included as a component of additional paid in capital in
the accompanying financial statements.
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 recognizes 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.
COST OF REVENUES
Cost of revenues consists primarily of production costs, amortization of
acquired programming and distribution rights and other costs related to
e-commerce revenue including product fulfillment and inbound and outbound
shipping costs. 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of Quokka's financial instruments, including
cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and other liabilities, approximate fair value due to their short
maturities. Based upon borrowing rates currently available for Quokka for loans
with similar terms, the carrying value of capital lease obligations approximates
fair value.
BUSINESS RISK AND CONCENTRATION OF CREDIT RISK
Quokka operates in the Internet industry, which are rapidly evolving and
intensely competitive. Quokka potentially competes with other Internet
companies, large, established media companies and sports marketing
organizations.
Quokka performs ongoing credit evaluations, does not require collateral and
does not currently maintain any reserves for potential credit losses. For the
year ended December 31, 1997, three customers accounted for 52%, 21% and 15% of
all revenues generated by Quokka. At December 31, 1997, there were no
receivables from these customers.
For the year ended December 31, 1998, three customers accounted for 52%,
16% and 12%, respectively, of all revenues generated by Quokka. At December 31,
1998, 23% of the outstanding accounts receivable was attributable to the
smallest of the three largest customers. One additional customer accounted for
another 65% of total outstanding accounts receivable. The remaining accounts
receivable balance at December 31, 1998 was attributable to three additional
customers.
F-10
<PAGE> 180
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the year ended December 31, 1999, four customers accounted for 27%,
23%, 14% and 15%, respectively, of all revenues generated by Quokka. At December
31, 1999, four customers accounted for 43%, 15%, 14% and 11%, respectively, of
total outstanding accounts receivable.
For the six months ended June 30, 2000, two customers accounted for 24% and
14%, respectively, of all revenues generated by Quokka. At June 30, 2000, three
customers accounted for 23%, 16% and 13%, respectively, of total outstanding
accounts receivable.
RESEARCH AND ENGINEERING
Research and engineering expenses include personnel costs, costs incurred
to improve and develop the "Quokka Sports Platform," broadband applications and
costs associated with network operations. Research and engineering costs are
expensed as incurred.
ADVERTISING
Advertising is expensed as incurred. Advertising expenses which are
included in sales and marketing expenses for the years then ended were $62,000
in 1997, $554,000 in 1998 and $7,727,000 in 1999. Advertising expenses for the
six months ended June 30, 2000 were $3,583,000.
STOCK-BASED COMPENSATION
In 1997, Quokka adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-based Compensation." Quokka has elected to continue
accounting for stock-based compensation issued to the employees using Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and, accordingly, pro forma disclosures required under SFAS No. 123
have been presented (See Note 10). Under APB No. 25, compensation expense is
based on the difference, if any, on the date of the grant, between the fair
value of Quokka's common stock and the exercise price. Additionally, pursuant to
SFAS No. 123, stock issued to non-employees is accounted for at the fair value
of the equity instruments issued, or at the fair value of the consideration
received, whichever is more reliably measurable.
RECLASSIFICATION
Quokka has reclassified the presentation of certain prior year information
to conform to the current year presentation. These changes had no effect on
previously reported financial position or results of operations.
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.
F-11
<PAGE> 181
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the computation of historical basic and
diluted net loss per share for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------- -------------------
1997 1998 1999 1999 2000
------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss available to common stockholders............. $(4,942) $(9,538) $(56,884) $(26,002) $(39,764)
Denominator:
Weighted average shares............................... 6,792 9,657 39,387 9,865 45,039
Weighted average unvested common shares subject to
repurchase agreements............................... -- (2) (21) (77) (20)
------- ------- -------- -------- --------
Denominator for basic and diluted calculation......... 6,792 9,655 39,366 9,788 45,019
======= ======= ======== ======== ========
Net loss per share:
Basic and diluted..................................... $ (0.73) $ (0.99) $ (1.45) $ (2.66) $ (0.88)
Anti-dilutive securities including options, warrants and
preferred stock not included in historical net loss
per share calculations................................ 1,643 17,755 11,840 34,082 13,626
======= ======= ======== ======== ========
</TABLE>
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of June 30, 2000 and for the six
months ended June 30, 2000 and 1999 are unaudited but have been prepared in
accordance with generally accepted accounting principles for interim financial
statements and the rules of the Securities and Exchange Commission and do not
include all disclosures required by generally accepted accounting principles for
annual financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
have been included. The results of operations of any interim period are not
necessarily indicative of the results of operations for the full year.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging activities. The
Statement, which is effective for the Company in 2000, requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measures those instruments at fair value. The Company is assessing the
requirements of SFAS No. 133 and the effects, if any, on the Company's financial
position, results of operations and cash flows.
In July 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137 ("SFAS No. 137"), "Accounting with
Derivative Instruments and Hedging Activities Deferral of the Effective Date of
FASB Statement No. 133," which deferred the effective date until the first
fiscal quarter ending June 30, 2000. The Company will adopt SFAS No. 133 in its
quarter ending June 30, 2000. The Company has not engaged in hedging activities
or invested in derivative instruments.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles ("GAAP") to revenue recognition in
financial statements. The adoption of SAB No. 101 did not have a material effect
on the Company's financial statements.
In April 2000, FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation -- an interpretation of APB Opinion
No. 25" ("FIN No. 44") was issued. FIN No. 44
F-12
<PAGE> 182
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
clarifies the application of APB No. 25 for only certain issues. Among other
issues, FIN No. 44 clarifies the definition of employee for purposes of applying
APB No. 25, the criteria for determining whether a plan qualifies as a
non-compensatory plan, the accounting consequences of various modifications to
the terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. FIN No. 44 is
effective July 1, 2000, but certain conclusions in this interpretation cover
specific events that occur after either December 15, 1998 or January 12, 2000.
The adoption of certain of the conclusions of FIN No. 44 covering events
occurring during the period after December 15, 1998 or January 12, 2000 did not
have a material impact on the Company's financial position and results of
operations. The Company does not expect that the adoption of the remaining
conclusions will have a material effect on the financial statements.
In January 2000, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF 99-17, "Accounting for Advertising Barter Transactions" (the
"Issue"). This Issue states that revenue and expense should be recognized at
fair value from an advertising barter transaction only if the fair value of the
advertising surrendered in the transaction is determinable within the limits of
this Issue. If the fair value of the advertising surrendered in the barter
transaction is not determinable within the limits of this Issue, the barter
transaction should be recorded based on the carrying amount of the advertising
surrendered, which likely would be zero. The adoption of this consensus did not
have a material impact on the Company's business practices.
3. MARKETABLE SECURITIES
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses and fair value of available-for-sale securities at June 30, 2000
is as follows (in thousands). There were no marketable securities as of December
31, 1998.
<TABLE>
<CAPTION>
GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED COST HOLDING GAINS HOLDING LOSSES FAIR VALUE
-------------- ---------------- ---------------- ----------
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1999
Cash and cash equivalents................. $ 428 -- -- 428
Municipal bonds and notes................. 21,372 4 -- 21,376
Corporate bonds........................... 16,010 -- (50) 15,960
Commercial paper.......................... 27,150 -- (12) 27,138
------- -- --- ------
$64,960 4 (62) 64,902
======= == === ======
</TABLE>
4. ACQUIRED RIGHTS
Acquired programming rights pertain to licensing fees paid for programming
rights related to our joint venture with NBC Olympics, Inc. for U.S. Digital
Coverage of the Olympic Games, the exclusive worldwide interactive media rights
to the FIM 500cc Road Racing Championship Grand Prix and America's Cup 2000
Yacht Race. Acquired distribution rights represent licensing fees paid for the
rights to distribute our programming on Excite@Home and Terra Networks. Acquired
programming rights to sporting events and acquired distribution rights are
amortized over their respective license periods on a straight line basis.
Amortization associated with these rights amounted to $3,441,000 for the year
ended December 31, 1999. There was no amortization expense in 1998 or 1997.
Amortization amounted to $3,618,000 and $2,087,000 for the six months ended June
30, 2000 and 1999, respectively.
F-13
<PAGE> 183
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------
1998 1999
------ -------
<S> <C> <C>
Computer, telecommunications, software and office
equipment................................................. $2,242 $ 9,096
Furniture and fixtures...................................... 356 1,129
Leasehold improvements...................................... 568 2,477
Leased equipment............................................ 75 505
Production equipment........................................ 94 2,383
------ -------
3,335 15,590
Less accumulated depreciation and amortization.............. 599 5,039
------ -------
Property and equipment, net............................... $2,736 $10,551
====== =======
</TABLE>
Accumulated amortization related to leased equipment was $38,000 and
$178,000 at December 31, 1998 and 1999, respectively. Accumulated amortization
was $262,000 at June 30, 2000. There were no significant asset disposals during
the years ended December 31, 1997, 1998 or 1999 or during the six months ended
June 30, 2000 or 1999.
6. ACCRUED LIABILITIES
Accrued liabilities are comprised of:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------
1998 1999
------ ------
<S> <C> <C>
Accrued compensation and related expenses................... $ 579 $1,184
Accrued accounts payable expenses........................... 620 1,597
Accrued hosting expense..................................... -- --
Accrued Other............................................... -- 1,016
------ ------
Total accrued liabilities................................. $1,199 $3,797
====== ======
</TABLE>
7. NOTES PAYABLE
Notes payable are summarized as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------
1998 1999
---- -------
<S> <C> <C>
Notes payable to bank (a)................................... $708 $ 458
Notes payable to bank (b)................................... -- 2,000
Notes payable to third party (c)............................ -- 5,113
Notes payable associated with acquired distribution and
programming rights (d).................................... -- 7,244
Note payable to third party (e)............................. -- 1,538
Other notes payable......................................... 83 770
---- -------
791 17,123
Less current installments................................... 290 5,921
---- -------
$501 $11,202
==== =======
</TABLE>
-------------------------
(a) Notes payable to bank represents an equipment financing loan that is secured
by furniture, fixtures and equipment. Terms of the loan calls for monthly
payments over 36 months commencing November 23, 1998. The note bears
interest at 0.75% over the prime rate as quoted by the bank
F-14
<PAGE> 184
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8.50% at December 31, 1999). The agreement also requires the Company to be
in compliance with certain financial covenants. The Company was in
compliance with its covenants as of December 31, 1999.
(b) Notes payable to bank represents an equipment financing loan that is secured
by furniture, fixtures and equipment. Terms of the loan calls for monthly
payments over 48 months commencing August 31, 1999. The note bears interest
at 0.75% over the prime rate as quoted by the bank (8.50% at December 31,
1999). The agreement also requires the Company to be in compliance with
certain financial covenants. The Company was in compliance with its
covenants as of December 31, 1999.
(c) Notes payable to third party represents subordinated debt agreements, due in
36 monthly installments over the terms of the agreements. In connection with
these agreements, warrants were issued for the purchase of 215,384 shares of
Series C Preferred Stock at an exercise price of $3.25, which were
automatically converted into warrants to purchase, on a one to one basis,
shares of common stock. The fair value of these warrants of $552,486 was
calculated using the Noreen-Wolfson and has been treated as a loan
commitment fee and was amortized over the term of the six month draw-down
period as no further services are requested to earn the warrants, and they
are fully vested.
(d) Obligations under acquired programming and distribution rights pertain to
licensing fees paid for rights to certain sporting events and rights to
distribute our content. Acquired rights obligations are payable in quarterly
payments over the terms of the agreements ranging from two to three years.
(See Note 3)
(e) Note payable to third party represents debt related to software licensing
fees which are payable in quarterly installments over the term of the two
year agreement.
Future minimum annual principal payments at December 31, 1999, are as
follows (in thousands):
<TABLE>
<S> <C>
2000..................................... $ 5,921
2001..................................... 5,764
2002..................................... 4,910
2003..................................... 528
2004..................................... --
Thereafter............................... --
-------
$17,123
=======
</TABLE>
8. COMMITMENTS
Quokka leases office facilities and equipment under noncancelable operating
leases. Rental expense under these operating leases for the years ended 1997,
1998 and 1999 was approximately $150,000, $233,000 and $1,600,000, respectively.
Rental expense under these operating leases for the six months ended June 30,
2000 was approximately $2,594,000. Additionally, Quokka leases certain office
equipment under capital lease agreements. These leases are due in monthly
installments at various dates through
F-15
<PAGE> 185
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2004. Minimum future payments under capital and operating lease agreements for
the years ended December 31, are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
2000........................................................ $154 $ 4,824
2001........................................................ 108 5,173
2002........................................................ 108 4,300
2002........................................................ 104 4,374
2004........................................................ 16 4,427
Thereafter.................................................. -- 17,598
---- -------
$490 $40,696
=======
Less amount representing interest........................... 79
----
Present value of minimum lease payments under capital
lease..................................................... 411
Less current portion........................................ 120
----
Non-current portion....................................... $291
====
</TABLE>
9. INCOME TAXES
The provision for income taxes are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Current tax expense
Federal............................................
State.............................................. $ 1 $ 1 $ 1
Foreign............................................ -- 12 36
Deferred tax expense
Federal............................................ (1,439) (2,846) (19,621)
State.............................................. (128) (486) (1,891)
Valuation allowance.................................. 1,567 3,332 21,512
------- ------- --------
Net tax provision.................................... $ 1 $ 13 $ 37
------- ------- --------
</TABLE>
The change in the valuation allowance was $21,380,705 during the year ended
December 31, 1999 and $3,332,030 during the year ended December 31, 1998. Tax
expenses, which were insignificant, were recorded in general and administrative
expenses. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Management
believes it is more likely that not the Company will realize the benefits of
these deductible differences. However given the uncertainty, a full valuation
allowance has been provided for the total net deferred tax assets at December
31, 1999.
F-16
<PAGE> 186
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The primary components of the net deferred tax asset are:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net operating loss carryforward...................... $ 1,527 $ 4,671 $ 22,681
Capitalized research and experimentation costs....... -- -- 219
Tax credits.......................................... -- -- 430
Deferred revenue..................................... -- -- 1,499
Other................................................ 40 228 1,582
------- ------- --------
Total deferred tax asset................... 1,567 4,899 26,411
Valuation allowance.................................. (1,567) (4,899) (26,411)
------- ------- --------
$ -- $ -- $ --
======= ======= ========
</TABLE>
As of December 31, 1999, the Company has net operating loss carryforwards
of $65,592,519 for federal tax purposes expiring in 2011 through 2019, and
$35,007,274 for California income tax purposes which expire in 2003 through
2004. The Company has research and development credit carryforwards of $350,573
for federal purposes and $198,315 for state purposes. The credits expire in
2019. The issuance of class A preferred stock in December, 1997, resulted in a
change of ownership under Section 382 of the Internal Revenue Code. As a result
of the change, approximately $3.8 million in federal losses and $1.8 million in
California losses are subject to an annual limitation of $254,319. In addition,
due to changes in the Company's ownership after 1997, the amount of net
operating losses and research and development credits available to offset future
federal income tax liabilities may be limited. The amount of such limitation, if
any, has not been determined. The losses incurred while operating as Ozware
Developments Unit Trust in Australia are not available for future utilization,
therefore, no deferred income taxes were recorded in the financial statements.
The effective income tax rate differs from the federal statutory income tax
rate of 34% primarily as a result of state income taxes and the change in the
valuation allowance. The difference between Quokka's effective income tax rate
and the Federal statutory rate is reconciled below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Provision at Federal Rate............................ $(1,702) $(3,243) $(19,340)
State tax, net of Federal benefit.................... (291) (556) (1,914)
Change in valuation allowance........................ 1,567 3,332 21,512
Other................................................ 427 480 (221)
------- ------- --------
Net tax provision.................................... $ 1 $ 13 $ 37
------- ------- --------
</TABLE>
10. STOCKHOLDERS' EQUITY
PREFERRED STOCK
In July 1999 and upon completion of the Company's initial public offering,
all 28,552,264 shares of Series A, B, C &D preferred stock were automatically
converted on a one to one basis into common stock of the Company.
COMMON STOCK
On July 28, 1999, Quokka issued 5,000,000 shares of its common stock at an
initial public offering price of $12.00 per share. The net proceeds to Quokka
from that offering were approximately $54.5 million after deducting the
underwriters' discount and offering expenses. Concurrent with the IPO, warrants
were
F-17
<PAGE> 187
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 stock were automatically converted into warrants
to purchase 3,113,252 shares of common stock (after consideration of net
exercises).
WARRANTS
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). Concurrent with the IPO,
warrants were exercised to purchase 452,048 share of common stock, resulting in
additional capital proceeds to the Company of $486,000.
At December 31, 1998 and 1999, the Company had 508,848 and 2,693,288 of
stock purchase warrants outstanding, respectively. These warrants were issued in
connection with private placements and other means of financing. The holders of
these warrants are entitled to receive one share of common stock of the Company
for one warrant exercised. The warrants have exercise prices ranging from $3.25
to $42.26 and expire ten years from the date of grant.
The estimated fair value of the above warrants have been determined based
on the Noreen-Wolfson fair value model with a volatility of 70%.
ISSUANCE OF STOCK OPTIONS TO NON-EMPLOYEES FOR SERVICES
The Company has recorded $62,000, $853,000 and $3,208,000 of compensation
expense in 1997, 1998 and 1999 respectively, relating to stock options issued to
non-employees for services rendered during those years.
11. STOCK OPTIONS
Pursuant to the Quokka Sports, Inc. 1997 Equity Incentive Plan ("the
Plan"), employees, directors and consultants of Quokka may be granted options to
purchase shares of common stock. At December 31, 1999, 13,350,000 shares of
common stock were reserved for issuance pursuant to the Plan. Incentive Stock
Options are granted to the extent permissible under IRS rules and generally vest
over a four-year term.
Concurrent with the IPO, the Company initiated the 1999 Non-Employee
Directors' Stock Option Plan. All non-employee directors as of the IPO date
received grants of 25,000 shares pursuant to the terms of the Plan. New
non-employee directors automatically receive grants of 25,000 shares upon their
appointment to the Board of Directors. Starting June 1, 2000, all non-employee
directors will automatically be granted an annual grant of 25,000 shares (or a
reduced pro rata for each full quarter prior to the date of grant during which
such person did not serve as a Non-Employee Director). All options granted under
this plan are non-qualified and immediately exercisable with a three-year term.
F-18
<PAGE> 188
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the activity under both Plans together with options granted
outside of the Plan is as follows:
<TABLE>
<CAPTION>
EXERCISE WEIGHTED
PRICE AGGREGATE AVERAGE
SHARES PER SHARE PRICE EXERCISE PRICE
---------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1996....... -- -- -- --
Granted................................ 1,340,000 $0.50 $ 670,000 $0.50
Cancelled.............................. (252,000) $0.50 (126,000) $0.50
---------- -------------- ----------- -----
Outstanding at December 31, 1997....... 1,088,000 $0.50 544,000 $0.50
Granted................................ 2,760,000 $0.50 - $ 2.60 3,736,200 $1.34
Exercised.............................. (48,799) $0.50 (24,400) $0.50
Cancelled.............................. (239,001) $0.50 - $ 1.50 (176,000) $0.74
---------- -------------- ----------- -----
Outstanding at December 31, 1998....... 3,560,200 $0.50 - $ 2.60 4,079,800 $1.12
---------- -------------- ----------- -----
Granted................................ 7,619,500 $3.25 - $17.00 62,270,500 $8.17
Exercised.............................. (557,617) $0.50 - $ 8.50 (587,900) $1.05
Cancelled.............................. (1,350,246) $0.50 - $12.00 (7,690,600) $5.70
---------- -------------- ----------- -----
Outstanding at December 31, 1999....... 9,271,837 $0.50 - $17.00 $58,071,800 $6.26
========== ============== =========== =====
</TABLE>
At December 31, 1999, options to purchase 1,322,830 shares were fully
vested.
The following table summarizes information with respect to stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------- -----------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE 12/31/99 EXERCISE PRICE
--------------- ----------- ----------------- --------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.50 930,965 7.85 $ 0.50 301,453 $0.50
$0.75 - $1.50 1,136,400 8.58 $ 1.25 235,727 $1.22
$2.25 - $3.25 781,200 8.97 $ 2.71 137,979 $2.52
$6.88 - $7.44 2,079,636 9.60 $ 7.02 308,013 $7.00
$8.00 - $8.50 2,924,536 9.57 $ 8.30 47,007 $8.60
$9.00 - $9.75 490,300 9.83 $ 9.10 20,751 $9.00
$10.00 - $12.00 896,300 9.00 $ 9.77 271,900 $6.33
$12.25 - $17.00 32,500 9.77 $12.55 --
--------- ---------
9,271,837 1,322,830
========= =========
</TABLE>
The following information concerning the Plan is provided in accordance
with Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123). Quokka accounts for the Plan in accordance
with Accounting Principles Board (APB) Opinion No. 25 and related
interpretations.
F-19
<PAGE> 189
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The fair value of each employee stock option grant has been estimated on
the date of grant using the minimum value method with the following weighted
average assumptions used for grants in 1999 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
----------- --------
<S> <C> <C>
Risk-free interest rates.................................... 5.69% 5.72%
Expected life of options.................................... 3.25 years 5 years
Expected dividends.......................................... $0 $0
</TABLE>
The weighted average fair value of options granted in 1999 was $4.04. Stock
options issued to consultants were valued utilizing the Black-Scholes option
pricing model with a volatility of 71%.
The following comprises the pro forma information pursuant to the provision
of SFAS No. 123:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Net loss -- historical............................... $(56,884) $(9,538) $(4,942)
Pro forma............................................ $(64,988) $(9,694) $(4,966)
Basic and diluted net loss per share
Historical......................................... $ (1.45) $ (0.99) $ (0.73)
Pro forma.......................................... $ (1.65) $ (1.00) $ (0.73)
</TABLE>
These pro forma amounts may not be representative of the effects on pro
forma net income (loss) for future years as options vest over several years and
additional awards are generally made each year.
12. 401(K) PLAN
On November 5, 1997, Quokka established a 401(k) plan, which took effect on
January 1, 1998. Under the plan, eligible employees are permitted to contribute
up to 15% of gross compensation, not to exceed the annual 402(g) limitation for
any plan year. Discretionary contributions may be made by Quokka. No
contributions have been made by Quokka since the adoption of the plan.
F-20
<PAGE> 190
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information and non-cash activities for the years
ended 1997, 1998 and 1999 and six month periods ended June 30 are as follows (in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- --------------------------
1997 1998 1999 1999 2000
----- ----- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosure of cash:
Equipment financed through capital
lease................................ $120 $ -- $ 429 $ 331 $ --
==== ==== ====== ====== =======
Accounts payable related to purchase of
property and equipment............... $ -- $242 $ 611 $ 572 $ 968
==== ==== ====== ====== =======
Issuance of Preferred warrants under
joint development agreement.......... $ 62 $415 $ -- $ -- $ --
==== ==== ====== ====== =======
Issuance of Preferred warrants for
subordinated debt.................... $ -- $ -- $ 572 $ 421 $ --
==== ==== ====== ====== =======
Issuance of Preferred warrants for
programming and distribution
rights............................... $ -- $ -- $6,104 $6,104 $ --
==== ==== ====== ====== =======
Issuance of Preferred warrants as
compensation for services rendered... $ -- $ -- $1,154 $1,154 $ --
==== ==== ====== ====== =======
Notes payable related to purchase of
programming and distribution
rights............................... $ -- $ -- $7,644 $8,251 $ --
==== ==== ====== ====== =======
Notes payable related to purchase of
property and equipment............... $ -- $ -- $2,293 $2,293 $ --
==== ==== ====== ====== =======
Equity issued in a business
acquisition.......................... $ -- $ -- $ -- $ -- $22,389
==== ==== ====== ====== =======
Stock options issued as compensation for
services rendered.................... $ -- $ 35 $ 355 $ 48 $ 2,222
==== ==== ====== ====== =======
Amortization of NBC content............. $ -- $ -- $1,936 $ 645 $ 1,291
==== ==== ====== ====== =======
</TABLE>
14. SUBSEQUENT EVENTS
On March 1, 2000, the Company entered into a definitive agreement to
acquire ZoneNetwork.com, Inc., a privately-held company that produces and owns a
leading mountain sports Internet property, Mountainzone.com and its sister web
site SkiResorts.com. The acquisition will extend the reach of the Quokka Sports
Network further into the action sports community. The all stock purchase
transaction is valued at $25 million and closed on March 31, 2000.
15. SUBSEQUENT EVENTS (UNAUDITED)
On June 8, 2000, the Company signed a definitive agreement to acquire a
controlling interest in Golf.com, LLC, a privately-held company that is in the
business of developing, marketing and distributing a golf related electronic
on-line service to be accessed via the Internet. The acquisition will extend the
reach of the Quokka Sports Network into the mainstream sports community. Quokka
issued approximately 3.9 million shares of common stock in exchange for 71% of
the ownership interest. This transaction was completed on October 3, 2000.
F-21
<PAGE> 191
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On July 20, 2000, the Company signed a definitive agreement to acquire
Total Sports, Inc., an event-centered, online sports media company. The
acquisition will further extend the reach of the Quokka Sports Network into the
sports community. Quokka will issue approximately 15 million shares of common
stock and the transaction is expected to close by the end of November 2000,
subject to various conditions.
At September 30, 2000, Quokka was in default of debt covenants relating to
a $2 million equipment financing loan with Silicon Valley Bank ("SVB"). Since
October 1, 2000, we are in default of certain covenants. The noteholder can call
the note at any time. At June 30, 2000, $554,000 of the outstanding loan was
classified as a current liability and $1,446,000 was classified as a long term
liability. We are in the process of working with the noteholder to amend the
covenants, however no assurances can be given that the covenants will be amended
or a waiver will be obtained.
On August 22, 2000, the Company signed a warrant issuance agreement whereby
we issued 10 million warrants to NBC for cash consideration of $500,000 and
NBC's continued relationship with the Company. These warrants are exercisable at
prices ranging from $8.89 to $20.00 through 2003. The estimated fair value of
the warrants of $23.2 million has been determined based on the Noreen-Wolfson
fair value model with a volatility of 65% and risk free interest rate of 6.10%
and will be reported as a component of stockholder's equity. The warrant will be
amortized ratably over its term, which expires on December 31, 2004.
On September 15, 2000, the Company completed a private placement of $77.4
million, before fees and expenses, of 7% convertible subordinated promissory
notes ("notes") and warrants. The five-year convertible notes carry a 7%
interest rate per annum, payable quarterly in cash or in kind at the Company's
option. A noteholder may elect to convert its notes into common stock at an
initial conversion price of $5.42, at any time prior to maturity or earlier
redemption. The conversion price is subject to downward adjustment under certain
circumstances. The investors also received warrants to purchase 2,805,750
shares. The warrants have an exercise price of $8.00 and are exercisable for
five years. The Company has the ability to force the exercise of half of the
warrants under certain circumstances. Applicable accounting rules require that
the gross proceeds be allocated among the notes, the beneficial conversion
feature of the notes and the warrants. As a result of that allocation, the
subordinated notes will initially be recorded on our balance sheet at a
discounted value of approximately $69.9 million. The $7.5 million discount
resulting from the issuance of warrants will be amortized to interest expense
over the five-year term of the notes. The $28.5 million discount resulting from
the beneficial conversion will be recognized immediately as a charge to interest
expense since the notes can be converted on day one at the holder's option. If
the notes are converted prior to the end of their term, the unamortized portion
of the discount resulting from the issuance of the warrants and debt issuance
costs will be reclassified to equity and treated as a stock issue cost. Lastly,
if certain events occur, including a merger of greater than 50% of the Company's
stock, the holders can force the redemption of the notes and warrants.
F-22
<PAGE> 192
GOLF.COM, L.L.C.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-24
Balance Sheets.............................................. F-25
Statements of Operations.................................... F-26
Statements of Members' Equity............................... F-27
Statements of Cash Flows.................................... F-28
Notes to Financial Statements............................... F-29
</TABLE>
F-23
<PAGE> 193
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board Members of
Golf.com, L.L.C.
In our opinion, the accompanying balance sheets and the related statements
of operations, of members' equity and of cash flows present fairly, in all
material respects, the financial position of Golf.com, L.L.C. at December 31,
1999, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered significant
operating losses, has an accumulated deficit of $4.8 million at June 30, 2000,
and a working capital deficiency which raises substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
PricewaterhouseCoopers LLP
San Jose, California
June 22, 2000, except for the going
concern discussion in Note 1,
which is as of August 11, 2000
F-24
<PAGE> 194
GOLF.COM, L.L.C.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1998 1999 2000
----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 35,648 $ 728,315 $ 799,566
Accounts receivable, net.............................. 206,799 238,831 706,156
Other receivable...................................... -- 5,000 41,500
Due from related party................................ 2,454 -- 75,432
----------- ----------- -----------
Total current assets............................... 244,901 972,146 1,622,654
Property and equipment, net............................. 5,771 2,479 2,354
Intangible assets....................................... 52,543 8,902 6,000
----------- ----------- -----------
Total assets....................................... $ 303,215 $ 983,527 $ 1,631,008
=========== =========== ===========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Notes payable, current................................ $ 100,000 $ -- $ --
Accounts payable...................................... 85,670 -- --
Interest payable...................................... 5,360 -- --
Accrued liabilities................................... -- 41,878 56,245
Due to related party.................................. -- 170,373 --
Deferred revenue...................................... 2,913 80,625 457,883
----------- ----------- -----------
Total current liabilities.......................... 193,943 292,876 514,128
----------- ----------- -----------
Members' equity:
Contributed capital................................... 3,114,658 4,426,257 5,540,314
Warrants.............................................. 129,000 404,000 404,000
Accumulated deficit................................... (3,134,386) (4,139,606) (4,827,434)
----------- ----------- -----------
Total members' equity.............................. 109,272 690,651 1,116,880
----------- ----------- -----------
Total liabilities and members' equity.............. $ 303,215 $ 983,527 $ 1,631,008
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 195
GOLF.COM, L.L.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET REVENUES:
Advertising and other.... $ 430,765 $ 626,307 $ 880,232 $ 307,582 $ 793,355
E-commerce............... 43,860 264,256 473,818 265,388 157,993
---------- ----------- ----------- --------- ----------
Total net revenues.... 474,625 890,563 1,354,050 572,970 951,348
========== =========== =========== ========= ==========
COST OF NET REVENUES:
Advertising and other.... 14,759 344,888 134,311 56,130 211,774
E-commerce............... 38,933 235,625 476,381 246,643 127,170
---------- ----------- ----------- --------- ----------
Total cost of
revenues............ 53,692 580,513 610,692 302,773 338,944
========== =========== =========== ========= ==========
OPERATING EXPENSES:
Operating expenses....... 1,338,025 1,296,006 1,708,619 610,996 1,318,623
Depreciation and
amortization.......... 52,471 55,614 13,704 6,852 3,027
Loss on
disposal/impairment of
assets................ -- 44,703 33,229 -- --
---------- ----------- ----------- --------- ----------
Total operating
expenses............ 1,390,496 1,396,323 1,755,552 617,848 1,321,650
========== =========== =========== ========= ==========
Loss from
operations.......... (969,563) (1,086,273) (1,012,194) (347,651) (709,246)
Interest income.......... 33,892 195 8,443 787 21,406
Interest expense......... -- (8,360) (1,469) (1,469) --
Other income, net........ 116 -- -- -- 12
---------- ----------- ----------- --------- ----------
Net loss.............. $ (935,555) $(1,094,438) $(1,005,220) $(348,333) $ (687,828)
========== =========== =========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 196
GOLF.COM, L.L.C.
STATEMENTS OF MEMBERS' EQUITY
<TABLE>
<CAPTION>
CONTRIBUTED CAPITAL TOTAL
------------------- ACCUMULATED MEMBERS'
UNITS AMOUNT WARRANTS DEFICIT EQUITY
----- ---------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997
(unaudited).................... 121 $2,214,709 $ -- $(1,104,393) $ 1,110,316
Issue of warrants
(unaudited)................. -- -- 129,000 -- 129,000
Net loss (unaudited)........... -- -- -- (935,555) (935,555)
--- ---------- -------- ----------- -----------
Balance at December 31, 1997
(unaudited).................... 121 2,214,709 129,000 (2,039,948) 303,761
Expenses paid by principal
shareholder (unaudited)..... -- 649,949 -- -- 649,949
Sale of units (unaudited)...... 41 250,000 -- -- 250,000
Net loss (unaudited)........... -- -- -- (1,094,438) (1,094,438)
--- ---------- -------- ----------- -----------
Balance at December 31, 1998
(unaudited).................... 162 3,114,658 129,000 (3,134,386) 109,272
Issue of warrants.............. -- -- 275,000 -- 275,000
Expenses paid by principal
shareholder................. -- 1,311,599 -- -- 1,311,599
Net loss....................... -- -- -- (1,005,220) (1,005,220)
--- ---------- -------- ----------- -----------
Balance at December 31, 1999..... 162 4,426,257 404,000 (4,139,606) 690,651
Expenses paid by principal
shareholder (unaudited)..... -- 1,064,057 -- -- 1,064,057
Exercise of warrant
(unaudited)................. 2 50,000 -- -- 50,000
Net loss (unaudited)........... -- -- -- (687,828) (687,828)
--- ---------- -------- ----------- -----------
Balance at June 30, 2000
(unaudited).................... 164 $5,540,314 $404,000 $(4,827,434) $ 1,116,880
--- ---------- -------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 197
GOLF.COM, L.L.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss............................ $(935,555) $(1,094,438) $(1,005,220) $(348,333) $ (687,828)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Provision for doubtful accounts
and returns.................... -- -- 25,130 -- 1,057
Loss on disposal/impairment of
assets......................... -- 44,703 33,229 -- --
Depreciation and amortization..... 52,471 55,614 13,704 6,852 3,027
Expenses paid by principal
shareholder.................... -- 649,949 1,311,599 551,227 1,064,057
Issue of warrants................. 129,000 -- 275,000 -- --
Changes in current assets and
liabilities:
Accounts receivable............... (107,328) 3,203 (57,162) (170,068) (468,382)
Other receivable.................. -- -- (5,000) -- (36,500)
Accounts payable.................. 48,383 14,545 (85,670) (85,670) --
Interest payable.................. -- 5,360 (5,360) (5,360) --
Due (to) from related party....... -- (2,454) 172,827 24,906 (245,805)
Accrued liabilities............... -- -- 41,878 7,046 14,367
Deferred revenue.................. -- 2,913 77,712 151,283 377,258
--------- ----------- ----------- --------- ----------
Net cash provided by (used
in) operating
activities................ (813,029) (320,605) 792,667 131,883 21,251
--------- ----------- ----------- --------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from disposal of
assets......................... -- (5,000) -- -- --
Purchase of property and
equipment...................... (71,780) -- -- -- --
--------- ----------- ----------- --------- ----------
Net cash (used in) investing
activities................ (71,780) (5,000) -- -- --
--------- ----------- ----------- --------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of member
units.......................... -- 250,000 -- -- --
Proceeds from the exercise of
warrant........................ -- -- -- -- 50,000
Proceeds from (repayment of) note
payable........................ -- 100,000 (100,000) (100,000) --
--------- ----------- ----------- --------- ----------
Net cash provided by (used
in) financing
activities................ -- 350,000 (100,000) (100,000) 50,000
--------- ----------- ----------- --------- ----------
Net increase (decrease) in cash and
cash equivalents.................. (884,809) 24,395 692,667 31,883 71,251
Cash and cash equivalents at
beginning of period............... 896,062 11,253 35,648 35,648 728,315
--------- ----------- ----------- --------- ----------
Cash and cash equivalents at end of
period............................ $ 11,253 $ 35,648 $ 728,315 $ 67,531 $ 799,566
--------- ----------- ----------- --------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest............ $ -- $ 3,000 $ 6,829 $ -- $ --
--------- ----------- ----------- --------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 198
GOLF.COM, L.L.C.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
Golf.com, L.L.C. (the "Company" or "Golf"), a Delaware limited liability
company was formed on June 6, 1996 between GolfData Corporation ("GolfData") and
NBC Multimedia, Inc. ("NBC"). GolfData contributed to the Company certain assets
and liabilities and NBC contributed a license agreement to use various NBC
materials, including the use of the NBC trademark and promotional activities.
On August 9, 1996, the New York Times Company Magazine Group, Inc.
("NYTMAG") and Media One Interactive Services, Inc. ("Media One") became parties
of the Company. NYTMAG contributed a license agreement to use any and all of
Golf Digest and Golf World magazines and other content on the site and Media One
contributed $1,620,000.
Both the NBC and NYTMAG license agreements have a three-year term and
automatically renew for successive three-year terms unless terminated by
providing 90 days notice of the intent not to renew. On January 12, 1999, Golf
and NYTMAG terminated their license agreement. As a result of the termination,
all NYTMAG materials and trademarks were removed from the web site and in return
NYTMAG paid Golf $130,548. NYTMAG retained its ownership interest in Golf.
On July 29, 1998, Total Sports Inc. ("Total Sports") contributed $250,000
and entered into a services agreement in return for an ownership interest in the
Company. Under the services agreement, Golf outsourced the hosting, operation
and management of its web site to Total Sports. In addition, it assigned its
rights to acquire content under various license agreements to Total Sports.
Total Sports operates and maintains the web site at its own expense, however,
these expenses have been recorded in the Golf financial statements as an expense
of the Company with an offsetting increase in contributed capital.
In January 1999, Golf entered into an advertising sales representation
agreement with Total Sports, Inc. Under the terms of the agreement Golf
appointed Total Sports as its exclusive advertising sales representative to sell
all on-line advertising and sponsorship. In consideration for this appointment,
Total Sports paid Golf $25,000 on January 1, 2000 and will pay such amount each
January 1 thereafter until the agreement is terminated. In consideration for
Total Sports providing this service, commencing April 1, 1999 Golf is obligated
to pay a fee equal to 20% of the net advertising revenues collected. Both the
services and advertising sales agreements shall terminate on June 15, 2003
unless terminated at an earlier date.
The Company is in the business of developing, marketing and distributing a
golf related electronic on-line service to be accessed via the World Wide Web
portion of the Internet. The Company's existence shall continue from June 1996
until the earlier of December 31, 2035 or the Company's dissolution. Upon
dissolution, the Company will wind up its affairs, distribute its assets and
file a certificate of cancellation to cancel the Certificate of Formation
according to Article 19 of the operating agreement. Assets will be distributed
first to creditors, then to the establishment of any reserves for any contingent
or unforeseen liabilities or obligations and finally to the holders of the units
in proportion to their capital accounts.
Net income or loss for each fiscal year will be allocated to the holders of
units, except for Total Sports, in proportion to their holdings of units on the
date chosen by the Board of Managers as the determination date for such
allocation. The allocation of net income or loss to Total Sports is equal to a
predetermined fraction, provided that Total Sports has achieved certain
measurements including page views and operating revenues, as stated in Article
13 of the operating agreement.
F-29
<PAGE> 199
GOLF.COM, L.L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
GOING CONCERN DISCUSSION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As of June 30, 2000, the Company had
approximately $799,566 in cash and cash equivalents. As shown in the financial
statements, the Company has relied upon the financial support of Total Sports to
fund working capital requirements in the past. As of June 23, 2000, there is
doubt of Total Sports' ability to continue as a going concern.
This raises substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original or remaining maturity of three months or less at the date of purchase
to be cash equivalents
ACCOUNTS RECEIVABLE
The accounts receivable balances at December 31, 1999 and June 30, 2000 are
recorded net of an allowance for doubtful accounts of $25,130 and $26,187
(unaudited) respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Fixed assets are depreciated on a straight-line basis over the
estimated useful life of three years. Property and equipment purchased under
capital leases are amortized on a straight-line basis over the lesser of the
estimated useful life of the asset or the lease term.
Maintenance and repairs, which neither materially add to the value of the
property nor prolong its life, are charged to expense as incurred. Gains or
losses on dispositions of capital assets are included in income in the year of
disposition (see Note 2).
REVENUE RECOGNITION
The Company earns its advertising revenue from the sale of web site
advertisements on short-term contracts. Advertising revenue is recognized
ratably over the period in which the advertisement is displayed. Deferred
revenue results from billings in excess of recognized revenue. Prior to 1999,
the Company recognized revenue on a gross basis since it was directly
responsible for the sales effort. After signing the advertising sales agreement
in 1999, revenue was recognized at 80% of gross sales revenue, since Total
Sports assumed the primary risks and acted as the principal in the related
transactions.
The Company earns its e-commerce revenue from the sale of sports equipment,
apparel and memorabilia through its online retail store. E-commerce revenues are
recognized from product sales, net of estimated sales returns, when the products
are shipped to customers. Gross outbound standard shipping and handling charges
are included in net sales. The Company provides an allowance for sales returns,
which is based on historical experience. For all product sales transactions with
its customers, the Company acts as a principal, takes title to all products sold
upon shipment, bears credit risk, and bears inventory risk of loss for returned
products that are not eligible to be returned to suppliers.
F-30
<PAGE> 200
GOLF.COM, L.L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash and cash equivalents and
accounts receivable. Cash and cash equivalents are deposited with high credit
quality financial institutions. Advertising and e-commerce sales to customers
located predominantly in the U.S. comprise substantially all of the Company's
revenue. Payments made by e-commerce customers are settled through customer
credit cards and, as a result, collection is made upon processing of the credit
card transactions. For the six months ended June 30, 1999 and 2000, no one
customer represented more than 10% of the Company's total revenue. For the year
ended December 31, 1999, one customer and a related party, NBC, accounted for
15% of total revenues of Golf. At December 31, 1999, there were no receivables
from this customer. For the year ended December 31, 1998, one customer, Golf
Digest, accounted for 57.6% of total revenues. At December 31, 1998, there were
no receivables from this customer. No one customer represented more than 10% of
the Company's total revenue for the year ended 1997. The 1997, 1998 and six
months ended June 30, 1999 and 2000 information presented is unaudited.
PRODUCT AND WEB SITE DEVELOPMENT COSTS
Product development costs include expenses incurred by the Company to
develop and enhance the Company's web site. Product development costs are
expensed as incurred. The Company recognizes web site development costs in
accordance with the Statement of Position ("SOP") 98-1 "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." As such, the
Company expenses all costs incurred in the planning and post implementation
phases of development. The Company also expenses costs associated with the
insignificant modifications to the existing site and the development of web site
content as incurred.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs for
the six months ended June 30, 2000 was $157,343 (unaudited). There are no
advertising costs for the year ended December 31, 1999. Advertising costs for
the years ended December 31, 1998 and 1997 were $18,661 (unaudited) and $11,021
(unaudited), respectively.
USE OF ESTIMATES AND ASSUMPTIONS
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
disclosures of contingent assets and liabilities at the date of the financial
statements and that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates its long-lived assets for financial
impairment and continues to evaluate them as events or changes in circumstances
indicate that the carrying amount of such assets may not be fully recoverable.
The Company evaluates the recoverability of long-lived assets by measuring the
carrying amount of such assets against the estimated undiscounted future cash
flows associated with these assets. At the time such evaluations indicate that
the future undiscounted cash flows of certain long-lived assets are not
sufficient to recover the carrying value of such assets, the carrying value of
the assets are reduced to their fair values. In 1999, an impairment loss was
recognized (see Note 2).
F-31
<PAGE> 201
GOLF.COM, L.L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
COMPREHENSIVE INCOME
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," effective January 1, 1998.
This Statement requires the disclosure of comprehensive income and its
components in a full set of general-purpose financial statements. Comprehensive
income is the change in equity from transactions and other events and
circumstances other than those resulting from investments by owners and
distributions to owners. This Statement had no impact on the Company and,
accordingly, no separate statement of comprehensive income has been presented.
SEGMENT INFORMATION
The Company has adopted Statement of Financial Accounting Standards No. 131
("SFAS No. 131"), "Disclosures about Segments of an Enterprise and Related
Information," which is effective for fiscal years beginning after December 31,
1997. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise," replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
No. 131 also requires disclosures about products and services, geographic areas,
and major customers. Management uses one measurement of profitability and does
not desegregate its business for internal reporting.
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of June 30, 2000 and for the six
months ended June 30, 2000 and 1999 are unaudited but have been prepared in
accordance with generally accepted accounting principles for interim financial
statements and the rules of the Securities and Exchange Commission and do not
include all disclosures required by generally accepted accounting principles for
annual financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
have been included. The results of operations of any interim period are not
necessarily indicative of the results of operations for the full year.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging activities. The
Statement, which is effective for the Company in 2000, requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measures those instruments at fair value. The Company is assessing the
requirements of SFAS No. 133 and the effects, if any, on the Company's financial
position, results of operations and cash flows.
In July 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137 ("SFAS No. 137"), "Accounting with
Derivative Instruments and Hedging Activities Deferral of the Effective Date of
FASB Statement No. 133," which deferred the effective date until the first
fiscal quarter ending June 30, 2000. The Company will adopt SFAS No. 133 in its
quarter ending June 30, 2000. The Company has not engaged in hedging activities
or invested in derivative instruments.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles ("GAAP") to revenue
F-32
<PAGE> 202
GOLF.COM, L.L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
recognition in financial statements. The adoption of SAB No. 101 did not have a
material effect on the Company's financial statements.
In April 2000, FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation -- an interpretation of APB Opinion
No. 25" ("FIN No. 44") was issued. FIN No. 44 clarifies the application of APB
No. 25 for only certain issues. Among other issues, FIN No. 44 clarifies the
definition of employee for purposes of applying APB No. 25, the criteria for
determining whether a plan qualifies as a non-compensatory plan, the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award, and the accounting for an exchange of stock compensation awards
in a business combination. FIN No. 44 is effective July 1, 2000, but certain
conclusions in this interpretation cover specific events that occur after either
December 15, 1998 or January 12, 2000. The adoption of certain of the
conclusions of FIN No. 44 covering events occurring during the period after
December 15, 1998 or January 12, 2000 did not have a material impact on the
Company's financial position and results of operations. The Company does not
expect that the adoption of the remaining conclusions will have a material
effect on the financial statements.
2. NON-RECURRING CHARGES
In 1999, the Company determined that its license to use the GMAP
photography program was other than temporarily impaired and as such wrote off
the balance in the amount of $33,229.
In 1998, the Company disposed of certain fixed assets in connection with
the closing of the Arlington, Virginia office. Upon the sale of the fixed
assets, the Company recognized a loss on the disposal in the amount of $44,703
(unaudited).
3. INCOME TAXES
No provision for federal and state income taxes was recorded from inception
through December 31, 1999 as the Company has elected to be taxed as a
partnership. Therefore, the federal and state tax effects of the Company's
results of operations are recorded by the Members in their respective income tax
returns.
4. NOTES PAYABLE
In 1998, the Company had a promissory note from NBC in the amount of
$100,000 for the purpose of a general loan. The interest rate of the note was 2%
over the prime rate and was payable on March 1, 1999. The amount was repaid in
1999.
5. MEMBERS' EQUITY
Each member shall be entitled to one vote for each unit held. The number of
units held at December 31, 1999 are as follows:
<TABLE>
<S> <C> <C>
NBC 48.0 units 29.6%
GolfData 48.5 units 29.9%
Media One 19.5 units 12.1%
NYTMAG 5.0 units 3.1%
Total Sports 41.0 units 25.3%
</TABLE>
NBC and GolfData are entitled to designate two of the six individuals to
the Board of Managers and Media One and Total Sports are entitled to designate
one individual. Additionally, NYTMAG is entitled to designate one observer to
the Board of Managers who has no voting rights. However, if NYTMAG
F-33
<PAGE> 203
GOLF.COM, L.L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
exercises its option to purchase additional units, NYTMAG shall be entitled to
designate a seventh individual to the Board of Managers.
WARRANTS
On September 16, 1996, Golf granted Otto Candies L.L.C., an unrelated
entity, a fully vested and exercisable warrant to purchase two membership units
at a price of $25,000 per unit. The warrant had a three year exercise term. The
fair value of this warrant was determined to be $129,000 calculated using the
Black-Scholes option pricing model using the following assumptions: risk-free
interest rate 5.0%, volatility 70%, a dividend yield of zero and a unit price of
$83,075, which is based upon the price per unit paid by Media One just one month
earlier. This warrant expired unexercised.
On September 27, 1999, a new fully vested and exercisable warrant was
granted to Otto Candies L.L.C. with an exercise period of two years. The fair
value of this warrant was $275,000 determined using the Black-Scholes model with
the following assumptions: risk-free interest rate 6.1%, volatility 70%, a
dividend yield of zero and a unit price of $159,000, which is based upon the
ramp between the Media One valuation and the value of the Company established by
Quokka (see Note 6).
6. SUBSEQUENT EVENTS
On May 30, 2000, Otto Candies L.L.C. exercised their warrant to purchase
two membership units of Golf for an aggregate price of $50,000, as provided in
the membership units purchase warrant agreement (see Note 5).
On June 8, 2000, Quokka Sports, Inc. ("Quokka") signed a definitive
agreement to acquire a controlling interest in the Company. Quokka will issue
approximately 3.9 million shares of common stock in exchange for 71% of the
ownership interest. NBC will retain its 29% ownership of the Company. The
transaction was completed on October 3, 2000.
F-34
<PAGE> 204
TOTAL SPORTS INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF TOTAL SPORTS INC.:
Independent Auditors' Report................................ F-36
Consolidated Balance Sheets as of December 31, 1998 and 1999
(As Restated), and June 30, 2000 (unaudited).............. F-37
Consolidated Statements of Operations for the period
February 20, 1997 (date of inception) through December 31,
1997, and the years ended December 31, 1998 and 1999 (As
Restated), and the six months ended June 30, 1999 and 2000
(unaudited)............................................... F-38
Consolidated Statements of Stockholders' Equity (Deficiency)
for the period February 20, 1997 (date of inception)
through December 31, 1997, and the years ended December
31, 1998 and 1999 (As Restated), and the six months ended
June 30, 2000 (unaudited)................................. F-39
Consolidated Statements of Cash Flows for the period
February 20, 1997 (date of inception) through December 31,
1997, and the years ended December 31, 1998 and 1999 (As
Restated), and the six months ended June 30, 1999 and 2000
(unaudited)............................................... F-41
Notes to Consolidated Financial Statements.................. F-43
</TABLE>
F-35
<PAGE> 205
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Total Sports Inc.
Raleigh, North Carolina
We have audited the accompanying consolidated balance sheets of Total
Sports Inc. and subsidiaries as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity (deficiency) and
cash flows for the period February 20, 1997 (date of inception) through December
31, 1997 and the years ended December 31, 1998 and 1999. These financial
statements are the responsibility of Total Sports' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Total Sports Inc. and
subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for the period February 20, 1997 (date of
inception) through December 31, 1997 and the years ended December 31, 1998 and
1999, in conformity with accounting principles generally accepted in the United
States of America.
We have not audited any financial statements of Total Sports for any period
subsequent to December 31, 1999. However, as discussed in Note 1 to the
financial statements, Total Sports has continued to experience recurring losses
from operations and negative cash flows during the three months ended March 31,
2000. These matters raise substantial doubt about Total Sports' ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in Note 19, the accompanying consolidated financial statements
have been restated.
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
January 24, 2000
(June 23, 2000 as to Note 19 and the going concern
discussion in Note 1)
F-36
<PAGE> 206
TOTAL SPORTS INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED AS TO JUNE 30, 2000 INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
------------- ------------- ------------
(AS RESTATED, (AS RESTATED,
SEE NOTE 19) SEE NOTE 19)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................. $ 684,777 $ 17,671,279 $ 1,860,703
Accounts receivable (less allowance for doubtful accounts;
1998 -- $25,000; 1999 -- $36,000; 2000 -- $38,000)....... 1,039,755 1,197,013 1,212,540
Accounts receivable from employees and affiliates (Note
18)...................................................... 13,800 229,878 35,111
Inventory (less allowance for obsolescence;
1998 -- $144,000; 1999 -- $536,000; 2000 -- $633,000).... 168,396 294,127 440,824
Deferred publishing costs (Note 4)......................... 97,049 373,859 375,091
Prepaid assets............................................. 184,465 240,525 2,405,517
Other current assets....................................... 16,965 1,106,882 --
------------ ------------ ------------
Total current assets................................. 2,205,207 21,113,563 6,329,786
Investment in Affiliate (Note 3)............................ 91,116 152,895
Deferred Publishing Costs (Note 4).......................... 392,688 690,670 1,298,763
Property and Equipment, Net (Notes 3, 5, 7 and 8)........... 1,307,403 3,438,395 5,507,384
Goodwill (less accumulated amortization; 1998 -- $1,262,000;
1999 -- $3,379,000; 2000 -- $4,464,000) (Note 3)........... 1,425,623 2,636,271 1,298,848
Databases (less accumulated amortization; 1998 -- $113,000;
1999 -- $206,000; 2000 -- $253,000) (Note 3)............... 541,407 447,921 401,179
Other Assets................................................ 66,679 20,491 20,885
------------ ------------ ------------
Total Assets......................................... $ 5,939,007 $ 28,438,427 $ 15,009,740
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable........................................... $ 615,804 $ 1,279,879 $ 4,366,584
Accrued expenses........................................... 1,373,448 3,427,477 6,289,247
Accrued expenses -- related parties (Note 18).............. 335,566 129,248 1,133,498
Deferred revenues.......................................... 58,173 511,152 610,924
Reserve for sales returns.................................. 415,733 1,004,835 781,748
Excess of affiliate losses over cost (Note 3).............. 9,077
Line of credit (Note 6).................................... 3,083,483
Current maturities of notes payable (Note 7)............... 42,392 43,241 46,364
Current maturities of notes payable -- related parties
(Note 7)................................................. 58,307 3,766,581
Current maturities of capital lease obligations (Note 8)... 73,972 282,867 562,731
------------ ------------ ------------
Total current liabilities............................ 6,007,648 6,737,006 17,557,677
Notes payable, net of current maturities (Note 7)........... 301,111 258,231 242,105
Notes payable -- related parties, net of current maturities
(Note 7)................................................... 51,077 37,097
Capital lease Obligations, net of current maturities (Note
8)......................................................... 121,658 268,849 1,434,564
Series A redeemable preferred stock (Notes 10 and 12) $10.00
par value; 125,000 shares authorized, issued and
outstanding at December 31, 1998 and 1999 and June 30, 2000
($1,250,000 aggregate liquidation value at December 31,
1998 and 1999 and June 30, 2000)........................... 1,342,824 1,536,829 1,633,869
Commitments and Contingencies (Notes 8 and 17)
Stockholders' Equity (Deficiency) (Notes 3, 10, 11 and 12):
Preferred stock, $.001 par value; 1,925,000 shares
authorized at December 31, 1998 and 761,903 shares
authorized at December 31, 1999 and June 30, 2000; no
shares issued and outstanding at December 31, 1998 and
1999 and June 30, 2000...................................
Series B convertible preferred stock, $4.49 par value;
650,000 shares authorized at December 31, 1998 and
518,841 shares authorized at December 31, 1999 and June
30, 2000; 445,263 shares issued and outstanding at
December 31, 1998 and 1999 and June 30, 2000
($2,000,000 aggregate liquidation value at December 31,
1998 and 1999 and June 30, 2000)....................... 1,936,935 1,936,935 1,936,935
Series C convertible preferred stock, $.001 par value;
1,500,000 shares authorized at December 31, 1998 and
1,418,200 shares authorized at December 31, 1999 and
June 30, 2000; 1,418,200 shares issued and outstanding
at December 31, 1998 and 1999 and June 30, 2000
($10,077,729 aggregate liquidation value at December
31, 1998 and 1999 and June 30, 2000)................... 1,418 1,418 1,418
Series C1 convertible preferred stock, $.001 par value;
800,000 shares authorized at December 31, 1998; 630,756
shares authorized, issued and outstanding at December
31, 1999 and June 30, 2000 ($5,985,874 aggregate
liquidation value at December 31, 1999 and June 30,
2000).................................................. 631 631
Series D convertible preferred stock, $.001 par value;
2,230,260 shares authorized; 2,140,873 shares issued
and outstanding at December 31, 1999 and June 30, 2000
($71,034,166 aggregate liquidation value at December
31, 1999 and June 30, 2000)............................ 2,141 2,141
Series D1 convertible preferred stock, $.001 par value;
1,003,617 shares authorized; no shares issued and
outstanding at December 31, 1998 and 1999 and June 30,
2000...................................................
Series E convertible preferred stock, $.001 par value;
811,423 shares authorized, issued and outstanding at
December 31, 1999 and June 30, 2000 ($26,054,793
aggregate liquidation value at December 31, 1999 and
June 30, 2000)......................................... 811 811
Senior employee preferred stock, $.001 per value;
3,200,000 shares authorized at June 30, 2000; no shares
issued and outstanding at June 30, 2000................
Common stock, $.001 par value; 30,000,000 shares
authorized at December 31, 1998 and 1999 and June 30,
2000; 1,755,180 shares issued and outstanding at
December 31, 1998; 2,882,663 shares issued and
outstanding at December 31, 1999; 2,891,862 shares
issued and outstanding June 30, 2000................... 1,755 2,882 2,891
Additional paid-in capital............................... 12,354,277 68,181,786 56,772,530
Deficit.................................................. (16,128,619) (37,955,348) (64,612,929)
------------ ------------ ------------
Total stockholders' equity (deficiency).............. (1,834,234) 19,586,435 (5,895,572)
------------ ------------ ------------
Total Liabilities and Stockholders' Equity
(Deficiency)......................................... $ 5,939,007 $ 28,438,427 $ 15,009,740
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-37
<PAGE> 207
TOTAL SPORTS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
<TABLE>
<CAPTION>
PERIOD
FEBRUARY 20,
1997 SIX MONTHS SIX MONTHS
THROUGH YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1997 1998 1999 1999 2000
------------- ------------- ------------- ----------- ------------
(AS RESTATED, (AS RESTATED, (AS RESTATED,
SEE NOTE 19) SEE NOTE 19) SEE NOTE 19)
<S> <C> <C> <C> <C> <C>
Revenues:
Digital publishing (Note 18)
(including revenue from non-cash barter
transactions for the period ended December
31, 1997 -- $0; December 31,
1998 -- $572,000; December 31,
1999 -- $1,210,000; June 30,
1999 -- $554,000; June 30,
2000 -- $77,000)............................. $ 920,636 $ 1,930,330 $ 5,396,906 $ 2,626,751 $ 4,515,740
E-Commerce (Note 18)........................... 13,586 435,172 1,355,569 701,111 821,179
----------- ------------ ------------ ----------- ------------
Total revenues.......................... 934,222 2,365,502 6,752,475 3,327,862 5,336,919
Cost of Revenues:
Digital publishing (Note 18)
(including expenses from non-cash barter
transactions for the period ended December
31, 1997 -- $0; December 31,
1998 -- $572,000; December 31,
1999 -- $1,210,000; June 30,
1999 -- $554,000; June 30,
2000 -- $77,000)............................. 1,378,980 3,570,438 8,765,125 3,866,188 7,944,503
E-Commerce (Note 18)........................... 1,249 331,720 1,191,376 543,291 778,410
----------- ------------ ------------ ----------- ------------
Total cost of revenues..................... 1,380,229 3,902,158 9,956,501 4,409,479 8,722,913
----------- ------------ ------------ ----------- ------------
Gross Profit (Loss).............................. (446,007) (1,536,656) (3,204,026) (1,081,617) (3,385,994)
Operating Expenses (Notes 15, 16 and 17):
Product development (Note 18).................. 1,310,516 2,550,459 4,033,226 1,952,733 3,063,061
Sales and marketing (Note 18).................. 576,738 2,728,502 5,216,987 1,607,060 7,741,396
General and administrative (Note 18)........... 355,842 1,879,587 3,745,341 1,210,454 4,642,075
Amortization (Note 3).......................... 321,631 572,250 1,906,449 515,064 1,284,829
----------- ------------ ------------ ----------- ------------
Total operating expenses................ 2,564,727 7,730,798 14,902,003 5,285,311 16,731,361
----------- ------------ ------------ ----------- ------------
Operating Loss................................... (3,010,734) (9,267,454) (18,106,029) (6,366,927) (20,117,355)
Other Income (Expense):
Minority interest in joint venture losses
(earnings) (Note 18)......................... (138,341) 41,492
Equity in earnings (loss) of affiliate (Note
3)........................................... (24,076) 100,193 16,372 61,779
Interest income................................ 5,120 18,332 87,718 5,279 279,657
Interest expense (Note 12)..................... (100,336) (507,348) (638,300) (161,242) (224,889)
Other income................................... 31,669 31,535 5,352
----------- ------------ ------------ ----------- ------------
Other income (expense), net................ (233,557) (439,931) (418,854) (139,591) 121,889
----------- ------------ ------------ ----------- ------------
Loss from continuing operations.................. (3,244,291) (9,707,385) (18,524,883) (6,506,518) (19,995,466)
Loss from the operations of discontinued segment
(Note 2)....................................... (903,148) (2,129,615) (3,301,846) (1,132,686) (1,242,115)
Loss on disposal of discontinued segment (Note
2)............................................. (5,420,000)
----------- ------------ ------------ ----------- ------------
Net loss......................................... (4,147,439) (11,837,000) (21,826,729) (7,639,204) (26,657,581)
Dividends on preferred stock..................... (144,180) (197,645) (194,005) (96,905) (97,040)
----------- ------------ ------------ ----------- ------------
Net loss applicable to common stockholders....... $(4,291,619) $(12,034,645) $(22,020,734) $(7,736,109) $(26,754,621)
=========== ============ ============ =========== ============
Basic and diluted loss from continuing operations
per common share (Note 13)..................... $ (2.79) $ (6.35) $ (10.52) $ (3.73) $ (10.23)
=========== ============ ============ =========== ============
Basic and diluted loss per common share (Note
13)............................................ $ (3.53) $ (7.71) $ (12.38) $ (4.37) $ (13.62)
=========== ============ ============ =========== ============
</TABLE>
See notes to consolidated financial statements.
F-38
<PAGE> 208
TOTAL SPORTS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(UNAUDITED AS TO THE SIX MONTHS ENDED JUNE 30, 2000 INFORMATION)
<TABLE>
<CAPTION>
SERIES B SERIES C SERIES C1 SERIES D
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
---------------------- ------------------ ------------------ ------------------
NUMBER OF NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ---------- --------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, February 20, 1997.............. $ $ $ $
Issuance of shares to founders.........
Additional equity contributions from
shareholder..........................
Issuance of common stock for Sports
Extra acquisition....................
Issuance of warrants in connection with
sale of Series A redeemable preferred
stock................................
Advance from stockholder reclassified
as equity contribution...............
Issuance of Series B convertible
preferred stock...................... 445,263 1,936,935
Issuance of common stock for DesigNet
acquisition..........................
Accrued dividends on Series A
redeemable preferred stock...........
Discount accretion on Series A
redeemable preferred stock...........
Net loss (as restated) (Note 19).......
------- ---------- --------- ------ ------- ---- --------- ------
Balance, January 1, 1998 (as restated)
(Note 19).............................. 445,263 1,936,935
------- ---------- --------- ------ ------- ---- --------- ------
Issuance of common stock for Total
College Communications acquisition...
Exercise of common options.............
Issuance of common stock...............
Issuance of Series C convertible
Preferred stock, net of offering
costs of $301,758.................... 1,418,200 1,418
Advance for Series C1 convertible
Preferred stock......................
Issuance of Series B cumulative
warrants.............................
Issuance of common stock options.......
Accrued dividends on Series A
Redeemable preferred stock...........
Discount accretion on Series A
Redeemable preferred stock...........
Net loss (as restated) (Note 19).......
------- ---------- --------- ------ ------- ---- --------- ------
Balance, December 31, 1998 (as restated)
(Note 19).............................. 445,263 1,936,935 1,418,200 1,418
------- ---------- --------- ------ ------- ---- --------- ------
<CAPTION>
SERIES E
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------ ------------------ STOCK ISSUED ADDITIONAL
NUMBER OF NUMBER OF FOR PREPAID PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT ADVERTISING CAPITAL DEFICIT
--------- ------ --------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, February 20, 1997.............. $ $ $ $ $
Issuance of shares to founders......... 961,291 961
Additional equity contributions from
shareholder.......................... 648,738
Issuance of common stock for Sports
Extra acquisition.................... 290,323 290 133,258
Issuance of warrants in connection with
sale of Series A redeemable preferred
stock................................ 179,000
Advance from stockholder reclassified
as equity contribution............... 125,000
Issuance of Series B convertible
preferred stock......................
Issuance of common stock for DesigNet
acquisition.......................... 33,142 33 16,538
Accrued dividends on Series A
redeemable preferred stock........... (127,500)
Discount accretion on Series A
redeemable preferred stock........... (16,680)
Net loss (as restated) (Note 19)....... (4,147,439)
------- ---- --------- ------ ----------- ------------ ------------
Balance, January 1, 1998 (as restated)
(Note 19).............................. 1,284,756 1,284 1,102,534 (4,291,619)
------- ---- --------- ------ ----------- ------------ ------------
Issuance of common stock for Total
College Communications acquisition... 418,971 419 462,278
Exercise of common options............. 280 1 140
Issuance of common stock............... 51,173 51 60,373
Issuance of Series C convertible
Preferred stock, net of offering
costs of $301,758.................... 9,774,553
Advance for Series C1 convertible
Preferred stock...................... 1,000,000
Issuance of Series B cumulative
warrants............................. 146,162
Issuance of common stock options....... 5,882
Accrued dividends on Series A
Redeemable preferred stock........... (150,000)
Discount accretion on Series A
Redeemable preferred stock........... (47,645)
Net loss (as restated) (Note 19)....... (11,837,000)
------- ---- --------- ------ ----------- ------------ ------------
Balance, December 31, 1998 (as restated)
(Note 19).............................. 1,755,180 1,755 12,354,277 (16,128,619)
------- ---- --------- ------ ----------- ------------ ------------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIENCY)
-------------
<S> <C>
Balance, February 20, 1997.............. $
Issuance of shares to founders......... 961
Additional equity contributions from
shareholder.......................... 648,738
Issuance of common stock for Sports
Extra acquisition.................... 133,548
Issuance of warrants in connection with
sale of Series A redeemable preferred
stock................................ 179,000
Advance from stockholder reclassified
as equity contribution............... 125,000
Issuance of Series B convertible
preferred stock...................... 1,936,935
Issuance of common stock for DesigNet
acquisition.......................... 16,571
Accrued dividends on Series A
redeemable preferred stock........... (127,500)
Discount accretion on Series A
redeemable preferred stock........... (16,680)
Net loss (as restated) (Note 19)....... (4,147,439)
------------
Balance, January 1, 1998 (as restated)
(Note 19).............................. (1,250,866)
------------
Issuance of common stock for Total
College Communications acquisition... 462,697
Exercise of common options............. 141
Issuance of common stock............... 60,424
Issuance of Series C convertible
Preferred stock, net of offering
costs of $301,758.................... 9,775,971
Advance for Series C1 convertible
Preferred stock...................... 1,000,000
Issuance of Series B cumulative
warrants............................. 146,162
Issuance of common stock options....... 5,882
Accrued dividends on Series A
Redeemable preferred stock........... (150,000)
Discount accretion on Series A
Redeemable preferred stock........... (47,645)
Net loss (as restated) (Note 19)....... (11,837,000)
------------
Balance, December 31, 1998 (as restated)
(Note 19).............................. (1,834,234)
------------
</TABLE>
F-39
<PAGE> 209
TOTAL SPORTS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
(UNAUDITED AS TO THE SIX MONTHS ENDED JUNE 30, 2000 INFORMATION)
<TABLE>
<CAPTION>
SERIES B SERIES C SERIES C1 SERIES D
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
---------------------- ------------------ ------------------ ------------------
NUMBER OF NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ---------- --------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 (as restated)
(Note 19).............................. 445,263 $1,936,935 1,418,200 $1,418 $ $
Issuance of common stock...............
Exercise of common stock options.......
Issuance of Series C1 convertible
Preferred stock...................... 630,756 631
Issuance of common stock for Long
Distance Technologies acquisition....
Issuance of common stock options.......
Issuance of warrants in connection with
Convertible promissory notes
payable..............................
Issuance of Series D convertible
Preferred stock...................... 2,140,873 2,141
Issuance of Series E convertible
Preferred stock and common stock for
the NBC Sports agreement.............
Advertising received from NBC Sports as
payment for common stock.............
Accrued dividends on Series A
Redeemable preferred stock...........
Discount accretion on Series A
Redeemable preferred stock...........
Net loss (as restated) (Note 19).......
------- ---------- --------- ------ ------- ---- --------- ------
Balance, January 1, 2000 (as restated)
(Note 19).............................. 445,263 1,936,935 1,418,200 1,418 630,756 631 2,140,873 2,141
Exercise of common stock options.......
Issuance of common stock options.......
Advertising received from NBC Sports...
Remeasurement of stock issued for
prepaid advertising..................
Issuance of warrants in connection with
Convertible promissory notes
payable..............................
Accrued dividends on Series A
Redeemable preferred stock...........
Discount accretion on Series A
Redeemable preferred stock...........
Net loss...............................
------- ---------- --------- ------ ------- ---- --------- ------
BALANCE, JUNE 30, 2000.................. 445,263 $1,936,935 1,418,200 $1,418 630,756 $631 2,140,873 $2,141
======= ========== ========= ====== ======= ==== ========= ======
<CAPTION>
SERIES E
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------ ------------------ STOCK ISSUED ADDITIONAL
NUMBER OF NUMBER OF FOR PREPAID PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT ADVERTISING CAPITAL DEFICIT
--------- ------ --------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 (as restated)
(Note 19).............................. $ 1,755,180 $1,755 $ $ 12,354,277 $(16,128,619)
Issuance of common stock............... 18,550 19 28,734
Exercise of common stock options....... 13,109 13 14,589
Issuance of Series C1 convertible
Preferred stock...................... 4,779,725
Issuance of common stock for Long
Distance Technologies acquisition.... 284,401 284 3,227,667
Issuance of common stock options....... 106,174
Issuance of warrants in connection with
Convertible promissory notes
payable.............................. 378,379
Issuance of Series D convertible
Preferred stock...................... 34,026,360
Issuance of Series E convertible
Preferred stock and common stock for
the NBC Sports agreement............. 811,423 811 811,423 811 (13,461,508) 13,459,886
Advertising received from NBC Sports as
payment for common stock............. 876,687
Accrued dividends on Series A
Redeemable preferred stock........... (150,000)
Discount accretion on Series A
Redeemable preferred stock........... (44,005)
Net loss (as restated) (Note 19)....... (21,826,729)
------- ---- --------- ------ ------------ ------------ ------------
Balance, January 1, 2000 (as restated)
(Note 19).............................. 811,423 811 2,882,663 2,882 (12,584,821) 68,181,786 (37,955,348)
Exercise of common stock options....... 9,199 9 9,480
Issuance of common stock options....... 36,203
Advertising received from NBC Sports... 687,387
Remeasurement of stock issued for
prepaid advertising.................. 11,897,434 (11,897,434)
Issuance of warrants in connection with
Convertible promissory notes
payable.............................. 539,535
Accrued dividends on Series A
Redeemable preferred stock........... (75,000)
Discount accretion on Series A
Redeemable preferred stock........... (22,040)
Net loss............................... (26,657,581)
------- ---- --------- ------ ------------ ------------ ------------
BALANCE, JUNE 30, 2000.................. 811,423 $811 2,891,862 $2,891 $ 0 $ 56,772,530 $(64,612,929)
======= ==== ========= ====== ============ ============ ============
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIENCY)
-------------
<S> <C>
Balance, January 1, 1999 (as restated)
(Note 19).............................. $ (1,834,234)
Issuance of common stock............... 28,753
Exercise of common stock options....... 14,602
Issuance of Series C1 convertible
Preferred stock...................... 4,780,356
Issuance of common stock for Long
Distance Technologies acquisition.... 3,227,951
Issuance of common stock options....... 106,174
Issuance of warrants in connection with
Convertible promissory notes
payable.............................. 378,379
Issuance of Series D convertible
Preferred stock...................... 34,028,501
Issuance of Series E convertible
Preferred stock and common stock for
the NBC Sports agreement.............
Advertising received from NBC Sports as
payment for common stock............. 876,687
Accrued dividends on Series A
Redeemable preferred stock........... (150,000)
Discount accretion on Series A
Redeemable preferred stock........... (44,005)
Net loss (as restated) (Note 19)....... (21,826,729)
------------
Balance, January 1, 2000 (as restated)
(Note 19).............................. 19,586,435
Exercise of common stock options....... 9,489
Issuance of common stock options....... 36,203
Advertising received from NBC Sports... 687,387
Remeasurement of stock issued for
prepaid advertising..................
Issuance of warrants in connection with
Convertible promissory notes
payable.............................. 539,535
Accrued dividends on Series A
Redeemable preferred stock........... (75,000)
Discount accretion on Series A
Redeemable preferred stock........... (22,040)
Net loss............................... (26,657,581)
------------
BALANCE, JUNE 30, 2000.................. $ (5,895,572)
============
</TABLE>
See notes to consolidated financial statements.
F-40
<PAGE> 210
TOTAL SPORTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
<TABLE>
<CAPTION>
PERIOD
FEBRUARY 20, 1997 SIX MONTHS SIX MONTHS
THROUGH YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1997 1998 1999 1999 2000
----------------- ------------- ------------- ----------- ------------
(AS RESTATED, (AS RESTATED, (AS RESTATED,
SEE NOTE 19) SEE NOTE 19) SEE NOTE 19)
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net loss........................................ $(4,147,439) $(11,837,000) $(21,826,729) $(7,639,204) $(26,657,581)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 703,301 1,357,641 4,014,198 1,079,449 2,535,333
Loss on sale of property and equipment........ 7,212 7,433 1,420 104,649
Loss on disposal of discontinued operations
(Note 2).................................... 5,420,000
Compensation expense for common stock and
options granted............................. 23,474 106,174 27,332 36,203
Interest expense on line of credit
guarantee................................... 42,665 28,753 33,390
Amortization of debt discount................. 146,162 105,337 17,833 77,077
Interest expense on notes payable converted
into equity................................. 125,918
Advertising received as payment for common
stock....................................... 876,687 687,387
Provisions for doubtful accounts.............. 20,000 4,832 11,635 27,885 1,854
Reserve for sales returns..................... 14,820 400,913 589,102 (223,087)
Provisions for inventory obsolescence......... 37,138 106,845 392,162 297,162 96,797
Computer equipment received as payment for
advertising sales........................... (100,000) (100,000) (100,000) (77,191)
Undistributed (earnings) losses of
affiliates.................................. 24,077 (100,193) (16,372) (61,779)
Minority interest in joint venture earnings
(losses).................................... (138,341) 41,493
Changes in operating assets and liabilities:
Accounts receivable........................... (266,448) (742,092) (373,753) 70,566 177,386
Inventory..................................... (200,557) (111,822) (498,910) (461,781) (243,494)
Deferred publishing costs..................... (124,910) (364,827) (1,436,375) (96,804) (609,325)
Prepaid expenses and other current assets..... (66,543) (201,611) (966,378) (30,984) (1,058,504)
Accounts payable.............................. 337,097 349,430 (420,619) 3,086,705
Accrued expenses.............................. 343,586 820,485 1,694,741 589,045 (1,553,980)
Deferred revenues............................. 58,173 452,979 99,772
----------- ------------ ------------ ----------- ------------
Net cash used in operating activities....... (3,825,393) (9,860,365) (16,673,707) (6,621,682) (18,161,778)
Investing Activities:
Purchases of property and equipment............. (357,371) (740,824) (2,154,442) (395,664) (1,510,173)
Equity investment in Golf.Com................... (250,000)
Cash from acquired companies.................... 26,880 36,388 19,177
Acquisition of KOZ sports content business...... (1,414,240)
----------- ------------ ------------ ----------- ------------
Net cash used in investing activities....... (1,771,611) (963,944) (2,118,054) (376,487) (1,510,173)
Financing Activities:
Borrowings (repayments) on line of credit,
net........................................... 2,330,000 753,483 (3,083,483) (2,350,893)
Proceeds from issuance of notes payable and
short-term advances........................... 3,453,838 6,606,626 3,783,000 3,660,530
Principal repayments on notes payable and
short-term advances........................... (12,847) (102,016) (492,568) (11,493) (56,316)
Principal repayments on capital leases.......... (29,524) (167,187) (52,769) (291,863)
Proceeds from issuance of common stock and cash
contributions................................. 649,699 308 14,602 7,317 9,489
Proceeds from issuance of Series A redeemable
preferred stock, net.......................... 750,998
Proceeds from issuance of warrants in connection
with preferred stock offerings and convertible
notes payable................................. 179,000 146,162 10,957,452 217,000 539,535
Proceeds from issuance of Series B Convertible
Preferred stock, net.......................... 1,936,935
Proceeds from issuance of Series C Convertible
Preferred stock, net.......................... 6,050,054
Proceeds from issuance of Series C1 Convertible
Preferred stock............................... 1,000,000 4,780,356 4,780,356
Proceeds from issuance of Series D Convertible
Preferred stock............................... 17,162,465
----------- ------------ ------------ ----------- ------------
Net cash provided by financing activities... 5,833,785 11,272,305 35,778,263 6,372,518 3,861,375
Net Increase (Decrease) in Cash and Cash
Equivalents..................................... 236,781 447,996 16,986,502 (625,651) (15,810,576)
Cash and Cash Equivalents, Beginning of Period... 236,781 684,777 684,777 17,671,279
----------- ------------ ------------ ----------- ------------
Cash and Cash Equivalents, End of Period......... $ 236,781 $ 684,777 $ 17,671,279 $ 59,126 $ 1,860,703
=========== ============ ============ =========== ============
</TABLE>
See notes to consolidated financial statements.
F-41
<PAGE> 211
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION FOR PERIOD ENDED:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1997 1998 1999 1999 2000
------------ ------------ ------------ -------- ---------
<S> <C> <C> <C> <C> <C>
Cash paid for interest................. $37,287 $108,805 $577,415 $163,179 $146,055_
======= ======== ======== ======== =========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Period February 20, 1997 through December 31, 1997:
As discussed in Note 3, Total Sports issued 290,323 shares of common stock
valued at $133,548 as consideration for the purchase of the assets and
liabilities of Sports Extra, Inc. In connection with the Sports Extra
acquisition, Total Sports forgave a note receivable of $100,000 from Sports
Extra. Also related to the Sports Extra acquisition, Total Sports assumed two
notes payable, totaling $93,046, including accrued interest, related to
databases acquired from Sports Extra.
As also discussed in Note 3, Total Sports issued 33,142 shares of common
stock valued at $16,571 as consideration for the purchase of the assets and
liabilities of DesigNet.
In connection with the Series A redeemable preferred stock offering, Total
Sports converted an advance from a stockholder of $250,000 into 25,000 shares of
Series A redeemable preferred stock.
Total Sports reclassified an advance from a founding stockholder of
$125,000 as paid-in capital.
Total Sports accrued dividends of $127,500 and discount accretion of
$16,680 relating to the Series A redeemable preferred stock.
Year Ended December 31, 1998:
As also discussed in Note 3, Total Sports issued 418,971 shares of common
stock valued at $481,817 as consideration for the remaining 50% ownership of
Total College Communications Company.
Total Sports acquired certain computer databases for $361,359 by issuing a
note payable.
Total Sports acquired certain computer hardware valued at $225,154 by
entering into noncancelable capital leases.
Total Sports accrued dividends of $150,000 and discount accretion of
$47,645 relating to the Series A redeemable preferred stock.
Notes payable and accrued interest totaling $3,725,918 were converted into
Series C convertible preferred stock.
Year Ended December 31, 1999:
As discussed in Note 3, Total Sports issued 284,401 shares of common stock
valued at $3,227,951 as consideration for the purchase of the assets and
liabilities of Long Distance Technologies, Inc. d/b/a Motortrax Interactive.
Total Sports acquired certain computer hardware valued at $523,273 by
entering into noncancelable capital leases.
Total Sports acquired certain computer equipment valued at $114,921 by
entering into a 3-year promissory note with First Raleigh Telex.
Total Sports accrued dividends of $150,000 and discount accretion of
$44,005 relating to the Series A redeemable preferred stock.
Notes payable totaling $6,500,000 were converted into Series D convertible
preferred stock.
In connection with the NBC Sports, Inc. agreement discussed in Note 11,
Total Sports issued 811,423 stock units valued at $16.59 per unit in exchange
for prepaid advertising. Each stock unit consists of one share of common stock
and one share of Series E preferred stock.
F-42
<PAGE> 212
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Total Sports is an event-centered, online sports media company. Total
Sports provides sports fans and enthusiasts with live, or real-time, simulcasts
of events in eight collegiate and professional sports, game summaries, in-depth
statistical analysis, breaking news and the opportunity to purchase
sports-related merchandise. Total Sports' networks provide online sponsorship
and e-commerce opportunities for advertisers and merchants associated with
specific sports, leagues, teams and events. Total Sports also publishes
encyclopedias, fan guides and other hard and soft cover books.
Total Sports Inc. was originally incorporated on February 20, 1997 as Total
Ltd., a North Carolina corporation. Prior to March 31, 1997, Total Ltd.
conducted no business and had no activity. Concurrent with the KOZ acquisition
(see Note 3), Total Ltd. began its principal operations.
On May 29, 1998, Total Sports Inc. was incorporated in the State of
Delaware. The capital structure of Total Sports Inc. was identical to Total
Ltd.'s in terms of the authorized number of shares, dividends, voting rights,
liquidation preference and redemption rights, except that the new capital
structure authorized Total Sports Inc. to issue up to 5,000,000 shares of
preferred stock.
On June 2, 1998, Total Ltd. was merged with and into Total Sports Inc. The
separate existence of Total Ltd. ceased, and Total Sports Inc. became the
surviving corporation. Prior to the merger, Total Sports Inc. had no operations
or activity. As part of the merger, each share of Total Ltd.'s issued and
outstanding Series A redeemable, Series B convertible, and common stock was
converted into and exchanged for one share of Total Sports Inc.'s Series A
redeemable preferred stock, Series B convertible preferred stock, and common
stock, respectively. The shareholders of the two companies were exactly the same
prior to and after the merger. As the ownership structures of the entities did
not change, the assets and liabilities transferred in the merger were recorded
at Total Ltd.'s historical book values with no goodwill or other step-up in
basis recorded.
GOING CONCERN DISCUSSION
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the consolidated
financial statements, Total Sports has experienced a substantial increase in
operating expenses since inception in connection with the growth of its
operations and staffing and the expansion of its service offerings. From its
inception, Total Sports has incurred net losses of more than $64.5 million
(unaudited), including losses of approximately $21.8 million in 1999 and $26.7
million during the six months ended June 30, 2000 (unaudited). Total Sports
expects to continue to incur net losses for the foreseeable future as it
implements its business strategy. In addition, the Company had a working capital
deficiency at June 30, 2000 and net cash used in operating activities during the
six months ended June 30, 2000 totaled $18.2 million (unaudited). These factors
among others may indicate that the Company will be unable to continue as a going
concern for a reasonable period of time. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might be
necessary should Total Sports be unable to continue as a going concern.
As of June 30, 2000, Total Sports had approximately $1.9 million
(unaudited) in cash and cash equivalents. Management has determined that it must
raise additional funds to support its operations and implement its business
strategy over the next twelve months, and is undertaking efforts to raise
additional capital. These efforts include obtaining bridge financing and
additional capital contributions from existing stockholders (see Note 20).
Although no assurances can be given that the Company will be successful in
raising additional capital sufficient to continue its operations, based on Total
Sports' history of raising
F-43
<PAGE> 213
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
equity, management believes that it can successfully raise funds necessary to
support its plans on its intended timetable. In the event that Total Sports is
not able to raise such additional funds, management has prepared a contingency
operating plan that consists of reductions in personnel and marketing
expenditures which, in the opinion of management, could be implemented and could
allow Total Sports to continue its operations for a reasonable period of time.
However, the full implementation of this contingency plan could have material
adverse effects on Total Sports' long-term operations.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Financial Statements
The consolidated financial statements as of June 30, 2000 and for the six
months ended June 30, 1999 and 2000 are unaudited. In addition, disclosure
information subsequent to January 24, 2000 (the original issuance date of our
1999 financial statements) is unaudited (except for the going concern discussion
in Note 1 and Note 19). In the opinion of management, the unaudited consolidated
balance sheet at June 30, 2000, and the unaudited consolidated statements of
operations, stockholders' equity, and cash flows for the six months ended June
30, 1999 and 2000, include all adjustments, which include only normal recurring
adjustments, necessary to present the financial position and results of
operations and cash flows for the periods then ended in accordance with
accounting principles generally accepted in the United States of America.
The results of operations for the six months ended June 30, 1999 and 2000
are not necessarily indicative of results to be expected for the full fiscal
year or any other period. The results of operations and comparisons with prior
and subsequent interim periods are materially impacted by the results of
operations of businesses acquired. Furthermore, Total Sports experiences higher
levels of revenues during the first quarter than during the second or third
quarters. Historically, Total Sports has achieved its highest revenues in its
first quarter.
Principles of Consolidation
The accompanying consolidated financial statements are prepared on the
accrual basis of accounting and include the accounts of Total Sports and its
wholly-owned subsidiary, Sports Extra Acquisition Corporation.
The consolidated financial statements for the year ended December 31, 1999
also include the accounts of Total Motorsports, Inc., a wholly-owned subsidiary,
which was formed during 1999 and acquired Long Distance Technologies, Inc. on
June 4, 1999, and Total Sports Publishing, Inc., a wholly-owned subsidiary,
which was also formed during 1999. All of the assets related to Total Sports'
print publishing segment were transferred to Total Sports Publishing, Inc., as
of June 30, 1999. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Total Sports' 50% investment in Total College Communications Company is
accounted for by the equity method of accounting. As discussed in Note 3, Total
Sports acquired the remaining 50% of Total College Communications in June 1998
and began consolidating Total College Communications at that date. All
intercompany transactions have been eliminated in consolidation.
Total Sports' investment in Golf.Com is accounted for by the equity method
of accounting as Total Sports exerts significant influence over this entity.
F-44
<PAGE> 214
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
Cash and Cash Equivalents
The Company considers all money market accounts, debt instruments purchased
with an original maturity of six months or less, and other highly liquid
investments to be cash equivalents.
Concentration of Credit Risk
Total Sports relied on a single distributor for sales of all print titles
during 1997 and 1998. This distributor collected all sales proceeds and remitted
these monies, less the distribution fees, on a monthly basis. Effective February
1999, Total Sports entered into a termination agreement with the distributor
that allows Total Sports to utilize another national distributor for all of its
titles except Total Hockey, with the original distributor receiving from 3% to
5% of sales for all titles through July 2000. Total Sports paid approximately
$77,000 during 1999 and $0 during the six months ended June 30, 2000 to the
original distributor under the terms of the termination agreement.
Inventory
Inventory consists primarily of the direct costs associated with the
printing of finished books, such as printing, jacket costs, etc. Costs are
recorded as titles are developed and are expensed on a per unit basis when sold.
Total Sports establishes an allowance for obsolete inventory based on historical
and industry experience. All book inventories are fully reserved upon the
one-year anniversary of the book's release.
Deferred Publishing Costs
Total Sports' investment in publishing costs is capitalized and amortized
over the estimated selling period of one year using the sum-of-the-months digits
method beginning on the release date of the related book. Costs incurred for
titles that have not been released are classified as long-term deferred
publishing costs. Amortization expense was approximately $29,000 in 1997,
$574,000 in 1998, $862,000 in 1999, $358,000 for six months ended June 30, 1999
and $799,000 for the six months ended June 30, 2000.
Property and Equipment
Property and equipment is carried at historical cost and is being
depreciated using the straight-line method over the estimated useful lives of
the related assets over periods ranging from one to seven years.
Maintenance and repairs are charged to expense when incurred; improvements
are capitalized. Upon the sale or retirement of assets, the cost and accumulated
depreciation are removed from the account and any gain or loss is recognized.
Goodwill
Goodwill is amortized on a straight-line basis over the periods that
expected economic benefits will be provided, ranging from 19 months to 5 years.
Management estimates the period of economic benefit considering factors such as
existing contracts and estimated lives of other operating assets acquired. Total
Sports evaluates the realizability of goodwill when events or circumstances
indicate a possible inability to recover the carrying amount. Events which could
indicate an impairment of goodwill include loss of key contracts with sports
leagues such as the NCAA and NASCAR, a disposal of a segment or business line,
and the effects of obsolescence, demand, and competition on our products and
services.
In the event of a possible impairment, Total Sports evaluates enterprise
level goodwill using a market capitalization method based on quoted prices or
cash transactions of equity securities. If an impairment is indicated, the
impairment is measured as the net book value of Total Sports less the market
value of Total
F-45
<PAGE> 215
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
Sports' equity securities. Total Sports evaluates goodwill attributable to an
acquired business whose operations are separately identifiable and which has not
been incorporated into Total Sports' general operations based on cash flow of
the existing business, discounted at rates commensurate with the risks involved.
Such discount rates are determined after considering Total Sports' cost of
capital and incremental borrowing rates. If an impairment of goodwill from a
separate business is indicated, the impairment is measured as the excess of the
carrying value of goodwill of the separate business over the fair value, as
measured by the total discounted cash flows of the business. The analyses
require significant management judgment to evaluate the capacity of an acquired
business to perform within projections.
As of December 31, 1999, net goodwill summarized by amortization period is
as follows:
<TABLE>
<S> <C>
19 months - 3 years...................... $2,101,565
3 - 5 years.............................. 534,706
----------
$2,636,271
==========
</TABLE>
Databases
Databases represent the cost of acquiring historical statistical
information from outside parties in electronic formats. Databases are amortized
on a straight-line basis over a period of 7 years. Internal costs incurred to
accumulate statistical information are expensed as incurred.
Income Taxes
Deferred income taxes are recognized for the tax consequences of
"temporary" differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities and for the tax effect of net
operating and economic loss carryforwards under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount that management believes is more likely than not to be
realized. As of December 31, 1998 and 1999 and June 30, 2000, the net deferred
tax assets have been fully reserved.
Revenue Recognition
Total Sports derives revenues from three primary sources: digital
publishing; print publishing; and e-commerce. Digital publishing revenues result
from the sale of sponsorships and of banner advertisements, licensing of
statistical data and content, and providing web site development services for
third parties. Sponsorship revenues generally relate to specific sporting
championship events, such as the NCAA men's basketball championships.
Advertising revenues are typically derived from sales of banner advertisements
on Total Sports' Web sites. Sponsorship revenues are recognized in the period
that the sponsored event occurs and the sponsorship is displayed, provided that
no significant obligations remain, such as unmet commitments for guaranteed
minimum impressions ("page views" or "hits"). Advertising revenues are
recognized ratably over the period in which the advertisement is displayed,
provided that no significant obligations remain. In the event that sponsorships
or advertising contracts contain minimum impressions guarantees, revenue is
recognized as progress is made toward the minimum impression commitments or
using the straight-line method, whichever is less.
Licensing revenue for statistical data is recognized when the statistical
data has been delivered and Total Sports has no further obligations. Content
licensing revenue is recognized over the period of the license agreement as
Total Sports delivers the content. Web site development revenue is recognized as
the
F-46
<PAGE> 216
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
services are performed, provided that no significant obligations remain. If Web
site development fees relate to or originate from an agreement to license
content, the development fees revenue is recognized over the content license
period. Amounts billed or received for which services have not yet been provided
are recorded as deferred revenue in the current liabilities section of the
balance sheets.
Print publishing revenues are derived from the sale of encyclopedias and
other hard cover and soft cover books. For titles Total Sports publishes, print
publishing revenue is recognized upon the sale of books by a third-party
distributor. For books that Total Sports co-published, revenue is recognized as
Total Sports earns fixed advances that are paid by the co-publisher. Upon the
sale of books where Total Sports is the publisher, a reserve for right of
returns, based on historical and industry averages, of approximately 37.0% is
established. Allowance for sales returns of books totaled approximately $416,000
at December 31, 1998 and $985,000 at December 31, 1999, and $782,000 at June 30,
2000.
E-commerce revenues represent sales of sports equipment, apparel and
memorabilia through online stores and through live event merchandising.
E-commerce revenue is recognized upon the delivery to and acceptance of goods to
our customers, which occurs only after credit card authorization. During 1998
and 1999, approximately 75% of goods used to fulfill customer orders were
purchased by Total Sports from third-party manufacturers or distributors after
Total Sports received customer orders. For all e-commerce sales, Total Sports
assumes credit risk and is responsible for pricing, processing orders, arranging
or authorizing delivery, processing all merchandise returns, providing all
customer support related to the transaction, and resolving customer disputes.
Title to goods held on hand at Total Sports' offices transfers to Total Sports
at the time the goods are received by Total Sports from its suppliers. Title to
goods purchased from distributors and shipped directly to customers transfers to
Total Sports at the time the goods are shipped from the distributor. Title
transfers from Total Sports to the final customer at the time the goods are
delivered to and accepted by the customer. In the event goods are lost or
damaged during shipment from or return to the distributor and coverage is denied
by the commercial shipping company, Total Sports bears the risk of loss. Credit
card sales account for approximately 100% of total e-commerce sales in 1998 and
1999. Total Sports' policy is to record a sales returns reserve for anticipated
future returns; however, prior to quarter ended June 30, 1999, e-commerce sales
returns were insignificant and were netted from e-commerce revenue as incurred.
Subsequent to June 30, 1999, Total Sports has provided for estimated e-commerce
returns at the time of shipment based on historical data. Allowance for
e-commerce returns totaled approximately $20,000 at December 31, 1999 and
$15,000 at June 30, 2000.
Barter Transactions
Total Sports recognizes advertising revenue as a result of barter
transactions for advertising and direct links to Total Sports' TotalCasts for
baseball and other sports. Such revenue is recognized based on the fair value of
the consideration received, which generally consists of advertising and computer
equipment. Barter revenue and the corresponding expense are recognized in the
period the advertising is displayed. Management determines the fair value of
barter transactions based on currently available advertising rates for similar
advertising (i.e., size of advertisement, type of publication, etc.) or the
current cost of similar computer equipment.
As discussed in Note 11, during 1999 Total Sports entered into an agreement
with NBC Sports, Inc. for promotional and advertising services. Under the
agreement, NBC Sports will provide $17.4 million in on-air promotion and
marketing of all Total Sports' TotalCasts for which it has broadcast rights over
a 51-month period. The promotion and advertising received by Total Sports under
this agreement will be recognized as sales and marketing expense in the
consolidated financial statements as the services are provided by NBC Sports.
The $17.4 million of promotion and advertising is expected to be received by
F-47
<PAGE> 217
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
Total Sports in the following periods: 1999 -- 6%; 2000 -- 20%; 2001 -- 30%;
2002 -- 22%; and 2003 -- 22%.
Cost of Revenues
Digital publishing cost of revenues consists primarily of compensation and
benefits for the editorial and operations staff, contract labor, commissions,
royalty and license payments, content fees, and allocations of facilities and
other shared costs such as depreciation, telecommunications and computer-related
expenses.
To provide content for its digital publishing activities, Total Sports
acquires statistical data and content from newspaper wire feeds. In addition,
Total Sports has the right to accumulate statistical data and content through
license agreements with sports leagues. Wire feeds are expensed as cost of sales
when incurred. Content licensing costs are paid at the beginning of the license
period and expensed as cost of sales ratably over the license period. Costs
incurred for wire feeds and content licensing costs totaled approximately
$308,000, $786,000 and $1,163,000 for the periods ended December 31, 1997, 1998,
and 1999 and $544,000 and $1,017,000 for the six months ended June 30, 1999 and
2000.
Print publishing cost of revenues consists primarily of the direct costs of
books sold to customers, product fulfillment, amortization of deferred
publishing costs such as author fees and royalty payments, license fees, and
allocations of facilities and other shared costs.
E-commerce cost of revenues consists primarily of the direct costs of
merchandise sold to customers, and costs associated with credit card and other
commissions, product fulfillment, outbound shipping and handling costs, and
allocations of facilities and other shared costs.
Product Development Costs
During its development and modification in 1997 and 1998, Total Sports'
TotalCast software was intended for internal use only and not for sale to
third-parties. As such, during that time Total Sports expensed all development
costs related to the TotalCast software as incurred. During 1999, Total Sports
adopted the provisions of AICPA Statement of Position 98-1, Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use, which requires
specified costs of developing or obtaining internal-use software to be
capitalized and amortized. Due to Total Sports' history of complete revisions to
its TotalCast software and the substantial uncertainty surrounding future
technological requirements, Total Sports expenses as incurred the costs of
internally developed software with either expected useful lives of six months or
less or total project costs of $5,000 or less.
Advertising
Total Sports expenses advertising costs as incurred. Advertising expense
was approximately $86,000 for the period February 20, 1997 through December 31,
1997, $835,000 for the year ended December 31, 1998, $1,358,000 for the year
ended December 31, 1999, $817,000 for six months ended June 30, 1999 and
$5,040,000 for six months ended June 30, 2000. There were no advertising costs
reported as assets at December 31, 1998. At December 31, 1999 and June 30, 2000,
there were advertising costs totaling approximately $14,000 reported as prepaid
assets.
Stock Compensation
Total Sports' stock option plans are accounted for in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. Total Sports follows the disclosure requirements of SFAS No. 123,
Accounting for Stock Based Compensation.
F-48
<PAGE> 218
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
Warrants
Stock purchase warrants issued in connection with debt and equity
financings are recorded at amounts based on their relative estimated fair values
at time of issuance and credited to additional paid-in capital. Any resulting
debt discount is amortized to interest expense over the term of the related debt
using the interest method.
Fair Value of Financial Instruments
Total Sports' financial instruments consist of cash and cash equivalents,
trade receivables, trade payables, line of credit and notes payable. The
carrying values of cash and cash equivalents, trade receivables and trade
payables approximate fair value because of the short-term nature of these assets
and liabilities. The carrying values of the revolving line of credit
approximates fair value because the related interest rate is based on LIBOR. The
estimated fair values of notes payable, which consist of fixed-rate borrowings,
are based on future cash flows discounted at 7.75%. The estimated fair value of
notes payable, including current maturities, at December 31, 1998 is
approximately $337,000, as compared to a carrying value of $343,503. The
estimated fair value of notes payable at December 31, 1999 is approximately
$417,000, as compared to a carrying value of $410,580. The estimated fair value
of notes payable at June 30, 2000 is approximately $4,441,000, as compared to a
carrying value of $4,092,147.
Net Loss Per Share
Total Sports computes net loss per share in accordance with SFAS No. 128,
Earnings Per Share. Basic and diluted net loss per share is computed by dividing
the net loss applicable to common stockholders for the period by the
weighted-average number of shares of common stock outstanding during the period.
The calculation of diluted net loss per share excludes potential shares of
common stock if the effect is antidilutive. Potential shares of common stock are
composed of incremental shares of common stock issuable upon the exercise of
potentially dilutive stock options and warrants using the treasury stock method
and upon conversion of Total Sports' preferred stock. Diluted net loss per share
presented in the accompanying consolidated financial statements is the same as
basic net loss per share because Total Sports had losses for all periods
presented and inclusion of potential shares would therefore be antidilutive.
Accounting Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 amounts could differ from these
estimates.
Presentation
Certain amounts for 1997 and 1998 have been reclassified to conform to the
1999 presentation.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, and No. 131, Disclosures About Segments of an
Enterprise and Related Information. SFAS No. 130 requires that an enterprise (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the balance
F-49
<PAGE> 219
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
sheet. Total Sports has adopted SFAS No. 130 as of January 1, 1998; however,
this standard does not currently impact disclosures.
SFAS No. 131 requires that a public business enterprise report financial
and descriptive information about its reportable operating segments. This
statement defines operating segments as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. Total Sports has adopted SFAS No. 131 as of January 1,
1998.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 is effective for
financial statements for the years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs. The adoption of SOP 98-1 during the year ended
December 31, 1999 did not have a significant effect on the reported results of
operations, financial position or cash flows.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. In June 1999, the Financial Accounting Standards Board issued
SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133. This
statement postpones the effective date of SFAS No. 133. Total Sports will be
required to adopt the new reporting guidelines for the fiscal year beginning
January 1, 2001. Total Sports has not fully analyzed the provisions of this
statement or its effects on Total Sports.
On December 3, 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101 summarizes certain views
of the SEC staff in applying accounting principles generally accepted in the
United States of America to revenue recognition in financial statements. The SEC
issued Staff Accounting Bulletin No. 101B on June 26, 2000, which delays the
implementation date of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 15, 1999. Total Sports adopted SAB 101 as
of January 1, 2000; however, this bulletin does not have a significant impact on
Total Sports' revenues.
In January 2000, the Emerging Issues Task Force ("EITF"), the EITF reached
a consensus on EITF 99-17, Accounting for Advertising Barter Transactions (the
"Issue"). This Issue states that revenue and expense should be recognized at
fair value from an advertising barter transaction only if the fair value of the
advertising surrendered in the transaction is determinable based on the entity's
own historical practice of receiving cash, marketable securities, or other
consideration that is readily convertible to a known amount of cash for similar
advertising from buyers unrelated to the counterparty in the barter transaction.
If the fair value of the advertising surrendered in the barter transaction is
not determinable within the limits of this Issue, the barter transaction should
be recorded based on the carrying amount of the advertising surrendered, which
likely will be zero. This Issue may be applied either prospectively to
transactions after January 20, 2000, or as a change in accounting principle.
Total Sports has elected to adopt the provisions of the Issue prospectively. Had
Total Sports adopted the provisions of EITF 99-17 as of February 20, 1997 (date
of inception), reported barter revenues would have decreased by $-0- in 1997,
$427,000 in 1998 and $1,110,000 in 1999.
F-50
<PAGE> 220
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
2. DISCONTINUED OPERATIONS
On March 27, 2000, management of Total Sports adopted a plan to sell its
wholly-owned subsidiary, Total Sports Publishing, which comprises the entire
operations of Total Sports' print publishing segment. The revenues from the
print publishing segment were $257,344, $1,314,692, and $1,831,208, for 1997,
1998, and 1999, respectively, and $1,041,000 and $773,000 for the six months
ended June 30, 1999 and 2000. At June 30, 2000, Total Sports was in negotiations
to sell Total Sports Publishing to a related party who is minority shareholder
of the Company. See discussion of the final agreement to sell Total Sports
Publishing in Note 20. Accordingly, the operations of the discontinued print
publishing business have been segregated in the accompanying statements of
operations. Net revenues, cost of sales, and operating expenses associated with
the discontinued operations have been reclassified from all periods presented.
No allocation of interest income or interest expense has been attributed to the
discontinued operations. In addition, segregated operations of the print
publishing business and the expected loss on disposal reflect no income tax
benefit.
The assets of the print publishing business to be disposed of at June 30,
2000, are as follows:
<TABLE>
<CAPTION>
JUNE 30,
2000
----------
<S> <C>
Accounts receivable............................ $ 312,443
Inventories.................................... 380,007
Prepaid expenses............................... 27,884
Deferred publishing costs...................... 1,673,854
Property and equipment......................... 791,094
----------
Net assets held for disposition................ $3,185,282
==========
</TABLE>
3. BUSINESS ACQUISITIONS AND EQUITY INVESTMENTS
KOZ Acquisition
On March 31, 1997, Total Sports purchased certain assets and assumed
certain liabilities of the sports content business of KOZ inc., a related
company, for an aggregate cash purchase price of $1,414,240. This acquisition
was financed by borrowings under a line of credit (see Note 6). The KOZ
acquisition has been accounted for in accordance with the purchase method of
accounting and the accompanying consolidated financial statements of Total
Sports reflect the purchase price allocated to assets acquired and liabilities
assumed based on their fair values as of the acquisition date. Goodwill
resulting from the KOZ acquisition is being amortized over 3 years. The
following is a summary of the purchase price allocation in connection with the
KOZ inc. acquisition:
<TABLE>
<S> <C>
Current assets................................. $ 120,546
Property and equipment......................... 557,172
Goodwill....................................... 1,286,522
Liabilities assumed............................ (550,000)
----------
$1,414,240
==========
</TABLE>
Sports Extra Acquisition
Concurrent with the KOZ acquisition, Total Sports purchased all the assets
and assumed all the liabilities of Sports Extra, Inc., an unrelated company, for
an aggregate purchase price of $233,548. The Sports Extra acquisition was funded
by forgiveness of a note receivable from Sports Extra of $100,000 and the
issuance of 290,323 shares of Total Sports' common stock valued at $133,548.
Sports Extra was
F-51
<PAGE> 221
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
merged into Sports Extra Acquisition Corporation, the surviving corporation. The
Sports Extra acquisition has been accounted for in accordance with the purchase
method of accounting and the accompanying consolidated financial statements of
Total Sports reflect the purchase price allocated to assets acquired and
liabilities assumed based on their fair values as of the acquisition date.
Goodwill resulting from the Sports Extra acquisition is being amortized over 3
years. The following is a summary of the purchase price allocation in connection
with the Sports Extra acquisition:
<TABLE>
<S> <C>
Property and equipment......................... $ 7,049
Goodwill....................................... 631,142
Databases...................................... 293,039
Liabilities assumed............................ (697,682)
---------
$ 233,548
=========
</TABLE>
Total College Communications Acquisition
In June 1998, Total Sports acquired the remaining 50% interest that it did
not own of Total College Communications Company. Total Sports issued Host
Communications 418,971 shares of common stock valued at $481,817 for Host's 50%
interest in Total College Communications. Total College Communications was then
merged into Total Sports. The Total College Communication acquisition has been
accounted for in accordance with the purchase method of accounting and the
accompanying consolidated financial statements of Total Sports reflect the
purchase price allocated to assets acquired and liabilities assumed based on
their fair values as of the acquisition date. Goodwill resulting from the Total
College Communication acquisition is being amortized over three years. The
following is a summary of the purchase price allocation of the Total College
Communication acquisition:
<TABLE>
<S> <C>
Goodwill........................................ $496,384
Extinguishment of minority interest payable to
joint venture partner......................... 28,152
Liabilities incurred in acquisition............. (42,719)
--------
$481,817
========
</TABLE>
Golf.Com L.L.C. Investment
In May and July 1998, Total Sports invested a total of $250,000 for a 25%
voting interest in Golf.Com L.L.C. At the time of the investment, Total Sports'
underlying ownership of Golf.Com's net assets approximated $15,000. The $235,000
difference has been accounted for as goodwill and is being amortized over three
years. Total Sports is using the equity method of accounting for the Golf.Com
investment. As part of this investment, Total Sports assumed full control over
the managerial and operation functions of the Golf.Com Web site. In addition,
Total Sports entered into an operating agreement with Golf.Com in which it
assumed the liability for all operating expenses of running the web site for a
five-year period. Total expenses charged to operations from outside third
parties under the agreement, excluding the cost of e-commerce merchandise, were
approximately $630,000 for 1998 and approximately $1,312,000 for 1999.
Under the agreement, Total Sports initially receives a 15% stake in
Golf.Com's net profits and losses. If under Total Sports management the Golf.Com
Web site meets performance thresholds for both operating revenues and total Web
page views, Total Sports will receive an annual 2.5% increase in its share of
Golf.Com's net profits and losses with a maximum aggregate increase of 10%. The
performance thresholds consist of achieving annual operating revenues
progressing from $1,160,000 to $2,106,000 and
F-52
<PAGE> 222
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
achieving annual page views of approximately 47,000,000 to 85,300,000 over a
four-year period. If the performance thresholds are not met in any single year,
but the thresholds are met in a subsequent year, Total Sports will receive the
current year's 2.5% increase as well as all prior year's increases not
previously granted. For the six months ended December 31, 1998, Total Sports
recorded as equity in earnings (loss) of affiliate 15.0% of Golf.Com's net loss
before deduction of expenses required under the operating agreement, totaling
approximately $24,000. For the year ended December 31, 1999 and the six months
ended June 30, 2000, Total Sports recorded 15.0% of Golf.Com's net earnings
before deduction of expenses required under the operating agreement, totaling
approximately $100,000 and $62,000, respectively. All costs incurred by Total
Sports as required under the operating agreement were expensed as incurred.
Total Sports is primarily responsible for operating the Golf.Com Web site and
selling and arranging advertising and sponsorships to be included on the Web
site. Summarized financial information of Golf.Com as of December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
Total assets................................................ $ 983,527
Total liabilities........................................... $ 292,876
Net loss for the year ended December 31, 1999............... $(1,200,859)
</TABLE>
On June 8, 2000, Total Sports signed a definitive agreement to sell its 25%
investment in Golf.Com to Quokka Sports, Inc. for approximately 1,375,000 shares
of Quokka's common stock, valued at approximately $7.4 million, Total Sports
will continue to operate the Golf.Com Web site in connection with its existing
operating agreement with Golf.Com. The sale was completed on October 3, 2000.
Long Distance Technologies Acquisition
On June 4, 1999, Total Sports acquired 100% of the common stock of Long
Distance Technologies, Inc. d/b/a Motortrax Interactive and subsequently merged
it into a wholly-owned subsidiary of Total Sports named Total Motorsports, Inc.
The Long Distance Technologies acquisition was funded by issuance of 284,401
shares of Total Sports' common stock valued at $3,227,951. The acquisition was
accounted for in accordance with the purchase method of accounting. The final
purchase price allocation has not been finalized. Preliminary goodwill resulting
from the purchase of Long Distance Technologies is being amortized over a period
of 19 months, the remaining life of its contract with NASCAR. The following is a
summary of the preliminary purchase price allocation of the Long Distance
Technologies acquisition:
<TABLE>
<S> <C>
Current assets................................... $ 127,001
Property and equipment........................... 110,896
Goodwill......................................... 3,327,478
Liabilities assumed.............................. (337,424)
----------
$3,227,951
==========
</TABLE>
Total Sports also acquired deferred tax assets of approximately $394,000
relating to net operating and economic loss carryforwards in the acquisition.
These deferred tax assets were fully reserved at the acquisition date as
management determined it was more likely than not the loss carryforwards would
not be realized.
The 284,401 shares of Total Sports' common stock issued as consideration in
the Long Distance Technologies acquisition are being held in escrow until any
and all indemnification claims or disputed claims notices have been satisfied.
One-third of the shares held in escrow, less any portion to be forfeited to
satisfy any indemnification claims, are due to be released on June 4, 2000,
subject to the occurrence of a significant event. The escrow agreement defines a
significant event as the effectiveness of a registration
F-53
<PAGE> 223
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
statement for the sale of the shares held in escrow in a underwritten public
offering registered under the Securities Act of 1933, or the consummation of a
transaction or series of events that result in the escrowed shares becoming
publicly traded. If such a significant event occurs before June 4, 2000, then at
that date escrowed shares with a value in excess of $4.0 million shall be
released from escrow, less any portion subject to a disputed claims notice. Upon
the occurrence of a significant event after June 4, 2000, an additional amount
of escrowed shares then in excess of $4.0 million shall be released, less any
portion subject to a disputed claims notice. The remainder of the escrowed
shares shall be released December 4, 2000, to the extent the escrowed shares are
not required to be forfeited in satisfaction of indemnification claims or
disputed claims notices. In accordance with the escrow agreement, 94,800 shares
were released from escrow effective June 4, 2000.
The following unaudited pro forma information presents a summary of the
consolidated results of operations of Total Sports as if the Long Distance
Technologies acquisition occurred at January 1, 1998:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Total Revenues.......................................... $ 2,480,000 $ 6,799,000
Loss before preferred dividends......................... $(12,982,000) $(22,172,000)
Net loss applicable for common shareholders............. $(13,180,000) $(22,364,000)
Net loss per share -- basic and diluted................. $ (8.44) $ (12.57)
</TABLE>
In management's opinion, the unaudited pro forma information is not
necessarily indicative of actual results that would have occurred had the
acquisition been consummated at January 1, 1998, or of future operations of the
combined companies.
4. DEFERRED PUBLISHING COSTS
Deferred publishing costs at December 31, 1998, 1999 and June 30, 2000 are
summarized as follows:
<TABLE>
<CAPTION>
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Author fees........................................ $ 520,676 $ 611,513 $1,565,256
License and content fees........................... 68,219 377,411 485,955
Design costs....................................... 474,842 901,485 1,233,093
---------- ---------- ----------
Total deferred publishing costs.......... 1,063,737 1,890,409 3,284,304
Less long-term portion............................. 392,688 690,670 1,298,763
---------- ---------- ----------
Total current deferred publishing
costs.................................. 671,049 1,199,739 1,985,541
Less accumulated amortization...................... (574,000) (825,880) (1,610,450)
---------- ---------- ----------
Current deferred publishing costs, net........... $ 97,049 $ 373,859 $ 375,091
========== ========== ==========
</TABLE>
F-54
<PAGE> 224
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1999 and June 30, 2000 are
summarized as follows:
<TABLE>
<CAPTION>
DEPRECIABLE
LIVES 1998 1999 2000
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Fixtures and furniture......................... 7 years $ 108,502 $ 190,882 $ 232,893
Computer equipment............................. 3 years 1,728,240 3,747,937 5,495,729
Software (external and internally developed)... 1-3 years 251,749 1,126,662 1,890,835
Leasehold improvements......................... 3-7 years 12,815 144,560 804,094
---------- ----------- -----------
Total.......................................... 2,101,306 5,210,041 8,423,551
---------- ----------- -----------
Less accumulated depreciation.................. (793,903) (1,771,646) (2,916,167)
---------- ----------- -----------
Property and equipment, net.................... $1,307,403 $ 3,438,395 $ 5,507,384
========== =========== ===========
</TABLE>
Certain property and equipment is pledged as collateral for notes payable
and capital leases.
6. CREDIT FACILITY
During 1998 and part of 1999 Total Sports maintained a line of credit
facility with a commercial lending institution in the amount of $3,500,000. This
line of credit bore interest at the LIBOR Market Index Rate plus 1.50% (6.60% at
December 31, 1998). Subsequent to December 31, 1998, Total Sports entered into a
series of renewals for the credit facility, which extended the maturity date to
November 30, 1999 and increased the facility by $500,000 until October 5, 1999
at the same terms and conditions. This credit facility was secured by Total
Sports' property and equipment and personally guaranteed by Total Sports'
Chairman and Chief Executive Officer. The line of credit facility was paid in
full during November 1999 with the proceeds of the Series D preferred stock
offering.
In March 1999, Total Sports renewed an irrevocable letter of credit for the
benefit of an office equipment vendor in the amount of $47,000. This letter of
credit expired on February 2, 2000.
F-55
<PAGE> 225
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
7. NOTES PAYABLE
Notes payable outstanding at December 31, 1998, 1999 and June 30, 2000 are
as follows:
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- ----------
<S> <C> <C> <C>
Notes Payable:
Note payable for baseball publication assumed in Sports
Extra Acquisition, payable in annual installments of
$6,992 each January 1 through 2001, including
interest at 7.2%..................................... $ 18,287 $ 12,886 $ 6,523
Note payable for baseball, football and basketball
databases, Payable in $5,000 installments on January
1 and June 1 each year through June 1, 2005,
including interest at 7.2%........................... 54,109 47,913 41,273
Note payable for hockey database license, payable in
annual installments of $50,000 on August 1 through
2002, and payments of $75,000 on August 1, 2003 and
2004, including interest at 7.2%..................... 271,107 240,673 240,673
-------- -------- ----------
Total notes payable:................................. 343,503 301,472 288,469
Less current maturities of notes payable.................. 42,392 43,241 46,364
-------- -------- ----------
Notes payable, net of current maturities.................. $301,111 $258,231 $ 242,105
======== ======== ==========
Notes Payable -- Related Parties:
Promissory note payable to First Raleigh Telex, payable
monthly through March 2002 with interest at 9.0%,
collateralized by computer/digital equipment......... $ -- $ 89,384 $ 67,037
Promissory notes payable to preferred shareholders for
bridge loans payable on December 31, 2000 with
interest at 9.0%..................................... -- -- 3,736,641
Note payable to related party due December 31, 1999,
with interest at 8%.................................. -- 20,000 --
-------- -------- ----------
Total notes payable -- related parties............... -- 109,384 3,803,678
Less current maturities of notes payable -- related
parties................................................. -- 58,307 3,766,581
-------- -------- ----------
Notes payable -- related parties, net of current
maturities.............................................. $ -- $ 51,077 $ 37,097
======== ======== ==========
</TABLE>
Long-term debt maturing after one year as of December 31, 1999 is as
follows: 2000 -- $101,548; 2001 -- $92,764; 2002 -- $54,810; 2003 -- $73,493;
2004 -- $78,782 and thereafter -- $9,459.
In conjunction with the note payable for hockey databases, Total Sports
issued a warrant for 20,000 shares of common stock at an exercise price of
$7.106 per share, exercisable within 10 years.
In conjunction with the notes payable for bridge loans, Total Sports issued
warrants for 50,346 shares of Series D Preferred Stock at an exercise price of
$16.59 per share, exercisable at any time prior to May 31, 2010 or the closing
of the Company's sale of all or substantially all of its assets or acquisition
of the Company.
8. LEASE COMMITMENTS
Total Sports leases certain equipment under various operating leases. These
leases contain renewal clauses for terms of one to three years, with adjustments
in annual rentals for inflationary increases. Rental expense charged to
operations for all operating leases totaled approximately $102,000 during 1997,
$371,000 during 1998 and $649,000 during 1999. As of December 31, 1999, future
minimum lease
F-56
<PAGE> 226
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
commitments on leases that had initial or remaining non-cancelable lease terms
of one year or longer, are as follows:
<TABLE>
<S> <C>
2000............................................. $ 613,800
2001............................................. 605,506
2002............................................. 597,483
2003............................................. 534,762
2004............................................. 497,130
----------
Total minimum lease payments..................... $2,848,681
==========
</TABLE>
Total Sports leases certain computer equipment under noncancelable leasing
arrangements, collateralized by the equipment, which are classified as capital
leases. The asset balance related to capital leases totaled $252,153 and
$775,426 at December 31, 1998 and 1999. Amortization expense related to assets
from capitalized leases was $36,696 and $145,094 for the years ended December
31, 1998 and 1999.
As of December 31, 1999, future minimum lease payments for capital leases
that have initial or remaining terms in excess of one year are as follows:
<TABLE>
<S> <C>
2000........................................................ $372,120
2001........................................................ 244,065
2002........................................................ 34,931
--------
Total minimum lease payments................................ 651,116
Less amount representing executory costs.................... 18,253
--------
Net minimum payments due.................................... 632,863
Less amount representing interest (11% to 26%).............. 81,147
--------
Present value of future minimum lease payments.............. 551,716
Less current portion........................................ 282,867
--------
Long-term portion of capital lease obligations.............. $268,849
========
</TABLE>
On August 8, 1999, Total Sports entered into a ten-year lease for office
space with First Raleigh Telex, LLC. Frank Daniels, Jr., a Total Sports director
and stockholder, is the beneficial owner of First Raleigh Telex.
F-57
<PAGE> 227
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
9. INCOME TAXES
The components of Total Sports' net deferred tax asset (liability) as of
December 31, 1998 and 1999, is as follows:
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............... $ 5,355,000 $ 12,533,000
Accrued vacation and salaries.................. 98,000 218,000
Bad debt and sales return reserves............. 173,000 407,000
Inventory allowance............................ 129,000 210,000
Depreciation................................... 79,000 64,000
Amortization of goodwill....................... 255,000 391,000
Capitalized development costs.................. 98,000
Other.......................................... 43,000 55,000
----------- ------------
Total deferred tax assets...................... 6,132,000 13,976,000
Valuation allowance............................ (6,132,000) (13,976,000)
----------- ------------
Net deferred tax assets........................ $ -- $ --
=========== ============
</TABLE>
Based on management's evaluation of the positive and negative evidence
impacting the realizability of the deferred tax assets, a valuation allowance
has been provided. Management has considered Total Sports' history of losses and
concluded that as of December 31, 1998 and 1999, and June 30, 2000, the net
deferred tax assets should be fully reserved as it is more likely than not the
deferred tax assets will not be realized.
For the periods ended December 31, 1997, 1998 and 1999, reported income
taxes differ from income tax benefit that would result from applying the federal
statutory rate of 34% to pretax loss due to the following:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Computed expected tax benefit............... $(1,411,000) $(4,026,000) $(7,422,000)
State income tax benefit, net of federal
benefit................................... (212,000) (605,000) (1,116,000)
Amortization................................ 62,000 85,000 571,000
Advertising................................. -- -- 298,000
Other....................................... 7,000 (32,000) 219,000
Change in valuation allowance............... 1,554,000 4,578,000 7,450,000
----------- ----------- -----------
Income tax benefit.......................... $ -- $ -- $ --
=========== =========== ===========
</TABLE>
During 1999, Total Sports acquired deferred tax assets relating to net
operating loss carryforwards of approximately $394,000 from the Long Distance
Technologies acquisition. These deferred tax assets were fully reserved for at
the acquisition date as it was more likely than not the assets would not be
realized.
Total Sports has operating and economic loss carryforwards of approximately
$32,000,000 at December 31, 1999 expiring 2012 through 2019, which can be offset
against future federal and state taxable income. Under the Tax Reform Act of
1986, the amounts of and benefits from net operating losses carried forward may
be impaired or limited in certain circumstances. Events which might cause
limitations in the amount of net operating losses that Total Sports may utilize
in any one year include, but are not limited to, a cumulative change in
ownership of more than 50% over a three-year period. At December 31, 1999, the
effect of such limitations, if imposed, is not expected to be significant.
F-58
<PAGE> 228
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
10. SERIES A REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Series A Redeemable Preferred Stock
In June 1997, Total Sports raised net proceeds of $750,998 from the
issuance of 100,000 shares of Series A redeemable preferred stock and $179,000
from the issuance of warrants to purchase 365,218 shares of common stock at
$0.01 per share to one institutional investor and one individual investor. These
warrants expire in June 2007 and are exercisable upon the occurrence of an
extraordinary event. An extraordinary event is defined as follows:
- A merger, consolidation, sale or reorganization in which Total Sports or
any of its subsidiaries is not the surviving corporation and in which the
warrant holders receive cash or securities.
- The consummation of a registered public offering of common stock or other
equity interests of Total Sports.
- A sale, lease or exchange, directly or indirectly, of all or
substantially all of the property and assets of Total Sports, whether or
not in the ordinary course of business, in which the warrant holders
receive cash or securities.
In conjunction with the execution of the Series A offering, Total Sports
issued to the placement agent warrants to purchase 6,598 shares of common stock
with an exercise price of $3.44 per share. The warrants expire upon the earliest
to occur of (a) June 2002, (b) the acquisition of Total Sports or (c) the
consummation of an initial public offering of common stock or other equity
interests of Total Sports. Concurrent with the Series A offering, an advance
from a stockholder of $250,000 was converted into 25,000 shares of Series A
stock.
Unless previously redeemed, all shares of Series A stock shall, at the
option of the holders of a majority of the issued and outstanding shares of
Series A stock, be redeemed by Total Sports at a price per share of $10.00 plus
all accrued and unpaid dividends upon the earlier of (a) June 2, 2002 or (b) an
extraordinary or liquidating event, as defined above. The carrying value of the
Series A stock is increased by periodic accretion, in the form of accrued
dividends, so that the carrying value will equal the mandatory redemption value
on the mandatory redemption date of June 2, 2002. Such accretion totaled $16,680
in 1997, $47,645 in 1998, $44,005 in 1999, $21,905 for the six months ended June
30, 1999 and $22,040 for the six months ended June 30, 2000.
Upon the occurrence of an extraordinary event, as defined above, Series A
stockholders will calculate the annual internal rate of return on the common
stock exercisable under their warrants. If the internal rate of return is less
than 45%, then the stockholders may require redemption by Total Sports at a
price per share of $10.00 plus all accrued and unpaid dividends. If the internal
rate of return is greater than 45%, then Total Sports may redeem the Series A
stock and all accrued and unpaid dividends at the extraordinary event redemption
price of $0.01 per share. At December 31, 1999, the price per share required to
achieve greater than 45% internal rate of return was $8.67.
Series B Convertible Preferred Stock
In November 1997, Total Sports raised net proceeds of $1,936,935 from the
issuance of 445,263 shares of Series B stock to an institutional investor and
several individual investors. In conjunction with this transaction, Total Sports
issued to the placement agent warrants to purchase 8,285 shares of common stock
with an exercise price of $4.94 per share. Such warrants expire upon the
earliest to occur of (a) June 2002, (b) the acquisition of Total Sports or (c)
the consummation of an initial public offering of common stock or other equity
interests of Total Sports.
F-59
<PAGE> 229
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
Series C Convertible Preferred Stock
In August 1998, Total Sports raised net proceeds of $9,775,971 from the
issuance of 1,418,200 shares of Series C stock to both institutional and
individual investors. In conjunction with this transaction, Total Sports issued
to the placement agent warrants to purchase 31,458 shares of common stock with
an exercise price of $7.82 per share. Such warrants expire upon the earliest to
occur of (a) June 2003, (b) the acquisition of Total Sports or (c) the
consummation of an initial public offering of common stock or other equity
interests of Total Sports.
Series C1 Convertible Preferred Stock
In December 1998, Total Sports received a $1,000,000 contribution of
capital towards the purchase of Series C1 stock from several existing
stockholders. In January and April 1999, Total Sports raised net proceeds of
$5,780,356, $1,000,000 of which was advanced by existing stockholders in
December 1998, from the issuance of 630,756 shares of Series C1 stock to both
institutional and individual investors. In conjunction with these transactions,
Total Sports issued to the placement agent warrants to purchase 12,907 shares of
common stock with an exercise price of $10.44 per share. Such warrants expire
upon the earliest to occur of (a) January 2004, (b) the acquisition of Total
Sports or (c) the consummation of an initial public offering of common stock or
other equity interests of Total Sports.
Series D Convertible Preferred Stock
On November 12, 1999, Total Sports raised net proceeds of $23,449,428 from
the issuance of 2,140,873 shares of Series D preferred stock and $10,579,073
from the issuance of warrants exercisable for an aggregate 963,370 shares of
Series D1 preferred stock, at an exercise price of $16.59 per share, to a
venture capital fund, various companies and several individual investors. The
Series D and D1 preferred stock is initially convertible into common stock on a
ratio of one-to-one. In the event that the per share price of common stock sold
in an initial public offering is less than $33.18, the conversion ratio of the
Series D preferred stock will be adjusted so that holders of Series D preferred
stock will be entitled to receive additional common stock so that each preferred
share will be convertible into $33.18 of common stock. Under the provision of
Emerging Issues Task Force Abstract 98-5, Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios, in the event of an initial public offering, Total Sports will be
required to record the beneficial conversion features associated with the Series
D preferred as a dividend of $24,938,000. This non-cash dividend will be
credited to additional paid in capital. In conjunction with this transaction,
Total Sports issued 46,004 agents warrants to purchase common stock at an
exercise price of $18.25 per share. Such warrants are exercisable upon the
occurrence of an extraordinary event, as defined above, and expire in November
2003.
Series E Convertible Preferred Stock
In connection with the NBC Sports advertising and promotion agreement
discussed in Note 10, NBC Sports received 811,423 stock units of Total Sports
valued at $16.59 per unit. Each stock unit consisted of one share each of Total
Sports' common stock and Series E Convertible Preferred Stock. The Series E
stock provides NBC Sports with a liquidation preference above common
stockholders but subordinate to all other preferred stockholders in the event of
a merger, acquisition or other liquidating event. The Series E shares are
convertible into one share of common stock for every 100,000 shares of Series E
stock at the option of NBC Sports at any time, and automatically convert into
common shares upon completion of an initial public offering by Total Sports. The
Series E shares are not entitled to dividends and have voting rights limited to
matters that would adversely affect the rights of the Series E shares.
F-60
<PAGE> 230
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
Senior Employee Preferred Stock
In May 2000, Total Sports granted stock options to employees to acquire
shares of Total Sports' senior employee preferred stock. The senior employee
preferred shares are entitled to dividends subject to the dividend preferences
of the Series A, Series B, Series C, Series C1, Series D, and Series D1 shares.
The employee preferred shares are entitled to vote a number of votes equal to
the number of common shares into which the senior employee preferred shares
could be converted. The senior employee preferred stockholders have liquidation
preference above all other preferred stockholders and common stockholders in the
event of a merger, acquisition or other liquidating event. The senior employee
preferred shares are convertible into one share of common stock for every share
of senior employee preferred stock at the option of the holder at any time, and
automatically convert into common shares upon completion of an initial public
offering by Total Sports.
Preferred Stock Conversion Rights
Each holder of Series B, Series C, and Series C1 stock shall have the right
to convert all or any portion of such shares at any time into shares of Total
Sports' common stock at an initial conversion rate of 1:1. Upon either
completion of a public offering of common stock of at least $20 million and a
per share price greater than $7.106 or the written consent of 80% of the Series
B, Series C, and Series C1 stockholders, all of the outstanding Series B, Series
C, and Series C1 shares automatically convert into shares of common stock at the
conversion rate then in effect. As discussed above, the Series D stock has
beneficial conversion features contingent upon the per share price of common
stock sold in an initial public offering. The Series E stock automatically
converts into one share of common stock for every 100,000 shares of Series E
stock upon completion of an initial public offering. The senior employee
preferred stock automatically converts into one share of common stock upon
completion of an initial public offering.
Preferred Stock Dividend Rights
The holders of the Series A stock are entitled to receive cumulative
dividends of $1.20 per share per annum, payable quarterly, when and if declared
by Total Sports' Board of Directors. To the extent not paid on the quarterly
payment date, all dividends which have accrued on each share of Series A stock
outstanding during the period ending upon each quarterly payment date shall be
accumulated and remain accumulated dividends with respect to such shares until
paid to holders thereof. So long as any share of Series A stock remains
outstanding, no dividends shall be paid upon, or declared or set apart for, the
Series B convertible preferred stock, the Series C convertible preferred stock,
the Series C1 convertible preferred stock, the Series D convertible preferred
stock or common stock or any other class of stock, unless and until all
cumulative dividends on the then outstanding Series A stock for all past
dividend periods have been or concurrently shall be paid. Dividends of $127,500,
$150,000 and $150,000 were accrued on the Series A stock in 1997, 1998 and 1999,
respectively. These dividends, in addition to the accreted dividends discussed
above, are reflected as the total increases in the carrying value of Series A
stock in the accompanying consolidated financial statements.
F-61
<PAGE> 231
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
After all cumulative dividends on the then outstanding shares of Series A
stock for all past dividend periods have been paid, the holders of Series B,
Series C, Series C1 and Series D stock are entitled to receive the following
pro-rata annual dividends per share, payable quarterly, when declared by Total
Sports' Board of Directors:
<TABLE>
<S> <C>
Series B..................................... $0.54
Series C..................................... $0.85
Series C1.................................... $1.14
Series D..................................... $1.99
Series D1.................................... $1.99
</TABLE>
To the extent not paid on the quarterly payment date, all dividends which
have accrued on each share of Series B, Series C, Series C1, Series D and Series
D1 stock outstanding during the period ending upon each quarterly payment date
shall be accumulated and remain accumulated dividends with respect to such
shares until paid to holder thereof or converted into shares of common stock in
accordance with the conversion privileges. Upon conversion of Series B, Series
C, Series C1, Series D and Series D1 stock into shares of common stock in
accordance with the conversion privileges, any outstanding accumulated dividends
shall be forfeited upon such conversion. Subject to the restrictions referred to
above related to Series A dividends, if any shares of Series B, Series C, Series
C1, Series D and Series D1 stock remain outstanding on September 30, 2004, then
all accumulated and unpaid dividends on Series B, Series C, Series C1, Series D
and Series D1 stock shall be paid in cash to the holders thereof.
At December 31, 1999, cumulative unpaid dividends on the Series B, Series
C, Series C1, Series D and Series D1 stock were as follows:
<TABLE>
<S> <C>
Series B................................. $ 721,326
Series C................................. 1,899,926
Series C1................................ 745,168
Series D................................. 1,632,357
Series D1................................ --
----------
Total.................................. $4,998,778
==========
</TABLE>
No dividends have been declared on the Series B, Series C, Series C1,
Series D and Series D1 stock and accordingly no liability has been recorded.
The Series E convertible preferred stock is not entitled to dividends.
The senior employee preferred shares are entitled to dividends subject to
the dividend preferences of the Series A, Series B, Series C, Series C1, Series
D, Series D1
Preferred Stock Liquidation Privileges
Upon the dissolution, liquidation, or winding up of Total Sports, whether
voluntary or involuntary, each share of senior employee preferred stock shall be
entitled to receive consideration calculated by dividing 8% of the aggregate
consideration by the number of outstanding senior employee preferred shares. The
holders of the senior employee preferred stock will receive any distribution
prior to the holders of any other series of preferred stock and common stock.
Upon the dissolution, liquidation, or winding up of Total Sports, whether
voluntary or involuntary, the holders of outstanding Series A stock shall be
entitled to receive $10 in cash for each share of Series A stock, together with
all accrued and unpaid dividends, after all obligations to the senior employee
preferred stockholders have been satisfied. If upon such liquidating event the
assets of Total Sports are insufficient to permit the payment of the Series A
liquidation value,
F-62
<PAGE> 232
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
the assets of Total Sports shall be distributed to the holders of Series A stock
ratably until the holders shall have received the full amount to which they
would otherwise be entitled.
Upon the dissolution, liquidation, or winding up of Total Sports, whether
voluntary or involuntary, the holders of outstanding Series B, Series C, Series
C1, Series D and Series D1 stock shall be entitled to receive, after all
obligations to the senior employee preferred stockholders and the Series A
stockholders have been satisfied, the following liquidation rates in cash for
each share of Series B, Series C, Series C1, Series D and Series D1 stock,
together with all accrued and unpaid dividends:
<TABLE>
<S> <C>
Series B................................... $ 4.492
Series C................................... $ 7.106
Series C1.................................. $ 9.490
Series D................................... $33.180
Series D1.................................. $16.590
</TABLE>
If upon such liquidating event, the assets of Total Sports are insufficient
to permit the payment of the Series B, Series C, Series C1, Series D and Series
D1 liquidation values, the assets of Total Sports shall be distributed to the
holders of Series B, Series C, Series C1, Series D and Series D1 stocks ratably
until the holders shall have received the full amount to which they would
otherwise be entitled.
Upon the dissolution, liquidation, or winding up of Total Sports, whether
voluntary or involuntary and after the payment in full of the Series A, Series
B, Series C, Series C1, Series D and Series D1 liquidation preferences, the
holders of outstanding Series E stock shall be entitled to receive for each
share of Series E preferred stock cash for the amount by which $32.11 exceeds
the amount distributable to each share of common stock.
Preferred Stock Covenants
All of Total Sports' preferred stock investment agreements contain
covenants restricting the ability of Total Sports and any of its subsidiaries
without prior written consent to among other things:
- Incur or assume additional indebtedness or obligations
- Incur liens
- Engage in mergers, acquisitions or asset sales
- Declare dividends or redeem or repurchase capital stock
- Engage in transactions with affiliates
Common Stock
Total Sports was originally capitalized with cash of $650,000 from a
founding stockholder. In February 1997, Total Sports issued 961,291 shares to
founders and related parties in connection with the incorporation of Total
Sports.
F-63
<PAGE> 233
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
As discussed in Note 3, Total Sports has issued common stock as
consideration in connection with the following acquisitions:
<TABLE>
<CAPTION>
NUMBER OF
ACQUIRED ENTITY TRANSACTION DATE COMMON SHARES
--------------- ----------------- -------------
<S> <C> <C>
Sports Extra................................ March 31, 1997 290,323
DesigNet.................................... December 22, 1997 33,142
Total College Communications................ June 2, 1998 418,971
Long Distance Technologies.................. June 4, 1999 284,401
</TABLE>
In May 1997, Total Sports issued warrants to purchase 16,200 shares of
common stock to two founding stockholders exercisable at $3.42 per share and
expiring upon the earliest to occur of (a) May 2007, (b) the acquisition of
Total Sports or (c) the consummation of an initial public offering of common
stock or other equity interests of Total Sports. No value was attributed to
these warrants using the Black-Scholes model, because the exercise price was
significantly greater than the market value of the common stock on the date of
grant. The fair value of the common stock warrants was calculated on the date of
the grant with the following assumptions: dividend yield of 0%; volatility of
70%; risk-free rates of approximately 6%; and expected lives of 10 years.
During 1998, the Chairman and Chief Executive Officer received 37,100
shares of common stock valued at $1.15 per share for his personal guarantee of
Total Sports' line of credit. The total value of these shares, as determined by
independent valuations, has been included in interest expense for the year ended
December 31, 1998.
On March 26, 1999, in connection with the refinancing of the $3,500,000
line of credit as discussed in Note 6, Total Sports' Board of Directors approved
the issuance of 18,550 shares of common stock valued at $1.55 per share to its
Chairman and Chief Executive Officer. The Chairman and Chief Executive Officer
received these shares for his personal guarantee of Total Sports' line of credit
until July 15, 1999. The total value of these shares has been included in
interest expense for the year ended December 31, 1999.
The terms of Total Sports' Restated Certificate of Incorporation prohibit
the payment of dividends to common stockholders prior to payment of all
accumulated dividends on preferred stock.
11. NBC SPORTS AGREEMENT
On November 12, 1999, Total Sports entered into an agreement with NBC
Sports, Inc. for promotion and advertising services. NBC Sports received 811,423
stock units of Total Sports valued at $16.59 per stock unit in exchange for
$17.4 million of on-air promotion and marketing of all of Total Sports'
TotalCasts for which it has the broadcast rights over a 51-month period. NBC
Sports will calculate the value of the promotion delivered at 100% of the rate
charged by NBC Sports to other customers for similar promotions during the time
period. Each stock unit issued to NBC Sports consisted of one share each of
Total Sports' common stock and Series E convertible preferred stock. NBC Sports
also received one seat on the Board of Directors of Total Sports. See Note 10
for discussion of the rights and privileges of the Series E preferred stock.
The original stock units issued to NBC Sports are "earned" as NBC Sports
provides advertising to Total Sports. Advertising expense relating to the earned
shares will be valued and recorded by Total Sports at the average fair value of
the common stock during the period in which the advertising was provided, up to
$21.41 per share. The prepaid advertising from NBC Sports and the unearned
shares outstanding at each reporting date will be remeasured at the then-current
fair value of the common stock, up to $21.41 per share. The prepaid advertising
due from NBC Sports has been recorded as a debit to prepaid
F-64
<PAGE> 234
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
advertising within the stockholders' equity (deficiency) section of the
accompanying balance sheet for the year ended December 31, 1999. Total Sports
recognized a non-cash charge to advertising expense of approximately $877,000 in
1999 and $687,000 during the six months ended June 30, 2000 relating to
advertising provided by NBC Sports under the agreement.
To the extent that NBC Sports does not meet the scheduled amount of
promotion during any quarter, NBC Sports will make up such shortfall the next
quarter or by June 30 of the following year. In the event any shortfall has not
been made up, NBC Sports is required to either pay the amount of such shortfall
back to Total Sports in cash or return common stock (plus any "Additional
Shares" issued in respect thereof as described below) equal to the amount of
such shortfall calculated using a value of $21.41 per share. If NBC Sports
returns common stock under the above terms, they must also return a pro rata
portion of the 811,423 Series E preferred shares.
If an advertising shortfall occurs that is not resolved to the satisfaction
of both parties, management of Total Sports expects NBC Sports to return common
stock if the fair value of the common stock is less than $21.41 per share. If
the fair value of the common stock exceeds $21.41 per share, management expects
NBC Sports to pay cash equal to the advertising shortfall. This expectation is
based on the economic benefit that NBC Sports will receive from remitting either
common stock or cash as consideration for the advertising shortfall, whichever
has the lowest fair value. In instances where the fair value of Total Sports'
common stock exceeds $21.41 per share, then the stock to be returned under the
agreement (calculated using $21.41 per share) would have a higher fair value
than the required cash payment. In this event, NBC Sports would remit the cash
payment. The practical obligation of NBC Sports to pay cash for an advertising
shortfall if the fair value of the common stock is greater than $21.41 per share
is deemed to be a disincentive for nonperformance sufficiently large enough so
as to constitute a performance commitment on the part of NBC Sports. Therefore,
in accordance with Emerging Issues Task Force Abstract 96-18, Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services, the shares earned by NBC Sports
will be valued and recorded at the average fair value of the common stock during
the period in which the advertising was provided, up to $21.41 per share. When
the fair value of the common stock exceeds $21.41 per share, the value of the
advertising provided is capped at $21.41 per share.
In the event that an initial public offering of Total Sports common stock
is consummated at a price less than $32.11 per share, then Total Sports will
issue additional shares of common stock ("Additional Shares") to NBC Sports in
an amount such that NBC Sports receives stock worth $32.11 for each share
originally issued to them. The issuance of Additional Shares would result in a
credit to common stock for the fair value of the Additional Shares, a debit to
prepaid advertising, and a debit to advertising expense equal to the pro rata
portion of the original stock units issued to NBC Sports that have been earned.
The Additional Shares will be remeasured at each reporting date based on the
then-current fair value of the common stock. If Additional Shares are issued,
the per share price at which NBC Sports has a disincentive to return the shares
will be lowered from $21.41 per share to a calculated value based on the total
number of shares issued. However, in no case will shares issued with a fair
value greater than $21.41 per share be remeasured to a lower per share value
until the fair value of the common stock drops below that per share price.
If Total Sports secures rights from the National Basketball Association
(the "NBA") to provide events coverage of NBA and Women's NBA (the "WNBA")
regular season games before July 31, 2000 (the "NBA Rights"), NBC Sports will
commit to deliver an additional $8.0 million of promotion of Total Sports'
coverage of NBA/WNBA events, subject to NBC Sports' ownership of television
broadcast rights for those events and NBC Sports' receipt of permission from the
NBA (at no cost to NBC Sports) to run the promotion. The value of the additional
promotion will be calculated by NBC Sports at 100% of the
F-65
<PAGE> 235
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
rate charged by NBC Sports to other customers for similar promotions during the
time period. Within 60 days of Total Sports' receiving the events coverage
rights from the NBA, NBC Sports and Total Sports shall agree on a schedule for
the additional promotion commitment.
In return for its additional NBA/WNBA promotion commitment described above,
NBC Sports would receive $8.0 million in additional shares of Total Sports'
common stock. If Total Sports' common stock is not publicly traded on a
nationally recognized exchange, the additional shares will be granted at price
per share equal to the lower of (1) $25.69 or (2) the price per share associated
with Total Sports' round of private cash financing of at least $10.0 million
completed most recently prior to the acquisition of such NBA Rights, with such
price per share increased at a rate of 1% per month, compounded monthly, with
such increase commencing on the date of the closing of the private financing. If
shares of Total Sports' common stock are publicly traded on a nationally
recognized exchange, the additional shares would be granted at the 30-day
trailing average closing price as of the date on which Total Sports obtained the
NBA Rights in writing.
As of August 1, 2000, Total Sports had not secured the NBA Rights.
12. STOCK OPTIONS AND WARRANTS
Stock Options
Total Sports has a stock option plan pursuant to which employees, officers,
and directors of Total Sports may be granted stock options to acquire up to a
maximum of 1,185,000 shares of Total Sports' common stock. On March 26, 1999,
the Board of Directors approved an increase in the employee option pool to 10%
of fully diluted shares outstanding. This resulted in an increase of
approximately 470,000 shares. Generally, options granted vest over a three-year
period as follows: 25% at the end of year one, an additional 25% at the end of
year two and the remaining 50% at the end of year three. Certain 1999 and 2000
grants vest monthly over a 3-year period. Incentive stock option exercise prices
are no less than 100% of the fair market value of the common stock at the date
of grant, as determined by Total Sports' Board of Directors. Non-qualified stock
options issued to directors have an exercise price of $0.01. Vested options may
be exercised for a period of up to ten years from the date of grant.
A summary of the changes in Total Sports' option plan as of and for the
periods ended December 31, 1997, 1998 and 1999 and June 30, 1999 and 2000 is
presented below:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999 JUNE 30, 1999 JUNE 30, 2000
------------------ ------------------ ------------------- ------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------ --------- ------ --------- ------- --------- ------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year............... -- $ -- 20,538 $0.50 90,613 $ 0.66 90,613 $0.66 468,773 $ 9.37
Granted............... 20,538 0.50 77,444 0.71 405,207 10.99 305,924 9.68 674,357 11.64
Exercised............. -- -- (280) 0.50 (13,109) 1.13 (11,741) .86 (9,199) 1.52
Terminated............ -- -- (7,089) 0.71 (13,938) 7.84 (3,460) 7.11 (245,385) 11.39
------ ------ ------- ------- --------
Outstanding at end of
year or period........ 20,538 $0.50 90,613 $0.66 468,773 $ 9.37 381,336 $7.83 888,546 $10.62
====== ====== ======= ======= ========
Options exercisable at
year-end or period.... -- $ -- 9,437 $0.50 62,217 $ 7.07 19,654 $6.24 133,606 $ 9.47
====== ====== ======= ======= ========
</TABLE>
F-66
<PAGE> 236
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED-AVERAGE ------------------------------
NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.01 27,600 9 $ 0.01 3,461 $ 0.01
0.50 19,328 8 0.50 6,972 0.50
0.55 11,131 3 0.55 5,566 0.55
0.75 31,197 8 0.75 2,288 0.75
1.25 8,267 9 1.25 2,067 1.25
1.50 2,424 9 1.50 606 1.50
10.20 278,843 9 10.20 40,104 10.20
16.59 89,983 10 16.59 1,153 16.59
------- ------
468,773 9 $ 9.37 62,217 $ 7.07
======= ======
</TABLE>
The following table summarizes information about fixed stock options
outstanding at June 30, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED-AVERAGE ------------------------------
NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.01 47,600 9 $ 0.01 9,254 $ 0.01
0.50 10,548 9 0.50 2,346 0.50
0.55 13,495 2 0.55 5,565 0.55
0.75 20,793 8 0.75 4,195 0.75
1.25 2,183 8 1.25 561 1.25
1.50 1,160 8 1.50 -- 1.50
10.20 208,852 9 10.20 59,909 10.20
12.00 526,260 10 12.00 46,486 12.00
16.59 57,655 9 16.59 5,290 16.59
------- -------
888,546 9 $10.62 133,606 $ 9.47
======= =======
</TABLE>
During 1997, 1998, 1999, and the six months ended June 30, 1999 and 2000
the fair value of each option grant was estimated on the date of the grant using
the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
DECEMBER DECEMBER DECEMBER JUNE JUNE
1997 1998 1999 1999 2000
-------- -------- ------------ ------ -------
<S> <C> <C> <C> <C> <C>
Exercise price less than market price on
date of grants:
Weighted-average exercise price.......... $ -- $0.71 $ 9.40 $9.68 $ 0.01
Weighted-average grant-date fair value... $ -- $0.42 $ 3.01 $2.39 $11.99
Exercise price equal to market price on
date of grants:
Weighted-average exercise price.......... $0.50 $ -- $16.59 $ -- $12.00
Weighted-average grant-date fair value... $0.47 $ -- $ 2.17 $ -- $ 1.95
Dividend yield............................. 0% 0% 0% 0% 0%
Risk-free interest rate.................... 6% 5% 6% 6% 6%
Expected lives............................. 4 years 3 years 1 to 3 years 1 year 3 years
</TABLE>
F-67
<PAGE> 237
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
Total Sports recognized compensation expense for stock-based compensation
awards of approximately $146,000 in 1998 and $106,000 in 1999, $2,000 in the six
months ended June 30, 1999 and $47,000 in the six months ended June 30, 2000. No
compensation expense for stock-based awards was recognized in 1997. Had
compensation cost for stock options granted in 1997, 1998 and 1999 been
determined consistent with SFAS No. 123, the effect on Total Sports' net loss
for the years ended December 31, 1997, 1998 and 1999 and the six months ended
June 30, 1999 and 2000 would have been to increase the net loss by $500 in 1997,
$7,000 in 1998, $89,000 in 1999, $21,000 in the six months ended June 30, 1999
and $293,000 in the six months ended 2000 and would not have changed basic or
diluted net loss per share in 1997 or 1998. Basic and diluted loss from
continuing operations per share would change for the year ended December 31,
1999 from $10.52 to $10.57 and for the six months ended June 30, 1999 from $3.73
to $3.74 and for the six months ended June 30, 2000 from $10.23 to $10.38.
Senior Employee Preferred Stock Options
On May 15, 2000, Total Sports issued options for 3,186,866 shares of Total
Sports' senior employee preferred stock. These options vest 25% every six months
over a two-year period and have terms of ten years. Additionally, upon a sale of
all or substantially all the assets of Total Sports or a merger, 50% of the then
unvested options shall terminate upon the transaction's consummation. The
options have an exercise price of $1.00 per share, grant date fair values of
$.42, and remaining contractual lives of approximately 10 years. The fair value
of the senior employee preferred stock options was calculated on the dates of
grant with the following assumptions: volatility of 0%; dividend yield of 0%;
risk-free rates of approximately 6%; and lives of three years.
Common Stock Warrants
Total Sports granted common stock warrants to preferred stockholders and
issued agent's warrants in connection with financing transactions during 1997,
1998 and 1999. All warrants granted have terms of five to ten years. All
warrants are fully exercisable at December 31, 1999 and June 30, 2000 except for
365,218 warrants that are exercisable upon an extraordinary event defined as a
reorganization, merger, initial public offering, sale of all assets or sale of
substantially all assets. A summary of the outstanding common stock warrants as
of December 31, 1997, 1998 and 1999 and June 30, 1999 and 2000 and changes
during the period February 20, 1997 through December 31, 1997, the years ended
December 31, 1998 and 1999, and six months ended June 30, 1999 and 2000 is
presented below:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999 JUNE 30, 1999
-------------------- -------------------- -------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
WARRANTS PRICE WARRANTS PRICE WARRANTS PRICE WARRANTS PRICE
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year
or period.......... -- $ -- 396,301 $0.31 773,527 $3.63 773,527 $ 3.63
Granted............ 396,301 0.31 377,226 7.12 134,255 16.57 73,184 15.51
------- ------- ------- -------
Outstanding at end of
year or period..... 396,301 $0.31 773,527 $3.63 907,782 $5.54 846,711 $ 4.66
======= ======= ======= =======
<CAPTION>
JUNE 30, 2000
--------------------
WEIGHTED-
AVERAGE
EXERCISE
WARRANTS PRICE
-------- ---------
<S> <C> <C>
Outstanding at
beginning of year
or period.......... 907,782 $5.54
Granted............ -- --
-------
Outstanding at end of
year or period..... 907,782 $5.54
=======
</TABLE>
F-68
<PAGE> 238
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
The estimated weighted-average grant-date fair value of common stock
warrants granted during the period February 20, 1997 through December 31, 1997,
the years ended December 31, 1998 and 1999, and six months ended June 30, 1999
and 2000 are as follows:
<TABLE>
<CAPTION>
DECEMBER DECEMBER DECEMBER JUNE JUNE
1997 1998 1999 1999 2000
-------- -------- -------- ------ ----
<S> <C> <C> <C> <C> <C>
Exercise price less than market price on date
of grants:
Weighted-average exercise price............ $0.01 $ -- $ -- $ -- $--
Weighted-average grant-date fair value..... $0.49 $ -- $ -- $ -- $--
Exercise price greater than market price on
date of grant:
Weighted-average exercise price............ $3.43 $7.12 $16.57 $15.51 $--
Weighted-average grant-date fair value..... $ -- $ -- $ 4.42 $ 3.31 $--
</TABLE>
The fair value of the common stock warrants was calculated on the dates of
grant with the following assumptions: volatility of approximately 70%; dividend
yield of 0%; risk-free rates of approximately 5-6%; and lives of five to ten
years.
The following table summarizes information about common stock warrants
outstanding at December 31, 1999 and June 30, 2000:
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS OUTSTANDING
-------------------------------------
WEIGHTED-
AVERAGE WEIGHTED-
REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE
------------------------ ----------- ----------- ---------
<S> <C> <C> <C>
$ 0.01 365,218 7 $ 0.01
$ 3.42 - $ 3.44 22,798 7 3.43
$ 4.49 - $ 4.94 15,553 3 4.73
$ 7.11 - $ 7.82 369,958 5 7.17
$10.44 12,907 4 10.44
$16.59 - $18.25 121,348 7 17.22
-------
907,782 6 $ 5.54
=======
</TABLE>
In connection with the Series C1 financing, Total Sports issued to the
placement agent warrants to purchase 12,907 shares of common stock with an
exercise price of $10.44 per share during January and April 1999.
Total Sports granted warrants to purchase 39,888 shares of common stock
with an exercise price of $25.07 per share in connection with the $4,000,000
convertible promissory note payable issued during 1999. The note was converted
into equity during the Series D round of preferred financing. The warrants were
subsequently adjusted to be exercisable for 60,277 shares of common stock at an
exercise price of $16.59 per share upon the sale of Series D preferred stock by
Total Sports. The fair value of the warrants, $302,000, was calculated on the
date of grant and is being amortized to interest expense over the life of the
note payable. These warrants were immediately exercisable for Total Sports'
common stock and expire on May 31, 2009.
Total Sports granted warrants to purchase 18,083 shares of common stock
with an exercise price of $16.59 per share in connection with $2,500,000 of
convertible promissory notes payable issued during 1999. The notes were
converted into equity during the Series D round of preferred financing. The fair
value of
F-69
<PAGE> 239
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
the warrants, approximately $187,000, was calculated on the date of the grants
using the Black-Scholes option pricing model with the following assumptions;
volatility of approximately 70%; dividend yield of 0%; risk-free rate of
approximately 5% and lives of ten years. The fair value is being amortized to
interest expense through the date the notes payable are converted into equity.
These warrants were immediately exercisable for Total Sports' common stock and
expire on May 31, 2009.
In connection with the Series D financing, Total Sports issued to the
placement agent warrants to purchase 46,004 shares of common stock with an
exercise price of $18.25 per share during November 1999. The fair value of the
warrants, $467,000, was calculated on the date of the grants using the Black-
Scholes option pricing model with the following assumptions; volatility of
approximately 70%; dividend yield of 0%; risk-free rate of approximately 6% and
lives of five years.
Series B Preferred Warrants
Total Sports granted warrants to purchase 73,578 shares of Series B stock
to preferred stockholders in connection with bridge financing transactions
during 1998. All warrants granted are immediately exercisable and have terms of
ten years. The warrants have an exercise price of $4.49 per share, grant date
fair values ranging from $0.42-$2.25, and remaining contractual lives of
approximately eight years. The fair value was calculated on the date of the
grant with the following assumptions: volatility of approximately 27%; dividend
yield of 0%; risk-free rates of approximately 5%; and expected lives of ten
years. These warrants will be exercisable for Total Sports' common stock upon
conversion of the Series B stock.
Series D1 Preferred Warrants
Total Sports granted warrants to purchase 963,370 shares of Series D1 stock
to a venture capital fund, various companies and several individual investors in
connection with the Series D financing during 1999. All warrants granted are
immediately exercisable and have a term of five years. The warrants have an
exercise price of $16.59 per share, with a grant date fair value of $10.50, and
remaining contractual lives of approximately five years. The fair value was
calculated on the date of the grant with the following assumptions: volatility
of approximately 70%; dividend yield of 0%; risk-free rates of approximately 6%;
and expected live of fives years. These warrants will be exercisable for Total
Sports' common stock upon conversion of the Series D stock.
F-70
<PAGE> 240
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
13. LOSS PER SHARE
Total Sports computes loss per share data in accordance with the
requirements of Statement of Financial Accounting Standards No. 128, Earnings
per share. The following table reflects the calculation of basic and diluted
earnings per share.
<TABLE>
<CAPTION>
PERIOD
FEBRUARY 20,
1997 SIX MONTHS SIX MONTHS
THROUGH YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1997 1998 1999 1999 2000
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net loss applicable to common
shareholders:
Net loss from continuing
operations........................ $(3,244,291) $ (9,707,385) $(18,524,883) $(6,506,518) $(19,995,466)
Dividends on preferred stock........ (144,180) (197,645) (194,005) (96,905) (97,040)
----------- ------------ ------------ ----------- ------------
Loss from continuing operations
applicable to common
shareholders...................... (3,388,471) (9,905,030) (18,718,888) (6,603,423) (20,092,506)
Loss from discontinued operations... (903,148) (2,129,615) (3,301,846) (1,132,686) (6,662,115)
----------- ------------ ------------ ----------- ------------
Net loss applicable to common
shareholders........................ $(4,291,619) $(12,034,645) $(22,020,734) $(7,736,109) $(26,754,621)
=========== ============ ============ =========== ============
Loss per share -- basic and diluted --
Weighted-average shares
outstanding......................... 1,214,419 1,560,903 1,778,670 1,770,552 1,964,515
=========== ============ ============ =========== ============
Loss from continuing operations --
Basic and diluted................. $ (2.79) $ (6.35) $ (10.52) $ (3.73) $ (10.23)
=========== ============ ============ =========== ============
Net loss per share -- basic and
diluted............................. $ (3.53) $ (7.71) $ (12.38) $ (4.37) $ (13.62)
=========== ============ ============ =========== ============
</TABLE>
The following securities and number of shares have been excluded from the
diluted per share computation as they are antidilutive:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1997 1998 1999 1999 2000
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Redeemable preferred stock -- Series
A..................................... 125,000 125,000 125,000 125,000 125,000
Convertible preferred stock -- Series
B..................................... 445,263 445,263 445,263 445,263 445,263
Convertible preferred stock -- Series
C..................................... -- 1,418,200 1,418,200 1,418,200 1,418,200
Convertible preferred stock -- Series
C1.................................... -- -- 630,756 630,756 630,756
Convertible preferred stock -- Series
D..................................... -- -- 2,140,873 -- 2,140,873
Convertible preferred stock -- Series
E..................................... -- -- 811,423 -- 811,423
Preferred stock warrants -- Series B.... -- 73,578 73,578 73,578 73,578
Preferred stock warrants -- Series D.... -- -- -- -- 50,346
Preferred stock warrants -- Series D1... -- -- 963,370 -- 963,370
Common stock held in escrow............. -- -- 284,401 -- --
Common stock warrants................... 396,301 773,527 907,782 846,711 907,782
Senior employee preferred stock
options............................... -- -- -- -- 3,186,866
Common stock options.................... 20,538 90,613 468,773 381,336 888,546
Unearned common stock issued to NBC
Sports................................ -- -- 758,579 -- 705,379
</TABLE>
F-71
<PAGE> 241
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
14. SEGMENT INFORMATION
Total Sports is engaged primarily in digital and print publishing and
e-commerce. Significantly all of Total Sports' revenues are to customers located
within the United States and significantly all long-lived assets are in the
United States.
<TABLE>
<CAPTION>
PERIOD FEBRUARY 20, 1997
THROUGH DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1998
------------------------------------ ------------------------------------
DIGITAL PRINT E-COMMERCE DIGITAL PRINT E-COMMERCE
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................................... $ 920,636 $ 257,344 $ 13,586 $1,930,330 $1,314,692 $435,172
Depreciation and amortization expense....... 540,989 161,513 799 1,102,813 234,530 20,298
Equity in earnings (losses) of affiliates... -- -- -- (24,076) -- --
Interest Income............................. 3,814 1,305 -- 8,158 10,174 --
Interest Expense............................ 74,750 25,586 -- 228,307 279,041 --
Net Loss.................................... 2,286,988 1,648,646 211,805 6,211,882 4,867,454 757,664
Assets...................................... 1,609,226 977,418 51,571 4,164,330 1,694,889 79,788
Capital expenditures........................ 267,677 59,938 29,756 685,431 42,884 12,509
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-------------------------------------
DIGITAL PRINT E-COMMERCE
----------- ---------- ----------
<S> <C> <C> <C>
Revenues................................................ $ 5,396,906 $1,831,208 $1,355,569
Depreciation and amortization expense................... 2,711,556 1,175,732 126,910
Equity in earnings (losses) of affiliates............... 100,193 -- --
Interest Income......................................... 79,076 8,642 --
Interest Expense........................................ 575,416 62,884 --
Net Loss................................................ 14,860,048 5,191,928 1,774,753
Assets.................................................. 26,039,811 2,371,146 27,470
Capital expenditures.................................... 2,725,156 178,376 --
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999 SIX MONTHS ENDED JUNE 30, 2000
-------------------------------------- ----------------------------------------
DIGITAL PRINT E-COMMERCE DIGITAL PRINT E-COMMERCE
----------- ----------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................... $ 2,626,751 $ 1,040,563 $ 701,111 $ 4,515,740 $ 772,846 $ 821,167
Depreciation and amortization
expense.............................. 1,227,278 70,011 20,492 2,357,560 83,966 93,809
Interest Income........................ 101,583 59,659 -- 195,186 54,361 30,110
Interest Expense....................... 3,326 1,953 -- 175,260 20,190 29,449
Net Loss............................... (4,499,015) (2,328,105) (812,084) (15,804,954) (9,202,197) (1,650,430)
</TABLE>
Barter revenues from one customer of Total Sports' digital publishing
segment represents approximately $336,800 or 12% of 1998 consolidated revenues.
Geographic information for sales by countries is determined by the location
of the customer. Total Sports had sales to the following countries for years
ended December 31, 1997, 1998 and 1999 and six months ended June 30, 1999 and
2000:
<TABLE>
<CAPTION>
DECEMBER DECEMBER DECEMBER JUNE JUNE
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
United States.................... $ 990,251 $3,437,220 $8,303,466 $4,179,830 $5,355,499
Canada........................... 395,623 230,717 127,512 675,074
Other countries.................. 18,698 -- 49,500 61,083 79,180
---------- ---------- ---------- ---------- ----------
$1,008,949 $3,832,843 $8,583,683 4,368,425 6,109,753
========== ========== ========== ========== ==========
</TABLE>
F-72
<PAGE> 242
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
15. EMPLOYEE BENEFIT PLAN
Total Sports has a 401(k) plan for all eligible employees. Total Sports
provides a 50% matching contribution of up to 6% of employee contributions.
Employer contributions vest over a four-year period as follows: -0-% at the end
of year one, 33% at year two, 67% at year three, and 100% at year four. Total
Sports' contribution amounted to approximately $42,000 in 1997, $85,000 in 1998
and $106,000 in 1999.
16. HEALTH INSURANCE PLAN
During 1997, Total Sports began providing medical and health insurance to
its full-time employees under a partial self-insurance plan administered by an
outside insurer. Under the provisions of the plan, Total Sports is responsible
for claims filed by eligible employees up to $10,000 per employee per term year,
with a lifetime liability of $2,000,000 per employee. During the period February
20, 1997 to December 31, 1997, Total Sports incurred expenses related to the
plan of approximately $88,000. During the years ended December 31, 1998 and
1999, Total Sports incurred expenses related to the plan of approximately
$193,000 and $237,000 respectively. A liability of approximately $28,000 and
$30,000 was recorded for the amount of claims incurred but not paid prior to
December 31, 1998 and 1999, respectively.
17. COMMITMENTS AND CONTINGENCIES
Total Sports is involved in legal actions arising in the normal course of
business. In the opinion of management, based on a review of these legal
proceedings, the ultimate outcome of these actions will not have a material
effect on the consolidated financial statements.
Total Sports has entered into employment agreements with several key
employees. The agreements generally provide annual base salary and termination
provisions. The minimum commitments under the agreements at December 31, 1999
are set forth in the following table:
<TABLE>
<S> <C>
2000......................................... $312,500
2001......................................... 220,000
2002......................................... 155,834
--------
Total commitments............................ $688,334
========
</TABLE>
During February and March 2000, Total Sports entered into employment
agreements with certain key employees. The agreements generally provide annual
base salary and termination provisions. The employment agreements call for total
compensation of $260,000 per annum for three years from the date of the
agreements.
During 2000, all employees with employment agreements, except one, either
voluntarily terminated their employment with Total Sports or relinquished the
agreements for one-time payments totaling $105,000. The one remaining employment
agreement calls for an annual salary of $100,000 and expires in December 2000.
In January 2000, Total Sports entered into an operating lease agreement for
additional office space. In connection with the lease agreement, Total Sports
also entered into a letter of credit agreement for the benefit of the lessor in
the amount of approximately $433,000. The lease agreement was terminated early
during June 2000 with a payment of approximately $418,000.
On May 8, 2000, the Company entered into an employment agreement and a
compensation agreement with Gary Stevenson, a director of Total Sports and the
Company's new interim President and Chief Executive Officer. Under the
agreement, Mr. Stevenson will be compensated for his management
F-73
<PAGE> 243
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
services through a one-time payment to occur upon the closing of any qualifying
capital transaction, as defined in the agreement. A qualifying capital
transaction is any business combination between the Company and another
business, a sale of the line of business or material asset of the Company, a
sale or exchange of securities under the Securities Act of 1933, any borrowings
that results in distributions to stockholders, or another transaction that
results in a receipt by the stockholder of consideration for their interest in
the Company. In addition, upon the termination of the agreement on May 8, 2001,
the Company will grant Mr. Stevenson shares of restricted preferred stock with a
fair value equal to 7.0% of the fair value of the Company on the issuance date,
in exchange for future consulting services. One-third of the restricted
preferred stock will vest and cease to be restricted on each of the first three
anniversaries of the grant date of the preferred stock.
18. RELATED PARTY TRANSACTIONS
KOZ inc., Total College Communications, Golf.Com, Host Communications
(joint venture partner until June 1998 and a stockholder until May 1999),
Winstar New Media (preferred stockholder), Bull Run Corporation Media (preferred
stockholder), Carolina Financial Services LLC (warrant holder and common
ownership), and the Josephus Group (common ownership) are considered related
parties of Total Sports.
Total Sports entered into a radio show and advertising agreement with an
affiliate of Winstar New Media as part of the Series C 1998 financing. The
agreement was for six months ending February 1999, and required the Winstar
affiliate to produce a Total Sports-branded radio show dedicated to a variety of
college and professional sports topics in exchange for $125,000. In addition,
Total Sports committed to purchase $375,000 of advertising over a six-month
period on the Winstar affiliate's radio programs. The advertising was valued at
the market rate for similar advertising in effect at the time the promotions
were delivered. In 1999, with the mutual consent of both parties, the agreement
was allowed to expire with the advertising commitment partially unfulfilled.
Total Sports incurred approximately $344,000 in expenses for the radio show
sponsorship and advertising during 1998 and $28,000 in 1999. During six months
ended June 30, 1999 and 2000, Total Sports recognized no advertising expenses
from Winstar. Included in accrued expenses -- related party at December 31, 1998
and 1999 was approximately $189,000 and $17,800, respectively, due to the
Winstar affiliate.
Total Sports has exclusive rights, through Host Communications, to provide
TotalCasts of NCAA championship events and receive sponsorship revenues from
corporate sponsors of the NCAA. Host Communications serves as an agent to Total
Sports under these agreements, in which Total Sports recognized sponsorship
revenues of approximately $818,000 in 1998 and $1,235,000 in 1999. In connection
with these agreements, Total Sports paid commissions to Host Communications of
approximately $164,000 in 1998 and $296,000 in 1999. In addition, Total Sports
paid Host Communications for consulting services related to Web site development
of approximately $264,000 for the year ended December 31, 1999 and $132,000 for
the six months ended December 31, 1999 and 2000. At December 31, 1998, 1999 and
June 30, 2000, Total Sports had approximately $66,000, $96,000 and $803,000
recorded in accrued expenses -- related party due to Host Communications. During
the six months ended June 30, 1999 and 2000, Total Sports recognized
approximately $1,067,000 and $1,804,000 in sponsorship revenues and incurred
$244,000 and $283,000 in commission expenses to Host Communications.
In connection with its management and sales agreements with Golf.Com, Total
Sports has exclusive rights to operate the Golf.Com online store. Total Sports
also has rights to sell advertising on the Golf.Com Web site, for which it pays
an annual license fee of $25,000 to Golf.Com. Total Sports recognized $1,074,000
in 1999 from sponsorship sales on the Golf.Com Web site. Total Sports recognized
$373,000 and $875,000 during the six months ended June 30, 1999 and 2000,
respectively, from sales of
F-74
<PAGE> 244
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
sponsorships on the Golf.Com Web site. In connection with these sponsorship
sales, Total Sports paid commissions of approximately $897,000 to Golf.Com
during the year ended 1999, $316,000 during the six months ended June 30, 1999
and $714,000 during the six months ended June 30, 2000.
Total Sports recognized $240,000 in 1998 and $478,000 in 1999, $264,000
during the six months ended June 30, 1999 and $192,000 during the six months
ended June 30, 2000 from e-commerce sales from the Golf.Com Web site. In
connection with these e-commerce sales, Total Sports paid commissions of
approximately $34,000 in 1998, $2,000 in 1999, $7,000 in the six months ended
June 30, 1999 and $64,000 in the six months ended June 30, 2000 to Golf.Com.
Total Sports had approximately $170,000 at December 31, 1999 in accounts
receivable from employees and affiliates due from Golf.com. At June 30, 2000,
Total Sports had $76,000 in accrued expenses due from related parties from
Golf.com.
Total Sports incurred fees related to the different financing rounds from
Carolina Financial Services LLC totaling approximately $62,500 for the period
ended December 31, 1997, $249,000 for the year ended December 31, 1998,
$1,254,000 for the year ended December 31, 1999, $126,000 for the six months
ended June 30, 1999 and $0 for the six months ended June 30, 2000.
During 1998, Total Sports recognized $25,000 in sponsorship revenue from
Rawlings, a company owned by the Bull Run Corporation Media.
Total Sports leased office space from the Josephus Group during 1997, 1998
and 1999. Total Sports incurred rent expense to the Josephus Group of
approximately $107,000 during the period February 20, 1997 through December 31,
1997, $75,000 during the year ended December 31, 1998, $108,000 during the year
ended December 31, 1999, $54,000 during the six months ended June 30, 1999 and
$54,000 during the six months ended June 30, 2000.
During 1997, Total Sports accrued a liability of $75,000 for compensation
to its Chairman and Chief Executive Officer related to services performed prior
to February 20, 1997. For the period from February 20, 1997 to December 31, 1997
and the year ended December 31, 1998, the Chairman and Chief Executive Officer
did not receive any compensation. During the year ended December 31, 1999, the
Chairman and Chief Executive Officer received the $75,000 previously accrued.
During 1998, the Chairman and Chief Executive Officer received 37,100
shares of common stock valued at $1.15 per share for his personal guarantee of
Total Sports' line of credit. In connection with the refinancing of the line of
credit on January 15, 1999 as discussed in Note 6, Total Sports' Board of
Directors issued 18,550 shares of common stock valued at $1.55 per share to its
Chairman and Chief Executive Officer for his personal guarantee of the line of
credit.
On August 6, 1998, Total Sports entered into a consulting agreement with a
Total Sports director, whereby Total Sports issued 14,073 shares of common stock
valued at $1.25 per share to the director for consulting services previously
provided and to be provided. Either party has the right to terminate the
agreement at any time with at least thirty days prior written notice. Total
costs of this agreement charged to operations were $17,591. In addition, Total
Sports has an agreement with the director in which it receives a percentage of
rental income received by the director for certain business meetings. Total
Sports received payments of approximately $31,000 in 1999, which have been
included in other non-operating income. During the six months ended June 30,
1999 and 2000, Total Sports received rental income of $9,000 and $5,000,
respectively.
In March 2000, Total Sports entered into a consulting agreement with
OnSport Strategies, Inc. Gary Stevenson, a Total Sports director at the time, is
the President and Chief Executive Officer of OnSport Strategies, Inc. Total
Sports paid $110,000 under this agreement during the six months ended June 30,
2000.
F-75
<PAGE> 245
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
On August 8, 1999, Total entered into a 10-year lease for office space with
First Raleigh Telex, LLC. Frank Daniels, Jr., a Total Sports director and
stockholder, is the beneficial owner of First Raleigh Telex, LLC. The lease
terms call for monthly rent of approximately $25,000 until November 1, 1999 and
monthly rent of $29,733 thereafter. Total recognized approximately $231,000 in
rent expense to First Raleigh Telex, LLC during 1999. Total recognized
approximately $77,000 and $182,000, respectively, in rent expense to First
Raleigh Telex, LLC during the six months ended June 30, 1999 and 2000.
As discussed in Note 7, Total Sports entered into a three-year promissory
note with First Raleigh Telex in the amount of $114,921 during 1999. During
1999, Total made payments totaling approximately $29,000 on the note and
recognized interest expense of approximately $7,000. During the six months ended
June 30, 1999 and 2000, Total Sports made payments totaling approximately $3,000
and $11,000, respectively on the note and recognized interest expense of
approximately $3,000 and $4,000, respectively.
As discussed in Note 7, Total Sports assumed a $20,000 note payable during
the Long Distance Technologies acquisition. The note was payable to the
president of Long Distance Technologies, who became a stockholder of Total
Sports upon consummation of the acquisition. The note was due December 31, 1999
and was paid in January 2000.
In September 1999 and November 1999, Total Sports issued 10% convertible
promissory notes in the aggregate principal amount of $2,500,000 and warrants
exercisable for an aggregate of 15,067 shares of common stock at an exercise
price of $16.59 per share. Winstar Interactive Ventures, Piedmont Venture
Partners, and Nuray Telluride Properties Limited, all Total Sports shareholders,
participated in $2,000,000 of the $2,500,000 and received warrants for 12,053
shares of common stock.
During October and November 1999, Total Sports received non-interest
bearing advances from Golf.Com totaling $425,000. These advances were used to
pay amounts owed by Total Sports to its vendors in connection with the Golf.Com
management agreement (see Note 3). The advances were repaid to Golf.Com in
December 1999.
In June 2000, Total Sports issued 9% convertible promissory notes in the
aggregate principal amount of approximately $4,200,000 and warrants exercisable
for an aggregate 50,346 shares of Series D preferred stock at an exercise price
of $16.59 per share. Winstar Interactive Ventures, Piedmont Venture Partners,
Frank Daniels, Jr., Frank Daniels III, Bull Run Corporation, Zilkha Capital
Partners and TCV III, all Total Sports shareholders, participated in these
notes. Interest expense on these notes was $97,000 during the six months ended
June 30, 2000.
19. RESTATEMENT
Subsequent to the issuance of Total Sports' 1999 financial statements,
Total Sports' management determined that following transactions should be
restated.
- The excess of the purchase price over the fair value of the net assets
acquired in the KOZ acquisition in March 1997 (see Note 3), totaling
$1,286,000, should be recorded as goodwill and not as a charge to
stockholders' equity. The goodwill resulting from the Sports Extra
acquisition in March 1997 (see Note 3), totaling $631,000, should be
amortized over a period of three years instead of fifteen years. This
increased amortization expense and net loss in the amounts of $447,860,
$597,146 and $597,146 for 1997, 1998 and 1999, respectively.
- The results of operations of Total College Communications Company for the
periods ended December 31, 1997 and 1998 should be accounted for under
the equity method of accounting and should not be consolidated with the
operations of Total Sports. This restatement resulted in reductions in
digital publishing revenues, and equal reductions in total digital
publishing cost of
F-76
<PAGE> 246
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
revenues, general and administrative expenses, and other income and
expense in the amount of $182,617 and $152,649 for 1997 and 1998,
respectively.
- Liabilities to employees for services previously rendered of $76,181 in
1998 and $293,085 in 1999 totaling $369,266 should have been accrued
during the periods ending December 31, 1998 and 1999. The resulting
increase in accrued expenses at each reporting date also resulted in
increases in salary costs, net loss and retained deficit for all periods
presented.
As a result, the 1997, 1998 and 1999 consolidated financial statements have
been restated from amounts previously reported to appropriately account for such
transactions. The following table summarizes the effects of the restatement
changes:
<TABLE>
<CAPTION>
1997 1998 1999
------------------------- --------------------------- ---------------------------
AS AS AS
PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31:
Goodwill.............................. $ -- $ -- $ 1,184,106 $ 1,425,623 $ 2,991,900 $ 2,636,271
Accrued expenses...................... 1,297,267 1,373,448 3,118,216 3,427,477
Additional paid-in capital............ 11,067,755 12,534,277 66,835,259 68,121,786
Retained deficit...................... (15,007,433) (16,128,169) (35,943,931) (37,955,348)
FOR THE PERIOD ENDED DECEMBER 31:
Total revenues........................ 1,008,949 934,222 3,832,843 2,365,502 8,583,683 6,752,475
Total cost of revenues................ 1,806,544 1,380,229 6,273,645 3,902,158 13,130,667 9,956,501
Amortization expense.................. 31,556 321,631 185,485 572,250 1,519,684 1,906,449
Total operating expenses.............. 2,945,109 2,564,727 8,199,955 7,730,798 16,030,665 14,902,003
Total other income (expense).......... 43,124 (233,557) (522,916) (439,931) (358,849) (418,854)
Net loss.............................. $(3,843,760) $(4,291,619) $(11,361,318) $(12,034,645) $(21,130,503) $(22,020,734)
Net loss per share -- basic and
diluted............................. $ (3.17) $ (3.53) $ (7.28) $ (7.71) $ (11.88) $ (12.38)
</TABLE>
20. SUBSEQUENT EVENTS (UNAUDITED)
On May 15, 2000, Total Sports canceled its plans for an initial public
offering of its common stock as a result of unfavorable financial market
conditions. The Company will recognize a loss of approximately $1,270,000 during
the six months ended June 30, 2000, relating of the write-off of costs
capitalized in connection with the proposed offering.
On July 20, 2000, Total Sports entered into a definitive agreement with
Quokka to exchange all outstanding shares of its common and preferred stock for
15,000,000 shares of Quokka common stock, valued at approximately $138 million.
Under the terms of the definitive agreement, Quokka would acquire the net assets
and operations of Total Sports' digital and e-commerce segments. Quokka would
not acquire the net assets or operations of Total Sports' discontinued print
publishing segment. The definitive agreement expires on December 31, 2000. In
the event the sale is not consummated by December 31, 2000, due to failure to
obtain approval of the acquisition by shareholders of Quokka or Total Sports or
either company's violation of certain requirements of the agreement, a penalty
of $7.5 million is payable to the breached party. The final purchase is subject
to working capital and other adjustments resulting from a closing balance sheet
audit to be performed within 45 days of the closing of the acquisition.
On August 18, 2000, and amended on August 31, 2000, Total Sports signed a
definitive agreement to sell Total Sports Publishing to a management buyout
group, Thorn Media, Inc., for $1 and the assumption of liabilities. In
conjunction with the sale, Total Sports entered into a license agreement with
Thorn Media, Inc. for certain uses of Total Sports' trademarks for three years.
Closing of the sale of the print division occurred on August 31, 2000.
F-77
<PAGE> 247
TOTAL SPORTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO JUNE 30, 1999 AND 2000 INFORMATION)
On October 9, 2000, Total Sports completed a recapitalization and bridge
financing agreement pursuant to which the stockholders participating in the
bridge financing agreement received shares of new series of preferred stock and
warrants exercisable for new series of preferred stock in exchange for the
cancellation of certain shares of existing preferred stock and warrants
exercisable for capital stock of Total Sports held by such stockholders. The
newly authorized series of preferred stock consist of Series A-prime preferred
stock, Series B-prime preferred stock, Series C-prime preferred stock, Series
C1-prime preferred stock, Series D-prime preferred stock, Series D1-prime
preferred stock, Series E-prime preferred stock, Series F-preferred stock,
Series G-preferred stock and Series H preferred stock. The bridge financing
consisted of the issuance of an aggregate of $12,700,000 of convertible
promissory notes and stock purchase warrants exercisable for an aggregate of up
to 110,794 shares of Series D-prime and 42,235 shares of Series F preferred
stock of Total Sports. The convertible promissory notes bear interest at 9.0%
per annum and are due in full on or before December 31, 2000. Upon the
effectiveness of the Quokka Merger, the unpaid principal and interest of these
notes shall automatically be converted into shares of Series D, Series D-prime,
Series F, and Series H Preferred Stock of Total Sports. The warrants are
immediately vested, have an exercise price of $16.59 per share for either series
of preferred stock, and have a term of 10 years. The $12,700,000 bridge
financing agreement replaces the $4,200,000 bridge financing received prior to
June 30, 2000 (See Notes 7 and 18). All outstanding warrants associated with the
$4,200,000 bridge financing were terminated. Winstar Interactive Ventures,
Piedmont Venture Partners, Frank Daniels, Jr., Frank Daniels III, Bull Run
Corporation, Zilkha Capital Partners, TCV III (GP), TCV III, L.P., TCV III (Q),
L.P. and TCV III Strategic Partners, L.P., all Total Sports stockholders, and
other existing stockholders participated in the $12,700,000 bridge financing
agreement.
F-78
<PAGE> 248
TOTAL SPORTS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING OF COSTS AND OTHER FOR PAYMENTS END OF
PERIOD EXPENSES ACCOUNTS OR WRITEOFFS PERIOD
------------ ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Period February 20, 1997
Through December 31, 1997:
Allowances for doubtful accounts..... $ -- $ 22,000 $ -- $ (2,000) $ 20,000
Allowance for sales returns.......... -- 14,820 -- -- 14,820
Allowance for obsolete inventory..... -- 37,138 -- -- 37,138
Deferred tax asset valuation
allowance.......................... -- 1,554,000 -- -- 1,554,000
---------- ---------- -------- --------- -----------
$ -- $1,627,958 $ -- $ (2,000) $ 1,625,958
========== ========== ======== ========= ===========
Year Ended December 31, 1998:
Allowance for doubtful accounts...... $ 20,000 $ 40,000 $ -- $ (35,168) $ 24,832
Allowance for sales returns.......... 14,820 543,244 -- (142,331) 415,733
Allowance for obsolete inventory..... 37,138 143,983 -- (37,138) 143,983
Deferred tax asset valuation
allowance.......................... 1,554,000 4,578,000 -- -- 6,132,000
---------- ---------- -------- --------- -----------
$1,625,958 $5,305,227 $ -- $(214,637) $ 6,716,548
========== ========== ======== ========= ===========
Year Ended December 31, 1999:
Allowance for doubtful accounts...... $ 24,832 $ 30,000 $ -- $ (18,365) $ 36,467
Allowance for sales returns.......... 415,733 1,430,009 -- (840,907) 1,004,835
Allowance for obsolete inventory..... 143,983 487,466 -- (95,304) 536,145
Deferred tax asset valuation
allowance.......................... 6,132,000 7,450,000 394,000 -- 13,976,000
---------- ---------- -------- --------- -----------
$6,716,548 $9,397,475 $394,000 $(954,576) $15,553,447
========== ========== ======== ========= ===========
</TABLE>
<PAGE> 249
ANNEX A-1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
AND REORGANIZATION
BETWEEN:
QUOKKA SPORTS, INC.,
A DELAWARE CORPORATION
AND
TOTAL SPORTS, INC.,
A DELAWARE CORPORATION
------------------------
DATED AS OF JULY 20, 2000
------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 250
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C> <C> <C>
SECTION 1 DESCRIPTION OF TRANSACTION.................................. A-1-1
1.1 Merger of the Company into Parent........................... A-1-1
1.2 Effect of the Merger........................................ A-1-1
1.3 Closing; Effective Time..................................... A-1-1
1.4 Certificate of Incorporation and Bylaws; Directors and
Officers.................................................... A-1-2
1.5 Conversion of Shares........................................ A-1-2
1.6 Closing of the Company's Transfer Books..................... A-1-3
1.7 Exchange of Certificates.................................... A-1-3
1.8 Escrow...................................................... A-1-4
1.9 Lockup...................................................... A-1-4
1.10 Closing Balance Sheet; Merger Consideration Adjustment...... A-1-5
1.11 Dissenting Shares........................................... A-1-6
1.12 Tax Consequences............................................ A-1-6
1.13 Accounting Treatment........................................ A-1-6
SECTION 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY............... A-1-7
2.1 Subsidiaries; Due Organization; Etc. ....................... A-1-7
2.2 Certificate of Incorporation and Bylaws; Records............ A-1-7
2.3 Capitalization, Etc......................................... A-1-7
2.4 Financial Statements........................................ A-1-9
2.5 Absence of Changes.......................................... A-1-9
2.6 Title to Assets............................................. A-1-10
2.7 Receivables; Customers; Inventories......................... A-1-11
2.8 Real Property; Equipment; Leasehold......................... A-1-11
2.9 Proprietary Assets.......................................... A-1-11
2.10 Contracts................................................... A-1-14
2.11 Liabilities................................................. A-1-16
2.12 Compliance with Legal Requirements.......................... A-1-16
2.13 Governmental Authorizations................................. A-1-16
2.14 Tax Matters................................................. A-1-17
2.15 Employee and Labor Matters; Benefit Plans................... A-1-17
2.16 Environmental Matters....................................... A-1-19
2.17 Insurance................................................... A-1-20
2.18 Related Party Transactions.................................. A-1-20
2.19 Legal Proceedings; Orders................................... A-1-20
2.20 Authority; Inapplicability of Anti-takeover Statutes;
Binding Nature of Agreement................................. A-1-21
2.21 Section 203 of the DGCL Not Applicable...................... A-1-21
2.22 No Existing Discussions..................................... A-1-21
2.23 Vote Required............................................... A-1-21
2.24 Non-Contravention; Consents................................. A-1-22
2.25 Full Disclosure............................................. A-1-22
SECTION 3 REPRESENTATIONS AND WARRANTIES OF PARENT.................... A-1-23
3.1 Due Organization; Subsidiaries; Etc. ....................... A-1-23
3.2 SEC Filings; Financial Statements........................... A-1-23
3.3 Authority; Binding Nature of Agreement...................... A-1-24
</TABLE>
i
<PAGE> 251
<TABLE>
<CAPTION>
PAGE
------
<S> <C> <C> <C>
3.4 Vote Required............................................... A-1-24
3.5 Valid Issuance.............................................. A-1-24
3.6 Capitalization.............................................. A-1-24
3.7 Absence of Changes.......................................... A-1-25
3.8 Liabilities................................................. A-1-25
3.9 Compliance with Legal Requirements.......................... A-1-25
3.10 Tax Matters................................................. A-1-25
3.11 Environmental Matters....................................... A-1-25
3.12 Legal Proceedings; Orders................................... A-1-26
3.13 Non-Contravention; Consents................................. A-1-26
3.14 Board Approval.............................................. A-1-27
3.15 No Brokers.................................................. A-1-27
3.16 Section 203 of the DGCL Not Applicable...................... A-1-27
3.17 Governmental Authorizations................................. A-1-27
3.18 Employee and Labor Matters; Benefit Plans................... A-1-27
SECTION 4 CERTAIN COVENANTS OF THE COMPANY AND PARENT................. A-1-27
4.1 Access and Investigation.................................... A-1-27
4.2 Operation of the Company's Business......................... A-1-28
4.3 No Solicitation............................................. A-1-30
4.4 Operation of Parent's Business.............................. A-1-31
SECTION 5 ADDITIONAL COVENANTS OF THE PARTIES......................... A-1-31
5.1 Form S-4 Registration Statement; Joint Proxy
Statement/Prospectus; Form S-3 Registration Statement....... A-1-31
5.2 Company Stockholders' Meeting............................... A-1-33
5.3 Parent Stockholders' Meeting................................ A-1-34
5.4 Regulatory Approvals........................................ A-1-34
5.5 Stock Options and Warrants.................................. A-1-35
5.6 Employee Benefits........................................... A-1-36
5.7 Directors' and Officers' Indemnification and Insurance...... A-1-36
5.8 Provision of Information.................................... A-1-37
5.9 Additional Agreements....................................... A-1-37
5.10 Disclosure.................................................. A-1-38
5.11 Listing..................................................... A-1-38
5.12 Tax Matters................................................. A-1-38
5.13 Letters of the Company's Accountants........................ A-1-38
5.14 Resignation of Officers and Directors....................... A-1-39
5.15 Election of Director........................................ A-1-39
5.16 Termination of Obligations Under Certain Agreements......... A-1-39
SECTION 6 CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT............... A-1-39
6.1 Accuracy of Representations................................. A-1-39
6.2 Performance of Covenants.................................... A-1-40
6.3 Effectiveness of Form S-4 Registration Statement............ A-1-40
6.4 Stockholder Approval........................................ A-1-40
6.5 Consents.................................................... A-1-40
6.6 Documents................................................... A-1-40
6.7 Employees................................................... A-1-40
</TABLE>
ii
<PAGE> 252
<TABLE>
<CAPTION>
PAGE
------
<S> <C> <C> <C>
6.8 No Material Adverse Effect.................................. A-1-40
6.9 HSR Act..................................................... A-1-40
6.10 Listing..................................................... A-1-40
6.11 No Restraints............................................... A-1-40
SECTION 7 CONDITIONS PRECEDENT TO OBLIGATION OF THE COMPANY........... A-1-41
7.1 Accuracy of Representations................................. A-1-41
7.2 Performance of Covenants.................................... A-1-41
7.3 Effectiveness of Registration Statements.................... A-1-41
7.4 Stockholder Approval........................................ A-1-41
7.5 Documents................................................... A-1-41
7.6 No Material Adverse Effect.................................. A-1-42
7.7 HSR Act..................................................... A-1-42
7.8 Listing..................................................... A-1-42
7.9 No Restraints............................................... A-1-42
7.10 Election of Director........................................ A-1-42
7.11 Financing................................................... A-1-42
SECTION 8. TERMINATION................................................. A-1-42
8.1 Termination................................................. A-1-42
8.2 Effect of Termination....................................... A-1-43
8.3 Expenses; Termination Fees.................................. A-1-44
SECTION 9 INDEMNIFICATION, ETC. ...................................... A-1-44
9.1 Survival of Representations, Etc. .......................... A-1-44
9.2 Indemnification and Escrow.................................. A-1-44
9.3 Deductible Amount........................................... A-1-45
9.4 Satisfaction of Indemnification Claim; Limitation of
Liability................................................... A-1-45
9.5 [Intentionally Omitted]..................................... A-1-45
9.6 Defense of Third-Party Claims............................... A-1-45
9.7 Tax Contests................................................ A-1-46
9.8 Exercise of Remedies by Indemnitees Other Than Parent....... A-1-46
SECTION 10 MISCELLANEOUS PROVISIONS.................................... A-1-46
10.1 Designated Company Agent.................................... A-1-46
10.2 Amendment................................................... A-1-47
10.3 Waiver...................................................... A-1-47
10.4 Entire Agreement; Counterparts.............................. A-1-47
10.5 Applicable Law; Jurisdiction................................ A-1-47
10.6 Company Disclosure Schedule................................. A-1-47
10.7 Attorneys' Fees............................................. A-1-48
10.8 Assignability; Third-Party Beneficiaries.................... A-1-48
10.9 Notices..................................................... A-1-48
10.10 Severability................................................ A-1-49
10.11 Construction................................................ A-1-49
</TABLE>
iii
<PAGE> 253
EXHIBITS
<TABLE>
<S> <C>
A Definitions
B Allocation of Merger Consideration
C Closing Balance Sheet Principles
D Form of opinion of Wyrick Robbins Yates & Ponton LLP
E Form of opinion of Cooley Godward LLP
F Form of Escrow Agreement
</TABLE>
iv
<PAGE> 254
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION ("Agreement") is made
and entered into as of July 20, 2000, by and among QUOKKA SPORTS, INC., a
Delaware corporation ("Parent"), and TOTAL SPORTS, INC., a Delaware corporation
(the "Company"). Certain capitalized terms used in this Agreement are defined in
Exhibit A.
RECITALS
A. Parent and the Company intend to effect a merger of the Company into
Parent in accordance with this Agreement and the Delaware General Corporation
Law (the "Merger"). Upon consummation of the Merger, Parent will be the
surviving corporation, and the Company will cease to exist.
B. It is intended that the Merger qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). For financial reporting purposes, it is intended that the
Merger be treated as a "purchase."
C. The respective boards of directors of Parent and the Company have
approved this Agreement and approved the Merger.
D. In order to induce Parent to enter into this Agreement and to consummate
the Merger, concurrently with the execution and delivery of this Agreement,
certain stockholders of the Company are executing voting agreements (the
"Company Stockholder Voting Agreements"). In order to induce the Company to
enter into this Agreement and to consummate the Merger, concurrently with the
execution and delivery of this Agreement, certain stockholders of Parent are
executing voting agreements (the "Parent Stockholder Voting Agreements").
E. In order to induce Parent to enter into this Agreement, concurrently
with the execution and delivery of this Agreement, certain employees of the
Company are entering into new or amended Employment and Non-Competition
Agreements.
AGREEMENT
The parties to this Agreement, intending to be legally bound, agree as
follows:
SECTION 1. DESCRIPTION OF TRANSACTION
1.1 Merger of the Company into Parent. Upon the terms and subject to the
conditions set forth in this Agreement, at the Effective Time (as defined in
Section 1.3), the Company will be merged with and into Parent, the separate
existence of the Company will cease and Parent will be the surviving corporation
in the Merger.
1.2 Effect of the Merger. The Merger will have the effects set forth in
this Agreement and in the applicable provisions of the Delaware General
Corporation Law (the "DGCL").
1.3 Closing; Effective Time. The consummation of the transactions
contemplated by this Agreement (the "Closing") will take place at the offices of
Cooley Godward LLP, One Maritime Plaza, 20th Floor, San Francisco, California,
at 10:00 a.m. on a date to be mutually agreed between Parent and the Company
(the "Closing Date"), which date will be no later than the fifth business day
after the satisfaction or waiver of the last to be satisfied or waived of the
conditions set forth in Sections 6 and 7 (other than those conditions that by
their nature are to be satisfied at the Closing, but subject to the satisfaction
or waiver of such conditions). Subject to the provisions of this Agreement, a
certificate of merger satisfying the applicable requirements of the DGCL will be
duly executed by the Company and concurrently with or as soon as practicable
following the Closing delivered to the Secretary of State of the State of
Delaware for filing. The Merger will become effective upon the filing of such
certificate of merger with the Secretary of State of the State of Delaware (the
"Effective Time").
A-1-1
<PAGE> 255
1.4 Certificate of Incorporation and Bylaws; Directors and Officers. As of
the Effective Time:
(a) the certificate of incorporation of the surviving corporation in
the Merger will be the certificate of incorporation of Parent as in effect
immediately prior to the Effective Time;
(b) the Bylaws of the surviving corporation in the Merger will be the
Bylaws of Parent as in effect immediately prior to the Effective Time; and
(c) the directors and officers of the surviving corporation in the
Merger will be the respective individuals who are directors and officers of
Parent immediately prior to the Effective Time.
1.5 Conversion of Shares.
(a) At the Effective Time, by virtue of the Merger and without any further
action on the part of Parent, the Company or any stockholder of the Company:
(i) any shares of Company Stock then held by the Company or any wholly
owned Subsidiary of the Company (or held in the Company's treasury) will be
canceled and retired and will cease to exist, and no consideration will be
delivered in exchange therefor;
(ii) any shares of Company Stock then held by Parent will be canceled
and retired and will cease to exist, and no consideration will be delivered
in exchange therefor; and
(iii) except as provided in clauses (i) and (ii) above and subject to
Sections 1.5(b), 1.5(c) and 1.5(d), the holder of a share of each class and
series of Company Stock then outstanding (other than Dissenting Shares, as
defined in Section 1.11) will be entitled to receive the percentage
interest in the Merger Consideration Shares (a portion of which will be
represented by Escrow Shares) set forth with respect to such class or
series of Company Stock on Exhibit B.
With respect to each class and series of Company Stock, the number of shares or
fraction of a share of Parent Common Stock specified in Section 1.5(a)(iii) (as
such fraction may be adjusted in accordance with this Section 1.5(b)) is
referred to as the "Exchange Ratio" applicable to such class or series of
Company Stock.
(b) If, between the date of this Agreement and the Effective Time, the
outstanding shares of Company Stock or Parent Common Stock are changed into a
different number or class of shares by reason of any stock split, division or
subdivision of shares, stock dividend, reverse stock split, consolidation of
shares, reclassification, recapitalization or other similar transaction, then
the Exchange Ratio applicable to each class and series of Company Stock will be
appropriately adjusted.
(c) If any shares of Company Stock outstanding immediately prior to the
Effective Time are unvested or are subject to a repurchase option, risk of
forfeiture or other condition under any applicable restricted stock purchase
agreement or other agreement with the Company or under which the Company has any
rights, then the shares of Parent Common Stock issued in exchange for such
shares of Company Stock will also be unvested and subject to the same repurchase
option, risk of forfeiture or other condition, and the certificates representing
such shares of Parent Common Stock may accordingly be marked with appropriate
legends. The Company will take all action that may be necessary to ensure that,
from and after the Effective Time, Parent is entitled to exercise any such
repurchase option or other right set forth in any such restricted stock purchase
agreement or other agreement.
(d) No fractional shares of Parent Common Stock will be issued in
connection with the Merger, and no certificates or scrip for any such fractional
shares will be issued. Any holder of Company Stock who would otherwise be
entitled to receive a fraction of a share of Parent Common Stock (after
aggregating all fractional shares of Parent Common Stock issuable to such
holder) will, in lieu of such fraction of a share and, upon surrender of such
holder's Company Stock Certificate(s) (as defined in Section 1.6), be paid in
cash the dollar amount (rounded to the nearest whole cent), without interest,
determined by multiplying such fraction by the closing price of a share of
Parent Common Stock on the Nasdaq National Market on the date the Merger becomes
effective.
A-1-2
<PAGE> 256
1.6 Closing of the Company's Transfer Books. At the Effective Time: (a)
all shares of Company Stock outstanding immediately prior to the Effective Time
will automatically be canceled and retired and will cease to exist, and all
holders of certificates representing shares of Company Stock that were
outstanding immediately prior to the Effective Time will cease to have any
rights as stockholders of the Company; and (b) the stock transfer books of the
Company will be closed with respect to all shares of Company Stock outstanding
immediately prior to the Effective Time. No further transfer of any such shares
of Company Stock will be made on such stock transfer books after the Effective
Time. If, after the Effective Time, a valid certificate previously representing
any shares of Company Stock (a "Company Stock Certificate") is presented to the
Exchange Agent (as defined in Section 1.7) or to Parent, such Company Stock
Certificate will be canceled and will be exchanged as provided in Section 1.7.
1.7 Exchange of Certificates.
(a) On or prior to the Closing Date, Parent will select a reputable bank or
trust company to act as exchange agent in the Merger (the "Exchange Agent"). On
or prior to the Effective Time, Parent will deposit with the Exchange Agent (i)
certificates representing the shares of Parent Common Stock issuable pursuant to
this Section 1, and (ii) cash sufficient to make payments in lieu of fractional
shares in accordance with Section 1.5(d). The shares of Parent Common Stock and
cash amounts so deposited with the Exchange Agent, together with any dividends
or distributions received by the Exchange Agent with respect to such shares, are
referred to collectively as the "Exchange Fund."
(b) As soon as reasonably practicable after the Effective Time, Parent will
deliver or cause to be delivered to Gary Stevenson a certificate representing
the Stevenson Compensation Shares (other than the portion representing Escrow
Shares) and cause the Exchange Agent to mail to the record holders of Company
Stock Certificates (i) a letter of transmittal in customary form and containing
such provisions as Parent may reasonably specify (including a provision
confirming that delivery of Company Stock Certificates will be effected, and
risk of loss and title to Company Stock Certificates will pass, only upon
delivery of such Company Stock Certificates to the Exchange Agent), and (ii)
instructions for use in effecting the surrender of Company Stock Certificates in
exchange for certificates representing Parent Common Stock. Upon surrender of a
Company Stock Certificate to the Exchange Agent for exchange, together with a
duly executed letter of transmittal and such other documents as may be
reasonably required by the Exchange Agent or Parent, (1) the holder of such
Company Stock Certificate will be entitled to receive in exchange therefor a
certificate representing the number of whole shares of Parent Common Stock that
such holder has the right to receive pursuant to the provisions of Section 1.5,
taking into account the Escrow Shares, as defined below (and cash in lieu of any
fractional share of Parent Common Stock), and (2) the Company Stock Certificate
so surrendered will be canceled. Until surrendered as contemplated by this
Section 1.7(b), each Company Stock Certificate will be deemed, from and after
the Effective Time, to represent only the right to receive shares of Parent
Common Stock, taking into account the Escrow Shares (and cash in lieu of any
fractional share of Parent Common Stock) as contemplated by Section 1. If any
Company Stock Certificate has been lost, stolen or destroyed, Parent may, in its
discretion and as a condition to the issuance of any certificate representing
Parent Common Stock, require the owner of such lost, stolen or destroyed Company
Stock Certificate to provide an appropriate affidavit and to deliver a bond (in
such sum as Parent may reasonably direct) as indemnity against any claim that
may be made against the Exchange Agent or Parent with respect to such Company
Stock Certificate.
(c) No dividends or other distributions declared or made with respect to
Parent Common Stock with a record date after the Effective Time will be paid to
the holder of any unsurrendered Company Stock Certificate with respect to the
shares of Parent Common Stock that such holder has the right to receive in the
Merger until such holder surrenders such Company Stock Certificate in accordance
with this Section 1.7 (at which time such holder will be entitled, subject to
the effect of applicable escheat or similar laws, to receive all such dividends
and distributions, without interest).
(d) Any portion of the Exchange Fund that remains undistributed to holders
of Company Stock Certificates as of the date 180 days after the Closing Date
will be delivered to Parent upon demand, and
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any holders of Company Stock Certificates who have not theretofore surrendered
their Company Stock Certificates in accordance with this Section 1.7 will
thereafter look only to Parent for satisfaction of their claims for Parent
Common Stock, cash in lieu of fractional shares of Parent Common Stock and any
dividends or distributions with respect to Parent Common Stock.
(e) Each of the Exchange Agent and Parent will be entitled to deduct and
withhold from any consideration payable or otherwise deliverable pursuant to
this Agreement to any holder or former holder of Company Stock such amounts as
may be required to be deducted or withheld therefrom under the Code or any
provision of state, local or foreign tax law. To the extent such amounts are so
deducted or withheld, such amounts will be treated for all purposes under this
Agreement as having been paid to the Person to whom such amounts would otherwise
have been paid.
(f) Parent will not be liable to any holder or former holder of Company
Stock or to any other Person with respect to any shares of Parent Common Stock
(or dividends or distributions with respect thereto), or for any cash amounts,
delivered to any public official pursuant to any applicable abandoned property
law, escheat law or similar Legal Requirement.
1.8 Escrow. Parent will deposit 1,500,000 shares of the Merger
Consideration Shares with the Escrow Agent to be held and disbursed by the
Escrow Agent in accordance with the Escrow Agreement. Each holder of a Company
Stock Certificate and Gary Stevenson (each an "Escrow Stockholder") will be
deemed, without any act of such Escrow Stockholder, to have received and
deposited with the Escrow Agent pursuant to the Escrow Agreement a number of
Merger Consideration Shares representing such Escrow Stockholder's proportionate
interest in the Escrow Shares ("Escrow Percentage"). Each Escrow Stockholder's
Escrow Percentage will be determined based on (a) the number of Merger
Consideration Shares issuable hereunder with respect to all Company Stock
Certificates held by such Escrow Stockholder (together, in the case of Gary
Stevenson, with the Stevenson Compensation Shares) divided by (b) the sum of (i)
the aggregate number of Merger Consideration Shares issuable hereunder with
respect to all Company Stock Certificates held by all Escrow Stockholders and
(ii) the Stevenson Compensation Shares. The Escrow Shares will be represented by
a certificate registered in the name of the nominee of the Escrow Agent (with
each Escrow Stockholder being the beneficial owner of such Escrow Stockholder's
Escrow Percentage). To the extent that any dividend or distribution, or other
transaction, with respect to the Escrow Shares results in a liability for Tax,
such Tax liability will be that of the Escrow Stockholders (in proportion to
each Escrow Stockholder's proportionate interest in the Escrow Shares), and not
of Parent or the Company. Any and all voting rights with respect to the Escrow
Shares will be exercisable by the Escrow Stockholders or their authorized agent
as of the Effective Time. Parent, the Company and the Escrow Stockholders hereby
agree and acknowledge that the Escrow Shares will be treated as transferred to
and owned by the Escrow Stockholders as of the Effective Time and at all times
thereafter for all Tax purposes.
1.9 Lockup. Notwithstanding Parent's agreement to register the shares of
Parent Common Stock to be issued in the Merger as provided in Sections 5.1 and
5.5, prior to the expiration of one year after the Closing Date, no share of
Parent Common Stock issued in the Merger (including shares of Parent Common
Stock received upon exercise of Company Warrants assumed or replaced as provided
in Section 5.5) may be sold, transferred, hypothecated, pledged, made the
subject of an equity swap or similar agreement or otherwise transferred
(collectively, a "Disposition") without the prior written consent of Parent,
except as provided in this Section 1.9. The persons receiving Parent Common
Stock in the Merger (including the Stevenson Compensation Shares) may effect
Dispositions as follows: (a) up to an aggregate of 10% of the shares of Parent
Common Stock received by such persons in the Merger (excluding Escrow Shares) at
any time after the Closing Date; (b) up to a cumulative aggregate of 22% of such
shares at any time after the expiration of 90 days after the Closing Date; (c)
up to a cumulative aggregate of 47% of such shares at any time after the
expiration of 180 days after the Closing Date; and (d) up to a cumulative
aggregate of 72% of such shares at any time after the expiration of 270 days
after the Closing Date. Within these totals, Gary Stevenson may effect
Dispositions of the Stevenson Compensation Shares as follows: (a) up to an
aggregate of 60% of the Stevenson Compensation Shares (excluding Escrow Shares)
at any time after the Closing Date; (b) up to a cumulative aggregate of 65%
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of such shares at any time after the expiration of 90 days after the Closing
Date; (c) up to a cumulative aggregate of 75% of such shares at any time after
the expiration of 180 days after the Closing Date; and (d) up to a cumulative
aggregate of 85% of such shares at any time after the expiration of 270 days
after the Closing Date. The maximum number of Stevenson Compensation Shares that
are permitted to be disposed of in each period will reduce the aggregate number
of other Merger Consideration Shares that are permitted to be disposed of in
that period, so that the total of the two equals the maximum aggregate number of
Merger Consideration Shares specified above for that period. Each person
receiving shares of Parent Common Stock in the Merger (other than the Stevenson
Compensation Shares) will be entitled to effect Dispositions of such person's
pro rata share of the maximum total number of shares (other than the Stevenson
Compensation Shares) available to be disposed of during each period. Promptly
after the Closing Date, Parent will determine in good faith and advise the
persons who received Parent Common Stock in the Merger of the maximum number or
percentage of such shares that may be disposed of in each of the above-described
periods. Parent, in its sole discretion, may legend the certificates
representing such shares of Parent Common Stock to give effect to this Section
1.9 and place stop transfer instructions with Parent's stock transfer agent to
enforce this Section 1.9.
1.10 Closing Balance Sheet; Merger Consideration Adjustment.
(a) As soon as practicable, and in any event within 45 days, after the
Closing, Parent will prepare in good faith, and will cause Parent's independent
auditors to audit, the consolidated balance sheet of the Company as of the close
of business on the Closing Date (the "Closing Balance Sheet") and a calculation
of the amount, if any, by which the Company's Net Deficit (as defined in Exhibit
C) reflected on the Closing Balance Sheet is greater than:
(i) $11,274,730 if the Closing Date is on or prior to September 30,
2000;
(ii) $11,424,730 if the Closing Date is after September 30, 2000 and
on or before October 15, 2000;
(iii) $11,574,730 if the Closing Date is after October 15, 2000 and on
or before October 31, 2000;
(iv) $11,724,730 if the Closing Date is after October 31, 2000 and on
or before November 15, 2000; or
(v) $11,874,730 if the Closing Date is after November 15, 2000 (the
"Merger Consideration Adjustment"). The Closing Balance Sheet will be
prepared in accordance with the principles set forth in Exhibit C. Promptly
after their preparation and review, Parent will deliver copies of the
Closing Balance Sheet and the calculation of the Merger Consideration
Adjustment to the Designated Company Agent. For a period of 45 days
thereafter, Parent will allow the Designated Company Agent and his or her
professional advisors, at reasonable times and on reasonable advance
notice, to review, copy and make extracts from the source documents and
work papers relied upon by Parent and its professional advisors in
preparing the Closing Balance Sheet. If the Designated Company Agent has
not given Parent notice of any objection to the Closing Balance Sheet or
the calculation of the Merger Consideration Adjustment (which notice must
contain a statement of the basis of the Designated Company Agent's
objection and the Designated Company Agent's calculation of the Merger
Consideration Adjustment) within 45 days after their delivery to the
Designated Company Agent, then the Closing Date Balance Sheet and
calculation of the Merger Consideration Adjustment in the forms delivered
to the Designated Company Agent will be deemed final upon the expiration of
such 45-day period.
(b) If the Designated Company Agent provides notice of an objection in
accordance with Section 1.10(a), then the issues in dispute and determination of
the Merger Consideration Adjustment will be resolved in accordance with this
Section 1.10(b). First, Parent and the Designated Company Agent will diligently
attempt in good faith to resolve the issues and agree on the amount of the
Merger Consideration Adjustment. If Parent and the Designated Company Agent are
unable to resolve all of the issues within 45 days after Parent's receipt of the
Designated Company Agent's objection, then Parent and the
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Designated Company Agent will submit the unresolved issues in dispute and the
determination of the Merger Consideration Adjustment to Arthur Andersen LLP,
independent auditors (the "Independent Auditors"), for final resolution. If
issues in dispute are submitted to the Independent Auditors for resolution,
then: (i) each party will furnish to the Independent Auditors such work papers
and other documents and information relating to the disputed issues as the
Independent Auditors may request and as are available to that party and will be
afforded the opportunity to present to the Independent Auditors any material
relating to the determination and to discuss the determination with the
Independent Auditors; (ii) the determination by the Independent Auditors of the
Merger Consideration Adjustment, as set forth in a written notice setting forth
such determination delivered to Parent and the Designated Company Agent by the
Independent Auditors (which will be requested within 30 days after the
submission to them of the issues in dispute), will be final, conclusive and
binding on the parties effective upon the delivery of such notice; and (iii)
Parent will bear the fees and costs of the Independent Auditors in making such
determination, subject to Parent's right to recover from the Escrow Fund: (x)
100% of such fees and costs if the final Merger Consideration Adjustment is
closer to the Merger Consideration Adjustment as calculated by Parent than it is
to the average of that number and the Merger Consideration Adjustment as
calculated by the Designated Company Agent; (y) none of such fees and costs if
the final Merger Consideration Adjustment is closer to the Merger Consideration
Adjustment as calculated by the Designated Company Agent than it is to the
average of that number and the Merger Consideration Adjustment as calculated by
Parent; and (z) 50% of such fees and costs in all other cases.
(c) At any time after a determination that the Merger Consideration
Adjustment is other than zero becomes final, Parent may deliver to the Escrow
Agent a copy, certified by Parent to be a true copy, of the final determination
thereof, whereupon the Merger Consideration Adjustment as so delivered will
represent an accepted claim under the Escrow Agreement.
1.11 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary, the
shares of any holder of Company Stock who (i) has the right under applicable law
to demand dissenter's or appraisal rights for such shares, (ii) has demanded and
perfected such rights under applicable law and (iii) as of the Effective Time,
has not effectively withdrawn or lost such rights ("Dissenting Shares"), will
not be converted into Parent Common Stock pursuant to Section 1.5, but the
holder thereof will only be entitled to such rights as are granted by applicable
law.
(b) Notwithstanding the foregoing, if any holder of shares of Company Stock
who has the right under applicable law to demand and who does demand appraisal
of such shares under applicable law effectively withdraws or loses (through
failure to perfect or otherwise) the right to appraisal, then, as of the later
of the Effective Time and the occurrence of such event, such holder's shares
will automatically be converted into and represent only Parent Common Stock in
accordance with Section 1.5.
(c) The Company will give Parent (i) prompt written notice of any written
demands for appraisal, withdrawals of demands for appraisal and any other
instruments served on the Company pursuant to applicable law and (ii) the
opportunity to direct all negotiations and proceedings with respect to demands
for appraisal under applicable law. The Company will not voluntarily make any
payment with respect to any demands for appraisal and will not, except with the
prior written consent of Parent, settle or offer to settle any such demands.
1.12 Tax Consequences. For federal income tax purposes, the Merger is
intended to constitute a reorganization within the meaning of Section 368 of the
Code. The parties to this Agreement hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the
United States Treasury Regulations.
1.13 Accounting Treatment. For financial reporting purposes, the Merger is
intended to be treated as a "purchase."
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SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent as follows:
2.1 Subsidiaries; Due Organization; Etc.
(a) The Company has no Subsidiaries, except for the corporations identified
in Part 2.1(a) of the Company Disclosure Schedule; and neither the Company nor
any of the other corporations identified in Part 2.1(a) of the Company
Disclosure Schedule owns any capital stock of, or any equity interest of any
nature in, any other Entity, other than the Entities identified in Part 2.1(a)
of the Company Disclosure Schedule. (The Company and each of its Subsidiaries
are referred to collectively in this Agreement as the "Acquired Corporations.")
None of the Acquired Corporations has agreed or is obligated to make, or is
bound by any Contract under which it may become obligated to make, any future
investment in or capital contribution to any other Entity. None of the Acquired
Corporations has, at any time, been a general partner of, or has otherwise been
liable for any of the debts or obligations of, any general partnership, limited
partnership or other Entity.
(b) Each of the Acquired Corporations is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation and has all necessary power and authority: (i) to conduct its
business in the manner in which its business is currently being conducted; (ii)
to own and use its assets in the manner in which its assets are currently owned
and used; and (iii) to perform its obligations under all Material Contracts by
which it is bound.
(c) Set forth in Part 2.1(c) of the Company Disclosure Schedule is a list
of each jurisdiction where each of the Acquired Corporations is qualified to do
business. Except as set forth in Part 2.1(c) of the Company Disclosure Schedule
or as will not at any time be deemed to have a Material Adverse Effect on the
Acquired Corporations, each of the Acquired Corporations is qualified to do
business as a foreign corporation, and is in good standing, under the laws of
all jurisdictions where the nature of its business requires such qualification.
2.2 Certificate of Incorporation and Bylaws; Records. The Company has
delivered to Parent accurate and complete copies of: (i) the certificate of
incorporation, bylaws and other charter and organizational documents of the
respective Acquired Corporations, including all amendments thereto, other than
the Company Charter Amendment; (ii) the stock records of the Company; and (iii)
except as set forth in Part 2.2 of the Company Disclosure Schedule, the minutes
and other records of the meetings and other proceedings (including any actions
taken by written consent or otherwise without a meeting) of the stockholders of
the Company, the board of directors of the Company and all committees of the
board of directors of the Company. There have been no formal meetings or other
proceedings of the stockholders of the Company, the board of directors of the
Company or any committee of the board of directors of the Company that are not
fully reflected in all material respects in such minutes or other records. There
has not been any material violation of any of the provisions of the Company's
articles of incorporation or bylaws, and the Company has not taken any action
that is inconsistent in any material respect with any resolution adopted by the
Company's stockholders, the Company's board of directors or any committee of the
Company's board of directors. The books of account, stock records and minute
books of the Company are accurate, up-to-date and complete in all material
respects and have been maintained in accordance with prudent business practices.
2.3 Capitalization, Etc.
(a) As of the date of this Agreement, the authorized capital stock of the
Company consists of: (i) 20,000,000 shares of Common Stock, of which 2,891,546
shares have been issued and are outstanding as of the date of this Agreement;
and (ii) 7,500,000 shares of Company Preferred Stock, of which 761,903 are
undesignated Preferred Stock (none of which are outstanding), 125,000 are
designated Series A Redeemable Preferred Stock, par value $10.00 per share,
518,841 are designated Series B Convertible Preferred Stock, par value $4.492
per share, 1,418,200 are designated Series C Convertible Preferred Stock, par
value $.001 per share, 630,756 are designated Series C1 Convertible Preferred
Stock, par value $.001 per share, 2,230,260 are designated Series D Convertible
Preferred Stock, par value $.001 per share,
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1,003,617 are designated Series D1 Convertible Preferred Stock, par value $.001
per share, and 811,423 are designated Series E Convertible Preferred Stock, par
value $.001 per share, of the Company. 125,000, 445,263, 1,418,200, 630,756,
2,140,873, 0, and 811,423 shares of Series A Redeemable Preferred Stock, Series
B Convertible Preferred Stock, Series C Convertible Preferred Stock, Series C1
Convertible Preferred Stock, Series D Convertible Preferred Stock, Series D1
Convertible Preferred Stock and Series E Convertible Preferred Stock,
respectively, have been issued and are outstanding as of the date of this
Agreement. Part 2.3(a) of the Company Disclosure Schedule sets forth the number
of shares of Company Common Stock into which each outstanding share of each
series the Company Preferred Stock (other than undesignated Company Preferred
Stock) is convertible as of the date of this Agreement. Except as set forth in
Part 2.3(a) of the Company Disclosure Schedule, the Company does not hold any
shares of its capital stock in its treasury. All of the outstanding shares of
Company Stock have been duly authorized and validly issued, and are fully paid
and nonassessable. As of the date of this Agreement, there are no shares of
Company Stock held by any of the other Acquired Corporations. Except as set
forth in Part 2.3(a) of the Company Disclosure Schedule: (i) none of the
outstanding shares of Company Stock is entitled or subject to any preemptive
right, right of participation, right to maintain interest or any similar right;
(ii) none of the outstanding shares of Company Stock is subject to any right of
first refusal in favor of the Company; and (iii) there is no Acquired
Corporation Contract relating to the voting or registration of, or restricting
any Person from purchasing, selling, pledging or otherwise disposing of (or
granting any option or similar right with respect to), any shares of Company
Stock. None of the Acquired Corporations is under any obligation, or is bound by
any Contract pursuant to which it may become obligated, to repurchase, redeem or
otherwise acquire any outstanding shares of Company Stock.
(b) As of the date of this Agreement, 3,200,000 shares of undesignated
Company Preferred Stock (which will be designated pursuant to the Company
Charter Amendment) and 1,185,000 shares of Company Common Stock are reserved for
future issuance pursuant to Company Options. Part 2.3(b) of the Company
Disclosure Schedule sets forth the following information with respect to each
Company Option outstanding as of the date of this Agreement: (i) the particular
plan (if any) pursuant to which such Company Option was granted; (ii) the name
of the optionee; (iii) the class, series and number of shares of Company Stock
subject to such Company Option; (iv) the exercise price of such Company Option;
(v) the date on which such Company Option was granted; (vi) the applicable
vesting schedule, and the extent to which such Company Option is vested and
exercisable as of the date of this Agreement; and (vii) the date on which such
Company Option expires. The Company has delivered to Parent accurate and
complete copies of all stock option plans pursuant to which any of the Acquired
Corporations has ever granted stock options, and the forms of all stock option
agreements evidencing such options.
(c) Except for the Company Warrants and as set forth in Part 2.3(c) of the
Company Disclosure Schedule, as of the date of this Agreement there is no: (i)
outstanding subscription, option, call, warrant or right (whether or not
currently exercisable) to acquire any shares of the capital stock or other
securities of any of the Acquired Corporations; (ii) outstanding security,
instrument or obligation that is or may become convertible into or exchangeable
for any shares of the capital stock or other securities of any of the Acquired
Corporations; (iii) stockholder rights plan (or similar plan commonly referred
to as a "poison pill") or Contract under which any of the Acquired Corporations
is or may become obligated to sell or otherwise issue any shares of its capital
stock or any other securities; or (iv) condition or circumstance that could
reasonably be expected to give rise to or provide a basis for the assertion of a
claim by any Person to the effect that such Person is entitled to acquire or
receive any shares of capital stock or other securities of any of the Acquired
Corporations.
(d) All outstanding capital stock, options and other securities of the
Acquired Corporations have been issued and granted in compliance, in all
material respects, with (i) all applicable securities laws and other applicable
Legal Requirements, and (ii) all requirements set forth in applicable Contracts.
(e) All of the outstanding shares of capital stock of the corporations
identified in Part 2.1(a) of the Company Disclosure Schedule have been duly
authorized and are validly issued, are fully paid and nonassessable and free of
preemptive rights, with no personal liability attaching to the ownership
thereof, and are owned beneficially and of record by the Company, free and clear
of any Encumbrances.
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2.4 Financial Statements.
(a) The Company has delivered to Parent the following financial statements
and notes (collectively, the "Company Financial Statements"):
(i) the audited consolidated balance sheets of the Acquired
Corporations as of December 31, 1999 and 1998 and the related audited
statements of operations, statements of stockholders' equity and statements
of cash flows of the Acquired Corporations for the years then ended,
together with the notes thereto and the report and opinion of Deloitte &
Touche LLP relating thereto; and
(ii) the unaudited consolidated balance sheet of the Acquired
Corporations as of May 31, 2000 (the "Unaudited Interim Balance Sheet"),
and the related unaudited income statement of the Acquired Corporations for
the five months then ended.
(b) The Company Financial Statements are accurate and complete in all
material respects and present fairly, in all material respects, the financial
positions of the Acquired Corporations as of the respective dates thereof and
the results of operations and (in the case of the financial statements referred
to in Section 2.4(a)(i)) cash flows of the Acquired Corporations for the periods
covered thereby. The Company Financial Statements have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods covered (except that the financial statements
referred to in Section 2.4(a)(ii) do not contain footnotes and are subject to
normal and recurring year-end audit adjustments, which will not, individually or
in the aggregate, be material in magnitude).
2.5 Absence of Changes. Except as set forth in Part 2.5 of the Company
Disclosure Schedule, since December 31, 1999 (the "Audited Balance Sheet Date"):
(a) there has not arisen any event, condition, fact or circumstance
that, considered together with all other events, conditions, facts and
circumstances, is deemed to have a Material Adverse Effect on the Acquired
Corporations;
(b) there has not been any material loss, damage or destruction to, or
any material interruption in the use of, the assets of any of the Acquired
Corporations taken as a whole (whether or not covered by insurance);
(c) none of the Acquired Corporations has (i) declared, accrued, set
aside or paid any dividend or made any other distribution in respect of any
shares of capital stock, or (ii) repurchased, redeemed or otherwise
reacquired any shares of capital stock or other securities, except for the
cancellation of Company Options or Company Warrants without payment of any
consideration by the Company;
(d) except in connection with the Bridge Financing, none of the
Acquired Corporations has sold, issued or granted, or authorized the
issuance of, (i) any capital stock or other security (except for Company
Common Stock issued upon the valid exercise of outstanding Company Options
or Company Warrants), (ii) any option, warrant or right to acquire any
capital stock or any other security (except for Company Options identified
and described in Part 2.3(b) or Part 2.3(c) of the Company Disclosure
Schedule), or (iii) any instrument convertible into or exchangeable for any
capital stock or other security;
(e) the Company has not amended or waived any of its material rights
under, or permitted the acceleration of vesting under, (i) any provision of
any of the Company's stock option plans, (ii) any provision of any Contract
evidencing any outstanding Company Option, or (iii) any restricted stock
purchase agreement;
(f) there has been no amendment to the certificate of incorporation,
bylaws or other charter or organizational documents of any of the Acquired
Corporations, and none of the Acquired Corporations has effected or been a
party to any merger, consolidation, share exchange, business combination,
recapitalization, reclassification of shares, stock split, reverse stock
split or similar transaction, except for the Company Charter Amendment;
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(g) none of the Acquired Corporations has formed any Subsidiary or
acquired any equity interest or other interest in any other Entity;
(h) none of the Acquired Corporations has made any capital expenditure
which, when added to all other capital expenditures made on behalf of the
Acquired Corporations since the Audited Balance Sheet Date exceeds $100,000
in the aggregate;
(i) none of the Acquired Corporations has: (i) entered into or
permitted any of the assets owned or used by it to become bound by any
Contract that is or would constitute a Material Contract (as defined in
Section 2.10), except for the Company Charter Amendment and the Bridge
Financing; or (ii) amended or terminated, or waived any right or remedy
under, any Material Contract;
(j) none of the Acquired Corporations has (i) acquired, leased or
licensed any right or other asset from any other Person, (ii) sold or
otherwise disposed of, or leased or licensed, any right or other asset to
any other Person, or (iii) waived or relinquished any right, except, in the
case of clauses (i) through (iii), for immaterial rights or other
immaterial assets acquired, leased, licensed, waived, relinquished or
disposed of in the ordinary course of business and consistent with past
practices;
(k) none of the Acquired Corporations has made any pledge of any of
its assets or otherwise permitted any of its assets to become subject to
any Encumbrance, except for Permitted Liens and pledges of immaterial
assets made in the ordinary course of business and consistent with past
practices;
(l) none of the Acquired Corporations has (i) lent money to any Person
(other than pursuant to routine travel advances made to employees in the
ordinary course of business), or (ii) incurred or guaranteed any
indebtedness for borrowed money in excess of $50,000 in the aggregate;
(m) none of the Acquired Corporations has (i) adopted, established or
entered into any Employee Plan (as defined in Section 2.15), (ii) caused or
permitted any Employee Plan to be amended in any material respect, (iii)
paid any bonus (other than bonuses not exceeding $20,000 in the aggregate
to any individual employee) or made any profit-sharing or similar payment
to any of its directors, officers or employees or consultants, or (iv)
except in the ordinary course of business and consistent with past
practices, increased the amount of the wages, salary, commissions, fringe
benefits or other compensation or remuneration payable to any of its
directors, officers or employees or consultants or hired any new employees
or consultants at the level of director or above;
(n) none of the Acquired Corporations has changed any of its methods
of accounting or accounting practices in any respect, except as required by
generally accepted accounting principles;
(o) none of the Acquired Corporations has made any material Tax
election;
(p) through the date of this Agreement, none of the Acquired
Corporations has commenced or settled any Legal Proceeding;
(q) none of the Acquired Corporations has entered into any material
transaction or taken any other material action that has had, or could
reasonably be expected to have, a Material Adverse Effect on the Acquired
Corporations;
(r) none of the Acquired Corporations has entered into any material
transaction or taken any other material action outside the ordinary course
of business or inconsistent with past practices except for the Company
Charter Amendment and the Bridge Financing; and
(s) none of the Acquired Corporations has agreed or committed to take
any of the actions referred to in clauses "(c)" through "(s)" above.
2.6 Title to Assets. The Acquired Corporations own, and have good and
valid title to, all assets purported to be owned by them, including: (i) all
assets reflected on the Unaudited Interim Balance Sheet (except for the
disposition of the Offline Publishing Assets described in Part 2.6(a) of the
Company
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Disclosure Schedule and inventory sold or otherwise disposed of in the ordinary
course of business since the date of the Unaudited Interim Balance Sheet); and
(ii) all other assets reflected in the books and records of the Acquired
Corporations as being owned by the Acquired Corporations. Except as described in
Part 2.6(a) of the Company Disclosure Schedule, all of such assets are owned by
the Acquired Corporations free and clear of any Encumbrances other than
Permitted Liens.
2.7 Receivables; Customers; Inventories.
(a) Part 2.7(a) of the Company Disclosure Schedule provides complete and
accurate information with respect to each account maintained by or for the
benefit of the Acquired Corporations at any bank or other financial institution.
(b) Part 2.7(b) of the Company Disclosure Schedule provides an accurate and
complete breakdown and aging of all accounts receivable, notes receivable and
other receivables of the Acquired Corporations as of June 28, 2000. Except as
set forth in Part 2.7(b) of the Company Disclosure Schedule, all existing
accounts receivable of the Acquired Corporations (including those accounts
receivable reflected on the Unaudited Interim Balance Sheet that have not yet
been collected and those accounts receivable that have arisen since the Audited
Balance Sheet Date, and have not yet been collected) (i) represent valid
obligations of customers of the Acquired Corporations arising from bona fide
transactions entered into in the ordinary course of business, and (ii), as of
the date of this Agreement and subject to the allowance for doubtful accounts
reflected on the Unaudited Interim Balance Sheet, are current and believed by
the Company to be collectible.
(c) Part 2.7(c) of the Company Disclosure Schedule contains an accurate and
complete list as of the date of this Agreement of all loans and advances made by
any of the Acquired Corporations to any employee, director, consultant or
independent contractor, other than routine travel advances made to employees in
the ordinary course of business.
(d) Part 2.7(d) of the Company Disclosure Schedule accurately identifies,
and provides an accurate and complete breakdown of the revenues received from,
each customer or other Person that accounted for (i) more than $750,000 of the
consolidated gross revenues of the Acquired Corporations in fiscal year 1999, or
(ii) more than $750,000 of the consolidated gross revenues of the Acquired
Corporations in the four months ended April 30, 2000.
2.8 Real Property; Equipment; Leasehold. All material items of equipment
and other tangible assets owned by or leased to the Acquired Corporations are in
good and safe condition and repair (ordinary wear and tear for items of
comparable age and usage excepted) and are in all material respects and in the
aggregate adequate for the conduct of the business of the Acquired Corporations
substantially in the manner in which such business is currently being conducted.
Except as set forth in Part 2.8 of the Company Disclosure Schedule, none of the
Acquired Corporations own any real property or any interest in real property.
Part 2.8 of the Company Disclosure Schedule contains an accurate and complete
list of all the Acquired Corporations' real property leases.
2.9 Proprietary Assets.
(a) Part 2.9(a)(i) of the Company Disclosure Schedule sets forth, with
respect to each Proprietary Asset owned by the Acquired Corporations and
registered with any Governmental Body or for which an application has been filed
with any Governmental Body, (i) a brief description of such Proprietary Asset,
and (ii) the names of the jurisdictions covered by the applicable registration
or application. Part 2.9(a)(ii) of the Company Disclosure Schedule identifies
and provides a brief description of all other Proprietary Assets owned by the
Acquired Corporations that are material to the business of the Acquired
Corporations. Part 2.9(a)(iii) of the Company Disclosure Schedule identifies and
provides a brief description of, and identifies any ongoing royalty or payment
obligations in excess of $40,000 per year with respect to, each Proprietary
Asset that is licensed or otherwise made available to the Acquired Corporations
by any Person and is material to the business of the Acquired Corporations
(except for any Proprietary Asset that is licensed to the Acquired Corporations
under any third-party software license generally available to the public or that
was at the time the license was entered into available on
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substantially similar terms to companies that are similarly situated), and
identifies the Contract under which such Proprietary Asset is being licensed or
otherwise made available to such Acquired Corporation. The Acquired Corporations
have good and valid title to all of the Acquired Corporation Proprietary Assets
purported to be owned by the Acquired Corporations, free and clear of all
Encumbrances other than Permitted Liens. The Acquired Corporations have a valid
right to use, license and otherwise exploit all Proprietary Assets required to
be identified in Part 2.9(a)(iii) of the Company Disclosure Schedule subject to
the terms of any applicable Contracts. Except as set forth in Part 2.9(a)(iv) of
the Company Disclosure Schedule, none of the Acquired Corporations has developed
jointly with any other Person any Acquired Corporation Proprietary Asset that is
material to the business of the Acquired Corporations with respect to which such
other Person has any rights. Except as set forth in Part 2.9(a)(v) of the
Company Disclosure Schedule, there is no Acquired Corporation Contract (with the
exception of end-user license agreements in the form previously delivered by the
Company to Parent) pursuant to which any Person has any right (whether or not
currently exercisable) to use, license or otherwise exploit any Acquired
Corporation Proprietary Asset.
(b) The Acquired Corporations have taken reasonable measures and
precautions to protect and maintain the confidentiality, secrecy and value of
all material Acquired Corporation Proprietary Assets (except Acquired
Corporation Proprietary Assets whose value would be unimpaired by disclosure).
Without limiting the generality of the foregoing, except as set forth in Part
2.9(b) of the Company Disclosure Schedule, (i) each current or former employee
of any Acquired Corporation who is or was involved in, or who has contributed
to, the creation or development of any material Acquired Corporation Proprietary
Asset has executed and delivered to such Acquired Corporation an agreement
(containing no exceptions to or exclusions from the scope of its coverage) that
is in substance the same as the form of Confidential Information and Invention
Assignment Agreement previously delivered by the Company to Parent, and (ii)
each current and former consultant or independent contractor to any Acquired
Corporation who is or was involved in, or who has contributed to, the creation
or development of any material Acquired Corporation Proprietary Asset has
executed and delivered to such Acquired Corporation an agreement (containing no
exceptions to or exclusions from the scope of its coverage) that is in substance
the same as the form of Consultant Confidential Information and Invention
Assignment Agreement previously delivered to Parent. No current or former
employee, officer, director, stockholder, consultant or independent contractor
has any right, claim or interest in or with respect to any material Acquired
Corporation Proprietary Asset.
(c) Except as set forth in Part 2.9(c) of the Company Disclosure Schedule:
(i) all patents, trademarks, service marks and copyrights held by any of the
Acquired Corporations are valid, enforceable and subsisting; (ii) none of the
Acquired Corporation Proprietary Assets and no Proprietary Asset that is
currently being developed by any of the Acquired Corporations (either by itself
or with any other Person) infringes, misappropriates or conflicts with any
Proprietary Asset owned or used by any other Person; (iii) none of the products,
systems, software, computer programs, source code, models, algorithms, formula,
compounds, inventions, designs, technology, proprietary rights or intangible
assets that is or has been designed, created, developed, assembled, manufactured
or sold by any of the Acquired Corporations is infringing, misappropriating or
making any unlawful or unauthorized use of any Proprietary Asset owned or used
by any other Person; (iv) none of the Acquired Corporations has received any
written or, to the Company's Knowledge, unwritten notice or other communication
regarding any actual or alleged infringement, misappropriation or unlawful or
unauthorized use of any Proprietary Asset owned or used by any other Person; (v)
to the Company's Knowledge, no other Person is infringing, misappropriating or
making any unlawful or unauthorized use of, and no Proprietary Asset owned or
used by any other Person infringes or conflicts with, any material Acquired
Corporation Proprietary Asset; and (vi) none of the Acquired Corporation
Proprietary Assets infringe upon the rights of privacy or rights of publicity of
any Person.
(d) The Acquired Corporation Proprietary Assets constitute all the
Proprietary Assets necessary to enable the Acquired Corporations to conduct
their business substantially in the manner in which such business is being
conducted. Except as set forth in Part 2.9(d) of the Company Disclosure
Schedule, none
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of the Acquired Corporations has (i) licensed any of the material Acquired
Corporation Proprietary Assets to any Person on an exclusive basis, or (ii)
entered into any covenant not to compete or Contract limiting or purporting to
limit the ability of any Acquired Corporation to exploit fully any material
Acquired Corporation Proprietary Assets or to transact business in any market or
geographical area or with any Person.
(e) Except as set forth in Part 2.9(e)(i) of the Company Disclosure
Schedule, none of the Acquired Corporations has disclosed or delivered to any
Person, or permitted the disclosure or delivery to any escrow agent or other
Person, of any Acquired Corporation Source or Object Code, except for disclosure
or delivery to employees or independent contractors who have signed agreements
that are in substance the same as the form of Confidential Information and
Invention Assignment Agreement previously delivered by the Company to Parent. No
event has occurred, and no circumstance or condition exists, that (with or
without notice or lapse of time) could reasonably be expected to, result in the
disclosure or delivery to any Person of any Acquired Corporation Source or
Object Code or the release from any escrow of any other Acquired Corporation
Proprietary Asset, except for disclosure or delivery to employees or independent
contractors who have signed agreements that are in substance the same as the
form of Confidential Information and Invention Assignment Agreement previously
delivered by the Company to Parent. Part 2.9(e)(ii) of the Company Disclosure
Schedule identifies each Contract pursuant to which the Company has deposited or
is required to deposit with an escrow holder or any other Person of any Acquired
Corporation Source or Object Code, and further describes whether the execution
of this Agreement or the consummation of any of the transactions contemplated
hereby could reasonably be expected to result in the release or disclosure of
any Acquired Corporation Source or Object Code or the release from any escrow of
any other Acquired Corporation Proprietary Asset.
(f) Except as set forth in Part 2.9(f)(i) of the Company Disclosure
Schedule, each computer, computer program and other item of software that is
owned by any of the Acquired Corporations and, to the Company's Knowledge, each
computer, computer program and other item of software that is used by any of the
Acquired Corporations for its internal business operations (in each case whether
installed on a computer or on any other piece of equipment, including firmware),
is Year 2000 Compliant. To the Company's Knowledge, except as set forth in Part
2.9(f)(ii) of the Company Disclosure Schedule, each computer program and other
item of software that has been designed, developed, sold, licensed or otherwise
made available to any Person by any of the Acquired Corporations is Year 2000
Compliant. For purposes of this Section 2.9, a computer, computer program or
other item of software is deemed to be "Year 2000 Compliant" if, except for such
deviations from the following as do not adversely affect its functioning in any
material respect: (i) the functions, calculations and other computing processes
of such computer, program or software perform in a consistent and correct manner
without interruption regardless of the date on which such functions,
calculations or other processes are actually performed and regardless of the
date input to the applicable computer system, whether before, on, or after
January 1, 2000; (ii) such computer, program or software accepts, calculates,
compares, sorts, extracts, sequences, and otherwise processes date inputs and
date values, and returns and displays date values, in a consistent and correct
manner regardless of the dates used whether before, on, or after January 1,
2000; (iii) such computer, program or software accepts and responds to year
input, if any, in a manner that resolves any ambiguities as to century in a
defined, predetermined, and appropriate manner; (iv) such computer, program or
software stores and displays date information in ways that are unambiguous as to
the determination of the century; and (v) such computer, program or software
determines leap years by the following standard: (A) if dividing the year by 4
yields an integer, it is a leap year, except for years ending in 00; but (B) a
year ending in 00 is a leap year if dividing it by 400 yields an integer.
(g) Except with respect to demonstration or trial copies, no product,
system, program or software module designed, developed, sold, licensed or
otherwise made available by any of the Acquired Corporations to any Person
contains any material "back door," "time bomb," "Trojan horse," "worm," "drop
dead device," "virus" or other software routines or hardware components designed
to permit unauthorized access or to disable or erase software, hardware or data
without the consent of the user.
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(h) Except as set forth in Part 2.9(h) of the Company Disclosure Schedule:
(i) each Acquired Corporation Proprietary Asset conforms in all material
respects with any written specification, documentation, performance standard,
representation or statement made or provided with respect thereto by or on
behalf of the Company; and (ii) there has not been any claim by any customer or
other Person alleging that any Acquired Corporation Proprietary Asset (including
each version thereof that has ever been licensed or otherwise made available by
the Company to any Person) does not conform in all material respects with any
written specification, documentation, performance standard, representation or
statement made or provided by or on behalf of the Company, and, to the Company's
Knowledge, there is no basis for any such claim. The Company has established
adequate reserves on the Unaudited Interim Balance Sheet to cover all costs
associated with any obligations that the Company may have with respect to the
correction or repair of programming errors or other defects in the Acquired
Corporation Proprietary Assets.
2.10 Contracts.
(a) Part 2.10 of the Company Disclosure Schedule identifies each Acquired
Corporation Contract that constitutes a "Material Contract." (For purposes of
this Agreement, each of the following will be deemed to constitute a "Material
Contract":
(i) any Contract (A) relating to the employment of, or the performance
of services by, any employee, consultant, or independent contractor, (B)
pursuant to which any of the Acquired Corporations is or may become
obligated to make any severance, termination or similar payment to any
current or former employee, director, consultant or independent contractor
or (C) pursuant to which any of the Acquired Corporations is or may become
obligated to make any bonus or similar payment (other than payments
constituting base salary) in excess of $25,000 to any current or former
employee or director, consultant or independent contractor;
(ii) any Contract relating to the acquisition, transfer, use,
development, sharing or license of any material Proprietary Asset (except
for any Contract pursuant to which (A) any Proprietary Asset is licensed to
the Acquired Corporations under any third party software license generally
available to the public at a cost of less than $10,000, or (B) any
Proprietary Asset is licensed by any of the Acquired Corporations to any
Person on a non-exclusive basis);
(iii) any Contract that provides for indemnification of any officer,
director, employee or agent;
(iv) any Contract imposing any material restriction on the right or
ability of any Acquired Corporation (A) to compete with any other Person,
(B) to acquire any product or other asset or any services from any other
Person, (C) to solicit, hire or retain any Person as an employee,
consultant or independent contractor, (D) to develop, sell, supply,
distribute, offer, support or service any product or any technology or
other asset to or for any other Person, (E) to perform services for any
other Person, or (F) to transact business or deal in any other manner with
any other Person;
(v) except with respect to the Bridge Financing, any Contract (other
than Contracts evidencing Company Options) (A) relating to the acquisition,
issuance, voting, registration, sale or transfer of any securities, (B)
providing any Person with any preemptive right, right of participation,
right of maintenance or any similar right with respect to any securities,
or (C) providing any of the Acquired Corporations with any right of first
refusal with respect to, or right to repurchase or redeem, any securities;
(vi) any Contract incorporating or relating to any material guaranty,
indemnity (other than for breach by an Acquired Corporation of its own
contractual obligations) or similar obligation;
(vii) any Contract relating to any currency hedging;
(viii) any Contract containing "standstill" or similar provisions;
(ix) any Contract (A) to which any Governmental Body is a party or
under which any Governmental Body has any rights or obligations, or (B)
directly or indirectly benefiting any
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Governmental Body (including any subcontract or other Contract between any
Acquired Corporation and any contractor or subcontractor to any
Governmental Body);
(x) except with respect to the Bridge Financing, any Contract
requiring that any of the Acquired Corporations give any notice or provide
any information to any Person prior to considering or accepting any
Acquisition Proposal or similar proposal, or prior to entering into any
discussions, agreement, arrangement or understanding relating to any
Acquisition Transaction or similar transaction;
(xi) except with respect to the Bridge Financing, any Contract that
involves the payment or delivery of cash or other consideration in an
amount or having a value in excess of $100,000 and may not be terminated by
an Acquired Corporation (without penalty) within 60 days after the delivery
of a termination notice by such Acquired Corporation;
(xii) except with respect to the Bridge Financing, any Contract that
contemplates or involves the payment or delivery of cash or other
consideration in an amount or having a value in excess of $100,000 in the
aggregate, or contemplates or involves the performance of services having a
value in excess of $100,000 in the aggregate, other than purchase orders
issued in the ordinary course of business;
(xiii) any Contract that could reasonably be expected to have a
material effect on the ability of the Company to perform any of its
obligations, or to consummate any of the transactions contemplated by, this
Agreement;
(xiv) any Contract (A) creating or involving any agency relationship,
distribution arrangement or franchise relationship, or (B) creating or
relating to any partnership or joint venture or any sharing of profits or
losses; and
(xv) except with respect to the Bridge Financing, any other Contract
entered into outside the ordinary course of business.
The Company has delivered to Parent an accurate and complete copy of each
Acquired Corporation Contract that constitutes a Material Contract,
including all amendments thereto.
(b) Each Acquired Corporation Contract that constitutes a Material Contract
is valid and in full force and effect and is enforceable against the Company
and, to the Company's Knowledge, each other party thereto in accordance with its
terms, subject to (i) laws of general application relating to bankruptcy,
insolvency and the relief of debtors, and (ii) rules of law governing specific
performance, injunctive relief and other equitable remedies.
(c) Except as set forth in Part 2.10(c) of the Company Disclosure Schedule:
(i) none of the Acquired Corporations has, in any material respect, violated or
breached, or committed any default under, any Material Contract (except for
violations, breaches and defaults that have been fully cured within applicable
cure periods or affirmatively waived by the other party to the affected Acquired
Corporation Contract), and, to the Company's Knowledge, no other Person has, in
any material respect, violated or breached, or committed any default under, any
Material Contract (except for violations, breaches and defaults that have been
fully cured within applicable cure periods or affirmatively waived by the
Company), (ii) to the Company's Knowledge, no event has occurred, and no
circumstance or condition exists, that (with or without notice or lapse of time)
could reasonably be expected to, (A) result in a violation or breach, in any
material respect, of any of the provisions of any Material Contract, (B) give
any Person the right to declare a material default or exercise any material
remedy in respect of a default under any Material Contract, (C) give any Person
the right to receive or require a rebate, chargeback, penalty or change in
delivery schedule under any Material Contract, (D) give any Person the right to
accelerate the maturity or performance of any Material Contract, (E) result in
the disclosure, release or delivery of any Acquired Corporation Source or Object
Code, or (F) give any Person the right to cancel, terminate or modify any
Material Contract, (iii) since the Audited Balance Sheet Date, none of the
Acquired Corporations has received any written or, to the Company's Knowledge,
unwritten notice or other
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communication regarding any actual or possible material violation or breach of,
or material default under, any Material Contract; and (iv) none of the Acquired
Corporations has waived any of its material rights under any Material Contract.
(d) The Contracts identified in Part 2.10 of the Company Disclosure
Schedule collectively constitute all of the Contracts necessary to enable the
Company to conduct its business substantially in the manner in which its
business is currently being conducted.
2.11 Liabilities. None of the Acquired Corporations has any accrued,
contingent or other liabilities of any nature, either matured or unmatured that
would be required to be reflected on a balance sheet prepared in accordance with
generally accepted accounting principles, whether due or to become due, and that
could reasonably be expected to have a Material Adverse Effect on the Company,
except for: (a) liabilities identified as such in the Unaudited Interim Balance
Sheet; (b) accounts payable and other liabilities that have been incurred by the
Company since May 31, 2000 in the ordinary course of business and consistent
with the Company's past practices; (c) liabilities under Material Contracts; (d)
other liabilities identified in the Company Disclosure Schedule; and (e)
liabilities arising under any agreement entered into to effect the Bridge
Financing.
2.12 Compliance with Legal Requirements. Except as will not at any time be
deemed to have a Material Adverse Effect on the Acquired Corporations, each of
the Acquired Corporations has complied in all material respects with all
applicable Legal Requirements. Except as will not at any time be deemed to have
a Material Adverse Effect on the Acquired Corporations, since the Audited
Balance Sheet Date, none of the Acquired Corporations has received any written
or, to the Company's Knowledge, unwritten notice or other communication from any
Governmental Body or other Person alleging any violation of, or failure to
comply with, any Legal Requirement.
2.13 Governmental Authorizations.
(a) Except as will not at any time be deemed to have a Material Adverse
Effect on the Acquired Corporations, the Acquired Corporations hold all
Governmental Authorizations necessary to enable the Acquired Corporations to
conduct their respective businesses substantially in the manner in which such
businesses are currently being conducted. All such Governmental Authorizations
are valid and in full force and effect and have been identified in Part 2.13(a)
of the Company Disclosure Schedule. The Company has delivered to Parent complete
and accurate copies of all such Governmental Authorizations. Each Acquired
Corporation is in substantial compliance with the terms and requirements of such
Governmental Authorizations. Since the Audited Balance Sheet Date, none of the
Acquired Corporations has received any written or, to the Company's Knowledge,
unwritten notice or other communication from any Governmental Body alleging (a)
any violation of or failure to comply with any term or requirement of any
Governmental Authorization, or (b) any revocation, withdrawal, suspension,
cancellation, termination or modification of any Governmental Authorization.
Except as will not at any time be deemed to have a Material Adverse Effect on
the Acquired Corporations, no Governmental Body has at any time challenged in
writing the right of any of the Acquired Corporations to design, manufacture,
offer or sell any of its products or services.
(b) Part 2.13(b) of the Company Disclosure Schedule describes the terms of
each grant, incentive or subsidy provided or made available to or for the
benefit of any of the Acquired Corporations by any U.S. or foreign Governmental
Body. Each of the Acquired Corporations is in full compliance with all of the
terms and requirements of each grant, incentive and subsidy identified or
required to be identified in Part 2.13(b) of the Company Disclosure Schedule.
Neither the execution, delivery or performance of this Agreement, nor the
consummation of the Merger or any of the other transactions contemplated by this
Agreement, will (with or without notice or lapse of time) give any Person the
right to revoke, withdraw, suspend, cancel, terminate or modify, any grant,
incentive or subsidy identified or required to be identified in Part 2.13(b) of
the Company Disclosure Schedule.
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2.14 Tax Matters.
(a) Each of the material Tax Returns required to be filed by or on behalf
of the respective Acquired Corporations with any Governmental Body with respect
to any taxable period ending on or before the Closing Date (the "Acquired
Corporation Returns") (i) has been or will be filed on or before the applicable
due date (including any extensions of such due date), and (ii) has been, or will
be when filed, complete and correct in all material respects. All amounts shown
on the Acquired Corporation Returns to be due on or before the Closing Date have
been or will be paid on or before the Closing Date. The Company has delivered to
Parent accurate and complete copies of the Acquired Corporation Returns
previously filed.
(b) The Unaudited Interim Balance Sheet fully accrues all actual and
contingent liabilities for Taxes with respect to all periods through May 31,
2000 in accordance with generally accepted accounting principles.
(c) No Acquired Corporation Return has ever been examined or audited by any
Governmental Body or other Person. No extension or waiver of the limitation
period applicable to any of the Acquired Corporation Returns has been granted
(by the Company or any other Person), and no such extension or waiver has been
requested from any Acquired Corporation.
(d) No claim or Legal Proceeding asserting an actual or potential Tax
liability is pending or, to the Company's Knowledge, has been overtly threatened
against or with respect to any Acquired Corporation in respect of any Tax. There
are no unsatisfied liabilities for Taxes (including liabilities for interest,
additions to tax and penalties thereon and related expenses) with respect to any
notice of deficiency or similar document received by any Acquired Corporation
with respect to any Tax (other than liabilities for Taxes asserted under any
such notice of deficiency or similar document which are being contested in good
faith by the Acquired Corporations and with respect to which adequate reserves
for payment have been established on the Unaudited Interim Balance Sheet). There
are no material liens for Taxes upon any of the assets of any of the Acquired
Corporations except liens for current Taxes not yet due and payable. None of the
Acquired Corporations has entered into or become bound by any agreement or
consent pursuant to Section 341(f) of the Code (or any comparable provision
under state or foreign Tax laws).
(e) Except as set forth in Part 2.14(e) of the Company Disclosure Schedule,
none of the Acquired Corporations is, or has ever been, a party to or bound by
any tax indemnity agreement, tax sharing agreement, tax allocation agreement or
similar Contract. There is no agreement, plan, arrangement or other Contract
covering any employee or independent contractor or former employee or
independent contractor of any of the Acquired Corporations that, considered
individually or considered collectively with any other such Contracts, will, or
could reasonably be expected to, give rise directly or indirectly to the payment
of any amount that would not be deductible pursuant to Section 280G or Section
162 of the Code (or any comparable provision of state or foreign Tax laws).
Notwithstanding the foregoing, the parties have agreed that the
non-deductibility of any payment by reason of Section 280G or Section 162 of the
Code (or any comparable provision of state or foreign Tax laws) would not in any
event (i) constitute Damages, or otherwise give rise to any claim by Parent
against the Company or the Escrow Fund, under this Agreement, or (ii) be taken
into account in determining whether the condition set forth in Section 6.1 has
been satisfied.
2.15 Employee and Labor Matters; Benefit Plans.
(a) Part 2.15(a) of the Company Disclosure Schedule identifies each salary,
bonus, vacation, deferred compensation, incentive compensation, stock purchase,
stock option, severance pay, termination pay, death and disability benefits,
hospitalization, medical, life or other insurance, flexible benefits,
supplemental unemployment benefits, profit-sharing, pension or retirement plan,
program or agreement and each other employee benefit plan or arrangement
(collectively, the "Employee Plans") sponsored, maintained, contributed to or
required to be contributed to by any of the Acquired Corporations for the
benefit of any current or former employee of any of the Acquired Corporations.
Part 2.15(a) of the Company Disclosure Schedule also identifies each Legal
Requirement pursuant to which any of the
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Acquired Corporations is required to establish any reserve or make any
contribution for the benefit of any current or former employee located in any
jurisdiction outside of the United States.
(b) Part 2.15(a) of the Company Disclosure Schedule includes any employee
pension benefit plan (as defined in Section 3(2) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or any similar pension
benefit plan under the laws of any foreign jurisdiction, whether or not excluded
from coverage under specific Titles or Subtitles of ERISA for the benefit of
employees or former employees of any of the Acquired Corporations (a "Pension
Plan").
(c) Part 2.15(a) of the Company Disclosure Schedule includes any employee
welfare benefit plan (as defined in Section 3(1) of ERISA or any similar welfare
benefit plan under the laws of any foreign jurisdiction, whether or not excluded
from coverage under specific Titles or Subtitles of ERISA), for the benefit of
any current or former employees or directors of any of the Acquired Corporations
(a "Welfare Plan").
(d) With respect to each Employee Plan, the Company has delivered to
Parent: (i) an accurate and complete copy of such Employee Plan (including all
amendments thereto); (ii) an accurate and complete copy of the annual report, if
required under ERISA, with respect to such Employee Plan for the last two years;
(iii) an accurate and complete copy of the most recent summary plan description,
together with each summary of material modifications, if required under ERISA,
with respect to such Employee Plan, (iv) if such Employee Plan is funded through
a trust or any third party funding vehicle, an accurate and complete copy of the
trust or other funding agreement (including all amendments thereto) and accurate
and complete copies the most recent financial statements thereof; (v) accurate
and complete copies of all material Contracts relating to such Employee Plan,
including service provider agreements, insurance contracts, minimum premium
contracts, stop-loss agreements, investment management agreements, subscription
and participation agreements and record-keeping agreements; and (vi) an accurate
and complete copy of the most recent determination letter received from the
Internal Revenue Service with respect to such Employee Plan (if such Employee
Plan is intended to be qualified under Section 401(a) of the Code).
(e) None of the Acquired Corporations is or has ever been required to be
treated as a single employer with any other Person under Section 4001(b)(1) of
ERISA or Section 414(b), (c), (m) or (o) of the Code, except for the Acquired
Corporations. None of the Acquired Corporations has ever been a member of an
"affiliated service group" within the meaning of Section 414(m) of the Code.
None of the Employee Plans identified in the Company Disclosure Schedule is a
multiemployer plan (within the meaning of Section 3(37) of ERISA). None of the
Acquired Corporations has ever made a complete or partial withdrawal from a
multiemployer plan, as such term is defined in Section 3(37) of ERISA, resulting
in "withdrawal liability," as such term is defined in Section 4201 of ERISA
(without regard to subsequent reduction or waiver of such liability under either
Section 4207 or 4208 of ERISA).
(f) None of the Acquired Corporations has any plan or commitment to create
any Welfare Plan or any Pension Plan, or to modify or change any existing
Welfare Plan or Pension Plan (other than to comply with applicable law) in a
manner that would affect any current or former employee or director of any of
the Acquired Corporations.
(g) No Employee Plan provides death, medical or health benefits (whether or
not insured) with respect to any current or former employee or director of any
of the Acquired Corporations after any termination of service of such employee
or director (other than benefit coverage mandated by applicable law, including
coverage provided pursuant to Section 4980B of the Code).
(h) With respect to any Employee Plan constituting a group health plan
within the meaning of Section 4980B(g)(2) of the Code, the provisions of Section
4980B of the Code ("COBRA") have been complied with in all material respects.
Part 2.15(h) of the Company Disclosure Schedule describes all obligations of the
Acquired Corporations as of the date of this Agreement under any of the
provisions of COBRA.
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(i) Each of the Employee Plans has been operated and administered in all
material respects in accordance with its terms and with applicable Legal
Requirements, including ERISA, the Code and applicable foreign Legal
Requirements. The Acquired Corporations have performed, in all material
respects, all of their respective obligations under the Employee Plans.
(j) Each of the Employee Plans intended to be qualified under Section
401(a) of the Code has received a favorable determination letter from the
Internal Revenue Service, and nothing has occurred that would adversely affect
such determination.
(k) Except as set forth in Part 2.15(k) of the Company Disclosure Schedule,
neither the execution, delivery or performance of this Agreement, nor the
consummation of the Merger or any of the other transactions contemplated by this
Agreement, will result in any bonus, golden parachute, severance or other
payment or obligation to any current or former employee or director of any of
the Acquired Corporations (whether or not under any Employee Plan), or
materially increase the benefits payable or provided under any Employee Plan, or
result in any acceleration of the time of payment or vesting of any such
benefits. Without limiting the generality of the foregoing (and except as set
forth in Part 2.15(k) of the Company Disclosure Schedule), the consummation of
the Merger will not result in the acceleration of vesting of any unvested
Company Options.
(l) Part 2.15(l) of the Company Disclosure Schedule contains a list of all
salaried employees of each of the Acquired Corporations as of the date of this
Agreement, and correctly reflects, in all material respects, their salaries, any
other compensation payable to them (including compensation payable pursuant to
bonus, deferred compensation or commission arrangements but excluding Company
Options), their dates of employment and their positions. None of the Acquired
Corporations is a party to any collective bargaining contract or other Contract
with a labor union involving any of its employees. Except as set forth in Part
2.15(l) of the Company Disclosure Schedule, all of the employees of the Acquired
Corporations are "at will" employees.
(m) Part 2.15(m) of the Company Disclosure Schedule identifies each
employee of any of the Acquired Corporations who, as of the date of this
Agreement, is not fully available to perform work because of long-term
disability or other leave and sets forth the basis of such disability or leave
and the anticipated date of return to full service.
(n) Each of the Acquired Corporations is in compliance in all material
respects with all applicable Contracts relating to employment, employment
practices, wages, bonuses and terms and conditions of employment, including
employee compensation matters, except as will not at any time be deemed to have
a Material Adverse Effect on the Acquired Corporations.
(o) The Acquired Corporations, taken as a whole, have good labor relations.
To the Company's Knowledge, there are no facts indicating that (i) the
consummation of the Merger or any of the other transactions contemplated by this
Agreement will have a material adverse effect on the labor relations of the
Acquired Corporations taken as a whole, or (ii) as of the date of this
Agreement, any of the employees of any of the Acquired Corporations identified
in Part 2.15(o) of the Company Disclosure Schedule intends to terminate his or
her employment with the Acquired Corporation with which such employee is
employed.
2.16 Environmental Matters. Each of the Acquired Corporations (i) is in
compliance in all material respects with all applicable Environmental Laws and
(ii) possesses all permits and other Governmental Authorizations required under
applicable Environmental Laws, and is in compliance with the terms and
conditions thereof in all material respects. None of the Acquired Corporations
has received any notice or other communication (in writing or otherwise),
whether from a Governmental Body, citizens group, employee or otherwise, that
alleges that any of the Acquired Corporations is not in compliance in all
material respects with any Environmental Law, and, to the Company's Knowledge,
there are no circumstances that could reasonably be expected to prevent or
interfere with the Acquired Corporations' future compliance in all material
respects with any existing Environmental Law. To the Company's Knowledge, (a)
all property that is leased to, controlled by or used by any of the Acquired
Corporations,
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and all surface water, groundwater and soil associated with or adjacent to such
property, is free of any material environmental contamination of any nature, (b)
none of the property leased to, controlled by or used by any of the Acquired
Corporations contains any underground storage tanks, asbestos, equipment using
PCBs, underground injection wells, and (c) none of the property leased to,
controlled by or used by any of the Acquired Corporations contains any septic
tanks in which process wastewater or any Materials of Environmental Concern have
been disposed. No Acquired Corporation has ever sent or transported, or arranged
to send or transport, any Materials of Environmental Concern to a site that,
pursuant to any applicable Environmental Law (i) has been placed on the
"National Priorities List" of hazardous waste sites or any similar state list,
(ii) is otherwise designated or identified as a potential site for remediation,
cleanup, closure or other environmental remedial activity, or (iii) is subject
to a Legal Requirement to take "removal" or "remedial" action as detailed in any
applicable Environmental Law or to make payment for the cost of cleaning up any
site.
2.17 Insurance. Part 2.17 of the Company Disclosure Schedule identifies
all insurance policies maintained by, at the expense of or for the benefit of
the Acquired Corporations and identifies any material claims thereunder that
have been made within two years prior to the date of this Agreement or have not
been fully adjusted. The Company has delivered to Parent accurate and complete
copies of the insurance policies and self insurance programs and arrangements
relating to the business, assets and operations of the Acquired Corporations.
Each of such insurance policies is in full force and effect. Since the Audited
Balance Sheet Date, none of the Acquired Corporations has received any notice or
other communication regarding any actual or overtly threatened (a) cancellation
or invalidation of any insurance policy, (b) refusal of any coverage or
rejection of any material claim under any insurance policy, or (c) material
adjustment in the amount of the premiums payable with respect to any insurance
policy.
2.18 Related Party Transactions. Except as set forth in Part 2.18 of the
Company Disclosure Schedule and except with respect to the Bridge Financing: (a)
no Related Party has, and no Related Party has had at any time since the Audited
Balance Sheet Date, any direct or indirect interest in any material asset used
in or otherwise relating to the business of the Company; (b) no Related Party
is, or has been at any time since the Audited Balance Sheet Date, indebted to
the Company; (c) since the Audited Balance Sheet Date, no Related Party has
entered into, or has had any direct or indirect financial interest in (other
than through de minimis stock ownership in public companies), any material
Contract, transaction or business dealing involving the Company; (d) no Related
Party is competing, or has competed at any time since the Audited Balance Sheet
Date, directly or indirectly, with the Company; and (e) no Related Party has any
claim or right against the Company (other than rights under Company Options,
warrants of the Company and rights to receive compensation for services
performed as an employee of the Company).
2.19 Legal Proceedings; Orders.
(a) Except as set forth in Part 2.19(a) of the Company Disclosure Schedule,
there is no pending Legal Proceeding, and, to the Company's Knowledge, no Person
has overtly threatened to commence any Legal Proceeding: (i) that involves any
of the Acquired Corporations or any of the assets owned or used by any of the
Acquired Corporations; or any Person whose liability has or may have been
retained or assumed, in any manner, by any of the Acquired Corporations; or (ii)
that challenges, or that could reasonably be expected to have the effect of
preventing, delaying, making illegal or otherwise interfering with, the Merger
or any of the other transactions contemplated by this Agreement. To the
Company's Knowledge, except as set forth in Part 2.19(a) of the Company
Disclosure Schedule, no event has occurred, and no claim, dispute or other
condition or circumstance exists, that could reasonably be expected to give rise
to or serve as a basis for the commencement of any such Legal Proceeding, except
for any such Legal Proceeding that will not at any time be deemed to have a
Material Adverse Effect on the Acquired Corporations.
(b) As of the date of this Agreement, except as set forth in Part 2.19(b)
of the Company Disclosure Schedule, no Legal Proceeding has ever been commenced
by or has ever been pending against any Acquired Corporation.
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(c) There is no order, writ, injunction, judgment or decree to which any of
the Acquired Corporations, or any of the assets owned or used by any of the
Acquired Corporations, is subject. To the Company's Knowledge, no officer or key
employee of any of the Acquired Corporations is subject to any order, writ,
injunction, judgment or decree that relates to the Acquired Corporations'
businesses or to any assets owned or used by the Acquired Corporations. To the
Company's Knowledge, no officer or other employee of the Acquired Corporations
is subject to any order, writ, injunction, judgment or decree that prohibits
such officer or other employee from engaging in or continuing any conduct,
activity or practice relating to the business of any of the Acquired
Corporations.
2.20 Authority; Inapplicability of Anti-takeover Statutes; Binding Nature
of Agreement. The Company has full corporate power and authority to enter into
and to perform its obligations under this Agreement. The board of directors of
the Company (at a meeting duly called and held) has (a) unanimously determined
that the Merger is advisable and fair and in the best interests of the Company
and its stockholders, (b) unanimously authorized and approved the execution,
delivery and performance of this Agreement by the Company and unanimously
approved the Merger, (c) unanimously recommended the adoption of this Agreement
by the holders of Company Stock and directed that this Agreement and the Merger
be submitted for consideration by the Company's stockholders at the Company
Stockholders' Meeting (as defined in Section 5.2), and (d) to the extent
necessary, adopted a resolution having the effect of causing the Company not to
be subject to any state takeover law or similar Legal Requirement that might
otherwise apply to the Merger or any of the other transactions contemplated by
this Agreement. This Agreement constitutes the legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
its terms, subject to (i) laws of general application relating to bankruptcy,
insolvency and the relief of debtors, and (ii) rules of law governing specific
performance, injunctive relief and other equitable remedies. No takeover statute
or similar Legal Requirement of the State of North Carolina applies or purports
to apply to the Merger, this Agreement or any of the transactions contemplated
hereby.
2.21 Section 203 of the DGCL Not Applicable. As of the date hereof and at
all times on or prior to the Effective Time, the board of directors and
stockholders of the Company have taken and will take all actions within their
power so that the restrictions applicable to business combinations contained in
Section 203 of the DGCL are, and will be, inapplicable to the execution,
delivery and performance of this Agreement and to the consummation of the Merger
and the other transactions contemplated by this Agreement.
2.22 No Existing Discussions. None of the Acquired Corporations, and no
Representative of any of the Acquired Corporations, is engaged, directly or
indirectly, in any discussions or negotiations with any other Person relating to
any Acquisition Proposal.
2.23 Vote Required. The only vote of the holders of any class or series of
the Company's capital stock necessary to adopt this Agreement and approve the
Merger and the other transactions contemplated by this Agreement (the "Required
Company Stockholder Vote") is as follows: (a) under the DGCL and the Company's
certificate of incorporation, the affirmative vote of the holders of a majority
of the shares of Company Stock (excluding the Series A Convertible Preferred
Stock and the Series E Convertible Preferred Stock) outstanding on the record
date for the Company Stockholders' Meeting; and (b) under Contracts of the
Company: (i) the affirmative vote of the holders of a majority of the shares of
Company's Series A Convertible Preferred Stock outstanding on the record date
for the Company Stockholders' Meeting; (ii) the affirmative vote of the holders
of 80% of the shares of Company's Series B Convertible Preferred Stock
outstanding on the record date for the Company Stockholders' Meeting; (iii) the
affirmative vote of the holders of 80% of the shares of Company's Series C
Convertible Preferred Stock and C-1 Convertible Preferred Stock outstanding on
the record date for the Company Stockholders' Meeting, voting together as a
single class; and (iv) the consent required pursuant to Section 1 of the Consent
Agreement referred to in paragraph (10) of Part 6.5 of the Company Disclosure
Schedule. Based on the shares of Company Stock outstanding as of the date of
this Agreement, if all of the Persons that have executed and delivered to Parent
the Company Stockholder Voting Agreements vote the shares of
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Company Stock shown as being owned by them in such agreements in the manner
required by such agreements, the Required Company Stockholder Vote will be
achieved.
2.24 Non-Contravention; Consents. Neither (1) the execution, delivery or
performance by the Company of this Agreement or any of the other agreements
referred to in this Agreement, nor (2) the consummation by the Company of the
Merger or any of the other transactions contemplated by this Agreement, will
directly or indirectly (with or without notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of
the provisions of the certificate of incorporation, bylaws or other charter
or organizational documents of any of the Acquired Corporations, or (ii)
any resolution adopted by the stockholders, the board of directors or any
committee of the board of directors of any of the Acquired Corporations;
(b) contravene, conflict with or result in a violation of any Legal
Requirement or any order, writ, injunction, judgment or decree to which any
of the Acquired Corporations, or any of the assets owned or used by any of
the Acquired Corporations, is subject, except as will not at any time be
deemed to have a Material Adverse Effect on the Acquired Corporations;
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate or modify, any Governmental
Authorization that is held by any of the Acquired Corporations, except as
will not at any time be deemed to have a Material Adverse Effect on the
Acquired Corporations;
(d) except as disclosed in Part 2.24(a) of the Company Disclosure
Schedule, contravene, conflict with or result in a violation or breach of,
or result in a default under, any provision of any Acquired Corporation
Contract that constitutes a Material Contract, or require the consent of
any party to any such Acquired Corporation Contract, or give any Person the
right to (i) declare a default or exercise any material remedy in respect
of a default under any such Acquired Corporation Contract, (ii) obtain a
rebate, chargeback, penalty or change in delivery schedule under any such
Acquired Corporation Contract, (iii) accelerate the maturity or performance
of any such Acquired Corporation Contract, or (iv) cancel, terminate or
modify any term of such Acquired Corporation Contract;
(e) result in the imposition or creation of any Encumbrance upon or
with respect to any asset owned or used by any of the Acquired Corporations
(except for Permitted Liens), except as will not at any time be deemed to
have a Material Adverse Effect on the Acquired Corporations; or
(f) result in, or increase the likelihood of, the disclosure or
delivery to any escrow holder or other Person of the Acquired Corporation
Source or Object Code, or the transfer of any material asset of any of the
Acquired Corporations to any Person, except as will not at any time be
deemed to have a Material Adverse Effect on the Acquired Corporations.
Except as set forth in Part 2.24(b) of the Company Disclosure Schedule, none of
the Acquired Corporations is or will be required to make any material filing
with or give any material notice to, or to obtain any material Consent from, any
Governmental Body in connection with (x) the execution, delivery or performance
by the Company of this Agreement or any of the other agreements referred to in
this Agreement, or (y) the consummation by the Company of the Merger or any of
the other transactions contemplated by this Agreement.
2.25 Full Disclosure.
(a) This Agreement (including the Company Disclosure Schedule) does not (i)
contain any representation or warranty of the Company that is false or
misleading with respect to any material fact, or (ii) omit to state any material
fact necessary in order to make the representations and warranties of the
Company contained herein (in the light of the circumstances under which such
representations and warranties were made) not false or misleading.
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(b) None of the information supplied or to be supplied by or on behalf of
the Company for inclusion or incorporation by reference in the Form S-4
Registration Statement or the Form S-3 Registration Statement will, at the time
the Form S-4 Registration Statement or the Form S-3 Registration Statement, as
applicable, becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not misleading. None of
the information supplied or to be supplied by or on behalf of the Company for
inclusion or incorporation by reference in the Joint Proxy Statement/Prospectus
will, at the time the Joint Proxy Statement/ Prospectus is mailed to the
stockholders of the Company or the stockholders of Parent or at the time of the
Company Stockholders' Meeting or the Parent Stockholders' Meeting, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they are made, not misleading.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to the Company as follows:
3.1 Due Organization; Subsidiaries; Etc. Each of Parent and each of its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware (or, in the case Subsidiaries
such other jurisdiction(s) in which they may be incorporated) and has all
necessary power and authority to: (a) conduct its business in the manner in
which its business is currently being conducted; (b) own and use its assets in
the manner in which its assets are currently owned and used; and (c) perform its
obligations under all Contracts by which it is bound. Each of Parent and each of
its Subsidiaries is duly qualified to do business as a foreign corporation, and
is in good standing, under the laws of all jurisdictions where the nature of its
business requires such qualification.
3.2 SEC Filings; Financial Statements.
(a) Parent has filed with the SEC all documents that it is required to have
filed with the SEC since July 27, 1999. Parent has delivered or made available
to the Company accurate and complete copies (excluding copies of exhibits) of
each report, registration statement and definitive proxy statement filed by
Parent with the SEC since July 27, 1999 (the "Parent SEC Documents"). As of the
time it was filed with the SEC (or, if amended or superseded by a filing prior
to the date of this Agreement, then on the date of such filing): (i) each of the
Parent SEC Documents complied in all material respects with the applicable
requirements of the Securities Act or the Exchange Act (as the case may be); and
(ii) none of the Parent SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. As of the date of this
Agreement, the Parent SEC Documents, considered in the aggregate together with
this Agreement (including the Parent Disclosure Schedule) and disregarding any
statements therein that have been amended, corrected or superseded by statements
contained in later-filed Parent SEC Documents, do not contain any untrue
statement by Parent of a material fact or omit to state a material fact required
to be stated therein by Parent or necessary in order to make the statements
therein by Parent, in the light of the circumstances under which they were made,
not misleading.
(b) The consolidated financial statements contained in the Parent SEC
Documents: (i) complied as to form in all material respects with the published
rules and regulations of the SEC applicable thereto; (ii) were prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods covered (except as may be indicated in the notes to
such financial statements and, in the case of unaudited statements, as permitted
by Form 10-Q of the SEC, and except that unaudited financial statements may not
contain footnotes and are subject to year-end audit adjustments, which will not,
individually or in the aggregate, be material in magnitude); and (iii) fairly
present the consolidated financial position of Parent and its subsidiaries as of
the respective dates thereof and the consolidated results of operations of
Parent and its subsidiaries for the periods covered thereby.
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(c) None of the information supplied or to be supplied by or on behalf of
Parent for inclusion or incorporation by reference in the Form S-4 Registration
Statement or the Form S-3 Registration Statement will, at the time the Form S-4
Registration Statement or the Form S-3 Registration Statement, as applicable,
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading. None of the information
supplied or to be supplied by or on behalf of Parent for inclusion or
incorporation by reference in the Joint Proxy Statement/Prospectus will, at the
time the Joint Proxy Statement/Prospectus is mailed to the stockholders of the
Company or the stockholders of Parent or at the time of the Company
Stockholders' Meeting or the Parent Stockholders' Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not misleading.
3.3 Authority; Binding Nature of Agreement. Parent has full corporate
power and authority to perform its obligations under this Agreement and the
execution, delivery and performance by Parent of this Agreement (including
without limitation performance of its obligations under Section 5.2) has been
duly authorized by all necessary action on the part of the board of directors of
Parent. This Agreement constitutes the legal, valid and binding obligation of
Parent, enforceable against Parent in accordance with its terms, subject to (i)
laws of general application relating to bankruptcy, insolvency and the relief of
debtors, and (ii) rules of law governing specific performance, injunctive relief
and other equitable remedies.
3.4 Vote Required. The only vote of Parent's stockholders required to
approve the Merger and the issuance of Parent Common Stock in the Merger is the
affirmative vote of the holders of a majority of the shares of Parent Common
Stock outstanding on the record date for the Parent Stockholders' Meeting (the
"Required Parent Stockholder Vote"). Based on the number of shares of Parent
Common Stock outstanding as of the date of this Agreement, if all of the Persons
that have executed and delivered to the Company the Parent Stockholder Voting
Agreements vote the shares of Parent Common Stock shown as being owned by them
in such agreements in the manner required by such agreements, the Required
Parent Stockholder Vote will be achieved.
3.5 Valid Issuance. The Parent Common Stock to be issued in the Merger
will, when issued in accordance with the provisions of this Agreement, be
validly issued, fully paid and nonassessable.
3.6 Capitalization.
(a) As of the date of this Agreement, the authorized capital stock of
Parent consists of 110,000,000 shares of Parent Common Stock and 10,000,000
shares of Preferred Stock, par value $.0001 per share. As of July 5, 2000,
approximately 46,300,000 shares of Parent Common Stock were issued and
outstanding. As of the date of this Agreement, no shares of preferred stock of
Parent are outstanding. All of the outstanding shares of Parent Common Stock
have been duly authorized and validly issued and are fully paid, nonassessable
and free of preemptive rights.
(b) Except as disclosed in the Parent SEC Documents filed prior to the date
of this Agreement or in Part 3.6 of the Parent Disclosure Schedule, there is no
(i) outstanding subscription, option, call, warrant or right (whether or not
currently exercisable) to acquire any shares of the capital stock or other
securities Parent or any of its Subsidiaries; (ii) outstanding security,
instrument or obligation that is or may become convertible into or exchangeable
for any shares of the capital stock or other securities of Parent or any of its
Subsidiaries; (iii) stockholder rights plan (or similar plan commonly referred
to as a "poison pill") or Contract under which Parent or any of its Subsidiaries
is or may become obligated to sell or otherwise issue any shares of its capital
stock or any other securities.
(c) All of the outstanding shares of capital stock of Parent's Subsidiaries
have been duly authorized and validly issued and are fully paid, nonassessable
and free of preemptive rights and, except to the extent otherwise disclosed in
the Parent SEC Documents filed prior to the date of this Agreement or in Part
3.6
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of the Parent Disclosure Schedule, are owned beneficially and of record by
Parent or its Subsidiaries, free and clear of any Encumbrances other than
Permitted Liens.
(d) The copies of Parents' certificate of incorporation and bylaws
previously made available to the Company are true and correct.
3.7 Absence of Changes. Since December 31, 1999, except as disclosed in
the Parent SEC Documents filed prior to the date of this Agreement or in Part
3.7 of the Parent Disclosure Schedule: (a) there has not arisen any event,
condition, fact or circumstance that, considered together with all other events,
conditions, facts and circumstances, is deemed to have a Material Adverse Effect
on Parent; (b) Parent and its Subsidiaries have conducted their business in the
ordinary course consistent with past practice; and (c) Parent has not (i)
declared, accrued, set aside or paid any dividend or made any other distribution
in respect of any shares of capital stock, (ii) repurchased, redeemed or
otherwise reacquired any shares of capital stock or other securities (except for
repurchases of Parent Common Stock from former employees or consultants pursuant
to contractual rights to do so) or (iii) changed any of its methods of
accounting or accounting practices in any material respect except as required by
generally accepted accounting principles.
3.8 Liabilities. Parent and its Subsidiaries have no accrued, contingent
or other liabilities of any nature, either matured or unmatured, that would be
required to be reflected in financial statements prepared in accordance with
generally accepted accounting principles, whether due or to become due, and that
could reasonably be expected to have a Material Adverse Effect on Parent, except
for: (a) liabilities identified as such in the Parent SEC Documents filed prior
to the date of this Agreement; (b) accounts payable and other liabilities that
have been incurred by Parent since December 31, 1999 in the ordinary course of
business and consistent with Parent's past practices; (c) liabilities under
material Contracts of Parent or its Subsidiaries; and (d) liabilities described
in Part 3.8 of the Parent Disclosure Schedule.
3.9 Compliance with Legal Requirements. Except as disclosed in the Parent
SEC Documents: (a) Parent and its Subsidiaries have complied with all applicable
Legal Requirements, except where the failure to comply will not at any time be
deemed to have a Material Adverse Effect on Parent; and (b) since December 31,
1999, none of Parent or its Subsidiaries has received any written notice from
any Governmental Body alleging any violation of, or failure to comply with, any
Legal Requirement, except where the failure to comply will not at any time be
deemed to have a Material Adverse Effect on Parent.
3.10 Tax Matters. Except as disclosed in the Parent SEC Documents filed
prior to the date of this Agreement:
(a) Each of the material Tax Returns required to be filed by or on
behalf of Parent or any of its Subsidiaries with any Governmental Body with
respect to any taxable period ending on or before the Closing Date (the
"Parent Returns") (i) has been, or will be, filed on or before the
applicable due date (including any extensions of such due date), and (ii)
was, or will be, when filed complete and correct in all material respects.
All amounts shown on the Parent Returns to be due on or before the Closing
Date have been, or will be, paid on or before the Closing Date. All
material Taxes payable by or with respect to Parent and its Subsidiaries
but not reflected on any Tax Return required to have been filed prior to
the date of the most recent balance sheet included in Parent's Form 10-Q
have been fully paid or adequate provision therefor has been made and
reflected on such balance sheet.
(b) No Parent Return has ever been examined or audited by any
Governmental Body or other Person. No extension or waiver of the limitation
period applicable to any of the Parent Returns has been granted (by Parent
or any other Person), and no such extension or waiver has been requested
from Parent or any of its Subsidiaries.
3.11 Environmental Matters. Except as disclosed in the Parent SEC
Documents filed prior to the date of this Agreement: (a) Parent and its
Subsidiaries (i) are in compliance in all material respects with all applicable
Environmental Laws and (ii) possess all permits and other Governmental
Authorizations required under applicable Environmental Laws and are in
compliance with the terms and conditions thereof; (b) Parent and its
Subsidiaries have not received any written notice, whether from a
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Governmental Body, citizens group, employee or otherwise, that alleges that any
of them is not in compliance in all material respects with any Environmental
Law; (c) Parent and its Subsidiaries have never sent or transported, or arranged
to send or transport, any Materials of Environmental Concern to a site that,
pursuant to any applicable Environmental Law (1) has been placed on the
"National Priorities List" of hazardous waste sites or any similar state list,
(2) is otherwise designated or identified as a potential site for remediation,
cleanup, closure or other environmental remedial activity, or (3) is subject to
a Legal Requirement to take "removal" or "remedial" action as detailed in any
applicable Environmental Law or to make payment for the cost of cleaning up any
site.
3.12 Legal Proceedings; Orders.
(a) Except as disclosed in the Parent SEC Documents filed prior to the date
of this Agreement or in Part 3.12 of the Parent Disclosure Schedule, there is no
pending Legal Proceeding, and (to Parent's knowledge) no Person has overtly
threatened to commence any Legal Proceeding: (i) except as would not reasonably
be expected to have a Material Adverse Effect on Parent, that involves Parent or
its Subsidiaries or any of the assets owned or used by any of them; or any
Person whose liability has or may have been retained or assumed, in any manner,
by any of them or (ii) that challenges, or that may have the effect of
preventing, delaying, making illegal or otherwise interfering with, the Merger
or any of the other transactions contemplated by this Agreement.
(b) Except as disclosed in the Parent SEC Documents filed prior to the date
of this Agreement: (i) there is no order, writ, injunction, judgment or decree
to which Parent or any of its Subsidiaries, or any of the assets owned or used
by any of them, is subject; (ii) to Parent's knowledge, no officer or key
employee of Parent or its Subsidiaries is subject to any order, writ,
injunction, judgment or decree that relates to Parent's or its Subsidiaries'
businesses or to any assets owned or used by Parent or its Subsidiaries; (iii)
to Parent's knowledge, no officer or other employee of Parent or any of its
Subsidiaries is subject to any order, writ, injunction, judgment or decree that
prohibits such officer or other employee from engaging in or continuing any
conduct, activity or practice relating to Parent's or its Subsidiaries'
businesses (except, in the case of any order, writ, injunction, judgment or
decree entered after the date of this Agreement, as would not reasonably be
expected to have a Material Adverse Effect on Parent).
3.13 Non-Contravention; Consents. Neither (1) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in this
Agreement by Parent, nor (2) the consummation by Parent of the Merger or any of
the other transactions contemplated by this Agreement, will directly or
indirectly (with or without notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of
the provisions of Parent's or its Subsidiaries' certificates of
incorporation or bylaws, or (ii) any resolution adopted by the
stockholders, the board of directors or any committee of the board of
directors of Parent or any of its Subsidiaries;
(b) contravene, conflict with or result in a violation of any Legal
Requirement or any order, writ, injunction, judgment or decree to which
Parent or any of its Subsidiaries, or any of the assets owned or used by
any of them, is subject;
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate or modify, any Governmental
Authorization that is held by Parent or any of its Subsidiaries;
(d) except as disclosed in Part 3.13 of the Parent Disclosure
Schedule, contravene, conflict with or result in a violation or breach of,
or result in a default under, any provision of any material Contract of
Parent or any of its Subsidiaries; or
(e) except as disclosed in Part 3.13 of the Parent Disclosure
Schedule, result in the imposition or creation of any Encumbrance upon or
with respect to any asset owned or used by Parent or any of its
Subsidiaries;
except, in the case of each of paragraphs (b) through (e) above, as will
not at any time be deemed to have a Material Adverse Effect on Parent.
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Except as required by the HSR Act or in connection with the Form S-4
Registration Statement, Parent is not and will not be required to make any
material filing with or give any material notice to, or to obtain any material
Consent from, any Governmental Body in connection with (x) the execution and
delivery or performance by Parent of this Agreement or any of the other
agreements referred to in this Agreement or (y) the consummation of the Merger
or any of other transactions contemplated by this Agreement.
3.14 Board Approval. The Board of Directors of Parent, by resolutions duly
adopted by unanimous vote of those voting at a meeting duly called and held and
not subsequently rescinded or modified in any way (the "Parent Board Approval"),
has duly (a) determined that this Agreement and the Merger are fair to and in
the best interests of Parent and its stockholders and declared the Merger to be
advisable; (b) approved this Agreement and the Merger; and (c) recommended that
the stockholders of Parent adopt this Agreement and directed that such matter be
submitted for consideration by Parent's stockholders at the Parent Stockholders
Meeting.
3.15 No Brokers. Parent has not entered into any contract, arrangement or
understanding with any person or firm which may result in the obligation of the
Company or Parent to pay any finder's fee, brokerage or agent's commissions or
other like payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated hereby, except as
set forth in Part 3.15 of the Parent Disclosure Schedule. Any fees, commissions
or other payments arising out of the items set forth in Part 3.15 of the Parent
Disclosure Schedule will be borne by Parent.
3.16 Section 203 of the DGCL Not Applicable. The board of directors of
Parent approved this Agreement, the other agreements referred to in this
Agreement, the Merger and the other transactions contemplated by this Agreement
on July 14, 2000. At all times on or prior to the Effective Time, the board of
directors of Parent will take all actions within its power so that the
restrictions applicable to business combinations contained in Section 203 of the
DGCL are, and will be, inapplicable to the execution, delivery and performance
of this Agreement and to the consummation of the Merger and the other
transactions contemplated by this Agreement.
3.17 Governmental Authorizations. Parent and its Subsidiaries hold all
Governmental Authorizations necessary to enable them to conduct their respective
businesses substantially in the manner in which such businesses are currently
being conducted, except where the failure to have a Governmental Authorization
will not at any time be deemed to have a Material Adverse Effect on Parent.
Parent and each of its Subsidiaries is in substantial compliance with the terms
and requirements of such Governmental Authorizations.
3.18 Employee and Labor Matters; Benefit Plans. All salary, bonus,
vacation, deferred compensation, incentive compensation, stock purchase, stock
option, severance pay, termination pay, death and disability benefits,
hospitalization, medical, life or other insurance, flexible benefits,
supplemental unemployment benefits, profit-sharing, pension or retirement plan,
program or agreement and each other employee benefit plan or arrangement
(collectively, the "Parent Employee Plans") sponsored, maintained, contributed
to or required to be contributed to by Parent or any of its Subsidiaries for the
benefit of any current or former employee of any of them has been operated and
administered in all material respects in accordance with its terms and with
applicable Legal Requirements, including ERISA, the Code and applicable foreign
Legal Requirements. Parent and each of its Subsidiaries have performed, in all
material respects, all of their respective obligations under the Parent Employee
Plans.
SECTION 4. CERTAIN COVENANTS OF THE COMPANY AND PARENT
4.1 Access and Investigation.
(a) During the period from the date of this Agreement through the Effective
Time (the "Pre-Closing Period"), the Company will, and will cause the respective
Representatives of the Acquired Corporations to: (i) provide Parent and Parent's
Representatives with reasonable access to the Acquired Corporations'
Representatives, personnel and assets and to all existing books, records, Tax
Returns, work papers and other documents and information relating to the
Acquired Corporations; and (ii) provide Parent and
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Parent's Representatives with such copies of the existing books, records, Tax
Returns, work papers and other documents and information relating to the
Acquired Corporations, and with such additional financial, operating and other
data and information regarding the Acquired Corporations, as Parent may
reasonably request. Without limiting the generality of the foregoing, during the
Pre-Closing Period, the Company will promptly provide Parent with copies of: (A)
all material operating and financial reports prepared by the Acquired
Corporations for the Company's senior management, including (1) copies of the
unaudited monthly consolidated balance sheets of the Acquired Corporations and
the related unaudited monthly consolidated statements of operations, statements
of stockholders' equity and statements of cash flows and (2) copies of any sales
forecasts, marketing plans, development plans, discount reports, write-off
reports, hiring reports and capital expenditure reports prepared for the
Company's senior management; (B) any written materials or communications sent by
or on behalf of the Company to its stockholders; (C) any material notice,
document or other communication sent by or on behalf of any of the Acquired
Corporations to any party to any Acquired Corporation Contract or sent to any of
the Acquired Corporations by any party to any Acquired Corporation Contract
(other than any communication that relates solely to routine commercial
transactions between an Acquired Corporation and the other party to any such
Acquired Corporation Contract and that is of the type sent in the ordinary
course of business and consistent with past practices); (D) any notice, report
or other document filed with or sent to any Governmental Body on behalf of any
of the Acquired Corporations in connection with the Merger or any of the other
transactions contemplated by this Agreement; and (E) any material notice, report
or other document received by any of the Acquired Corporations from any
Governmental Body.
(b) During the period from the date of this Agreement through the Effective
Time (the "Pre-Closing Period"), Parent will, and will cause the respective
Representatives of Parent to: (i) provide the Company and the Company's
Representatives with reasonable access to Parent's Representatives, personnel
and assets and to all existing books, records, Tax Returns, work papers and
other documents and information relating to Parent; and (ii) provide the Company
and the Company's Representatives with such copies of the existing books,
records, Tax Returns, work papers and other documents and information relating
to Parent, and with such additional financial, operating and other data and
information regarding Parent, as the Company may reasonably request.
4.2 Operation of the Company's Business.
(a) During the Pre-Closing Period: (i) the Company will ensure that each of
the Acquired Corporations conducts its business and operations in the ordinary
course and consistent with past practices; (ii) the Company will use all
reasonable efforts to ensure that each of the Acquired Corporations preserves
intact its current business organization, keeps available the services of its
current officers and employees and maintains its relations and goodwill with all
suppliers, customers, landlords, creditors, licensors, licensees, employees and
other Persons having business relationships with the respective Acquired
Corporations; (iii) the Company will cause to be provided all notices,
assurances and support required by any Acquired Corporation Contract relating to
any Proprietary Asset in order to ensure that no condition under such Acquired
Corporation Contract occurs that could reasonably be expected to result in or
increase the likelihood of, (1) any transfer or disclosure by any Acquired
Corporation of any Acquired Corporation Source or Object Code, or (2) a release
from any escrow of any Acquired Corporation Source or Object Code that has been
deposited or is required to be deposited in escrow under the terms of such
Acquired Corporation Contract; (iv) the Company will promptly notify Parent of
(1) any written or, to the Company's Knowledge, unwritten notice or other
communication from any Person alleging that the Consent of such Person is or may
be required in connection with any of the transactions contemplated by this
Agreement, and (2) any Legal Proceeding commenced or, to the Company's
Knowledge, overtly threatened against, relating to or involving or otherwise
affecting any of the Acquired Corporations that relates to the consummation of
the transactions contemplated by this Agreement; (v) the Company will (to the
extent reasonably requested by Parent) cause its officers to report to Parent
concerning the status of the Company's business. Notwithstanding anything to the
contrary in this Agreement, the Company will be permitted to, and the Company
will not be deemed to have been the subject of a Material Adverse Effect or to
have breached any representation, warranty, covenant or agreement contained
herein, if the
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Company shall: (i) obtain interim financing through the sale and issuance of
securities constituting, or that as of the Effective Time will constitute,
Company Stock; (ii) discontinue or dispose of the Offline Publishing Business;
(iii) take necessary actions, including seeking and obtaining the approval of
its stockholders, to effect the Company Charter Amendment; and (iv) pay bonuses
to its employees to the extent such bonuses do not exceed an aggregate of
$20,000 to any individual employee during the Pre-Closing Period. In addition,
notwithstanding anything to the contrary in this Agreement, the Company will not
be deemed to have been the subject of a Material Adverse Effect, or to have
breached any representation, warranty, covenant or agreement contained herein,
if National Broadcasting Company, Inc. ("NBC") exercises its right to
discontinue Promotion under paragraph 2 of the Letter Agreement Re: NBC
Sports/Total Sports Joint Venture dated November 11, 1999 between the Company
and NBC Sports, a division of NBC. The Bridge Financing may be structured so
that the closing of such financing is conditioned upon the satisfaction (or
waiver) of all conditions to the Merger hereunder and/or so that such financing
is consummated at the Closing hereunder but immediately prior to the Effective
Time, and, in connection therewith, Parent will cooperate with the Company as
reasonably requested by the Company, it being acknowledged that the Company will
need to prepare an offering memorandum which contains or incorporates by
reference information prepared for the Joint Proxy Statement/Prospectus and the
Form S-4 Registration Statement.
(b) During the Pre-Closing Period, except as expressly permitted by Section
4.2(a), the Company will not (without the prior written consent of Parent), and
will not permit any of the other Acquired Corporations to:
(i) declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any shares of capital stock, or repurchase,
redeem or otherwise reacquire any shares of capital stock or other
securities, except for the cancellation of Company Options or Company
Warrants without payment of any consideration by the Company;
(ii) sell, issue, grant or authorize the issuance or grant of (1) any
capital stock or other security, (2) any option, call, warrant or right to
acquire any capital stock or other security, or (3) any instrument
convertible into or exchangeable for any capital stock or other security
(except that the Company may (A) issue Company Stock upon the valid
conversion of convertible securities outstanding as of the date of this
Agreement, (B) issue Company Stock upon the valid exercise of Company
Options or Company Warrants outstanding as of the date of this Agreement,
and (C) grant options under its 2000 Stock Plan as described in Part
4.2(b)(ii) of the Company Disclosure Schedule;
(iii) amend or waive any of its material rights under, or accelerate
the vesting under, any provision of any of the Company's stock option
plans, any provision of any agreement evidencing any outstanding stock
option or any restricted stock purchase agreement, or otherwise modify any
of the terms of any outstanding option, warrant or other security or any
related Contract;
(iv) amend or permit the adoption of any amendment to its certificate
of incorporation or bylaws or other charter or organizational documents, or
effect or become a party to any merger, consolidation, share exchange,
business combination, amalgamation, recapitalization, reclassification of
shares, stock split, reverse stock split, division or subdivision of
shares, consolidation of shares or similar transaction;
(v) form any Subsidiary or acquire any equity interest or other
interest in any other Entity;
(vi) make any capital expenditure (except that the Acquired
Corporations may make capital expenditures that, when added to all other
capital expenditures made on behalf of the Acquired Corporations during the
Pre-Closing Period, do not exceed $200,000 in the aggregate);
(vii) enter into or become bound by, or permit any of the assets owned
or used by it to become bound by, any Material Contract, or amend or
terminate, or waive or exercise any material right or remedy under, any
Material Contract;
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(viii) acquire, lease or license any right or other asset from any
other Person or sell or otherwise dispose of, or lease or license, any
right or other asset to any other Person (except in each case for
immaterial assets acquired, leased, licensed or disposed of by the Company
in the ordinary course of business and consistent with past practices), or
waive or relinquish any right that is material to the Acquired
Corporations, taken as a whole;
(ix) lend money to any Person, or incur or guarantee any indebtedness
make routine borrowings in the ordinary course of business;
(x) establish, adopt or amend any employee benefit plan, pay any bonus
or make any profit-sharing or similar payment to, or increase the amount of
the wages, salary, commissions, fringe benefits or other compensation or
remuneration payable to, any of its directors, officers or employees
(except that the Company (A) may make routine, reasonable salary increases
in connection with the Company's customary employee review process, and (B)
may pay customary bonus payments and profit sharing payments consistent
with past practices payable in accordance with existing bonus and profit
sharing plans referred to in Part 2.15(a) of the Company Disclosure
Schedule);
(xi) hire any new employee at the level of director or above or with
an annual base salary in excess of $100,000, promote any employee except in
order to fill a position vacated after the date of this Agreement, or
engage any consultant or independent contractor for a period that is not
terminable by the Company (without penalty) within 30 days;
(xii) change, in any material respect that is adverse to the Acquired
Corporations, any of its pricing policies, product return policies, product
maintenance polices, service policies, product modification or upgrade
policies, personnel policies or other business policies, or any of its
methods of accounting or accounting practices;
(xiii) make any material Tax election;
(xiv) settle any Legal Proceeding on terms that would impose any
obligation on Parent after the Effective Time without first advising and
consulting with Parent;
(xv) take any other material action outside the ordinary course of
business;
(xvi) take any action that would or would reasonably be expected to
result in (1) any of the conditions to the Merger set forth in Section 6
not being satisfied or (2) a material delay in the satisfaction of such
conditions; or
(xvii) agree or commit to take any of the actions described in clauses
"(i)" through "(xvi)" of this Section 4.2(b).
4.3 No Solicitation.
(a) The Company will not directly or indirectly, and will not authorize or
permit any of the other Acquired Corporations or any Representative of any of
the Acquired Corporations directly or indirectly to, (i) solicit, initiate,
encourage, induce or facilitate the making, submission or announcement of any
Acquisition Proposal or take any action that could reasonably be expected to
lead to an Acquisition Proposal, (ii) furnish any information regarding any of
the Acquired Corporations to any Person in connection with or in response to an
Acquisition Proposal or an inquiry or indication of interest that could lead to
an Acquisition Proposal, (iii) engage in discussions or negotiations with any
Person with respect to any Acquisition Proposal, (iv) approve, endorse or
recommend any Acquisition Proposal or (v) enter into any letter of intent or
similar document or any Contract contemplating or otherwise relating to any
Acquisition Transaction. Without limiting the generality of the foregoing, the
Company acknowledges and agrees that any action inconsistent with of any of the
provisions set forth in the preceding sentence by any Representative of any of
the Acquired Corporations, whether or not such Representative is purporting to
act on behalf of any of the Acquired Corporations, will be deemed to constitute
a breach of this Section 4.3 by the Company.
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(b) The Company will promptly (and in no event later than 24 hours after
receipt of any Acquisition Proposal, any inquiry or indication of interest that
could reasonably be expected to lead to an Acquisition Proposal or any request
for nonpublic information) advise Parent orally and in writing of any
Acquisition Proposal, any inquiry or indication of interest that could
reasonably be expected to lead to an Acquisition Proposal or any request for
nonpublic information relating to any of the Acquired Corporations (including
the identity of the Person making or submitting such Acquisition Proposal,
inquiry, indication of interest or request, and the terms thereof) that is made
or submitted by any Person during the Pre-Closing Period. The Company will keep
Parent fully informed with respect to the status of any such Acquisition
Proposal, inquiry, indication of interest or request and any modification or
proposed modification thereto.
(c) The Company will immediately cease and cause to be terminated any
existing discussions with any Person that relate to any Acquisition Proposal.
(d) The Company agrees not to release or permit the release of any Person
from, or to waive or permit the waiver of any provision of, any confidentiality,
"standstill" or similar agreement to which any of the Acquired Corporations is a
party or under which any of the Acquired Corporations has any rights, and will
use its best efforts to enforce or cause to be enforced each such agreement at
the request of Parent.
4.4 Operation of Parent's Business. Except as set forth in Part 4.4 of the
Parent Disclosure Schedule, during the Pre-Closing Period, Parent will not
(without the prior written consent of the Company):
(a) declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any shares of capital stock, purchase, redeem or
otherwise reacquire, directly or indirectly, any shares of capital stock or
other securities (except for repurchases of Parent Common Stock from former
employees or consultants pursuant to contractual rights to do so);
(b) issue any capital stock at less than fair market value (other than
(i) pursuant to any Parent employee stock option plans, (ii) upon
conversion or exercise of presently-outstanding securities convertible into
or exercisable for capital stock or (iii) pursuant to presently-outstanding
contractual rights to acquire such capital stock) or permit any of its
Subsidiaries to effect such an issuance, or effect any split of its capital
stock;
(c) issue any capital stock (other than (i) pursuant to any Parent
employee stock option plans, (ii) upon conversion or exercise of
presently-outstanding securities convertible into or exercisable for
capital stock or (iii) pursuant to presently-outstanding rights to acquire
such capital stock) if the effect of such issuance would be that the
Persons that have executed and delivered to the Company the Parent
Stockholder Voting Agreements would not hold sufficient shares of Parent
Common Stock to approve the Merger and the issuance of Parent Common Stock
in the Merger;
(d) amend or permit the adoption of any amendment to its certificate
of incorporation or bylaws, or effect or become a party to, or permit any
of its Subsidiaries to effect or become a party to, any Acquisition
Transaction;
(e) take any action that would or would reasonably be expected to
result in (i) any of the conditions to the Merger set forth in Section 7
not being satisfied or (ii) a material delay in the satisfaction of such
conditions.
(f) agree or commit to take any of the actions described in clauses
"(a)" through "(d)" of this Section 4.4.
SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES
5.1 Form S-4 Registration Statement; Joint Proxy Statement/Prospectus;
Form S-3 Registration Statement.
(a) As promptly as practicable after the date of this Agreement, Parent and
the Company will prepare and cause to be filed with the SEC the Joint Proxy
Statement/Prospectus and Parent will prepare
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and cause to be filed with the SEC the Form S-4 Registration Statement, in which
the Joint Proxy Statement/Prospectus will be included as a prospectus. Each of
Parent and the Company will use all reasonable efforts to cause the Form S-4
Registration Statement and the Joint Proxy Statement/ Prospectus to comply with
the rules and regulations promulgated by the SEC, to respond promptly to any
comments of the SEC or its staff and to have the Form S-4 Registration Statement
declared effective under the Securities Act as promptly as practicable after it
is filed with the SEC. Parent will use all reasonable efforts to cause the Joint
Proxy Statement/Prospectus to be mailed to Parent's stockholders, and the
Company will use all reasonable efforts to cause the Joint Proxy
Statement/Prospectus to be mailed to the Company's stockholders, as promptly as
practicable after the Form S-4 Registration Statement is declared effective
under the Securities Act. Each of the Company and Parent will promptly furnish
to the other party all information concerning such party and its stockholders
that may be required or reasonably requested in connection with any action
contemplated by this Section 5.1. If the Company or Parent becomes aware of any
information, that should be disclosed in an amendment or supplement to the Form
S-4 Registration Statement or the Joint Proxy Statement/Prospectus, then such
party will promptly inform the other party thereof and will cooperate with such
other party in filing such amendment or supplement with the SEC and, if
appropriate, in mailing such amendment or supplement to the stockholders of the
Company and Parent.
(b) Prior to the Effective Time, Parent will use reasonable efforts to
obtain all regulatory approvals needed to ensure that the Parent Common Stock to
be issued in the Merger will be registered or qualified under the securities law
of every jurisdiction of the United States in which any registered holder of
Company Stock has an address of record on the record date for determining the
stockholders entitled to notice of and to vote at the Company Stockholders'
Meeting; provided, however, that Parent will not be required (i) to qualify to
do business as a foreign corporation in any jurisdiction in which it is not now
qualified or (ii) to file a general consent to service of process in any
jurisdiction.
(c) As promptly as practicable after the date on which it becomes eligible
to register securities on Form S-3, Parent will cause to be filed with the SEC
the Form S-3 Registration Statement to register the resale in brokers'
transactions of the Parent Common Stock received in the Merger by those
stockholders of the Company who will be subject to the resale restrictions set
forth in paragraph (c) of Rule 145 under the Securities Act (the "Rule 145
Sellers"). Parent will use all reasonable efforts to cause the Form S-3
Registration Statement to comply with the rules and regulations promulgated by
the SEC, to respond promptly to any comments of the SEC or its staff and to have
the Form S-3 Registration Statement declared effective under the Securities Act
as promptly as practicable after it is filed with the SEC and in any event prior
to the Closing Date. The Company will keep the Form S-3 Registration Statement
continuously effective under the Securities Act for a period ending one year
after the Closing and during such period will supplement or amend the Form S-3
Registration Statement if and as required by the Securities Act or the rules and
regulations promulgated by the SEC thereunder.
(d) As a condition precedent to using the Form S-3 Registration Statement,
each of the Rule 145 Sellers will enter into an agreement with Parent containing
the following provisions:
(i) In the event that (1) there occurs an event described in paragraph
(ii) below or (2) in the reasonable judgment of Parent, it becomes
advisable to suspend use of the prospectus included in the Form S-3
Registration Statement (the "Resale Prospectus") for a discrete period of
time due to pending material corporate developments or similar material
events that have not yet been publicly disclosed and as to which Parent
believes public disclosure will be prejudicial to Parent, Parent will
deliver to the Rule 145 Sellers a certificate to such effect, signed by an
authorized officer of Parent. Each of the Rule 145 Sellers will refrain
from executing any sales of securities pursuant to the Resale Prospectus
from the time of receipt of such certificate until such Rule 145 Seller is
advised in writing by Parent that the Resale Prospectus may again be used
and has received copies of any additional or supplemental filings that are
incorporated or deemed incorporated by reference in the Resale Prospectus.
Parent will use all reasonable efforts to ensure that the use of the Resale
Prospectus may be resumed as soon as practicable and, in the case of a
pending development or event referred to above, as soon as the earlier of
(1) public disclosure of such pending material corporate development
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or similar material event or (2) in the judgment of Parent, public
disclosure of such material corporate development or similar material event
would not be prejudicial to Parent. Parent will be entitled to exercise its
right to suspend use of the Resale Prospectus under this Section 5.1(d)(i)
only for a period or periods not to exceed an aggregate of 30 days in any
three-month period or 90 days in any 12-month period.
(ii) The events referred to in the first sentence of paragraph (i)
above are: (i) any request by the SEC for amendments or supplements to the
Form S-3 Registration Statement or the Resale Prospectus or for additional
information; (ii) the issuance by the SEC of any stop order suspending the
effectiveness of the Form S-3 Registration Statement or the initiation or
overt threatening of any proceedings for that purpose; (iii) the receipt by
Parent of any notification with respect to the suspension of the
qualification or exemption from qualification of the Parent Common Stock
for sale in any jurisdiction or the initiation or overt threatening of any
proceeding for such purpose; and (iv) the existence of any fact or
occurrence of any event that makes any statement of a material fact in the
Form S-3 Registration Statement or the Resale Prospectus or any document
incorporated or deemed to be incorporated by reference therein untrue or
that would require the making of any changes in the Form S-3 Registration
Statement or Resale Prospectus in order that, in the case of the Form S-3
Registration Statement, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and
that in the case of the Resale Prospectus, it will not contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
5.2 Company Stockholders' Meeting.
(a) The Company will take all action necessary under all applicable Legal
Requirements to call, give notice of and hold a meeting of the holders of
Company Stock to vote on a proposal to adopt this Agreement (the "Company
Stockholders' Meeting"). The Company Stockholders' Meeting will be held as
promptly as practicable after the Form S-4 Registration Statement is declared
effective under the Securities Act. The Company will ensure that all proxies
solicited in connection with the Company Stockholders' Meeting are solicited in
compliance with all applicable Legal Requirements.
(b) Subject to Section 5.2(c): (i) the Joint Proxy Statement/Prospectus
will include a statement to the effect that the board of directors of the
Company recommends that the Company's stockholders vote to adopt this Agreement
at the Company Stockholders' Meeting (the recommendation of the Company's board
of directors that the Company's stockholders vote to adopt this Agreement being
referred to as the "Company Board Recommendation"); and (ii) the Company Board
Recommendation will not be withdrawn or modified in a manner adverse to Parent,
and no resolution by the board of directors of the Company or any committee
thereof to withdraw or modify the Company Board Recommendation in a manner
adverse to Parent will be adopted or proposed.
(c) Notwithstanding anything to the contrary contained in Section 5.2(b),
at any time prior to the adoption of this Agreement by the Required Company
Stockholder Vote, the Company Board Recommendation may be withdrawn or modified
in a manner adverse to Parent if the Company's board of directors determines in
good faith, after having taken into account the written advice of the Company's
outside legal counsel, that the withdrawal or modification of the Company Board
Recommendation is required in order for the Company's board of directors to
comply with its fiduciary obligations to the Company's stockholders under
applicable law.
(d) The Company's obligation to call, give notice of and hold the Company
Stockholders' Meeting in accordance with Section 5.2(a) will not be limited or
otherwise affected by the commencement, disclosure, announcement or submission
of any Acquisition Proposal or by any withdrawal or modification of the Company
Board Recommendation.
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5.3 Parent Stockholders' Meeting.
(a) Parent will take all action necessary to call, give notice of and hold
a meeting of the holders of Parent Common Stock to vote on the issuance of
Parent Common Stock in the Merger (the "Parent Stockholders' Meeting"). The
Parent Stockholders' Meeting will be held as promptly as practicable after the
Form S-4 Registration Statement is declared effective under the Securities Act.
Parent will ensure that all proxies solicited in connection with the Parent
Stockholders' Meeting are solicited in compliance with all applicable Legal
Requirements.
(b) Subject to Section 5.3(c): (i) the Joint Proxy Statement/Prospectus
will include a statement to the effect that the board of directors of Parent
recommends that Parent's stockholders vote to approve the issuance of Parent
Common Stock in the Merger (the recommendation of Parent's board of directors
that Parent's stockholders vote to approve the issuance of Parent Common Stock
in the Merger being referred to as the "Parent Board Recommendation"); and (ii)
the Parent Board Recommendation will not be withdrawn or modified in a manner
adverse to the Company, and no resolution by the board of directors of Parent or
any committee thereof to withdraw or modify the Parent Board Recommendation in a
manner adverse to the Company will be adopted or proposed.
(c) Notwithstanding anything to the contrary contained in Section
5.3(b)(i), at any time prior to the approval of the issuance of Parent Common
Stock in the Merger by the stockholders of Parent, the Parent Board
Recommendation may be withdrawn or modified if the board of directors of Parent
concludes in good faith, after having taken into account the written advice of
Parent's outside legal counsel, that the withdrawal or modification of the
Parent Board Recommendation is required in order for the board of directors of
Parent to comply with its fiduciary obligations to Parent's stockholders under
applicable law.
(d) Parent's obligation to call, give notice of and hold the Parent
Stockholders' Meeting will not be limited or otherwise affected by any
withdrawal or modification of the Parent Board Recommendation.
5.4 Regulatory Approvals. Each party will use all reasonable efforts to
file, as soon as practicable after the date of this Agreement, all notices,
reports and other documents required to be filed by such party with any
Governmental Body with respect to the Merger and the other transactions
contemplated by this Agreement, and to submit promptly any additional
information requested by any such Governmental Body. Without limiting the
generality of the foregoing, the Company and Parent will, promptly after the
date of this Agreement, prepare and file the notifications required under the
HSR Act and any applicable foreign antitrust laws or regulations in connection
with the Merger. The Company and Parent will respond as promptly as practicable
to (i) any inquiries or requests received from the Federal Trade Commission or
the Department of Justice for additional information or documentation and (ii)
any inquiries or requests received from any state attorney general, foreign
antitrust authority or other Governmental Body in connection with antitrust or
related matters. Each of the Company and Parent will (1) give the other party
prompt notice of the commencement or overt threat of commencement of any Legal
Proceeding by or before any Governmental Body with respect to the Merger or any
of the other transactions contemplated by this Agreement, (2) keep the other
party informed as to the status of any such Legal Proceeding or threat, and (3)
promptly inform the other party of any communication to or from the Federal
Trade Commission, the Department of Justice or any other Governmental Body
regarding the Merger. Except as may be prohibited by any Governmental Body or by
any Legal Requirement, (a) the Company and Parent will consult and cooperate
with one another, and will consider in good faith the views of one another, in
connection with any analysis, appearance, presentation, memorandum, brief,
argument, opinion or proposal made or submitted in connection with any Legal
Proceeding under or relating to the HSR Act or any other foreign, federal or
state antitrust or fair trade law, and (b) in connection with any such Legal
Proceeding, each of the Company and Parent will permit authorized
Representatives of the other party to be present at each meeting or conference
relating to any such Legal Proceeding and to have access to and be consulted in
connection with any document, opinion or proposal made or submitted to any
Governmental Body in connection with any such Legal Proceeding.
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5.5 Stock Options and Warrants.
(a) Subject to Section 5.5(c), at the Effective Time, each Company Option
which is outstanding and unexercised immediately prior to the Effective Time,
whether or not vested, will be converted into and become an option to purchase
Parent Common Stock, and Parent will assume each such Company Option in
accordance with the terms (as in effect as of the date of this Agreement) of the
stock option plan under which it was issued and the terms of the stock option
agreement by which it is evidenced. Accordingly, from and after the Effective
Time, (i) each Company Option assumed by Parent may be exercised solely for
shares of Parent Common Stock, (ii) the number of shares of Parent Common Stock
subject to each such Company Option will be equal to the number of shares of
Company Stock subject to such Company Option immediately prior to the Effective
Time multiplied by the Exchange Ratio applicable to the class or series of
Company Stock for which such Company Option was exercisable immediately prior to
the Effective Time, rounding down to the nearest whole share, (iii) the
per-share exercise price under each such Company Option will be adjusted by
dividing the per-share exercise price under such Company Option by the
applicable Exchange Ratio and rounding up to the nearest cent and (iv) any
restriction on the exercise of any such Company Option will continue in full
force and effect and the term, exercisability, vesting schedule and other
provisions of such Company Option will otherwise remain unchanged; provided,
however, that each Company Option assumed by Parent in accordance with this
Section 5.5(a) will, in accordance with its terms, be subject to further
adjustment as appropriate to reflect any stock split, division or subdivision of
shares, stock dividend, reverse stock split, consolidation of shares,
reclassification, recapitalization or other similar transaction subsequent to
the Effective Time. The assumption of Company Options provided for in this
Section 5.5(a) is intended to be effected in a manner which is consistent with
Section 424(a) of the Code with respect to Company Options that are intended to
be "incentive stock options." In connection with the assumption or substitution
of Company Options, Parent intends to take such actions as may be necessary to
ensure that, prior to the expiration of one year after the Closing Date, no
shares of Parent Common Stock received upon exercise of assumed or substituted
Company Options may be the subject of a Disposition (as defined in Section 1.9)
without the prior written consent of Parent, except that each optionee may
dispose of: (a) up to an aggregate of 10% of the total number of shares of
Parent Common Stock covered by such options at any time after the Closing Date;
(b) up to a cumulative aggregate of 47% of such shares at any time after the
expiration of 180 days after the Closing Date; and (c) up to a cumulative
aggregate of 72% of such shares at any time after the expiration of 270 days
after the Closing Date. Parent, in its sole discretion, may legend the
certificates representing such shares of Parent Common Stock to give effect to
any applicable legal or contractual restrictions on resale. Parent will file
with the SEC, no later than 10 days after the Closing Date, a registration
statement on Form S-8 relating to the shares of Parent Common Stock issuable
with respect to the Company Options assumed by Parent in accordance with this
Section 5.5(a) or replaced with new options by Parent in accordance with Section
5.5(c); provided, however, that Parent will have no obligation to register, at
any point in time, a greater number of shares than could then be resold in
compliance with the limitations set forth above in this Section 5.5(a).
(b) Subject to Section 5.5(c), at the Effective Time, each Company Warrant
which survives the Merger will be assumed by Parent in accordance with the terms
(as in effect as of the date of this Agreement) of any agreement by which such
Company Warrant is evidenced. All rights with respect to Company Common Stock
under outstanding Company Warrants will thereupon be converted into rights with
respect to Parent Common Stock. Accordingly, from and after the Effective Time,
(i) each Company Warrant assumed by Parent may be exercised solely for shares of
Parent Common Stock, (ii) the number of shares of Parent Common Stock subject to
each such assumed Company Warrant will be equal to the number of shares of
Company Common Stock that were subject to such Company Warrant immediately prior
to the Effective Time multiplied by the Exchange Ratio applicable to the class
or series of Company Stock for which such Company Warrant was exercisable
immediately prior to the Effective Time, rounded up to the nearest whole number
of shares of Parent Common Stock, (iii) the per share exercise price for the
Parent Common Stock issuable upon exercise of each such assumed Company Warrant
will be determined by dividing the exercise price per share of Company Common
Stock subject to such Company Warrant, as in effect immediately prior to the
Effective Time, by the Exchange Ratio for which such
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Company Warrant was exercisable immediately prior to the Effective Time, and
rounding the resulting exercise price up to the nearest whole cent, and (iv) all
restrictions on the exercise of each such assumed Company Warrant will continue
in full force and effect, and the term, exercisability, vesting schedule and
other provisions of such Company Warrant will otherwise remain unchanged;
provided, however, that each such assumed Company Warrant will, in accordance
with its terms, be subject to further adjustment as appropriate to reflect any
stock split, reverse stock split, stock dividend, recapitalization or other
similar transaction effected by Parent after the Effective Time.
(c) Notwithstanding anything to the contrary contained in this Section 5.5,
in lieu of assuming outstanding Company Options in accordance with Section
5.5(a) or outstanding Company Warrants in accordance with Section 5.5(b), Parent
may, at its election, cause such outstanding Company Options or Company Warrants
to be replaced by issuing reasonably equivalent replacement stock options or
warrants (as the case may be) in substitution therefor.
(d) Prior to the Effective Time, the Company will take all action that may
be necessary (under the plans pursuant to which Company Options are outstanding
and otherwise) to effectuate the provisions of this Section 5.5 and to ensure
that, from and after the Effective Time, holders of Company Options and Company
Warrants have no rights with respect thereto other than those specifically
provided in this Section 5.5.
5.6 Employee Benefits.
(a) Parent agrees that all employees of the Acquired Corporations who
continue employment with Parent or any Subsidiary of Parent after the Effective
Time ("Continuing Employees") will be eligible to continue to participate in
Parent's health and welfare benefit plans; provided, however, that (i) nothing
in this Section 5.6 or elsewhere in this Agreement will limit the right of
Parent to amend or terminate any such health or welfare benefit plan at any
time, and (ii) if Parent terminates any such health or welfare benefit plan,
then (upon expiration of any appropriate transition period), the Continuing
Employees will be eligible to participate in Parent's health and welfare benefit
plans, to substantially the same extent as similarly situated employees of
Parent. Nothing in this Section 5.6 or elsewhere in this Agreement will be
construed to create a right in any employee to employment with Parent or any
other Subsidiary of Parent and the employment of each Continuing Employee will
be "at will" employment.
(b) The Company agrees to take (or cause to be taken) all actions necessary
or appropriate to terminate, effective immediately prior to the Effective Time,
any employee benefit plan sponsored by any of the Acquired Corporations (or in
which any of the Acquired Corporations participate) that contains a cash or
deferred arrangement intended to qualify under Section 401(k) of the Code.
(c) Part 5.6(c) of the Company Disclosure Schedule sets forth certain
existing commitments to pay bonuses to employees of the Company who remain
employed by the Company (or by Parent or any of Parent's affiliates) through
December 15, 2000 (the "Stay Bonuses"). Parent agrees to pay the specified Stay
Bonuses to employees who remain employed by the Company (or by Parent or any of
Parent's affiliates) through December 15, 2000. In addition, Parent agrees to
pay the specified Stay Bonuses, together with severance as specified in Part 5.6
of the Parent Disclosure Schedule, to any of such employees whose employment is
terminated by Parent, other than for cause, prior to December 15, 2000.
5.7 Directors' and Officers' Indemnification and Insurance.
(a) All rights to indemnification existing in favor of any Person who is
now, or had been at any time prior to the date of this Agreement or who becomes
prior to the Effective Time, a director or officer of any of the Acquired
Corporations (the "Indemnified Persons") for acts and omissions occurring prior
to the Effective Time, as provided in the Company's certificate of incorporation
and bylaws (as in effect as of the date of this Agreement) and as provided in
any indemnification agreements between the Company and the Indemnified Persons
(as in effect as of the date of this Agreement) in the forms disclosed by the
Company to Parent prior to the date of this Agreement, including, in the case of
Gary Stevens, any replacement for such agreement containing substantially
identical indemnification provisions, will survive
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the Merger and will be observed by Parent to the fullest extent available under
applicable law for a period of six years from the Effective Time.
(b) Parent will include and cause to be maintained in effect in its (or any
successor's) certificate of incorporation and bylaws after the Effective Time,
provisions regarding elimination of liability of directors, indemnification of
officers, directors and employees and advancement of expenses which are, in the
aggregate, no less advantageous to the intended beneficiaries than the
corresponding provisions contained as of the date of this Agreement in the
certificate of incorporation and bylaws of the Company.
(c) From the Effective Time until the sixth anniversary of the Effective
Time, Parent will maintain in effect, for the benefit of the Indemnified Persons
with respect to acts or omissions occurring prior to the Effective Time, the
existing policy of directors' and officers' liability insurance maintained by
the Company as of the date of this Agreement in the form disclosed by the
Company to Parent prior to the date of this Agreement (the "Existing Policy");
provided, however, that (i) Parent may substitute for the Existing Policy a
policy or policies of comparable coverage, and (ii) Parent will not be required
to pay annual premiums for the Existing Policy (or for any substitute policies)
in excess of $60,000 in the aggregate. In the event any future annual premiums
for the Existing Policy (or any substitute policies) exceeds $60,000 in the
aggregate, Parent will be entitled to reduce the amount of coverage of the
Existing Policy (or any substitute policies) to the amount of coverage that can
be obtained for an annual premium equal to $60,000.
(d) The obligations of Parent under this Section 5.7 may not be terminated
or modified in such a manner as to adversely affect any of the Indemnified
Persons without the consent of each such affected Indemnified Person (it being
expressly agreed that the Indemnified Persons are intended third party
beneficiaries of this Section 5.7).
5.8 Provision of Information. During the Pre-Closing Period, each of the
Company and Parent will promptly notify the other party in writing of: (i) the
discovery by it of any event, condition, fact or circumstance that occurred or
existed on or prior to the date of this Agreement and that caused or constitutes
a material inaccuracy in any representation or warranty made by it in this
Agreement; (ii) any material breach of any covenant or obligation of it; and
(iii) any event, condition, fact or circumstance that, considered together with
all other events, conditions, facts and circumstances, would make the timely
satisfaction of any of the conditions set forth in Section 6 or Section 7
impossible or unlikely or is deemed to have a Material Adverse Effect on the
Acquired Corporations (in the case of the Company) or a Material Adverse Effect
on Parent (in the case of Parent). Without limiting the generality of the
foregoing, each of the Company and Parent will promptly advise the other party
in writing of any Legal Proceeding or material claim overtly threatened,
commenced or asserted against or with respect to any of the Acquired
Corporations (in the case of Parent) or Parent. No notification given pursuant
to this Section 5.8 will limit or otherwise affect any of the representations,
warranties, covenants or obligations of the parties contained in this Agreement.
5.9 Additional Agreements.
(a) Subject to Section 5.9(b), Parent and the Company will use all
reasonable efforts to take, or cause to be taken, all actions necessary to
consummate the Merger and make effective the other transactions contemplated by
this Agreement. Without limiting the generality of the foregoing, but subject to
Section 5.9(b), each party to this Agreement (i) will make all filings (if any)
and give all notices (if any) required to be made and given by such party in
connection with the Merger and the other transactions contemplated by this
Agreement, (ii) will use all reasonable efforts to obtain each Consent (if any)
required to be obtained (pursuant to any applicable Legal Requirement or
Contract, or otherwise) by such party in connection with the Merger or any of
the other transactions contemplated by this Agreement, and (iii) will use all
reasonable efforts to lift any restraint, injunction or other legal bar to the
Merger. Each of the Company and Parent will promptly deliver to the other party
a copy of each such filing made, each such notice given and each such Consent
obtained during the Pre-Closing Period.
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(b) Notwithstanding anything to the contrary contained in this Agreement,
Parent will not have any obligation under this Agreement: (i) to dispose or
transfer or cause any of its Subsidiaries to dispose of or transfer any assets,
or to commit to cause any of the Acquired Corporations to dispose of any assets;
(ii) to discontinue or cause any of its Subsidiaries to discontinue offering any
product or service, or to commit to cause any of the Acquired Corporations to
discontinue offering any product or service; (iii) to license or otherwise make
available, or cause any of its Subsidiaries to license or otherwise make
available, to any Person, any technology, software or other Proprietary Asset,
or to commit to cause any of the Acquired Corporations to license or otherwise
make available to any Person any technology, software or other Proprietary
Asset; (iv) to hold separate or cause any of its Subsidiaries to hold separate
any assets or operations (either before or after the Closing Date), or to commit
to cause any of the Acquired Corporations to hold separate any assets or
operations; or (v) to make or cause any of its Subsidiaries to make any
commitment to any Governmental Body regarding its future operations or the
future operations of any of the Acquired Corporations.
5.10 Disclosure. Parent and the Company will consult with each other
before issuing any press release or otherwise making any public statement with
respect to the Merger or any of the other transactions contemplated by this
Agreement. Without limiting the generality of the foregoing, the Company will
not, and will not permit any of its Subsidiaries or any Representative of any of
the Acquired Corporations to, make any public disclosure regarding the Merger or
any of the other transactions contemplated by this Agreement unless (a) Parent
shall have approved such disclosure or (b) the Company shall have been advised
in writing by its outside legal counsel that such disclosure is required by
applicable law.
5.11 Listing. Parent will use all reasonable efforts to cause the shares
of Parent Common Stock being issued in the Merger to be approved for listing
(subject to notice of issuance) on the Nasdaq National Market no later than the
Closing Date.
5.12 Tax Matters. At or prior to the filing of the Form S-4 Registration
Statement, the Company and Parent will execute and deliver to Cooley Godward LLP
and to Clifford Chance, Rogers & Wells LLP tax representation letters in
customary form. Parent and the Company will each confirm to Cooley Godward LLP
and to Clifford Chance, Rogers & Wells LLP the accuracy and completeness as of
the Effective Time of the tax representation letters delivered pursuant to the
immediately preceding sentence. Parent and the Company will use all reasonable
efforts prior to and after the Effective Time to cause the Merger to qualify as
a tax-free reorganization under Section 368(a)(1) of the Code. Following
delivery of the tax representation letters pursuant to the first sentence of
this Section 5.12, each of Parent and the Company will use its reasonable
efforts to cause Cooley Godward LLP and Clifford Chance, Rogers & Wells LLP,
respectively, to deliver to it a tax opinion satisfying the requirements of Item
601 of Regulation S-K promulgated under the Securities Act. In rendering such
opinions, each of such counsel will be entitled to rely on the tax
representation letters referred to in this Section 5.12. For a period of at
least two years from the date the Merger becomes effective, except for actions
taken in the ordinary course of business or as otherwise required by applicable
Law, Parent and its Subsidiaries will not sell, transfer, distribute or
otherwise dispose of any of the operating assets acquired from the Company in
the Merger, whether by merger or otherwise, in a transaction or series of
transactions that would cause the Merger to fail to satisfy the continuity of
business enterprise requirements of a reorganization under Section 368(a) of the
Code or the applicable Treasury Regulations.
5.13 Letters of the Company's Accountants. The Company will use all
reasonable efforts to cause to be delivered to Parent:
(a) a letter from Deloitte & Touche LLP to Parent, dated no more than
two business days before the date on which the Form S-4 Registration
Statement becomes effective and reasonably satisfactory in form and
substance to Parent, that is customary in scope and substance for letters
delivered by independent public accountants in connection with registration
statements similar to the Form S-4 Registration Statement; and
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(b) a letter from Deloitte & Touche LLP to Parent, dated the Closing
Date and reasonably satisfactory in form and substance to Parent, updating
the letter referred to in paragraph (a) above;
provided, however, that, in the case of each of such letters, the Company will
have such obligation only to the extent Parent is using reasonable efforts to
cause a comparable letter to be delivered by PricewaterhouseCoopers LLP.
5.14 Resignation of Officers and Directors. The Company will use all
reasonable efforts to obtain and deliver to Parent on or prior to the Closing
Date the resignation of each officer and director of each of the Acquired
Corporations, effective no later than the Effective Time.
5.15 Election of Director. Parent will use all reasonable efforts to
secure the election of an individual who is mutually acceptable to Parent and
the Company to Parent's board of directors, effective no later than the
Effective Time.
5.16 Termination of Obligations Under Certain Agreements. Prior to the
Closing Date, the Company will take and procure such actions as may be necessary
so that (a) all convertible promissory notes issued by the Company and
outstanding as of the date of this Agreement and all other securities issued by
the Company in connection with the Bridge Financing will be converted into
Company Stock on or before the Effective Time, and (b) from and after the
Effective Time, Parent will have no obligations under the Management Rights
Agreement dated as of November 12, 1999 between the Company and TCV III(Q), L.P.
and no obligations that would restrict its capitalization or business, or the
issuance, transfer or voting of its securities, under any provision of the
agreements identified in items (3) and (5) - (12) of Part 2.3(a) of the Company
Disclosure Schedule. Prior to the Closing Date, the Company will use all
reasonable efforts to ensure that, from and after the Effective Time, Parent
will have no other obligations under the agreements identified in items (3) and
(5) - (12) of Part 2.3(a) of the Company Disclosure Schedule.
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT
The obligation of Parent to effect the Merger and otherwise consummate the
transactions contemplated by this Agreement is subject to the satisfaction, at
or prior to the Closing, of each of the following conditions (each of which may
be waived in whole or in part by Parent in its sole discretion):
6.1 Accuracy of Representations.
(a) The representations and warranties of the Company contained in this
Agreement shall have been accurate in all respects as of the date of this
Agreement, except that any inaccuracies in such representations and warranties
will be disregarded if the circumstances giving rise to all such inaccuracies
(considered collectively) do not constitute, and could not reasonably be
expected to have, a Material Adverse Effect on the Acquired Corporations;
provided, however that, for purposes of determining the accuracy of such
representations and warranties, (i) all "Material Adverse Effect" qualifications
and other materiality qualifications, and any similar qualifications, contained
in such representations and warranties will be disregarded and (ii) any update
of or modification to the Company Disclosure Schedule made or purported to have
been made after the date of this Agreement will be disregarded.
(b) The representations and warranties of the Company contained in this
Agreement shall be accurate in all respects as of the Closing Date as if made on
and as of the Closing Date, except that any inaccuracies in such representations
and warranties will be disregarded if the circumstances giving rise to all such
inaccuracies (considered collectively) do not constitute, and could not
reasonably be expected to have, a Material Adverse Effect on the Acquired
Corporations; provided, however that, for purposes of determining the accuracy
of such representations and warranties, (i) all "Material Adverse Effect"
qualifications and other materiality qualifications, and any similar
qualifications, contained in such representations and warranties will be
disregarded and (ii) any update of or modification to the Company Disclosure
Schedule made or purported to have been made after the date of this Agreement
will be disregarded.
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6.2 Performance of Covenants. Each covenant or obligation that the Company
is required to comply with or to perform at or prior to the Closing shall have
been complied with and performed in all material respects.
6.3 Effectiveness of Form S-4 Registration Statement. The Form S-4
Registration Statement shall have become effective in accordance with the
provisions of the Securities Act, and no stop order shall have been issued, and
no proceeding for that purpose shall have been initiated or be overtly
threatened, by the SEC with respect to the Form S-4 Registration Statement.
6.4 Stockholder Approval.
(a) This Agreement shall have been duly adopted by the Required Company
Stockholder Vote.
(b) The issuance of Parent Common Stock in the Merger shall have been duly
approved by the Required Parent Stockholder Vote.
(c) The holders of Company Stock representing the right to receive at least
90% of the Merger Consideration Shares shall have either voted such shares in
favor of the adoption of this Agreement and approval of the Merger or
effectively withdrawn or lost (through failure to perfect or otherwise) the
right to exercise dissenter's or appraisal rights with respect to such shares in
connection with the Merger.
6.5 Consents. Each of the Consents identified in Part 6.5 of the Company
Disclosure Schedule shall have been obtained and shall be in full force and
effect.
6.6 Documents. Parent shall have received the following documents:
(a) a certificate, dated the Closing Date and executed on behalf of
the Company by its Chief Executive Officer and Chief Financial Officer,
confirming that the conditions set forth in Sections 6.1, 6.2, 6.4(a), 6.5
and 6.8 have been duly satisfied
(b) a legal opinion of Wyrick Robbins Yates & Ponton LLP, dated the
Closing Date, substantially in the form of Exhibit D; and
(c) the written resignations of all officers and directors of each of
the Acquired Corporations, effective no later than the Effective Time.
6.7 Employees. Unless Parent shall have expressed an intention not to
continue a particular individual's employment, none of the individuals
identified in Part 2.15(o) of the Company Disclosure Schedule shall have either
ceased to be employed by the Company or expressed to Parent an intention to
terminate employment with the Company. None of the Acquired Corporations will
have any liability or obligation to be satisfied or performed after the
Effective Time under or with respect to the termination of the employment
agreements identified in Part 2.10(a) of the Company Disclosure Schedule, except
to the extent the Company has obligations that survive the Merger under the
terms of the agreements with Gary Stevenson identified in paragraphs (3) and (4)
of Part 2.10(a)(i)(A) of the Company Disclosure Schedule.
6.8 No Material Adverse Effect. Since the date of this Agreement, there
shall not have occurred or arisen any event, condition, fact or circumstance
that is deemed to have a Material Adverse Effect on the Acquired Corporations.
6.9 HSR Act. The waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated and any Consent
required under any applicable foreign antitrust law or regulation shall have
been obtained.
6.10 Listing. The shares of Parent Common Stock to be issued in the Merger
shall have been approved for listing (subject to notice of issuance) on the
Nasdaq National Market.
6.11 No Restraints. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent
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jurisdiction and remain in effect, and there shall not be any Legal Requirement
applicable to the Merger that makes consummation of the Merger illegal.
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATION OF THE COMPANY
The obligation of the Company to effect the Merger and otherwise consummate
the transactions contemplated by this Agreement are subject to the satisfaction,
at or prior to the Closing, of the following conditions (each of which may be
waived in whole or in part by the Company in its sole discretion):
7.1 Accuracy of Representations.
(a) The representations and warranties of Parent contained in this
Agreement shall have been accurate in all respects as of the date of this
Agreement, except that any inaccuracies in such representations and warranties
will be disregarded if the circumstances giving rise to all such inaccuracies
(considered collectively) do not constitute, and could not reasonably be
expected have, a Material Adverse Effect on Parent; provided, however, that, for
purposes of determining the accuracy of such representations and warranties as
of the Closing Date, all "Material Adverse Effect" qualifications and other
materiality qualifications, and any similar qualifications, contained in such
representations and warranties will be disregarded.
(b) The representations and warranties of Parent contained in this
Agreement shall be accurate in all respects as of the Closing Date as if made on
and as of the Closing Date, except that any inaccuracies in such representations
and warranties will be disregarded if the circumstances giving rise to all such
inaccuracies (considered collectively) do not constitute, and could not
reasonably be expected have, a Material Adverse Effect on Parent; provided,
however, that, for purposes of determining the accuracy of such representations
and warranties as of the Closing Date, all "Material Adverse Effect"
qualifications and other materiality qualifications, and any similar
qualifications, contained in such representations and warranties will be
disregarded.
7.2 Performance of Covenants. All of the covenants and obligations that
Parent is required to comply with or to perform at or prior to the Closing shall
have been complied with and performed in all material respects.
7.3 Effectiveness of Registration Statements. The Form S-4 Registration
Statement and the Form S-3 Registration Statement shall have become effective in
accordance with the provisions of the Securities Act, and no stop order shall
have been issued, and no proceeding for that purpose shall have been initiated
or be overtly threatened, by the SEC with respect to the Form S-4 Registration
Statement or the Form S-3 Registration Statement.
7.4 Stockholder Approval.
(a) This Agreement shall have been duly adopted by the Required Company
Stockholder Vote.
(b) The issuance of Parent Common Stock in the Merger shall have been duly
approved by the Required Parent Stockholder Vote.
7.5 Documents. The Company shall have received the following documents:
(a) a legal opinion of Clifford Chance Rogers & Wells LLP, dated the
Closing Date, to the effect that the Merger will constitute a
reorganization within the meaning of Section 368 of the Code (it being
understood that in rendering such opinion, Clifford Chance Rogers & Wells
LLP may rely upon the tax representation letters referred to in Section
5.12;
(b) a legal opinion of Cooley Godward LLP, dated the Closing Date,
substantially in the form of Exhibit E; and
(c) a certificate executed on behalf of Parent by an executive officer
of Parent, confirming that conditions set forth in Sections 7.1, 7.2,
7.4(b) and 7.6 have been duly satisfied.
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7.6 No Material Adverse Effect. Since the date of this Agreement, there
shall not have occurred or arisen any event, condition, fact or circumstance
that is deemed to have a Material Adverse Effect on Parent.
7.7 HSR Act. The waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated and any Consent
required under any applicable foreign antitrust law or regulation shall have
been obtained.
7.8 Listing. The shares of Parent Common Stock to be issued in the Merger
shall have been approved for listing (subject to notice of issuance) on the
Nasdaq National Market.
7.9 No Restraints. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger by
the Company shall have been issued by any court of competent jurisdiction and
remain in effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger by the Company
illegal.
7.10 Election of Director. An individual who is mutually acceptable to
Parent and the Company shall have been elected to Parent's board of directors,
effective no later than the Effective Time.
7.11 Financing. Parent shall have completed one or more transactions with
investors in which Parent shall have received cash proceeds equal to at least
$27,500,000.
SECTION 8. TERMINATION
8.1 Termination. This Agreement may be terminated prior to the Effective
Time (whether before or after adoption of this Agreement by the Company's
stockholders and whether before or after approval of the issuance of Parent
Common Stock in the Merger by Parent's stockholders):
(a) by mutual written consent of Parent and the Company;
(b) by either Parent or the Company if the Merger shall not have been
consummated by December 31, 2000; provided, however, that (i) Parent will
not be permitted to terminate this Agreement pursuant to this Section
8.1(b) if the failure to consummate the Merger by December 31, 2000 is
attributable to (1) a failure on Parent's part to perform any covenant in
this Agreement required to be performed by Parent at or prior to the
Effective Time or (2) Parent's failure to obtain the Required Parent
Stockholder Vote by reason of the breach of any of the Parent Stockholder
Voting Agreements (which failure will be deemed a breach of this Agreement
by Parent), and (ii) the Company will not be permitted to terminate this
Agreement pursuant to this Section 8.1(b) if the failure to consummate the
Merger by December 31, 2000 is attributable to (1) a failure on the
Company's part to perform any covenant in this Agreement required to be
performed by the Company at or prior to the Effective Time or (2) the
Company's failure to obtain the Required Company Stockholder Vote by reason
of the breach of any of the Company Stockholder Voting Agreements (which
failure will be deemed a breach of this Agreement by the Company);
(c) by either Parent or the Company if a court of competent
jurisdiction or other Governmental Body shall have issued a final and
non-appealable order, decree or ruling, or shall have taken any other
action, having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger;
(d) by either Parent or the Company if (i) the Company Stockholders'
Meeting (including any adjournments and postponements thereof) shall have
been held and completed and the Company's stockholders shall have taken a
final vote on a proposal to adopt this Agreement, and (ii) this Agreement
shall not have been adopted at the Company Stockholders' Meeting (and shall
not have been adopted at any adjournment or postponement thereof) by the
Required Company Stockholder Vote; provided, however, that (A) a party will
not be permitted to terminate this Agreement pursuant to this Section
8.1(d) if the failure to have this Agreement adopted by the Required
Company Stockholder Vote is attributable to a failure on the part of such
party to perform any covenant in this Agreement required to be performed by
such party at or prior to the Effective Time, and (B) the
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Company will not be permitted to terminate this Agreement pursuant to this
Section 8.1(d) (1) if the failure to have this Agreement adopted by the
Required Company Stockholder Vote is attributable to the breach of any of
the Company Stockholder Voting Agreements (which failure will be deemed a
breach of this Agreement by the Company) and (2) in any event, unless the
Company shall have paid to Parent the fee required to be paid to Parent
pursuant to Section 8.3(b);
(e) by either Parent or the Company if (i) the Parent Stockholders'
Meeting (including any adjournments and postponements thereof) shall have
been held and completed and Parent's stockholders shall have taken a final
vote on a proposal to adopt this Agreement, and (ii) this Agreement shall
not have been adopted at the Parent Stockholders' Meeting (and shall not
have been approved at any adjournment or postponement thereof) by the
Required Parent Stockholder Vote; provided, however, that (A) a party will
not be permitted to terminate this Agreement pursuant to this Section
8.1(e) if the failure to have this Agreement adopted by the Required Parent
Stockholder Vote is attributable to a failure on the part of the party
seeking to terminate this Agreement to perform any covenant in this
Agreement required to be performed by such party at or prior to the
Effective Time, and (B) Parent will not be permitted to terminate this
Agreement pursuant to this Section 8.1(e) (1) if the failure to have this
Agreement adopted by the Required Parent Stockholder Vote is attributable
to the breach of any of the Parent Stockholder Voting Agreements (which
failure will be deemed a breach of this Agreement by Parent) and (2) in any
event, unless Parent shall have paid to the Company the fee required to be
paid to the Company pursuant to Section 8.3(b);
(f) by Parent if (i) any of the Company's representations and
warranties contained in this Agreement shall be inaccurate as of the date
of this Agreement, or shall have become inaccurate as of a date subsequent
to the date of this Agreement (as if made on such subsequent date), in
either case after giving effect to the proviso to Section 6.1, such that
the condition set forth in Section 6.1 would not be satisfied, or (ii) any
of the Company's covenants contained in this Agreement shall have been
breached such that the condition set forth in Section 6.2 would not be
satisfied; provided, however, that if an inaccuracy in any of the Company's
representations and warranties as of a date subsequent to the date of this
Agreement or a breach of a covenant by the Company is curable by the
Company, then Parent may not terminate this Agreement under this Section
8.1(f) on account of such inaccuracy or breach until after Parent has given
the Company written notice of its intention to do so and, if the Company
thereupon commences exercising all reasonable efforts to cure such
inaccuracy or breach, for so long thereafter as the Company is continuing
to do so; or
(g) by the Company if (i) any of Parent's representations and
warranties contained in this Agreement shall be inaccurate as of the date
of this Agreement, or shall have become inaccurate as of a date subsequent
to the date of this Agreement (as if made on such subsequent date), in
either case after giving effect to the proviso to Section 7.1, such that
the condition set forth in Section 7.1 would not be satisfied, or (ii) if
any of Parent's covenants contained in this Agreement shall have been
breached such that the condition set forth in Section 7.2 would not be
satisfied; provided, however, that if an inaccuracy in any of Parent's
representations and warranties as of a date subsequent to the date of this
Agreement or a breach of a covenant by Parent is curable by Parent, then
the Company may not terminate this Agreement under this Section 8.1(g) on
account of such inaccuracy or breach until after the Company has given
Parent written notice of its intention to do so and, if Parent thereupon
commences exercising all reasonable efforts to cure such inaccuracy or
breach, for so long thereafter as Parent is continuing to do so.
8.2 Effect of Termination. In the event of the termination of this
Agreement as provided in Section 8.1, this Agreement will be of no further force
or effect; provided, however, that (i) this Section 8.2, Section 8.3 and Section
10 will survive the termination of this Agreement and will remain in full force
and effect, and (ii) the termination of this Agreement will not relieve any
party from any liability for any material breach of any representation,
warranty, covenant, obligation or other provision contained in this Agreement.
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8.3 Expenses; Termination Fees.
(a) All fees and expenses incurred in connection with this Agreement and
the transactions contemplated by this Agreement will be paid by the party
incurring such expenses, whether or not the Merger is consummated, it being
understood that, if the Merger is consummated, the Company's fees and expenses
will be borne by Parent as the surviving corporation in the Merger.
(b) If this Agreement is terminated by Parent or the Company pursuant to
Section 8.1(d), then the Company will pay to Parent, in cash at the time
specified in Section 8.3(c) a nonrefundable fee in the amount of $7,500,000. If
this Agreement is terminated by Parent or the Company pursuant to Section
8.1(e), then Parent will pay to the Company, at the time specified in Section
8.3(c), a nonrefundable fee in the amount of $7,500,000.
(c) In the case of termination of this Agreement by the Company pursuant to
Section 8.1(d), any fee payable pursuant to Section 8.3(b) will be paid by the
Company prior to the time of such termination; and in the case of termination of
this Agreement by Parent pursuant to Section 8.1(d), any fee payable pursuant to
Section 8.3(b) will be paid by the Company within two business days after such
termination. In the case of termination of this Agreement by Parent pursuant to
Section 8.1(e), any fee payable pursuant to Section 8.3(b) will be paid by
Parent prior to the time of such termination; and in the case of termination of
this Agreement by the Company pursuant to Section 8.1(e), any fee payable
pursuant to Section 8.3(b) will be paid by Parent within two business days after
such termination.
SECTION 9. INDEMNIFICATION, ETC.
9.1 Survival of Representations, Etc.
(a) The representations and warranties made by the Company will survive the
Closing and will expire on the date one year after the Closing Date (such date
will be referred to as the "Survival Expiration Date"); provided, however, that
if, at any time prior to the Survival Expiration Date, any Indemnitee (acting in
good faith) delivers to the Designated Company Agent (as defined in Section
10.1) a written notice alleging the existence of an inaccuracy in or a breach of
any of the representations and warranties made by the Company (and setting forth
in reasonable detail the basis for such Indemnitee's belief that such an
inaccuracy or breach may exist) and asserting a claim for recovery under Section
9.2 or Section 9.3 based on such alleged inaccuracy or breach, then the claim
asserted in such notice will survive the Survival Expiration Date until such
time as such claim is fully and finally resolved. All representations and
warranties made by Parent will terminate and expire as of the Closing Date, and
any liability of Parent with respect to such representations and warranties will
thereupon cease.
(b) The representations, warranties, covenants and obligations of the
Company, and the rights and remedies that may be exercised by the Indemnitees,
will not be limited or otherwise affected by or as a result of any information
furnished to, or any investigation made by or knowledge of, any of the
Indemnitees or any of their Representatives.
(c) For purposes of this Agreement, each statement or other item of
information set forth in the Company Disclosure Schedule or in any update to the
Company Disclosure Schedule will be deemed to be a representation and warranty
made by the Company in this Agreement. Without limiting the foregoing, however,
it is understood by the parties that no updated Company Disclosure Schedule will
be deemed to supplement or amend the Company Disclosure Schedule for the
purposed of determining the accuracy as of the date of this Agreement of any of
the representations and warranties made by the Company in this Agreement.
9.2 Indemnification and Escrow.
(a) From and after the Effective Time (but subject to Section 9.1(a)) the
Escrow Fund will be available to compensate and reimburse each of the
Indemnitees for any Damages which are directly or indirectly suffered or
incurred by any of the Indemnitees or to which any of the Indemnitees may
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otherwise become subject (regardless of whether or not such Damages relate to
any third-party claim) and which arise from or as a result of, or are directly
or indirectly connected with:
(i) any inaccuracy in or breach of any representation, warranty,
covenant or obligation made by the Company herein and any Legal Proceeding
relating to any such inaccuracy or breach (including any Legal Proceeding
commenced by any Indemnitee for the purpose of enforcing any of its rights
under this Section 9); or
(ii) any of the following: (1) any Merger Consideration Adjustment
pursuant to Section 1.10; (2) any Company Transaction Expenses to the
extent the aggregate of all such expenses exceeds $2,200,000; and (3) the
claims described in paragraphs (3) and (4) of Part 2.19(a) of the Company
Disclosure Schedule (the "Patent Claims").
(b) Indemnification pursuant to this Section 9.2 will be the exclusive
remedy available to the Indemnitees for Damages of the type referred to in the
foregoing sentence, provided however that such limitation will not apply with
respect to claims based on the fraud of the Company.
9.3 Deductible Amount.
(a) Except as otherwise expressly provided in Section 9.3(b), the
Indemnitees will be entitled to indemnification only if and to the extent the
aggregate amount of Damages that have been directly or indirectly suffered or
incurred by any one or more of the Indemnitees, or to which any one or more of
the Indemnitees has or have otherwise become subject, exceeds $500,000 (the
"Deductible Amount").
(b) The Deductible Amount will not apply to any Damages which arise from or
as a result of or are directly or indirectly connected with (i) the Patent
Claims, or (ii) the fraud of the Company.
9.4 Satisfaction of Indemnification Claim; Limitation of Liability.
(a) From and after the Effective Time, all claims against the Escrow
Stockholders under this Agreement will be satisfied exclusively and, to the
extent possible given such limitation, in full from the Escrow Fund in
accordance with the Escrow Agreement. Without limiting the foregoing, from and
after the Effective Time, the maximum liability of any Escrow Stockholder for
any breach of a representation, warranty or covenant of the Company or other
indemnified matter will be limited to such Escrow Stockholder's proportionate
interest in the Escrow Fund. Any Escrow Fund assets used to satisfy a claim
against the Escrow Stockholders under this Agreement will be taken from all of
the Escrow Stockholders on a pro rata basis in proportion to such Escrow
Stockholders' respective interests in the Escrow Fund.
(b) In no event will the Indemnitees be entitled to receive from the Escrow
Fund an aggregate amount greater than $500,000 in respect of the Patent Claims.
The parties hereto agree that the ability of the Indemnitees to be indemnified
for Patent Claims without application of the Deductible Amount (but subject to
the indemnification cap set forth herein) is the exclusive remedy in respect of
Patent Claims under this Agreement and will not be included as part of a
separate indemnification claim that would have the effect of negating the
limitations applicable to Patent Claims hereunder.
(c) In no event will the Indemnitees be entitled to receive from the Escrow
Fund an amount already recovered by Parent pursuant to the Merger Consideration
Adjustment provided for in Section 1.10 and in no event will any Damages include
any amount for which an accrual is included as a liability on the Final Closing
Balance Sheet.
9.5 [Intentionally Omitted].
9.6 Defense of Third-Party Claims. In the event of the assertion or
commencement by any Person of any claim or Legal Proceeding (whether against
Parent, against Parent or against any other Person) with respect to which any
Indemnitee may be entitled to make a claim pursuant to this Section 9, Parent
will notify the Designated Company Agent of such assertion or commencement
promptly after receiving notice thereof. The failure to give or delay in giving
such notice will not reduce the amount of any such claim, except to the extent
of any prejudice resulting from such failure or delay. The Escrow Stockholders,
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acting through the Designated Company Agent, will defend the Indemnitees in such
action with counsel selected by the Designated Company Agent and reasonably
satisfactory to Parent.
(a) If the Designated Company Agent so proceeds with the defense of
any such claim or Legal Proceeding:
(i) The Designated Company Agent may obtain reimbursement for all
reasonable expenses relating to the defense of such claim or Legal
Proceeding as provided in the Escrow Agreement;
(ii) Parent will make available to the Designated Company Agent any
documents and materials in its possession or control that may be
necessary to the defense of such claim or Legal Proceeding; and
(iii) The Designated Company Agent will have the right to settle,
adjust or compromise such claim or Legal Proceeding with the consent of
Parent; provided, however, that such consent will not be unreasonably
withheld.
(b) To the extent that the Designated Company Agent fails to provide
such defense in a timely manner, Parent will have the right to proceed with
the defense of such claim or Legal Proceeding with counsel selected by
Parent. If Parent so proceeds with the defense of any such claim or Legal
Proceeding:
(i) All reasonable expenses relating to the defense of such claim
or Legal Proceeding will be indemnifiable under Section 9.2;
(ii) The Designated Company Agent defined below will make available
to Parent any documents and materials in his or her possession or
control that may be necessary to the defense of such claim or Legal
Proceeding; and
(iii) Parent will have the right to settle, adjust or compromise
such claim or Legal Proceeding with the consent of the Designated
Company Agent; provided, however, that such consent will not be
unreasonably withheld.
9.7 Tax Contests. Parent will have the sole right to conduct any tax audit
or other tax contest relating to tax return of Parent; provided, however, prior
to the termination of the Escrow, the Designated Company Agent will have the
right to conduct any Tax examination, audit or contest relating to a Tax Return
of the Company that is subject to the indemnification obligations under Section
9 and will have the right to settle, adjust or compromise any such tax contest
with the consent of Parent, which consent will not be unreasonably withheld. The
Designated Company Agent may obtain reimbursement in accordance with the Escrow
Agreement for all reasonable expenses relating to the conduct of any such Tax
examination, audit or contest.
9.8 Exercise of Remedies by Indemnitees Other Than Parent. No Indemnitee
(other than Parent or any successor thereto or assign thereof) will be permitted
to assert any indemnification claim or exercise any other remedy under this
Agreement unless Parent (or any successor thereto or assign thereof) will have
consented to the assertion of such indemnification claim or the exercise of such
other remedy.
SECTION 10. MISCELLANEOUS PROVISIONS
10.1 Designated Company Agent. Prior to the Closing Date, the Company will
appoint a Person to serve as the agent for the Escrow Stockholders for purposes
of this Agreement (the "Designated Company Agent"). Parent will be entitled to
deal exclusively with the Designated Company Agent on all matters relating to
this Agreement, and will be entitled to rely conclusively (without further
evidence of any kind whatsoever) on any document executed or purported to be
executed on behalf of the Company and the Escrow Stockholders by the Designated
Company Agent, and on any other action taken or purported to be taken on behalf
of the Company and the Escrow Stockholders by the Designated Company Agent, as
fully binding upon the Company and the Escrow Stockholders. If the person acting
as the Designated Company Agent should die, become disabled or otherwise be
unable to fulfill his or her responsibilities as agent of
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the Company or in the event that a majority in interest of the Escrow
Stockholders shall elect to terminate the responsibilities of the person acting
as Designated Company Agent, then a majority in interest of the Escrow
Stockholders will appoint a new representative to serve as the Designated
Company Agent and will promptly notify Parent of the identity of such successor.
Any such successor will become the "Designated Company Agent" for purposes of
this Agreement.
10.2 Amendment. This Agreement may be amended with the approval of the
respective boards of directors of the Company and Parent at any time (whether
before or after adoption of this Agreement by the Company's stockholders and
whether before or after approval of the issuance of Parent Common Stock in the
Merger by Parent's stockholders); provided, however, that (i) after any such
adoption of this Agreement by the Company's stockholders, no amendment will be
made which by law requires further approval of the stockholders of the Company
without the further approval of such stockholders, and (ii) after any such
approval of the issuance of Parent Common Stock in the Merger by Parent's
stockholders, no amendment will be made which by law or NASD regulation requires
further approval of Parent's stockholders without the further approval of such
stockholders. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto.
10.3 Waiver.
(a) No failure on the part of any party to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any party
in exercising any power, right, privilege or remedy under this Agreement, will
operate as a waiver of such power, right, privilege or remedy; and no single or
partial exercise of any such power, right, privilege or remedy will preclude any
other or further exercise thereof or of any other power, right, privilege or
remedy.
(b) No party will be deemed to have waived any claim arising out of this
Agreement, or any power, right, privilege or remedy under this Agreement, unless
the waiver of such claim, power, right, privilege or remedy is expressly set
forth in a written instrument duly executed and delivered on behalf of such
party; and any such waiver will not be applicable or have any effect except in
the specific instance in which it is given.
10.4 Entire Agreement; Counterparts. This Agreement and the other
agreements referred to herein constitute the entire agreement and supersede all
other prior agreements and understandings, both written and oral, among or
between any of the parties with respect to the subject matter hereof and
thereof; provided, however, that the letter agreement dated April 6, 2000
between the Company and Parent (relating to the protection of confidential
information) will not be superseded and will remain in full force and effect.
This Agreement may be executed in several counterparts, each of which will be
deemed an original and all of which will constitute one and the same instrument.
10.5 Applicable Law; Jurisdiction. The procedures applicable to and effect
of the Merger will be governed by the laws of the State of Delaware. Subject to
the immediately preceding sentence, this Agreement will be governed by, and
construed in accordance with, the laws of the State of California, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof. In any action between any of the parties arising out of or
relating to this Agreement or any of the transactions contemplated by this
Agreement: (a) each of the parties irrevocably and unconditionally consents and
submits to the exclusive jurisdiction and venue of the state and federal courts
located in Denver, Colorado; (b) if any such action is commenced in a state
court, then, subject to applicable law, no party will object to the removal of
such action to any federal court located in Colorado; (c) each of the parties
irrevocably waives the right to trial by jury; and (d) each of the parties
irrevocably consents to service of process by first class certified mail, return
receipt requested, postage prepaid, to the address at which such party is to
receive notice in accordance with Section 10.9.
10.6 Company Disclosure Schedule. The Company Disclosure Schedule will be
arranged in separate parts corresponding to the numbered and lettered sections
contained in Section 2, and the information disclosed in any numbered or
lettered part will be deemed to relate to and to qualify only the particular
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representation or warranty set forth in the corresponding numbered or lettered
section in Section 2, and will not be deemed to relate to or to qualify any
other representation or warranty.
10.7 Attorneys' Fees. In any action at law or suit in equity to enforce
this Agreement or the rights of any of the parties hereunder, the prevailing
party in such action or suit will be entitled to receive a reasonable sum for
its attorneys' fees and all other reasonable costs and expenses incurred in such
action or suit.
10.8 Assignability; Third-Party Beneficiaries. This Agreement will be
binding upon, and will be enforceable by and inure solely to the benefit of, the
parties hereto and their respective successors and assigns; provided, however,
that neither this Agreement nor any party's rights hereunder may be assigned by
such party without the prior written consent of each other party, and any
attempted assignment of this Agreement or any of such rights by any party
without such consent will be void and of no effect. Nothing in this Agreement,
express or implied, is intended to or will confer upon any Person (other than
the parties hereto) any right, benefit or remedy of any nature whatsoever,
except that (a) the Rule 145 Sellers (as defined in Section 5.1(c)) will be
third-party beneficiaries of Section 5.1(c), (b) the Indemnified Persons (as
defined in Section 5.7) will be third-party beneficiaries of Section 5.7, and
(c) the Indemnitees (as defined in Section 9.2) will be third-party
beneficiaries of Section 9.2.
10.9 Notices. Any notice or other communication required or permitted to
be delivered to any party under this Agreement must be in writing and will be
deemed properly delivered, given and received (a) upon receipt when delivered by
hand, or (b) two business days after sent by registered mail or by courier or
express delivery service, provided that in each case the notice or other
communication is sent to the address set forth beneath the name of such party
below (or to such other address as such party shall have specified in a written
notice given to the other parties hereto):
If to Parent:
Quokka Sports, Inc.
525 Brannan Street
Ground Floor
San Francisco, CA 94107
Attn: Chief Executive Officer
With a Copy To:
Kenneth L. Guernsey
Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, CA 94111
If to the Company:
Total Sports, Inc.
133 Fayetteville Street Mall
Sixth Floor
Raleigh, NC 27601
Attn: Chief Executive Officer
With Copies To:
Steven A. Hobbs
Clifford Chance Rogers & Wells LLP
200 Park Avenue
New York, NY 10166
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And:
Larry E. Robbins
Wyrick Robbins Yates & Ponton LLP
4101 Lake Boone Trail, Suite 300
Raleigh, NC 27607
10.10 Severability. In the event that any provision of this Agreement, or
the application of any such provision to any Person or set of circumstances,
shall be determined to be invalid, unlawful, void or unenforceable to any
extent, the remainder of this Agreement, and the application of such provision
to Persons or circumstances other than those as to which it is determined to be
invalid, unlawful, void or unenforceable, will not be impaired or otherwise
affected and will continue to be valid and enforceable to the fullest extent
permitted by law.
10.11 Construction.
(a) For purposes of this Agreement, whenever the context requires: the
singular number will include the plural, and vice versa; the masculine gender
will include the feminine and neuter genders; the feminine gender will include
the masculine and neuter genders; and the neuter gender will include masculine
and feminine genders.
(b) The parties hereto agree that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party will not be
applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and "including," and
variations thereof, will not be deemed to be terms of limitation, but rather
will be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Agreement to
"Sections," "Exhibits" and "Schedules" are intended to refer to Sections of this
Agreement and Exhibits or Schedules to this Agreement.
(e) The bold-faced headings contained in this Agreement are for convenience
of reference only, will not be deemed to be a part of this Agreement and will
not be referred to in connection with the construction or interpretation of this
Agreement.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first above written.
QUOKKA SPORTS, INC.
By: /s/ ALAN RAMADAN
--------------------------------------
Name: Alan Ramadan
--------------------------------------
Title: President and CEO
--------------------------------------
TOTAL SPORTS, INC.
By: /s/ FRANK DANIELS
--------------------------------------
Name: Frank Daniels III
--------------------------------------
Title: Chairman
--------------------------------------
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EXHIBIT A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit A):
Acquired Corporation Contract. "Acquired Corporation Contract" means any
Contract: (a) to which any of the Acquired Corporations is a party; (b) by which
any of the Acquired Corporations or any asset of any of the Acquired
Corporations is bound or under which any of the Acquired Corporations has any
obligation; or (c) under which any of the Acquired Corporations has any right or
interest.
Acquired Corporation Proprietary Asset. "Acquired Corporation Proprietary
Asset" means any Proprietary Asset owned by or licensed to any of the Acquired
Corporations or otherwise used by any of the Acquired Corporations.
Acquired Corporation Source or Object Code. "Acquired Corporation Source or
Object Code" means any source or object code, or any portion, aspect or segment
of any source or object code, relating to any Proprietary Asset owned by or
licensed to any of the Acquired Corporations or otherwise used by any of the
Acquired Corporations.
Acquisition Proposal. "Acquisition Proposal" means any offer, proposal,
inquiry or indication of interest (other than an offer, proposal, inquiry or
indication of interest made or submitted by Parent) contemplating or otherwise
relating to any Acquisition Transaction.
Acquisition Transaction. "Acquisition Transaction" means:
(a) in the case of the Company, any transaction or series of
transactions involving:
(i) any merger, consolidation, share exchange, business
combination, issuance of securities, acquisition of securities, tender
offer, exchange offer or other similar transaction (excluding the Bridge
Financing) (1) in which, in the case of a merger or consolidation, any
of the Acquired Corporations is a constituent corporation, (2) in which
a Person or "group" (as defined in the Exchange Act and the rules
promulgated thereunder) of Persons directly or indirectly acquires
beneficial or record ownership of securities representing more than 20%
of the outstanding securities of any class of voting securities of any
of the Acquired Corporations, or (3) in which any of the Acquired
Corporations issues securities representing more than 20% of the
outstanding securities of any class of voting securities of any of the
Acquired Corporations;
(ii) any sale, lease, exchange, transfer, license, acquisition or
disposition of any business or businesses or assets that constitute or
account for 20% or more of the consolidated net revenues, net income or
assets the Acquired Corporations taken as a whole; or
(iii) any liquidation or dissolution of any of the Acquired
Corporations; and
(b) in the case of Parent, any transaction or series of transactions
involving:
(i) any merger, consolidation, share exchange, business
combination, issuance of securities, acquisition of securities, tender
offer, exchange offer or other similar transaction (excluding the
financing referred to in Section 7.11) (1) in which, in the case of a
merger or consolidation, Parent is a constituent corporation and is not
the surviving or acquiring corporation, (2) in which a Person or "group"
(as defined in the Exchange Act and the rules promulgated thereunder) of
Persons directly or indirectly acquires beneficial or record ownership
of securities representing more than 20% of the outstanding securities
of any class of voting securities of Parent, or (3) in which Parent
issues securities representing more than 20% of the outstanding
securities of any class of its voting securities;
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(ii) any sale, lease, exchange, transfer, license, acquisition or
disposition of any business or businesses or assets (including the stock
of any Subsidiaries) that constitute or account for 20% or more of the
consolidated net revenues, net income or assets of Parent and its
Subsidiaries taken as a whole; or
(iii) any liquidation or dissolution of Parent.
Agreement. "Agreement" means the Agreement and Plan of Merger and
Reorganization to which this Exhibit A is attached, as it may be amended from
time to time.
Bridge Financing. "Bridge Financing" means a bridge financing of the
Company as described in, and conducted in compliance with, Section 4.2(a).
Code. "Code" means the Internal Revenue Code of 1986, as amended.
Company Common Stock. "Company Common Stock" means the Common Stock, par
value $.001 per share, of the Company.
Company Charter Amendment. "Company Charter Amendment" means the amendment
of the Company's certificate of incorporation, to be effected prior to the
Closing, to make the following changes in the Company's authorized capital
stock: (a) increase the total number of authorized shares of capital stock to
approximately 42,145,000; (b) increase the authorized number of shares of Series
D Convertible Preferred Stock to approximately 3,675,000; and (c) designate a
new series of Company Preferred Stock, called "Senior Employee Preferred Stock,"
consisting of approximately 3,200,000 shares.
Company Disclosure Schedule. "Company Disclosure Schedule" means the
disclosure schedule (dated as of the date of this Agreement) that has been
prepared by the Company in accordance with the requirements of Section 10.6 of
the Agreement and that has been delivered by the Company to Parent on the date
of this Agreement.
Company Options. "Company Options" means options to purchase shares of
Company Stock, whether granted by the Company pursuant to the Company's stock
option plans, assumed by the Company in connection with any merger, acquisition
or similar transaction or otherwise issued or granted.
Company Preferred Stock. "Company Preferred Stock" means the undesignated
Preferred Stock, par value $.001 per share, Series A Redeemable Preferred Stock,
par value $10.00 per share, Series B Convertible Preferred Stock, par value
$4.492 per share, Series C Convertible Preferred Stock, par value $.001 per
share, Series C1 Convertible Preferred Stock, par value $.001 per share, Series
D Convertible Preferred Stock, par value $.001 per share, Series D1 Convertible
Preferred Stock, par value $.001 per share, and Series E Convertible Preferred
Stock, par value $.001 per share, of the Company.
Company Stock. "Company Stock" means Company Common Stock and Company
Preferred Stock.
Company Transaction Expenses. "Company Transaction Expenses" means the
aggregate amount of payments made and liabilities incurred for out-of-pocket
expenses (including without limitation investment banking, legal, accounting and
other professional fees and disbursements) that become payable by the Acquired
Corporations as a result of the Merger or the other transactions contemplated by
this Agreement (including without limitation the negotiation and execution of
this Agreement and the other agreements contemplated hereby and the interim
financing arrangements described in Section 4.2(a)), excluding any amounts paid
or payable to Deloitte & Touche LLP in respect of the letters referred to in
Section 5.13.
Company Warrants. "Company Warrants" means warrants to purchase 907,782
shares of Company Common Stock, 50,346 shares of the Company's Series D
Convertible Preferred Stock and 963,370 shares of the Company's Series D1
Convertible Preferred Stock that are outstanding on the date of this Agreement.
Company's Knowledge. "Company's Knowledge" means the collective actual
knowledge of the following persons: Gary Stevenson, Frank Daniels, Ezra Kucharz,
Drue Moore, Colin Boatwright, Petra Weishaupt and Will York.
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Consent. "Consent" means any approval, consent, ratification, permission,
waiver or authorization (including any Governmental Authorization).
Contract. "Contract" means any written, oral or other agreement, contract,
subcontract, lease, understanding, instrument, note, option, warranty, purchase
order, license, sublicense, insurance policy, benefit plan or legally binding
commitment or undertaking of any nature.
Damages. "Damages" means losses, damages, liabilities, claims, judgments,
settlements, fines, costs and expenses (including reasonable attorney's fees).
Encumbrance. "Encumbrance" means any lien, pledge, hypothecation, mortgage,
security interest or encumbrance.
Entity. "Entity" means any corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any company
limited by shares, limited liability company or joint stock company), firm,
society or other enterprise, association, organization or entity.
Environmental Law. "Environmental Law" means any federal, state, local or
foreign Legal Requirement relating to pollution or protection of human health or
the environment (including ambient air, surface water, ground water, land
surface or subsurface strata), including any law or regulation relating to
emissions, discharges, releases or threatened releases of Materials of
Environmental Concern, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Materials of Environmental Concern.
Escrow Agent. "Escrow Agent" means the party serving from time to time as
Escrow Agent pursuant to the Escrow Agreement, initially State Street Bank and
Trust Company of California, N.A.
Escrow Agreement. "Escrow Agreement" means an escrow agreement in the form
attached hereto as Exhibit F, as the same may be amended from time to time.
Escrow Fund. "Escrow Fund" means the Escrow Shares and any other assets
that may be held from time to time by the Escrow Agent pursuant to the Escrow
Agreement.
Escrow Shares. "Escrow Shares" means the shares of Parent Common Stock
deposited in escrow by Parent, reduced by any portion thereof that may be used
to satisfy claims against the Escrow Stockholders in accordance with the Escrow
Agreement.
Exchange Act. "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
Form S-3 Registration Statement. "Form S-3 Registration Statement" means
the registration statement on Form S-3 to be filed with the SEC by Parent in
connection with certain resales of Parent Common Stock to be issued in the
Merger, as such registration statement may be amended prior to the time it is
declared effective by the SEC.
Form S-4 Registration Statement. "Form S-4 Registration Statement" means
the registration statement on Form S-4 to be filed with the SEC by Parent in
connection with issuance of Parent Common Stock in the Merger, as such
registration statement may be amended prior to the time it is declared effective
by the SEC.
Governmental Authorization. "Governmental Authorization" means any: (a)
permit, license, certificate, franchise, permission, variance, clearance,
registration, qualification or authorization issued, granted, given or otherwise
made available by or under the authority of any Governmental Body or pursuant to
any Legal Requirement; or (b) right under any Contract with any Governmental
Body.
Governmental Body. "Governmental Body" means any: (a) nation, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign or
other government; or (c) governmental or quasi-governmental authority of any
nature.
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HSR Act. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.
Indemnitees. "Indemnitees" will mean the following Persons: (a) Parent
(including in its capacity as the surviving corporation in the Merger); (b)
Parent's current and future affiliates; (c) the respective Representatives of
the Persons referred to in clauses "(a)" and "(b)" above; and (d) the respective
successors and assigns of the Persons referred to in clauses "(a)", "(b)" and
"(c)" above; provided, however, that the securityholders of the Company
immediately prior to the Effective Time will not be deemed to be "Indemnitees."
Joint Proxy Statement/Prospectus. "Joint Proxy Statement/Prospectus" means
the joint proxy statement/prospectus to be sent to the Company's stockholders in
connection with the Company Stockholders' Meeting and to Parent's stockholders
in connection with the Parent Stockholders' Meeting.
Legal Proceeding. "Legal Proceeding" means any action, suit, litigation,
arbitration, proceeding (including any civil, criminal, administrative,
investigative or appellate proceeding), hearing, inquiry, audit, examination or
investigation commenced, brought, conducted or heard by or before, or otherwise
involving, any court or other Governmental Body or any arbitrator or arbitration
panel.
Legal Requirement. "Legal Requirement" means any federal, state, local,
municipal, foreign or other law, statute, constitution, principle of common law,
resolution, ordinance, code, edict, decree, rule, regulation, ruling or
requirement issued, enacted, adopted, promulgated, implemented or otherwise put
into effect by or under the authority of any Governmental Body (or under the
authority of the Nasdaq National Market).
Material Adverse Effect. An event, condition, fact, circumstance,
violation, inaccuracy or other matter will be deemed to have a "Material Adverse
Effect" on the Acquired Corporations if such event, condition, fact,
circumstance, violation, inaccuracy or other matter (either individually or, to
the extent expressly specified elsewhere in this Agreement, considered together
with other events, conditions, facts, circumstances, violations, inaccuracies
and other matters) had or could reasonably be expected to have a material
adverse effect on (i) the business, financial condition, capitalization, assets,
liabilities, operations or results of operations of the Acquired Corporations
taken as a whole, or (ii) the ability of the Company to consummate the Merger or
any of the other transactions contemplated by the Agreement or to perform any of
its obligations under the Agreement; provided, however, that neither of the
following, in and of itself or in combination with the other, will be deemed to
have a Material Adverse Effect on the Acquired Corporations: (x) the disposition
or discontinuation of the Offline Publishing Business; and (y) the depletion of
the Acquired Corporations' liquidity and capital resources through the
incurrence of continued operating losses consistent with past experience. An
event, condition, fact, circumstance, violation, inaccuracy or other matter will
be deemed to have a "Material Adverse Effect" on Parent if such event,
condition, fact, circumstance, violation, inaccuracy or other matter (either
individually or, to the extent specified elsewhere in this Agreement, considered
together with other events, conditions, facts, circumstances, violations,
inaccuracies and other matters) had or could reasonably be expected to have a
material adverse effect on (i) the business, financial condition,
capitalization, assets, liabilities, operations or results of operations of
Parent and its Subsidiaries taken as a whole or (ii) the ability of Parent to
consummate the Merger or any of the other transactions contemplated by the
Agreement or to perform any of its obligations under the Agreement; provided,
however, that a decline in Parent's stock price, in and of itself, will not be
deemed to have a Material Adverse Effect on Parent. For purposes of determining
whether there has been a Material Adverse Effect, all of the following, in and
of themselves and in combination with the others, will be disregarded: (i) any
change, effect, event or occurrence resulting from this Agreement or the
transactions contemplated hereby or the announcement thereof; (ii) any change,
effect, event or occurrence relating to the economy or securities markets of the
United States or any other region in general; (iii) any change, effect, event or
occurrence relating to the new media industry in general, and not specifically
related to any of the Acquired Corporations or Parent and its Subsidiaries; and
(iv) the failure to meet the predictions of securities analysts.
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Materials of Environmental Concern. "Materials of Environmental Concern"
means chemicals, pollutants, contaminants, wastes, toxic substances, petroleum
and petroleum products and any other substance that is now or hereafter
regulated by any Environmental Law or that is otherwise a danger to health,
reproduction or the environment.
Merger Consideration Shares. "Merger Consideration Shares" means an
aggregate of 15,000,000 shares of Parent Common Stock, subject to adjustment as
provided in Sections 1.5 (b), 1.5(d) and 1.10. For avoidance of doubt, the
Merger Consideration Shares include the Stevenson Compensation Shares and any
shares of Parent Common Stock issuable upon exercise of Company Options or
Company Warrants assumed by Parent in connection with the Merger or any stock
options or warrants issued by Parent in substitution for Company Options or
Company Warrants as provided in Section 5.5.
Offline Publishing Assets. "Offline Publishing Assets" means the assets
associated the Acquired Corporations employed in the Offline Publishing Business
and not employed in any other aspect of the business of the Acquired
Corporations.
Offline Publishing Business. "Offline Publishing Business" refers to the
operations of the Company's print publishing division, the assets of which
include: (a) the Company's copyright rights pertaining to the publications
created pursuant to the contracts listed on Part 2.5(r) of the Company
Disclosure Schedule (the "Works"); (b) all inventory of the Works in the control
or possession of the Company; (c) all film plates and other production materials
inventory for the Works in the control or possession of the Company; (d) all
furniture, fixtures, owned equipment and personal property of the Company
located in its Kingston, NY, office; (e) all office supplies on hand for the
Publishing Division; and (f) all claims against any parties related to the TS
Publishing assets.
Parent Common Stock. "Parent Common Stock" means the Common Stock, $.001
par value per share, of Parent.
Parent Disclosure Schedule. "Parent Disclosure Schedule" means the
disclosure schedule (dated as of the date of this Agreement) that has been
prepared by Parent and that has been delivered by Parent to the Company on the
date of this Agreement.
Permitted Lien. "Permitted Lien" means any (a) lien for current taxes not
yet due and payable, (b) lien that does not (in any individual case or in the
aggregate) materially detract from the value of the assets subject thereto or
materially impair the operations of any of the Acquired Corporations, or (iii)
mechanics or similar lien arising by operation of law securing obligations not
yet due and payable or in respect of which adequate reserves have been
established.
Person. "Person" means any individual, Entity or Governmental Body.
Proprietary Asset. "Proprietary Asset" means any: (a) patent, patent
application, trademark (whether registered or unregistered), trademark
application, trade name, fictitious business name, service mark (whether
registered or unregistered), service mark application, copyright (whether
registered or unregistered), copyright application, domain name, maskwork,
maskwork application, trade secret, know-how, customer list, computer software,
computer program, source code, proprietary algorithm, invention, proprietary
product, technology, proprietary right or other intellectual property right or
intangible asset; or (b) right to use or exploit any of the foregoing.
Related Party. "Related Party" means any: (a) individual who is, or who has
been at any time since the Audited Balance Sheet Date, a director or officer of
the Company; (b) member of the immediate family of each of the individuals
referred to in clause (a) above; and (c) trust or other Entity (other than the
Company) in which any one of the individuals referred to in clauses (a) and (b)
above holds (or in which more than one of such individuals collectively hold),
beneficially or otherwise, a material voting, proprietary or equity interest.
Representatives. "Representatives" means officers, directors, employees,
agents, attorneys, accountants, advisors and representatives.
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SEC. "SEC" means the United States Securities and Exchange Commission.
Securities Act. "Securities Act" means the Securities Act of 1933, as
amended.
Stevenson Compensation Shares. "Stevenson Compensation Shares" means the
shares of Parent Common Stock payable to Gary Stevenson by reason of the Merger
under the Compensation and Equity Rights Agreement dated July 20, 2000 between
the Company and Gary Stevenson.
Subsidiary. An entity will be deemed to be a "Subsidiary" of another Person
if such Person directly or indirectly owns, beneficially or of record, (a) an
amount of voting securities of or other interests in such Entity that is
sufficient to enable such Person to elect a majority of the members of such
Entity's board of directors or other governing body, or (b) at least 50% of the
outstanding equity or financial interests of such Entity.
Tax. "Tax" means any tax (including any income tax, franchise tax, capital
gains tax, gross receipts tax, value-added tax, surtax, estimated tax,
unemployment tax, excise tax, ad valorem tax, transfer tax, stamp tax, sales
tax, use tax, property tax, business tax, withholding tax or payroll tax), levy,
assessment, tariff or duty (including any customs duty), and any related charge
or amount (including any fine, penalty or interest), imposed, assessed or
collected by or under the authority of any Governmental Body.
Tax Return. "Tax Return" means any return (including any information
return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information filed
with or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment, collection
or payment of any Tax or in connection with the administration, implementation
or enforcement of or compliance with any Legal Requirement relating to any Tax.
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EXHIBIT B
MERGER CONSIDERATION AND EXCHANGE RATIOS
A. The following exchange ratios shall be calculated by reference to the
formula in paragraph B and the definitions in paragraph C of this Exhibit B.
1. Senior Employee Preferred Stock Exchange Ratio of Parent Common Stock
received for each Senior Employee Preferred Stock share equals:
[Senior Employee Preferred Stock Amount] divided by [Senior Employee
Preferred Stock]
2. Series A Preferred Stock Exchange Ratio of Parent Common Stock received
for each Series A Preferred Stock Unit equals:
[Series A Preferred Stock Amount] divided by [Series A Preferred Stock
Units]
3. Series B Preferred Stock Exchange Ratio of Parent Common Stock received
for each Series B Preferred Stock Unit equals:
[Series B Preferred Stock Amount] divided by [Series B Preferred Stock
Units]
4. Series C Preferred Stock Exchange Ratio of Parent Common Stock received
for each Series C Preferred Stock Unit equals:
[Series C Preferred Stock Amount] divided by [Series C Preferred Stock
Units]
5. Series C1 Preferred Stock Exchange Ratio of Parent Common Stock
received for each Series C1 Preferred Stock Unit equals:
[Series C1 Preferred Stock Amount] divided by [Series C1 Preferred
Stock Units]
6. Series D Preferred Stock Exchange Ratio of Parent Common Stock received
for each Series D Preferred Stock Unit equals:
[Series D Preferred Stock Amount] divided by [Series D Preferred Stock
Units]
7. Series D1 Preferred Stock Exchange Ratio of Parent Common Stock
received for each Series D1 Preferred Stock Unit equals:
[Series D1 Preferred Stock Amount] divided by [Series D1 Preferred
Stock Units]
8. Series E Preferred Stock Exchange Ratio of Parent Common Stock received
for each Series E Preferred Stock share equals:
[Series E Preferred Stock Amount] divided by [Series E Preferred Stock]
9. Series E Preferred Stock Unit Maximum Amount Exchange Ratio per Series
E Preferred Stock Unit equals:
[Series E Preferred Stock Unit Maximum Amount] divided by [Series E
Preferred Stock Units]
10. Common Stock Exchange Ratio per Common Stock share equals:
[Common Stock Amount] divided by [Common Stock]
B. The Merger Consideration Shares shall be allocated among and distributed
to the holders of the Company Stock in the priorities set forth below:
1. Merger Consideration Shares:
Less: Stevenson Compensation Shares:
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2. Shares Available for Distribution, if any:
Less: Senior Employee Preferred Stock Amount:(1)
3. Shares Available for Distribution, if any:
Less: Series A Preferred Stock Amount:
4. Shares Available for Distribution, if any:
Less: Senior Preferred Stock Amount:
5. Shares Available for Distribution, if any:
Less: Series E Preferred Stock Amount:
6. Shares Available for Distribution, if any:
Less: Series E Preferred Stock Maximum Amount:
7. Common Stock Amount:
C. The Exchange Ratios shall be determined in accordance with the formulas
set forth above in paragraph B and by reference to the following defined terms.
Capitalized terms not defined in this Exhibit shall have the same definitions
and meanings ascribed to such terms in the Agreement.
1. Merger Consideration Shares means an aggregate of 15,000,000 shares of
Parent Common Stock, subject to adjustment as set forth in the
Agreement.
2. Senior Employee Preferred Stock means the number of shares of Senior
Employee Preferred Stock which may be acquired pursuant to options
granted and vested under the 2000 Stock Plan which remain outstanding
as of the Effective Date.
3. Senior Employee Preferred Stock Amount means a number of shares of
Parent Common Stock equal to the product of (i) the Merger
Consideration Shares, (ii) eight (8%) percent and (iii) the fraction
(expressed as a percentage) of which the numerator is the Senior
Employee Preferred Stock and the denominator is 3,200,000.
4. Series A Preferred Stock means the number of shares of the Company's
Series A Redeemable Preferred Stock issued and outstanding and the
number of shares of the Company's Series A Redeemable Preferred Stock
issuable upon exercise of options or warrants outstanding as of the
Effective Date.
5. Series A Preferred Stock Amount means the amount if any, remaining
after payment of the Stevenson Compensation Shares and Senior Employee
Preferred Stock Amount, in an amount of shares of Parent Common Stock
equal to the quotient of (i) the product of (A) the Series A Preferred
Stock and (B) the Series A Liquidation Preference and (ii) the
Effective Date Value.
6. Series A Liquidation Preference means an aggregate amount equal to
$10.00 for each share of Series A Preferred Stock outstanding (as
defined in Definition 4), plus accrued but unpaid dividends at the rate
of $1.20 per share per annum accruing each year beginning on the date
of issuance of such shares of Series A Preferred Stock.
7. Series A Preferred Stock Units means the aggregate number determined by
taking the quotient of (i) the Series A Liquidation Preference for each
share of Series A Preferred Stock and (ii) $10.00. The Series A
Preferred Stock Amount shall be allocated among the holders of Series A
Preferred Stock by reference to the number of Units held by each such
holder in relation to the total number of Series A Preferred Stock
Units.
8. Series B Preferred Stock means the number of shares of the Company's
Series B Convertible Preferred Stock issued and outstanding and the
number of shares of the Company's Series B
---------------
(1) Only to the extent that such shares are authorized by the Certificate of
Incorporation of Total Sports.
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Convertible Preferred Stock issuable upon exercise of options or
warrants outstanding as of the Effective Date.
9. Series B Preferred Stock Amount means a number of shares of Parent
Common Stock, if any, remaining after payment of the Stevenson
Compensation Shares, Senior Employee Preferred Stock Amount and Series
A Preferred Stock Amount, in an amount equal to the quotient of (i) the
amount to be distributed to the holders of Series B Preferred Stock
calculated under the Senior Preferred Stock Amount and designated as
the Series B Liquidation Amount and assuming the exercise in full of
all warrants to purchase the Company's Series B Preferred Stock which
remain outstanding as of the Effective Date and (ii) the Effective Date
Value.
10. Series B Liquidation Preference means an aggregate amount equal to
$4.492 for each share of Series B Preferred Stock (as set forth in
Definition 8), plus accrued but unpaid dividends at the rate of $0.54
per share per annum accruing each year beginning on the date of
issuance of such shares of Series B Preferred Stock.
11. Series B Conversion Amount means the value of the portion of Merger
Consideration Shares based upon the Effective Date Value which would
have been paid with respect to the aggregate number of shares of Common
Stock issuable upon conversion of the Series B Preferred Stock,
assuming the conversion on a one-to-one basis of all Senior Preferred
Stock immediately prior to the Effective Date.
12. Series B Preferred Stock Units means the aggregate number determined by
taking the quotient of (i) the Series B Liquidation Preference for each
share of Series B Preferred Stock and (ii) $4.492; provided, however if
a holder of Series B Preferred Stock receives the Series B Conversion
Amount in lieu of the Series B Liquidation Preference for its Series B
Preferred Stock, the number of Units held by such holder shall be equal
to the number of shares of Series B Preferred Stock held by such
holder. The Series B Preferred Stock Amount shall be allocated among
the holders of Series B Preferred Stock by reference to the number of
Units held by each such holder in relation to the total number of
Series B Preferred Stock Units.
13. Series C Preferred Stock means the number of shares of the Company's
Series C Convertible Preferred Stock issued and outstanding and the
number of shares of Series C Preferred Stock issuable upon exercise of
options or warrants outstanding as of the Effective Date.
14. Series C Preferred Stock Amount means a number of shares of Parent
Common Stock, if any, remaining after payment of the Stevenson
Compensation Shares, Senior Employee Preferred Stock Amount and Series
A Preferred Stock Amount, in an amount equal to the quotient of (i) the
amount to be distributed to the holders of Series C Preferred Stock
calculated under the Senior Preferred Stock Amount and designated as
the Series C Liquidation Amount divided by (ii) the Effective Date
Value.
15. Series C Liquidation Preference means an aggregate amount equal to
$7.106 for each share of Series C Preferred Stock (as set forth in
Definition 13) plus accrued but unpaid dividends at the rate of $0.85
per share per annum accruing each year beginning on the date of
issuance of such shares of Series C Preferred Stock.
16. Series C Conversion Amount means the value of the portion of Merger
Consideration Shares based upon the Effective Date Value which would
have been paid with respect to the aggregate number of shares of Common
Stock issuable upon conversion of the Series C Preferred Stock,
assuming the conversion on a one-to-one basis of all outstanding Senior
Preferred Stock immediately prior to the Effective Date.
17. Series C Preferred Stock Units means the aggregate number determined by
taking the quotient of (i) the Series C Liquidation Preference for each
share of Series C Preferred Stock and (ii) $7.106; provided, however if
a holder of Series C Preferred Stock receives the Series C Conversion
Amount in lieu of the Series C Liquidation Preference for its Series C
Preferred
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Stock, the number of Units held by such holder shall be equal to the
number of shares of Series C Preferred Stock held by such holder. The
Series C Preferred Stock Amount shall be allocated among the holders of
Series C Preferred Stock by reference to the number of Units held by
each such holder in relation to the total number of Series C Preferred
Stock Units.
18. Series C1 Preferred Stock means the number of shares of the Company's
Series C1 Convertible Preferred Stock issued and outstanding and the
number of shares of Series C1 Preferred Stock issuable upon exercise of
options or warrants outstanding as of the Effective Date.
19. Series C1 Preferred Stock Amount means a number of shares of Parent
Common Stock, if any, remaining after payment of the Stevenson
Compensation Shares, Senior Employee Preferred Stock Amount and Series
A Preferred Stock Amount, in an amount equal to the quotient of (i) the
amount to be distributed to the holders of Series C1 Preferred Stock
calculated under the Senior Preferred Stock Amount and designated as
the Series C1 Liquidation Amount and (ii) the Effective Date Value.
20. Series C1 Liquidation Preference means an aggregate amount equal to
$9.49 for each share of Series C1 Preferred Stock (as set forth in
Definition 18) plus accrued but unpaid dividends at the rate of $1.14
per share per annum accruing each year beginning on the date of
issuance of such shares of Series C1 Preferred Stock.
21. Series C1 Conversion Amount means the value of the portion of Merger
Consideration Shares based upon the Effective Date Value which would
have been paid with respect to the aggregate number of shares of Common
Stock issuable upon conversion of the Series C1 Preferred Stock
assuming the conversion on a one-to-one basis of all outstanding Senior
Preferred Stock immediately prior to the Effective Date.
22. Series C1 Preferred Stock Units means the aggregate number determined
by taking the quotient of (i) the Series C1 Liquidation Preference for
each share of Series C1 Preferred Stock and (ii) $9.49; provided,
however, if a holder of Series C1 Preferred Stock receives the Series
C1 Conversion Amount in lieu of the Series C1 Liquidation Preference
for its Series C1 Preferred Stock, the number of Units held by such
holder shall be equal to the number of shares of Series C1 Preferred
Stock held by such holder. The Series C1 Preferred Stock Amount shall
be allocated among the holders of Series C1 Preferred Stock by
reference to the number of Series C1 Preferred Stock Units held by each
such holder in relation to the total number of Series C1 Preferred
Stock Units.
23. Series D Preferred Stock means the number of shares of the Company's
Series D Convertible Preferred Stock issued and outstanding and the
number of shares of the Company's Series D Convertible Preferred Stock
issuable upon exercise of options or warrants outstanding as of the
Effective Date.
24. Series D Preferred Stock Amount means a number of shares of Parent
Common Stock, if any, remaining after payment of the Stevenson
Compensation Shares, Senior Employee Preferred Stock Amount and Series
A Preferred Stock Amount, in an amount equal to the quotient of (i) the
amount to be distributed to the holders of Series D Preferred Stock and
calculated under the Senior Preferred Stock Amount as the Series D
Liquidation Amount and assuming the exercise in full of all warrants to
purchase the Company's Series D Preferred Stock which remain
outstanding as of the Effective Date and (ii) the Effective Date Value.
25. Series D Liquidation Preference means an aggregate amount equal to
$33.18 for each share of Series D Preferred Stock (as set forth in
Definition 23), plus accrued but unpaid dividends at the rate of $1.99
per share per annum accruing each year beginning on the date of
issuance of such shares of Series D Preferred Stock.
26. Series D Conversion Amount means the value of the portion of Merger
Consideration Shares based upon the Effective Date Value which would
have been paid with respect to the aggregate
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number of shares of Common Stock issuable upon Conversion of the Series
D Preferred Stock assuming the conversion on a one-to-one basis of all
outstanding Senior Preferred Stock immediately prior to the Effective
Date.
27. Series D Preferred Stock Units means the aggregate number determined by
taking the quotient of (i) the Series D Liquidation Preference for each
share of Series D Preferred Stock and (ii) $33.18; provided, however,
if a holder of Series D Preferred Stock receives the Series D
Conversion Amount in lieu of the Series D Liquidation Preference for
its Series D Preferred Stock, the number of Units held by such holder
shall be equal to the number of shares of Series D Preferred Stock held
by such holder. The Series D Preferred Stock Amount shall be allocated
among the holders of Series D Preferred Stock by reference to the
number of Series D Preferred Stock Units held by each such holder in
relation to the total number of Series D Preferred Stock Units.
28. Series D1 Preferred Stock means the number of shares of the Company's
Series D1 Convertible Preferred Stock issued and outstanding and the
number of shares of the Company's Series D1 Convertible Preferred Stock
issuable upon exercise of options or warrants outstanding as of the
Effective Date.
29. Series D1 Preferred Stock Amount means a number of shares of Parent
Common Stock, if any, remaining after payment of the Stevenson
Compensation Shares, Senior Employee Preferred Stock Amount and Series
A Preferred Stock Amount, in an amount equal to the quotient of (i) the
amount to be distributed to the holders of Series D1 Preferred Stock
and calculated under the Senior Preferred Stock Amount as the Series D1
Liquidation Amount and assuming the exercise in full of all warrants to
purchase the Company's Series D1 Preferred Stock which remain
outstanding as of the Effective Date and (ii) the Effective Date Value.
30. Series D1 Liquidation Preference means an aggregate amount equal to
$16.59 for each share of Series D1 Preferred Stock (as set forth in
Definition 26), plus accrued but unpaid dividends at the rate of $1.99
per share per annum accruing each year beginning on the date of
issuance of such shares of Series D1 Preferred Stock.
31. Series D1 Conversion Amount means the value of the portion of Merger
Consideration Shares based upon the Effective Date Value which would
have been paid with respect to the aggregate number of shares of Common
Stock issuable upon conversion of the Series D1 Preferred Stock
assuming the conversion on a one-to-one basis of all outstanding Senior
Preferred Stock immediately prior to the Effective Date.
32. Series D1 Preferred Stock Units means the aggregate number determined
by taking the quotient of (i) the Series D1 Liquidation Preference for
each share of Series D1 Preferred Stock and (ii) $16.59; provided,
however, if a holder of Series D1 Preferred Stock receives the Series
D1 Conversion Amount in lieu of the Series D1 Liquidation Preference
for its Series D1 Preferred Stock, the number of Units held by such
holder shall be equal to the number of shares of Series D1 Preferred
Stock held by such holder. The Series D1 Preferred Stock Amount shall
be allocated among the holders of Series D1 Preferred Stock by
reference to the number of Series D1 Preferred Stock Units held by each
such holder in relation to the total number of Series D1 Preferred
Stock Units.
33. Series E Preferred Stock means the number of shares of the Company's
Series E Convertible Preferred Stock issued and outstanding and the
number of shares of the Company's Series E Preferred Stock issuable
upon exercise of options or warrants outstanding as of the Effective
Date.
34. Series E Preferred Stock Amount means the number of shares of Parent
Common Stock, if any, remaining after payment of the Stevenson
Compensation, Senior Employee Preferred Stock Amount, Series A
Preferred Stock Amount and Senior Preferred Stock Amount, in an amount
equal to the quotient of (i) the product of (A) the amount, if any, by
which $32.11 exceeds the
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per share amount, if any, distributable on each share of Common Stock
and (B) the Series E Preferred Stock, and (ii) the Effective Date
Value, where the Common Stock Amount is calculated by assuming the
Series E Preferred Stock Amount to be the quotient of (i) the product
of (A) $32.11 and (B) the Series E Preferred Stock and (ii) the
Effective Date Value.
35. Series E Preferred Stock Unit means the number of shares of Series E
Preferred Stock held by the holders of Common Stock.
36. Series E Preferred Stock Unit Maximum Amount means an amount, if any,
remaining after payment of the Stevenson Compensation, Senior Employee
Preferred Stock Amount, Series A Preferred Stock Amount and Senior
Preferred Stock Amount, in an amount equal to the quotient of (i) the
product of (A) $32.11, minus any amounts distributed with respect to
the Series E Preferred Stock or the per share amount distributable on
each share of Common Stock, and (B) the Series E Preferred Stock Units
and (ii) the Effective Date Value.
37. Common Stock means the number of shares of the Company's Common Stock
issued and outstanding and the number of shares of the Company's Common
Stock issuable upon the exercise of options and warrants outstanding as
of the Effective Date.
38. Common Stock Amount means the number of Merger Consideration Shares, if
any, remaining to be distributed after payment of the Stevenson
Compensation Shares, Senior Employee Preferred Stock Amount, the Series
A Preferred Stock Amount, the Senior Preferred Stock Amount, the Series
E Preferred Stock Amount and the Series E Preferred Stock Unit Minimum
Amount.
39. Effective Date Value means the average of the last sales price of
Parent Common Stock quoted on the NASDAQ Stock Market for the five
consecutive business days ending on the day immediately prior to the
Effective Date.
40. Stevenson Compensation Shares means the aggregate number of the Merger
Consideration Shares payable to Gary Stevenson pursuant to his
agreement with the Company as of the Effective Time.
41. Senior Preferred Stock Amount means the number of Merger Consideration
Shares, if any, remaining after payment of the Stevenson Compensation
Shares, Senior Employee Preferred Stock Amount, Series A Preferred
Stock Amount and payable to all Senior Preferred Stock, in an amount
equal to the greater of the quotient of (i) (A) the Senior Preferred
Stock Liquidation Preference, or (B) the Senior Conversion Amount and
(ii) the Effective Date Value; provided, however, that if (A) the
amount of the Senior Preferred Stock Liquidation Preference is greater
than the amount of the Senior Conversion Amount, and (B) the Effective
Date Value of the Merger Consideration Shares distributable to the
holders of Senior Preferred Stock is less than the Senior Preferred
Stock Liquidation Preference, then the amount of Merger Consideration
Shares available to be distributed to the holders of Senior Preferred
Stock shall be distributed ratably among the holders of Senior
Preferred Stock in proportion to the Series B Liquidation Preference,
Series C Liquidation Preference, Series C1 Liquidation Preference,
Series D Liquidation Preference and Series D1 Liquidation Preference.
Notwithstanding the foregoing, in the event that the Senior Conversion
Amount exceeds the Senior Preferred Stock Liquidation Preference, but
the per share amount determined with respect to the Senior Conversion
Amount is less than the per share amount payable under the Series B
Liquidation Preference, the Series C Liquidation Preference, the Series
C1 Liquidation Preference, the Series D Liquidation Preference or the
Series D1 Liquidation Preference, individually, then any holder of
Senior Preferred Stock may elect to receive its respective liquidation
preference for such holder's Senior Preferred Stock in lieu of the
Senior Conversion Amount and the amount payable with respect to any
non-electing holders of Senior Preferred Stock shall be adjusted to
reflect the priority of such payment. (For example, if the Senior
Conversion Amount equates to a Series D Conversion Amount equal to
$28.00 per share, the Series D Liquidation Preference per share would
be greater than this value. In this scenario, the holder of Series D
Preferred Stock could elect to
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receive the Series D Liquidation Preference in lieu of the Series D
Conversion Amount; if the holders so elected, the Senior Conversion
Amount would be reduced by the value of the Series D Liquidation
Preference.) Each amount calculated under this definition with respect
to the Series B Preferred Stock, the Series C Preferred Stock, the
Series C1 Preferred Stock, the Series D Preferred Stock, and the Series
D1 Preferred Stock and included in this Senior Preferred Stock Amount
shall be designated respectively as the Series B Liquidation Amount,
the Series C Liquidation Amount, the Series C1 Liquidation Amount, the
Series D Liquidation Amount and the Series D1 Liquidation Amount.
42. Senior Preferred Stock Liquidation Preference means the sum of (i) the
Series B Liquidation Preference; (ii) the Series C Liquidation
Preference; (iii) the Series C1 Liquidation Preference; (iv) the Series
D Liquidation Preference and (v) the Series D1 Liquidation Preference.
43. Senior Conversion Amount means the sum of (i) the Series B Conversion
Amount; (ii) the Series C Conversion Amount; (iii) the Series C1
Conversion Amount; (iv) the Series D Conversion Amount and (v) the
Series D1 Conversion Amount.
44. Senior Preferred Stock means collectively the Series B Preferred Stock,
the Series C Preferred Stock the Series C1 Preferred Stock, the Series
D Preferred Stock and the Series D1 Preferred Stock.
45. Company Stock means collectively the Common Stock, Senior Employee
Preferred Stock, Senior Preferred Stock and Series E Preferred Stock,
including shares of Company Stock issuable upon exercise of outstanding
options or warrants.
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EXHIBIT C
CLOSING BALANCE SHEET PRINCIPLES
1. For purposes of Section 1.10 of the Agreement and this Exhibit C, "Net
Deficit" means the total assets of the Acquired Corporations minus the total
liabilities of the Acquired Corporations, in each case on a consolidated basis,
which total liabilities will include, without limitation, any current
liabilities, long term liabilities, redeemable preferred stock, and any other
commitments and contingencies requiring accrual in accordance with generally
accepted accounting principles.
2. Except as otherwise set forth in this Exhibit C, the Closing Balance
Sheet will be prepared in accordance with generally accepted accounting
principles.
3. Except as otherwise set forth in this Exhibit C, the Closing Balance
Sheet will reflect all assets and liabilities of the Acquired Corporations that
arise upon or as a consequence of the Merger, except that the Closing Balance
Sheet:
(a) will be prepared as if the Acquired Corporations had not paid or
incurred liability for any Company Transaction Expenses;
(b) will include all liabilities and adjustments necessary to fairly
reflect (1) if the Offline Publishing Business is divested or discontinued
on or prior to the Closing Date, the effects of such divestiture or
discontinuation, or (2) if the Offline Publishing Business is not divested
or discontinued on or prior to the Closing Date, the effects of the
discontinuation of such business effective as of the Closing Date;
(c) will not include any liabilities in respect of the Patent Claims
(as defined in Section 9.4); and
(d) will disregard (i) any shares of Parent Common Stock received by
the Company in connection with Parent's purchase of the Company's
membership interest in Golf.com, L.L.C. and (ii) any receivables from
Parent under the Production Services Agreement dated June 8, 2000 between
Golf.com, L.L.C. and the Company.
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EXHIBIT D
FORM OF OPINION OF WYRICK ROBBINS YATES & PONTON LLP
Agreements -- Merger Agreement and Parent Stockholder Voting Agreements
1. The Company has been duly incorporated and is a validly existing
corporation in good standing under the laws of the State of Delaware.
2. The Company has the requisite corporate power to own its property and
assets, to conduct its business as such business is currently being
conducted, to enter into the Agreements and to consummate the
transactions contemplated thereby. To our knowledge, the Company is
qualified as a foreign corporation to do business and is in good
standing in each jurisdiction in the United States in which the
ownership of its property or the conduct of its business requires such
qualification and where the failure to qualify would have a Material
Adverse Effect on the Company.
3. All corporate action required to be taken on the part of the Company and
its stockholders to authorize the Agreements and consummate the
transaction contemplated thereby has been taken.
4. Each of the Agreements has been duly and validly authorized, executed
and delivered by the Company and constitutes a valid and binding
agreement of the Company, enforceable against the Company in accordance
with its terms, except as enforcement may be limited by applicable laws
and except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, arrangement, moratorium or other similar
laws affecting creditors' rights, and subject to general equity
principles and to limitations on availability of equitable relief,
including specific performance and injunctive relief.
5. The execution and delivery of the Agreements and the consummation by the
Company of the merger contemplated thereby are not prohibited by, and
will not violate or conflict with (i) any provision of the certificate
of incorporation or bylaws of the Company, (ii) any resolution adopted
by the Company's stockholders, the Company's board of directors or any
committee of the Company's board of directors, (iii) to the best of our
knowledge, subject to receipt by the Company of the third-party consents
identified on the Company Disclosure Schedule, any material Contract of
the Company or, to the best of our knowledge, any of its Subsidiaries,
except as would not be expected to have a Material Adverse Effect on the
Company, or (iv) any law, rule or regulation, the violation or
contravention of which would be expected to have a Material Adverse
Effect on the Company.
6. To our knowledge, except as set forth in the Disclosure Schedule, there
are no civil, criminal or administrative actions, suits or proceedings
pending or threatened against the Company before any court, arbitrator,
or administrative, governmental or regulatory authority, domestic or
foreign, that question the validity or enforceability of the Agreements
or the right of the Company to enter into the Agreements or could have a
Material Adverse Effect on the Company.
7. Immediately prior to the Effective Time, the authorized capital stock of
the Company consisted of (i) 20,000,000 shares of Common Stock and (ii)
7,500,000 shares of Company Preferred Stock, of which 761,903 are
undesignated Preferred Stock (none of which are outstanding), 125,000
are designated Series A Redeemable Preferred Stock, par value $10.00 per
share, 518,841 are designated Series B Convertible Preferred Stock, par
value $4.492 per share, 1,418,200 are designated Series C Convertible
Preferred Stock, par value $.001 per share, 630,756 are designated
Series C1 Convertible Preferred Stock, par value $.001 per share,
2,230,260 are designated Series D Convertible Preferred Stock, par value
$.001 per share, 1,003,617 are designated Series D1 Convertible
Preferred Stock, par value $.001 per share, and 811,423 are designated
Series E Convertible Preferred Stock, par value $.001 per share, of the
Company. 125,000, 445,263, 1,418,200, 630,756, 2,140,873, 0, and 811,423
shares of Series A Redeemable Preferred Stock, Series B Convertible
Preferred Stock, Series C Convertible Preferred Stock, Series C1
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Convertible Preferred Stock, Series D Convertible Preferred Stock,
Series D1 Convertible Preferred Stock and Series E Convertible Preferred
Stock, respectively, have been issued and are outstanding as of the date
of this Agreement, based upon the Company's records, which are to our
knowledge, accurate. To our knowledge, based upon a certificate of an
officer of the Company, all of the outstanding shares of capital stock
of the Company which have been issued have been duly authorized and
validly issued, and are fully paid and non-assessable. To our knowledge,
all of the outstanding shares of capital stock of the Company were
issued in transactions exempt from the registration requirements of
Section 5 of the Securities Act of 1933, as amended. To our knowledge,
except as set forth in the Disclosure Schedule, none of the outstanding
shares of the Company Common Stock or Company Preferred Stock is subject
to any repurchase option or restrictions on transfer in favor of, or
imposed by, the Company (other than restrictions on transfer imposed by
virtue of applicable federal and state securities laws). Except as set
forth in the Agreement and on the Disclosure Schedule, to our knowledge,
there are no options, warrants, conversion privileges, preemptive rights
or other rights presently outstanding to purchase any of the authorized
but unissued capital stock of the Company.
9. Immediately prior to the Closing Date, except as set forth in the
Disclosure Schedule, to our knowledge there was no: (a) outstanding
subscription, option, call, warrant or right (whether or not currently
exercisable) to acquire from the Company any authorized but unissued
shares of the capital stock or other securities of the Company; (b)
outstanding security, instrument or obligation that is or may become
convertible into or exchangeable for any shares of the capital stock or
other securities of the Company or (c) contract under which the Company
is or may become obligated to sell or otherwise issue any shares of its
capital stock or any other securities.
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EXHIBIT E
FORM OF OPINION OF COOLEY GODWARD LLP
We have acted as counsel for Quokka Sports, Inc., a Delaware corporation
(the "Company"), in connection with that certain Agreement and Plan of Merger
and Reorganization (the "Agreement"), dated as of July 20, 2000, by and between
the Company and Total Sports, Inc., a Delaware corporation ("Seller"). We are
rendering this opinion pursuant to Section 7.5(b) of the Agreement. Except as
otherwise defined herein, capitalized terms used but not defined herein have the
respective meanings given to them in the Agreement.
In connection with this opinion, we have examined and relied upon the
representations and warranties as to factual matters contained in and made
pursuant to the Agreement by the various parties and originals or copies
certified to our satisfaction, of such records, documents, certificates,
opinions, memoranda and other instruments as in our judgment are necessary or
appropriate to enable us to render the opinion expressed below. Where we render
an opinion "to the best of our knowledge" or concerning an item "known to us" or
our opinion otherwise refers to our knowledge, it is based solely upon (i) an
inquiry of attorneys within this firm who perform legal services for the
Company, (ii) receipt of a certificate executed by an officer of the Company
covering such matters, and (iii) such other investigation, if any, that we
specifically set forth herein.
In rendering this opinion, we have assumed: the genuineness and
authenticity of all signatures on original documents; the authenticity of all
documents submitted to us as originals; the conformity to originals of all
documents submitted to us as copies; the accuracy, completeness and authenticity
of certificates of public officials; and the due authorization, execution and
delivery of all documents (except the due authorization, execution and delivery
by the Company of the Agreement, the Escrow Agreement and the Company
Stockholder Voting Agreements (collectively, the "Agreements")), where
authorization, execution and delivery are prerequisites to the effectiveness of
such documents. We have also assumed: that all individuals executing and
delivering documents had the legal capacity to so execute and deliver; that you
have received all documents you were to receive under the Agreements; that the
Agreement is an obligation binding upon you; if you are a corporation or other
entity, that you have filed any required California franchise or income tax
returns and have paid any required California franchise or income taxes; and
that there are no extrinsic agreements or understandings among the parties to
the Agreements that would modify or interpret the terms of the Agreements or the
respective rights or obligations of the parties thereunder.
Our opinion is expressed only with respect to the federal laws of the
United States of America, the laws of the State of California and the General
Corporation Law of Delaware. Our opinion in paragraph 4 below as to the
validity, binding effect and enforceability of the Agreements is premised upon
the result that would obtain if a California court were to apply the internal
laws of the State of California to the interpretation and enforcement of the
Agreements. We express no opinion as to whether the laws of any particular
jurisdiction apply, and no opinion to the extent that the laws of any
jurisdiction other than those identified above are applicable to the subject
matter hereof. We are not rendering any opinion as to compliance with any
antifraud law, rule or regulation relating to securities, or to the sale or
issuance thereof.
With regard to our opinion in paragraph 8 below, we have examined and
relied upon a certificate executed by an officer of the Company, to the effect
that the consideration for all outstanding shares of capital stock of the
Company was received by the Company in accordance with the provisions of the
applicable Board of Directors resolutions and any agreement relating to the
issuance of such shares, and we have undertaken no independent verification with
respect thereto.
On the basis of the foregoing, in reliance thereon and with the foregoing
qualifications, we are of the opinion that:
4. The Company has been duly incorporated and is a validly existing
corporation in good standing under the laws of the State of Delaware.
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5. The Company has the requisite corporate power to own its property and
assets, to conduct its business as such business is currently being conducted,
to enter into the Agreements and to consummate the transactions contemplated
thereby. To our knowledge, the Company is qualified as a foreign corporation to
do business and is in good standing in each jurisdiction in the United States in
which the ownership of its property or the conduct of its business requires such
qualification and where the failure to qualify would have a Material Adverse
Effect on the Company.
6. All corporate action required to be taken on the part of the Company to
authorize the Agreements and consummate the transaction contemplated thereby has
been taken.
7. Each of the Agreements has been duly and validly authorized, executed
and delivered by the Company and constitutes a valid and binding agreement of
the Company, enforceable against the Company in accordance with its terms,
except as enforcement may be limited by applicable laws and except as
enforcement may be limited by applicable bankruptcy, insolvency, reorganization,
arrangement, moratorium or other similar laws affecting creditors' rights, and
subject to general equity principles and to limitations on availability of
equitable relief, including specific performance and injunctive relief.
8. The execution and delivery of the Agreements and the consummation by the
Company of the merger contemplated thereby are not prohibited by, and will not
violate or conflict with (i) any provision of the certificate of incorporation
or bylaws of the Company, (ii) any resolution adopted by the Company's
stockholders, the Company's board of directors or any committee of the Company's
board of directors, (iii) to the best of our knowledge, any material Contract of
the Company or, to the best of our knowledge, any of its Subsidiaries, except as
would not be expected to have a Material Adverse Effect on the Company, or (iv)
any law, rule or regulation, the violation or contravention of which would be
expected to have a Material Adverse Effect on the Company.
9. To our knowledge, except as set forth in the Parent Disclosure Schedule,
there are no civil, criminal or administrative actions, suits or proceedings
pending or threatened against the Company before any court, arbitrator, or
administrative, governmental or regulatory authority, domestic or foreign, that
question the validity or enforceability of the Agreements or the right of the
Company to enter into the Agreements or could have a Material Adverse Effect on
the Company.
10. The shares of Parent Common Stock to be issued pursuant to the
Agreement have been duly authorized, and upon issuance and delivery against
payment therefor in accordance with the terms of the Agreement, will be validly
issued, outstanding, fully paid and nonassessable.
11. Immediately prior to the Effective Time, the authorized capital stock
of the Company consisted of (i) 250,000,000 shares of Common Stock, of which
are issued and outstanding based upon the Company's records,
which are to our knowledge, accurate, and (ii) 10,000,000 shares of Preferred
Stock, none of which are issued and outstanding. To our knowledge, all of the
outstanding shares of capital stock of the Company which have been issued have
been duly authorized and validly issued, and are fully paid and non-assessable.
This opinion is intended solely for your benefit and is not to be made
available to or be relied upon by any other person, firm, or entity without our
prior written consent.
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EXHIBIT F
FORM OF ESCROW AGREEMENT
THIS ESCROW AGREEMENT ("Agreement") is made and entered into as of
, 2000 by and among: QUOKKA SPORTS, INC., a Delaware corporation
("Parent") , as the designated company agent appointed pursuant
to the Merger Agreement ("Designated Company Agent"), and STATE STREET BANK AND
TRUST COMPANY OF CALIFORNIA, N.A., a national banking association (the "Escrow
Agent").
RECITALS
A. Parent and the Company have entered into an Agreement and Plan of Merger
and Reorganization dated as of July , 2000 (the "Merger Agreement"), pursuant
to which the Parent will be the surviving corporation, the Company will cease to
exist and the Company's stockholders and Gary Stevenson ("Escrow Stockholders")
will have the right to receive shares of Common Stock of Parent.
B. Section 1.8 of the Merger Agreement contemplates the establishment of an
escrow arrangement to secure the indemnification and other obligations of the
Company under Section 9 of the Merger Agreement.
C. Pursuant to Section 10.1 of the Merger Agreement and Section 10 of this
Agreement, the Escrow Stockholders have irrevocably appointed ,
as representative, to serve as Designated Company Agent for, among other things,
all matters set forth in Section 9 of the Merger Agreement.
AGREEMENT
The parties, intending to be legally bound, agree as follows:
1. Defined Terms. Capitalized terms used in this Agreement and not
otherwise defined shall have the meanings given to them in the Merger Agreement,
a copy of which is attached hereto.
2. Escrow and Indemnification.
(a) Shares Placed in Escrow. At the Effective Time, which shall be set
forth in a written notice by Parent to Escrow Agent: Parent shall issue and
deliver to Escrow Agent certificates for shares of Parent Common Stock
registered in the name of "Embassy & Co.," the nominee of the Escrow Agent,
representing the amounts with respect to the Escrow Stockholders as set forth on
EXHIBIT A hereto (the total number of such Parent Common Stock being placed in
escrow at the Effective Time being referred to herein as the "Initial Escrow
Shares"), evidencing the shares of Parent Common Stock to be held in escrow in
accordance with this Agreement and containing the following legend: "THE SHARES
REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN ESCROW AGREEMENT, DATED AS OF
, 2000, BY AND AMONG QUOKKA SPORTS, INC., A DESIGNATED COMPANY AGENT
IDENTIFIED THEREIN AND STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A."
(the "Escrow Legend"). The shares of Parent Common Stock being held in escrow
pursuant to this Agreement (the "Escrow Shares"), together with any Escrow Cash
(as defined below) resulting from the sale by Escrow Agent of Escrow Shares (as
further described herein), shall constitute an escrow fund (the "Escrow Fund")
with respect to the indemnification obligations of the Company under Section
9.2(a) of the Merger Agreement. The Escrow Fund shall be held as a trust fund
and shall not be subject to any lien, attachment, trustee process or any other
judicial process of any creditor of any Escrow Stockholder or of any party
hereto. The Escrow Agent agrees to accept delivery of the Escrow Fund and to
hold the Escrow Fund in an escrow account (the "Escrow Account"), subject to the
terms and conditions of this Agreement.
(b) Voting of Escrow Shares. The Escrow Stockholders, as beneficial owners
of the Escrow Shares, shall be entitled to exercise all voting rights with
respect to such Escrow Shares and the Escrow Agent shall not have any authority
to exercise any such voting rights. The Escrow Agent shall have no
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responsibility for the genuineness, validity, market value, title or sufficiency
for any intended purpose of the Escrow Shares. The Escrow Agent shall be under
no obligation to preserve, protect or exercise rights in the Escrow Shares, and
shall be responsible only for reasonable measures to maintain the physical
safekeeping thereof, and otherwise to perform and observe such duties on its
part as are expressly set forth in this Agreement. The Escrow Agent shall not be
responsible for forwarding to any party, notifying any party with respect to, or
taking any action with respect to, any notice, solicitation or other document or
information, written or otherwise, received from the issuer or other person with
respect to the Escrow Shares, including but not limited to, proxy material,
tenders, options, the pendency of calls and maturities and expiration of rights
(such materials being referred to generally as "Proxy Materials"); provided,
however, that the Escrow Agent shall, within two (2) business days of receipt of
Proxy Materials that entitle the Escrow Stockholders to vote, send to Parent's
transfer agent a written notice identifying the number of Escrow Shares held in
the Escrow Fund as of the record date set forth in the Proxy Materials (the
"Record Date Escrow Shares"), including a copy of the pro rata interest of each
Escrow Stockholder shown on Exhibit A, and requesting that the transfer agent
(i) distribute the Proxy Materials to the Escrow Stockholders as beneficial
owners of the Escrow Shares and (ii) prepare proxy cards for each Escrow
Stockholder entitling each such Escrow Stockholder to vote the number of shares
(rounding down in order to avoid fractional shares) determined by multiplying
the Record Date Escrow Shares by the pro rata interest of each Escrow
Stockholder shown on Exhibit A.
(c) Dividends, Etc. Any securities or other property distributable (whether
by way of dividend, stock split or otherwise) in a tax-free transaction in
respect of or in exchange for any Escrow Shares shall not be distributed to the
Escrow Stockholders, but rather shall be distributed to and held by the Escrow
Agent in the Escrow Account. Ordinary cash dividends and any other taxable
dividends, distributions or exchange proceeds will be paid by Parent directly to
the Escrow Stockholders and not to the Escrow Agent. Unless and until the Escrow
Agent shall actually receive such additional securities or other property, it
may assume without inquiry that the Escrow Shares currently being held by it in
the Escrow Account are all that the Escrow Agent is required to hold. At the
time any Escrow Shares are required to be released from the Escrow Account to
any Person pursuant to this Agreement, any securities or other property
previously received by the Escrow Agent in respect of or in exchange for such
Escrow Shares shall be released from the Escrow to such Person.
(d) Transferability. The interests of the Escrow Stockholders in the Escrow
Account and in the Escrow Shares shall not be assignable or transferable, other
than by operation of law. No transfer of any of such interests by operation of
law shall be recognized or given effect until Parent and the Escrow Agent shall
have received written notice of such transfer.
(e) Fractional Shares. No fractional shares of Parent Common Stock shall be
retained in or released from the Escrow Account pursuant to this Agreement. In
connection with any release of Escrow Shares from the Escrow Account, Parent and
the Escrow Agent shall "round down" in order to avoid retaining any fractional
share in the Escrow Account and in order to avoid releasing any fractional share
from the Escrow Account. When shares are "rounded down", no cash-in-lieu
payments need to be made.
(f) Sale of Escrow Shares.
(i) Voluntary Sale. Subject to the lockup restrictions identified
below, the Designated Company Agent may direct the Escrow Agent to sell any
or all of the Escrow Shares held in the Escrow Fund by delivery to the
Escrow Agent and Parent of a written notice stating the number of Escrow
Shares to be sold by the Escrow Agent and the minimum price per share to be
realized from such sale (the "Sale Notice"). Notwithstanding anything to
the contrary herein, without Parent's written consent (which consent the
Escrow Agent shall not be required to request) the Escrow Agent shall not
sell any of the Escrow Shares pursuant to this Section 2(f)(i) prior to the
expiration of one year after the Closing Date, except for (a) up to an
aggregate of 10% of the Initial Escrow Shares at any time after the Closing
Date; (b) up to a cumulative aggregate of 22% of the Initial Escrow Shares
at any time after the expiration of 90 days after the Closing Date; (c) up
to a cumulative aggregate of 47% of the Initial Escrow Shares at any time
after the expiration of 180 days after the Closing Date; and (d) up
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to a cumulative aggregate of 72% of the Initial Escrow Shares at any time
after the expiration of 270 days after the Closing Date. To the extent
directed to do so by the Designated Company Agent (and provided that the
Sale Notice does not contemplate a sale of Escrow Shares in violation of
the lockup restriction identified above), the Escrow Agent shall, pursuant
to the provisions in Section 2(g) below, within two (2) business days of
receipt of the Sale Notice (provided that the minimum price per share
indicated may be realized) direct the sale of the number of Escrow Shares
set forth in the Sale Notice and shall add the proceeds of such sale less
commission and Escrow Agent fees (the "Transaction Fees") to the Escrow
Fund (the proceeds, net of the Transaction Fees, being referred to as
"Escrow Cash"). Any liability resulting from sales of Escrow Shares in
violation of the lockup restrictions identified above shall not be borne by
the Escrow Agent but rather shall be borne by the Escrow Stockholders
indirectly as a result of their pro rata interest in the Escrow Fund.
(ii) Required Sale. Satisfaction of any indemnification claim pursuant
to this Agreement shall be made only with Escrow Cash and not with Escrow
Shares.
(A) In order to satisfy any claims pursuant to Section 3 hereunder,
the Designated Company Agent shall direct the Escrow Agent to sell such
number of Escrow Shares held in the Escrow Fund as shall be necessary to
satisfy such claim by delivery to the Escrow Agent of a written notice
stating the number of Escrow Shares to be sold. To the extent directed
to do so by the Designated Company Agent, the Escrow Agent shall,
pursuant to the provisions in Section 2(g) below, within two (2)
business days of receipt of such notice sell such number of Escrow
Shares as is designated by the Designated Company Agent, and shall add
the Escrow Cash realized by the sale to the Escrow Fund.
(B) In the event the Designated Company Agent shall be deemed to
have agreed (pursuant to Sections 3(b), (c) or (g) hereunder) that
Escrow Shares shall be sold by the Escrow Agent to satisfy an
indemnification claim, the Escrow Agent shall sell such number of Escrow
Shares held in the Escrow Fund as shall be necessary to satisfy such
claim and shall add the Escrow Cash realized by the sale to the Escrow
Fund.
(g) Mechanics of Sale of Escrow Shares.
(i) In connection with any sale of Escrow Shares pursuant to Section
2(f) of this Agreement, the Escrow Agent shall be entitled to receive and
rely upon, prior to taking action in that regard, written direction from
the Designated Company Agent as to the manner and method to be undertaken
in carrying out such sale, including without limitation written direction
(i) identifying the number of Escrow Shares to be sold and (ii) identifying
the brokerage firm the Designated Company Agent requests to be used or
instructing the Escrow Agent to use a brokerage service of its choice, and
(iii) setting forth any necessary or special instructions with respect to
the sale (including any stop loss or minimum price per share instruction);
and the Designated Company Agent shall execute and deliver any instruments
reasonably required by the Escrow Agent in order to carry out such sale.
(ii) The Escrow Agent shall have no responsibility in connection with
such sale other than to make delivery of the Escrow Shares to the selected
brokerage firm, with instruction (including any special instruction
provided by the Designated Company Agent), and to receive and deposit into
the Escrow Fund the Escrow Cash received therefrom. The Escrow Agent shall
have no liability for any actions or omissions of any such brokerage firm
and shall have no liability for the price or execution achieved. Without
limiting the generality of the foregoing, the Designated Company Agent
expressly acknowledges that (a) the Escrow Shares may need to be sent to a
transfer agent to be reissued in saleable form, (b) the Escrow Shares may
contain or be subject to transfer restrictions that may limit their
marketability and impose restrictions upon the number of types of
purchasers to whom they can be offered or sold, and (c) the Escrow Agent
shall have no liability for any failure or delay (or any price change
during such delay) on the part of the Designated Company Agent or any
transfer agent, or caused by any necessary registration or delivery
procedures, or compliance with any applicable transfer restrictions,
involved in the sale of such Escrow Shares.
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(iii) The Escrow Agent shall be entitled to contract with any
brokerage firm (which may be selected by the Escrow Agent without liability
on its part unless the Designated Company Agent shall have indicated a
brokerage firm to be used, in which event such brokerage firm shall be
used), which may be affiliated with the Escrow Agent. The Escrow Agent
shall be indemnified hereunder for any costs, expenses and risks associated
therewith or arising thereunder (other than resulting from its own gross
negligence, bad faith or wilful misconduct), and the Escrow Cash
attributable to the Escrow Fund shall be net of all brokerage commissions
and charges (including the Escrow Agent's charges). Any Escrow Shares to be
sold by the Escrow Agent pursuant to the terms of this Agreement shall
reduce the Escrow Shares attributable to the Escrow Stockholders on a pro
rata basis, in proportion to their respective interests set forth on
Exhibit A.
(iv) In connection with any sale of Escrow Shares, the Escrow Agent
shall within five (5) business days of such sale, provide the Designated
Company Agent and Parent with written notice of the Escrow Cash realized
from such sale (net of all brokerage commissions and Escrow Agent charges).
In addition, after satisfaction of a claim hereunder, the Escrow Agent
shall within five (5) business days after satisfaction of such claim,
provide the Designated Company Agent and Parent with a written notice of
the Escrow Cash remaining in the Escrow Fund.
(v) In the event of a sale of Escrow Shares pursuant to Section 2(f)
hereunder, the Escrow Agent shall invest the Escrow Cash realized from the
sale of Escrow Shares (within two (2) business days of receipt thereof) in
the SSgA U.S. Treasury Money Market Fund; provided, however, that the
Escrow Agent shall (within 2 business days of receipt of a written request
from the Designated Company Agent) invest the Escrow Cash realized from a
voluntary sale pursuant to Section 2(f)(i) hereunder in accordance with the
Designated Company Agent's written request; provided, however, that the
Designated Company Agent may only request that the investment of Escrow
Cash be made in treasury or money market accounts of a nationally
recognized financial institution (if the Escrow Agent is unable to
determine whether the financial institution is nationally recognized, the
Escrow Agent shall request and obtain Parent's consent prior to making the
requested investment, which consent shall not be unreasonably withheld).
Interest earnings on investments of Escrow Cash shall be reinvested by the
Escrow Agent in the investment to which such interest earnings pertain
unless otherwise instructed by the Designated Company Agent; provided,
however, that if such reinvestment is impracticable, the Escrow Agent shall
notify the Designated Company Agent requesting written instructions and,
absent such written instructions, shall not reinvest such interest
earnings. To the extent required by applicable laws or regulations, the
Escrow Agent shall allocate any interest earnings resulting from any
investment of the Escrow Cash to the Escrow Stockholders pro rata in
accordance with each Escrow Stockholder's proportionate interest in the
Escrow Shares.
3. Administration of Escrow Account. Except as otherwise provided herein,
with respect to any claim pursuant to Section 9 of the Merger Agreement, the
Escrow Agent shall be entitled to rely on the instructions of the Designated
Company Agent on behalf of the Escrow Stockholders and shall administer the
Escrow Account as follows:
(a) If any Indemnitee has or claims to have incurred or suffered
Damages for which it is or may be entitled to indemnification, compensation
or reimbursement under Section 9 of the Merger Agreement, such Indemnitee
may deliver a claim notice (a "Claim Notice") to the Designated Company
Agent and to the Escrow Agent, on or prior to, but not after, the one year
anniversary of the Closing Date under the Merger Agreement (such one year
anniversary being referred to herein as the "Termination Date"); provided,
however, that if, at any time on or prior to the Termination Date, any
Indemnitee (acting in good faith) delivers to the Designated Company Agent
and the Escrow Agent a Claim Notice, then the claim asserted in such Claim
Notice will survive the Termination Date until such time as such claim is
fully and finally resolved in accordance with the provisions of this
Section 3. The Escrow Agent shall not be deemed to have knowledge of
termination of this Agreement earlier than the Termination Date unless
notice in writing of such earlier date has been provided by Parent. Each
Claim Notice shall state that such Indemnitee is entitled to
indemnification, compensation or reimbursement under Section 9.2(a) of the
Merger Agreement and shall contain a
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brief description of the circumstances supporting such Indemnitee's belief
and shall contain a non-binding, preliminary estimate of the amount of
Damages such Indemnitee claims to have so incurred or suffered (the
"Claimed Amount").
(b) Within 45 business days after receipt by the Designated Company
Agent of a Claim Notice, the Designated Company Agent may deliver to the
Indemnitee who delivered the Claim Notice and to the Escrow Agent a written
response (the "Response Notice") in which the Designated Company Agent: (i)
agrees that a whole number of Escrow Shares having a value equal to the
full Claimed Amount shall be sold by the Escrow Agent pursuant to Sections
2(f) and (g) and the Escrow Cash realized by the sale may be released from
the Escrow Account to the Indemnitee; (ii) agrees that Escrow Shares having
a value equal to part, but not all, of the Claimed Amount (the "Agreed
Amount") shall be sold by the Escrow Agent pursuant to Sections 2(f) and
(g) and the Escrow Cash realized by the sale may be released from the
Escrow Account to the Indemnitee or (iii) indicates that no part of the
Claimed Amount may be released from the Escrow Account to the Indemnitee.
Any part of the Claimed Amount that is not to be released to the Indemnitee
shall be the "Contested Amount." If a Response Notice is not received by
the Escrow Agent within such 45 business-day period, then the Designated
Company Agent shall be deemed to have agreed that Escrow Shares having a
value equal to the full Claimed Amount shall be sold by the Escrow Agent
pursuant to Sections 2(f) and (g) and the Escrow Cash realized by the sale
may be released to the Indemnitee from the Escrow Account.
(c) If the Designated Company Agent delivers a Response Notice
agreeing that Escrow Shares having a value equal to the full Claimed Amount
shall be sold by the Escrow Agent pursuant to Sections 2(f) and (g) and the
Escrow Cash realized by the sale may be released from the Escrow Account to
the Indemnitee, or if the Designated Company Agent does not deliver a
Response Notice in accordance with Section 3(b) within the 45 business-day
period specified in Section 3(b), the Escrow Agent shall within five (5)
business days following the receipt of the Response Notice (or, if the
Escrow Agent has not received a Response Notice, within three (3) business
days following the expiration of the 45 business-day period referred to in
Section 3(b)), sell or cause to be sold such Escrow Shares pursuant to
Sections 2(f) and (g) and the Escrow Agent shall deliver or cause to be
delivered to such Indemnitee the Escrow Cash realized by the sale. Such
payment shall be deemed to be made in full satisfaction of the claim
described in such Claim Notice and Escrow Agent shall not be liable for the
Claim Amount so released.
(d) If the Designated Company Agent delivers a Response Notice
agreeing that Escrow Shares having a value equal to part, but not all, of
the Claimed Amount shall be sold by the Escrow Agent pursuant to Sections
2(f) and (g) and the Escrow Cash realized by the sale may be released from
the Escrow Account to the Indemnitee, the Escrow Agent shall within five
(5) business days following the receipt of the Response Notice sell or
cause to be sold such Escrow Shares pursuant to Sections 2(f) and (g) and
the Escrow Agent shall deliver or cause to be delivered to such Indemnitee
the Escrow Cash equal to the Agreed Amount.
(e) If the Designated Company Agent delivers a Response Notice
indicating that there is a Contested Amount, the Designated Company Agent
and the Indemnitee shall attempt in good faith to resolve the dispute
related to the Contested Amount. If the Indemnitee and the Designated
Company Agent shall resolve such dispute, such resolution shall be binding
on all of the Escrow Stockholders and all of the Indemnitees and a
settlement agreement shall be signed by the Indemnitee and the Designated
Company Agent and sent to the Escrow Agent, who shall, within five (5)
business days following receipt thereof, if applicable, sell or cause to be
sold pursuant to Section 2(g) Escrow Shares from the Escrow Account in
accordance with such agreement and having a value approximately equal to
the amount set forth in such settlement agreement (the "Settlement Amount")
and shall deliver or cause to be delivered to the Indemnitee Escrow Cash
equal to the Settlement Amount.
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(f) If the Designated Company Agent and the Indemnitee are unable to
resolve the dispute relating to any Contested Amount within 45 days after
the delivery of the Claim Notice, then the Escrow Agent shall retain the
Contested Amount in the Escrow Account until it receives either (i) a final
non-appealable court order from a court of competent jurisdiction, or (ii)
written instructions signed by Parent and the Designated Company Agent, in
which case the Escrow Agent shall follow the instructions set forth in such
court order or written instructions.
(g) Any Escrow Cash released from the Escrow Account to an Indemnitee
shall be deemed to reduce the Escrow Cash pro rata with respect to each
Escrow Stockholder in accordance with each Escrow Stockholder's percentage
interest in the Escrow Fund set forth in Exhibit A.
4. Release of Escrow Shares and Escrow Cash.
(a) Within five (5) business days after the Termination Date, the Escrow
Agent shall distribute or cause the stock transfer agent for the Parent Common
Stock to distribute to each of the Escrow Stockholders at such Escrow
Stockholder's address set forth on EXHIBIT A (or at such other address(es) as
the Designated Company Agent shall provide the Escrow Agent) such Escrow
Stockholder's pro-rata portion of the Escrow Shares and Escrow Cash then held in
escrow (less any shares or cash distributed to the Designated Company Agent
pursuant to Section 10 hereof) and based on the percentage interests in the
Escrow Fund set forth in EXHIBIT A; provided, however, that if prior to the
Termination Date, any Indemnitee has given a Claim Notice containing a claim
which has not been resolved prior to the Termination Date in accordance with
Section 3, the Escrow Agent shall retain in the Escrow Account after the
Termination Date Escrow Shares and/or Escrow Cash having a value equal to 100%
of the Claimed Amount or Contested Amount, as the case may be, with respect to
all claims which have not then been resolved.
(b) The Escrow Agent is not the stock transfer agent for the Parent Common
Stock. Accordingly, if a distribution of a number of shares of Parent Common
Stock less than all of the Escrow Shares is to be made, the Escrow Agent must
requisition the appropriate number of shares from such stock transfer agent,
delivering to it the appropriate stock certificate(s). For the purposes of this
Agreement, the Escrow Agent shall be deemed to have delivered Parent Common
Stock to the Person entitled to it when the Escrow Agent has delivered such
certificates to such stock transfer agent with instructions to deliver it to the
appropriate Person. Distributions of Parent Common Stock shall be made to Parent
or the Escrow Stockholders, as appropriate, at the addresses described in
Section 11(b) or set forth on EXHIBIT A hereto. Whenever a distribution of
Escrow Shares or Escrow Cash is to be made to the Escrow Stockholders, pro rata
distributions shall be made to each of them based on their proportionate
interest in the Escrow Fund and at their addresses set forth in Exhibit A.
(c) Whenever a release of Escrow Shares occurs pursuant to the terms of
this Agreement, the Escrow Agent shall be authorized to request and shall
request that the transfer agent for the Parent Common Stock remove the Escrow
Legend from the Escrow Shares being released.
(d) In the event the Designated Company Agent has assumed the defense of a
third-party claim pursuant to Section 9.6 of the Merger Agreement, the
Designated Company Agent shall be authorized to direct the Escrow Agent to use
Escrow Cash then held in the Escrow Fund (or to sell Escrow Shares pursuant to
Section 2(f)(i) and use the Escrow Cash realized thereby) to cover the costs of
such defense without regard to the lockup restrictions set forth in Section
2(f)(i) hereof. Upon receipt of a written notice from the Designated Company
Agent specifying the amount of Escrow Cash to be distributed to cover the
defense of such a third-party claim (or the number of Escrow Shares to be sold
by the Escrow Agent pursuant to Section 2(f)(i)) and the manner of such
distribution, the Escrow Agent shall so distribute the amount of Escrow Cash
specified in such notice or sell the number of Escrow Shares specified in such
notice and distribute the Escrow Cash realized thereby.
5. Stock Splits. All numbers contained in, and all calculations required to
be made pursuant to, this Agreement shall be adjusted as appropriate to reflect
any stock split, reverse stock split, stock dividend or similar transaction
effected by Parent after the date hereof; provided, however, that the Escrow
Agent shall have received notice of such stock split or other action and shall
have received the appropriate number of
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additional shares of Parent Common Stock or other property pursuant to Section
2(c) hereof. In the event of any such stock split or other similar occurrence,
Parent and the Designated Company Agent shall deliver to the Designated Company
Agent, within five (5) business days of such event, a revised Exhibit A setting
forth the new number of Escrow Shares to be held in the Escrow Fund. Unless and
until the Escrow Agent receives the certificates representing additional shares
of Parent Common Stock or other property pursuant to Section 2(c), the Escrow
Agent may assume without inquiry that no such stock or other property has been
or is required to be issued with respect to Escrow Shares.
6. Fees and Expenses. Upon the execution of this Agreement by all parties
hereto and the initial deposit of the Escrow Fund in the Escrow Account, fees
and expenses, in accordance with Exhibit B attached hereto, will be payable to
the Escrow Agent. This annual Escrow Agent fee will cover the first twelve
months of the escrow. In accordance with Exhibit B attached hereto, the Escrow
Agent will also be entitled to reimbursement for reasonable and documented
out-of-pocket expenses, including those of its counsel, incurred by the Escrow
Agent in the performance of its duties hereunder and the execution and delivery
of this Agreement. All such fees and expenses shall be paid by Parent, except
for the payment of Transaction Fees (it being understood that the payment of
Transaction Fees shall reduce the net proceeds realized from the sale of Escrow
Shares and shall have the effect of reducing the amount of Escrow Cash held in
the Escrow Fund).
7. Limitation of Escrow Agent's Liability.
(a) The Escrow Agent undertakes to perform such duties as are specifically
set forth in this Agreement only each of which are solely ministerial in nature,
and shall have no duty under or obligation to determine compliance with, any
other agreement or document notwithstanding their being referred to herein or
attached hereto as an exhibit. The Escrow Agent shall not be liable except for
the performance of such duties as are specifically set forth in this Agreement,
and no implied covenants or obligations shall be read into this Agreement
against the Escrow Agent. The Escrow Agent shall not be deemed to be a fiduciary
and shall incur no liability with respect to any action taken by it or for any
inaction on its part in reliance upon any notice, direction, instruction,
consent, statement or other document believed by it to be genuine and duly
authorized, nor for any other action or inaction except for its own willful
misconduct or negligence. In all questions arising under this Agreement, the
Escrow Agent may rely on the advice of counsel, and for anything done, omitted
or suffered in good faith by the Escrow Agent based upon such advice the Escrow
Agent shall not be liable to anyone. The Escrow Agent shall not be required to
take any action hereunder involving any expense unless the payment of such
expense is made or provided for in a manner reasonably satisfactory to it. In no
event shall the Escrow Agent be liable for incidental, punitive or consequential
damages whatsoever, even if the Escrow Agent has been advised of the likelihood
of such damages.
(b) Parent hereby agrees to indemnify the Escrow Agent, its officers,
directors, employees and agents for, and hold it harmless against, any loss,
liability or expense incurred without negligence or willful misconduct on the
part of Escrow Agent, arising out of or in connection with its carrying out of
its duties hereunder. This right of indemnification shall survive the
termination of this Agreement, and the resignation of the Escrow Agent. The
costs and expenses of enforcing this right of indemnification shall also be paid
by Parent.
(c) In the event that the Escrow Agent should at any time be (i) confronted
with inconsistent or conflicting claims or demands by the other parties hereto
or (ii) unsure of its duties hereunder, the Escrow Agent shall have the right to
interplead the parties in any California court or any court of competent
jurisdiction and request that such court determine the respective rights of the
parties with respect to this Agreement and, upon doing so, the Escrow Agent
shall be released from any obligations or liability to the other parties as a
consequence of any such claims or demands. The Escrow Agent may consult counsel
satisfactory to it, including in-house counsel, and will be protected in respect
of any action taken or omitted in reliance thereon.
(d) The Escrow Agent may execute any of its powers or responsibilities
hereunder and exercise any rights hereunder, either directly or by or through
its agents or attorneys. Nothing in this Agreement shall be deemed to impose
upon the Escrow Agent any duty to qualify to do business in any jurisdiction
other
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than California. The Escrow Agent shall not be responsible for and shall not be
under a duty to examine, inquire into or pass upon the validity, binding effect,
execution or sufficiency of this Agreement or of any amendment or supplement
hereto.
8. Termination. This Agreement shall terminate on the Termination Date or,
if earlier, upon the release by the Escrow Agent of the entire Escrow Fund in
accordance with this Agreement; provided, however, that if the Escrow Agent has
received from any Indemnitee a Claim Notice setting forth a claim that has not
been resolved by the Termination Date, then this Agreement shall continue in
full force and effect until the claim has been resolved and the Escrow Shares
sold and the Escrow Cash released in accordance with this Agreement.
9. Successor Escrow Agent. In the event the Escrow Agent becomes
unavailable or unwilling to continue as escrow agent under this Agreement, the
Escrow Agent may resign and be discharged from its duties and obligations
hereunder by giving its written resignation to the parties to this Agreement.
Such resignation shall take effect not less than 30 calendar days after it is
given to all parties hereto. Parent may appoint a successor Escrow Agent only
with the consent of a majority in interest of the Escrow Stockholders (which
consent shall not be unreasonably withheld or delayed). If the parties fail to
agree on a successor Escrow Agent within such time, the Escrow Agent shall have
the right to apply to a court of competent jurisdiction for the appointment of a
successor Escrow Agent. The successor Escrow Agent shall execute and deliver to
the Escrow Agent an instrument accepting such appointment, and the successor
Escrow Agent shall, without further acts, be vested with all the estates,
property rights, powers and duties of the predecessor Escrow Agent as if
originally named as Escrow Agent herein. The Escrow Agent shall act in
accordance with written instructions from Parent and the Designated Company
Agent as to the transfer of the Escrow Fund to a successor escrow agent.
10. Designated Company Agent. Pursuant to Section 10.1 of the Merger
Agreement, the Company irrevocably appointed , as Designated
Company Agent, to act on behalf of the Company and the Escrow Stockholders as
their agent for purposes of the Merger Agreement, which includes their consent
to allow the Designated Company Agent to give and receive notices and
communications, to authorize delivery to Parent of Parent Common Stock, Escrow
Cash or other property from the Escrow Fund, to object to such deliveries, to
agree to, negotiate, enter into settlements and compromises, comply with orders
of courts with respect to such claims and to take all actions necessary or
appropriate in the judgment of the Designated Company Agent for the
accomplishment of the foregoing. Section 10.1 of the Merger Agreement provides
that a majority in interest of the Escrow Stockholders shall appoint a new
representative to serve as the Designated Company Agent if the person acting as
the Designated Company Agent should die, become disabled or otherwise be unable
to fulfill his or her responsibilities. The Designated Company Agent shall not
be responsible for any act done or omitted thereunder as Designated Company
Agent while acting in good faith and in the exercise of reasonable judgment. The
Designated Company Agent shall be indemnified out of the Escrow Fund and held
harmless against any loss, liability or expense incurred without gross
negligence, bad faith or willful misconduct on the part of the Designated
Company Agent and arising out of or in connection with the acceptance or
administration of the Designated Company Agent's duties hereunder, including the
reasonable fees and expenses of any legal counsel or other professional retained
by the Designated Company Agent. The Designated Company Agent shall be paid (i)
the reasonable fees of the Designated Company Agent relating to his services
performed in such capacity and (ii) all costs and expenses, including those of
any legal counsel or other professional retained by the Designated Company
Agent, in connection with the acceptance and administration of the Designated
Company Agent's duties hereunder. Subject to the prior right of Parent to make
claims for Damages, the Designated Company Agent shall have the right to recover
from the Escrow Fund, prior to any distribution to the Escrow Stockholders
pursuant to Section 4(a) or Section 4(b) hereof, a number of Escrow Shares (or
an equivalent amount of Escrow Cash then held in escrow) set forth in a
certificate of the Designated Company Agent delivered to the Escrow Agent at
least two (2) business days prior to the date on which a distribution is to be
made to the Escrow Stockholders equal to the quotient obtained by dividing (i)
any reasonable fees, costs and expenses set forth in such certificate, including
those of any legal counsel or other professional retained by the Designated
Company Agent, in connection with the
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acceptance and administration of the Designated Company Agent's duties
hereunder, by (ii) the average of the closing sales price of Parent Common Stock
on the Nasdaq National Market as reported in the Wall Street Journal for the
twenty (20) trading days preceding the Closing Date under the Merger Agreement.
The Escrow Agent shall not be required to verify or confirm the amounts set
forth in such certificate or determine that reasonableness of such amounts and
shall be entitled to rely on such certificate in making payments to Designated
Company Agent hereunder. The Escrow Agent agrees to deliver to the Designated
Company Agent such number of Escrow Shares, or an equivalent amount of Escrow
Cash then held in escrow, prior to making any distribution of Escrow Shares or
Escrow Cash to the Escrow Stockholders.
11. Miscellaneous.
(a) Attorneys' Fees. If any action or proceeding relating to this Agreement
or the enforcement of any provision of this Agreement is brought against any
party hereto (other than the Escrow Agent, whose rights to reimbursement for its
attorneys fees, costs and disbursement are set forth in Sections 6 and 7), the
prevailing party shall be entitled to recover reasonable attorneys' fees, costs
and disbursements (in addition to any other relief to which the prevailing party
may be entitled).
(b) Notices. Any notice or other communication required or permitted to be
delivered to any party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by hand, by
registered mail or by courier or express delivery service) to the address set
forth in Section 10.9 of the Merger Agreement or to the Escrow Agent at the
address set forth below (or to such other address as such party shall have
specified in a written notice given to the other parties hereto):
State Street Bank and Trust Company of California, N.A.
Corporate Trust Division
633 West 5th Street, 12th Floor
Los Angeles, CA 90071
Attention: Corporate Trust Administration:
[Quokka Sports, Inc./Total Sports Inc.]
Telephone: (213) 362-7334
The Escrow Agent may assume that any Claim Notice, Response Notice or other
notice of any kind required to be delivered to the Escrow Agent and any other
Person has been received by such other Person if it has been received by the
Escrow Agent, but the Escrow Agent need not inquire into or verify such receipt.
(c) Headings. The headings contained in this Agreement are for convenience
of reference only, shall not be deemed to be a part of this Agreement and shall
not be referred to in connection with the construction or interpretation of this
Agreement.
(d) Counterparts. This Agreement may be executed in several counterparts,
each of which shall constitute an original and all of which, when taken
together, shall constitute one agreement.
(e) Governing Law. This Agreement shall be construed in accordance with,
and governed in all respects by, the internal laws of the State of California
(without giving effect to principles of conflicts of laws).
(f) Successors and Assigns. No party hereto may assign or transfer any
right or obligation under this Agreement without the written consent of the
other parties hereto. Subject to the foregoing limitations, this Agreement shall
inure to the benefit of Parent, Escrow Agent, the Designated Company Agent and
the respective successors and assigns, if any, of the foregoing.
(g) Waiver. No failure on the part of any Person to exercise any power,
right, privilege or remedy under this Agreement, and no delay on the part of any
Person in exercising any power, right, privilege or remedy under this Agreement,
shall operate as a waiver of such power, right, privilege or remedy; and no
single or partial exercise of any such power, right, privilege or remedy shall
preclude any other or further exercise thereof or of any other power, right,
privilege or remedy. No Person shall be deemed to have waived any claim arising
out of this Agreement, or any power, right, privilege or remedy under this
Agreement, unless the waiver of such claim, power, right, privilege or remedy is
expressly set forth in a
A-1-77
<PAGE> 331
written instrument duly executed and delivered on behalf of such Person; and any
such waiver shall not be applicable or have any effect except in the specific
instance in which it is given.
(h) Amendments. This Agreement may not be amended, modified, altered or
supplemented other than by means of a written instrument duly executed and
delivered on behalf of all of the parties hereto; provided, however, that each
of Parent and the Designated Company Agent may amend this Agreement solely to
(i) add additional parties to EXHIBIT A as a result of death, divorce, mergers
or similar events, upon execution of a counterpart signature page of this
Agreement or (ii) to update EXHIBIT A appropriate contact information for Escrow
Stockholders.
(i) Severability. In the event that any provision of this Agreement, or the
application of any such provision to any Person or set of circumstances, shall
be determined to be invalid, unlawful, void or unenforceable to any extent, the
remainder of this Agreement, and the application of such provision to Persons or
circumstances other than those as to which it is determined to be invalid,
unlawful, void or unenforceable, shall not be impaired or otherwise affected and
shall continue to be valid and enforceable to the fullest extent permitted by
law.
(j) Entire Agreement. This Agreement and the other agreements referred to
herein set forth the entire understanding of the parties hereto relating to the
subject matter hereof and thereof and supersede all prior agreements and
understandings among or between any of the parties relating to the subject
matter hereof and thereof.
(k) Waiver of Jury Trial. Each of the parties hereto hereby irrevocably
waives any and all right to trial by jury in any Legal Proceeding arising out of
or related to this Agreement or the transactions contemplated hereby.
(l) Tax Reporting Information and Certification of Tax Identification
Numbers.
(i) The parties hereto agree that, for tax reporting purposes, all
taxable dividends, interest on or other income, if any, attributable to the
Escrow Shares or any other amount held in escrow by the Escrow Agent
pursuant to this Agreement shall be allocable to the Escrow Stockholders in
accordance with their percentage interests in the Escrow Fund set forth in
EXHIBIT A.
(ii) Parent agrees to furnish the Escrow Stockholders with necessary
tax forms to enable the Escrow Stockholders to provide the Escrow Agent
with certified tax identification numbers for each of them by furnishing
appropriate forms W-9 (or Forms W-8, in the case of non-U.S. persons) and
any other forms and documents that the Escrow Agent may reasonably request
(collectively, "Tax Reporting Documentation") to the Escrow Agent within 30
days after the date hereof. The parties hereto understand that, if such Tax
Reporting Documentation is not so certified to the Escrow Agent, the Escrow
Agent shall be required by the Internal Revenue Code, as it may be amended
from time to time, to withhold and remit to the Internal Revenue Service a
portion of any interest or other income earned on the investment of monies
or other property held by the Escrow Agent pursuant to this Agreement.
(n) Construction. For purposes of this Agreement, whenever the context
requires: the singular number shall include the plural, and vice versa; the
masculine gender shall include the feminine and neuter genders; the feminine
gender shall include the masculine and neuter genders; and the neuter gender
shall include the masculine and feminine genders. The parties hereto agree that
any rule of construction to the effect that ambiguities are to be resolved
against the drafting party shall not be applied in the construction or
interpretation of this Agreement. As used in this Agreement, the words "include"
and "including," and variations thereof, shall not be deemed to be terms of
limitation, but rather shall be deemed to be followed by the words "without
limitation."
[Signature Page Follows on the Next Page]
A-1-78
<PAGE> 332
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
day and year first above written.
QUOKKA SPORTS, INC.
Signature:
--------------------------------------
Printed Name:
--------------------------------------
Title:
--------------------------------------
DESIGNATED COMPANY AGENT:
Signature:
--------------------------------------
Printed Name:
--------------------------------------
STATE STREET BANK AND TRUST
COMPANY OF CALIFORNIA, N.A.,
AS ESCROW AGENT
Signature:
--------------------------------------
Printed Name:
--------------------------------------
Title:
--------------------------------------
A-1-79
<PAGE> 333
EXHIBIT A
ESCROW STOCKHOLDERS
<TABLE>
<CAPTION>
PRO RATA
SHARES TO BE PERCENTAGE
HELD IN INTEREST IN
ESCROW STOCKHOLDER ADDRESS ESCROW ACCOUNT ESCROW FUND
------------------ ------- -------------- -----------
<S> <C> <C> <C>
.......................
.......................
.......................
.......................
.......................
.......................
.......................
------
Total........ 100.00%
======
</TABLE>
A-1-80
<PAGE> 334
EXHIBIT B
STATE STREET BANK AND TRUST COMPANY
OF CALIFORNIA, N.A.
SCHEDULE OF FEES FOR ESCROW SERVICES
PROJECT DEEP SOUTH
<TABLE>
<S> <C>
Acceptance Fee:............................................. $ 750.00
This one-time charge, payable at closing, includes
acceptance and assumption of responsibility and duties as
Escrow Agent; review and comment on the form of agreement;
and establishment of account(s) in accordance with
governing document.
Legal Counsel:.............................................. At Cost
Escrow Agent Fee:........................................... $3,500.00
Payable at funding and annually thereafter, if applicable.
Compensates State Street for administrative services in
accordance with the Escrow Agreement.
ADDITIONAL FEES, IF APPLICABLE:
PRO-RATA PERCENTAGE: Should the Escrow Agreement require
pro-rata distribution of principal cash or investment
income to the beneficiaries, STATE STREET WILL ASSESS an
additional $100, for each beneficiary pro-rata
distribution, which may be offset at State Street's
discretion against each distribution.
DIRECTED SALE: State Street will charge $500.00, plus
broker commission, for each Directed Sale. In addition, if
State Street is required to retain the proceeds from the
Directed Sale, an annual fee of $250.00 will be charged to
open and maintain a segregated account. THE FEES
ASSOCIATED WITH A DIRECTED SALE, SHAREHOLDER ACCOUNTING
AND INVESTMENT FEES, IN ANY, WILL BE PAID FROM THE
PROCEEDS OF SUCH SALE.
Claims (if applicable):
Uncontested............................................... $ 500.00
Contested..............................................Billed at Cost
Wire Transfer Fee (This fee will be deducted from wire
amount, if applicable):
International............................................. $ 40.00
Domestic.................................................. $ 20.00
Investment Fee:............................................. $ 65.00
Per security purchased (i.e. Treasuries, Agencies, etc.)
Investment in State Street Investment Vehicles:.........40 BASIS POINTS (.0040)
(Calculated on the Average Daily Net Assets)
Investment Vehicles:
SSgA Prime Money Market Fund
SSgA US Treasury Money Market Fund
SSgA Tax Free Money Market Fund
Out-of-Pocket Expense:...................................... At Cost
</TABLE>
The transaction underlying this proposal, and all related documentation, is
subject to review and acceptance by State Street in accordance with its policies
and procedures. Should the actual transaction materially differ from the
assumptions used herein, State Street reserves the right to modify this
proposal. In the event that the subject transaction fails to close for reasons
beyond the control of State Street, the party requesting these services agrees
to pay State Street's acceptance fees, legal fees and out-of-pocket expenses.
This proposal is a confidential document and should not be duplicated and/or
distributed.
A-1-81
<PAGE> 335
ANNEX A-2
AMENDMENT NO. 1
TO
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
(the "Amendment") is made and entered into as of October 10, 2000, by and among
QUOKKA SPORTS, INC., a Delaware corporation ("Parent"), and TOTAL SPORTS, INC.,
a Delaware corporation (the "Company").
RECITALS
A. Parent and the Company have entered into an Agreement and Plan of Merger
and Reorganization, dated as of July 20, 2000 (the "Merger Agreement").
B. The Company has entered into a Note and Warrant Purchase Agreement,
Exchange Agreement and Security Agreement, dated as of October 9, 2000, pursuant
to which (a) the Company issued secured convertible promissory notes in the
aggregate principal amount of US $17,200,000.00 and warrants to purchase up to
an aggregate 153,105 shares of capital stock of the Company, exercisable at
$16.59 per share (the "Company Bridge Financing"), to certain existing
stockholders (the "Bridge Investors") and (b) the Company exchanged certain
shares of newly created series of capital stock of the Company and new warrants
of the Company for certain shares of capital stock and warrants of the Company
currently held by the Bridge Investors (the "Company Exchange").
C. Pursuant to the terms of Section 10.2 of the Merger Agreement, Parent
and the Company desire to amend the terms of the Merger Agreement to update the
capitalization of the Company after the effectiveness of the Company Bridge
Financing and Company Exchange and amend other related provisions of the Merger
Agreement.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
conditions set forth in this Amendment, and other good and valuable
consideration, the receipt of which is hereby acknowledged, and pursuant to
Section 10.2 of the Merger Agreement, the parties to this Amendment mutually
agree as follows.
1. Capitalized Terms. All capitalized terms used herein that are not
otherwise defined herein shall have the meanings assigned to them in the Merger
Agreement unless the context hereof requires otherwise.
2. Amendments. The Merger Agreement is hereby amended as follows.
2.1 The following definitions referenced on Exhibit A of the Merger
Agreement are hereby amended and restated in their entirety to read as follows:
Company Charter Amendment. "Company Charter Amendment" means the
amendment(s) of the Company's certificate of incorporation, to be effected
prior to the Closing, to make the following changes in the Company's
authorized capital stock: (a) increase the total number of authorized
shares of capital stock to approximately 84,000,000; (b) increase the
authorized number of shares of Series D Convertible Preferred Stock to
approximately 3,675,000; (c) authorize and designate the rights and
preferences of the following additional series of preferred stock: 125,000
shares of Series A-Prime Preferred Stock, 518,841 shares of Series B-Prime
Preferred Stock, 1,418,200 shares of Series C-Prime Preferred Stock,
630,756 shares of Series C1-Prime Preferred Stock, 3,675,000 shares of
Series D-Prime Preferred Stock, 1,003,617 shares of Series D1-Prime
Preferred Stock, 811,423 shares of Series E-Prime Preferred Stock, 300,000
shares of Series F Preferred Stock,
A-2-1
<PAGE> 336
3,500,000 shares of Series G Preferred Stock, 350,000 shares of Series H
Preferred Stock and 3,200,000 shares of Senior Employee Preferred Stock.
Company Preferred Stock. "Company Preferred Stock" means the Series A
Redeemable Preferred Stock, par value $10.00 per share, Series A-Prime
Redeemable Preferred Stock, par value $10.00 per share, Series B
Convertible Preferred Stock, par value $4.492 per share, Series B-Prime
Convertible Preferred Stock, par value $4.492 per share, Series C
Convertible Preferred Stock, par value $.001 per share, Series C-Prime
Convertible Preferred Stock, par value $.001 per share, Series C1
Convertible Preferred Stock, par value $.001 per share, Series C1-Prime
Convertible Preferred Stock, par value $.001 per share, Series D
Convertible Preferred Stock, par value $.001 per share, Series D-Prime
Convertible Preferred Stock, par value $.001 per share, Series D1
Convertible Preferred Stock, par value $.001 per share, Series D1-Prime
Convertible Preferred Stock, par value $.001 per share, Series E
Convertible Preferred Stock, par value $.001 per share, Series E-Prime
Convertible Preferred Stock, par value $.001 per share, Series F
Convertible Preferred Stock, par value $.001 per share, Series G
Convertible Preferred Stock, par value $.001 per share, Series H
Convertible Preferred Stock, par value $.001 per share and Senior Employee
Preferred Stock, par value $.001 per share, of the Company.
Company Warrants. "Company Warrants" means warrants to purchase
907,782 shares of Company Common Stock, 4,283 shares of the Company's
Series B Convertible Preferred Stock, 69,295 shares of the Company's Series
B-Prime Convertible Preferred Stock, 110,794 shares of the Company's Series
D-Prime Convertible Preferred Stock, 1,416 shares of the Company's Series
D1 Convertible Preferred Stock, 961,954 shares of the Company's Series
D1-Prime Convertible Preferred Stock, 42,235 shares of the Company's Series
F Convertible Preferred Stock and 1,336,123 shares of the Company's Series
G Convertible Preferred Stock, that are outstanding on the date of this
Agreement, as amended.
2.2 Exhibit B to the Merger Agreement is hereby amended and restated in
its entirety to read as set forth as Exhibit B attached hereto.
2.3 The first two sentences of Section 2.3 of the Merger Agreement are
hereby amended and restated in their entirety to read as follows:
(a) As of the date of this Agreement, as amended on October 10, 2000,
the authorized capital stock of the Company consists of: (i) 60,000,000
shares of Common Stock, of which 2,891,546 shares have been issued and are
outstanding as of the date of this Agreement; and (ii) 23,715,674 shares of
Company Preferred Stock, of which 125,000 are designated Series A
Redeemable Preferred Stock, par value $10.00 per share, 125,000 are
designated Series A-Prime Redeemable Preferred Stock, par value $10.00 per
share, 518,841 are designated Series B Convertible Preferred Stock, par
value $4.492 per share, 518,841 are designated Series B-Prime Convertible
Preferred Stock, par value $4.492 per share, 1,418,200 are designated
Series C Convertible Preferred Stock, par value $.001 per share, 1,418,200
are designated Series C-Prime Convertible Preferred Stock, par value $.001
per share, 630,756 are designated Series C1 Convertible Preferred Stock,
par value $.001 per share, 630,756 are designated Series C1-Prime
Convertible Preferred Stock, par value $.001 per share, 3,675,000 are
designated Series D Convertible Preferred Stock, par value $.001 per share,
3,675,000 are designated Series D-Prime Convertible Preferred Stock, par
value $.001 per share, 1,003,617 are designated Series D1 Convertible
Preferred Stock, par value $.001 per share, 1,003,617 are designated Series
D1-Prime Convertible Preferred Stock, par value $.001 per share, 811,423
are designated Series E Convertible Preferred Stock, par value $.001 per
share, 811,423 are designated Series E-Prime Convertible Preferred Stock,
par value $.001 per share, 300,000 are designated Series F Convertible
Preferred Stock, par value $.001 per share, 3,500,000 are designated Series
G Convertible Preferred Stock, par value $.001 per share, 350,000 are
designated Series H Convertible Preferred Stock, par value $.001 per share
and 3,200,000 are designated Senior Employee Preferred Stock, par value
$.001 per share, of the Company. 10,440 shares of Series A Redeemable
Preferred Stock, 114,560 shares of Series A-Prime Redeemable Preferred
Stock, 11,621 shares of Series B
A-2-2
<PAGE> 337
Convertible Preferred Stock, 433,642 shares of Series B-Prime Convertible
Preferred Stock, 39,153 shares of Series C Convertible Preferred Stock,
1,379,047 shares of Series C-Prime Convertible Preferred Stock, 36,065
shares of Series C1 Convertible Preferred Stock, 594,691 shares of Series
C1-Prime Convertible Preferred Stock, 3,146 shares of Series D Convertible
Preferred Stock, 2,137,727 shares of Series D-Prime Convertible Preferred
Stock, 0 shares of Series D1 Convertible Preferred Stock, 0 shares of
Series D1-Prime Convertible Preferred Stock, 811,423 shares of Series E
Convertible Preferred Stock, 0 shares of Series E-Prime Convertible
Preferred Stock, 0 shares of Series F Convertible Preferred Stock,
2,093,080 shares of Series G Convertible Preferred Stock, 0 shares of
Series H Convertible Preferred Stock and 0 shares of and Senior Employee
Preferred Stock, have been issued and are outstanding as of the date of
this Agreement, as amended on October 9, 2000.
2.4 Section 5.1(c) of the Merger Agreement is hereby amended by
amending and restating the second sentence of such section in its entirety to
read as follows:
. . . Parent will use all reasonable efforts to cause the Form S-3
Registration Statement to comply with the rules and regulations promulgated
by the SEC, to respond promptly to any comments of the SEC or its staff and
to have the Form S-3 Registration Statement declared effective under the
Securities Act as promptly as practicable after it is filed with the SEC
and in any event within 20 business days subsequent to the Closing Date.
2.5 Section 7.3 of the Merger Agreement is hereby amended and restated
in its entirety to read as follows:
7.3 Effectiveness of Registration Statements. The Form S-4
Registration Statement shall have become effective in accordance with the
provisions of the Securities Act, and no stop order shall have been issued,
and no proceeding for that purpose shall have been initiated or be overtly
threatened, by the SEC with respect to the Form S-4 Registration Statement.
3. Validity. The parties agree that this Amendment is entered into in
accordance with Section 10.2 of the Merger Agreement.
4. No Other Amendment. Except as specifically amended pursuant to this
Amendment, the Merger Agreement remains in full force and effect in accordance
with its terms.
5. Governing Law. The procedures applicable to and effect of the Merger
will be governed by the laws of the State of Delaware. Subject to the
immediately preceding sentence, this Amendment will be governed by, and
construed in accordance with, the laws of the State of California, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
6. Counterparts. This Amendment may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7. Binding Effect. This Amendment shall be binding upon and shall inure
to the benefit of the parties hereto and their heirs, successors and assigns.
[THE NEXT PAGE IS THE SIGNATURE PAGE.]
A-2-3
<PAGE> 338
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
as of the date first above written.
QUOKKA SPORTS, INC.
By: /s/ ALAN S. RAMADAN
Name: Alan S. Ramadan
Title: President and Chief Executive
Officer
TOTAL SPORTS, INC.
By: /s/ GARY STEVENSON
Name: Gary Stevenson
Title: President and Chief Executive
Officer
A-2-4
<PAGE> 339
EXHIBIT B
MERGER CONSIDERATION AND EXCHANGE RATIOS
A. The following exchange ratios shall be calculated by reference to the
formula in paragraph B and the definitions in paragraph C of this Exhibit B.
1. Series H Preferred Stock Exchange Ratio of Parent Common Stock received
for each Series H Preferred Stock Unit equals:
[Series H Preferred Stock Amount] divided by [Series H Preferred Stock
Units]
3. Senior Employee Preferred Stock Exchange Ratio of Parent Common Stock
received for each Senior Employee Preferred Stock share equals:
[Senior Employee Preferred Stock Amount] divided by [Senior Employee
Preferred Stock]
4. Series F Preferred Stock Exchange Ratio of Parent Common Stock received
for each Series F Preferred Stock Unit equals:
[Series F Preferred Stock Amount] divided by [Series F Preferred Stock
Units]
5. Series A-Prime Preferred Stock Exchange Ratio of Parent Common Stock
received for each Series A-Prime Preferred Stock Unit equals:
[Series A-Prime Preferred Stock Amount] divided by [Series A-Prime
Preferred Stock Units]
6. Series B-Prime Preferred Stock Exchange Ratio of Parent Common Stock
received for each Series B-Prime Preferred Stock Unit equals:
[Series B-Prime Preferred Stock Amount] divided by [Series B-Prime
Preferred Stock Units]
7. Series C-Prime Preferred Stock Exchange Ratio of Parent Common Stock
received for each Series C-Prime Preferred Stock Unit equals:
[Series C-Prime Preferred Stock Amount] divided by [Series C-Prime
Preferred Stock Units]
8. Series C1-Prime Preferred Stock Exchange Ratio of Parent Common Stock
received for each Series C1-Prime Preferred Stock Unit equals:
[Series C1-Prime Preferred Stock Amount] divided by [Series C1-Prime
Preferred Stock Units]
9. Series D-Prime Preferred Stock Exchange Ratio of Parent Common Stock
received for each Series D-Prime Preferred Stock Unit equals:
[Series D-Prime Preferred Stock Amount] divided by [Series D-Prime
Preferred Stock Units]
10. Series D1-Prime Preferred Stock Exchange Ratio of Parent Common Stock
received for each Series D1-Prime Preferred Stock Unit equals:
[Series D1-Prime Preferred Stock Amount] divided by [Series D1-Prime
Preferred Stock Units]
11. Series E-Prime Preferred Stock Exchange Ratio of Parent Common Stock
received for each Series E-Prime Preferred Stock share equals:
[Series E-Prime Preferred Stock Amount] divided by [Series E-Prime
Preferred Stock]
12. Series E-Prime Preferred Stock Unit Maximum Amount Exchange Ratio per
Series E-Prime Preferred Stock Unit equals:
[Series E-Prime Preferred Stock Unit Maximum Amount] divided by [Series
E-Prime Preferred Stock Units]
A-2-5
<PAGE> 340
13. Series G Preferred Stock Exchange Ratio of Parent Common Stock received
for each Series G Preferred Stock Unit equals:
[Series G Preferred Stock Amount] divided by [Series G Preferred Stock
Units]
14. Series A Preferred Stock Exchange Ratio of Parent Common Stock received
for each Series A Preferred Stock Unit equals:
[Series A Preferred Stock Amount] divided by [Series A Preferred Stock
Units]
15. Series B Preferred Stock Exchange Ratio of Parent Common Stock received
for each Series B Preferred Stock Unit equals:
[Series B Preferred Stock Amount] divided by [Series B Preferred Stock
Units]
16. Series C Preferred Stock Exchange Ratio of Parent Common Stock received
for each Series C Preferred Stock Unit equals:
[Series C Preferred Stock Amount] divided by [Series C Preferred Stock
Units]
17. Series C1 Preferred Stock Exchange Ratio of Parent Common Stock
received for each Series C1 Preferred Stock Unit equals:
[Series C1 Preferred Stock Amount] divided by [Series C1 Preferred Stock
Units]
18. Series D Preferred Stock Exchange Ratio of Parent Common Stock received
for each Series D Preferred Stock Unit equals:
[Series D Preferred Stock Amount] divided by [Series D Preferred Stock
Units]
19. Series D1 Preferred Stock Exchange Ratio of Parent Common Stock
received for each Series D1 Preferred Stock Unit equals:
[Series D1 Preferred Stock Amount] divided by [Series D1 Preferred Stock
Units]
20. Series E Preferred Stock Exchange Ratio of Parent Common Stock received
for each Series E Preferred Stock share equals:
[Series E Preferred Stock Amount] divided by [Series E Preferred Stock]
21. Series E Preferred Stock Unit Maximum Amount Exchange Ratio per Series
E Preferred Stock Unit equals:
[Series E Preferred Stock Unit Maximum Amount] divided by [Series E
Preferred Stock Units]
22. Common Stock Exchange Ratio per Common Stock share equals:
[Common Stock Amount] divided by [Common Stock]
B. The Merger Consideration Shares shall be allocated among and distributed
to the holders of the Company Stock in the priorities set forth below:
1. Merger Consideration Shares:
Less: Series H Preferred Stock Amount:
2. Shares Available for Distribution, if any:
Less: Stevenson Compensation Shares:
3. Shares Available for Distribution, if any:
Less: Senior Employee Preferred Stock Amount:
4. Shares Available for Distribution, if any:
Less: Series F Preferred Stock Amount:
A-2-6
<PAGE> 341
5. Shares Available for Distribution, if any:
Less: Series A-Prime Preferred Stock Amount:
6. Shares Available for Distribution, if any:
Less: Senior Prime Preferred Stock Amount:
7. Shares Available for Distribution, if any:
Less: Series E-Prime Preferred Stock Amount:
8. Shares Available for Distribution, if any:
Less: Series E-Prime Preferred Stock Unit Maximum Amount:
9. Shares Available for Distribution, if any:
Less: Series G Preferred Stock Amount:
10. Shares Available for Distribution, if any:
Less: Series A Preferred Stock Amount:
11. Shares Available for Distribution, if any:
Less: Senior Preferred Stock Amount:
12. Shares Available for Distribution, if any:
Less: Series E Preferred Stock Amount:
13. Shares Available for Distribution, if any:
Less: Series E Preferred Stock Unit Maximum Amount:
14. Common Stock Amount:
C. The Exchange Ratios shall be determined in accordance with the formulas
set forth above in paragraph B and by reference to the following defined terms.
Capitalized terms not defined in this Exhibit shall have the same definitions
and meanings ascribed to such terms in the Agreement.
1. Merger Consideration Shares means an aggregate of 15,000,000 shares of
Parent Common Stock, subject to adjustment as set forth in the
Agreement.
2. Series H Preferred Stock means the number of shares of the Company's
Series H Convertible Preferred Stock issued and outstanding and the
number of shares of the Company's Series H Convertible Preferred Stock
issuable upon exercise of options or warrants outstanding as of the
Effective Date.
3. Series H Preferred Stock Amount means the amount of shares of Parent
Common Stock equal to the quotient of (i) the product of (A) the Series
H Preferred Stock and (B) the Series H Liquidation Preference and (ii)
the Effective Date Value.
4. Series H Liquidation Preference means an aggregate amount equal to
$66.36 for each share of Series H Preferred Stock outstanding (as
defined in Definition 2), plus accrued but unpaid dividends at the rate
of $1.99 per share per annum accruing each year beginning on the date of
issuance of such shares of Series H Preferred Stock.
5. Series H Preferred Stock Units means the aggregate number determined by
taking the quotient of (i) the Series H Liquidation Preference for each
share of Series H Preferred Stock and (ii) $66.36. The Series H
Preferred Stock Amount shall be allocated among the holders of Series H
Preferred Stock by reference to the number of Series H Preferred Stock
Units held by each such holder in relation to the total number of Series
H Preferred Stock Units.
6. Senior Employee Preferred Stock means the number of shares of Senior
Employee Preferred Stock which may be acquired pursuant to options
granted and vested under the Company's 2000 Stock Plan which remain
outstanding as of the Effective Date.
A-2-7
<PAGE> 342
7. Senior Employee Preferred Stock Amount means a number of shares of
Parent Common Stock equal to the product of (i) the Merger Consideration
Shares, (ii) eight (8%) percent and (iii) the fraction (expressed as a
percentage) of which the numerator is the Senior Employee Preferred
Stock and the denominator is 3,200,000.
8. Series F Preferred Stock means the number of shares of the Company's
Series F Convertible Preferred Stock issued and outstanding and the
number of shares of the Company's Series F Convertible Preferred Stock
issuable upon exercise of options or warrants outstanding as of the
Effective Date.
9. Series F Preferred Stock Amount means the amount if any, remaining after
payment of the Series H Preferred Stock Amount, Stevenson Compensation
Shares and Senior Employee Preferred Stock Amount, in an amount of
shares of Parent Common Stock equal to the quotient of (i) the product
of (A) the Series F Preferred Stock and (B) the Series F Liquidation
Preference and (ii) the Effective Date Value.
10. Series F Liquidation Preference means an aggregate amount equal to
$41.48 for each share of Series F Preferred Stock outstanding (as
defined in Definition 8), plus accrued but unpaid dividends at the rate
of $1.99 per share per annum accruing each year beginning on the date of
issuance of such shares of Series F Preferred Stock.
11. Series F Preferred Stock Units means the aggregate number determined by
taking the quotient of (i) the Series F Liquidation Preference for each
share of Series F Preferred Stock and (ii) $41.48. The Series F
Preferred Stock Amount shall be allocated among the holders of Series F
Preferred Stock by reference to the number of Series F Preferred Stock
Units held by each such holder in relation to the total number of Series
F Preferred Stock Units.
12. Series A-Prime Preferred Stock means the number of shares of the
Company's Series A-Prime Redeemable Preferred Stock issued and
outstanding and the number of shares of the Company's Series A-Prime
Redeemable Preferred Stock issuable upon exercise of options or warrants
outstanding as of the Effective Date.
13. Series A-Prime Preferred Stock Amount means the amount if any,
remaining after payment of the Series H Preferred Stock Amount,
Stevenson Compensation Shares, Senior Employee Preferred Stock Amount
and Series F Preferred Stock Amount, in an amount of shares of Parent
Common Stock equal to the quotient of (i) the product of (A) the Series
A-Prime Preferred Stock and (B) the Series A-Prime Liquidation
Preference and (ii) the Effective Date Value.
14. Series A-Prime Liquidation Preference means an aggregate amount equal
to $10.00 for each share of Series A-Prime Preferred Stock outstanding
(as defined in Definition 12), plus accrued but unpaid dividends at the
rate of $1.20 per share per annum accruing each year beginning on the
date of issuance of either (i) shares of Series A Preferred Stock
exchanged for such shares of Series A-Prime Preferred Stock pursuant to
the Exchange Agreement or (ii) such shares of Series A-Prime Preferred
Stock if not issued in exchange for Series A Preferred Stock.
15. Series A-Prime Preferred Stock Units means the aggregate number
determined by taking the quotient of (i) the Series A-Prime Liquidation
Preference for each share of Series A Preferred Stock and (ii) $10.00.
The Series A-Prime Preferred Stock Amount shall be allocated among the
holders of Series A-Prime Preferred Stock by reference to the number of
Units held by each such holder in relation to the total number of Series
A-Prime Preferred Stock Units.
16. Series B-Prime Preferred Stock means the number of shares of the
Company's Series B-Prime Convertible Preferred Stock issued and
outstanding and the number of shares of the Company's Series B-Prime
Convertible Preferred Stock issuable upon exercise of options or
warrants outstanding as of the Effective Date.
17. Series B-Prime Preferred Stock Amount means a number of shares of
Parent Common Stock, if any, remaining after payment of the Series H
Preferred Stock Amount, Stevenson Compensation
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Shares, Senior Employee Preferred Stock Amount, Series F Preferred Stock
Amount and Series A-Prime Preferred Stock Amount, in an amount equal to
the quotient of (i) the amount to be distributed to the holders of
Series B-Prime Preferred Stock calculated under the Senior-Prime
Preferred Stock Amount and designated as the Series B-Prime Liquidation
Amount and assuming the exercise in full of all warrants to purchase the
Company's Series B-Prime Preferred Stock which remain outstanding as of
the Effective Date and (ii) the Effective Date Value.
18. Series B-Prime Liquidation Preference means an aggregate amount equal
to $4.492 for each share of Series B-Prime Preferred Stock (as set forth
in Definition 16), plus accrued but unpaid dividends at the rate of
$0.54 per share per annum accruing each year beginning on the date of
issuance of either (i) shares of Series of Series B Preferred Stock
exchanged for such shares of Series B-Prime Preferred Stock pursuant to
the Exchange Agreement or (ii) such shares of Series B-Prime Preferred
Stock if not issued in exchange for Series B Preferred Stock.
19. Series B-Prime Conversion Amount means the value of the portion of
Merger Consideration Shares based upon the Effective Date Value which
would have been paid with respect to the aggregate number of shares of
Common Stock issuable upon conversion of the Series B-Prime Preferred
Stock, assuming the conversion on a one-to-one basis of all Senior Prime
Preferred Stock immediately prior to the Effective Date.
20. Series B-Prime Preferred Stock Units means the aggregate number
determined by taking the quotient of (i) the Series B-Prime Liquidation
Preference for each share of Series B-Prime Preferred Stock and (ii)
$4.492; provided, however if a holder of Series B-Prime Preferred Stock
receives the Series B-Prime Conversion Amount in lieu of the Series
B-Prime Liquidation Preference for its Series B-Prime Preferred Stock,
the number of Units held by such holder shall be equal to the number of
shares of Series B-Prime Preferred Stock held by such holder. The Series
B-Prime Preferred Stock Amount shall be allocated among the holders of
Series B-Prime Preferred Stock by reference to the number of Units held
by each such holder in relation to the total number of Series B-Prime
Preferred Stock Units.
21. Series C-Prime Preferred Stock means the number of shares of the
Company's Series C-Prime Convertible Preferred Stock issued and
outstanding and the number of shares of Series C-Prime Preferred Stock
issuable upon exercise of options or warrants outstanding as of the
Effective Date.
22. Series C-Prime Preferred Stock Amount means a number of shares of
Parent Common Stock, if any, remaining after payment of the Series H
Preferred Stock Amount, Stevenson Compensation Shares, Senior Employee
Preferred Stock Amount, Series F Preferred Stock Amount and Series
A-Prime Preferred Stock Amount, in an amount equal to the quotient of
(i) the amount to be distributed to the holders of Series C-Prime
Preferred Stock calculated under the Senior-Prime Preferred Stock Amount
and designated as the Series C-Prime Liquidation Amount and (ii) the
Effective Date Value.
23. Series C-Prime Liquidation Preference means an aggregate amount equal
to $7.106 for each share of Series C-Prime Preferred Stock (as set forth
in Definition 21) plus accrued but unpaid dividends at the rate of $0.85
per share per annum accruing each year beginning on the date of issuance
of either (i) shares of Series C Preferred Stock exchanged for such
shares of Series C-Prime Preferred Stock pursuant to the Exchange
Agreement or (ii) such shares of Series C-Prime Preferred Stock if not
issued in exchange for Series C Preferred Stock.
24. Series C-Prime Conversion Amount means the value of the portion of
Merger Consideration Shares based upon the Effective Date Value which
would have been paid with respect to the aggregate number of shares of
Common Stock issuable upon conversion of the Series C-Prime Preferred
Stock, assuming the conversion on a one-to-one basis of all outstanding
Senior-Prime Preferred Stock immediately prior to the Effective Date.
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25. Series C-Prime Preferred Stock Units means the aggregate number
determined by taking the quotient of (i) the Series C-Prime Liquidation
Preference for each share of Series C-Prime Preferred Stock and (ii)
$7.106; provided, however if a holder of Series C-Prime Preferred Stock
receives the Series C-Prime Conversion Amount in lieu of the Series
C-Prime Liquidation Preference for its Series C-Prime Preferred Stock,
the number of Units held by such holder shall be equal to the number of
shares of Series C-Prime Preferred Stock held by such holder. The Series
C-Prime Preferred Stock Amount shall be allocated among the holders of
Series C-Prime Preferred Stock by reference to the number of Units held
by each such holder in relation to the total number of Series C-Prime
Preferred Stock Units.
26. Series C1-Prime Preferred Stock means the number of shares of the
Company's Series C1-Prime Convertible Preferred Stock issued and
outstanding and the number of shares of Series C1-Prime Preferred Stock
issuable upon exercise of options or warrants outstanding as of the
Effective Date.
27.Series C1-Prime Preferred Stock Amount means a number of shares of
Parent Common Stock, if any, remaining after payment of the Series H
Preferred Stock Amount, Stevenson Compensation Shares, Senior Employee
Preferred Stock Amount, Series F Preferred Stock Amount and Series
A-Prime Preferred Stock Amount, in an amount equal to the quotient of
(i) the amount to be distributed to the holders of Series C1-Prime
Preferred Stock calculated under the Senior-Prime Preferred Stock Amount
and designated as the Series C1-Prime Liquidation Amount and (ii) the
Effective Date Value.
28.Series C1-Prime Liquidation Preference means an aggregate amount equal
to $9.49 for each share of Series C1-Prime Preferred Stock (as set forth
in Definition 26) plus accrued but unpaid dividends at the rate of $1.14
per share per annum accruing each year beginning on the date of issuance
of either (i) shares of Series C1 Preferred Stock exchanged for such
shares of Series C1-Prime Preferred Stock pursuant to the Exchange
Agreement or (ii) such shares of Series C1-Prime Preferred Stock if not
issued in exchange for Series C1 Preferred Stock.
29.Series C1-Prime Conversion Amount means the value of the portion of
Merger Consideration Shares based upon the Effective Date Value which
would have been paid with respect to the aggregate number of shares of
Common Stock issuable upon conversion of the Series C1-Prime Preferred
Stock assuming the conversion on a one-to-one basis of all outstanding
Senior-Prime Preferred Stock immediately prior to the Effective Date.
30.Series C1-Prime Preferred Stock Units means the aggregate number
determined by taking the quotient of (i) the Series C1-Prime Liquidation
Preference for each share of Series C1-Prime Preferred Stock and (ii)
$9.49; provided, however, if a holder of Series C1-Prime Preferred Stock
receives the Series C1-Prime Conversion Amount in lieu of the Series
C1-Prime Liquidation Preference for its Series C1-Prime Preferred Stock,
the number of Units held by such holder shall be equal to the number of
shares of Series C1-Prime Preferred Stock held by such holder. The
Series C1-Prime Preferred Stock Amount shall be allocated among the
holders of Series C1-Prime Preferred Stock by reference to the number of
Series C1-Prime Preferred Stock Units held by each such holder in
relation to the total number of Series C1-Prime Preferred Stock Units.
31.Series D-Prime Preferred Stock means the number of shares of the
Company's Series D-Prime Convertible Preferred Stock issued and
outstanding and the number of shares of the Company's Series D-Prime
Convertible Preferred Stock issuable upon exercise of options or
warrants outstanding as of the Effective Date.
32.Series D-Prime Preferred Stock Amount means a number of shares of Parent
Common Stock, if any, remaining after payment of the Series H Preferred
Stock Amount, Stevenson Compensation Shares, Senior Employee Preferred
Stock Amount, Series F Preferred Stock Amount and Series A-Prime
Preferred Stock Amount, in an amount equal to the quotient of (i) the
amount
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to be distributed to the holders of Series D-Prime Preferred Stock and
calculated under the Senior-Prime Preferred Stock Amount as the Series
D-Prime Liquidation Amount and assuming the exercise in full of all
warrants to purchase the Company's Series D-Prime Preferred Stock which
remain outstanding as of the Effective Date and (ii) the Effective Date
Value.
33.Series D-Prime Liquidation Preference means an aggregate amount equal to
$33.18 for each share of Series D-Prime Preferred Stock (as set forth in
Definition 31), plus accrued but unpaid dividends at the rate of $1.99
per share per annum accruing each year beginning on the date of issuance
of either (i) shares of Series D Preferred Stock exchanged for such
shares of Series D-Prime Preferred Stock pursuant to the Exchange
Agreement or (ii) such shares of Series D-Prime Preferred Stock if not
issued in exchange for Series D Preferred Stock.
34.Series D-Prime Conversion Amount means the value of the portion of
Merger Consideration Shares based upon the Effective Date Value which
would have been paid with respect to the aggregate number of shares of
Common Stock issuable upon Conversion of the Series D-Prime Preferred
Stock assuming the conversion on a one-to-one basis of all outstanding
Senior-Prime Preferred Stock immediately prior to the Effective Date.
35.Series D-Prime Preferred Stock Units means the aggregate number
determined by taking the quotient of (i) the Series D-Prime Liquidation
Preference for each share of Series D-Prime Preferred Stock and (ii)
$33.18; provided, however, if a holder of Series D-Prime Preferred Stock
receives the Series D-Prime Conversion Amount in lieu of the Series
D-Prime Liquidation Preference for its Series D-Prime Preferred Stock,
the number of Units held by such holder shall be equal to the number of
shares of Series D-Prime Preferred Stock held by such holder. The Series
D-Prime Preferred Stock Amount shall be allocated among the holders of
Series D-Prime Preferred Stock by reference to the number of Series
D-Prime Preferred Stock Units held by each such holder in relation to
the total number of Series D-Prime Preferred Stock Units.
36.Series D1-Prime Preferred Stock means the number of shares of the
Company's Series D1-Prime Convertible Preferred Stock issued and
outstanding and the number of shares of the Company's Series D1-Prime
Convertible Preferred Stock issuable upon exercise of options or
warrants outstanding as of the Effective Date.
37.Series D1-Prime Preferred Stock Amount means a number of shares of
Parent Common Stock, if any, remaining after payment of the Series H
Preferred Stock Amount, Stevenson Compensation Shares, Senior Employee
Preferred Stock Amount, Series F Preferred Stock Amount and Series
A-Prime Preferred Stock Amount, in an amount equal to the quotient of
(i) the amount to be distributed to the holders of Series D1-Prime
Preferred Stock and calculated under the Senior Preferred Stock Amount
as the Series D1-Prime Liquidation Amount and assuming the exercise in
full of all warrants to purchase the Company's Series D1-Prime Preferred
Stock which remain outstanding as of the Effective Date and (ii) the
Effective Date Value.
38. Series D1-Prime Liquidation Preference means an aggregate amount equal
to $16.59 for each share of Series D1-Prime Preferred Stock (as set
forth in Definition 36), plus accrued but unpaid dividends at the rate
of $1.99 per share per annum accruing each year beginning on the date
of issuance of either (i) shares of D1 Preferred Stock exchanged for
such shares of Series D1-Prime Preferred Stock pursuant to the Exchange
Agreement or (ii) such shares of Series D1-Prime Preferred Stock if not
issued in exchange for Series D1 Preferred Stock.
39. Series D1-Prime Conversion Amount means the value of the portion of
Merger Consideration Shares based upon the Effective Date Value which
would have been paid with respect to the aggregate number of shares of
Common Stock issuable upon conversion of the Series D1-Prime Preferred
Stock assuming the conversion on a one-to-one basis of all outstanding
Senior-Prime Preferred Stock immediately prior to the Effective Date.
40. Series D1-Prime Preferred Stock Units means the aggregate number
determined by taking the quotient of (i) the Series D1-Prime
Liquidation Preference for each share of Series D1-Prime
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Preferred Stock and (ii) $16.59; provided, however, if a holder of
Series D1-Prime Preferred Stock receives the Series D1-Prime Conversion
Amount in lieu of the Series D1-Prime Liquidation Preference for its
Series D1-Prime Preferred Stock, the number of Units held by such
holder shall be equal to the number of shares of Series D1-Prime
Preferred Stock held by such holder. The Series D1-Prime Preferred
Stock Amount shall be allocated among the holders of Series D1-Prime
Preferred Stock by reference to the number of Series D1-Prime Preferred
Stock Units held by each such holder in relation to the total number of
Series D1-Prime Preferred Stock Units.
41. Series E-Prime Preferred Stock means the number of shares of the
Company's Series E-Prime Convertible Preferred Stock issued and
outstanding and the number of shares of the Company's Series E-Prime
Preferred Stock issuable upon exercise of options or warrants
outstanding as of the Effective Date.
42. Series E-Prime Preferred Stock Amount means the number of shares of
Parent Common Stock, if any, remaining after payment of the Series H
Preferred Stock Amount, Stevenson Compensation Shares, Senior Employee
Preferred Stock Amount, Series F Preferred Stock Amount, Series A-Prime
Preferred Stock Amount and Senior-Prime Preferred Stock Amount, in an
amount equal to the quotient of (i) the product of (A) the amount, if
any, by which $32.11 exceeds the per share amount, if any,
distributable on each share of Common Stock and (B) the Series E-Prime
Preferred Stock, and (ii) the Effective Date Value, where the Common
Stock Amount is calculated by assuming the Series E-Prime Preferred
Stock Amount to be the quotient of (i) the product of (A) $32.11 and
(B) the Series E-Prime Preferred Stock and (ii) the Effective Date
Value.
43. Series E-Prime Preferred Stock Unit means the number of shares of
Series E-Prime Preferred Stock held by the holders of Common Stock.
44. Series E-Prime Preferred Stock Unit Maximum Amount means an amount, if
any, remaining after payment of the Series H Preferred Stock Amount,
Stevenson Compensation Shares, Senior Employee Preferred Stock Amount,
Series F Preferred Stock Amount, Series A-Prime Preferred Stock Amount
and Senior-Prime Preferred Stock Amount, in an amount equal to the
quotient of (i) the product of (A) $32.11, minus any amounts
distributed with respect to the Series E-Prime Preferred Stock or the
per share amount distributable on each share of Common Stock, and (B)
the Series E-Prime Preferred Stock Units and (ii) the Effective Date
Value.
45. Series G Preferred Stock means the number of shares of the Company's
Series G Convertible Preferred Stock issued and outstanding and the
number of shares of the Company's Series G Convertible Preferred Stock
issuable upon exercise of options or warrants outstanding as of the
Effective Date.
46. Series G Preferred Stock Amount means the amount if any, remaining
after payment of the Series H Preferred Stock Amount, Stevenson
Compensation Shares, Senior Employee Preferred Stock Amount, Series F
Preferred Stock Amount, Series A-Prime Preferred Stock Amount,
Senior-Prime Preferred Stock Amount, Series E-Prime Preferred Stock
Amount and Series E-Prime Preferred Stock Unit Minimum Amount in an
amount of shares of Parent Common Stock equal to the quotient of (i)
the product of (A) the Series G Preferred Stock and (B) the Series G
Liquidation Preference and (ii) the Effective Date Value.
47. Series G Liquidation Preference means the quotient of (i) the aggregate
sum for all holders of Series G Preferred Stock of the amount, if any,
by which the product of (A) $1.00 multiplied by (B) the shares of
Series G Preferred Stock held by each individual holder, exceeds the
aggregate amount, if any, distributable on shares of Common Stock held
by such individual holder of Series G Preferred Stock, where the Common
Stock Amount is calculated by assuming the Series G Liquidation
Preference equals $1.00, and (ii) the Series G Preferred Stock.
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48. Series G Preferred Stock Units means the aggregate number determined by
taking the quotient of (i) the Series G Liquidation Preference for each
individual holder of Series G Preferred Stock and (ii) the product of
(A) the Series G Liquidation Preference and (B) the Series G Preferred
Stock. The Series G Preferred Stock Amount shall be allocated among the
holders of Series G Preferred Stock by reference to the number of
Series G Preferred Stock Units held by each such holder in relation to
the total number of Series G Preferred Stock Units.
49. Series A Preferred Stock means the number of shares of the Company's
Series A Redeemable Preferred Stock issued and outstanding and the
number of shares of the Company's Series A Redeemable Preferred Stock
issuable upon exercise of options or warrants outstanding as of the
Effective Date.
50. Series A Preferred Stock Amount means the amount if any, remaining
after payment of the Series H Preferred Stock Amount, Stevenson
Compensation Shares, Senior Employee Preferred Stock Amount, Series F
Preferred Stock Amount, Series A-Prime Preferred Stock Amount,
Senior-Prime Preferred Stock Amount, Series E-Prime Preferred Stock
Amount, Series E-Prime Preferred Stock Unit Minimum Amount and Series G
Preferred Stock Amount in an amount of shares of Parent Common Stock
equal to the quotient of (i) the product of (A) the Series A Preferred
Stock and (B) the Series A Liquidation Preference, and (ii) the
Effective Date Value.
51. Series A Liquidation Preference means an aggregate amount equal to
$10.00 for each share of Series A Preferred Stock outstanding (as
defined in Definition 49), plus accrued but unpaid dividends at the
rate of $1.20 per share per annum accruing each year beginning on the
date of issuance of such shares of Series A Preferred Stock.
52. Series A Preferred Stock Units means the aggregate number determined by
taking the quotient of (i) the Series A Liquidation Preference for each
share of Series A Preferred Stock and (ii) $10.00. The Series A
Preferred Stock Amount shall be allocated among the holders of Series A
Preferred Stock by reference to the number of Units held by each such
holder in relation to the total number of Series A Preferred Stock
Units.
53. Series B Preferred Stock means the number of shares of the Company's
Series B Convertible Preferred Stock issued and outstanding and the
number of shares of the Company's Series B Convertible Preferred Stock
issuable upon exercise of options or warrants outstanding as of the
Effective Date.
54. Series B Preferred Stock Amount means a number of shares of Parent
Common Stock, if any, remaining after payment of the Series H Preferred
Stock Amount, Stevenson Compensation Shares, Senior Employee Preferred
Stock Amount, Series F Preferred Stock Amount, Series A-Prime Preferred
Stock Amount, Senior-Prime Preferred Stock Amount, Series E-Prime
Preferred Stock Amount, Series E-Prime Preferred Stock Unit Minimum
Amount, Series G Preferred Stock Amount and Series A Preferred Stock
Amount, in an amount equal to the quotient of (i) the amount to be
distributed to the holders of Series B Preferred Stock calculated under
the Senior Preferred Stock Amount and designated as the Series B
Liquidation Amount and assuming the exercise in full of all warrants to
purchase the Company's Series B Preferred Stock which remain
outstanding as of the Effective Date, and (ii) the Effective Date
Value.
55. Series B Liquidation Preference means an aggregate amount equal to
$4.492 for each share of Series B Preferred Stock (as set forth in
Definition 53), plus accrued but unpaid dividends at the rate of $0.54
per share per annum accruing each year beginning on the date of
issuance of such shares of Series B Preferred Stock.
56. Series B Conversion Amount means the value of the portion of Merger
Consideration Shares based upon the Effective Date Value which would
have been paid with respect to the aggregate number of shares of Common
Stock issuable upon conversion of the Series B Preferred Stock,
assuming the conversion on a one-to-one basis of all Senior Preferred
Stock immediately prior to the Effective Date.
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57. Series B Preferred Stock Units means the aggregate number determined by
taking the quotient of (i) the Series B Liquidation Preference for each
share of Series B Preferred Stock and (ii) $4.492; provided, however if
a holder of Series B Preferred Stock receives the Series B Conversion
Amount in lieu of the Series B Liquidation Preference for its Series B
Preferred Stock, the number of Units held by such holder shall be equal
to the number of shares of Series B Preferred Stock held by such
holder. The Series B Preferred Stock Amount shall be allocated among
the holders of Series B Preferred Stock by reference to the number of
Units held by each such holder in relation to the total number of
Series B Preferred Stock Units.
58. Series C Preferred Stock means the number of shares of the Company's
Series C Convertible Preferred Stock issued and outstanding and the
number of shares of Series C Preferred Stock issuable upon exercise of
options or warrants outstanding as of the Effective Date.
59. Series C Preferred Stock Amount means a number of shares of Parent
Common Stock, if any, remaining after payment of the Series H Preferred
Stock Amount, Stevenson Compensation Shares, Senior Employee Preferred
Stock Amount, Series F Preferred Stock Amount, Series A-Prime Preferred
Stock Amount, Senior-Prime Preferred Stock Amount, Series E-Prime
Preferred Stock Amount, Series E-Prime Preferred Stock Unit Minimum
Amount, Series G Preferred Stock Amount and Series A Preferred Stock
Amount, in an amount equal to the quotient of (i) the amount to be
distributed to the holders of Series C Preferred Stock calculated under
the Senior Preferred Stock Amount and designated as the Series C
Liquidation Amount, and (ii) the Effective Date Value.
60. Series C Liquidation Preference means an aggregate amount equal to
$7.106 for each share of Series C Preferred Stock (as set forth in
Definition 58) plus accrued but unpaid dividends at the rate of $0.85
per share per annum accruing each year beginning on the date of
issuance of such shares of Series C Preferred Stock.
61. Series C Conversion Amount means the value of the portion of Merger
Consideration Shares based upon the Effective Date Value which would
have been paid with respect to the aggregate number of shares of Common
Stock issuable upon conversion of the Series C Preferred Stock,
assuming the conversion on a one-to-one basis of all outstanding Senior
Preferred Stock immediately prior to the Effective Date.
62. Series C Preferred Stock Units means the aggregate number determined by
taking the quotient of (i) the Series C Liquidation Preference for each
share of Series C Preferred Stock and (ii) $7.106; provided, however if
a holder of Series C Preferred Stock receives the Series C Conversion
Amount in lieu of the Series C Liquidation Preference for its Series C
Preferred Stock, the number of Units held by such holder shall be equal
to the number of shares of Series C Preferred Stock held by such
holder. The Series C Preferred Stock Amount shall be allocated among
the holders of Series C Preferred Stock by reference to the number of
Units held by each such holder in relation to the total number of
Series C Preferred Stock Units.
63. Series C1 Preferred Stock means the number of shares of the Company's
Series C1 Convertible Preferred Stock issued and outstanding and the
number of shares of Series C1 Preferred Stock issuable upon exercise of
options or warrants outstanding as of the Effective Date.
64. Series C1 Preferred Stock Amount means a number of shares of Parent
Common Stock, if any, remaining after payment of the Series H Preferred
Stock Amount, Stevenson Compensation Shares, Senior Employee Preferred
Stock Amount, Series F Preferred Stock Amount, Series A-Prime Preferred
Stock Amount, Senior-Prime Preferred Stock Amount, Series E-Prime
Preferred Stock Amount, Series E-Prime Preferred Stock Unit Minimum
Amount, Series G Preferred Stock Amount and Series A Preferred Stock
Amount, in an amount equal to the quotient of (i) the amount to be
distributed to the holders of Series C1 Preferred Stock calculated
under the Senior Preferred Stock Amount and designated as the Series C1
Liquidation Amount, and (ii) the Effective Date Value.
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65. Series C1 Liquidation Preference means an aggregate amount equal to
$9.49 for each share of Series C1 Preferred Stock (as set forth in
Definition 63) plus accrued but unpaid dividends at the rate of $1.14
per share per annum accruing each year beginning on the date of
issuance of such shares of Series C1 Preferred Stock.
66. Series C1 Conversion Amount means the value of the portion of Merger
Consideration Shares based upon the Effective Date Value which would
have been paid with respect to the aggregate number of shares of Common
Stock issuable upon conversion of the Series C1 Preferred Stock
assuming the conversion on a one-to-one basis of all outstanding Senior
Preferred Stock immediately prior to the Effective Date.
67. Series C1 Preferred Stock Units means the aggregate number determined
by taking the quotient of (i) the Series C1 Liquidation Preference for
each share of Series C1 Preferred Stock and (ii) $9.49; provided,
however, if a holder of Series C1 Preferred Stock receives the Series
C1 Conversion Amount in lieu of the Series C1 Liquidation Preference
for its Series C1 Preferred Stock, the number of Units held by such
holder shall be equal to the number of shares of Series C1 Preferred
Stock held by such holder. The Series C1 Preferred Stock Amount shall
be allocated among the holders of Series C1 Preferred Stock by
reference to the number of Series C1 Preferred Stock Units held by each
such holder in relation to the total number of Series C1 Preferred
Stock Units.
68. Series D Preferred Stock means the number of shares of the Company's
Series D Convertible Preferred Stock issued and outstanding and the
number of shares of the Company's Series D Convertible Preferred Stock
issuable upon exercise of options or warrants outstanding as of the
Effective Date.
69. Series D Preferred Stock Amount means a number of shares of Parent
Common Stock, if any, remaining after payment of the Series H Preferred
Stock Amount, Stevenson Compensation Shares, Senior Employee Preferred
Stock Amount, Series F Preferred Stock Amount, Series A-Prime Preferred
Stock Amount, Senior-Prime Preferred Stock Amount, Series E-Prime
Preferred Stock Amount, Series E-Prime Preferred Stock Unit Minimum
Amount, Series G Preferred Stock Amount and Series A Preferred Stock
Amount, in an amount equal to the quotient of (i) the amount to be
distributed to the holders of Series D Preferred Stock and calculated
under the Senior Preferred Stock Amount as the Series D Liquidation
Amount and assuming the exercise in full of all warrants to purchase
the Company's Series D Preferred Stock which remain outstanding as of
the Effective Date, and (ii) the Effective Date Value.
70. Series D Liquidation Preference means an aggregate amount equal to
$33.18 for each share of Series D Preferred Stock (as set forth in
Definition 68), plus accrued but unpaid dividends at the rate of $1.99
per share per annum accruing each year beginning on the date of
issuance of such shares of Series D Preferred Stock.
71. Series D Conversion Amount means the value of the portion of Merger
Consideration Shares based upon the Effective Date Value which would
have been paid with respect to the aggregate number of shares of Common
Stock issuable upon Conversion of the Series D Preferred Stock assuming
the conversion on a one-to-one basis of all outstanding Senior
Preferred Stock immediately prior to the Effective Date.
72. Series D Preferred Stock Units means the aggregate number determined by
taking the quotient of (i) the Series D Liquidation Preference for each
share of Series D Preferred Stock and (ii) $33.18; provided, however,
if a holder of Series D Preferred Stock receives the Series D
Conversion Amount in lieu of the Series D Liquidation Preference for
its Series D Preferred Stock, the number of Units held by such holder
shall be equal to the number of shares of Series D Preferred Stock held
by such holder. The Series D Preferred Stock Amount shall be allocated
among the holders of Series D Preferred Stock by reference to the
number of Series D
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Preferred Stock Units held by each such holder in relation to the total
number of Series D Preferred Stock Units.
73. Series D1 Preferred Stock means the number of shares of the Company's
Series D1 Convertible Preferred Stock issued and outstanding and the
number of shares of the Company's Series D1 Convertible Preferred Stock
issuable upon exercise of options or warrants outstanding as of the
Effective Date.
74. Series D1 Preferred Stock Amount means a number of shares of Parent
Common Stock, if any, remaining after payment of the Series H Preferred
Stock Amount, Stevenson Compensation Shares, Senior Employee Preferred
Stock Amount, Series F Preferred Stock Amount, Series A-Prime Preferred
Stock Amount, Senior-Prime Preferred Stock Amount, Series E-Prime
Preferred Stock Amount, Series E-Prime Preferred Stock Unit Minimum
Amount, Series G Preferred Stock Amount and Series A Preferred Stock
Amount, in an amount equal to the quotient of (i) the amount to be
distributed to the holders of Series D1 Preferred Stock and calculated
under the Senior Preferred Stock Amount as the Series D1 Liquidation
Amount and assuming the exercise in full of all warrants to purchase
the Company's Series D1 Preferred Stock which remain outstanding as of
the Effective Date, and (ii) the Effective Date Value.
75. Series D1 Liquidation Preference means an aggregate amount equal to
$16.59 for each share of Series D1 Preferred Stock (as set forth in
Definition 73), plus accrued but unpaid dividends at the rate of $1.99
per share per annum accruing each year beginning on the date of
issuance of such shares of Series D1 Preferred Stock.
76. Series D1 Conversion Amount means the value of the portion of Merger
Consideration Shares based upon the Effective Date Value which would
have been paid with respect to the aggregate number of shares of Common
Stock issuable upon conversion of the Series D1 Preferred Stock
assuming the conversion on a one-to-one basis of all outstanding Senior
Preferred Stock immediately prior to the Effective Date.
77. Series D1 Preferred Stock Units means the aggregate number determined
by taking the quotient of (i) the Series D1 Liquidation Preference for
each share of Series D1 Preferred Stock and (ii) $16.59; provided,
however, if a holder of Series D1 Preferred Stock receives the Series
D1 Conversion Amount in lieu of the Series D1 Liquidation Preference
for its Series D1 Preferred Stock, the number of Units held by such
holder shall be equal to the number of shares of Series D1 Preferred
Stock held by such holder. The Series D1 Preferred Stock Amount shall
be allocated among the holders of Series D1 Preferred Stock by
reference to the number of Series D1 Preferred Stock Units held by each
such holder in relation to the total number of Series D1 Preferred
Stock Units.
78. Series E Preferred Stock means the number of shares of the Company's
Series E Convertible Preferred Stock issued and outstanding and the
number of shares of the Company's Series E Preferred Stock issuable
upon exercise of options or warrants outstanding as of the Effective
Date.
79. Series E Preferred Stock Amount means the number of shares of Parent
Common Stock, if any, remaining after payment of the Series H Preferred
Stock Amount, Stevenson Compensation Shares, Senior Employee Preferred
Stock Amount, Series F Preferred Stock Amount, Series A-Prime Preferred
Stock Amount, Senior-Prime Preferred Stock Amount, Series E-Prime
Preferred Stock Amount, Series E-Prime Preferred Stock Unit Minimum
Amount, Series G Preferred Stock Amount, Series A Preferred Stock
Amount and Senior Preferred Stock Amount, in an amount equal to the
quotient of (i) the product of (A) the amount, if any, by which $32.11
exceeds the per share amount, if any, distributable on each share of
Common Stock and (B) the Series E Preferred Stock, and (ii) the
Effective Date Value, where the Common Stock Amount is calculated by
assuming the Series E Preferred Stock Amount to be the quotient of
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(i) the product of (A) $32.11 and (B) the Series E Preferred Stock and
(ii) the Effective Date Value.
80. Series E Preferred Stock Unit means the number of shares of Series E
Preferred Stock held by the holders of Common Stock.
81. Series E Preferred Stock Unit Maximum Amount means an amount, if any,
remaining after payment of the Series H Preferred Stock Amount,
Stevenson Compensation Shares, Senior Employee Preferred Stock Amount,
Series F Preferred Stock Amount, Series A-Prime Preferred Stock Amount,
Senior-Prime Preferred Stock Amount, Series E-Prime Preferred Stock
Amount, Series E-Prime Preferred Stock Unit Minimum Amount, Series G
Preferred Stock Amount, Series A Preferred Stock Amount, Senior
Preferred Stock Amount and Series E Preferred Stock Amount in an amount
equal to the quotient of (i) the product of (A) $32.11, minus any
amounts distributed with respect to the Series E Preferred Stock or the
per share amount distributable on each share of Common Stock, and (B)
the Series E Preferred Stock Units and (ii) the Effective Date Value.
82. Common Stock means the number of shares of the Company's Common Stock
issued and outstanding and the number of shares of the Company's Common
Stock issuable upon the exercise of options and warrants outstanding as
of the Effective Date.
83. Common Stock Amount means the number of Merger Consideration Shares, if
any, remaining to be distributed after payment of the Series H
Preferred Stock Amount, Stevenson Compensation Shares, Senior Employee
Preferred Stock Amount, Series F Preferred Stock Amount, Series A-Prime
Preferred Stock Amount, Senior-Prime Preferred Stock Amount, Series
E-Prime Preferred Stock Amount, Series E-Prime Preferred Stock Unit
Minimum Amount, Series G Preferred Stock Amount, Series A Preferred
Stock Amount, Senior Preferred Stock Amount, Series E Preferred Stock
Amount and the Series E Preferred Stock Unit Minimum Amount.
84. Effective Date Value means the average of the last sales price of
Parent Common Stock quoted on the NASDAQ Stock Market for the five
consecutive business days ending on the day immediately prior to the
Effective Date.
85. Stevenson Compensation Shares means the aggregate number of the Merger
Consideration Shares payable to Gary Stevenson pursuant to his
agreement with the Company as of the Effective Time.
86. Exchange Agreement means that Note and Warrant Agreement, Exchange
Agreement and Security Agreement dated as of September , 2000 among
the Company, the Purchasers named therein and Piedmont Venture Partners
II, L.P.
87. Senior-Prime Preferred Stock Amount means the number of Merger
Consideration Shares, if any, remaining after payment of the Series H
Preferred Stock Amount, Stevenson Compensation Shares, Senior Employee
Preferred Stock Amount, Series F Preferred Stock Amount, Series A-Prime
Preferred Stock Amount, and payable to all Senior-Prime Preferred
Stock, in an amount equal to the greater of the quotient of (i) (A) the
Senior-Prime Preferred Stock Liquidation Preference, or (B) the
Senior-Prime Conversion Amount and (ii) the Effective Date Value;
provided, however, that if (A) the amount of the Senior-Prime Preferred
Stock Liquidation Preference is greater than the amount of the
Senior-Prime Conversion Amount, and (B) the Effective Date Value of the
Merger Consideration Shares distributable to the holders of
Senior-Prime Preferred Stock is less than the Senior-Prime Preferred
Stock Liquidation Preference, then the amount of Merger Consideration
Shares available to be distributed to the holders of Senior-Prime
Preferred Stock shall be distributed ratably among the holders of
Senior-Prime Preferred Stock in proportion to the Series B-Prime
Liquidation Preference, Series C-Prime Liquidation Preference, Series
C1-Prime Liquidation Preference, Series D-Prime Liquidation Preference
and Series D1-Prime Liquidation Preference. Notwithstanding the
foregoing, in the event that the Senior-Prime Conversion Amount exceeds
the Senior-Prime
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Preferred Stock Liquidation Preference, but the per share amount
determined with respect to the Senior-Prime Conversion Amount is less
than the per share amount payable under the Series B-Prime Liquidation
Preference, the Series C-Prime Liquidation Preference, the Series
C1-Prime Liquidation Preference, the Series D-Prime Liquidation
Preference or the Series D1-Prime Liquidation Preference, individually,
then any holder of Senior-Prime Preferred Stock may elect to receive
its respective liquidation preference for such holder's Senior-Prime
Preferred Stock in lieu of the Senior-Prime Conversion Amount and the
amount payable with respect to any non-electing holders of Senior-Prime
Preferred Stock shall be adjusted to reflect the priority of such
payment. (For example, if the Senior-Prime Conversion Amount equates to
a Series D-Prime Conversion Amount equal to $28.00 per share, the
Series D-Prime Liquidation Preference per share would be greater than
this value. In this scenario, the holder of Series D-Prime Preferred
Stock could elect to receive the Series D-Prime Liquidation Preference
in lieu of the Series D-Prime Conversion Amount; if the holders so
elected, the Senior-Prime Conversion Amount would be reduced by the
value of the Series D-Prime Liquidation Preference.) Each amount
calculated under this definition with respect to the Series B-Prime
Preferred Stock, the Series C-Prime Preferred Stock, the Series
C1-Prime Preferred Stock, the Series D-Prime Preferred Stock, and the
Series D1-Prime Preferred Stock and included in this Senior-Prime
Preferred Stock Amount shall be designated respectively as the Series
B-Prime Liquidation Amount, the Series C-Prime Liquidation Amount, the
Series C1-Prime Liquidation Amount, the Series D-Prime Liquidation
Amount and the Series D1-Prime Liquidation Amount.
88. Senior-Prime Preferred Stock Liquidation Preference means the sum of
(i) the Series B-Prime Liquidation Preference; (ii) the Series C-Prime
Liquidation Preference; (iii) the Series C1-Prime Liquidation
Preference; (iv) the Series D-Prime Liquidation Preference and (v) the
Series D1-Prime Liquidation Preference.
89. Senior-Prime Conversion Amount means the sum of (i) the Series B-Prime
Conversion Amount; (ii) the Series C-Prime Conversion Amount; (iii) the
Series C1-Prime Conversion Amount; (iv) the Series D-Prime Conversion
Amount and (v) the Series D1-Prime Conversion Amount.
90. Senior-Prime Preferred Stock means collectively the Series B-Prime
Preferred Stock, the Series C-Prime Preferred Stock the Series C1-Prime
Preferred Stock, the Series D-Prime Preferred Stock and the Series
D1-Prime Preferred Stock.
91. Senior Preferred Stock Amount means the number of Merger Consideration
Shares, if any, remaining after payment of the Series H Preferred Stock
Amount, Stevenson Compensation Shares, Senior Employee Preferred Stock
Amount, Series F Preferred Stock Amount, Series A-Prime Preferred Stock
Amount, Senior-Prime Preferred Stock Amount, Series E-Prime Preferred
Stock Amount, Series E-Prime Preferred Stock Unit Minimum Amount,
Series G Preferred Stock Amount, Series A Preferred Stock Amount and
payable to all Senior Preferred Stock, in an amount equal to the
greater of the quotient of (i)(A) the Senior Preferred Stock
Liquidation Preference, or (B) the Senior Conversion Amount and (ii)
the Effective Date Value; provided, however, that if (A) the amount of
the Senior Preferred Stock Liquidation Preference is greater than the
amount of the Senior Conversion Amount, and (B) the Effective Date
Value of the Merger Consideration Shares distributable to the holders
of Senior Preferred Stock is less than the Senior Preferred Stock
Liquidation Preference, then the amount of Merger Consideration Shares
available to be distributed to the holders of Senior Preferred Stock
shall be distributed ratably among the holders of Senior Preferred
Stock in proportion to the Series B Liquidation Preference, Series C
Liquidation Preference, Series C1 Liquidation Preference, Series D
Liquidation Preference and Series D1 Liquidation Preference.
Notwithstanding the foregoing, in the event that the Senior Conversion
Amount exceeds the Senior Preferred Stock Liquidation Preference, but
the per share amount determined with respect to the Senior Conversion
Amount is less than the per share amount payable under the Series B
Liquidation Preference, the Series C Liquidation Preference, the Series
C1 Liquidation Preference, the Series D Liquidation Preference or the
Series D1 Liquidation Preference, individually, then any
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holder of Senior Preferred Stock may elect to receive its respective
liquidation preference for such holder's Senior Preferred Stock in lieu
of the Senior Conversion Amount and the amount payable with respect to
any non-electing holders of Senior Preferred Stock shall be adjusted to
reflect the priority of such payment. (For example, if the Senior
Conversion Amount equates to a Series D Conversion Amount equal to
$28.00 per share, the Series D Liquidation Preference per share would
be greater than this value. In this scenario, the holder of Series D
Preferred Stock could elect to receive the Series D Liquidation
Preference in lieu of the Series D Conversion Amount; if the holders so
elected, the Senior Conversion Amount would be reduced by the value of
the Series D Liquidation Preference.) Each amount calculated under this
definition with respect to the Series B Preferred Stock, the Series C
Preferred Stock, the Series C1 Preferred Stock, the Series D Preferred
Stock, and the Series D1 Preferred Stock and included in this Senior
Preferred Stock Amount shall be designated respectively as the Series B
Liquidation Amount, the Series C Liquidation Amount, the Series C1
Liquidation Amount, the Series D Liquidation Amount and the Series D1
Liquidation Amount.
92. Senior Preferred Stock Liquidation Preference means the sum of (i) the
Series B Liquidation Preference; (ii) the Series C Liquidation
Preference; (iii) the Series C1 Liquidation Preference; (iv) the Series
D Liquidation Preference and (v) the Series D1 Liquidation Preference.
93. Senior Conversion Amount means the sum of (i) the Series B Conversion
Amount; (ii) the Series C Conversion Amount; (iii) the Series C1
Conversion Amount; (iv) the Series D Conversion Amount and (v) the
Series D1 Conversion Amount.
94. Senior Preferred Stock means collectively the Series B Preferred Stock,
the Series C Preferred Stock the Series C1 Preferred Stock, the Series
D Preferred Stock and the Series D1 Preferred Stock.
95. Company Stock means collectively the Common Stock, Senior Employee
Preferred Stock, Series A Preferred Stock, Series A-Prime Preferred
Stock, Senior Preferred Stock, Senior-Prime Preferred Stock, Series E
Preferred Stock, Series E-Prime Preferred Stock, Series F Preferred
Stock, Series G Preferred Stock and Series H Preferred Stock, including
shares of Company Stock issuable upon exercise of outstanding options
or warrants.
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ANNEX B-1
FORM OF VOTING AGREEMENT
THIS VOTING AGREEMENT is entered into as of July 20, 2000, by and between
TOTAL SPORTS INC., a Delaware corporation (the "Company"), and the
below-identified holder ("Holder") of the securities of QUOKKA SPORTS, INC., a
Delaware corporation ("Parent").
RECITALS
A. Parent and the Company are entering into an Agreement and Plan of Merger
and Reorganization of even date herewith (the "Reorganization Agreement") which
provides (subject to the conditions set forth therein) for the merger of the
Company into Parent (the "Merger").
B. In order to induce the Company to enter into the Reorganization
Agreement, Holder is entering into this Voting Agreement.
C. Insofar as the Company may be deemed to become an "interested
stockholder" under Section 203 of the Delaware General Corporation Law by virtue
of the execution and delivery of this Agreement, the parties acknowledge that
the Board of Directors of Parent has approved this Agreement prior to the
parties' execution and delivery of this Agreement, thereby complying with
Section 203 of the Delaware General Corporation Law.
AGREEMENT
The parties to this Voting Agreement, intending to be legally bound, agree
as follows:
SECTION 1. CERTAIN DEFINITIONS
For purposes of this Voting Agreement:
(a) "Parent Common Stock" shall mean the common stock, par value
$.0001 per share, of Parent.
(b) "Expiration Date" shall mean the earlier of (i) the date upon
which the Reorganization Agreement is validly terminated, or (ii) the date
upon which the Merger becomes effective.
(c) Holder shall be deemed to "Own" or to have acquired "Ownership" of
a security if Holder: (i) is the record owner of such security, with the
right to vote such security; or (ii) is the "beneficial owner" (within the
meaning of Rule 13d-3 under the Securities Exchange Act of 1934) of such
security, with the right to vote such security; provided that Holder shall
only be deemed to "Own" or have acquired "Ownership" of securities held as
record owner by MediaOne Group, Inc. and its subsidiaries, and not
securities held as record owner by AtHome Corporation, Liberty QS, Inc. or
other affiliates of AT&T Corporation.
(d) "Person" shall mean any (i) individual, (ii) corporation, limited
liability company, partnership or other entity, or (iii) governmental
authority.
(e) "Subject Securities" shall mean: (i) all securities of Parent
(including all shares of Parent Common Stock and all options, warrants and
other rights to acquire shares of Parent Common Stock) Owned by Holder as
of the date of this Agreement; and (ii) all additional securities of Parent
(including all additional shares of Parent Common Stock and all additional
options, warrants and other rights to acquire shares of Parent Common
Stock) of which Holder acquires Ownership during the period from the date
of this Agreement through the Expiration Date.
(f) A Person shall be deemed to have a effected a "Transfer" of a
security if such Person directly or indirectly: (i) sells, pledges,
encumbers, grants an option with respect to, transfers or
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disposes of such security or any interest in such security; or (ii) enters
into an agreement or commitment contemplating the possible sale of, pledge
of, encumbrance of, grant of an option with respect to, transfer of or
disposition of such security or any interest therein.
SECTION 2. TRANSFER OF SUBJECT SECURITIES
2.1 Transferee of Subject Securities to be Bound by this Agreement. Holder
agrees that, during the period from the date of this Voting Agreement through
the Expiration Date, Holder shall not cause or permit any Transfer of any of the
Subject Securities to be effected unless each Person to which any of such
Subject Securities, or any interest in any of such Subject Securities, is or may
be transferred shall have: (a) executed a counterpart of this Voting Agreement
and a proxy in the form attached hereto as Exhibit A; and (b) agreed to hold
such Subject Securities (or interest in such Subject Securities) subject to all
of the terms and provisions of this Voting Agreement.
2.2 Transfer of Voting Rights. Holder agrees that, during the period from
the date of this Voting Agreement through the Expiration Date, Holder shall
ensure that: (a) none of the Subject Securities is deposited into a voting
trust; and (b) no proxy is granted, and no voting agreement or similar agreement
is entered into, with respect to any of the Subject Securities, if in either
case such trust, proxy or agreement would entail obligations or restrictions
inconsistent with Holder's obligations under this Agreement.
SECTION 3. VOTING OF SHARES
3.1 Voting Agreement. Holder agrees that, during the period from the date
of this Voting Agreement through the Expiration Date:
(a) at any meeting of stockholders of Parent, however called, Holder
shall (unless otherwise directed in writing by the Company) cause all
outstanding shares of Parent Common Stock that are Owned by Holder as of
the record date fixed for such meeting to be voted in favor of the approval
and adoption of the Reorganization Agreement and the approval of the
Merger, the issuance of Parent Common Stock in the Merger and in favor of
each of the other actions contemplated by the Reorganization Agreement, in
each case on substantially the terms and conditions set forth in the
Reorganization Agreement, as amended in accordance with the applicable
provisions thereof; provided that such amendments do not result in a
material change to the fundamental economic terms of the transaction set
forth in the Reorganization Agreement; and
(b) in the event written consents are solicited or otherwise sought
from stockholders of Parent with respect to the approval or adoption of the
Reorganization Agreement, with respect to the approval of the Merger or
with respect to any of the other actions contemplated by the Reorganization
Agreement, Holder shall (unless otherwise directed in writing by the
Company) cause to be executed, with respect to all outstanding shares of
Parent Common Stock that are Owned by Holder as of the record date fixed
for the consent to the proposed action, a written consent or written
consents to such proposed action.
3.2 Proxy; Further Assurances.
Contemporaneously with the execution of this Voting Agreement: (i) Holder
shall deliver to the Company a proxy in the form attached to this Voting
Agreement as Exhibit A, which shall be irrevocable to the fullest extent
permitted by law (except at set forth in Section 8.13 below), with respect to
the shares referred to therein (the "Proxy"); and (ii) Holder shall cause to be
delivered to the Company an additional proxy (in the form attached hereto as
Exhibit A) executed on behalf of the record owner of any outstanding shares of
Parent Common Stock that are owned beneficially (within the meaning of Rule
13d-3 under the Securities Exchange Act of 1934), but not of record, by Holder.
SECTION 4. WAIVER OF APPRAISAL RIGHTS
Holder hereby irrevocably and unconditionally waives, and agrees to cause
to be waived and to prevent the exercise of, any rights of appraisal, any
dissenters' rights and any similar rights relating to the
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Merger or any related transaction that Holder or any other Person may have by
virtue of the Ownership of any outstanding shares of Parent Common Stock Owned
by Holder.
SECTION 5. NO SOLICITATION
Holder agrees that, during the period from the date of this Voting
Agreement through the Expiration Date, Holder shall not, directly or indirectly,
and Holder shall ensure that his Representatives (as defined in the
Reorganization Agreement) do not, directly or indirectly: (i) solicit, initiate,
encourage or induce the making, submission or announcement of any Acquisition
Proposal (as defined in the Reorganization Agreement) or take any action that
could reasonably be expected to lead to an Acquisition Proposal; (ii) furnish
any information regarding Parent or any direct or indirect subsidiary of Parent
to any Person in connection with or in response to an Acquisition Proposal or
potential Acquisition Proposal; or (iii) engage in discussions with any Person
with respect to any Acquisition Proposal. Holder shall immediately cease and
discontinue, and Holder shall ensure that his Representatives immediately cease
and discontinue, any existing discussions with any Person that relate to any
Acquisition Proposal.
SECTION 6. REPRESENTATIONS AND WARRANTIES OF HOLDER
Holder hereby represents and warrants to the Company as follows:
6.1 Authorization, etc. If Holder is not an individual, Holder has the
corporate, limited liability company, partnership or other comparable
organizational power and authority to execute and deliver this Voting Agreement
and the Proxy and to perform its obligations hereunder and thereunder. This
Voting Agreement and the Proxy have been duly executed and delivered by Holder
and constitute legal, valid and binding obligations of Holder, enforceable
against Holder in accordance with their terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of debtors, and
(ii) rules of law governing specific performance, injunctive relief and other
equitable remedies.
6.2 No Conflicts or Consents.
(a) The execution and delivery of this Voting Agreement and the Proxy by
Holder do not, and the performance of this Voting Agreement and the Proxy by
Holder will not: (i) conflict with or violate any law, rule, regulation, order,
decree or judgment applicable to Holder or by which he or any of his properties
is or may be bound or affected and, if Holder is not an individual, Holder's
certificate of incorporation, formation certificate, partnership agreement or
comparable organizational document; or (ii) result in or constitute (with or
without notice or lapse of time) any breach of or default under, or give to any
other Person (with or without notice or lapse of time) any right of termination,
amendment, acceleration or cancellation of, or result (with or without notice or
lapse of time) in the creation of any encumbrance or restriction on any of the
Subject Securities pursuant to, any contract to which Holder is a party or by
which Holder or any of his affiliates or properties is or may be bound or
affected.
(b) The execution and delivery of this Voting Agreement and the Proxy by
Holder do not, and the performance of this Voting Agreement and the Proxy by
Holder will not, require any consent or approval of any Person.
6.3 Title to Securities. As of the date of this Voting Agreement: (a)
Holder holds of record (free and clear of any liens or encumbrances) the number
of outstanding shares of Parent Common Stock set forth under the heading "Shares
Held of Record" on the signature page hereof; (b) Holder holds (free and clear
of any liens or encumbrances) the options, warrants and other rights to acquire
shares of Parent Common Stock set forth under the heading "Options and Other
Rights" on the signature page hereof; (c) Holder Owns the additional securities
of Parent set forth under the heading "Additional Securities Beneficially Owned"
on the signature page hereof; and (d) Holder does not directly or indirectly Own
any shares of capital stock or other securities of the Company, or any option,
warrant or other right to acquire (by purchase, conversion or otherwise) any
shares of capital stock or other securities of Parent, other than the shares and
options, warrants and other rights set forth on the signature page hereof.
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SECTION 7. [RESERVED]
SECTION 8. MISCELLANEOUS
8.1 Survival of Representations, Warranties and Agreements. All
representations, warranties, covenants and agreements made by Holder in this
Voting Agreement shall survive the Expiration Date.
8.2 Expenses. All costs and expenses incurred in connection with the
transactions contemplated by this Voting Agreement shall be paid by the party
incurring such costs and expenses.
8.3 Notices. Any notice or other communication required or permitted to be
delivered to either party under this Voting Agreement shall be in writing and
shall be deemed properly delivered, given and received when delivered (by hand,
by registered mail, by courier or express delivery service or by facsimile) to
the address or facsimile telephone number set forth beneath the name of such
party below (or to such other address or facsimile telephone number as such
party shall have specified in a written notice given to the other party):
if to Holder:
at the address set forth below Holder's signature on the signature page
hereof
With a copy to:
Quokka Sports, Inc.
525 Brannan Street
San Francisco, CA 94107
Attention: General Counsel
Fax: (415) 908-4069
if to the Company:
Total Sports Inc.
234 Fayetteville Street
Raleigh, NC 27601
Attn: General Counsel
Fax:(919) 573-5436
With a copy to:
Steven A. Hobbs
Clifford Chance Rogers & Wells LLP
200 Park Avenue
New York, NY 10166
Fax: (212) 878-8375
8.4 Severability. If any provision of this Voting Agreement or any part of
any such provision is held under any circumstances to be invalid or
unenforceable in any jurisdiction, then (a) such provision or part thereof
shall, with respect to such circumstances and in such jurisdiction, be deemed
amended to conform to applicable laws so as to be valid and enforceable to the
fullest possible extent, (b) the invalidity or unenforceability of such
provision or part thereof under such circumstances and in such jurisdiction
shall not affect the validity or enforceability of such provision or part
thereof under any other circumstances or in any other jurisdiction, and (c) the
invalidity or unenforceability of such provision or part thereof shall not
affect the validity or enforceability of the remainder of such provision or the
validity or enforceability of any other provision of this Voting Agreement. Each
provision of this Voting Agreement is separable from every other provision of
this Voting Agreement, and each part of each provision of this Voting Agreement
is separable from every other part of such provision.
8.5 Entire Agreement. This Voting Agreement, the Proxy and any other
documents delivered by the parties in connection herewith constitute the entire
agreement between the parties with respect to the subject matter hereof and
thereof and supersede all prior agreements and understandings between the
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parties with respect thereto. No addition to or modification of any provision of
this Voting Agreement shall be binding upon either party unless made in writing
and signed by both parties.
8.6 Assignment; Binding Effect. Except as provided herein, neither this
Voting Agreement nor any of the interests or obligations hereunder may be
assigned or delegated by Holder or the Company and any attempted or purported
assignment or delegation of any of such interests or obligations shall be void.
Subject to the preceding sentence, this Voting Agreement shall be binding upon
Holder, the Company and their respective heirs, estate, executors, personal
representatives, successors and assigns, and shall inure to the benefit of the
Company and its successors and assigns. Without limiting any of the restrictions
set forth in Section 2 or elsewhere in this Voting Agreement, this Voting
Agreement shall be binding upon any Person to whom any Subject Securities are
Transferred. Nothing in this Voting Agreement is intended to confer on any
Person (other than the Company and its successors and assigns) any rights or
remedies of any nature.
8.7 Specific Performance. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Voting Agreement or the
Proxy was not performed in accordance with its specific terms or was otherwise
breached. Holder agrees that, in the event of any breach or threatened breach by
Holder of any covenant or obligation contained in this Voting Agreement or in
the Proxy, the Company shall be entitled (in addition to any other remedy that
may be available to it, including monetary damages) to seek and obtain (a) a
decree or order of specific performance to enforce the observance and
performance of such covenant or obligation, and (b) an injunction restraining
such breach or threatened breach. Holder further agrees that neither the Company
nor any other Person shall be required to obtain, furnish or post any bond or
similar instrument in connection with or as a condition to obtaining any remedy
referred to in this Section 8.7, and Holder irrevocably waives any right he may
have to require the obtaining, furnishing or posting of any such bond or similar
instrument.
8.8 Non-Exclusivity. The rights and remedies of the Company under this
Voting Agreement are not exclusive of or limited by any other rights or remedies
which it may have, whether at law, in equity, by contract or otherwise, all of
which shall be cumulative (and not alternative). Without limiting the generality
of the foregoing, the rights and remedies of the Company under this Voting
Agreement, and the obligations and liabilities of Holder under this Voting
Agreement, are in addition to their respective rights, remedies, obligations and
liabilities under common law requirements and under all applicable statutes,
rules and regulations. Nothing in this Voting Agreement shall limit any of
Holder's obligations, or the rights or remedies of the Company, under any
Affiliate Agreement between the Company and Holder; and nothing in any such
Affiliate Agreement shall limit any of Holder's obligations, or any of the
rights or remedies of the Company, under this Voting Agreement.
8.9 Governing Law.
This Voting Agreement and the Proxy shall be construed in accordance with,
and governed in all respects by, the laws of the State of Delaware (without
giving effect to principles of conflicts of laws).
STOCKHOLDER IRREVOCABLY WAIVES THE RIGHT TO A JURY TRIAL IN CONNECTION WITH
ANY LEGAL PROCEEDING RELATING TO THIS VOTING AGREEMENT OR THE PROXY OR THE
ENFORCEMENT OF ANY PROVISION OF THIS VOTING AGREEMENT OR THE PROXY.
8.10 Counterparts. This Voting Agreement may be executed by the parties in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument.
8.11 Captions. The captions contained in this Voting Agreement are for
convenience of reference only, shall not be deemed to be a part of this Voting
Agreement and shall not be referred to in connection with the construction or
interpretation of this Voting Agreement.
8.12 Attorneys' Fees. If any legal action or other legal proceeding
relating to this Voting Agreement or the enforcement of any provision of this
Voting Agreement is brought against Holder, the prevailing
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party shall be entitled to recover reasonable attorneys' fees, costs and
disbursements (in addition to any other relief to which the prevailing party may
be entitled).
8.13 Waiver. No failure on the part of the Company to exercise any power,
right, privilege or remedy under this Voting Agreement, and no delay on the part
of the Company in exercising any power, right, privilege or remedy under this
Voting Agreement, shall operate as a waiver of such power, right, privilege or
remedy; and no single or partial exercise of any such power, right, privilege or
remedy shall preclude any other or further exercise thereof or of any other
power, right, privilege or remedy. The Company shall not be deemed to have
waived any claim available to the Company arising out of this Voting Agreement,
or any power, right, privilege or remedy of the Company under this Voting
Agreement, unless the waiver of such claim, power, right, privilege or remedy is
expressly set forth in a written instrument duly executed and delivered on
behalf of the Company; and any such waiver shall not be applicable or have any
effect except in the specific instance in which it is given.
8.13 Termination of Agreement. In the event that the Effective Time of the
Merger has not occurred on or prior to December 31, 2000, then, in such event,
Holder shall have the right to terminate this Agreement at any time subsequent
to December 31, 2000 by providing notice of such termination to the Company in
accordance with Section 8.3 hereof.
8.15 Construction.
(a) For purposes of this Voting Agreement, whenever the context requires:
the singular number shall include the plural, and vice versa; the masculine
gender shall include the feminine and neuter genders; the feminine gender shall
include the masculine and neuter genders; and the neuter gender shall include
masculine and feminine genders.
(b) The parties agree that any rule of construction to the effect that
ambiguities are to be resolved against the drafting party shall not be applied
in the construction or interpretation of this Voting Agreement.
(c) As used in this Voting Agreement, the words "include" and "including,"
and variations thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Voting Agreement
to "Sections" and "Exhibits" are intended to refer to Sections of this Voting
Agreement and Exhibits to this Voting Agreement.
B-1-6
<PAGE> 360
IN WITNESS WHEREOF, the Company and Holder have caused this Voting
Agreement to be executed as of the date first written above.
TOTAL SPORTS INC.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
HOLDER:
--------------------------------------
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address:
--------------------------------------
--------------------------------------
--------------------------------------
Facsimile:
--------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL SECURITIES
SHARES HELD OF RECORD OPTIONS AND OTHER RIGHTS BENEFICIALLY OWNED
--------------------- ------------------------ ---------------------
<S> <C> <C>
3,897,437 shares of 653,934 shares of Common Stock
Common Stock to be received in the pending
Golf.com transaction
</TABLE>
B-1-7
<PAGE> 361
EXHIBIT A
FORM OF PROXY
The undersigned stockholder of Quokka Sports, Inc., a Delaware corporation
("Parent"), hereby irrevocably (to the fullest extent permitted by law) appoints
and constitutes Gary Stevenson, Frank Daniels III and Total Sports Inc., a
Delaware corporation (the "Company"), and each of them, the attorneys and
proxies of the undersigned with full power of substitution and resubstitution,
to the full extent of the undersigned's rights with respect to (i) the
outstanding shares of capital stock of Parent owned of record by the undersigned
as of the date of this proxy, which shares are specified on the final page of
this proxy, and (ii) any and all other shares of capital stock of Parent which
the undersigned may acquire on or after the date hereof. (The shares of the
capital stock of Parent referred to in clauses "(i)" and "(ii)" of the
immediately preceding sentence are collectively referred to as the "Shares.")
Upon the execution hereof, all prior proxies given by the undersigned with
respect to any of the Shares are hereby revoked, and the undersigned agrees that
no subsequent proxies will be given with respect to any of the Shares.
Except as provided below, this proxy is irrevocable, is coupled with an
interest and is granted in connection with the Voting Agreement, dated as of the
date hereof, between the Company and the undersigned (the "Voting Agreement"),
and is granted in consideration of the Company entering into the Agreement and
Plan of Merger and Reorganization, dated as of the date hereof, among Parent,
Merger Sub (as that term is defined in the Reorganization Agreement defined
herein) and the Company (the "Reorganization Agreement").
The attorneys and proxies named above will be empowered, and may exercise
this proxy, to vote the Shares at any time until the earlier to occur of the
valid termination of the Reorganization Agreement or the effective time of the
merger contemplated thereby (the "Merger") at any meeting of the stockholders of
Parent, however called, or in connection with any solicitation of written
consents from stockholders of Parent, in favor of the approval and adoption of
the Reorganization Agreement and the approval of the Merger, and in favor of
each of the other actions contemplated by the Reorganization Agreement, in each
case on substantially the terms and conditions set forth in the Reorganization
Agreement, as amended in accordance with the applicable provisions thereof;
provided that such amendments do not result in a material change to the
fundamental economic terms of the transaction set forth in the Reorganization
Agreement.
The undersigned may vote the Shares on all other matters.
This proxy shall be binding upon the heirs, estate, executors, personal
representatives, successors and assigns of the undersigned (including any
transferee of any of the Shares).
If any provision of this proxy or any part of any such provision is held
under any circumstances to be invalid or unenforceable in any jurisdiction, then
(a) such provision or part thereof shall, with respect to such circumstances and
in such jurisdiction, be deemed amended to conform to applicable laws so as to
be valid and enforceable to the fullest possible extent, (b) the invalidity or
unenforceability of such provision or part thereof under such circumstances and
in such jurisdiction shall not affect the validity or enforceability of such
provision or part thereof under any other circumstances or in any other
jurisdiction, and (c) the invalidity or unenforceability of such provision or
part thereof shall not affect the validity or enforceability of the remainder of
such provision or the validity or enforceability of any other provision of this
proxy. Each provision of this proxy is separable from every other provision of
this proxy, and each part of each provision of this proxy is separable from
every other part of such provision.
B-1-8
<PAGE> 362
This proxy shall terminate upon the earlier of the valid termination of the
Reorganization Agreement or the effective time of the Merger and is terminable
at the option of the undersigned stockholder at any time after December 31,
2000.
Dated: , 2000.
Name of
stockholder:
--------------------------------------
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Number and type of shares of stock of Parent
owned of record as of the date of this proxy:
<TABLE>
<CAPTION>
TYPE/CLASS OF SECURITIES NUMBER OF SECURITIES
------------------------ --------------------
<S> <C>
---------------------------------------- ----------------------------------------
---------------------------------------- ----------------------------------------
---------------------------------------- ----------------------------------------
---------------------------------------- ----------------------------------------
---------------------------------------- ----------------------------------------
</TABLE>
B-1-9
<PAGE> 363
ANNEX B-2
FORM OF VOTING AGREEMENT
THIS VOTING AGREEMENT is entered into as of July 20, 2000, by and between
TOTAL SPORTS INC., a Delaware corporation (the "Company"), and the
below-identified holder ("Holder") of the securities of QUOKKA SPORTS, INC., a
Delaware corporation ("Parent").
RECITALS
A. Parent, Tailback Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of Parent ("Merger Sub"), and the Company are entering into an
Agreement and Plan of Merger and Reorganization of even date herewith (the
"Reorganization Agreement") which provides (subject to the conditions set forth
therein) for the merger of Merger Sub into the Company (the "Merger").
B. In order to induce the Company to enter into the Reorganization
Agreement, Holder is entering into this Voting Agreement.
C. Insofar as the Company may be deemed to become an "interested
stockholder" under Section 203 of the Delaware General Corporation Law by virtue
of the execution and delivery of this Agreement, the parties acknowledge that
the Board of Directors of Parent has approved this Agreement prior to the
parties' execution and delivery of this Agreement, thereby complying with
Section 203 of the Delaware General Corporation Law.
AGREEMENT
The parties to this Voting Agreement, intending to be legally bound, agree
as follows:
SECTION 1. CERTAIN DEFINITIONS
For purposes of this Voting Agreement:
(a) "Parent Common Stock" shall mean the common stock, par value
$.0001 per share, of Parent.
(b) "Expiration Date" shall mean the earlier of (i) the date upon
which the Reorganization Agreement is validly terminated, or (ii) the date
upon which the Merger becomes effective.
(c) Holder shall be deemed to "Own" or to have acquired "Ownership" of
a security if Holder: (i) is the record owner of such security; or (ii) is
the "beneficial owner" (within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934) of such security.
(d) "Person" shall mean any (i) individual, (ii) corporation, limited
liability company, partnership or other entity, or (iii) governmental
authority.
(e) "Subject Securities" shall mean: (i) all securities of Parent
(including all shares of Parent Common Stock and all options, warrants and
other rights to acquire shares of Parent Common Stock) Owned by Holder as
of the date of this Agreement; and (ii) all additional securities of Parent
(including all additional shares of Parent Common Stock and all additional
options, warrants and other rights to acquire shares of Parent Common
Stock) of which Holder acquires Ownership during the period from the date
of this Agreement through the Expiration Date.
(f) A Person shall be deemed to have a effected a "Transfer" of a
security if such Person directly or indirectly: (i) sells, pledges,
encumbers, grants an option with respect to, transfers or disposes of such
security or any interest in such security; or (ii) enters into an agreement
or commitment contemplating the possible sale of, pledge of, encumbrance
of, grant of an option with respect to, transfer of or disposition of such
security or any interest therein.
B-2-1
<PAGE> 364
SECTION 2. TRANSFER OF SUBJECT SECURITIES
2.1 Transferee of Subject Securities to be Bound by this Agreement. Holder
agrees that, during the period from the date of this Voting Agreement through
the Expiration Date, Holder shall not cause or permit any Transfer of any of the
Subject Securities to be effected unless each Person to which any of such
Subject Securities, or any interest in any of such Subject Securities, is or may
be transferred shall have: (a) executed a counterpart of this Voting Agreement
and a proxy in the form attached hereto as Exhibit A; and (b) agreed to hold
such Subject Securities (or interest in such Subject Securities) subject to all
of the terms and provisions of this Voting Agreement.
2.2 Transfer of Voting Rights. Holder agrees that, during the period from
the date of this Voting Agreement through the Expiration Date, Holder shall
ensure that: (a) none of the Subject Securities is deposited into a voting
trust; and (b) no proxy is granted, and no voting agreement or similar agreement
is entered into, with respect to any of the Subject Securities.
SECTION 3. VOTING OF SHARES
3.1 Voting Agreement. Holder agrees that, during the period from the date
of this Voting Agreement through the Expiration Date:
(a) at any meeting of stockholders of Parent, however called, Holder
shall (unless otherwise directed in writing by the Company) cause all
outstanding shares of Parent Common Stock that are Owned by Holder as of
the record date fixed for such meeting to be voted in favor of the approval
and adoption of the Reorganization Agreement and the approval of the
Merger, the issuance of Parent Common Stock in the Merger and in favor of
each of the other actions contemplated by the Reorganization Agreement; and
(b) in the event written consents are solicited or otherwise sought
from stockholders of Parent with respect to the approval or adoption of the
Reorganization Agreement, with respect to the approval of the Merger or
with respect to any of the other actions contemplated by the Reorganization
Agreement, Holder shall (unless otherwise directed in writing by the
Company) cause to be executed, with respect to all outstanding shares of
Parent Common Stock that are Owned by Holder as of the record date fixed
for the consent to the proposed action, a written consent or written
consents to such proposed action.
3.2 Proxy; Further Assurances.
Contemporaneously with the execution of this Voting Agreement: (i) Holder
shall deliver to the Company a proxy in the form attached to this Voting
Agreement as Exhibit A, which shall be irrevocable to the fullest extent
permitted by law, with respect to the shares referred to therein (the "Proxy");
and (ii) Holder shall cause to be delivered to the Company an additional proxy
(in the form attached hereto as Exhibit A) executed on behalf of the record
owner of any outstanding shares of Parent Common Stock that are owned
beneficially (within the meaning of Rule 13d-3 under the Securities Exchange Act
of 1934), but not of record, by Holder.
SECTION 4. WAIVER OF APPRAISAL RIGHTS
Holder hereby irrevocably and unconditionally waives, and agrees to cause
to be waived and to prevent the exercise of, any rights of appraisal, any
dissenters' rights and any similar rights relating to the Merger or any related
transaction that Holder or any other Person may have by virtue of the Ownership
of any outstanding shares of Parent Common Stock Owned by Holder.
SECTION 5. NO SOLICITATION
Holder agrees that, during the period from the date of this Voting
Agreement through the Expiration Date, Holder shall not, directly or indirectly,
and Holder shall ensure that his Representatives (as defined in the
Reorganization Agreement) do not, directly or indirectly: (i) solicit, initiate,
encourage or induce
B-2-2
<PAGE> 365
the making, submission or announcement of any Acquisition Proposal (as defined
in the Reorganization Agreement) or take any action that could reasonably be
expected to lead to an Acquisition Proposal; (ii) furnish any information
regarding Parent or any direct or indirect subsidiary of Parent to any Person in
connection with or in response to an Acquisition Proposal or potential
Acquisition Proposal; or (iii) engage in discussions with any Person with
respect to any Acquisition Proposal. Holder shall immediately cease and
discontinue, and Holder shall ensure that his Representatives immediately cease
and discontinue, any existing discussions with any Person that relate to any
Acquisition Proposal.
SECTION 6. REPRESENTATIONS AND WARRANTIES OF HOLDER
Holder hereby represents and warrants to the Company as follows:
6.1 Authorization, etc. If Holder is not an individual, Holder has the
corporate, limited liability company, partnership or other comparable
organizational power and authority to execute and deliver this Voting Agreement
and the Proxy and to perform its obligations hereunder and thereunder. This
Voting Agreement and the Proxy have been duly executed and delivered by Holder
and constitute legal, valid and binding obligations of Holder, enforceable
against Holder in accordance with their terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of debtors, and
(ii) rules of law governing specific performance, injunctive relief and other
equitable remedies.
6.2 No Conflicts or Consents.
(a) The execution and delivery of this Voting Agreement and the Proxy by
Holder do not, and the performance of this Voting Agreement and the Proxy by
Holder will not: (i) conflict with or violate any law, rule, regulation, order,
decree or judgment applicable to Holder or by which he or any of his properties
is or may be bound or affected and, if Holder is not an individual, Holder's
certificate of incorporation, formation certificate, partnership agreement or
comparable organizational document; or (ii) result in or constitute (with or
without notice or lapse of time) any breach of or default under, or give to any
other Person (with or without notice or lapse of time) any right of termination,
amendment, acceleration or cancellation of, or result (with or without notice or
lapse of time) in the creation of any encumbrance or restriction on any of the
Subject Securities pursuant to, any contract to which Holder is a party or by
which Holder or any of his affiliates or properties is or may be bound or
affected.
(b) The execution and delivery of this Voting Agreement and the Proxy by
Holder do not, and the performance of this Voting Agreement and the Proxy by
Holder will not, require any consent or approval of any Person.
6.3 Title to Securities. As of the date of this Voting Agreement: (a)
Holder holds of record (free and clear of any liens or encumbrances) the number
of outstanding shares of Parent Common Stock set forth under the heading "Shares
Held of Record" on the signature page hereof; (b) Holder holds (free and clear
of any liens or encumbrances) the options, warrants and other rights to acquire
shares of Parent Common Stock set forth under the heading "Options and Other
Rights" on the signature page hereof; (c) Holder Owns the additional securities
of Parent set forth under the heading "Additional Securities Beneficially Owned"
on the signature page hereof; and (d) Holder does not directly or indirectly Own
any shares of capital stock or other securities of the Company, or any option,
warrant or other right to acquire (by purchase, conversion or otherwise) any
shares of capital stock or other securities of Parent, other than the shares and
options, warrants and other rights set forth on the signature page hereof.
SECTION 7. [RESERVED]
SECTION 8. MISCELLANEOUS
8.1 Survival of Representations, Warranties and Agreements. All
representations, warranties, covenants and agreements made by Holder in this
Voting Agreement shall survive the Expiration Date.
8.2 Expenses. All costs and expenses incurred in connection with the
transactions contemplated by this Voting Agreement shall be paid by the party
incurring such costs and expenses.
B-2-3
<PAGE> 366
8.3 Notices. Any notice or other communication required or permitted to be
delivered to either party under this Voting Agreement shall be in writing and
shall be deemed properly delivered, given and received when delivered (by hand,
by registered mail, by courier or express delivery service or by facsimile) to
the address or facsimile telephone number set forth beneath the name of such
party below (or to such other address or facsimile telephone number as such
party shall have specified in a written notice given to the other party):
if to Holder:
at the address set forth below Holder's signature on the signature
page hereof
With a copy to:
Quokka Sports, Inc.
525 Brannan Street
San Francisco, CA 94107
Attention: General Counsel
Fax: (415) 908-4069
if to the Company:
Total Sports Inc.
234 Fayetteville Street
Raleigh, NC 27601
Attn: General Counsel
Fax: (919) 573-5436
With a copy to:
Steven A. Hobbs
Clifford Chance Rogers & Wells LLP
200 Park Avenue
New York, NY 10166
Fax: (212) 878-8375
8.4 Severability. If any provision of this Voting Agreement or any part of
any such provision is held under any circumstances to be invalid or
unenforceable in any jurisdiction, then (a) such provision or part thereof
shall, with respect to such circumstances and in such jurisdiction, be deemed
amended to conform to applicable laws so as to be valid and enforceable to the
fullest possible extent, (b) the invalidity or unenforceability of such
provision or part thereof under such circumstances and in such jurisdiction
shall not affect the validity or enforceability of such provision or part
thereof under any other circumstances or in any other jurisdiction, and (c) the
invalidity or unenforceability of such provision or part thereof shall not
affect the validity or enforceability of the remainder of such provision or the
validity or enforceability of any other provision of this Voting Agreement. Each
provision of this Voting Agreement is separable from every other provision of
this Voting Agreement, and each part of each provision of this Voting Agreement
is separable from every other part of such provision.
8.5 Entire Agreement. This Voting Agreement, the Proxy and any other
documents delivered by the parties in connection herewith constitute the entire
agreement between the parties with respect to the subject matter hereof and
thereof and supersede all prior agreements and understandings between the
parties with respect thereto. No addition to or modification of any provision of
this Voting Agreement shall be binding upon either party unless made in writing
and signed by both parties.
8.6 Assignment; Binding Effect. Except as provided herein, neither this
Voting Agreement nor any of the interests or obligations hereunder may be
assigned or delegated by Holder or the Company and any attempted or purported
assignment or delegation of any of such interests or obligations shall be void.
Subject to the preceding sentence, this Voting Agreement shall be binding upon
Holder, the Company and their respectived his heirs, estate, executors, personal
representatives, successors and assigns, and shall
B-2-4
<PAGE> 367
inure to the benefit of the Company and its successors and assigns. Without
limiting any of the restrictions set forth in Section 2 or elsewhere in this
Voting Agreement, this Voting Agreement shall be binding upon any Person to whom
any Subject Securities are Transferred. Nothing in this Voting Agreement is
intended to confer on any Person (other than the Company and its successors and
assigns) any rights or remedies of any nature.
8.7 Specific Performance. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Voting Agreement or the
Proxy was not performed in accordance with its specific terms or was otherwise
breached. Holder agrees that, in the event of any breach or threatened breach by
Holder of any covenant or obligation contained in this Voting Agreement or in
the Proxy, the Company shall be entitled (in addition to any other remedy that
may be available to it, including monetary damages) to seek and obtain (a) a
decree or order of specific performance to enforce the observance and
performance of such covenant or obligation, and (b) an injunction restraining
such breach or threatened breach. Holder further agrees that neither the Company
nor any other Person shall be required to obtain, furnish or post any bond or
similar instrument in connection with or as a condition to obtaining any remedy
referred to in this Section 8.7, and Holder irrevocably waives any right he may
have to require the obtaining, furnishing or posting of any such bond or similar
instrument.
8.8 Non-Exclusivity. The rights and remedies of the Company under this
Voting Agreement are not exclusive of or limited by any other rights or remedies
which it may have, whether at law, in equity, by contract or otherwise, all of
which shall be cumulative (and not alternative). Without limiting the generality
of the foregoing, the rights and remedies of the Company under this Voting
Agreement, and the obligations and liabilities of Holder under this Voting
Agreement, are in addition to their respective rights, remedies, obligations and
liabilities under common law requirements and under all applicable statutes,
rules and regulations. Nothing in this Voting Agreement shall limit any of
Holder's obligations, or the rights or remedies of the Company, under any
Affiliate Agreement between the Company and Holder; and nothing in any such
Affiliate Agreement shall limit any of Holder's obligations, or any of the
rights or remedies of the Company, under this Voting Agreement.
8.9 Governing Law.
This Voting Agreement and the Proxy shall be construed in accordance with,
and governed in all respects by, the laws of the State of Delaware (without
giving effect to principles of conflicts of laws).
STOCKHOLDER IRREVOCABLY WAIVES THE RIGHT TO A JURY TRIAL IN CONNECTION WITH
ANY LEGAL PROCEEDING RELATING TO THIS VOTING AGREEMENT OR THE PROXY OR THE
ENFORCEMENT OF ANY PROVISION OF THIS VOTING AGREEMENT OR THE PROXY.
8.10 Counterparts. This Voting Agreement may be executed by the parties in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument.
8.11 Captions. The captions contained in this Voting Agreement are for
convenience of reference only, shall not be deemed to be a part of this Voting
Agreement and shall not be referred to in connection with the construction or
interpretation of this Voting Agreement.
8.12 Attorneys' Fees. If any legal action or other legal proceeding
relating to this Voting Agreement or the enforcement of any provision of this
Voting Agreement is brought against Holder, the prevailing party shall be
entitled to recover reasonable attorneys' fees, costs and disbursements (in
addition to any other relief to which the prevailing party may be entitled).
8.13 Waiver. No failure on the part of the Company to exercise any power,
right, privilege or remedy under this Voting Agreement, and no delay on the part
of the Company in exercising any power, right, privilege or remedy under this
Voting Agreement, shall operate as a waiver of such power, right, privilege or
remedy; and no single or partial exercise of any such power, right, privilege or
remedy shall preclude any other or further exercise thereof or of any other
power, right, privilege or remedy. The
B-2-5
<PAGE> 368
Company shall not be deemed to have waived any claim available to the Company
arising out of this Voting Agreement, or any power, right, privilege or remedy
of the Company under this Voting Agreement, unless the waiver of such claim,
power, right, privilege or remedy is expressly set forth in a written instrument
duly executed and delivered on behalf of the Company; and any such waiver shall
not be applicable or have any effect except in the specific instance in which it
is given.
8.14 Construction.
(a) For purposes of this Voting Agreement, whenever the context requires:
the singular number shall include the plural, and vice versa; the masculine
gender shall include the feminine and neuter genders; the feminine gender shall
include the masculine and neuter genders; and the neuter gender shall include
masculine and feminine genders.
(b) The parties agree that any rule of construction to the effect that
ambiguities are to be resolved against the drafting party shall not be applied
in the construction or interpretation of this Voting Agreement.
(c) As used in this Voting Agreement, the words "include" and "including,"
and variations thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Voting Agreement
to "Sections" and "Exhibits" are intended to refer to Sections of this Voting
Agreement and Exhibits to this Voting Agreement.
B-2-6
<PAGE> 369
IN WITNESS WHEREOF, the Company and Holder have caused this Voting
Agreement to be executed as of the date first written above.
TOTAL SPORTS INC.
By:
Name:
Title:
HOLDER:
By:
Name:
Title:
Address:
--------------------------------------
--------------------------------------
--------------------------------------
Facsimile:
--------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL SECURITIES
SHARES HELD OF RECORD OPTIONS AND OTHER RIGHTS BENEFICIALLY OWNED
--------------------- ------------------------ ---------------------
<S> <C> <C>
</TABLE>
B-2-7
<PAGE> 370
EXHIBIT A
FORM OF IRREVOCABLE PROXY
The undersigned stockholder of Quokka Sports, Inc., a Delaware corporation
("Parent"), hereby irrevocably (to the fullest extent permitted by law) appoints
and constitutes Gary Stevenson, Frank Daniels III and Total Sports Inc., a
Delaware corporation (the "Company"), and each of them, the attorneys and
proxies of the undersigned with full power of substitution and resubstitution,
to the full extent of the undersigned's rights with respect to (i) the
outstanding shares of capital stock of Parent owned of record by the undersigned
as of the date of this proxy, which shares are specified on the final page of
this proxy, and (ii) any and all other shares of capital stock of Parent which
the undersigned may acquire on or after the date hereof. (The shares of the
capital stock of Parent referred to in clauses "(i)" and "(ii)" of the
immediately preceding sentence are collectively referred to as the "Shares.")
Upon the execution hereof, all prior proxies given by the undersigned with
respect to any of the Shares are hereby revoked, and the undersigned agrees that
no subsequent proxies will be given with respect to any of the Shares.
This proxy is irrevocable, is coupled with an interest and is granted in
connection with the Voting Agreement, dated as of the date hereof, between the
Company and the undersigned (the "Voting Agreement"), and is granted in
consideration of the Company entering into the Agreement and Plan of Merger and
Reorganization, dated as of the date hereof, among Parent, Merger Sub (as that
term is defined in the Reorganization Agreement defined herein) and the Company
(the "Reorganization Agreement").
The attorneys and proxies named above will be empowered, and may exercise
this proxy, to vote the Shares at any time until the earlier to occur of the
valid termination of the Reorganization Agreement or the effective time of the
merger contemplated thereby (the "Merger") at any meeting of the stockholders of
Parent, however called, or in connection with any solicitation of written
consents from stockholders of Parent, in favor of the approval and adoption of
the Reorganization Agreement and the approval of the Merger, and in favor of
each of the other actions contemplated by the Reorganization Agreement.
The undersigned may vote the Shares on all other matters.
This proxy shall be binding upon the heirs, estate, executors, personal
representatives, successors and assigns of the undersigned (including any
transferee of any of the Shares).
If any provision of this proxy or any part of any such provision is held
under any circumstances to be invalid or unenforceable in any jurisdiction, then
(a) such provision or part thereof shall, with respect to such circumstances and
in such jurisdiction, be deemed amended to conform to applicable laws so as to
be valid and enforceable to the fullest possible extent, (b) the invalidity or
unenforceability of such provision or part thereof under such circumstances and
in such jurisdiction shall not affect the validity or enforceability of such
provision or part thereof under any other circumstances or in any other
jurisdiction, and (c) the invalidity or unenforceability of such provision or
part thereof shall not affect the validity or enforceability of the remainder of
such provision or the validity or enforceability of any other provision of this
proxy. Each provision of this proxy is separable from every other provision of
this proxy, and each part of each provision of this proxy is separable from
every other part of such provision.
B-2-8
<PAGE> 371
This proxy shall terminate upon the earlier of the valid termination of the
Reorganization Agreement or the effective time of the Merger.
Dated: , 2000.
Name of
stockholder:
By:
Name:
Title:
Number and type of shares of stock of Parent
owned of record as of the date of this proxy:
<TABLE>
<CAPTION>
TYPE/CLASS OF SECURITIES NUMBER OF SECURITIES
------------------------ --------------------
<S> <C>
---------------------------------------- ----------------------------------------
---------------------------------------- ----------------------------------------
---------------------------------------- ----------------------------------------
---------------------------------------- ----------------------------------------
---------------------------------------- ----------------------------------------
</TABLE>
B-2-9
<PAGE> 372
ANNEX C
FORM OF VOTING AGREEMENT
THIS VOTING AGREEMENT is entered into as of July , 2000, by and between
QUOKKA SPORTS, INC., a Delaware corporation ("Parent"), and the below-identified
holder ("Holder") of the securities of TOTAL SPORTS INC., a Delaware corporation
(the "Company").
RECITALS
A. Parent, Tailback Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of Parent ("Merger Sub"), and the Company are entering into an
Agreement and Plan of Merger and Reorganization of even date herewith (the
"Reorganization Agreement") which provides (subject to the conditions set forth
therein) for the merger of Merger Sub into the Company (the "Merger").
B. In order to induce Parent and Merger Sub to enter into the
Reorganization Agreement, Holder is entering into this Voting Agreement.
C. Insofar as Parent may be deemed to become an "interested stockholder"
under Section 203 of the Delaware General Corporation Law by virtue of the
execution and delivery of this Agreement, the parties acknowledge that the Board
of Directors of the Company has approved this Agreement prior to the parties'
execution and delivery of this Agreement, thereby complying with Section 203 of
the Delaware General Corporation Law.
AGREEMENT
The parties to this Voting Agreement, intending to be legally bound, agree
as follows:
SECTION 1. CERTAIN DEFINITIONS
For purposes of this Voting Agreement:
(a) "Company Stock" shall mean any of the following securities of the
Company: (i) common stock, par value $.001 per share; (ii) Series A
Redeemable Preferred Stock, par value $10.00 per share; (iii) Series B
Convertible Preferred Stock, par value $4.492 per share; (iv) Series C
Convertible Preferred Stock, par value $.001 per share; (v) Series C1
Convertible Preferred Stock, par value $.001 per share; (vi) Series D
Convertible Preferred Stock, par value $.001 per share; (vi) Series D1
Convertible Preferred Stock, par value $.001 per share; (vii) Series E
Convertible Preferred Stock, par value $.001 per share.
(b) "Expiration Date" shall mean the earlier of (i) the date upon
which the Reorganization Agreement is validly terminated, or (ii) the date
upon which the Merger becomes effective.
(c) Holder shall be deemed to "Own" or to have acquired "Ownership" of
a security if Holder: (i) is the record owner of such security; or (ii) is
the "beneficial owner" (within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934) of such security.
(d) "Person" shall mean any (i) individual, (ii) corporation, limited
liability company, partnership or other entity, or (iii) governmental
authority.
(e) "Subject Securities" shall mean: (i) all securities of the Company
(including all shares of Company Stock and all options, warrants and other
rights to acquire shares of Company Stock) Owned by Holder as of the date
of this Agreement; and (ii) all additional securities of the Company
(including all additional shares of Company Stock and all additional
options, warrants and other rights to acquire shares of Company Stock) of
which Holder acquires Ownership during the period from the date of this
Agreement through the Expiration Date.
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(f) A Person shall be deemed to have a effected a "Transfer" of a
security if such Person directly or indirectly: (i) sells, pledges,
encumbers, grants an option with respect to, transfers or disposes of such
security or any interest in such security; or (ii) enters into an agreement
or commitment contemplating the possible sale of, pledge of, encumbrance
of, grant of an option with respect to, transfer of or disposition of such
security or any interest therein.
SECTION 2. TRANSFER OF SUBJECT SECURITIES
2.1 Transferee of Subject Securities to be Bound by this Agreement. Holder
agrees that, during the period from the date of this Voting Agreement through
the Expiration Date, Holder shall not cause or permit any Transfer of any of the
Subject Securities to be effected unless each Person to which any of such
Subject Securities, or any interest in any of such Subject Securities, is or may
be transferred shall have: (a) executed a counterpart of this Voting Agreement
and a proxy in the form attached hereto as Exhibit A; and (b) agreed to hold
such Subject Securities (or interest in such Subject Securities) subject to all
of the terms and provisions of this Voting Agreement.
2.2 Transfer of Voting Rights. Holder agrees that, during the period from
the date of this Voting Agreement through the Expiration Date, Holder shall
ensure that: (a) none of the Subject Securities is deposited into a voting
trust; and (b) no proxy is granted, and no voting agreement or similar agreement
is entered into, with respect to any of the Subject Securities.
SECTION 3. VOTING OF SHARES
3.1 Voting Agreement. Holder agrees that, during the period from the date
of this Voting Agreement through the Expiration Date:
(a) at any meeting of stockholders of the Company, however called,
Holder shall (unless otherwise directed in writing by Parent) cause all
outstanding shares of Company Stock that are Owned by Holder as of the
record date fixed for such meeting to be voted in favor of the approval and
adoption of the Reorganization Agreement and the approval of the Merger,
and in favor of each of the other actions contemplated by the
Reorganization Agreement; and
(b) in the event written consents are solicited or otherwise sought
from stockholders of the Company with respect to the approval or adoption
of the Reorganization Agreement, with respect to the approval of the Merger
or with respect to any of the other actions contemplated by the
Reorganization Agreement, Holder shall (unless otherwise directed in
writing by Parent) cause to be executed, with respect to all outstanding
shares of Company Stock that are Owned by Holder as of the record date
fixed for the consent to the proposed action, a written consent or written
consents to such proposed action.
3.2 Proxy; Further Assurances.
Contemporaneously with the execution of this Voting Agreement: (i) Holder
shall deliver to Parent a proxy in the form attached to this Voting Agreement as
Exhibit A, which shall be irrevocable to the fullest extent permitted by law,
with respect to the shares referred to therein (the "Proxy"); and (ii) Holder
shall cause to be delivered to Parent an additional proxy (in the form attached
hereto as Exhibit A) executed on behalf of the record owner of any outstanding
shares of Company Stock that are owned beneficially (within the meaning of Rule
13d-3 under the Securities Exchange Act of 1934), but not of record, by Holder.
SECTION 4. WAIVER OF APPRAISAL RIGHTS
Holder hereby irrevocably and unconditionally waives, and agrees to cause
to be waived and to prevent the exercise of, any rights of appraisal, any
dissenters' rights and any similar rights relating to the Merger or any related
transaction that Holder or any other Person may have by virtue of the Ownership
of any outstanding shares of Company Stock Owned by Holder.
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SECTION 5. NO SOLICITATION
Holder agrees that, during the period from the date of this Voting
Agreement through the Expiration Date, Holder shall not, directly or indirectly,
and Holder shall ensure that his Representatives (as defined in the
Reorganization Agreement) do not, directly or indirectly: (i) solicit, initiate,
encourage or induce the making, submission or announcement of any Acquisition
Proposal (as defined in the Reorganization Agreement) or take any action that
could reasonably be expected to lead to an Acquisition Proposal; (ii) furnish
any information regarding the Company or any direct or indirect subsidiary of
the Company to any Person in connection with or in response to an Acquisition
Proposal or potential Acquisition Proposal; or (iii) engage in discussions with
any Person with respect to any Acquisition Proposal. Holder shall immediately
cease and discontinue, and Holder shall ensure that his Representatives
immediately cease and discontinue, any existing discussions with any Person that
relate to any Acquisition Proposal.
SECTION 6. REPRESENTATIONS AND WARRANTIES OF HOLDER
Holder hereby represents and warrants to Parent as follows:
6.1 Authorization, etc. If Holder is not an individual, Holder has the
corporate, limited liability company, partnership or other comparable
organizational power and authority to execute and deliver this Voting Agreement
and the Proxy and to perform its obligations hereunder and thereunder. This
Voting Agreement and the Proxy have been duly executed and delivered by Holder
and constitute legal, valid and binding obligations of Holder, enforceable
against Holder in accordance with their terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of debtors, and
(ii) rules of law governing specific performance, injunctive relief and other
equitable remedies.
6.2 No Conflicts or Consents.
(a) The execution and delivery of this Voting Agreement and the Proxy by
Holder do not, and the performance of this Voting Agreement and the Proxy by
Holder will not: (i) conflict with or violate any law, rule, regulation, order,
decree or judgment applicable to Holder or by which he or any of his properties
is or may be bound or affected and, if Holder is not an individual, Holder's
certificate of incorporation, formation certificate, partnership agreement or
comparable organization documents; or (ii) result in or constitute (with or
without notice or lapse of time) any breach of or default under, or give to any
other Person (with or without notice or lapse of time) any right of termination,
amendment, acceleration or cancellation of, or result (with or without notice or
lapse of time) in the creation of any encumbrance or restriction on any of the
Subject Securities pursuant to, any contract to which Holder is a party or by
which Holder or any of his affiliates or properties is or may be bound or
affected.
(b) The execution and delivery of this Voting Agreement and the Proxy by
Holder do not, and the performance of this Voting Agreement and the Proxy by
Holder will not, require any consent or approval of any Person.
6.3 Title to Securities. As of the date of this Voting Agreement: (a)
Holder holds of record (free and clear of any liens or encumbrances) the number
of outstanding shares of Company Stock set forth under the heading "Shares Held
of Record" on the signature page hereof; (b) Holder holds (free and clear of any
liens or encumbrances) the options, warrants and other rights to acquire shares
of Company Stock set forth under the heading "Options and Other Rights" on the
signature page hereof; (c) Holder Owns the additional securities of the Company
set forth under the heading "Additional Securities Beneficially Owned" on the
signature page hereof; and (d) Holder does not directly or indirectly Own any
shares of capital stock or other securities of the Company, or any option,
warrant or other right to acquire (by purchase, conversion or otherwise) any
shares of capital stock or other securities of the Company, other than the
shares and options, warrants and other rights set forth on the signature page
hereof.
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SECTION 7. [RESERVED]
SECTION 8. MISCELLANEOUS
8.1 Survival of Representations, Warranties and Agreements. All
representations, warranties, covenants and agreements made by Holder in this
Voting Agreement shall survive the Expiration Date.
8.2 Expenses. All costs and expenses incurred in connection with the
transactions contemplated by this Voting Agreement shall be paid by the party
incurring such costs and expenses.
8.3 Notices. Any notice or other communication required or permitted to be
delivered to either party under this Voting Agreement shall be in writing and
shall be deemed properly delivered, given and received when delivered (by hand,
by registered mail, by courier or express delivery service or by facsimile) to
the address or facsimile telephone number set forth beneath the name of such
party below (or to such other address or facsimile telephone number as such
party shall have specified in a written notice given to the other party):
if to Holder:
at the address set forth below Holder's signature on the signature page
hereof
With a copy to:
Steven A. Hobbs
Clifford Chance Rogers & Wells LLP
200 Park Avenue
New York, NY 10166
Fax: (212) 878-8375
if to Parent:
Quokka Sports, Inc.
525 Brannan Street
San Francisco, CA 94107
Attn: General Counsel
Fax: (415) 908-4069
8.4 Severability. If any provision of this Voting Agreement or any part of
any such provision is held under any circumstances to be invalid or
unenforceable in any jurisdiction, then (a) such provision or part thereof
shall, with respect to such circumstances and in such jurisdiction, be deemed
amended to conform to applicable laws so as to be valid and enforceable to the
fullest possible extent, (b) the invalidity or unenforceability of such
provision or part thereof under such circumstances and in such jurisdiction
shall not affect the validity or enforceability of such provision or part
thereof under any other circumstances or in any other jurisdiction, and (c) the
invalidity or unenforceability of such provision or part thereof shall not
affect the validity or enforceability of the remainder of such provision or the
validity or enforceability of any other provision of this Voting Agreement. Each
provision of this Voting Agreement is separable from every other provision of
this Voting Agreement, and each part of each provision of this Voting Agreement
is separable from every other part of such provision.
8.5 Entire Agreement. This Voting Agreement, the Proxy and any other
documents delivered by the parties in connection herewith constitute the entire
agreement between the parties with respect to the subject matter hereof and
thereof and supersede all prior agreements and understandings between the
parties with respect thereto. No addition to or modification of any provision of
this Voting Agreement shall be binding upon either party unless made in writing
and signed by both parties.
8.6 Assignment; Binding Effect. Except as provided herein, neither this
Voting Agreement nor any of the interests or obligations hereunder may be
assigned or delegated by Holder or Parent and any attempted or purported
assignment or delegation of any of such interests or obligations shall be void.
Subject to the preceding sentence, this Voting Agreement shall be binding upon
Holder, Parent and their
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<PAGE> 376
respective heirs, estate, executors, personal representatives, successors and
assigns, and shall inure to the benefit of Parent and its successors and
assigns. Without limiting any of the restrictions set forth in Section 2 or
elsewhere in this Voting Agreement, this Voting Agreement shall be binding upon
any Person to whom any Subject Securities are Transferred. Nothing in this
Voting Agreement is intended to confer on any Person (other than Parent and its
successors and assigns) any rights or remedies of any nature.
8.7 Specific Performance. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Voting Agreement or the
Proxy was not performed in accordance with its specific terms or was otherwise
breached. Holder agrees that, in the event of any breach or threatened breach by
Holder of any covenant or obligation contained in this Voting Agreement or in
the Proxy, Parent shall be entitled (in addition to any other remedy that may be
available to it, including monetary damages) to seek and obtain (a) a decree or
order of specific performance to enforce the observance and performance of such
covenant or obligation, and (b) an injunction restraining such breach or
threatened breach. Holder further agrees that neither Parent nor any other
Person shall be required to obtain, furnish or post any bond or similar
instrument in connection with or as a condition to obtaining any remedy referred
to in this Section 8.7, and Holder irrevocably waives any right he may have to
require the obtaining, furnishing or posting of any such bond or similar
instrument.
8.8 Non-Exclusivity. The rights and remedies of Parent under this Voting
Agreement are not exclusive of or limited by any other rights or remedies which
it may have, whether at law, in equity, by contract or otherwise, all of which
shall be cumulative (and not alternative). Without limiting the generality of
the foregoing, the rights and remedies of Parent under this Voting Agreement,
and the obligations and liabilities of Holder under this Voting Agreement, are
in addition to their respective rights, remedies, obligations and liabilities
under common law requirements and under all applicable statutes, rules and
regulations. Nothing in this Voting Agreement shall limit any of Holder's
obligations, or the rights or remedies of Parent, under any Affiliate Agreement
between Parent and Holder; and nothing in any such Affiliate Agreement shall
limit any of Holder's obligations, or any of the rights or remedies of Parent,
under this Voting Agreement.
8.9 Governing Law.
This Voting Agreement and the Proxy shall be construed in accordance with,
and governed in all respects by, the laws of the State of Delaware (without
giving effect to principles of conflicts of laws).
STOCKHOLDER IRREVOCABLY WAIVES THE RIGHT TO A JURY TRIAL IN CONNECTION WITH
ANY LEGAL PROCEEDING RELATING TO THIS VOTING AGREEMENT OR THE PROXY OR THE
ENFORCEMENT OF ANY PROVISION OF THIS VOTING AGREEMENT OR THE PROXY.
8.10 Counterparts. This Voting Agreement may be executed by the parties in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument.
8.11 Captions. The captions contained in this Voting Agreement are for
convenience of reference only, shall not be deemed to be a part of this Voting
Agreement and shall not be referred to in connection with the construction or
interpretation of this Voting Agreement.
8.12 Attorneys' Fees. If any legal action or other legal proceeding
relating to this Voting Agreement or the enforcement of any provision of this
Voting Agreement is brought against Holder, the prevailing party shall be
entitled to recover reasonable attorneys' fees, costs and disbursements (in
addition to any other relief to which the prevailing party may be entitled).
8.13 Waiver. No failure on the part of Parent to exercise any power,
right, privilege or remedy under this Voting Agreement, and no delay on the part
of Parent in exercising any power, right, privilege or remedy under this Voting
Agreement, shall operate as a waiver of such power, right, privilege or remedy;
and no single or partial exercise of any such power, right, privilege or remedy
shall preclude any other or further exercise thereof or of any other power,
right, privilege or remedy. Parent shall not be
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<PAGE> 377
deemed to have waived any claim available to Parent arising out of this Voting
Agreement, or any power, right, privilege or remedy of Parent under this Voting
Agreement, unless the waiver of such claim, power, right, privilege or remedy is
expressly set forth in a written instrument duly executed and delivered on
behalf of Parent; and any such waiver shall not be applicable or have any effect
except in the specific instance in which it is given.
8.14 Construction.
(a) For purposes of this Voting Agreement, whenever the context requires:
the singular number shall include the plural, and vice versa; the masculine
gender shall include the feminine and neuter genders; the feminine gender shall
include the masculine and neuter genders; and the neuter gender shall include
masculine and feminine genders.
(b) The parties agree that any rule of construction to the effect that
ambiguities are to be resolved against the drafting party shall not be applied
in the construction or interpretation of this Voting Agreement.
(c) As used in this Voting Agreement, the words "include" and "including,"
and variations thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Voting Agreement
to "Sections" and "Exhibits" are intended to refer to Sections of this Voting
Agreement and Exhibits to this Voting Agreement.
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<PAGE> 378
IN WITNESS WHEREOF, Parent and Holder have caused this Voting Agreement to
be executed as of the date first written above.
QUOKKA SPORTS, INC.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
HOLDER:
--------------------------------------
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address:
--------------------------------------
--------------------------------------
--------------------------------------
Facsimile:
--------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL SECURITIES
SHARES HELD OF RECORD OPTIONS AND OTHER RIGHTS BENEFICIALLY OWNED
--------------------- ------------------------ ---------------------
<S> <C> <C>
</TABLE>
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<PAGE> 379
EXHIBIT A
FORM OF IRREVOCABLE PROXY
The undersigned stockholder of Total Sports Inc., a Delaware corporation
(the "Company"), hereby irrevocably (to the fullest extent permitted by law)
appoints and constitutes , and Quokka Sports,
Inc., a Delaware corporation ("Parent"), and each of them, the attorneys and
proxies of the undersigned with full power of substitution and resubstitution,
to the full extent of the undersigned's rights with respect to (i) the
outstanding shares of capital stock of the Company owned of record by the
undersigned as of the date of this proxy, which shares are specified on the
final page of this proxy, and (ii) any and all other shares of capital stock of
the Company which the undersigned may acquire on or after the date hereof. (The
shares of the capital stock of the Company referred to in clauses "(i)" and
"(ii)" of the immediately preceding sentence are collectively referred to as the
"Shares.") Upon the execution hereof, all prior proxies given by the undersigned
with respect to any of the Shares are hereby revoked, and the undersigned agrees
that no subsequent proxies will be given with respect to any of the Shares.
This proxy is irrevocable, is coupled with an interest and is granted in
connection with the Voting Agreement, dated as of the date hereof, between
Parent and the undersigned (the "Voting Agreement"), and is granted in
consideration of Parent entering into the Agreement and Plan of Merger and
Reorganization, dated as of the date hereof, among Parent, Merger Sub (as that
term is defined in the Voting Agreement) and the Company (the "Reorganization
Agreement").
The attorneys and proxies named above will be empowered, and may exercise
this proxy, to vote the Shares at any time until the earlier to occur of the
valid termination of the Reorganization Agreement or the effective time of the
merger contemplated thereby (the "Merger") at any meeting of the stockholders of
the Company, however called, or in connection with any solicitation of written
consents from stockholders of the Company, in favor of the approval and adoption
of the Reorganization Agreement and the approval of the Merger, and in favor of
each of the other actions contemplated by the Reorganization Agreement.
The undersigned may vote the Shares on all other matters.
This proxy shall be binding upon the heirs, estate, executors, personal
representatives, successors and assigns of the undersigned (including any
transferee of any of the Shares).
If any provision of this proxy or any part of any such provision is held
under any circumstances to be invalid or unenforceable in any jurisdiction, then
(a) such provision or part thereof shall, with respect to such circumstances and
in such jurisdiction, be deemed amended to conform to applicable laws so as to
be valid and enforceable to the fullest possible extent, (b) the invalidity or
unenforceability of such provision or part thereof under such circumstances and
in such jurisdiction shall not affect the validity or enforceability of such
provision or part thereof under any other circumstances or in any other
jurisdiction, and (c) the invalidity or unenforceability of such provision or
part thereof shall not affect the validity or enforceability of the remainder of
such provision or the validity or enforceability of any other provision of this
proxy. Each provision of this proxy is separable from every other provision of
this proxy, and each part of each provision of this proxy is separable from
every other part of such provision.
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<PAGE> 380
This proxy shall terminate upon the earlier of the valid termination of the
Reorganization Agreement or the effective time of the Merger.
Dated: , 2000.
Name of
stockholder:
By:
Name:
Title:
Number and type of shares of stock
of the Company owned of record as of
the date of this proxy:
<TABLE>
<CAPTION>
TYPE/CLASS OF SECURITIES NUMBER OF SECURITIES
------------------------ --------------------
<S> <C>
---------------------------------------- ----------------------------------------
---------------------------------------- ----------------------------------------
---------------------------------------- ----------------------------------------
---------------------------------------- ----------------------------------------
---------------------------------------- ----------------------------------------
</TABLE>
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<PAGE> 381
ANNEX D
July 20, 2000
Board of Directors
Total Sports Inc.
234 Fayetteville Street
Raleigh, NC 27601
Gentlemen:
We understand that Total Sports Inc. ("Total Sports") and Quokka Sports,
Inc. ("Quokka") are considering entering into a Merger Agreement with terms
substantially as set forth in the draft dated July 20, 2000 (the "Merger
Agreement") proposing to effect a transaction as described in the Merger
Agreement and related documentation (the "Transaction").
Pursuant to an engagement letter dated March 7, 2000, you have asked us to
render our opinion as of the date hereof as to the fairness of the Transaction
from a financial point of view to the securityholders of Total Sports.
Allen & Company Incorporated ("Allen"), as part of its investment banking
business, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, private placements and
related financings, bankruptcy reorganizations and similar recapitalizations,
negotiated underwritings, secondary distributions of listed and unlisted
securities, and valuations for corporate and other purposes.
As you know, Allen has been engaged by Total Sports since March 7, 2000, to
render certain financial advisory services in connection with a potential sale
of Total Sports. As you know, Allen holds 365,718 warrants to purchase 365,718
shares of common stock of Total Sports, although the terms of the Transaction
indicate such warrants are likely to have no economic value and are likely to
expire in connection with the closing of the Transaction. In connection with
such engagement, Allen will receive a fee upon consummation of the Transaction.
Our opinion as expressed herein reflects and gives effect to information
concerning Total Sports which we acquired during the course of this assignment,
including information provided by senior management in the course of a number of
discussions. We have not, however, been engaged to, and we have not conducted an
independent appraisal of Total Sports' assets, or independently verified the
information concerning Total Sports' operations or other data which we have
considered in our review, and for the purpose of expressing our opinion set
forth herein, we have assumed that all such information is accurate, complete
and current.
In arriving at our conclusion, we have considered, among other factors we
deemed relevant, (i) the terms of the draft Merger Agreement and related
documentation (which prior to the delivery of this opinion has not been executed
by the parties); (ii) the nature of the operations and financial history of
Total Sports, including discussions with senior management regarding the
business and prospects of Total Sports relating to, among other things, Total
Sports' operating budget and financial outlook; (iii) the pro forma cash
position and operating projections for the combined company which were developed
by both management teams; (iv) the financing alternatives available to support
the development of Total Sports; (v) Quokka's filings with the Securities and
Exchange Commission, including audited and unaudited financial statements; (vi)
the historical trading information for the common stock of Quokka; and (vii)
certain financial and stock market information for certain other companies in
businesses related to those of Total Sports and Quokka. In addition to our
review and analyses of the specific information set forth above, our opinion
herein reflects and gives effect to our assessment of general economic,
monetary, market and industry conditions existing as of the date hereof as they
may affect the business and prospects of Total Sports.
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<PAGE> 382
Board of Directors
Total Sports Inc.
Page 2
We have been informed that Quokka and National Broadcasting Company, Inc.
("NBC"), an existing investor in Total Sports represented on Total Sports' Board
of Directors and a co-venturer of Quokka's in one of Quokka's significant
strategic programming initiatives, are continuing their ongoing negotiations of
the nature of their various business relationships, in connection with which NBC
is acquiring a warrant to purchase common stock of Quokka.
In opining as to the fairness of the consideration to be received by the
securityholders of Total Sports pursuant to the Transaction, we are necessarily
opining as to the aggregate consideration to be received by such securityholders
in the Transaction. We understand that the allocation of such Transaction
consideration among the various classes of securityholders of Total Sports is
determined by the certificate of incorporation and other organic documentation
of Total Sports.
It is understood that this letter has been prepared for the information of
the Board of Directors of Total Sports and may not be used for any other purpose
without our prior written consent, except that this opinion may be included in
its entirety in any filing made by Total Sports or Quokka with the Securities
and Exchange Commission with respect to the Transaction.
The opinion rendered herein does not constitute a recommendation to
securityholders of Total Sports as to whether to vote in favor of the
Transaction or to exchange.
Based upon and subject to the foregoing, it is our opinion as of the date
hereof that the aggregate consideration to be received by the securityholders of
Total Sports in connection with the Transaction is fair from a financial point
of view.
Very truly yours,
ALLEN & COMPANY INCORPORATED
By /s/ STANLEY S. SHUMAN
------------------------------------
Executive Vice President
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<PAGE> 383
ANNEX E
DELAWARE GENERAL CORPORATION LAW
SECTION 262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one (1) or more shares, or fractions
thereof, solely of stock of a corporation, which stock is deposited with the
depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to
sec. 251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or
sec. 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a, b and c of this paragraph.
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<PAGE> 384
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten 10 days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated
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<PAGE> 385
therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record
date that shall be not more than 10 days prior to the date the notice is
given, provided, that if the notice is given on or after the effective date
of the merger or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day
next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has
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<PAGE> 386
submitted such stockholder's certificates of stock to the Register in Chancery,
if such is required, may participate fully in all proceedings until it is
finally determined that such stockholder is not entitled to appraisal rights
under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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<PAGE> 387
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by Section 145 of the Delaware General Corporation Law, our
Bylaws provide that (i) we are required to indemnify our directors and executive
officers to the fullest extent permitted by the Delaware General Corporation
Law, (ii) we may, in our discretion, indemnify other officers, employees and
agents as set forth in the Delaware General Corporation Law, (iii) to the
fullest extent permitted by the Delaware General Corporation Law, we are
required to advance all expenses incurred by our directors and executive
officers in connection with a legal proceeding (subject to certain exceptions),
(iv) the rights conferred in our Bylaws are not exclusive, (v) we are authorized
to enter into indemnification agreements with our directors, officers, employees
and agents and (vi) we may not retroactively amend the Bylaws provisions
relating to indemnity.
We have entered into agreements with our directors and executive officers
that require us to indemnify such persons against expenses, judgments, fines,
settlements and other amounts that such person becomes legally obligated to pay
(including expenses of a derivative action) in connection with any proceeding,
whether actual or threatened, to which any such person may be made a party by
reason of the fact that such person is or was our director or officer or any of
our affiliated enterprises, provided such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to our best
interests. The indemnification agreements also set forth certain procedures that
will apply in the event of a claim for indemnification thereunder.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
02.01(1)++ Agreement and Plan of Merger and Reorganization dated March 1,
2000 by and among Quokka, Montana Acquisition Corporation
and ZoneNetwork.com, Inc.
02.02(2) Purchase Agreement and Plan of Reorganization dated June 8,
2000, as amended, by and among Quokka, Golf.com L.L.C.,
GolfData Corporation, The New York Times Company Magazine
Group, Inc., MediaOne Interactive Services, Inc., Total Sports
Inc. and Otto Candies, L.L.C.
02.03 Agreement and Plan of Merger and Reorganization dated July
20, 2000, as amended, by and among Quokka and Total Sports Inc.
(included as Annex A to the joint proxy statement/prospectus).
02.04 Form of Voting Agreement dated July 20, 2000 by and between
Quokka and MediaOne Interactive Services, Inc. (included as
Annex B-1 to the joint proxy statement/prospectus).
02.05 Form of Voting Agreement dated July 20, 2000 by and among
Quokka and certain stockholders of Quokka (included as
Annex B-2 to the joint proxy statement/prospectus).
02.06 Form of Voting Agreement dated July 20, 2000 by and among
Total Sports Inc. and certain stockholders of Total Sports
Inc. (included as Annex C to the joint proxy statement/
prospectus).
02.07 Opinion of Allen & Company Incorporated (included as Annex D
to the joint proxy statement/prospectus).
03.01* Amended and Restated Certificate of Incorporation.
03.02(4) Amended and Restated Bylaws.
04.01(5) Form of Specimen Stock Certificate.
04.02 Amended and Restated Investors' Rights Agreement dated
September 15, 2000 by and among Quokka and the Investors as
set forth on Exhibit A thereto (attached as Exhibit C to
Exhibit 04.04)
04.03(4) Registration Rights Agreement dated March 30, 2000 between
Quokka and KLAS, Inc.
04.04 Note Purchase Agreement dated as of September 15, 2000 between
Quokka Sports, Inc. and the Purchasers identified therein,
including exhibits thereto
04.05 Form of 7.0% Convertible Subordinated Promissory Note dated
September 15, 2000 issued by Quokka Sports, Inc. (attached as
Exhibit A to Exhibit 04.04)
04.06 Form of Common Stock Purchase Warrant dated September 15, 2000
issued by Quokka Sports, Inc. (attached as Exhibit B to
Exhibit 04.04)
05.01 Opinion of Cooley Godward LLP regarding the legality of the
securities.
08.01* Opinion of Cooley Godward LLP regarding tax matters.
08.02* Opinion of Clifford Chance Rogers & Wells LLP regarding
tax matters.
10.01(5) Form of Indemnity Agreement entered into by Quokka with each
of its directors and certain executive officers.
</TABLE>
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<PAGE> 388
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.02(5) 1999 Non-Employee Directors' Stock Option Plan.
10.03(5) Form of Nonstatutory Stock Option Agreement under the 1999
Non-Employee Directors' Stock Option Plan.
10.04(5) 1999 Employee Stock Purchase Plan.
10.05(5) Form of 1999 Employee Stock Purchase Plan Offering.
10.06(5) Amended and Restated 1997 Equity Incentive Plan
10.07(5) Form of Stock Option Agreement under the Amended and
Restated 1997 Equity Incentive Plan
10.08(6) ZoneNetwork.com, Inc. 1996 Stock Option Plan.
10.09(5) Key Employee Agreement dated March 25, 1999 between Alvaro
Saralegui and Quokka.
10.10(4) Employment Agreement dated January 18, 2000 between Michael
Gough and Quokka.
10.11(5) Subordinated Loan and Security Agreement, dated February 12,
1999, between Quokka and Comdisco, Inc.
10.12(5) Master Venture Agreement, dated February 9, 1999, by and
among Quokka, NBC Olympics, Inc. and NBC/Quokka Ventures,
LLC.
10.13(5)+ Operating Agreement of NBC/Quokka Ventures, LLC, dated
February 9, 1999, between Quokka and NBC Olympics, Inc., as
amended.
10.14(5)+ Digital Entertainment Partnership Agreement, dated January
1, 1999, between Quokka and Compaq Computer Corporation.
10.15(5) Lease, dated April 23, 1999, between Quokka and 1301 Evans
Street Associates, LLC.
10.16(5) Office Lease Agreement, dated May 27, 1999, between Quokka
and EOP-Mission Street, L.L.C.
10.17(5) Lease, dated July 16, 1999, between SKS Brannan Associates,
LLC and Quokka.
10.18(3)+ Memorandum of Agreement dated September 15, 1999 between
Quokka and Intel Corporation.
10.19++ Amended and Restated Loan and Security Agreement, dated
June 7, 1999, between Quokka and Silicon Valley Bank.
21.01 List of Subsidiaries.
23.01 Consent of Cooley Godward LLP (set forth in Exhibit 5.01).
23.02* Consent of Cooley Godward LLP (set forth in Exhibit 8.01).
23.03* Consent of Clifford Chance Rogers & Wells LLP (set forth in
Exhibit 8.02).
23.04* Consent of PricewaterhouseCoopers LLP, independent
accountants (Quokka and Golf.com).
23.05* Consent of Deloitte & Touche LLP, independent accountants
(Total Sports).
23.06 Consent of Allen & Company Incorporated (set forth in Annex
D to the joint proxy statement/prospectus).
24.01 Power of Attorney (set forth on signature page).
27.01(7) Financial Data Schedule.
99.01* Form of Quokka Proxy.
99.02* Form of Total Sports Proxy.
</TABLE>
-------------------------
* Filed herewith. Unless otherwise noted, all other exhibits have been
previously filed.
(1) Previously filed as an Exhibit to Quokka's Current Report on Form 8-K
filed on April 14, 2000 (File No. 000-26311).
(2) Previously filed as an Annex to Quokka's Preliminary Schedule 14A
filed on August 14, 2000 (File No. 000-26311).
(3) Previously filed as an Exhibit to Quokka's Report on Form 10-Q filed
on November 15, 1999 (File No. 000-26311).
(4) Previously filed as an Exhibit to Quokka's Report on Form 10-Q filed
on May 15, 2000 (File No. 000-26311).
(5) Previously filed as an Exhibit to Quokka's Registration Statement on
Form S-1 (File No. 333-76981) filed in connection with the Company's
initial public offering.
(6) Previously filed as an Exhibit to Quokka's Registration Statement on
Form S-8 filed on May 24, 2000 (File No. 333-37732).
(7) Previously filed as an Exhibit to Quokka's Report on Form 10-Q filed
on August 14, 2000 (File No. 000-26311) and as an Exhibit to Quokka's
Report on Form 10-K filed on March 29, 2000 (File No. 000-26311).
+ Confidential treatment has been granted as to portions of this Exhibit. The
information omitted pursuant to such confidential treatment order has been
filed separately with the Securities and Exchange Commission.
++ Attachments to this exhibit were omitted, but will be provided to the
Securities and Exchange Commission supplementally upon request.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required in Section 10(a) (3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in
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<PAGE> 389
the aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering;
(4) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this form,
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request;
(5) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form;
(6) That every prospectus (i) that is filed pursuant to paragraph (5)
immediately preceding, or (ii) that purports to meet the requirements of Section
10(a)(3) of the Securities Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof; and
(7) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
(8) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to our directors, officers, and controlling persons
pursuant to the provisions described in Item 14 or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by us of
expenses incurred or paid by one of our directors, officers, or controlling
persons in the successful defense of any action, suit, or proceeding) is
asserted by such director, officer, or controlling person in connection with the
securities being registered, we will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
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<PAGE> 390
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of San Francisco, state of
California, on October 11, 2000.
QUOKKA SPORTS, INC.
By: /s/ ALAN S. RAMADAN
------------------------------------
Alan S. Ramadan
President and Chief
Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ALAN S. RAMADAN President, Chief Executive Officer October 11, 2000
--------------------------------------------- and Director (Principal Executive
(Alan S. Ramadan) Officer)
* Executive Vice President, Chief October 11, 2000
--------------------------------------------- Financial Officer and Secretary
(Les Schmidt) (Principal Financial and Accounting
Officer)
* Director (Chairman of the Board of October 11, 2000
--------------------------------------------- Directors)
(Richard H. Williams)
* Director (Vice-Chairman of the Board October 11, 2000
--------------------------------------------- of Directors)
(John Bertrand A.M.)
* Director October 11, 2000
---------------------------------------------
(Walter W. Bregman)
* Director October 11, 2000
---------------------------------------------
(James G. Shennan, Jr.)
* Director October 11, 2000
---------------------------------------------
(Barry M. Weinman)
* By: /s/ ALAN S. RAMADAN
---------------------------------------
Alan S. Ramadan
ATTORNEY-IN-FACT
</TABLE>
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<PAGE> 391
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
02.01(1)++ Agreement and Plan of Merger and Reorganization dated March
1, 2000 by and among Quokka, Montana Acquisition Corporation
and ZoneNetwork.com, Inc.
02.02(2) Purchase Agreement and Plan of Reorganization dated June 8,
2000, as amended, by and among Quokka, Golf.com L.L.C.,
GolfData Corporation, The New York Times Company Magazine
Group, Inc., MediaOne Interactive Services, Inc., Total Sports
Inc. and Otto Candies, L.L.C.
02.03 Agreement and Plan of Merger and Reorganization dated July
20, 2000, as amended, by and among Quokka and Total Sports Inc.
(included as Annex A to the joint proxy statement/prospectus).
02.04 Form of Voting Agreement dated July 20, 2000 by and between
Quokka and MediaOne Interactive Services, Inc. (included as
Annex B-1 to the joint proxy statement/prospectus).
02.05 Form of Voting Agreement dated July 20, 2000 by and among
Quokka and certain stockholders of Quokka (included as Annex
B-2 to the joint proxy statement/prospectus).
02.06 Form of Voting Agreement dated July 20, 2000 by and among
Total Sports Inc. and certain stockholders of Total Sports
Inc. (included as Annex C to the joint proxy statement/
prospectus).
02.07 Opinion of Allen & Company Incorporated (included as Annex D
to the joint proxy statement/prospectus).
03.01* Amended and Restated Certificate of Incorporation.
03.02(4) Amended and Restated Bylaws.
04.01(5) Form of Specimen Stock Certificate.
04.02 Amended and Restated Investors' Rights Agreement dated
September 15, 2000 by and among Quokka and the Investors as set
forth on Exhibit A thereto (attached as Exhibit C to
Exhibit 04.04)
04.03(4) Registration Rights Agreement dated March 30, 2000 between
Quokka and KLAS, Inc.
04.04 Note Purchase Agreement dated as of September 15, 2000 between
Quokka and the Purchasers identified therein, including
exhibits thereto.
04.05 Form of 7.0% Convertible Subordinated Promissory Note dated
September 15, 2000 issued by Quokka (attached as Exhibit A to
Exhibit 04.04)
04.06 Form of Common Stock Purchase Warrant dated September 15, 2000
issued by Quokka (attached as Exhibit B to Exhibit 04.04)
05.01 Opinion of Cooley Godward LLP regarding the legality of the
securities.
08.01* Opinion of Cooley Godward LLP regarding tax matters.
08.02* Opinion of Clifford Chance Rogers & Wells LLP regarding
tax matters.
10.01(5) Form of Indemnity Agreement entered into by Quokka with each
of its directors and certain executive officers.
</TABLE>
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<PAGE> 392
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.02(5) 1999 Non-Employee Directors' Stock Option Plan.
10.03(5) Form of Nonstatutory Stock Option Agreement under the 1999
Non-Employee Directors' Stock Option Plan.
10.04(5) 1999 Employee Stock Purchase Plan.
10.05(5) Form of 1999 Employee Stock Purchase Plan Offering.
10.06(5) Amended and Restated 1997 Equity Incentive Plan
10.07(5) Form of Stock Option Agreement under the Amended and
Restated 1997 Equity Incentive Plan
10.08(6) ZoneNetwork.com, Inc. 1996 Stock Option Plan.
10.09(5) Key Employee Agreement dated March 25, 1999 between Alvaro
Saralegui and Quokka.
10.10(4) Employment Agreement dated January 18, 2000 between Michael
Gough and Quokka.
10.11(5) Subordinated Loan and Security Agreement, dated February 12,
1999, between Quokka and Comdisco, Inc.
10.12(5) Master Venture Agreement, dated February 9, 1999, by and
among Quokka, NBC Olympics, Inc. and NBC/Quokka Ventures,
LLC.
10.13(5)+ Operating Agreement of NBC/Quokka Ventures, LLC, dated
February 9, 1999, between Quokka and NBC Olympics, Inc., as
amended.
10.14(5)+ Digital Entertainment Partnership Agreement, dated January
1, 1999, between Quokka and Compaq Computer Corporation.
10.15(5) Lease, dated April 23, 1999, between Quokka and 1301 Evans
Street Associates, LLC.
10.16(5) Office Lease Agreement, dated May 27, 1999, between Quokka
and EOP-Mission Street, L.L.C.
10.17(5) Lease, dated July 16, 1999, between SKS Brannan Associates,
LLC and Quokka.
10.18(3)+ Memorandum of Agreement dated September 15, 1999 between
Quokka and Intel Corporation.
10.19++ Amended and Restated Loan and Security Agreement, dated
June 7, 1999, between Quokka and Silicon Valley Bank.
21.01 List of Subsidiaries.
23.01 Consent of Cooley Godward LLP (set forth in Exhibit 5.01).
23.02* Consent of Cooley Godward LLP (set forth in Exhibit 8.01).
23.03* Consent of Clifford Chance Rogers & Wells LLP (set forth in
Exhibit 8.02).
23.04* Consent of PricewaterhouseCoopers LLP, independent
accountants (Quokka and Golf.com).
23.05* Consent of Deloitte & Touche LLP, independent accountants
(Total Sports).
23.06 Consent of Allen & Company Incorporated (set forth in Annex
D to the joint proxy statement/prospectus).
24.01 Power of Attorney (set forth on signature page).
27.01(7) Financial Data Schedule.
99.01* Form of Quokka Proxy.
99.02* Form of Total Sports Proxy.
</TABLE>
-------------------------
* Filed herewith. Unless otherwise noted, all other exhibits have been
previously filed.
(1) Previously filed as an Exhibit to Quokka's Current Report on Form 8-K
filed on April 14, 2000 (File No. 000-26311).
(2) Previously filed as an Annex to Quokka's Preliminary Schedule 14A
filed on August 14, 2000 (File No. 000-26311).
(3) Previously filed as an Exhibit to Quokka's Report on Form 10-Q filed
on November 15, 1999 (File No. 000-26311).
(4) Previously filed as an Exhibit to Quokka's Report on Form 10-Q filed
on May 15, 2000 (File No. 000-26311).
(5) Previously filed as an Exhibit to Quokka's Registration Statement on
Form S-1 (File No. 333-76981) filed in connection with the Company's
initial public offering.
(6) Previously filed as an Exhibit to Quokka's Registration Statement on
Form S-8 filed on May 24, 2000 (File No. 333-37732).
(7) Previously filed as an Exhibit to Quokka's Report on Form 10-Q filed
on August 14, 2000 (File No. 000-26311) and as an Exhibit to Quokka's
Report on Form 10-K filed on March 29, 2000 (File No. 000-26311).
+ Confidential treatment has been granted as to portions of this Exhibit. The
information omitted pursuant to such confidential treatment order has been
filed separately with the Securities and Exchange Commission.
++ Attachments to this exhibit were omitted, but will be provided to
the Securities and Exchange Commission supplementally upon request.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required in Section 10(a) (3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in
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