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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
November 18, 1998
INFOSEEK CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 000-25071 77-0494507
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(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
1399 Moffett Park Drive
Sunnyvale, California 94089
(Address of Principal Executive Offices)
(Zip Code)
Registrant's telephone number, including area code: (408) 543-6000
Not Applicable
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(Former name or former address, if changed since last report)
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The current report on Form 8-K dated November 18, 1998, for Infoseek
Corporation, a Delaware Corporation (the "Registrant" or "Infoseek"), and filed
with the Securities Exchange Commission on December 2, 1998 is hereby amended
and restated in its entirety as follows.
ITEM 1. CHANGES IN CONTROL OF REGISTRANT
(a) On November 18, 1998, the Registrant, pursuant to that certain
Agreement and Plan of Reorganization dated June 18, 1998 by and among the
Registrant, Infoseek Corporation, a California corporation and wholly owned
subsidiary of the Registrant ("Infoseek California"), Starwave Corporation, a
Washington corporation ("Starwave"), and Disney Enterprises, Inc. ("DEI") (the
"Reorganization Agreement"), the Registrant ceased to be a wholly owned
subsidiary of Infoseek California and the former shareholders of Infoseek
California and Starwave became the shareholders of the Registrant as a result of
the Mergers as described and defined below in Item 2. In addition, also on
November 18, 1998, pursuant to the Common Stock and Warrant Purchase Agreement
dated June 18, 1998 by and between the Registrant and The Walt Disney Company, a
Delaware corporation ("Disney") (the "Purchase Agreement"), Disney acquired
2,642,000 additional unregistered shares of common stock of the Registrant, par
value of $0.001 per share ("Infoseek Delaware Common Stock") (the "Shares"), and
a warrant to purchase 15,720,000 unregistered shares of Infoseek Delaware Common
Stock (the "Warrant") in exchange for approximately $70 million in cash and a
five year promissory note, principal amount $139 million. The Warrant vests,
subject to certain acceleration events, and becomes exercisable as to one-third
of the shares subject to the Warrant on each of the first three anniversaries of
November 18, 1998 at an exercise price equal to 120% of the average closing
sales price of the Infoseek Delaware common stock on the Nasdaq Stock Market for
the thirty trading days prior to each such vesting date, subject to a $50.00 per
share maximum exercise price.
As a result of Disney's prior ownership in Starwave through its affiliate
Disney Enterprises, Inc., and the purchase of the Shares and the Warrant,
Disney became the owner of approximately 43% of the outstanding Infoseek
Delaware Common Stock and will have the right to acquire, through the Warrant
and over time, approximately 50.1% of Infoseek Delaware Common Stock on a fully
diluted basis assuming exercise of all outstanding options, warrants and other
rights to acquire Infoseek Delaware Common Stock (including those assumed
pursuant to the Reorganization Agreement).
(b) Not applicable.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
(a) On November 18, 1998, pursuant to the Reorganization Agreement the
Registrant: (i) acquired Infoseek California through the merger of ICO
Acquisition Corp., a California corporation and a wholly-owned subsidiary of the
Registrant ("Infoseek Merger Sub"), with and into Infoseek California (the
"Infoseek Merger"), which survived the Infoseek Merger as a wholly-owned
subsidiary of the Registrant; and (ii) acquired Starwave through the merger of
Starwave Acquisition Corp., a Washington corporation and a wholly-owned
subsidiary of the Registrant ("Starwave Merger Sub"), with and into Starwave
(the "Starwave Merger"), which survived the Starwave Merger as a wholly-owned
subsidiary of the Registrant.
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Pursuant to the Infoseek Merger, each outstanding share of the common
stock, no par value, of Infoseek California ("Infoseek California Common
Stock"), was converted into the right to receive one share of registered
Infoseek Delaware Common Stock. In addition, options and rights to acquire
approximately 8.6 million shares of Infoseek California Common Stock outstanding
under Infoseek California's option plans were assumed by the Registrant and
converted into options and rights to purchase the same number of shares of
Infoseek Delaware Common Stock. A Registration Statement on Form S-8 with
respect to the shares of Infoseek Delaware Common Stock underlying such options
and rights was filed by the Registrant on November 18, 1998.
Pursuant to the Starwave Merger, each outstanding share of the common
stock, par value of $0.01, of Starwave ("Starwave Common Stock") was converted
into the right to receive 0.2649570 of a share of registered Infoseek Delaware
Common Stock. As a result, approximately 97.9 million shares of Starwave Common
Stock outstanding immediately prior to the Merger were converted into
approximately 25.9 million registered shares of Infoseek Delaware Common Stock.
In addition, options to acquire approximately 8.3 million shares of Starwave
Common Stock outstanding under Starwave's stock option plans were assumed by the
Registrant and converted into options to purchase approximately 2.2 million
shares of Infoseek Delaware Common Stock. An additional Registration Statement
on Form S-8 with respect to the shares of Infoseek Delaware Common Stock
underlying such options was filed by the Registrant on November 18, 1998.
The summary of the provisions of the Reorganization Agreement set forth
above is qualified by reference to the Reorganization Agreement, which is
incorporated herein by reference to Annex A to the Registration Statement on
Form S-4 of the Registrant (the "Form S-4"), as filed with the Securities and
Exchange Commission (the "Commission") on October 14, 1998.
ITEM 5. OTHER EVENTS
On October 2, 1998, the Board of Directors of the Registrant authorized
and declared a dividend of one Right pursuant to and as defined in that certain
Preferred Shares Rights Agreement dated October 2, 1998 by and between the
Registrant and BankBoston, N.A. for each share of Infoseek Delaware Common Stock
outstanding as of 5:00 p.m. New York time on November 18, 1998.
In addition, you should carefully consider the risks described below
before making an investment in Infoseek. These risks and uncertainties are not
the only ones facing Infoseek. Additional risks and uncertainties not presently
known to Infoseek or that Infoseek does not currently believe are important to
an investor may also harm Infoseek's business operations. If any of the events,
contingencies, circumstances or conditions described in the following risks
actually occur, Infoseek's business, financial condition or our results of
operations could be seriously harmed. In such event, the trading price of
Infoseek common stock could decline, and you may lose all or part of your
investment. This Form 8-K/A contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended that involve risks and
uncertainties. Infoseek's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain known and
unknown factors, including the risks faced by us described below and elsewhere
in this Form 8-K/A. References to Infoseek below include, after November 18,
1998, Infoseek's wholly owned subsidiaries, including Starwave.
RISKS REGARDING DEVELOPMENT, LAUNCH AND ACCEPTANCE OF GO NETWORK
Infoseek is, in conjunction with Disney, developing GO Network. GO Network will
combine certain content, promotion, brands and technologies of Infoseek,
Starwave, Disney and certain joint ventures relating to ESPN.COM and ABCNEWS.COM
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(the "ESPN Joint Venture" and "ABC News Joint Venture," respectively).
Infoseek believes that developing, launching and promoting GO Network is
critical to attracting and expanding its Internet audience and to differentiate
itself from its competitors. Infoseek believes that this is especially true
given that it is relatively easy to enter the market of providing Internet
services and content and that there is a growing number of new Internet sites.
Infoseek also has an agreement with ABC, a Disney affiliate, for Infoseek to
purchase promotion for GO Network. The success of GO Network therefore depends
greatly on Disney and its affiliates, including ABC and ESPN. See "--
Relationship with and Dependence on Disney; Possibility of Control by Disney."
Infoseek plans to launch a beta version of GO Network in December 1998. However
Infoseek cannot assure you that GO Network will be successfully developed and
launched by that time, or at all. The beta version of GO Network will not have
all of the functions and services currently planned for GO Network. Infoseek
expects to launch the premier version of GO Network in early 1999 and add more
functions and services to GO Network in the future. Statements regarding the
December beta launch
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date for GO Network and plans for additional functions and services are
forward-looking statements that involve risks and uncertainties. Actual results
may differ from those described in the forward-looking statements as a result
of a number of factors. These factors are described in this section and under
"--Uncertainties Regarding Integration of Starwave Operations" and "--Dependence
on Third Party Relationships, Advertising Relationships and Joint Ventures." If
Infoseek does not successfully develop, launch and promote GO Network quickly,
Infoseek's business, financial condition and operating results could be
seriously harmed.
If consumers do not find the GO Network content and experience to be of high
quality, or if Infoseek introduces new Internet sites or enters into new
business ventures that are not appreciated by consumers, Infoseek will not be
able to expand its Internet audience. An expanding audience is necessary to
increase advertising and related sales and other sources of revenue. Infoseek,
therefore, cannot assure you that GO Network will be successful or result in
greater revenues, cash flows or profits (if any) to Infoseek. In addition,
current Infoseek advertisers and content providers may not continue to
advertise or provide content to Infoseek's present Internet service or GO
Network. If there is a significant delay or reduction in advertising sales or
orders, Infoseek could suffer harm to its business and results of operations.
In addition, the launch and promotion of GO Network may result in potential
confusion or a decline in loyalty among users or customers of the current
Infoseek service or the ABCNEWS.com and ESPN.com services.
In order to attract users and build strong brand recognition and loyalty, the
launch of GO Network will require a significant increase in spending for
promotional activities, including the purchase of promotion from ABC discussed
above. Infoseek may also be required to spend additional money to purchase and
produce new content. Infoseek cannot assure you that it will be able to recover
the costs of these promotional and other activities through increased cash
flows from operations. If Infoseek incurs excessive expenses to develop,
launch, promote and improve GO Network, Infoseek's business, financial
condition and operating results could be seriously harmed.
UNCERTAINTIES REGARDING INTEGRATION OF OPERATIONS
Infoseek recently acquired Starwave. To achieve benefits from the acquisition,
Infoseek must quickly and smoothly integrate its operations with the operations
of Starwave, the ESPN Joint Venture and ABCNews Joint Venture. Infoseek will be
required to coordinate Infoseek's and Starwave's respective product and service
offerings. Infoseek will also be required to combine Infoseek's and Starwave's
sales, marketing and research and development efforts. Infoseek cannot assure
you that it will be able to take full advantage of the combined companies sales
force, marketing and research and development efforts.
Since Infoseek's principal office (Sunnyvale, California), Starwave's
headquarters (Seattle, Washington), the ABCNews Joint Venture (principally
located in New York City) and the ESPN Joint Venture (principally located in
Bristol, Connecticut and New York City), are geographically dispersed,
integrating these organizations and operating these businesses will be more
difficult. In addition, Infoseek has substantially more employees now than
prior to the combination. On September 30, 1998, Infoseek had approximately 319
employees. On November 30, 1998, together with Starwave, Infoseek had
approximately 650 employees. In addition, given the planned expanded
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operations of Infoseek, Infoseek must recruit and retain highly qualified
management, engineering, and sales and marketing personnel. Infoseek management
will be required to spend a significant amount of time on integration issues,
which may distract their attention from the day-to-day operations of Infoseek.
Infoseek also has an agreement to acquire Quando, Inc. ("Quando"), subject to
Quando shareholder approval. In order to achieve the benefits of the proposed
Quando acquisition, Infoseek must also quickly and smoothly integrate Quando's
technology and operations and retain Quando's employees and customers.
Infoseek cannot assure you that the integration of Starwave and Quando will
occur quickly and successfully. The integration may consume too much of
management's time, or Infoseek may not be able to continue to recruit and
retain qualified employees. If Infoseek does not successfully integrate its
operations or does not effectively recruit and retain qualified personnel,
Infoseek's business, results of operations, financial condition and prospects
could be seriously harmed.
AMORTIZATION OF GOODWILL AND INCREASED OPERATING EXPENSES WILL DELAY PROFITS
Infoseek's acquisition of Starwave was accounted for under the purchase method
of accounting. Under the purchase method, the purchase price of Starwave was
allocated to the assets and liabilities acquired from Starwave. Infoseek will
incur a charge for in-process research and development of Starwave of
$72.6 million in the quarter ended December 31, 1998.
In addition, intangible assets related to developed technology and assembled
workforce of Starwave are estimated at $45.2 million and will be amortized over
two years. Intangible assets related to goodwill and joint ventures are
estimated at $656.3 and $178.5 million, respectively, and will be amortized
over ten years. In addition, Infoseek expects to have increased operating
expenses associated with the expanded operations of its business and the
development, launch and promotion of GO Network. To the extent that such
expenses are not timely followed by increased revenues, Infoseek's business,
results of operations, financial condition and prospects would be further
materially adversely affected.
In connection with the proposed Quando acquisition, intangible assets related
to goodwill, developed technology and assembled workforce are preliminarily
estimated at approximately $16.9 million and will be amortized over two years.
Infoseek also expects to take a charge for in-process research and development
of Quando of approximately $4.3 million in the quarter ending December 31,
1998.
As a result of these acquisitions, management currently estimates that Infoseek
will not have profits until at least 2002. Without these acquisitions, the
amortization of goodwill and other intangibles from the acquisition of
Starwave, Infoseek would not have profits until at least 2000. The estimates of
when Infoseek will achieve profits are forward-looking-statements that are
subject to risks and uncertainties. Actual results may vary materially as a
result of a number of factors, including but not limited to those set forth
under "--Uncertainties Regarding Integration of Operations," "--Risks Regarding
Development, Launch and Acceptance of GO Network," "--Dependence on Third Party
Relationships, Advertising Relationships and Joint Ventures," and "--Risks of
Acquisition Strategy."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
Infoseek currently anticipates that its cash and other available sources of
funds will last through at least December 31, 1999. The other available sources
include Infoseek's equipment term loan facility, payments under a note in
principal amount of $139 million from Disney and cash generated from
advertising revenues. After that time, Infoseek may need to raise additional
funds.
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Infoseek may decide to increase expenditures for any number of activities,
including:
. expanding more quickly
. developing new or enhancing existing services or products
. promoting GO Network or other services, or
. acquiring complementary products, businesses or technologies
If Infoseek does any of these activities, Infoseek may be required to raise
additional funds sooner than currently anticipated. If any additional funds are
raised through the sale of stock or convertible debt, the percentage ownership
of Infoseek's current stockholders will be reduced. Such stock or convertible
debt also may have rights, preferences or privileges greater than Infoseek's
common stock.
Additional financing may not be available on good terms, or at all. If Infoseek
cannot raise enough additional funds, Infoseek may not be able to continue
expanding, developing new or enhancing existing services or products, or
promoting GO Network or other services or acquiring other businesses, products
or technologies. Infoseek's business, results of operations, financial
condition and prospects could be seriously harmed.
POTENTIAL FLUCTUATIONS IN FUTURE RESULTS
Infoseek and its subsidiaries have limited operating histories. The Internet
and intranet markets addressed by Infoseek are new. Infoseek therefore does not
have internal or industry-based historical financial data for any significant
period of time upon which to base projections for revenues or to help budget
operating expenses.
Infoseek expects that its results may also vary significantly in the future due
to a number of reasons, including:
. the amounts of growth, usage and acceptance of the Internet, intranets
and online services
. the rate of acceptance of the Internet as an advertising medium and a
channel of commerce, and the demand for advertising
. demand for Infoseek's products and services
. the advertising budgeting cycles of individual advertisers
. costs related to expansion and capital investments
. results of acquisitions and strategic agreements
. the introduction, marketing and acceptance of new, enhanced or
alternative products or services by Infoseek including GO Network, or by
its competitors
. Infoseek's ability to anticipate and effectively adapt to and expand in a
developing market
. Infoseek's ability to adapt to rapidly changing technologies and develop
new technologies
. technical difficulties or system outages
. Infoseek's ability to integrate operations and manage expansion
. Infoseek's ability to attract, retain and motivate qualified personnel
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. initiation, implementation, amendment, renewal or expiration of
significant contracts with partners, such as Disney, ABC, ESPN,
Microsoft, Borders Online, the National Basketball Association (NBA),
NASCAR, the National Football League (NFL), Netscape and others
. performance of its partners such as Disney, ABC and ESPN in developing
their own brands
. short and long term pricing changes by Infoseek or its competitors
. specific economic conditions in the Internet, intranet and digital media
markets
. strikes or other work disruptions involving the content of Infoseek's
services or Infoseek's creative personnel
. seasonal fluctuations in Internet use and the markets for news and sports
events
. general economic conditions
. other factors
Also, almost all of Infoseek's revenues currently come from advertising sales.
Infoseek expects this reliance on advertising will continue in the future. Most
of Infoseek's contracts with advertisers are for three months or less.
Advertising prices are closely related to the number of viewers on Infoseek's
services. Infoseek cannot accurately predict the number of viewers that will
visit its site in a given time frame. Future sales and operating results are
therefore difficult to forecast. However, because Infoseek expects future
revenues to increase and Infoseek's expense levels increase with revenues,
Infoseek does not expect expense levels to decrease in the short term and
possibly the long term.
Infoseek cannot assure you that it will be able to adjust spending quickly to
compensate for any reduction in future revenues. Accordingly, if revenues do
not meet Infoseek's expectations, there would be an immediate and serious
impact on Infoseek's business, results of operations, financial condition and
prospects.
RELATIONSHIP WITH AND DEPENDENCE ON DISNEY; POSSIBILITY OF CONTROL BY DISNEY
Disney is the principal stockholder of Infoseek, owning approximately 43% of
Infoseek's outstanding stock. Disney also owns warrants, which generally become
exercisable over three years from November 1998. These warrants will allow
Disney to obtain control (50.1% or more) of Infoseek at the end of the three
years. Although Disney has agreed for a three-year period to not increase its
percentage ownership to more than 49.9%, this "standstill" obligation may be
terminated earlier in certain limited circumstances. Infoseek also has several
commercial agreements with Disney relating to GO Network.
Infoseek and its stockholders face several risks relating to its relationship
with Disney, including the following:
. Control Over Governance. Through its substantial ownership of and its
agreements with Infoseek, Disney may exercise significant control over
Infoseek. Specifically:
1. As a result of Disney's current and future share ownership, Disney
may be able to exercise effective control over certain matters
requiring stockholder approval.
2. Under a governance agreement between Infoseek and Disney, Disney
also has the right, so long as it owns 10% of Infoseek stock, to have
its nominees for director submitted to a
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vote of stockholders of Infoseek. Disney currently is entitled to a
number of nominees sufficient to require the approval of the Disney
nominees for those transactions requiring supermajority Board approval,
described below. Currently, that number is three of eight directors on
the Infoseek Board.
3. Supermajority Board approval is required for certain Infoseek
transactions, including:
. amendment of Infoseek's certificate of incorporation or bylaws
. a transaction in which the ownership control of Infoseek changes
. sales of 15% or more of Infoseek's assets
. issuance of securities representing 15% or more of Infoseek's
outstanding shares or for $200 million or more
. certain debt or cash transactions by Infoseek of $200 million or
more
. any appointment of a new Chief Executive Officer of Infoseek
4. Disney's standstill obligation described above will terminate if
certain events occur. These events include a tender offer by a third
party for Infoseek shares or a tender offer by Disney for all of
Infoseek's shares that is approved by a majority of the non-Disney
members of Infoseek's Board of Directors and that requires the tender
of a majority of shares held by persons other than Disney. If the
standstill obligation terminates, Disney could quickly obtain majority
control over Infoseek.
. Disney Right to Purchase Additional Shares in Future Infoseek
Offerings. Disney has a right to purchase additional shares and (under
some cases) warrants of Infoseek in order to maintain its ownership level
if Infoseek issues additional shares. In the event the acquisition of Quando
is consummated, Disney will have a right to purchase shares of Infoseek
common stock and a warrant to purchase Infoseek common stock sufficient to
maintain its current ownership interest in Infoseek. Disney's right to
purchase additional shares will dilute other Infoseek stockholders'
ownership and could reduce Infoseek's earnings per share, if any.
. Promotion of GO Network. GO Network will be promoted in part by Disney
through an agreement in which Infoseek will purchase $165 million of
promotion from ABC. The quality and type of the purchased promotion will
be in part Disney's decision.
. Trademarks and other Intellectual Property. The GO Network name is a
trademark of Disney. Infoseek has the right to use the GO Network
trademark and certain other trademarks and other intellectual property
related to GO Network through a license agreement between Disney and
Infoseek. Infoseek depends on Disney to enforce Disney's rights in this
intellectual property against third party infringement and cannot assure
you that Disney will take adequate steps to enforce its intellectual
property rights, or be successful in doing so. See "--Intellectual
Property." Further, the license agreement between Infoseek and Disney
terminates if certain events occur, such as if another party acquires 25%
or more of Infoseek's stock, Infoseek fails to spend a certain amount of
money to promote GO Network, or Infoseek files for bankruptcy.
. Limited Non-Competition Agreements. Under the terms of Infoseek's
agreements with Disney, Disney has agreed to not compete in certain areas
with Infoseek for a period of fifteen years after November 18, 1998
(unless the intellectual property license agreement
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described above terminates earlier). However, this agreement not to
compete only applies to the United States and only applies to a broad
based Internet portal service for delivery at data transmission rates that
do not allow for real time, full motion video with television broadcast
resolution. Disney, ESPN and ABC also have agreed not to develop or
commercialize Internet quality sports- or general news-related products or
services in the United States or Canada. None of Infoseek's agreements
with Disney legally prohibits Disney from entering into transactions with
any of Infoseek's competitors or from providing Disney content to
Infoseek's competitors. Disney currently provides some of its content to
competitors of Infoseek and maintains a number of websites which are not
expected to be linked to GO Network. Infoseek cannot assure you that
Disney will not compete with GO Network.
. Reduced Opportunity for Acquisition by Third Party. Infoseek's trademark
license terminates if another party acquires 25% of Infoseek. This
license provision, as well as Disney's substantial ownership position in
Infoseek, may prevent or discourage tender offers for Infoseek's common
stock or other changes in the control of Infoseek unless the terms are
approved by Disney. Therefore, it is more difficult for a person other
than Disney to acquire all or a large portion of Infoseek stock.
DEPENDENCE ON THIRD PARTY RELATIONSHIPS, ADVERTISING RELATIONSHIPS AND JOINT
VENTURES
Infoseek's success depends in great part on strategic relationships with third
parties, including Disney. Infoseek depends on third parties as sources of
traffic and as providers of content to its Web site.
Infoseek's traffic agreements generally have terms of one year or less. For
the year ended December 31, 1997 and the nine months ended September 30, 1998,
approximately 46% and 35% of the aggregate page views on Infoseek's service
were generated by traffic derived from third party sources. Among the most
important of these traffic relationships are the following:
. Microsoft. Infoseek has an agreement with Microsoft pursuant to which it
is one of five premier providers of search and navigational services on
Microsoft's network of Internet products and services. Under the
Microsoft agreement, which expires in September 1999, Infoseek is
obligated to pay an aggregate of $10.7 million for a guaranteed minimum
number of impressions on both Microsoft's Internet Explorer search
feature and Microsoft's website. Infoseek will also pay, based on the
number of impressions delivered, for additional impressions on both
Internet Explorer and Microsoft's website, up to a maximum of $18.0
million.
. WebTV. Infoseek has an agreement with WebTV Networks, Inc. under which
Infoseek is the exclusive provider of search and directory services to
WebTV. Infoseek has also agreed to manage advertising sales for all of
WebTV's search traffic and the substantial majority of WebTV's current
non-search traffic through September 2001. Under this agreement, Infoseek
will pay WebTV $26.0 million in cash, $15.0 million of which was paid in
advance for the first five quarters during which the agreement is in
effect. The remaining $11.0 million is payable ratably over the last
three quarters of the term of the agreement. A portion of these payments
by Infoseek will be reimbursed if WebTV is unable to deliver a minimum of
4.5 billion impressions on WebTV over the life of the agreement. Infoseek
receives all of the revenue generated from such advertising sales up to a
pre-determined amount that is larger
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than Infoseek's total payment obligations to WebTV under the agreement.
Beyond that pre-determined amount, additional advertising sales revenue is
allocated between Infoseek and WebTV.
. Netscape. Since March 1995, Infoseek's search service has been a featured
provider of navigational services on the website of Netscape. In 1996 and
1997 and during the first nine months of 1998, approximately 65%, 33% and
16%, respectively, of all page views of the Infoseek search service came
from traffic attributable to the Netscape website. On June 1, 1998,
Infoseek entered into a one-year agreement with Netscape with terms that
provided for Infoseek to pay, based upon the level of impressions
delivered, up to an aggregate of $12.5 million in cash to be one of the
six non-exclusive premier providers of navigational services (along with
Excite, Netscape, Lycos, Alta Vista, and LookSmart). On November 25,
1998, Infoseek and Netscape renegotiated the terms of the agreement to
provide that starting in January 1999 Infoseek will receive 5% of
Netscape's premier provider rotations--the pages served to visitors who
have not selected a preferred provider--until May 31, 1999 and will pay
an average of 20 percent more than before for the Netscape traffic it
receives.
When these traffic agreements terminate, Infoseek may not be able to renew them
or find other agreements on good terms or at all. If Infoseek does not renew
these agreements or enter into similar agreements on good terms and does not
develop significant traffic to make up for the loss of these agreements,
Infoseek's advertising revenues will be reduced. Reduced advertising revenues
would likely seriously harm Infoseek's business, results of operations,
financial condition and prospects.
In addition, the products or services of those companies that provide access or
links to Infoseek's products or services, such as other website operators, may
not achieve market acceptance or commercial success, which would likely
seriously harm Infoseek's business, results of operations, financial condition
and prospects.
Infoseek's success will also depend in great part on the continuation and
integration of Starwave's joint ventures and third party relationships,
especially the Joint Ventures. On a pro forma basis for the twelve months
ended December 31, 1997 and the nine months ended September 30, 1998 (assuming
that the current agreements with Disney affiliates ABC and ESPN had been
entered into during these periods), revenues of these joint ventures would
have represented 29% and 28% of the total revenues of Infoseek for those
respective periods. Infoseek's future success will depend to a large extent on
its ability to maintain these relationships with ESPN and ABC, and to
establish relationships with new partners to develop co-branded websites. If
Infoseek fails to keep good relationships with ESPN and ABC or fails to find
new partners, Infoseek may not be able to keep or create interactive services
and products that are attractive to users and advertisers. This in turn could
seriously harm Infoseek business, financial results and financial condition.
LIMITED OPERATING HISTORY; HISTORICAL LOSSES; ANTICIPATION OF CONTINUED LOSSES
Both Infoseek and Starwave have limited operating histories. These limited
operating histories make it difficult to budget or predict future results.
Infoseek and Starwave have incurred significant net losses since they began
operations. Infoseek expects it will continue to have consolidated net losses
for a number of years. As of September 30, 1998, Infoseek had an accumulated
deficit of $53,724,000. On a pro forma basis as of September 30, 1998,
including Infoseek, Starwave and
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Quando, Infoseek would have had an accumulated deficit of $130.7 million
(including in-process research and development charges of $76.9 million in
connection with the Starwave Merger and proposed Quando merger). Infoseek and
its prospects must be considered in light of the risks, costs and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in the new and rapidly evolving Internet market. Infoseek
cannot assure you that it will be able to address any of these challenges.
Although Infoseek has experienced significant revenue growth in 1997 and 1998,
Infoseek cannot assure you that this growth rate will be sustained, that
revenues will continue to grow or that Infoseek will achieve profitability.
In addition, Infoseek may elect from time to time to make certain pricing,
service or marketing decisions or acquisitions that could have a short-term
material adverse effect on Infoseek's business, results of operations,
financial condition and prospects and which may not generate the long-term
benefits intended. From time to time, Infoseek has entered into and may
continue to enter into strategic relationships with companies for cross service
advertising, such as Infoseek's relationship with United Parcel Service of
America, Inc. ("UPS"). Infoseek's revenues have in the past been, and may in
the future continue to be, partially dependent on its relationship with its
strategic partners. Such strategic relationships have and may continue to
include substantial one-time or up front payments from Infoseek's partners.
Accordingly, Infoseek believes that its quarterly revenues are likely to vary
significantly in the future, that period-to-period comparisons are not
necessarily meaningful and that such comparisons should not necessarily be
relied upon as an indication of Infoseek's future performance. Due to the
foregoing factors, in future periods, Infoseek's operating results may be below
the expectations of public market analysts and investors. In such event, the
market price of Infoseek's common stock would likely be significantly reduced.
VOLATILE STOCK PRICE
The market price of Infoseek's common stock has fluctuated and may continue to
fluctuate widely. Such changes are in response to a number of events and
factors such as:
. quarterly changes in results of operations
. announcements of new technological innovations or new products and media
properties by Infoseek or its competitors
. changes in financial estimates and recommendations by securities analysts
. the operating and stock price performance of other companies that
investors may deem comparable to Infoseek
. news relating to trends in Infoseek's markets or the economy generally
In addition, the stock market and specifically the stock of Internet companies
have been very volatile. This volatility is often not related to the operating
performance of the companies. This broad market volatility and industry
volatility may reduce the price of Infoseek's common stock, without regard to
Infoseek's operating performance.
RISKS ASSOCIATED WITH BRAND DEVELOPMENT
Infoseek believes that establishing and maintaining the GO Network brand is a
critical aspect of its business. Infoseek believes brand recognition is
important in its efforts to attract and expand its
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audience. Infoseek also believes that brand recognition will be even more
important as the number of Internet sites grows, due to the relative ease of
entering the Internet market. Promotion and enhancement of Infoseek brands
largely depends on Infoseek's success in providing high-quality products and
services and in designing and implementing effective media promotions. Infoseek
cannot assure you that it will continue to offer high-quality products and
services.
In order to attract and retain Internet users and to promote and maintain the
GO Network brand in response to competitive pressures, Infoseek believes it is
necessary to spend a large amount of resources in creating and maintaining a
distinct brand loyalty among consumers. If Infoseek is unable to provide high-
quality products and services or design and implement effective media
promotions, or otherwise fails to promote and maintain its brands, or if
Infoseek incurs excessive expenses in an attempt to improve its products and
services or promote and maintain its brands, its business, results of
operations, financial condition and prospects would be seriously harmed.
INTENSE COMPETITION
The market for Internet and intranet products and services is very competitive.
Infoseek expects the market to become more competitive. Because the market for
search and portal services is new and developing, Infoseek cannot predict how
competition will affect Infoseek, its competitors or its customers. Infoseek
believes that the Internet market increasingly will require portal services to
deliver a large variety of multimedia content and services. Infoseek believes
that its future success partly depends on its ability to deliver a broad
variety of multimedia content and services. Infoseek believes this includes the
following:
. Electronic commerce
. Enhanced search and directory functions
. Development of online communities, including chat, e-mail and games
. Timely, relevant and diverse high-quality multimedia content
. Access to live video and audio events
With respect to attracting advertisers, in order to be competitive Infoseek
believes it must offer:
. a large number of viewers
. viewers with attractive demographic profiles
. cost-effectiveness
Infoseek believes that the number of companies selling advertising on the Web
and the amount of advertising space on the Internet have greatly increased
recently. Infoseek may therefore face a market which demands lower prices for
the purchase of advertisements and this could result in a decline in Infoseek's
revenues.
Infoseek may not be able to compete successfully. If Infoseek fails to respond
to competitive pressures, including those listed below, Infoseek's business,
results of operations, financial condition and prospects will be seriously
harmed.
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Infoseek believes it faces competition in numerous areas, including the
following:
. Consolidated Internet Products. Companies like Yahoo!, America Online,
Netscape, Microsoft, Excite, CNET (Snap) and Lycos offer integrated
products which include a variety of features. Such products often offer
search and directory services on the Internet, white and yellow pages, e-
mail listings, news and sports, financial and stock information, weather,
internet commerce, auctions and classifieds, chat, bulletin boards, e-
mail and other community and information features. These companies have
often developed integrated products through internal development, through
acquisitions of competitors of Infoseek or strategic and licensing
arrangements with competitors of Infoseek. Because these sites are often
an initial point of entry for Internet viewers or have a large number of
users, it is likely they will continue developing, acquiring or licensing
Internet search and navigation functions competitive with those offered
by Infoseek. These competitors will also likely attempt to control
Internet content, such as news, sports and entertainment. These
competitors may also merge or enter into cooperative agreements which may
increase their market dominance. These competitors may take actions that
make it more difficult for viewers to find and use Infoseek's products
and services or that make Infoseek's products and services including GO
Network less attractive. If these integrated services continue to expand,
Infoseek's business, results of operations, financial condition and
prospects could be seriously harmed.
. Search and Navigation Products. Many companies currently offer Web search
and navigation products which compete with Infoseek's search service.
These include DEC/AltaVista, Excite, HotBot, Inktomi, Lycos, Snap and
Yahoo! The two most widely used Web browsers are produced by Netscape and
Microsoft. Each of these browsers contain easy to locate search buttons
and feature "push" technologies, both of which can direct search traffic
to services which compete with Infoseek.
. Search Software. Infoseek's Ultraseek Server product competes directly
with intranet products and services offered by companies such as
DEC/AltaVista, Lycos, Open Text and Verity.
. Internet Media Sources. Through the production of ESPN.com and
ABCNEWS.com, Infoseek competes with other Internet sites that provide
news and sports information. For example, many Internet sites such as CBS
Sportsline, CNNsi, Yahoo! Sports and Fox Sports Online provide
information on sports. Internet sites such as CNN, The New York Times,
The Washington Post, CBS News and MSNBC provide news and analysis. Sites
such as Microsoft Investor, Quicken Financial Network, Reuters, DowJones,
Bloomberg and CNNfn provide financial news. Other sites, like E! Online
and Entertainment Weekly/PathFinder offer entertainment news.
. Competition from Internet and other advertising media. Infoseek competes
with online services, other Web site operators and advertising networks
for advertisers. Infoseek also competes with other media sources such as
broadcast television, cable television, radio, newspapers and magazines.
Typical competitors in these media sources are print publications such as
Sports Illustrated, USA Today, The New York Times and The Washington
Post, as well broadcast and cable sources such as ABC, NBC, CBS, CNN and
Fox. Infoseek competes with these other media sources for a portion of
advertisers' total advertising budgets. Infoseek also competes with these
other media sources for viewers. To compete successfully against
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these other sources, Infoseek must provide interesting and popular
interactive content. In addition, Infoseek's partners in its joint venture
relationships, ESPN and ABC, have certain rights to compete with Infoseek.
For example, ESPN and ABC sell advertising on their broadcast programs in
competition with Infoseek.
. Competition from Electronic Retailers. If and when Infoseek begins to
offer substantial electronic commerce capabilities, it will face
competition from many Internet sites which offer products and services
for sale over the Internet. Websites such as Yahoo!, AOL/Netcenter,
Excite, MSN, Lycos and Amazon.com and others already offer items for sale
over the Internet, and have established brand names and infrastructure
for electronic commerce.
. Other Internet sites. Infoseek also competes for users with many other
commercial and non-profit websites.
In order for Infoseek to compete successfully, Infoseek must overcome many
risks, including:
. Low barriers to entry to the Internet. Infoseek believes that it is
relatively inexpensive to develop new internet technologies, products and
services. It is likely that other companies may offer similar products
and services that compete with Infoseek for advertisers.
. Quickly Changing Market. Because the Internet market is new and changing
quickly, Infoseek cannot predict which companies are likely to offer
competitive services in the future.
. Reliance on Advertising Revenues. Infoseek depends on advertising sales
for revenue. Because the Internet is still a new advertising medium,
there is a risk that the number of advertisers purchasing advertisements
on the Internet could decrease. Such a decrease could result in lower
advertising revenues for Infoseek.
If Infoseek does not compete effectively, it will suffer immediate harm to its
services, results of operations and prospects.
RISK OF INABILITY TO ACHIEVE REVENUE MINIMUMS UNDER REPRESENTATION AGREEMENTS
Under certain representation agreements with ESPN and ABC, Infoseek (through
Starwave) has agreed to act as the representative of the ESPN and ABCNews Joint
Ventures. As such representative, Infoseek will sell advertising and related
services for these joint ventures, and has agreed to make quarterly payments to
the joint ventures. These payments will be the greater of (A) a predetermined
minimum amount or (B) revenues actually billed to third parties (even if not
collected) in the performance of such advertising and related services, less
the costs of providing the services and a predetermined profit margin.
Infoseek may not be able to sell the guaranteed minimum amount in any quarterly
period or be able to collect the money due from these sales and services.
Failure to sell the predetermined minimum amount or collect enough money from
these sales services could seriously harm Infoseek's business, results of
operations and financial condition.
COSTS OF INTEGRATION AND TRANSACTION EXPENSES
Infoseek will incur costs of approximately $22.0 million associated with the
acquisition of Starwave, which will be accounted for as part of the purchase
price of Starwave. The $22.0 million includes: (A) $5.0 million for liabilities
related to involuntary employee termination benefits (relocations) of
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Starwave employees and (B) $5.0 million for costs to exit other Starwave
activities, primarily operating leases of Starwave. Infoseek expects to incur
additional integration costs of up to $7.0 million for Starwave and Quando of
which $1.4 million were included in the results for the quarter ended September
30, 1998. The remaining integration costs of up to $5.6 million will affect
future operations and all of these additional integration costs do not qualify
as liabilities in connection with a purchase business combination under
accounting rules. Infoseek may also incur additional significant charges in
future quarters to reflect additional costs associated with the acquisition of
Starwave.
Infoseek expects to incur costs of $1.0 million in connection with the proposed
Quando acquisition, which are expected to be accounted for as part of the
purchase price of Quando. Infoseek expects to incur additional costs of $0.5
million in connection with the integration of Quando. The integration costs will
affect future operations and do no qualify as liabilities in connection with a
purchase business combination under accounting rules. Infoseek may also incur
additional charges in future quarters to reflect additional costs associated
with the acquisition of Quando.
DEPENDENCE ON CONTINUED GROWTH IN USE OF THE INTERNET, ELECTRONIC COMMERCE AND
INTERNET ADVERTISING
To grow revenues, Infoseek depends on increased acceptance and use of the
Internet, intranets and other interactive online platforms as sources of
information, entertainment and sales of goods and services. Infoseek depends
heavily on advertisements as a source of revenue. Therefore, Infoseek also
depends on the acceptance and success of advertising on the Internet.
The Internet has grown very rapidly in recent years. Infoseek cannot assure you
that the Internet will continue to be accepted and widely used. In particular,
Infoseek cannot assure you that consumers will continue to use the Internet for
purchasing or selling goods and services or that advertisers will continue to
use it for advertising goods and services. Infoseek also cannot assure you that
a large base of users will support Infoseek's business. Significant structural
problems remain in using the Internet and conducting electronic commerce,
including:
. security
. reliability
. cost
. ease of use and access
. quality of service
. lack of network infrastructure to support increased use
. speed (including slow deployment of high speed communications technology)
. limitations on access by corporations and schools
. privacy
These problems may slow the growth of Internet use or the attractiveness of the
Internet for advertising and online transactions. In addition, the use of the
Internet could be reduced due to delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet
activity or as the result of increased government regulation.
In addition, the Internet market is changing quickly. The number of new
competitors in the online market is increasing. Many of the advertisers on
Infoseek's services are relatively new to Internet advertising. Many of the
advertisers have not devoted significant amounts of their advertising budgets
to Internet advertising. Advertisers may determine that traditional sources of
advertising, like television, radio and newspapers, may be less costly or
better at reaching customers than the Internet. There are no widely accepted
standards to measure Internet advertising.
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Infoseek believes that advertising sales generally, such as television, are
generally lower in the winter and summer of each year as compared with the fall
and spring. Infoseek also believes that advertising usage changes with the
economy. Seasonal and economic changes could be more serious on the Internet,
depending on the acceptance of the Internet for advertising. Any seasonal or
economic-based advertising, on the Internet or not, could seriously harm
Infoseek's business, financial condition and operating results.
If the Internet grows more slowly than expected, or does not grow at all,
Infoseek's business, financial condition and operating results would be
seriously harmed. If access to the Internet or Infoseek's services is
restricted, Infoseek's business, financial condition and operating results
would also be seriously harmed.
The Internet industry is young. The business model of Infoseek and its
competitors changes frequently and very few products and services have become
established in the market. The Internet market might not continue developing or
develop more slowly than expected. Infoseek may be unable to modify its
business model rapidly enough to remain competitive. The Internet market might
become filled with competitors. Infoseek's products may not become accepted by
Internet users or advertisers. If any of these events occurs, Infoseek's
business, results of operations, financial condition and prospects would be
seriously harmed.
RISKS OF ACQUISITION STRATEGY
Infoseek believes that it may be necessary to enter into joint ventures or
other strategic relationships to grow its business. Infoseek also believes it
may be necessary to acquire complementary products, technologies or businesses
to remain competitive. If this strategy is not successful, Infoseek may
experience decreased market share, viewer traffic or brand loyalty.
There are several risks of acquisitions or other strategic transactions,
including the proposed Quando and completed Starwave acquisitions, such as:
. the difficulty of integrating the operations and personnel of acquired
companies, assets or operations
. potential disruption of Infoseek's ongoing businesses
. inability to successfully incorporate acquired technology or content into
existing products, services and media properties
. expenses and other charges associated with transactions
. the necessity of establishing and implementing uniform standards,
controls, procedures and policies for acquired companies
. impairment of relationships with employees, vendors and customers as a
result of any integration of new management personnel, technologies,
products and services
. potential unknown liabilities associated with acquired businesses
In addition, because of the Starwave acquisition and transactions between
Infoseek and Disney, Infoseek may not be able to account for future acquisitions
as pooling-of-interests transactions under accounting rules for a period of
time. Also, if Disney chooses to obtain control when its warrant vests, Infoseek
will not be able to use pooling-of-interests accounting. As a result, Infoseek
may be required to add large
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amounts of goodwill to its balance sheet as a result of acquisition
transactions in the future. The amortization of this goodwill will reduce
Infoseek's profits in the periods over which it is amortized. Infoseek may also
take charges for acquired in-process research and technology when acquisitions
occur. Such charges for acquired in-process research and technology would
reduce Infoseek's profits in such period.
There can be no assurance that Infoseek will be successful in overcoming these
risks. Infoseek may also encounter other problems in connection with
acquisition transactions. Infoseek cannot assure you that the proposed Quando
acquisition or any other transactions will or will not occur. If transactions
do occur, they could harm Infoseek's business or may fail to enhance Infoseek's
business.
Infoseek may use significant amounts of its available cash to conduct these
transactions. Infoseek may also use significant amounts of its stock to conduct
these transactions. Use of stock would dilute the interests of existing
stockholders in Infoseek.
TECHNOLOGICAL CHANGE; NEED FOR CONTINUED TECHNOLOGICAL INNOVATION
The market for Internet products and services is one of rapid technological
change, changing customer needs, frequent new product introductions and
evolving industry standards. Moreover, the Internet market is emerging and many
companies are expected to introduce new Internet products and services in the
near future. To be successful, Infoseek must respond to these changing demands
of the market and competition by introducing new products, services and
technologies. Infoseek must also continue to improve the performance, features
and reliability of its products and services. If it does not continue to timely
and continually improve its products and services and introduce new ones,
Infoseek could suffer serious harm to its business, results of operations and
prospects.
In the fourth quarter of 1997, Infoseek released a new version of its search
service which currently features 18 "channels." The channels are designed to
bring together topical information, services, products and communities on the
Web. Most of Infoseek's additional channel sponsorship and partnership
arrangements are dependent on increases in viewer traffic. If it does not
attract a significant amount of viewers, Infoseek may not be able to retain its
channel sponsors and partners. Infoseek cannot assure you that its sponsorship
and partnership strategies will continue to be accepted by advertisers.
A key element of Infoseek's strategy is to continue to develop new
technological innovations in order to enhance the user's experience and
strengthen relationships with advertisers. The success of GO Network and its
component sites, including ABCNEWS.com and ESPN.com, will depend in part on how
easy-to-use, functional and feature-filled such services are.
Because Infoseek needs to continue to provide technological improvements to its
services, Infoseek faces many risks. Infoseek cannot assure you:
. Any of its new or proposed product or services will be accepted by the
market or will continue to meet the market's changing needs
. It will successfully design, develop, test, market and introduce new and
enhanced technologies and services
. It will successfully improve its existing and planned products and
services
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. It will not experience difficulties that delay or prevent the successful
development, introduction or marketing of new or enhanced technologies,
products and services
. It will bring its technological innovations to the market quickly and in
advance of its competitors
. It will not have large expenses in order to develop, improve or acquire
new technologies
. Its new or enhanced products and services will be free of errors and will
not require significant design changes once introduced
If any of these risks occurs customers may become dissatisfied with Infoseek's
products and services. In turn, Infoseek could lose viewers and could
experience delayed or lost advertising revenues. If Infoseek cannot create,
develop or acquire successful new or improved technologies for its services
ahead of its competitors, it could suffer serious harm to its business,
financial results or prospects. If Infoseek does not test, market and support
such new or improved technologies, it could also suffer serious harm to its
business, financial results or prospects. If the market does not accept
Infoseek's new or improved technologies, Infoseek could also suffer serious
harm to its business, financial results or prospects.
INTERNET SECURITY AND ELECTRONIC COMMERCE RISKS
The security of online transactions and the privacy of users on the Internet
may prevent the growth of the Internet and electronic commerce. If an intruder
is able to circumvent Infoseek's security measures, the intruder could steal
confidential or proprietary information. The intruder could also interrupt
Infoseek's online operations. Infoseek expects to spend significant amounts of
cash and resources to protect against the threat of such an intruder or to fix
problems caused by potential intruders.
Infoseek cannot assure you, however, that these efforts to protect Infoseek
from security intrusions will be successful. Infoseek and its contractors store
and transmit confidential information, such as computer software or credit card
numbers. Infoseek could be held liable for lost or stolen data. If data is lost
or stolen, Infoseek may be sued by the owners of the lost or stolen data or by
other entities who rely on the data.
Although Infoseek has agreements which are designed to limit Infoseek's
liability for losses, these agreements may not be enforceable. Even if they
are, the agreements may not be successful in limiting Infoseek's liability.
Also, Infoseek may not be able to negotiate these agreements with all parties.
Infoseek does not have insurance against these security risks, although it does
have standard business interruption and crime insurance which might cover
certain losses. If Infoseek's revenue from electronic commerce increases
substantially, Infoseek will consider buying additional insurance. However, if
Infoseek does not or cannot obtain adequate insurance at that time, large or
repeated security breaches into Infoseek's systems could seriously harm
Infoseek's business, results of operations and financial condition.
Infoseek has agreements and expects to enter into other agreements with third
parties where Infoseek is entitled to receive part of the revenues received by
these third parties from the purchase of goods
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and services by users referred from Infoseek's products and services. Infoseek
may also directly sell goods and services on the Internet. These arrangements
may expose Infoseek to additional risks and uncertainties, including potential
liabilities to consumers of such products and services.
YEAR 2000 COMPLIANCE
Infoseek is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. Virtually every computer
operation will be affected by the "year 2000 problem." Many computer systems
only provide for a two digit date and therefore will not properly recognize
dates when the year changes from 1999 ("99" in most systems) to 2000, since the
system may recognize the year as 1900 instead of 2000. Computer systems that do
not properly recognize the year 2000 could generate incorrect data or cause a
system to fail.
Infoseek management has conducted a review of Infoseek's exposure to the year
2000 problem. Infoseek is working with its major computer system vendors, data
feed and software vendors to determine if they are prepared for the year 2000.
Based on Infoseek's internal review and discussions with these vendors,
Infoseek currently believes that its internal systems are year 2000 compliant
(with the exception of three systems, which are scheduled to be replaced as
part of a regular upgrade program prior to the end of 1999 and are not material
to Infoseek's operations). Infoseek does not expect to incur significant
expenses or to have to purchase additional computer systems to avoid the year
2000 problem, for either Infoseek's internal information technology systems or
Infoseek's products and services.
Despite Infoseek's review, the effects of the year 2000 problem are still very
uncertain. Infoseek cannot assure you that its vendors' representations are
accurate. Infoseek has also not investigated year 2000 compliance by third
parties who are not vendors of Infoseek. Infoseek has no control over these
third parties' compliance. For example, if a link on GO Network or the Infoseek
search service points to a website which is not year 2000 compliant, that link
may not be available to users and therefore the Infoseek services will offer
fewer features. If many linked sites do not work, the value of user traffic and
advertising on Infoseek's websites could materially decrease.
If Infoseek or any of its viewers, customers, linked sites, advertisers,
vendors or other third parties are not year 2000 compliant, Infoseek's
business, results of operations, financial condition and prospects could be
seriously harmed.
MANAGEMENT OF GROWTH
Infoseek has experienced, and may continue to experience, rapid growth. In
order to take advantage of market opportunities, Infoseek may be required to
expand further. This growth has placed, and could continue to place, a
significant strain on Infoseek's limited personnel and other resources.
Competition for engineering, sales and marketing personnel is intense. Infoseek
cannot assure you that it will be successful in attracting and retaining such
personnel. Infoseek may not be able to manage such growth effectively.
In order to succeed, Infoseek must continue to:
. Invest in and improve operational, financial and management information
systems. These systems are necessary to support increased accounting and
management. The upgrade and
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installation of these systems, which is expected to be completed by the
middle of 1999, will affect almost all parts of Infoseek's operations such
as planning, advertising sales, management, finance and accounting.
. Enhance its advertising inventory management analysis system. This system
will provide enhanced internal reporting and customer feedback on
advertising, and is discussed further under "--Limited Computer Systems
Capacity and Risks of System Failure; Reliance on Advertising Management
System" and "Infoseek Business--Technology."
. Hire, train, motivate and manage its employees. So far, Infoseek has
experienced difficulty in hiring and retaining enough personnel to
support the growth of Infoseek's business.
. Maintain relationships with various partners, advertising customers,
advertising agencies, Internet sites and services, Internet service
providers and other third parties. Infoseek must manage and strengthen
its strategic relationships with various third parties, including
Microsoft, WebTV, Disney, ESPN and ABC. See "--Dependence on Third Party
Relationships, Advertising Relationships and Joint Ventures," "--Risks
Regarding Development, Launch and Acceptance of GO Network" and "--
Uncertainties Regarding Integration of Operations."
. Retain control by management over the operations and strategic direction
of Infoseek in a rapidly changing environment. Management must continue
to locate new business activities and direct Infoseek's resources to
these activities. See "--Dependence on Key Personnel."
. Develop Expanded Electronic Commerce Capabilities. Infoseek must
significantly expand its ability to provide electronic commerce,
including creating an infrastructure for electronic transactions,
security, delivery and financial reporting for electronic commerce.
If Infoseek does not successfully improve its systems or is not able to
attract and keep personnel, Infoseek's business, results of operations,
financial condition and prospects could be seriously harmed. Furthermore, if
Infoseek does not maintain its many business relationships or management or
does not maintain control over growth, Infoseek's business, results of
operations, financial condition and prospects could be seriously harmed.
Infoseek may experience problems, delays or unanticipated additional costs in
addressing these concerns or in the use of existing systems. If any of these
problems occur, Infoseek could suffer serious harm to its business, results of
operations, financial condition and prospects, particularly in the period or
periods in which these changes occur.
LIMITED COMPUTER SYSTEMS CAPACITY AND RISKS OF SYSTEM FAILURE; RELIANCE ON
ADVERTISING MANAGEMENT SYSTEM
A large part of Infoseek's strategy is to attract a large number of users to
its products and services. In order for Infoseek to be successful at this
strategy, Infoseek's products and services must perform well. If not, Infoseek
will not establish a strong reputation or attract advertisers and users.
Infoseek relies on computer, network and telecommunications systems to provide
its products and services. Such systems:
. May fail to operate correctly
. May be strained by too many users or demands
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. May be damaged by earthquakes, fires, floods, wind storms, power loss,
lightning, electrical and telecommunication failures or similar events
. May be damaged through physical or electronic break-ins or computer
viruses
If Infoseek's systems, the majority of which are located in Sunnyvale,
California, and Bellevue and Seattle, Washington, fail or function poorly for
any of these reasons or other reasons, these interruptions would result in less
traffic to Infoseek's services. If the interruptions continue, they could
reduce the number of users of and advertisers on Infoseek's products and
services. Infoseek does not maintain a comprehensive disaster recovery plan and
does not have redundant systems for each of its services.
Although Infoseek has insurance for fires, floods, earthquakes (and, for the
systems in Washington, wind storms) and general business interruptions, the
amount of coverage may not be adequate to cover all losses which could occur.
If losses occur from failures of Infoseek systems and insurance does not fully
cover such losses, they could seriously harm Infoseek's business, results of
operations, financial condition and prospects.
Infoseek also depends on Web browser makers and Internet and online service
providers. Infoseek's viewers have experienced and may in the future experience
difficulties due to incompatibilities or other problems. Infoseek cannot
control these Web browser makers and online services providers and cannot
predict when these incompatibilities or problems will occur. Infoseek also
depends on computer hardware suppliers to promptly deliver, install and service
its servers and other equipment and services used to provide Infoseek's
products and services. If Infoseek's access to the Internet or computer systems
fail, it could result in serious harm to Infoseek's business, results of
operations, financial condition and prospects.
In order to generate revenues, Infoseek must manage the advertising on its
large, high traffic websites. Infoseek relies on internal advertising inventory
management and analysis systems to provide internal reporting and customer
feedback on advertising. Infoseek is currently evaluating Starwave's system. If
Infoseek has serious difficulties in utilizing Starwave's system, Infoseek will
need to devote more resources to enhance the system currently in use.
If Infoseek fails to properly display advertising because of problems with its
advertising management system or other technical problems, Infoseek would be
required to deliver additional advertising displays which otherwise could have
been sold to other advertisers. Significant amounts of these "make good"
obligations could result in serious harm to Infoseek's business, results of
operations, financial condition and prospects.
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
As part of its business strategy, Infoseek has begun to expand its products and
services into international markets and is exploring further opportunities to
expand internationally. Infoseek believes that international expansion is
important to Infoseek's growth. In marketing its products and services
internationally, however, Infoseek faces new competitors. In addition, in order
to be successful in international markets, Infoseek must create localized
versions of its products and services.
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Infoseek may not be successful in creating localized versions of its products
and services or marketing or distributing its products abroad. Even if Infoseek
is successful, its international revenues may not be adequate to offset the
expense of establishing and maintaining international operations. To date,
Infoseek has limited experience in marketing and distributing its products and
services internationally. Further, in addition to the uncertainty of Infoseek's
ability to establish an international presence, there are difficulties and
risks inherent in doing business internationally, such as:
. compliance with regulatory requirements and changes in these requirements
. export restrictions
. export controls relating to technology
. tariffs and other trade barriers
. difficulty in protection of intellectual property rights
. difficulties in staffing and managing international operations
. longer payment cycles
. problems in collecting accounts receivable
. political instability
. fluctuations in currency exchange rates
. potentially adverse tax consequences
Any one or more of these factors could prevent Infoseek from being successful
in international markets. If Infoseek fails to be successful in international
markets, it could seriously harm Infoseek's business, results of operations,
financial condition and prospects.
If in the future Infoseek derives a large portion of its revenues from
international operations, changes in currency exchange rates will expose
Infoseek to more risk. If and when Infoseek derives a large portion of its
revenues from international expansion, it will determine whether to engage in a
hedging strategy to minimize the risks of currency fluctuations.
DEPENDENCE ON KEY PERSONNEL
Infoseek's ability to generate revenues and profits depends upon its senior
management team. Infoseek depends upon its Chairman of the Board, Steven
Kirsch, who is very involved in Infoseek's research and development efforts,
Harry Motro, its Chief Executive Officer, Les Wright, its Chief Operating
Officer and Chief Financial Officer, and Patrick Naughton, its Chief Technical
Officer. Infoseek also depends on many other employees, such as employees with
writing, editing, sales, management, marketing or technical ability. Employees
with these skills are difficult to find, and competition for these employees is
intense. If Infoseek were unable to attract and retain these key and other
skilled employees, its business, results of operations, financial condition and
prospects would be seriously harmed.
-22-
<PAGE>
INTELLECTUAL PROPERTY
Infoseek's success depends heavily upon its exclusive technology, brand names
and Internet locations ("domain names"). To protect its rights to its software,
systems, documentation and product features, Infoseek currently relies on a
combination of:
. patent, copyright and trademark and service mark laws
. trade secret laws
. confidentiality procedures, and
. contractual provisions
These methods of protection may not be adequate to protect against others using
Infoseek's technology, brand names and content. Accordingly, Infoseek cannot
assure you that it will be able to maintain the goodwill associated with its
products and services or competitive features.
Infoseek and its subsidiaries hold three United States patents and currently
have 15 U.S. patent applications pending and six foreign patent applications
pending. Infoseek has registered and applied for registration for certain
service marks and trademarks, and will continue to evaluate the registration of
additional service marks and trademarks, as appropriate. Infoseek generally
enters into confidentiality agreements with its employees and with its
consultants and customers.
Despite these measures, Infoseek may not be able to protect its intellectual
property. Infoseek may not be able to protect its technology because:
. Pending and new patent applications and trademark registrations may not
be approved
. Even if issued, new patents and trademark registration may be challenged,
invalidated or designed around
. Infoseek's new products or technologies may not be patentable
. Time-consuming and costly litigation may be necessary to protect
Infoseek's proprietary technologies
. Policing unauthorized use of Infoseek's intellectual property is
difficult and expensive, particularly given the global nature of the
Internet and the ease of digital copying
. The laws of some foreign countries do not protect proprietary rights to
as great an extent as do the laws of the United States
. There can be no assurance that Infoseek's means of protecting its
proprietary rights will be adequate or that Infoseek's competitors will
not independently develop similar technology, duplicate Infoseek's
products or design around patents issued to Infoseek or other
intellectual property rights of Infoseek
The application of copyright and trademark laws to the Internet and other
digital media is very uncertain. There has been a substantial amount of
litigation in the technology industry regarding intellectual property rights.
Further, Infoseek may not be able to use its intellectual property or further
develop its business because of third parties. Third parties:
. may bring claims of patent, copyright or trademark infringement against
Infoseek
-23-
<PAGE>
. may obtain patents or other intellectual property rights which may limit
Infoseek's ability to do business or require Infoseek to license or
cross-license technology
. may claim Infoseek has misappropriated their creative ideas or formats or
otherwise infringed upon their proprietary rights
. may bring costly, time consuming lawsuits which divert management
attention, require Infoseek to enter into costly royalty or licensing
arrangements or prevent Infoseek from using important technologies or
methods
Infoseek is aware of a number of issued patents which cover interactive
programming, Internet programming and techniques, and electronic commerce. For
example, Infoseek is aware of a U.S. patent recently issued to Carnegie Mellon
related to Web spider technology. This patent has been licensed to Lycos and is
currently used in the Lycos search engine. While Infoseek currently believes,
based on a preliminary review of such issued patent and consultation with its
patent counsel, that its products and services do not infringe the Carnegie
Mellon patent, Infoseek cannot assure you it would prevail if Lycos or Carnegie
Mellon claimed Infoseek infringed such patent. Infoseek expects patent
infringement regarding Internet technologies to increase as the number of
products and competitors in this market grows and as new patents are issued.
Infoseek expects that patents, particularly in the areas of real-time or
"streaming" audio and video, online commerce and "digital cash," and other
technologies may issue in the future. Some of these technologies may be
considered to be critical to long-term success in the Internet marketplace.
Infoseek has also from time to time received informal notices from copyright
and trademark holders regarding use of music, images and websites in their
services.
Infoseek cannot assure you that it can adequately protect its intellectual
property. If Infoseek fails to protect its intellectual property, it could
suffer serious harm to its business, results of operations or prospects.
Infoseek also cannot assure you that third parties will not in the future claim
infringement by Infoseek with respect to Infoseek's current or future products.
Any such claims or counterclaims could (i) be time-consuming, (ii) result in
costly litigation, (iii) cause product release delays, (iv) require Infoseek to
redesign its products or (v) require Infoseek to enter into royalty or
licensing agreements. These claims of infringement, whether successful or not,
could seriously harm Infoseek's business, results of operations or prospects.
RISKS OF GOVERNMENT REGULATION AND CHANGING LAWS
No government entity directly regulates Infoseek. Infoseek is, however, subject
to those general laws and regulations that apply to all businesses. At present,
there are few laws or regulations that apply to access to or commerce on the
Internet. However, proposals for regulation are presented to federal, state,
and foreign governments frequently. Laws or regulations may be passed regarding
the Internet on such issues as:
. user privacy (including sending of unsolicited e-mail, or "spamming")
. consumer protection for products and services
. media regulation, such as libel and obscenity
. intellectual property
. liability of Internet service providers
-24-
<PAGE>
In addition, courts are still determining how existing laws regarding property,
copyrights, trade secrets, libel and defamation, and privacy apply to the
Internet.
If these new laws or regulations are adopted or if courts apply or expand
existing laws in Internet cases, Internet use may decrease. This could in turn
decrease the demand for Infoseek's products and services or increase Infoseek's
cost of doing business. These effects or other effects of new laws and
regulations could seriously harm Infoseek's business, results of operations,
financial condition and prospects.
Infoseek may also face claims because materials may be downloaded through its
online or Internet services and then distributed to others. Some of Infoseek's
products and services, such as chat rooms, messaging, and hosted Web pages,
contain content provided by users. Infoseek has little control over these
users' content. Claims might be made against Infoseek under a variety of media
and intellectual property laws for the nature, content, publication and
distribution of its materials or its user materials. For example, Infoseek
might be subject to claims of copyright or trademark infringement, obscenity,
or libel brought against it for content that appears on its site. These types
of claims have been brought against online service providers in the past, some
of which have been successful.
Infoseek provides a variety of third-party information through its services.
For example, Infoseek's service provides news, stock quotes, analyst estimates
or other stock trading information. If this information contains errors,
Infoseek could be sued for losses suffered by users who relied on the
information. Infoseek expects to offer Web-based e-mail services in the near
future. E-mail may further expose Infoseek to potential risks. For example,
Infoseek may be subject to claims or liabilities from spamming, lost or
incorrectly delivered messages, use of e-mail for illegal purposes or fraud,
harassment or interruptions or delays in e-mail service.
Although Infoseek carries general liability insurance, such insurance may not
cover all claims or may not be sufficient to reimburse Infoseek for all
liabilities that may occur.
-25-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS
Set forth below are the financial statements of Infoseek California and
Starwave, as well as ABCNews/Starwave Partners d/b/a ABC Internet Ventures and
ESPN/Starwave d/b/a ESPN Internet Ventures, partnerships in which a subsidiary
of Starwave is a partner.
-26-
<PAGE>
INFOSEEK CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP................................................. 28
Consolidated Balance Sheets................................................. 29
Consolidated Statements of Operations ...................................... 30
Consolidated Statements of Cash Flows ...................................... 31
Consolidated Statements of Shareholders' Equity ............................ 32
Notes to Consolidated Financial Statements.................................. 33
</TABLE>
-27-
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Infoseek Corporation
We have audited the accompanying consolidated balance sheets of Infoseek
Corporation as of December 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. 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 in accordance with generally accepted auditing
standards. 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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Infoseek Corporation at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
San Jose, California
January 16, 1998,
except for Note 8, as to which the date is February 12, 1998
and Note 2, as to which the date is April 17, 1998
-28-
<PAGE>
INFOSEEK CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1997 1996 1998
-------- -------- ---------------
ASSETS
------ (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.............. $ 3,323 $ 3,786 $ 6,801
Short-term investments................. 28,116 42,867 47,740
Accounts receivable, less allowance for
doubtful accounts of $1,675 in 1998,
$980 in 1997, and $350 in 1996........ 6,921 2,428 7,619
Prepaid to service providers........... -- -- 5,838
Other current assets................... 648 371 998
-------- -------- --------
Total current assets................. 39,008 49,452 68,996
Property and equipment:
Computer and office equipment.......... 16,525 9,651 24,958
Furniture and fixtures................. 935 307 1,546
Leasehold improvements................. 1,323 108 2,153
-------- -------- --------
18,783 10,066 28,657
Less accumulated depreciation and
amortization.......................... 8,295 2,479 13,480
-------- -------- --------
Net property and equipment............... 10,488 7,587 15,177
Direct acquisition costs................. -- -- 2,825
Deposits and other assets................ 1,993 1,293 3,315
-------- -------- --------
Total assets......................... $ 51,489 $ 58,332 $ 90,313
======== ======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable....................... $ 4,861 $ 3,269 $ 6,717
Accrued payroll and related expenses... 1,630 1,362 2,191
Accrued liabilities to service
providers............................. 4,221 -- 1,558
Other accrued liabilities.............. 2,262 1,070 2,418
Deferred revenue....................... 2,564 760 4,789
Accrued restructuring and other
charges............................... 1,877 -- --
Short-term obligations................. 2,575 994 2,683
Short-term portion of capital lease
obligations........................... -- -- 259
-------- -------- --------
Total current liabilities............ 19,990 7,455 20,615
Long-term obligations.................... 4,493 1,892 2,668
Long-term portion of capital lease
obligations............................. -- -- 313
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value:
Authorized shares--5,000,000
No shares issued and outstanding....... -- -- --
Common stock, no par value:
Authorized shares--60,000,000
Issued and outstanding shares--
31,508,000 in 1998, 27,534,000 in
1997, and 25,691,000 in 1996.......... 76,000 73,754 121,292
Accumulated deficit...................... (48,030) (20,771) (53,724)
Deferred compensation.................... (753) (3,546) (717)
Notes receivable from shareholders....... (211) (452) (134)
-------- -------- --------
Total shareholders' equity........... 27,006 48,985 66,717
-------- -------- --------
Total liabilities and shareholders'
equity.............................. $ 51,489 $ 58,332 $ 90,313
======== ======== ========
</TABLE>
See accompanying notes.
-29-
<PAGE>
INFOSEEK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -------------------
1997 1996 1995 1998 1997
-------- -------- ------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Advertising revenues....... $ 32,941 $ 15,095 $ 1,032 $ 45,044 $ 21,062
Software licensing
revenues.................. 2,141 -- -- 5,671 1,345
-------- -------- ------- -------- ---------
Total revenues........... 35,082 15,095 1,032 50,715 22,407
COSTS AND EXPENSES
Hosting, content and
website costs............. 6,319 3,194 614 7,956 4,397
Research and development... 7,900 4,550 1,175 7,432 5,879
Sales and marketing........ 34,320 20,455 1,488 35,144 22,520
General and
administrative............ 7,042 4,177 1,148 7,876 5,242
Restructuring and other
charges................... 7,349 -- -- -- 7,349
-------- -------- ------- -------- ---------
Total costs and
expenses................ 62,930 32,376 4,425 58,408 45,387
-------- -------- ------- -------- ---------
Operating loss............... (27,848) (17,281) (3,393) (7,693) (22,980)
INTEREST INCOME (EXPENSE)
Interest income............ 1,943 1,771 115 2,516 1,502
Interest expense........... (657) (428) (18) (517) (436)
-------- -------- ------- -------- ---------
1,286 1,343 97 1,999 1,066
-------- -------- ------- -------- ---------
NET LOSS..................... $(26,562) $(15,938) $(3,296) $ (5,694) $ (21,914)
======== ======== ======= ======== =========
Basic and diluted net loss
per share................... $ (1.00) $ (0.72) $ (0.21) $ (0.19) $ (0.83)
Shares used in computing
basic and diluted net loss
per share (pro forma in
1995)....................... 26,627 22,120 15,535 30,512 26,270
</TABLE>
See accompanying notes.
-30-
<PAGE>
INFOSEEK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- -------------------
1997 1996 1995 1998 1997
-------- -------- ------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss..................... $(26,562) $(15,938) $(3,296) $ (5,694) $(21,914)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization............... 4,849 2,157 438 5,185 3,920
Provision for doubtful
accounts................... 930 651 42 1,045 242
Writedown of restructure
related assets............. 2,080 -- -- -- --
Amortization of unearned
compensation related to
stock options.............. 832 1,347 44 314 717
Amortization of warrants
issued in connection with
term loan.................. -- -- 21 -- --
Fair value assigned to
services provided by
Netscape................... -- -- 200 -- --
Changes in operating assets
and liabilities
Accounts receivable......... (5,420) (2,580) (541) (1,743) (2,070)
Other current assets........ (211) (260) (92) (350) (186)
Prepaid to service
providers.................. -- -- -- (5,838) --
Deposits and other current
assets..................... (1,490) -- -- (1,322) (898)
Direct acquisition costs.... -- -- -- (2,825) --
Accounts payable............ 1,491 2,047 1,211 1,856 (1,219)
Accrued payroll and related
expenses................... 253 1,291 67 561 (237)
Accrued liabilities to
service providers.......... 4,221 -- -- (2,663) 2,357
Other accrued liabilities... 1,192 457 498 156 229
Deferred revenue............ 1,804 760 -- 2,225 854
Accrued restructuring and
other charges.............. 1,877 -- -- (1,877) 2,904
-------- -------- ------- --------- --------
Net cash used in operating
activities................. (14,154) (10,068) (1,408) (10,970) (15,301)
INVESTING ACTIVITIES
Purchases of available-for-
sale investments............ (44,769) (92,966) (2,483) (147,907) (29,667)
Proceeds from sales of
available-for-sale
investments................. 59,520 50,596 1,986 128,283 44,428
Issuance of notes
receivable.................. (950) (600) -- -- --
Purchase of property and
equipment................... (7,597) (6,857) (2,829) (9,170) (7,479)
-------- -------- ------- --------- --------
Net cash provided by (used
in) investing activities... 6,204 (49,827) (3,326) (28,794) 7,282
FINANCING ACTIVITIES
Proceeds from term loan...... 5,265 2,573 967 133 5,000
Repayments of term loan...... (1,082) (763) (100) (1,850) (815)
Principal payments on capital
leases...................... -- -- -- (132) --
Proceeds from issuance of
convertible debt............ 305 -- -- -- --
Payment of deposit........... -- (693) -- -- --
Proceeds from sale of
convertible preferred stock,
net of issuance costs....... -- 17,619 4,430 -- --
Proceeds from sale of common
stock, net of issuance
costs....................... 1,217 43,785 -- 43,015 972
Proceeds from the exercise of
stock options............... 1,183 6 -- 1,520 1,018
Proceeds from employee stock
purchase plan............... 295 -- -- 479 295
Proceeds from repayment of
notes receivable from
shareholders................ 302 28 -- 77 302
Repurchase of common stock... -- (3) (2) -- --
-------- -------- ------- --------- --------
Net cash provided by
financing activities....... 7,485 62,552 5,295 43,242 6,772
-------- -------- ------- --------- --------
Net Increase (decrease) in
cash and cash equivalents... (465) 2,657 561 3,478 (1,247)
Cash and cash equivalents at
beginning of period......... 3,788 1,129 568 3,323 3,788
-------- -------- ------- --------- --------
Cash and cash equivalents at
end of period............... $ 3,323 $ 3,786 $ 1,129 $ 6,801 $ 2,541
======== ======== ======= ========= ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Unearned compensation related to stock options amounted to $440,000,
$3,102,000 and $2,124,000 for the years ended December 31, 1997, 1996 and
1995, respectively, and $352,000 (unaudited) and none (unaudited) for the nine
months ended September 30, 1998 and 1997, respectively. Cash paid for interest
expense amounted to $657,000, $428,000 and $18,000 for the years ended December
31, 1997, 1996 and 1995, respectively, and $517,000 (unaudited) and $436,000
(unaudited) for the nine months ended September 30, 1998 and 1997, respectively.
Assets acquired under capital leases totaled $704,000 and none (unaudited) for
the nine months ended September 30, 1998 and 1997, respectively (none for the
years ended December 31, 1997, 1996 and 1995).
See accompanying notes.
-31-
<PAGE>
INFOSEEK CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK RECEIVABLE TOTAL
----------------- ---------------- ACCUMULATED DEFERRED FROM SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT DEFICIT COMPENSATION SHAREHOLDERS EQUITY
------- -------- ------ -------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1994................... 9,421 $ 2,020 3,783 $ 38 $ (1,537) $ -- $ -- $ 521
Issuance of Series A
preferred stock for
purchased technology... 559 224 -- -- -- -- -- 224
Repurchase of common
stock from founder..... -- -- (155) (2) -- -- -- (2)
Issuance of Series C
convertible preferred
stock for cash, net of
issuance costs......... 5,600 4,430 -- -- -- -- -- 4,430
Issuance of warrants for
shares of series C
convertible preferred
stock.................. -- 21 -- -- -- -- -- 21
Issuance of common stock
to employee for note
receivable............. -- -- 372 50 -- -- (50) --
Unearned compensation
related to stock
options................ -- -- -- 2,124 -- (2,124) -- --
Amortization of unearned
compensation related to
stock options.......... -- -- -- -- -- 44 -- 44
Fair value assigned to
services provided by
Netscape............... -- -- -- 200 -- -- -- 200
Net loss and
comprehensive net
loss................... -- -- -- -- (3,296) -- -- (3,296)
------- -------- ------ -------- -------- ------- ----- --------
BALANCE AT DECEMBER 31,
1995................... 15,580 6,695 4,000 2,410 (4,833) (2,080) (50) 2,142
Cancellation of
convertible preferred
stock issued for
purchased technology... (280) -- -- -- -- -- -- --
Unearned compensation
related to stock
options................ -- -- -- 3,102 -- (3,102) -- --
Amortization of unearned
compensation........... -- -- -- -- -- 1,346 -- 1,346
Issuance of convertible
preferred stock for
cash, net of issuance
costs.................. 2,267 17,619 -- -- -- -- -- 17,619
Repurchases of common
stock.................. -- -- (325) (3) -- -- -- (3)
Issuance of common stock
to officers............ -- -- 787 910 -- -- (610) 300
Cancellation of note
receivable and
repurchase of shares... -- -- (365) (470) -- 290 180 --
Payment on shareholders'
notes receivable....... -- -- -- -- -- -- 28 28
Conversion of
convertible preferred
stock into common stock
upon the initial public
offering............... (17,567) (24,314) 17,567 24,314 -- -- -- --
Issuance of common stock
in connection with
initial public
offering, net of
issuance costs......... -- -- 3,973 43,485 -- -- -- 43,485
Exercise of common stock
options................ -- -- 54 6 -- -- -- 6
Net loss and
comprehensive net
loss................... -- -- -- -- (15,938) -- -- (15,938)
------- -------- ------ -------- -------- ------- ----- --------
BALANCE AT DECEMBER 31,
1996................... -- -- 25,691 73,754 (20,771) (3,546) (452) 48,985
Issuance of common stock
and activity from
merger with WebChat
Communications, Inc.... -- -- 167 571 (697) -- -- (126)
Issuance of common stock
for cash............... -- -- 58 1,217 -- -- -- 1,217
Unearned compensation
related to stock
options................ -- -- -- 440 -- (440) -- --
Amortization of unearned
compensation........... -- -- -- -- -- 832 -- 832
Reversal of unearned
compensation........... -- -- -- (2,071) -- 2,071 -- --
Writeoff deferred
compensation related to
restructure............ -- -- -- -- -- 330 -- 330
Repurchases of common
stock.................. -- -- (27) -- -- -- -- --
Issuance of common stock
for notes receivable... -- -- 38 61 -- -- (61) --
Payment on shareholders'
notes receivable....... -- -- -- -- -- -- 302 302
Conversion of debt into
common stock........... -- -- 27 550 -- -- -- 550
Exercise of common stock
options................ -- -- 1,445 1,183 -- -- -- 1,183
Issuance of common stock
through employee stock
purchase plan.......... -- -- 44 295 -- -- -- 295
Issuance of common stock
from exercise of
warrants............... -- -- 91 -- -- -- -- --
Net loss and
comprehensive net
loss................... -- -- -- -- (26,562) -- -- (26,562)
------- -------- ------ -------- -------- ------- ----- --------
BALANCE AT DECEMBER 31,
1997................... -- -- 27,534 76,000 (48,030) (753) (211) 27,006
Unearned compensation
related to stock
options (unaudited).... -- -- -- 352 -- (352) -- --
Amortization of unearned
compensation
(unaudited)............ -- -- -- -- -- 314 -- 314
Reversal of unearned
compensation
(unaudited)............ -- -- -- (74) -- 74 -- --
Payment on shareholders'
notes receivable
(unaudited)............ -- -- -- -- -- -- 77 77
Exercise of common stock
options (unaudited).... -- -- 480 1,520 -- -- -- 1,520
Issuance of common stock
through employee stock
purchase plan
(unaudited)............ -- -- 44 479 -- -- -- 479
Issuance of common stock
in connection with
follow-on public
offering, net of
issuance costs
(unaudited)............ -- -- 3,450 43,015 -- -- -- 43,015
Net loss and
comprehensive net loss
(unaudited)............ -- -- -- -- (5,694) -- -- (5,694)
------- -------- ------ -------- -------- ------- ----- --------
BALANCE AT SEPTEMBER 30,
1998 (UNAUDITED)....... -- $ -- 31,508 $121,292 $(53,724) $ (717) $(134) $ 66,717
======= ======== ====== ======== ======== ======= ===== ========
</TABLE>
See accompanying notes.
-32-
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization--Infoseek Corporation, (the "Company"), provides leading Internet
search and navigation technology, products and services that use the Web to
connect its viewers' personal, work and community lives. As a "connected" media
company, Infoseek is able to segment viewers by interest area, providing
advertisers with focused and targeted audiences. The Infoseek Service is a
comprehensive Internet gateway that combines search and navigation with
directories of relevant information sources and content sites, offers chat and
instant messaging for communicating shared interest and facilitates the
purchase of related goods and services. The Company conducts its business
predominantly within one industry segment.
Basis of Presentation--The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary. All significant
intercompany transactions and balances have been eliminated. As more fully
described in Note 2, a wholly owned subsidiary of the Company merged with
WebChat Communications, Inc. ("WebChat") in April 1998 in a pooling of
interests transaction. The consolidated financial statements for 1997 have been
restated to include the financial position, results of operations and cash
flows of WebChat. Prior to 1997, these amounts for WebChat were not significant
compared to those of the Company and accordingly, the Company's previously
issued financial statements were not restated. An adjustment was made to the
beginning 1997 common stock and accumulated deficit as a result of not
restating the Company's financial statements prior to 1997.
Unaudited Interim Financial Information--The accompanying consolidated
financial statements at September 30, 1998 and for the nine months ended
September 30, 1998 and 1997 are unaudited but include all adjustments
(consisting of normal recurring accruals) which, in the opinion of management,
are necessary for a fair statement of the financial position and the operating
results and cash flows for the interim date and periods presented. Results for
the interim period ended September 30, 1998 are not necessarily indicative of
results for the entire fiscal year or future periods.
Cash and Cash Equivalents--The Company considers all highly liquid debt
instruments which are purchased with a maturity of three months or less to be
cash equivalents.
Short-Term Investments--The Company accounts for investments in accordance with
Financial Accounting Standards Board, Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Management determines the
appropriate classification of debt securities at the time of purchase and
reevaluates such designation as of each balance sheet date. The Company's
short-term investments, which consist primarily of commercial paper and
government agency notes with maturities of one year or less, are classified as
available-for-sale and are carried at amortized cost which approximates fair
market value. The amortized cost of debt securities in this category is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization, as
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<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
well as any interest on the securities, is included in interest income.
Realized gains and losses and declines in value judged to be other-than-
temporary on available-for-sale securities are included in interest income
(expense). The cost of securities sold is based on the specific identification
method. The Company had no investments in equity securities at September 30,
1998 and December 31, 1997 and 1996.
Property and Equipment--Property and equipment are carried at cost less
accumulated depreciation. The Company depreciates property and equipment using
the straight-line method over the estimated useful lives of three to five
years. Leasehold improvements are amortized using the straight-line method
over the shorter of the life of the related asset or the term of the lease.
Research and Development--Research and development expenditures are generally
charged to operations as incurred. Financial Accounting Standards Board,
Statement No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed," requires the capitalization of certain software
development costs subsequent to the establishment of technological
feasibility. In the Company's case, capitalization would begin upon completion
of a working model as the Company does not prepare detail program designs as
part of the development process. As of September 30, 1998 and December 31,
1997 and 1996, capitalized costs of this nature were insignificant.
Stock-Based Compensation--The Company has elected to follow Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting of Stock Issued to
Employees" and related interpretations, in accounting for its employee stock
options because, as discussed below, the alternative fair value accounting
provided for under Financial Accounting Standards Board, Statement No. 123
(SFAS No. 123) "Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, with the exception of certain options granted during
the nine months ended September 30, 1998 and 1997 and for the years ended
December 31, 1997, 1996 and 1995 as discussed in Note 9, no compensation
expense is recognized as the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant.
Long-Lived Assets--In 1995, the Financial Accounting Standards Board released
the Statement No. 121 (SFAS No. 121), "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. SFAS No. 121 has not had a material impact on the
consolidated financial statements of the Company.
Revenue Recognition--The Company's advertising revenues are derived
principally from short-term advertising contracts in which the Company
guarantees a minimum number of impressions for a fixed fee. Advertising
revenues are recognized ratably over the term of the contract provided that
the monthly minimum impressions are met, the Company does not have any
remaining significant
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<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
obligations, and collection of the resulting receivable is probable. To the
extent the minimum guaranteed impressions are not met, the Company defers
recognition of the revenue until guaranteed impressions levels are met.
Also included in advertising revenues is the exchange by the Company of
advertising space on the Company's Web sites for reciprocal advertising space
in other media publications or other Web sites or receipt of applicable goods
and services. Revenues from these exchange transactions are recorded as
advertising revenue at the estimated fair value of the goods and services
received and are recognized when both the Company's advertisements and the
reciprocal advertisements are run, or goods or services are received.
Advertising revenues recognized under these trading activities were less than
10% of total revenues for all periods presented.
In late 1997, the Company released a new version of its service which now
features 18 "channels," and provides opportunities for revenue from the sale of
channel sponsorships, as well as to enable the Company to share in a portion of
the revenue generated by its viewers with these channel sponsors. Revenue
generated by channel sponsors is included in advertising revenues and is
generally recognized on a straight line basis over the term of the agreements
provided that minimum impressions are met.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position No. 97-2, Software Revenue Recognition
("SOP 97-2"), which superseded Statement of Position 91-1, Software Revenue
Recognition, and provides guidance on generally accepted accounting principles
for recognizing revenue on software transactions.
SOP 97-2 requires that revenue recognized from software arrangements be
allocated to each element of the arrangement based on the relative fair values
of the elements, such as software products, upgrades, enhancements, post
contract customer support, installation, or training. Under SOP 97-2, the
determination of fair value is based on objective evidence which is specific
to the vendor. If such evidence of fair value for each element of the
arrangement does not exist, all revenue from the arrangement is deferred until
such time that evidence of fair value does exist or until all elements of the
arrangement are delivered. SOP 97-2 was amended in February 1998 by Statement
of Position 98-4 ("SOP 98-4"), Deferral of the Effective Date of a Provision
of SOP 97-2, which deferred for one year the specification of what was
considered vendor specific objective evidence of fair value for the various
elements in a multiple element arrangement. The Company has adopted the
provisions of these SOPs as of January 1, 1998.
The Company recognizes revenue allocable to software licenses and specified
upgrades upon delivery of the software product or upgrade to the end user,
unless the fee is not fixed or determinable or collectibility is not probable.
The Company considers all arrangements with payment terms extending beyond
twelve months and other arrangements with payment terms longer than normal not
to be fixed or determinable. If the fee is not fixed or determinable, revenue
is recognized as payments become due from the customer.
Postcontract customer support ("PCS") includes telephone support, bug fixes,
and rights to upgrades on a when-and-if-available basis. In software
arrangements that include rights to multiple software products, specified
upgrades, PCS, and/or other services, the Company allocates the total
arrangement fee among each deliverable based on the relative fair value of each
deliverable based on vendor-specific objective evidence. Revenue allocable to
PCS is recognized on a straight-line basis over the period PCS is provided.
The Company derived revenues of $5,671,000 and $1,345,000 for the nine months
ended September 30, 1998 and 1997, respectively, and $2,141,000 for the year
ended December 31, 1997 from the licensing of its Ultraseek technology and the
sale of PCS.
During 1996 and 1995, the Company also derived revenues from fees related to a
premium subscription service offered to business and professional users.
Revenues from this service were recognized over the period the services were
provided. During the third quarter of 1996, the Company discontinued this
service.
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<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
Advertising Costs--Advertising costs are expensed as incurred. Advertising
costs, which include service provider fees and reciprocal advertising amounted
to $17,697,000 and $10,104,000 for the nine months ended September 30, 1998 and
1997, respectively, and were $15,104,000 and $8,523,000 for the years ended
December 31, 1997 and 1996, respectively. There were no advertising costs for
the year ended December 31, 1995. The Company does not incur any significant
direct response advertising costs.
Concentration of Credit Risk--Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of cash
equivalents, short-term investments, and trade receivables. The Company places
its cash equivalents and short-term investments with high-quality financial
institutions. Through September 30, 1998 and December 31, 1997, the Company
invested its excess cash in commercial paper, government agency notes and
money market funds. Through September 30, 1998 and December 31, 1997, the
Company operates predominantly in one business segment and sells advertising
to various companies across several industries. The Company generally does not
require collateral. The Company maintains allowances for credit losses, and
such losses have been within management's expectations. For the nine months
ended September 30, 1998 and 1997 and for the year ended December 31, 1997, no
customer accounted for greater than 10% of revenues. For the year ended
December 31, 1996, one customer (a related party, see Note 13) accounted for
13% of revenues and for the year ended December 31, 1995, another customer
accounted for 13% of revenues.
Net Loss Per Share--In 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share ("SFAS No. 128"). SFAS No. 128 replaced
the calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary and fully diluted earnings per
share, outstanding nonvested shares are not included in the computations of
basic and diluted earnings per share until the time-based vesting restriction
has lapsed. Basic earnings per share also excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is
very similar to the previously reported fully diluted earnings per share. In
addition, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 98, Earnings Per Share, in February 1998. Staff Accounting
Bulletin No. 98 effected the treatment of certain stock and warrants ("cheap
stock") issued within a one-year period prior to an initial public offering.
Earnings per share amounts presented have been restated to conform to the
requirements of SFAS No. 128 and Staff Accounting Bulletin No. 98.
Net loss per share information for 1997 has been adjusted on a retroactive
basis to give effect to the merger with WebChat (see Note 2), whereby each
share of WebChat was converted to 0.03 shares of Infoseek common stock. Share
information for 1996 and 1995 has not been restated due to WebChat amounts
being insignificant.
Pro Forma Net Loss Per Share--Pro forma net loss per share for the year ended
December 31, 1995 has been computed as described above and also gives effect,
even if antidilutive, to common
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<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
equivalent shares from preferred stock that automatically converted upon the
closing of the Company's initial public offering (using the as-if-converted
method).
Use of Estimates in the Preparation of Financial Statements--The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported amounts of revenue and expenses during the reporting period. Actual
results inevitably will differ from those estimates, and such differences may
be material to the financial statements.
Comprehensive Income--During 1998, the Company adopted the Financial Accounting
Standards Board Statement No. 130, Reporting Comprehensive Income (SFAS No.
130). SFAS No. 130 establishes rules for reporting and displaying comprehensive
income or comprehensive loss. The Company's total comprehensive net loss was
the same as its net loss for the nine months ended September 30, 1998 and 1997
and for the years ended December 31, 1997, 1996 and 1995.
New Accounting Pronouncements--In June 1997, the Financial Accounting Standards
Board issued Statement No. 131, Disclosures About Segments of An Enterprise and
Related Information (SFAS No. 131). SFAS No. 131 is effective for the Company
for the year ended December 31, 1998 and requires the Company to use the
"management approach" in disclosing segment information. The Company does not
believe that the adoption of SFAS No. 131 will have a material impact on the
Company's results of operations, cash flows, or financial position.
Reclassifications--Certain reclassifications, none of which affected net loss,
have been made to prior year's amounts in order to conform to the current
year's presentation.
2. BUSINESS COMBINATION
On April 17, 1998, the Company acquired WebChat in a tax-free reorganization in
which a wholly owned subsidiary of the Company was merged directly into
WebChat. The Company has exchanged approximately 316,000 shares of Infoseek
Corporation common stock and has reserved approximately 11,000 shares for
WebChat options assumed by the Company. Each share exchanged represents 0.03
share of common stock of the Company for each share of the common, and
preferred stock of WebChat. Merger related expenses were not significant and
were recorded in the second quarter of 1998. The merger has been accounted for
under the pooling of interests method.
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<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
A reconciliation of revenues and net loss of the Company, as previously
reported, WebChat and combined for the year ended December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
REVENUES NET LOSS
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Infoseek................................................. $34,603 $24,623
WebChat.................................................. 479 1,939
------- -------
Combined................................................. $35,082 $26,562
======= =======
</TABLE>
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value amounts have been determined by the Company
using available market information and appropriate valuation methodologies.
However, considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998
------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
SHORT-TERM INVESTMENTS COST GAINS LOSSES FAIR VALUE
---------------------- --------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial paper.................. $43,323 $ 1 $ -- $43,324
Money market fund................. 4,417 -- -- 4,417
------- ---- ---- -------
Total........................... $47,740 $ 1 $ -- $47,741
======= ==== ==== =======
<CAPTION>
AT DECEMBER 31, 1997
------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
SHORT-TERM INVESTMENTS COST GAINS LOSSES FAIR VALUE
---------------------- --------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial paper.................. $23,007 $-- $-- $23,007
Government agency notes........... 4,003 2 -- 4,005
Money market fund................. 1,106 -- -- 1,106
------- ---- ---- -------
Total........................... $28,116 $ 2 $-- $28,118
======= ==== ==== =======
<CAPTION>
AT DECEMBER 31, 1996
------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
SHORT-TERM INVESTMENTS COST GAINS LOSSES FAIR VALUE
---------------------- --------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial paper.................. $27,588 $ -- $ -- $27,588
Government agency notes........... 15,279 -- -- 15,279
------- ---- ---- -------
Total........................... $42,867 $ -- $ -- $42,867
======= ==== ==== =======
</TABLE>
Realized gains and losses were insignificant during the nine months ended
September 30, 1998 and 1997 and for the years ended December 31, 1997, 1996 and
1995.
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<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
4. OBLIGATIONS
In March 1997, the Company entered into a four year, $5,000,000 equipment term
loan facility. The loan bears interest at the bank's prime rate plus 0.25%
(8.75% at September 30, 1998 and December 31, 1997). Under the terms of the
agreement, the Company grants a security interest in certain assets of the
Company and must maintain financial covenants including minimum tangible net
worth and others based on monthly cash balances with which the Company was in
compliance as of September 30, 1998 and December 31, 1997. Under the equipment
term loan facility, the Company is restricted in its ability to pay dividends.
Interest only payments will be made during the first twelve months and
borrowings and interest will be repaid on a straight-line basis over 36 months
beginning in month thirteen of the facility. As of September 30, 1998 and
December 31, 1997, there was approximately $4,345,000 and $5,000,000,
outstanding against the term loan facility, respectively.
In February 1997, WebChat entered into a three and one half year $300,000
equipment term loan facility. The loan bears interest at the bank's prime rate
plus 2.5% (11% at December 31, 1997). Under the terms of the facility, WebChat
grants a security interest in certain assets and is restricted in its ability
to pay cash dividends. Interest-only payments will be made during the first six
months and principal and interest will be repaid on a straight-line basis over
36 months beginning in month seven of the facility. The Company repaid the
equipment term loan during the nine months ended September 30, 1998 and no
amount was outstanding under the equipment term loan facility as of September
30, 1998. As of December 31, 1997, there was approximately $265,000 outstanding
against the term loan facility.
In 1996 and 1995, the Company entered into term loan agreements with a lending
institution under which the Company borrowed approximately $3,540,000 to
finance the purchase of equipment. Borrowings made under the agreement are due
over 37 months, bear interest which ranges from 15.80% to 16.39%, and are
secured by certain assets of the Company. As of September 30, 1998, December
31, 1997 and December 31, 1996, approximately $1,006,000, $1,741,000 and
$2,886,000 were outstanding against the term loan agreements, respectively. In
connection with the term loan agreements, the Company paid a cash deposit of
$693,000 in 1996 to the lending institution which is included in deposits and
other assets on the balance sheet.
Maturities under these agreements as of September 30, 1998 and December 31,
1997 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
1998........................................... $1,023 $2,575
1999........................................... 2,245 2,344
2000........................................... 1,667 1,733
2001........................................... 416 416
------ ------
$5,351 $7,068
====== ======
</TABLE>
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<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
5. COMMITMENTS
The Company leases its facilities under operating lease agreements which expire
at various dates through 2002. Total rent expense for the nine months ended
September 30, 1998 and 1997 was $2,003,000 and $866,000, respectively, and for
the years ended December 31, 1997, 1996 and 1995 total rent expense was
$1,397,000, $379,000 and $86,000, respectively. In January 1998, the Company
signed an agreement to sublease approximately 20,500 square feet of its
Sunnyvale, California facility. In connection with the sublease agreement, the
Company will receive future rent payments of approximately $372,000 in 1998 and
$300,000 in 1999. For the nine months ended September 30, 1998, the Company
recorded sublease rental income of $279,000.
The Company leases certain equipment under noncancelable lease agreements that
are accounted for as capital leases. Equipment under capital lease arrangements
is included in property and equipment and aggregated $704,000 at September 30,
1998. Related accumulated amortization was $209,000 at September 30, 1998.
Amortization expense related to assets under capital leases is included in
depreciation expense. In addition, the capital leases are secured by the
related equipment, and the Company is required to maintain liability and
property damage insurance.
Future minimum lease payments under noncancelable operating leases and capital
leases are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
-------------------- -----------------
OPERATING CAPITAL OPERATING
LEASES LEASES LEASES
---------- -------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
1998.................... $ 723 $ 51 $ 2,128
1999.................... 2,720 307 2,099
2000.................... 2,366 215 2,089
2001.................... 1,950 44 1,985
2002.................... 1,589 -- 1,712
--------- -------- -------
Total minimum payments.. $ 9,348 617 $10,013
========= =======
Less amount representing
interest............... (45)
--------
572
Less current portion.... (259)
--------
$ 313
========
</TABLE>
NETSCAPE
Historically, a large portion of the Company's traffic was derived through the
Web page of Netscape Communications Corporation ("Netscape"). In March 1996,
the Company entered into an agreement with Netscape, which provided that the
Company would be listed as a Premier Provider on Netscape's Web page for the
period from April 10, 1996 to March 31, 1997. This agreement with
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<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
Netscape provided for payments of up to an aggregate of $5,000,000 in cash and
reciprocal advertising ($3,500,000 in cash and $1,500,000 in reciprocal
advertising) over the course of the one-year term of the agreement. In March
1997, Infoseek renewed its agreement with Netscape under terms that extended
the current contract through April 30, 1997 and thereafter provided for
Infoseek to be one of four premier providers displayed on Netscape's Web page
for the period of May 1, 1997 through April 30, 1998. The renewed agreement
with Netscape provided for payments of up to an aggregate of $12,500,000 in
cash and reciprocal advertising ($10,000,000 in cash and $2,500,000 in
reciprocal advertising) over the term of the agreement.
As of June 1, 1998, the Company had entered into an one-year agreement with
Netscape with terms that provide for the Company to pay, based on impressions
delivered, up to an aggregate of $12,500,000 in cash to be one of the six non-
exclusive premier providers of navigational services (along with Excite,
Netscape, Lycos, Alta Vista, and LookSmart). Under terms of the agreement, the
Company will receive 15% of premiere provider rotations--the pages served to
visitors who have not selected a preferred provider. The payments to Netscape
are being recognized ratably over the term of the agreement. The Company and
Netscape subsequently renegotiated the agreement (see Note 15).
During the nine months ended September 30, 1998 and 1997, the Company
recognized $6,595,000 and $5,416,000, respectively, of expense related to this
agreement and for the years ended December 31, 1997 and 1996, the Company
recognized $9,583,000 and $3,750,000, respectively, of expense related to this
agreement. The costs of the Netscape agreement are being recognized ratably
over the term of the agreement. As of September 30, 1998, the Company has a
cash commitment ranging from a minimum of $4,150,000 to a maximum of
$12,500,000 depending on the level of traffic delivered by Netscape in
connection with this agreement. At December 31, 1997, the Company had
$7,555,000 of cash commitment remaining in connection with the agreement. At
September 30, 1998 and December 31, 1997, $1,558,000 and $4,221,000 is included
in accrued liabilities to service providers, respectively.
In July 1997, the Company entered into an one-year agreement with Netscape
whereby it was designated as a premier provider of international search and
navigational guide services for the Netscape Net Search Program. Under the
terms of the agreement, the Company will provide services for 10 Netscape local
Web sites. The Company's agreement with Netscape provides for payments ranging
from a minimum of $666,000 ($400,000 in cash and $266,000 in reciprocal
advertising) to a maximum of $1,219,000 ($677,000 in cash and $542,000 in
reciprocal advertising) depending on the level of traffic delivered by
Netscape. For the nine months ended September 30, 1998 and 1997, the Company
incurred sales and marketing expenses of approximately $506,000 and $99,750
under this agreement, respectively. During the year ended December 31, 1997,
Netscape delivered traffic at the
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<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
minimum level and as a result the Company recognized sales and marketing
expenses of approximately $333,000 under this agreement. As of September 30,
1998, the Company had a cash commitment of $248,000. At December 31, 1997, the
Company had a cash commitment ranging from a minimum of $74,000 to a maximum of
$351,000 depending on the level of traffic delivered by Netscape in connection
with this agreement. This agreement originally expired on June 30, 1998, but
was subsequently extended to September 30, 1998 under similar terms.
MICROSOFT AND WEBTV NETWORKS
The Company also had an agreement with Microsoft Corporation ("Microsoft") to
provide navigational services on certain Microsoft web sites through which the
Company also receives traffic. In exchange for such traffic, the Company made
available to Microsoft advertising space on the Infoseek service free of charge.
Effective October 1, 1998, the Company terminated the agreement and entered into
a new agreement with Microsoft to become one of five premier providers of search
and navigation services on Microsoft's network of internet products and
services. Under the terms of the new twelve month Microsoft agreement, the
Company is obligated to pay an aggregate of $10,675,000 for a guaranteed minimum
number of impressions on both Microsoft's Internet Explorer search feature and
Microsoft's website. The Company will also pay, based on the number of
impressions delivered, for additional impressions on both Internet Explorer and
Microsoft's website, up to a maximum of $18,000,000. The accounting treatment
for the Microsoft agreement will result in amortizing the obligation over the
one-year term of the agreement, beginning in the quarter ended December 31, 1998
which is the quarter that the service is launched. In connection with the
agreement, the Company made a prepayment of $5,338,000 as of September 30, 1998,
which is included in prepaid to service providers.
In addition, the Company recently entered into an agreement with WebTV
Networks, Inc. ("WebTV") pursuant to which the Company will be the exclusive
provider of search and directory services to WebTV. Under this two year
agreement, the Company is responsible for managing advertising sales for all of
WebTV's search traffic and the substantial majority of WebTV's current non-
search traffic. Pursuant to the agreement which was effective on August 28,
1998, the Company is obligated to make cash payments to WebTV totaling
$26,000,000, with $15,000,000 of such amount being payable in advance for the
first five quarters upon mutual acceptance of the technology by both parties.
The remaining $11,000,000 is being paid ratably over the last three quarters of
the agreement term. Such payments by the Company are subject to reimbursement in
the event that WebTV is unable to deliver a minimum of 4.5 billion impressions
over the life of the agreement. The Company is to receive all of the revenue
generated from such advertising sales up to a pre-determined amount that is in
excess of the Company's total payment obligations to WebTV under the agreement,
with allocations of such revenue between the Company and WebTV being made beyond
this pre-determined amount. In connection with the agreement, the Company made a
prepayment of $500,000 as of September 30, 1998, which is included in prepaid to
service providers.
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<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
CONTINGENCIES
From time to time, the Company may be a party of litigation and claims incident
to the ordinary course of its business. Although the results of litigation and
claims cannot be predicted with certainty, the Company believes that the final
outcome of such matters will not have a material adverse effect on the
Company's financial position results of operations, or cash flows.
6. RESTRUCTURING AND OTHER CHARGES
During the second quarter of 1997, the Company recorded restructuring and other
charges of approximately $7,400,000, of which approximately $6,200,000 related
to a program to discontinue certain business arrangements, which were
determined to be non-strategic, and approximately $1,200,000 related to
management changes. Of these restructuring charges, approximately $5,000,000
involves cash outflows, of which $3,100,000 has been completed as of December
31, 1997. Non-cash restructuring charges of approximately $2,400,000 relate
primarily to the write-down of certain non-strategic business assets. There
have been no material changes to the restructuring plan or in the estimates of
the restructuring costs. As of December 31, 1997, the Company has approximately
$1,900,000 remaining in its restructuring reserve, which was fully utilized as
of September 30, 1998.
7. SHAREHOLDERS' EQUITY
Preferred Stock--On May 15, 1996, the Board of Directors authorized 5,000,000
shares of undesignated preferred stock. In connection with this action, the
Board has the authority to issue in one or more series and to fix the rights,
preferences, privileges, and restrictions thereof, without further vote or
action by the shareholders. No such shares have been issued to date.
Convertible Preferred Stock--Through May of 1996, the Company issued series A,
B, C, and E convertible preferred stock. A portion of the Series E convertible
preferred stock was redeemable at the request of the holder. On June 11, 1996
the Company completed its initial public offering and at that time all
outstanding shares of convertible preferred stock were converted into common
stock on a one-for-one basis.
Common Stock--On May 15, 1996, the Company's Shareholders approved a 3-for-4
reverse stock split of the Company's preferred and common stock. All
outstanding preferred, common and common equivalent shares in the accompanying
financial statements have been retroactively adjusted to give effect to this
reverse stock split. At the same time, the Board of Directors approved the
increase of authorized common stock to 60,000,000 shares.
Founders' Common Stock--The Company has the right, at any time within sixty
days after termination of a founder's employment or service, to repurchase
certain common shares at the price per share paid by the founder. The Company's
right to repurchase lapses with respect to 25% of the total number of shares
held by the founder, commencing twelve months after purchase, and in
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<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
monthly increments of 2.08% of the total number of shares thereafter. There
were no founders' common shares subject to repurchase as of September 30, 1998
and at December 31, 1997 and 1996 there were 7,000 and 1,101,000 founders'
common shares subject to repurchase, respectively.
Shareholders' Notes Receivable--During 1997, 1996 and 1995, the Company entered
into agreements with certain officers and employees to sell approximately
38,000, 412,000 and 372,000 shares, respectively, of the Company's common stock
in exchange for full recourse promissory notes. The shares are subject to
repurchase by the Company, and such repurchase options lapse in monthly
increments of 2.08% of the total number of shares purchased. At September 30,
1998 and December 31, 1997 and 1996, there were approximately 53,000, 88,500
and 504,000 common shares, respectively, subject to repurchase by the Company.
Warrants--During 1995, in connection with an equipment financing transaction,
the Company issued warrants to purchase 100,000 shares of Series C convertible
preferred stock at an exercise price of $0.80 per share. These warrants are
exercisable at any time through October 2000. As of December 31, 1997, all
warrants had been exercised. The Company recorded additional interest expense
using the minimum value method to determine the value of the warrants.
Common Stock Reserved For Future Issuance--Shares of common stock reserved for
future issuance are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Preferred stock................................. 5,000 5,000
Stock option plan............................... 6,773 5,753
Employee stock purchase plan.................... 499 143
------ ------
12,272 10,896
====== ======
</TABLE>
8. FOLLOW-ON PUBLIC OFFERING
In February 1998, the Company completed a follow-on public offering of
3,450,000 shares of Common Stock and received proceeds of approximately
$43,015,000 net of underwriting discounts, commissions and other offering
costs.
9. STOCK OPTION/STOCK ISSUANCE PLAN
The Company's Stock Option Plan (the "Predecessor Plan") provides for the grant
of incentive stock options and non statutory stock options to employees and
consultants of the Company at prices ranging from 85% to 110% (depending on the
type of grant) of the fair market value of the common stock on the date of
grant as determined by the Board of Directors.
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INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
In April 1996, the Board of Directors adopted the 1996 Stock Option/Stock
Issuance Plan (the "1996 Plan") which was approved by the Company's
shareholders on May 15, 1996. The 1996 Plan is intended to serve as the
successor equity incentive stock issuance program to the Predecessor Plan.
Under the 1996 Plan, 7,225,000 shares of common stock have been authorized for
issuance. In June 1998, the Company's shareholders ratified and approved to
increase the number of shares available for grant by 1,500,000 to a total of
8,725,000 for the 1996 Stock Option/Stock Issuance Plan. The 1996 Plan is
divided into three separate components: the Discretionary Option Grant Program
under which eligible individuals may be granted options to purchase shares of
common stock at an exercise price of not less than 85% of their fair market
value on the grant date; the Stock Issuance Program under which eligible
individuals may be issued shares of common stock directly through the purchase
of such shares at a price of not less than 85% of their fair market value at
the time of issuance or as a bonus tied to the performance of services; and the
Automatic Option Grant Program under which option grants will automatically be
made at periodic intervals to eligible non employee Board members to purchase
shares of common stock at an exercise price equal to 100% of their fair market
value on the grant date.
The vesting and exercise provisions of the option grants are determined by the
Board of Directors. Options generally vest and become exercisable as to 25% of
the shares one year from the date of grant and the balance in monthly
increments over the subsequent three years of service. Options expire no later
than ten years from the date of grant. Options for the purchase of 1,171,000,
583,000 and 845,000 shares were exercisable as of September 30, 1998 and
December 31, 1997 and 1996, respectively.
The Company has elected to follow Accounting Principles Board Opinion No. 25
(APB No. 25), "Accounting of Stock Issued to Employees" and related
interpretations, in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Financial Accounting Standards Board, Statement No. 123 (SFAS No. 123)
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. The
Company, under APB No. 25, generally does not recognize compensation expense as
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant.
Through September 30, 1998 and December 31, 1997, the Company recorded
aggregate deferred compensation of $6,018,000 and $5,666,000, respectively,
representing the difference between the grant price and the deemed fair value
of the Company's common stock granted during those periods. The amortization of
deferred compensation is being charged to operations and is being amortized
over the vesting period of the options, which is typically four years. For the
nine months ended September 30, 1998 and 1997, amortized expenses were $314,000
and $717,000, respectively, and for the years ended December 31, 1997, 1996 and
1995, the amortized expenses were $832,000, $1,346,000 and $44,000,
respectively.
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<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
Pro forma information regarding net loss and loss per share is required by SFAS
No. 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of this statement. The fair value
for options granted during 1997 were estimated at the date of grant using the
Black-Scholes multiple option pricing model with the following weighted average
assumptions: risk-free interest rates ranging from 5.53% to 6.77%; a dividend
yield of 0.0%; a volatility factor of the expected market price of the
Company's common stock of .87; and a weighted-average expected life of the
option of five years for officers and four years for non officers. Subsequent
to the Company's initial public offering in June 1996, the fair value of
options granted during the balance of 1996 were estimated with the following
weighted average assumptions: risk-free interest rate ranging from 5.18% to
6.58% in 1996 and 5.34% to 7.03% in 1995; a dividend yield of 0.0%; a
volatility factor of the expected market price of the Company's common stock of
.80; and a weighted-average expected life of the option of five years for
officers and four years for non officers. The fair value for options granted
prior to the Company's initial public offering in June 1996 were estimated at
the date of grant using the minimum value method and have a volatility factor
of zero.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, the Company's net loss and
loss per share would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Pro forma net loss................................. $(30,919) $(17,328) $(3,442)
Pro forma basic and diluted net loss per share..... $ (1.16) $ (0.78) $ (0.22)
</TABLE>
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1999.
In July 1997, the Board of Directors authorized the repricing of options to
purchase 821,300 shares of common stock effective on July 23, 1997 to the then
fair market value of $6.13 per share. Under the terms of the repricing, the
repriced options maintain the same vesting and expiration terms, except they
may not be exercised until January 9, 1998. Executive officers, consultants and
members of the Board of Directors were not eligible to participate in the
repricing.
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<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
A summary of the Company's stock option activity and related information for
the nine months ended September 30, 1998 and the years ended December 31 are as
follows (amounts used in 1997 have been restated to reflect the April 17, 1998
merger with WebChat):
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------------------------------------
1998 1997 1996 1995
---------------- ----------------- ---------------- ----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA )
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding--beginning
of period.............. 4,158 $ 4.92 4,921 $2.10 3,074 $0.13 165 $0.07
Granted............... 2,451 $20.41 4,418 $6.61 2,851 $3.98 3,438 $0.13
Exercised............. (480) $ 3.17 (1,456) $0.79 (54) $0.11 -- $ --
Canceled.............. (337) $13.81 (3,725) $4.79 (957) $1.51 (529) $0.11
----- ------ ----- -----
Outstanding--end of
period................. 5,792 $11.12 4,158 $4.92 4,914 $2.10 3,074 $0.13
===== ====== ===== =====
Exercisable at end of
period................. 1,171 $ 3.99 583 $2.63 845 $0.35 155 $0.13
Weighted average fair
value of options
granted during the
period................. $4.48 $3.79 $0.40
</TABLE>
Outstanding and Exercisable By Price Range as of December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- -----------------------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AS OF REMAINING AVERAGE EXERCISABLE AS OF AVERAGE
RANGE OF EXERCISE PRICES DECEMBER 31, 1997 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1997 EXERCISE PRICE
------------------------ ----------------- ---------------- -------------- ----------------- --------------
(IN THOUSANDS) (YEARS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$ 0.00-$ 5.00........... 2,724 7.9 $ 3.47 386 $0.51
$ 5.01-$10.00........... 1,018 7.5 $ 6.64 197 $6.77
$10.01-$15.00........... 416 9.8 $10.26 -- --
----- ---
4,158 8.0 $ 2.10 583 $2.63
===== ===
</TABLE>
10. EMPLOYEE STOCK PURCHASE PLAN
In April 1996, the Board of Directors adopted the 1996 Employee Stock Purchase
Plan (the "Purchase Plan"), which is designed to allow eligible employees of
the Company to purchase shares of common stock at semiannual intervals through
their periodic payroll deductions. An aggregate of 187,500 shares of common
stock were originally reserved for the Purchase Plan. In June 1998, the
Company's shareholders increased the number of shares reserved by 400,000 to a
total of 587,500, of which 88,866 and 44,443 had been issued through September
30, 1998 and December 31, 1997, respectively. The Purchase Plan is implemented
in a series of successive offering periods, each with a maximum duration of 24
months. Eligible employees can have up to 10% (up to a maximum of 1,000 shares
per year) of their base salary deducted that is to be used to purchase shares
of the
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<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
common stock on specific dates determined by the Board of Directors. The price
of common stock purchased under the Purchase Plan will be equal to 85% of the
lower of the fair market value of the common stock on the commencement date of
each offering period or the specified purchase date. The Company does not
recognize compensation cost related to employee purchase rights under the Plan.
To comply with the pro forma reporting requirements of SFAS No. 123,
compensation cost is estimated for the fair value of the employees' purchase
rights using the Black-Scholes model with the following assumptions for those
rights granted in 1997: a risk free interest rate of 6.0%; dividend yield of
0.0%; expected volatility factor of .87; an expected life of six months; and
for those granted in 1996: a risk free interest rate of 5.0%; dividend yield of
0.0%; expected volatility factor of .80; an expected life of six months. The
weighted average estimated fair value of the Purchase Plan shares granted in
1997 was $4.05.
11. INCOME TAXES
Due to the Company's loss position, there was no provision for income taxes for
any period presented.
As of December 31, 1997, the Company has federal and state net operating loss
carryforwards of approximately $45,000,000 and $29,500,000, respectively. The
federal net operating loss carryforwards will expire in the years 2009 through
2012, and the state net operating loss carryforwards will expire in the years
1999 through 2002. The Company has federal and state research and
experimentation credits of approximately $300,000 each, that will expire in the
years 2009 through 2012. Utilization of the net operating losses and credits
may be subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986 and similar state
provisions. The annual limitation may result in the expiration of net operating
losses and credits before utilization.
Deferred taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets consisted of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating losses.................................... $ 17,448 $ 7,500
Research credit carryforwards........................... 406 200
Accrued royalties....................................... 37 60
Other individually immaterial items..................... 1,654 340
-------- -------
Total deferred tax assets............................. 19,545 8,100
Valuation allowance..................................... (19,545) (8,100)
-------- -------
Total net deferred tax assets......................... $ -- $ --
======== =======
</TABLE>
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<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
The change in the valuation allowance was a net increase of approximately
$6,409,000 and $1,030,000 for the years ended December 31, 1996 and 1995,
respectively.
12. EMPLOYEE BENEFIT PLAN
In January 1996, the Company adopted a plan to provide retirement and
incidental benefits for its eligible employees, known as the Infoseek
Corporation 401(k) Plan ("The Plan"). As allowed under Section 401(k) of the
Internal Revenue Code, the Plan provides tax-deferred salary deductions for
eligible employees. Participants in the Plan may make salary deferrals of up to
20% of their annual salary, limited by the maximum dollar amount allowed by the
Internal Revenue Code. The Company, at its discretion, may elect to make
contributions to the Plan on behalf of its eligible participants. The Company
has made no such contributions to date.
13. RELATED PARTY TRANSACTIONS
Bell Atlantic, with a representative on the Company's Board of Directors and
ownership of a substantial amount of the outstanding common stock of the
Company is considered a related party. In March 1996, the Company and Bell
Atlantic entered into a one-year agreement, which provided for the Company's
display of the Big Yellow logo within the Infoseek Service. According to the
terms of the agreement, Bell Atlantic agreed to pay to the Company up to an
aggregate of $4,600,000, in monthly payments, which amount would be decreased
proportionately if the number of impressions of the Big Yellow logo were below
a specified number. In February 1997, the Company signed an amendment with Bell
Atlantic extending the term of the original agreement, dated March 1996,
through June 1998 in exchange for an additional $1,400,000, for a total of
$6,000,000, in monthly payments. The terms of conditions of the amended
agreement were substantially the same, except for elimination of certain
exclusivity and reimbursement provisions. The Company recognized revenue of
$1,298,000 and $2,116,000 for the nine months ended September 30, 1998 and
1997, respectively, and $2,820,000 and $1,882,000 in connection with this
agreement for the years ended December 31, 1997 and 1996, respectively. Amounts
receivable from and payable to such related party were insignificant at
September 30, 1998 and December 31, 1997 and 1996.
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<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -------------------
1997 1996 1995 1998 1997
-------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Numerator:
Net Loss:............... $(26,562) $(15,938) $(3,296) $(5,694) $(21,914)
-------- -------- ------- -------- ---------
Numerator for basic and
diluted loss per share... $(26,562) $(15,938) $(3,296) $(5,694) $(21,914)
======== ======== ======= ======== =========
Weighted average of common
shares................... 26,627 14,076 1,635 30,512 26,270
Conversion of preferred
stock not included in
shares related to SEC
Staff Accounting Bulletin
98....................... -- 8,044 13,900 -- --
-------- -------- ------- -------- ---------
Denominator for basic and
diluted loss per share... 26,627 22,120 15,535 30,512 26,270
======== ======== ======= ======== =========
Basic and diluted loss per
share (pro forma in
1995).................... $ (1.00) $ (0.72) $ (0.21) $ (0.19) $ (0.83)
======== ======== ======= ======== =========
</TABLE>
15. SUBSEQUENT EVENTS (UNAUDITED)
On July 24, 1998, the Company entered into an agreement to acquire Quando, Inc.
("Quando") for approximately $17,000,000, subject to adjustment, in shares of
the Company's common stock. The Company expects to incur approximately
$1,000,000 in acquisition costs. The transaction is subject to customary
closing conditions, including shareholder approval by Quando, and is expected
to close in December 1998.
Based upon preliminary estimates of the fair value of Quando and the allocation
of the consideration paid for the assets and liabilities of Quando, the Company
will record approximately $16,900,000 in
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<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
goodwill, developed technology, and other intangibles which will be amortized on
a straight-line basis over a two year period. In addition, the Company expects
to incur write-offs related to in-process research and development, currently
estimated at approximately $4,300,000. The estimated amounts relating to
goodwill and the in-process research and development charges represent a
preliminary estimate which could materially differ from the actual results that
will be experienced by the Company as final values have not yet been
established.
On November 9, 1998, the Company renewed the international agreement with
Netscape for which the Company will be one of the non-exclusive premier
providers for search and directory services in seven foreign sites for the
period of October 1, 1998 to September 30, 1999. Under the terms of the renewed
agreement, the Company will pay Netscape a one-time $120,000 nonrecurring
engineering fee with additional quarterly payments being made based upon
established rates for impressions delivered by Netscape. The agreement may be
terminated by either party upon sixty days prior written notice to the other
party.
On November 11, 1998, the Company received notice from Netscape of their intent
to either terminate the contract or negotiate a new agreement to afford
Infoseek with different positioning or a lower rotation percentage on the
Netscape site on pricing terms to be mutually agreed. On November 25, 1998, the
Company and Netscape renegotiated the terms of the June 1998 agreement to
provide for the purchase of 5% of Netscape's available search traffic beginning
January 11, 1999 and through the duration of the agreement which terminates May
31, 1999. Under the new agreement, the Company is charged a higher rate for
certain traffic received. The maximum payment cap is $12,500,000 less any
payments made under the prior agreement.
On November 18, 1998, the Company completed its acquisition of Starwave
Corporation ("Starwave"), a subsidiary of The Walt Disney Company ("Disney")
whereby the Company issued 25,932,681 shares of common stock in exchange for
all outstanding Starwave shares. The Company also reserved 2,205,316 shares of
common stock in connection with outstanding stock options of Starwave to be
assumed by the Company. The fair value of the Company's shares and options
issued was approximately $897,800,000.
A new holding company structure was established as a result of the acquisition.
Starwave and Infoseek Corporation, a California corporation, became wholly-
owned subsidiaries of the Infoseek Corporation, a Delaware corporation, (the
"Holding Company") which is a registered public company incorporated in
Delaware. The authorized capital stock of the Holding Company consists of
500,000,000 shares of $0.001 par value common stock and 25,000,000 shares of
$0.001 par value Preferred Stock. Disney also purchased an additional 2,642,000
unregistered shares of the Holding Company's common stock and a warrant,
subject to vesting, to purchase an additional 15,720,000 unregistered shares of
the Holding Company's common stock (the "Warrant") in exchange for
approximately $70,000,000 in cash and a $139,000,000 five-year promissory note.
The Warrant generally enables Disney to achieve a majority stake in the Company
over a three year period. The Company also committed to spend approximately
$165,000,000 to promote the GO Network, a new portal service established by
the Holding Company.
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<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
The Company expects to incur approximately $22,000,000 in acquisition costs
which will be included in the purchase price of Starwave. As of September 30,
1998, the Company had incurred approximately $2,800,000 of these direct
acquisition costs. The Company is accounting for the Starwave acquisition
under the purchase method of accounting. Based upon preliminary estimates of
the fair value of Starwave and the allocation of the consideration paid for
the assets and liabilities of Starwave, the Company expects to record
approximately $656,300,000 and joint venture relationships in goodwill which
will be amortized on a straight-line basis over a ten year period. Also, the
Company expects to record approximately $45,200,000 for developed technology and
assembled workforce which will be amortized on a straight-line basis over a two
year period. In addition, the Company expects to incur write-offs related to in-
process research and development, currently estimated at $72,600,000. The
estimated amounts relating to goodwill, joint venture relationships, developed
technology, assembled workforce, and the in-process research and development
charges represent a preliminary estimate which could materially differ from the
actual results experienced by the Company as a final valuation has not been
completed.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------
MARCH 31, 1998 JUNE 30, 1998 SEPT. 30, 1998
-------------- ------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Total revenues................. $14,453 $17,066 $19,196
Costs and expenses
Hosting, content and website
costs....................... 2,154 2,524 3,278
Research and development..... 2,130 2,667 2,635
Sales and marketing.......... 10,577 11,863 12,704
General and administrative... 1,862 2,061 3,953
------- ------- -------
Total costs and expenses... 16,723 19,115 22,570
------- ------- -------
Operating loss................. (2,270) (2,049) (3,374)
Net interest income............ 470 782 747
------- ------- -------
Net loss....................... $(1,800) $(1,267) $(2,627)
======= ======= =======
Basic and diluted net loss per
share......................... $ (0.06) $ (0.04) $ (0.08)
======= ======= =======
</TABLE>
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<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------
MARCH 31, 1997 JUNE 30, 1997 SEPT. 30, 1997 DEC. 31, 1997
-------------- ------------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues.......... $ 6,240 $ 7,786 $ 8,381 $12,675
Costs and expenses
Hosting, content and
website costs........ 1,297 1,533 1,567 1,922
Research and
development.......... 1,728 2,374 1,777 2,021
Sales and marketing... 6,650 7,541 8,329 11,800
General and
administrative....... 1,470 1,825 1,947 1,800
Restructuring and
other charges........ -- 7,349 -- --
------- -------- ------- -------
Total costs and
expenses........... 11,145 20,622 13,620 17,543
------- -------- ------- -------
Operating loss.......... (4,905) (12,836) (5,239) (4,868)
Net interest income..... 400 379 287 220
------- -------- ------- -------
Net loss................ $(4,505) $(12,457) $(4,952) $(4,648)
======= ======== ======= =======
Basic and diluted net
loss per share......... $ (0.17) $ (0.47) $ (0.19) $ (0.17)
======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------
MARCH 31, 1996 JUNE 30, 1996 SEPT. 30, 1996 DEC. 31, 1996
-------------- ------------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues.......... $ 1,731 $ 3,286 $ 4,007 $ 6,071
Cost and expenses
Hosting, content and
website costs.......... 690 729 827 948
Research and
development.......... 934 950 1,218 1,448
Sales and marketing... 2,757 5,566 5,219 6,913
General and
administrative....... 860 919 1,091 1,307
------- ------- ------- -------
Total costs and
expenses........... 5,241 8,164 8,355 10,616
------- ------- ------- -------
Operating loss.......... (3,510) (4,878) (4,348) (4,545)
Net interest
income (expense)....... (58) 155 652 594
------- ------- ------- -------
Net loss................ $(3,568) $(4,723) $(3,696) $(3,951)
======= ======= ======= =======
Basic and diluted net
loss per share......... $ (0.18) $ (0.25) $ (0.15) $ (0.16)
======= ======= ======= =======
</TABLE>
The 1997 quarterly amounts have been restated to reflect the April 17, 1998
merger with Webchat. The 1996 quarterly amounts have not been restated due to
WebChat amounts being insignificant.
-53-
<PAGE>
STARWAVE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of PricewaterhouseCoopers LLP...................................... 55
Report of KPMG Peat Marwick LLP........................................... 56
Consolidated Balance Sheets as of October 4, 1998, September 28, 1997 and
December 31, 1996........................................................ 57
Consolidated Statements of Operations for the Year Ended October 4, 1998,
Nine months Ended September 28, 1997 and Year Ended December 31, 1996 ... 58
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for
the Year Ended October 4, 1998, Nine months Ended September 28, 1997 and
the Year Ended December 31, 1996......................................... 59
Consolidated Statements of Cash Flows for the Year Ended October 4, 1998,
Nine months Ended September 28, 1997 and Year Ended December 31, 1996.... 60
Notes to Consolidated Financial Statements................................ 61
</TABLE>
-54-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Starwave Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Starwave Corporation and its subsidiaries at October 4,
1998 and September 28, 1997, and the results of their operations and their cash
flows for the year ended October 4, 1998 and the nine months ended September
28, 1997, in conformity with generally accepted accounting principles. 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
generally accepted auditing standards 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.
As described in Note 1, in April 1997, May 1998 and November 1998 the Company
completed a number of transactions which significantly changed its capital and
operating structure.
PricewaterhouseCoopers LLP
Seattle, Washington
November 18, 1998
-55-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Starwave Corporation:
We have audited the accompanying balance sheet of Starwave Corporation as of
December 31, 1996, and the related statements of operations, shareholders'
deficit, and cash flows for the year then ended. 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 in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Starwave Corporation as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Seattle, Washington
February 7, 1997
-56-
<PAGE>
STARWAVE CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 4, SEPTEMBER 28, DECEMBER 31,
1998 1997 1996
---------- ------------- ------------
<S> <C> <C> <C>
ASSETS
------
Cash and cash equivalents................ $ 1,415 $ 18,306 $ 305
Accounts receivable, net................. 165 163 2,950
Accounts receivable from related
parties................................. 897 611 --
Receivable from affiliate................ 516 1,292 --
Other receivables........................ 10 60 73
Deferred royalties, net.................. -- -- 783
Prepaid expenses and other assets........ 803 378 787
Equipment and leasehold improvements, net
(Note 3)................................ 4,629 4,323 4,815
Investment in affiliates................. 7,377 4,328
--------- --------- --------
$ 15,812 $ 29,461 $ 9,713
========= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
------------------------------------
Accounts payable......................... $ 1,816 $ 1,500 $ 3,277
Accrued compensation..................... 3,365 1,555 629
Accrued royalties........................ 250 500 2,087
Accrued liabilities of discontinued
operations (Note 9)..................... 347 359 519
Other accrued liabilities................ 66 118
Due to affiliates........................ 1,023 1,922 --
Deferred revenue......................... 60 11 651
Loans from shareholder (Note 4).......... -- -- 84,888
--------- --------- --------
Total liabilities.................... 6,927 5,847 92,169
--------- --------- --------
Commitments (Notes 6 and 8)
Shareholders' equity (deficit)
Common stock A, $.01 par value;
authorized 250,000 shares in 1998,
1997 and 1996; issued and outstanding
57,660 shares in 1998, 55,512 shares
in 1997 and 34,214 shares in 1996..... 576 555 342
Common stock B, $.01 par value;
authorized 80,000 shares in 1998, 1997
and 1996, issued and outstanding
39,869 shares in 1998 and 1997, and no
shares in 1996........................ 399 399 --
Additional paid-in capital............. 127,198 123,095 138
Deferred stock option compensation
expense............................... (3,599) (172) (246)
Accumulated deficit.................... (115,689) (100,263) (82,690)
--------- --------- --------
Total shareholders' equity
(deficit)........................... 8,885 23,614 (82,456)
--------- --------- --------
$ 15,812 $ 29,461 $ 9,713
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
-57-
<PAGE>
STARWAVE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED NINE-MONTHS ENDED YEAR ENDED
OCTOBER 4, SEPTEMBER 28, DECEMBER 31,
1998 1997 1996
---------- ----------------- ------------
<S> <C> <C> <C>
Revenues............................ $ 5,266 $ 4,892 $ 8,302
-------- -------- --------
Operating expenses
Cost of online services........... 3,143 7,185 18,170
Development....................... 1,225 1,605 6,138
Sales and marketing............... 94 1,589 5,492
General and administrative........ 2,772 2,527 4,845
-------- -------- --------
Total operating expenses........ 7,234 12,906 34,645
-------- -------- --------
Operating loss...................... (1,968) (8,014) (26,343)
-------- -------- --------
Other income (expense)
Loss from affiliate--EIV.......... (4,139) (2,251) --
Loss from affiliate--AIV.......... (10,020) (5,958) --
Interest income (expense), net.... 748 (1,814) (4,675)
Other, net (Note 10).............. (47) 464 (658)
-------- -------- --------
Net other expense............... (13,458) (9,559) (5,333)
-------- -------- --------
Loss from continuing operations..... (15,426) (17,573) (31,676)
-------- -------- --------
Discontinued operations (Note 9)
Loss from operations of Multimedia
CD-ROM segment................... -- -- (1,046)
Loss on disposal of Multimedia CD-
ROM segment...................... -- -- (3,243)
-------- -------- --------
Loss from discontinued
operations..................... -- -- (4,289)
-------- -------- --------
Net loss............................ $(15,426) $(17,573) $(35,965)
======== ======== ========
Basic and diluted net loss per share
from continuing operations......... $ (.16) $ (0.25) $ (0.99)
Basic and diluted net loss per share
from discontinued operations....... -- -- (0.14)
-------- -------- --------
Basic and diluted net loss per
share.............................. $ (.16) $ (0.25) $ (1.13)
======== ======== ========
Shares used in computing basic and
diluted net loss per share......... 96,475 71,691 31,958
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-58-
<PAGE>
STARWAVE CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
OCTOBER 4, 1998, SEPTEMBER 28, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
DEFERRED TOTAL
COMMON STOCK ADDITIONAL STOCK OPTION SHAREHOLDERS'
-------------- PAID-IN COMPENSATION ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL EXPENSE DEFICIT (DEFICIT)
------ ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1995................... 28,683 $287 $ (215) $ (46,725) $(46,653)
Exercise of stock
options................ 5,531 55 (41) 14
Deferred compensation
expense related to
issuance of stock
options................ -- -- 394 $ (394) -- --
Amortization of deferred
stock option
compensation expense... -- -- -- 148 -- 148
Net loss................ (35,965) (35,965)
------ ---- -------- ------- --------- --------
Balance at December 31,
1996................... 34,214 342 138 (246) (82,690) (82,456)
Exercise of stock
options................ 2,612 26 (20) -- -- 6
Stock repurchase........ (1,935) (19) (3,950) -- -- (3,969)
Sale of common stock
Common Stock A........ 20,621 206 45,458 -- -- 45,664
Common Stock B........ 39,869 399 81,469 -- -- 81,868
Amortization of deferred
stock option
compensation expense... -- -- -- 74 -- 74
Net loss................ -- -- -- -- (17,573) (17,573)
------ ---- -------- ------- --------- --------
Balance at September 28,
1997................... 95,381 954 123,095 (172) (100,263) 23,614
Exercise of stock
options................ 2,148 21 144 -- -- 165
Deferred compensation
expense related to
issuance of stock
options................ -- -- 4,232 (4,232) -- --
Forfeitures of nonvested
stock options.......... -- -- (273) 273 -- --
Amortization of deferred
stock option
compensation expense... -- -- -- 532 -- 532
Net loss................ -- -- -- -- (15,426) (15,426)
------ ---- -------- ------- --------- --------
Balance at October 4,
1998................... 97,529 $975 $127,198 $(3,599) $(115,689) $ 8,885
====== ==== ======== ======= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
-59-
<PAGE>
STARWAVE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE-MONTHS ENDED YEAR ENDED
OCTOBER 4, SEPTEMBER 28, DECEMBER 31,
1998 1997 1996
---------- ----------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................ $(15,426) $(17,573) $(35,965)
Adjustments to reconcile net loss to
net cash provided (used) by
operating activities
Depreciation and amortization of
equipment and leasehold
improvements...................... 2,855 1,629 2,170
Equity in losses from affiliates... 14,159 8,209 --
Loss on sale of equipment.......... 21 36 90
Amortization of deferred stock
compensation expense.............. 532 74 148
Change in certain assets and
liabilities
Accounts receivable (trade) and
accounts receivable from related
parties.......................... (288) 2,176 (2,216)
Receivable from affiliate and
other receivables................ 826 (1,279) 179
Deferred royalties................ 783 (755)
Prepaid expenses and other
assets........................... (425) 572 (253)
Net assets and accrued liabilities
of discontinued operations....... (12) (160) 1,571
Accounts payable.................. 316 (1,777) 2,567
Accrued interest on loans from
shareholder...................... -- -- (286)
Accrued compensation.............. 1,810 926 356
Accrued royalties................. (250) (1,587) 2,087
Due to affiliates................. (899) 1,922 (47)
Deferred revenue.................. 49 (640) 353
Other accrued liabilities......... 66 (118) (59)
-------- -------- --------
Net cash provided by (used) in
operating activities............ 3,334 (6,807) (30,060)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment and leasehold
improvements....................... (3,182) (1,336) (3,358)
Proceeds from sale of equipment..... -- -- 37
Expenses incurred on behalf of
affiliates......................... (17,208) (12,537) --
-------- -------- --------
Net cash used in investing
activities...................... (20,390) (13,873) (3,321)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in loans from shareholder.. -- 10,776 33,863
Repayment of loans from
shareholders....................... -- (50,000) --
Decrease in bank overdraft.......... -- -- (191)
Proceeds from sale of stock, net.... -- 81,868 --
Funds used for stock repurchase..... -- (3,969) --
Proceeds from exercise of stock
options............................ 165 6 14
-------- -------- --------
Net cash provided by financing
activities...................... 165 38,681 33,686
-------- -------- --------
Net (decrease) increase in cash and
cash equivalents.................... (16,891) 18,001 305
Cash and cash equivalents at
beginning of year................... 18,306 305 --
-------- -------- --------
Cash and cash equivalents at end of
year................................ $ 1,415 $ 18,306 $ 305
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the year for
interest............................ $ 41 $ 2,099 $ 4,889
SCHEDULE OF NONCASH FINANCING
ACTIVITIES
Equity issued to shareholder in
return for extinguishment of debt... -- $ 45,664 --
Issuance of stock options............ $ 4,232 -- --
Forfeitures of nonvested stock
options............................. $ 273 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
-60-
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 4, 1998, SEPTEMBER 28, 1997 AND DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. CHANGE IN CAPITAL AND OPERATING STRUCTURE
In April 1997, Starwave Corporation (the Company) completed a number of
transactions to recapitalize its equity structure and change its operating
structure as follows. As of April 22, 1997, The Walt Disney Company (Disney)
purchased a controlling interest in the Company (Note 7). A portion of the
proceeds from the sale of common stock to Disney was used to repay part of the
outstanding balance under the loan from the Company's primary shareholder. The
remaining balance of the loan from shareholder was converted to Class A common
stock (Note 4). Effective April 1, 1997, the Company established a wholly owned
subsidiary, Starwave Ventures, Inc. (SVI). Concurrent with the Disney equity
transaction, two new partnerships were formed and the majority of the Company's
operations were contributed to those partnerships. The Company maintains
website hosting, software development and research, and the majority of its
website operations costs are allocated to the partnerships. The structure and
purpose of the partnerships is summarized in Note 2. From April 1997,
substantially all of the Company's operations were transferred to the
partnerships. Certain expenses of the partnerships are incurred by the Company
and allocated to the partnerships.
In May 1998, Disney completed the recapitalization by purchasing the remaining
outstanding shares from the primary shareholder for a majority interest in the
Company (Note 7).
The Company and it shareholders have approved a merger of the Company and
Infoseek Corporation (Infoseek) as of November 18, 1998 (Note 11).
2. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company produces Internet-based services intended to appeal to broad
consumer interests in sports, news and entertainment.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history and the limited history of commerce on
the Internet. Future revenues from online services are dependent on the
continued growth and acceptance of the Internet, use of the Internet for
information, publication, distribution and commerce, and acceptance of the
Internet as an effective advertising medium. In 1997, the Company established
partnerships with related parties to produce the online services summarized as
follows:
ABC NEWS/STARWAVE PARTNERS
On April 1, 1997, SVI and DOL Online Investments, Inc. (DOL), entered into a
partnership for the production of Internet-based services intended to appeal to
a broad consumer interest in news and entertainment-related content areas. SVI
contributed the technical expertise, labor, and
-61-
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
infrastructure, and DOL contributed licensed content. SVI is allocated a 60%
economic interest in partnership losses, and a 50% interest in partnership
gains. DOL is allocated a 40% economic interest in partnership losses and a 50%
interest in partnership gains.
The partners make contributions to the partnership based on actual development
and production expenses incurred on behalf of the partnership or on formulas
and sharing ratios for general and administrative expenses as defined in the
partnership agreement. For the year ended October 4, 1998, contributions to the
partnership totaled $19,137, of which $11,483 was contributed by SVI during the
year and $1,023 is due to the partnership and is included in amounts due
affiliates. For the nine months ended September 28, 1997, contributions to the
partnership totaled $14,416, of which $8,660 was contributed by SVI during the
year and $1,922 was due to the partnership and is included in amounts due
affiliates. The Company considers the methodology of allocation of
contributions reasonable.
ESPN/STARWAVE PARTNERS
On April 1, 1997, SVI and ESPN Online Investments, Inc. (EOL), entered into a
partnership for the production of Internet-based services intended to appeal to
a broad consumer interest in sports-related content areas. SVI contributed the
technical expertise, labor and infrastructure, and EOL contributed licensed
content. SVI is allocated a 60% economic interest in partnership losses and a
50% economic interest in partnership gains. EOL is allocated a 40% economic
interest in partnership losses and a 50% economic interest in partnership
gains.
The partners make contributions to the partnership based on actual development
and production expenses incurred on behalf of the partnership or on formulas
and sharing ratios for general and administrative expenses as defined in the
partnership agreement. For the year ended October 4, 1998, contributions to the
partnership totaled $9,559, of which $5,735 was contributed by SVI during the
year and $516 is due from the partnership and is included in amounts receivable
from affiliates. For the nine months ended September 28, 1997, contributions to
the partnership totaled $7,972, of which $5,377 was contributed by SVI during
the period and $1,203 was due from the partnership and is included in amounts
receivable from affiliates. The Company considers the methodology of allocation
of contributions reasonable.
Included in other income (expense) for fiscal years 1998 and 1997 are losses
from these partnerships of $14,159 and $8,209, respectively. Certain assets
transferred by the Company to the partnerships upon formation were recorded at
book value.
-62-
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Summarized financial information from the financial statements of the
partnerships is as follows:
<TABLE>
<CAPTION>
ESPN/STARWAVE ABC NEWS/STARWAVE
PARTNERS PARTNERS
------------------------ ------------------------
OCTOBER 4, SEPTEMBER 28, OCTOBER 4, SEPTEMBER 28,
1998 1997 1998 1997
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Current assets.......... $ 8,823 $ 4,985 $ 6,505 $ 4,256
Noncurrent assets....... 479 84 3,967 3,134
Current liabilities..... 3,906 2,333 3,574 2,930
Noncurrent liabilities.. -- -- -- --
Revenues................ 19,193 6,996 9,878 1,929
Cost of online
services............... 15,715 7,168 18,182 9,015
Net loss................ (6,899) (3,752) (16,699) (9,930)
</TABLE>
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Starwave
Corporation and its wholly owned subsidiary, Starwave Ventures, Inc. All
significant intercompany transactions have been eliminated. Investments in
partnerships are accounted for using the equity method of accounting.
FISCAL YEAR CHANGE
Effective April 1, 1997, the Company changed its fiscal year-end from a
calendar year ended December 31 to a fiscal year ending the Sunday in the last
week of September. For the purposes of the consolidated financial statements,
fiscal year 1998 ended October 4, 1998.
The following is selected financial data for the year ended October 4, 1998 and
the comparable period ended September 28, 1997:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 4, 1998 SEPTEMBER 28, 1997
--------------- ------------------
(UNAUDITED)
<S> <C> <C>
Revenues............................... $ 5,266 $ 8,611
-------- --------
Operating expenses
Cost of online services.............. 3,143 14,309
Development.......................... 1,225 2,157
Sales and marketing.................. 94 4,209
General and administrative........... 2,772 3,983
-------- --------
Total operating expenses........... 7,234 24,658
-------- --------
Operating loss......................... (1,968) (16,047)
-------- --------
Other income (expense)
Earnings (loss) from affiliate EIV... (4,139) (2,251)
Earnings (loss) from affiliate AIV... (10,020) (5,958)
Interest income (expense), net....... 748 (3,302)
Other, net........................... (47) (142)
-------- --------
Net other expense.................. (13,458) (11,653)
-------- --------
Net loss............................... $(15,426) $(27,700)
======== ========
</TABLE>
-63-
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with an original
maturity of three months or less.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation and
amortization of equipment and leasehold improvements are provided on the
straight-line method over the estimated useful lives of the assets or the lease
term, whichever is shorter. Estimated useful lives range from one to six years.
DEFERRED ROYALTIES
Deferred royalties represent payments made or accrued to co-branding partners
and independent content providers under development and production agreements.
Amortization begins upon launch of the applicable online service and is based
on the greater of amounts determined by the contractual royalty rates or
amounts computed on a straight-line basis over the term of the agreements. In
April 1997, all significant deferred revenues were contributed to the
partnerships.
REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK
Revenues from subscriptions to the Company's online services and advertising
appearing on the Company's online services were recognized on the straight-line
method over the terms of the subscriptions and advertising contracts,
respectively. Advertising revenues were stated net of commissions. Deferred
revenue represented online subscriptions and customer advertising not yet
recognized as revenue.
The Company guaranteed to certain advertising customers a minimum number of
page impressions to be delivered to users of its online service for a specified
period. To the extent minimum guaranteed page impression deliveries are not
met, the Company defers recognition of the corresponding revenues until
guaranteed page impression delivery levels are achieved. As of October 4, 1998,
September 28, 1997 and December 31, 1996, no revenues had been deferred as a
result of these guarantees. As described above, beginning in April 1997 all
advertising and subscription revenues are recognized by the partnerships.
The Company has two software license arrangements with related parties. The
software licenses are one-time fees and are recognized at the time the software
master is delivered and when the criteria for fixed fee revenue recognition
under Statement of Position 91-1, Software Revenue Recognition, are satisfied.
The Company has contracted to provide for additional post-contract support for
a fee, which is recognized over the period of the contract. License and post
contract support revenues amounted to $1,779 and $401 for the periods ended
October 4, 1998 and September 28, 1997, respectively.
-64-
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During fiscal years 1998 and 1997, the Company had revenues from related
parties representing 58% and 52% of revenues, respectively. At October 4, 1998
and September 28, 1997, related party receivables represented 84% and 79%,
respectively of trade accounts receivable. The Company had no revenues or
accounts receivable from related parties as of and for the year ended December
31, 1996.
DEVELOPMENT EXPENSES
Development expenses relate to the development of new online services and
consist principally of compensation to company employees, as well as costs for
content, facilities and equipment. Development expenses are charged to results
of operations as incurred. Once an online service is launched and available to
generate revenues, expenses associated with enhancements and developments of
new features for the service are included in cost of online services, and
beginning in April 1997, are allocated to the partnerships. For the year ended
October 4, 1998, the development expenses consist mainly of the expenses
associated with the core technology software used to run the online services.
ADVERTISING EXPENSES
Advertising and promotion costs are expensed as incurred. The Company incurred
advertising costs of $80, $451 and $1,203 in fiscal years 1998, 1997 and 1996,
respectively.
FEDERAL INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to be recovered or settled. The effect on deferred income tax assets
and liabilities of changes in tax rates is recognized in income in the period
that includes the enactment date.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable, accounts
receivable from related parties, receivable from affiliate, other receivables,
accounts payable, accrued compensation, accrued royalties and due to affiliates
approximates fair value due to the short-term maturity of these instruments.
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.
-65-
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations. As
such, compensation expense would be recorded on the date of grant to employees
only if the current market price of the underlying stock exceeded the exercise
price. On January 1, 1996, the Company adopted the disclosure provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 for transactions with employees and
provide pro forma disclosures for employee stock option grants made in 1995 and
future years as if the fair value-based method defined in SFAS No. 123 had been
applied to these transactions. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 to these transactions and provide the pro
forma disclosure provisions of SFAS No. 123.
NET LOSS PER SHARE
Basic net loss per share represents net loss divided by the weighted average
number of shares outstanding during the period. Diluted net loss per share
represents net loss divided by the weighted average number of shares
outstanding including the potentially dilutive impact of the stock options.
Common stock options are converted using the treasury stock method. Basic and
diluted net loss per share are equal for the periods presented because the
impact of stock options is anti-dilutive.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current
presentation.
ACCOUNTING CHANGES
In June 1997, Statement of Financial Accounting Standards No. 130 (SFAS 130),
Reporting Comprehensive Income, was issued. This pronouncement requires
companies to report comprehensive income and its components prominently in the
financial statements. Comprehensive income includes both net income and charges
or credits to equity that are not the results of transactions with owners. SFAS
130 is required to be adopted for fiscal years beginning after December 15,
1997. The Company does not have any comprehensive income items other than net
income; therefore, SFAS 130 is not expected to impact the Company.
In June 1998, Statement of Financial Accounting Standards No. 133 (SFAS),
Accounting for Derivative Instruments and Hedging Activities, was issued. This
pronouncement standardizes the accounting for derivative instruments by
requiring that an entity recognize those items as assets or liabilities in the
financial statements and measure them at fair value. SFAS 133 is required to be
adopted for fiscal years beginning after June 15, 1999. Since the Company does
not hold any derivative instruments, SFAS 133 is not expected to impact the
Company.
-66-
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In October 1997, Statement of Position No. 97-2 (SOP 97-2), Software Revenue
Recognition, was issued. This pronouncement outlines criteria which must be
satisfied before revenue selling or licensing software can be recognized. SOP
97-2 is required to be adopted for transactions entered into in fiscal years
beginning after December 15, 1997. The Company is currently reviewing the
requirements of SOP 97-2 and assessing its impact on the Company's financial
statements.
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
OCTOBER 4, SEPTEMBER 28, DECEMBER 31,
1998 1997 1996
---------- ------------- ------------
<S> <C> <C> <C>
Equipment.......................... $11,510 $ 9,879 $ 9,171
Leasehold improvements............. 1,699 826 403
------- ------- -------
13,209 10,705 9,574
Less: Accumulated depreciation and
amortization...................... (8,580) (6,382) (4,759)
------- ------- -------
Net equipment and leasehold
improvements...................... $ 4,629 $ 4,323 $ 4,815
======= ======= =======
</TABLE>
4. LOANS FROM SHAREHOLDER
During 1995 and 1996, the Company's majority shareholder made unsecured loans
to the Company under a $100,000 credit agreement which did not require
repayment of principal until October 31, 1999, at which time the entire
outstanding balance was due. The loans accrued interest at a rate which varied
based on the higher of the Citibank, N.A. base rate or 0.5% above certain money
market rates. In April 1997, the balance of the loan was repaid via a cash
repayment of $50,000, and conversion of the remaining $45,664 to Class A common
stock.
5. INCOME TAXES
A current provision for income taxes has not been recorded for the year ended
October 4, 1998, the period ended September 28, 1997 or the year ended December
31, 1996 due to taxable losses incurred during such periods. A valuation
allowance has been recorded for deferred tax assets because realization is
primarily dependent on generating sufficient taxable income prior to expiration
of net operating loss carry-forwards. Deferred tax assets are summarized as
follows:
<TABLE>
<CAPTION>
OCTOBER 4, SEPTEMBER 28, DECEMBER 31,
1998 1997 1996
---------- ------------- ------------
<S> <C> <C> <C>
Capitalized "start-up" expenses..... $ 1,824 $ 2,635 $ 2,635
Net operating loss carry-forward.... 24,369 18,633 12,730
Other............................... 1,170 902 512
-------- -------- --------
Gross deferred tax assets........... (27,363) 22,170 15,877
Less: Valuation allowance........... (27,363) (22,170) (15,877)
-------- -------- --------
Net deferred tax assets............. $ -- $ -- $ --
======== ======== ========
</TABLE>
-67-
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The reconciliation of expected income taxes at the federal statutory rate of
34% to the actual tax expense of $0 is:
<TABLE>
<CAPTION>
YEAR ENDED NINE-MONTHS ENDED YEAR ENDED
OCTOBER 4, SEPTEMBER 28, DECEMBER 31,
1998 1997 1996
---------- ----------------- ------------
<S> <C> <C> <C>
Tax at statutory rate........... $(5,245) $(5,975) $(12,228)
Change in valuation allowance... 5,193 6,293 12,126
Other........................... 52 (318) 102
------- ------- --------
$ -- $ -- $ --
======= ======= ========
</TABLE>
As of October 4, 1998, the Company has approximately $70,185 of net operating
loss carry-forwards available to offset future taxable income, if any, through
2012.
Under the provisions of the IRC, utilization of the Company's net operating
loss carry-forwards may be subject to limitation if it should be determined
that a greater than 50% ownership change were to occur in the future. The
Company has determined that such a change occurred in May 1998 and November
1998 and the annual utilization of loss carry-forwards generated through those
periods will be limited.
6. STOCK OPTION PLAN
The Company has a Combined Incentive and Nonqualified Stock Option Plan (the
Plan) for employees, directors, consultants or independent contractors whereby
140,000 shares of Class A common stock are reserved for stock option grants.
Pursuant to the Plan, the Board of Directors may grant nonqualified and
incentive stock options. The vesting period, exercise price and expiration
period of options are established at the discretion of the Board of Directors.
However, in no event shall the term of any incentive stock option exceed ten
years. All option grants to date vest over periods ranging from three to four
years, and expire ten years from the date of grant.
The per share weighted average fair value of stock options granted during 1998,
1997 and 1996 was $5.87, $1.62 and $0.11, respectively, on the date of grant
using the Black Scholes option-pricing model with the following weighted
average assumptions: fiscal years 1998, 1997 and 1996--expected dividend yield
0%; risk-free interest rate of 5.61%, 6.28% and 6.14%, respectively, and an
expected life of 4.26, 2.68 and 2.89 years, respectively.
The Company applies APB Opinion No. 25 in accounting for its plan and,
accordingly, compensation cost has been recognized for its stock options in the
financial statements only to the extent that the exercise price of the option
is less than the fair value of the underlying stock on the date of the grant.
In fiscal years 1998, 1997 and 1996 the Company recorded deferred compensation
relating to the issuance of stock options less than fair value of $4,232, $0
and $394, respectively. Amortization of these costs amounted to $532, $74, and
$148 for the fiscal years 1998, 1997 and 1996, respectively. Had the Company
determined compensation cost based on the fair value at the grant date for its
-68-
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
stock options under SFAS No. 123, the Company's net loss would have been
increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
OCTOBER 4, SEPTEMBER 28, DECEMBER 31,
1998 1997 1996
---------- ------------- ------------
<S> <C> <C> <C>
Net loss
As reported............. $(15,426) $(17,573) $(35,965)
Pro forma............... (16,595) (18,116) (36,049)
Basic and diluted net
loss per share
As reported............. (.16) (.25) (1.13)
Pro forma............... (.17) (.25) (1.13)
</TABLE>
Pro forma net loss reflects only options granted in fiscal years 1998, 1997,
1996 and 1995. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net loss
amounts presented above because compensation cost is reflected over the
options' vesting period of three to four years and compensation cost for
options granted prior to January 1, 1995 is not considered.
The following summarizes the activity, restated for the common stock split
(Note 7), under the Company's plan:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
NUMBER AVERAGE FAIR VALUE
OF EXERCISE OF OPTIONS
SHARES PRICE GRANTED
------ -------- ----------
<S> <C> <C> <C>
Balances at December 31, 1995.................. 11,568 $0.003
Options granted:
Exercise price equal to fair value........... 3,420 0.27 $0.03
Exercise price less than fair value.......... 1,920 0.09 0.22
Options exercised............................ (5,531) 0.003
Options canceled............................. (1,300) 0.03
------
Balances at December 31, 1996.................. 10,077 0.105
Options granted:
Exercise price equal to fair value........... 4,383 2.27 1.62
Options exercised............................ (2,612) 0.01
Options canceled............................. (816) 0.12
------
Balances at September 28, 1997................. 11,032 0.99
Options granted:
Exercise price equal to fair value........... 935 3.79 8.32
Exercise price less than fair value.......... 740 2.95 2.95
Options exercised............................ (2,148) .08
Options canceled............................. (1,453) 1.24
------
Balances at October 4, 1998.................... 9,106 3.41
Options exercisable at:
December 31, 1996............................ 2,800 .025
September 28, 1997........................... 3,116 .38
October 4, 1998.............................. 3,941 1.04
</TABLE>
-69-
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At October 4, 1998, 143,447 shares remained reserved and available for grant
under the Plan.
The following table summarizes information about stock options outstanding
under the Plan at October 4, 1998:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.003 1,275 6.75 $0.003 673 $0.003
0.09 1,451 7.70 0.09 1,147 0.09
0.15-.44 945 7.84 .42 443 .42
2.27 4,182 8.52 2.27 1,678 2.27
2.95 1,013 9.09 2.95
4.47-8.81 221 9.91 7.06
9.32 2 9.73 9.32
9.85 11 9.75 9.85
9.94 6 9.74 9.94
----- -----
9,106 8.23 $ 3.41 3,941 $ 1.04
===== =====
</TABLE>
7. EQUITY
As of April 22, 1997, the Company amended its Articles of Incorporation to
authorize the issuance of two new classes of shares, designated, respectively,
Class A common stock and Class B common stock. As of October 4, 1998, the
Company had the authority to issue 250,000 shares and 80,000 shares of Class A
common stock and Class B common stock, respectively, at a par value of $.01 per
share. Each holder of Class A common stock is entitled to one vote per share
owned and each holder of Class B common stock is entitled to 2 1/2 votes per
share owned. Class B shares may be converted into one share of Class A common
stock at any time, and the transfer of Class B shares to a third party results
in its automatic conversion to Class A shares. Each outstanding share of common
stock on the date of amendment became one share of Class A common stock.
As established in the Stock Purchase Agreement dated March 28, 1997, effective
April 22, 1997 Disney obtained a controlling interest in the Company by
purchasing 39,869 shares of the Company's Class B common shares. The initial
purchase proceeds provided $31,868 in cash to the Company, and extinguished
loans from a key shareholder of $50,000 (Note 4). The agreement provides that
Disney has the option to acquire all of the outstanding Class A shares held by
key shareholders and employees at a predetermined price.
On May 1, 1998, Disney exercised this option and acquired all of the
outstanding Class A shares from the primary shareholder, thereby increasing its
percentage ownership of the Company's outstanding common stock from
approximately 41% to approximately 91% on a primary share basis.
COMMON STOCK SPLIT
On October 4, 1997, the Board of Directors declared a four-for-one stock split
on the Company's Class A and Class B common stock effected in the form of a
stock dividend to holders of record on
-70-
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
that date. Class A and Class B common stock issued, including stock option
information, and additional paid-in capital for all years have been restated to
reflect this split.
8. COMMITMENTS
The Company occupies its current facilities under terms of a noncancelable
operating lease that expires in May 2001, subject to extensions at the
Company's option. At October 4, 1998, future minimum rental payments under the
lease are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER,
----------------------
<S> <C>
1999.............................................................. $1,502
2000.............................................................. 1,206
2001.............................................................. 550
------
$3,258
======
</TABLE>
Rent expense under noncancelable operating leases amounted to $1,493, $871 and
$931 in fiscal years 1998, 1997 and 1996, respectively.
During fiscal year 1998, the Company entered into separation agreements with
certain employees. The terms of these agreements include severance payments
based on staff level and years of service, accelerated stock option vesting and
payment of post-employment insurance premiums. The termination of employees
under these separation agreements is contingent upon completion of the Infoseek
merger, and the Company's obligations under the agreements will transfer to
Infoseek at that time. Accordingly, no liability for these arrangements has
been recorded by the Company as of October 4, 1998.
9. DISCONTINUED OPERATIONS
In March 1996, the Company made the decision to discontinue its multimedia CD-
ROM segment. During the phase-out period, the Company completed production of
its final CD-ROM product and disposed of its remaining inventory of CD-ROM
products currently released. The phase-out period was completed by March 31,
1997. Operating results of the Multimedia CD-ROM segment for 1996 are shown
separately in the accompanying consolidated statements of operations. Any
activity subsequent to December 31, 1996 reduced the net liability.
Accrued liabilities of discontinued operations consist of the following:
<TABLE>
<CAPTION>
OCTOBER 4, SEPTEMBER 28, DECEMBER 31,
1998 1997 1996
---------- ------------- ------------
<S> <C> <C> <C>
Accrued liabilities
Accounts payable and accrued
liabilities....................... $(347) $(359) $(500)
Accrual for expected losses during
phase-out period.................. (19)
----- ----- -----
$(347) $(359) $(519)
===== ===== =====
</TABLE>
-71-
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net revenues and expenses of the Multimedia CD-ROM segment consist of the
following:
<TABLE>
<CAPTION>
OCTOBER 4, SEPTEMBER 28, DECEMBER 31,
1998 1997 1996
---------- ------------- ------------
<S> <C> <C> <C>
Net revenues......................... $-- $-- $ 664
Expenses............................. (4,934)
Accrual for expected losses during
phase-out period.................... (19)
--- --- -------
Loss from discontinued operations.... $-- $-- $(4,289)
=== === =======
</TABLE>
The Company recognized revenues from CD-ROM product sales at the time of
shipment from the Company's distributor. The estimated effect of price
protection programs and product returns were recorded as reductions to revenue.
10. OTHER EXPENSE
During 1996, the Company incurred legal and accounting fees of $606 in
connection with a proposed initial public offering, which was not completed. As
a result, the costs were expensed in 1996 and included in other expenses.
11. SUBSEQUENT EVENT
On November 18, 1998, the Company's shareholders approved a merger with
Infoseek Corporation (Infoseek), a developer and retailer of Internet
technology. Under the terms of the agreement, Infoseek acquired 100% of the
Company's outstanding common stock for approximately 25,512 shares of Infoseek
common stock and assumed options outstanding under the Company's stock option
plans for an aggregate of approximately 2,626 options for Infoseek common
stock. In connection with this acquisition, the joint venture terms of the ABC
News/Starwave Partners and ESPN/Starwave Partners are extended for ten years
from the date of the acquisition.
Upon closing of the transaction, Infoseek and Starwave will become wholly owned
subsidiaries of a newly organized holding company, Infoseek Corporation
(Newco), incorporated in Delaware. Shares of Newco, a registered public
company, will trade on Nasdaq and will be held by the former shareholders of
Infoseek and Starwave.
-72-
<PAGE>
ESPN JOINT VENTURE INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of PricewaterhouseCoopers LLP...................................... 74
ESPN/Starwave Partners Balance Sheets as of October 4, 1998 and September
28, 1997................................................................. 75
ESPN/Starwave Partners Statements of Operations for the Year Ended October
4, 1998 and the Period from April 1, 1997 (Inception) to September 28,
1997..................................................................... 76
ESPN/Starwave Partners Statement of Changes in Partners' Equity for the
Year Ended October 4, 1998 and the Period from April 1, 1997 (Inception)
to September 28, 1997.................................................... 77
ESPN/Starwave Partners Statements of Cash Flows for the Year Ended October
4, 1998 and the Period from April 1, 1997 (Inception) to September 28,
1997..................................................................... 78
ESPN/Starwave Partners Notes to Financial Statements...................... 79
</TABLE>
-73-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To ESPN/Starwave Partners
d/b/a ESPN Internet Ventures
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in partners' equity and of cash flows present fairly, in
all material respects, the financial position of ESPN/Starwave Partners d/b/a
ESPN Internet Ventures at October 4, 1998 and September 28, 1997, and the
results of its operations and its cash flows for the year ended October 4, 1998
and the period from April 1, 1997 (inception) to September 28, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Partnership'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
generally accepted auditing standards 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.
Subsequent to year-end, the Partnership completed a transaction which
significantly changed its partnership and operating structure as described in
Note 4.
PricewaterhouseCoopers LLP
Seattle, Washington
November 18, 1998
-74-
<PAGE>
ESPN/STARWAVE PARTNERS
(D/B/A ESPN INTERNET VENTURES)
BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 4, SEPTEMBER 28,
1998 1997
---------- -------------
<S> <C> <C>
ASSETS
------
Current assets
Cash and cash equivalents........................... $3,623 $1,900
Accounts receivable (net of allowance of $79 and
$71, respectively)................................. 3,244 2,555
Prepaid royalties................................... 1,956 530
------ ------
Total current assets.............................. 8,823 4,985
Property and equipment, net........................... 479 84
------ ------
Total assets...................................... $9,302 $5,069
====== ======
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
Current liabilities
Accounts payable.................................... $1,040 $ 506
Deferred revenue.................................... 2,866 1,718
Due to partner...................................... 109
------ ------
Total current liabilities......................... 3,906 2,333
Commitments (Note 3)
Partners' equity...................................... 5,396 2,736
------ ------
Total liabilities and partners' equity............ $9,302 $5,069
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-75-
<PAGE>
ESPN/STARWAVE PARTNERS
(D/B/A ESPN INTERNET VENTURES)
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 1, 1997
YEAR ENDED (INCEPTION) TO
OCTOBER 4, SEPTEMBER 28,
1998 1997
---------- --------------
<S> <C> <C>
Revenues:
Advertising revenue................................. $13,459 $ 4,868
Subscription revenue................................ 2,459 1,732
Fantasy games and other............................. 3,275 396
------- -------
Total revenues.................................... 19,193 6,996
------- -------
Operating expenses:
Cost of online services............................. 15,715 7,168
Development......................................... 1,847 515
Sales and marketing................................. 5,724 2,262
General and administrative.......................... 3,055 811
------- -------
Total operating expenses.......................... 26,341 10,756
------- -------
Interest income....................................... 249 8
------- -------
Net loss.............................................. $(6,899) $(3,752)
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-76-
<PAGE>
ESPN/STARWAVE PARTNERS
(D/B/A ESPN INTERNET VENTURES)
STATEMENT OF CHANGES IN PARTNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
STARWAVE ESPN ONLINE TOTAL
VENTURES, INC. INVESTMENTS INC. PARTNERS' EQUITY
-------------- ---------------- ----------------
<S> <C> <C> <C>
Initial capital contribution
April 1, 1997 (Note 1)..... $(1,484) $(1,484)
Capital contributions........ 5,377 $ 2,595 7,972
Net loss for the period...... (2,251) (1,501) (3,752)
------- ------- -------
Balance at September 28,
1997........................ 1,642 1,094 2,736
Capital contributions........ 5,735 3,824 9,559
Net loss for the period...... (4,139) (2,760) (6,899)
------- ------- -------
Balance at October 4, 1998... $ 3,238 $ 2,158 $ 5,396
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-77-
<PAGE>
ESPN/STARWAVE PARTNERS
(D/B/A ESPN INTERNET VENTURES)
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 1, 1997
YEAR ENDED (INCEPTION) TO
OCTOBER 4, SEPTEMBER 28,
1998 1997
---------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................ $(6,899) $(3,752)
Adjustments to reconcile net loss to net cash
provided by operating activities
Deferred revenue from contributed assets.......... 1,484
Operating expenses allocated from partners........ 9,559 5,004
Depreciation and amortization..................... 87 3
Change in accounts receivable..................... (689) (2,555)
Change in prepaid royalties....................... (1,426) (530)
Change in accounts payable........................ 534 506
Change in deferred revenue........................ 1,148 1,718
Change in due to partner.......................... (109) 109
------- -------
Net cash provided by operating activities....... 2,205 1,987
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment.................. (482) (87)
------- -------
Net increase in cash and cash equivalents........... 1,723 1,900
Cash and cash equivalents, beginning of period...... 1,900
------- -------
Cash and cash equivalents, end of period............ $ 3,623 $ 1,900
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-78-
<PAGE>
ESPN/STARWAVE PARTNERS
(D/B/A ESPN INTERNET VENTURES)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 4, 1998 AND SEPTEMBER 28, 1997
(IN THOUSANDS)
1. ORGANIZATION, BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
ESPN Internet Ventures (the Partnership) was formed on April 1, 1997 upon the
execution of a Joint Partnership agreement between Starwave Ventures, Inc.
(SVI) and ESPN Online Investments Inc. SVI and ESPN Online Investments Inc.
(the Partners) are allocated net losses and net profits of the Partnership
60%/40% and 50%/50%, respectively. In addition, the partners incur and pay
certain operating expenses on behalf of the Partnership. These expenses are
allocated to the Partnership and considered contributions to partners' equity.
Upon inception, SVI contributed a deferred revenue liability of $1,484 relating
to services subsequently performed by the Partnership.
BUSINESS
The Partnership was established to develop, produce and maintain Internet-based
services intended to appeal to broad consumer interests in sports-related
content areas. The Partnership generates revenue from advertisements sold for
display upon its services, and from fantasy games and subscriptions sold to the
end consumer.
Inherent in the Partnership's business are various risks and uncertainties,
including its limited operating history and the limited history of commerce on
the Internet. Future revenues from online services are dependent on the
continued growth and acceptance of the Internet, use of the Internet as an
information source, and acceptance of the Internet as an effective advertising
medium.
REVENUE RECOGNITION
Advertising, subscription and fantasy game revenues are recognized using the
straight-line method over the period of the related advertising contract,
subscription term or sports season. Merchandise revenue is recognized at the
time of sale. Advertising revenues are stated net of commissions. The
Partnership guarantees to certain advertising customers a minimum number of
page impressions to be delivered to users of its services for a specified
period. To the extent minimum guaranteed page impression deliveries are not
met, the Partnership defers recognition of the corresponding revenues until
guaranteed page impression delivery levels are achieved. As of October 4, 1998
and September 28, 1997, no revenues had been deferred as a result of these
guarantees. Deferred revenues represent advance payments received by the
Partnership which are deferred until earned. Deferred revenues are classified
based on the period of the related advertising contract or subscription.
CASH AND EQUIVALENTS
Cash and equivalents include highly liquid investments with an original
maturity of three months or less.
-79-
<PAGE>
ESPN/STARWAVE PARTNERS
(D/B/A ESPN INTERNET VENTURES)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
PREPAID ROYALTIES
Prepaid royalties represents payments made or accrued to independent content
providers under development and production agreements. Amortization begins upon
launch of the applicable online service and is based on the greater of amounts
determined by the contractual royalty rates or amounts computed on a straight-
line basis over the terms of the agreements. At October 4, 1998 and September
28, 1997, the Partnership had one contract for a total of $2,000 and $1,300,
respectively, which is being amortized on a straight-line basis over the
duration of the life of the contract.
Management periodically evaluates the future recoverability of prepaid
royalties. In the event management does not expect to generate revenues
sufficient to recover the prepaid royalty under a particular contract, the
Partnership will reduce the carrying amount of its prepaid royalty to its fair
value on the date such a determination is made.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost for purchased assets and net book
value for contributed assets. Depreciation and amortization are recognized
using the straight-line method over the estimated useful lives of such assets.
The estimated useful life used is three years.
DEVELOPMENT EXPENSES
Development expenses relate to the development of new technologies that may
benefit the existing online services and consist principally as costs for
content, facilities and equipment. Development expenses are charged to results
of operations as incurred. Once an online service is launched and available to
generate revenues, expenses associated with enhancements and development of new
features for the service are included in cost of online services.
ADVERTISING EXPENSES
Advertising and promotion costs are expensed as incurred. The Partnership
incurred advertising costs of $1,743 and $1,558 during the periods ended
October 4, 1998 and September 28, 1997, respectively.
INCOME TAXES
Profits or losses of the Partnership are attributable directly to the partners
for income tax purposes. Consequently, an income tax provision has not been
reflected in these financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable, and
accounts payable approximates fair value because of the short-term maturity of
these instruments.
-80-
<PAGE>
ESPN/STARWAVE PARTNERS
(D/B/A ESPN INTERNET VENTURES)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 disclosures 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.
ACCOUNTING CHANGES
In June 1997, Statement of Financial Accounting Standards No. 130 (SFAS 130),
Reporting Comprehensive Income, was issued. This pronouncement requires
companies to report comprehensive income and its components prominently in the
financial statements. Comprehensive income includes both net income and charges
or credits to equity that are not the results of transactions with owners. SFAS
130 is required to be adopted for fiscal years beginning after December 15,
1997. The Partnership does not have any comprehensive income items other than
net income; therefore, SFAS 130 is not expected to impact the Partnership.
In June 1998, Statement of Financial Accounting Standards No. 133 (SFAS),
Accounting for Derivative Instruments and Hedging Activities, was issued. This
pronouncement standardizes the accounting for derivative instruments by
requiring that an entity recognize those items as assets or liabilities in the
financial statements and measure them at fair value. SFAS 133 is required to be
adopted for fiscal years beginning after June 15, 1999. Since the Partnership
does not hold any derivative instruments, SFAS 133 is not expected to impact
the Partnership.
In October 1997, Statement of Position No. 97-2 (SOP 97-2), Software Revenue
Recognition, was issued. This pronouncement outlines criteria which must be
satisfied before revenue selling or licensing software can be recognized. SOP
97-2 is required to be adopted for transactions entered into in fiscal years
beginning after December 15, 1997. Since the Partnership does not generate
revenue from selling or licensing software, SOP 97-2 is not expected to impact
the Partnership.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
OCTOBER 4, SEPTEMBER 28,
1998 1997
---------- -------------
<S> <C> <C>
Computer hardware....... $569 $87
Less: Accumulated
depreciation and
amortization........... (90) (3)
---- ---
$479 $84
==== ===
</TABLE>
The Partnership shares office space and certain operating equipment with its
partners and the related rent of $0 and $88, and depreciation of $370 and $145,
respectively, was allocated to the Partnership for the year ended October 4,
1998 and the period from April 1, 1997 (inception) to September 28, 1997.
-81-
<PAGE>
ESPN/STARWAVE PARTNERS
(D/B/A ESPN INTERNET VENTURES)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. COMMITMENTS
The Partnership has production agreements with third parties (licensors) under
which the Partnership produces online services utilizing content licensed under
the production agreements. In exchange for content licenses, the licensors are
entitled to royalties calculated as a percentage of gross revenues from the
online services, as defined in the production agreements. During the term of
the production agreements, the Partnership is required to pay minimum
nonrefundable payments which are offset against the royalties as they are
earned. Future minimum royalty payments are summarized as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
------------------
<S> <C>
1999.............................................................. $3,250
2000.............................................................. 3,000
------
$6,250
======
</TABLE>
4. SUBSEQUENT EVENT
On November 18, 1998, the parent company of SVI completed a merger with
Infoseek Corporation (Infoseek), a developer and retailer of internet
technology. As a result of this acquisition, DOL Online Investments, Inc. and
Infoseek agreed to extend the Partnerships' joint venture terms for ten years
from the date of the acquisition.
-82-
<PAGE>
ABC NEWS JOINT VENTURE INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of PricewaterhouseCoopers LLP..................................... 84
ABC News/Starwave Partners Balance Sheets as of October 4, 1998 and
September 28, 1997...................................................... 85
ABC News/Starwave Partners Statements of Operations for the Year Ended
October 4, 1998 and the Period from April 1, 1997 (Inception) to
September 28, 1997 ..................................................... 86
ABC News/Starwave Partners Statement of Changes in Partners' Equity for
the Year Ended October 4, 1998 and the Period from April 1, 1997
(Inception) to September 28, 1997 ...................................... 87
ABC News/Starwave Partners Statements of Cash Flows for the Year Ended
October 4, 1998 and the Period from April 1, 1997 (Inception) to
September 28, 1997...................................................... 88
ABC News/Starwave Partners Notes to Financial Statements................. 89
</TABLE>
-83-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To ABC News/Starwave Partners
d/b/a ABC News Internet Ventures
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in partners' equity and of cash flows present fairly, in
all material respects, the financial position of ABC News/Starwave Partners
d/b/a ABC News Internet Ventures at October 4, 1998 and September 28, 1997, and
the results of its operations and its cash flows for the year ended October 4,
1998 and the period from April 1, 1997 (inception) to September 28, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Partnership'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
generally accepted auditing standards 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.
Subsequent to year-end, the Partnership completed a transaction which
significantly changed its partnership and operating structure as described in
Note 4.
PricewaterhouseCoopers LLP
Seattle, Washington
November 18, 1998
-84-
<PAGE>
ABC NEWS/STARWAVE PARTNERS
(D/B/A ABC NEWS INTERNET VENTURES)
BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 4, SEPTEMBER 28,
1998 1997
---------- -------------
<S> <C> <C>
ASSETS
------
Current assets
Cash and cash equivalents............................. $ 1,941 $ 31
Accounts receivable (net of allowance of $42 and
$10, respectively)................................. 2,936 1,368
Prepaid royalties................................... 1,628 2,857
------- ------
Total current assets.............................. 6,505 4,256
Equipment and leasehold improvements, net............. 3,967 3,134
------- ------
Total assets...................................... $10,472 $7,390
======= ======
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
Current liabilities
Accounts payable.................................... $ 1,444 $2,605
Accrued compensation................................ 49 240
Deferred revenue.................................... 207 85
Other liabilities................................... 44 --
Due to partner...................................... 1,830 --
------- ------
Total current liabilities......................... 3,574 2,930
Commitments (Note 3)
Partners' equity...................................... 6,898 4,460
------- ------
Total liabilities and partners' equity............ $10,472 $7,390
======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-85-
<PAGE>
ABC NEWS/STARWAVE PARTNERS
(D/B/A ABC NEWS INTERNET VENTURES)
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 1, 1997
YEAR ENDED (INCEPTION) TO
OCTOBER 4, 1998 SEPTEMBER 28, 1997
--------------- ------------------
<S> <C> <C>
Revenues:
Advertising revenues....................... $ 4,034 $ 937
Royalties.................................. 5,844 992
-------- -------
Total revenues........................... 9,878 1,929
-------- -------
Operating expenses:
Cost of online services.................... 18,182 9,015
Development................................ 1,751 532
Sales and marketing........................ 3,959 1,777
General and administrative................. 2,746 537
-------- -------
Total operating expenses................. 26,638 11,861
-------- -------
Interest income.............................. 61 2
-------- -------
Net loss..................................... $(16,699) $(9,930)
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-86-
<PAGE>
ABC NEWS/STARWAVE PARTNERS
(D/B/A ABC NEWS INTERNET VENTURES)
STATEMENT OF CHANGES IN PARTNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
STARWAVE DOL ONLINE PARTNERS'
VENTURES, INC. INVESTMENTS, INC. EQUITY
-------------- ----------------- ---------
<S> <C> <C> <C>
Initial capital contribution, April
1, 1997........................... $ (26) $ (26)
Capital contributions.............. 8,660 $ 5,756 14,416
Net loss for the period............ (5,958) (3,972) (9,930)
-------- ------- --------
Balance at September 28, 1997...... 2,676 1,784 4,460
Capital contributions.............. 11,483 7,654 19,137
Net loss for the period............ (10,020) (6,679) (16,699)
-------- ------- --------
Balance at October 4, 1998......... $ 4,139 $ 2,759 $ 6,898
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-87-
<PAGE>
ABC NEWS/STARWAVE PARTNERS
(D/B/A ABC NEWS INTERNET VENTURES)
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 1, 1997
YEAR ENDED (INCEPTION) TO
OCTOBER 4, SEPTEMBER 28,
1998 1997
---------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................ $(16,699) $(9,930)
Adjustments to reconcile net loss to net cash
provided by operating activities
Deferred revenue from contributed assets.......... -- 26
Operating expenses allocated from partners........ 17,988 11,327
Depreciation and amortization..................... 676 273
Change in accounts receivable..................... (1,568) (1,368)
Change in prepaid royalties....................... 1,229 (2,857)
Change in accounts payable........................ (1,161) 2,605
Change in accrued compensation.................... (191) 240
Change in deferred revenue........................ 122 85
Change in other liabilities....................... 44 --
Change in due to partner.......................... 1,830 --
-------- -------
Net cash provided by operating activities....... 2,270 401
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment and leasehold improvements.. (360) (370)
-------- -------
Net increase in cash and cash equivalents........... 1,910 31
Cash and cash equivalents, beginning of period...... 31 --
-------- -------
Cash and cash equivalents, end of period............ $ 1,941 $ 31
======== =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Fixed assets contributed by partners................ $ 1,149 $ 3,037
</TABLE>
The accompanying notes are an integral part of these financial statements.
-88-
<PAGE>
ABC NEWS/STARWAVE PARTNERS
(D/B/A ABC NEWS INTERNET VENTURES)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 4, 1998 AND SEPTEMBER 28, 1997
(in thousands)
1. ORGANIZATION, BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
ABC News Internet Ventures (the Partnership) was formed on April 1, 1997 upon
the execution of a Joint Partnership agreement between Starwave Ventures, Inc.
(SVI) and DOL Online Investments Inc. (DOL). SVI and DOL are allocated the net
losses and net profits of the Partnership 60%/40% and 50%/50%, respectively. In
addition, the partners incur and pay certain operating expenses on behalf of
the Partnership. These expenses are allocated to the Partnership and considered
contributions to partners' equity. Upon inception, SVI contributed a deferred
revenue liability of $26, relating to services subsequently performed by the
Partnership.
BUSINESS
The Partnership was established to develop, produce and maintain Internet-based
services intended to appeal to broad consumer interests in news and
entertainment content areas. The Partnership currently generates revenue from
advertisements sold for display upon its services, and royalties from certain
production agreements.
Inherent in the Partnership's business are various risks and uncertainties,
including its limited operating history and the limited history of commerce on
the Internet. Future revenues from online services are dependent on the
continued growth and acceptance of the Internet, use of the Internet as an
information source, and acceptance of the Internet as an effective advertising
medium.
REVENUE RECOGNITION
Advertising revenues are recognized using the straight-line method over the
period of the related advertising contract. Advertising revenues are stated net
of commissions. The Partnership guarantees to certain advertising customers a
minimum number of page impressions to be delivered to users of its services for
a specified period. To the extent minimum guaranteed page impression deliveries
are not met, the Partnership defers recognition of the corresponding revenues
until guaranteed page impression delivery levels are achieved. As of October 4,
1998 and September 28, 1997, no revenues have been deferred as a result of
these guarantees. Deferred revenues represent payments received in advance by
the Partnership which are deferred until earned. Deferred revenues are
classified based on the period of the related advertising or production
contract.
CASH AND EQUIVALENTS
Cash and equivalents include highly liquid investments with an original
maturity of three months or less.
-89-
<PAGE>
ABC NEWS/STARWAVE PARTNERS
(D/B/A ABC NEWS INTERNET VENTURES)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
PREPAID ROYALTIES
Prepaid royalties represents payments made or accrued to independent content
providers under development and production agreements. Amortization begins upon
launch of the applicable online service and is based on the greater of amounts
determined by the contractual royalty rates or amounts computed on a straight-
line basis over the terms of the agreements. At October 4, 1998 and September
28, 1997, the Partnership had one contract for a total of $3,750, which is
being amortized on a straight-line basis over the three-year life of the
contract.
Management periodically evaluates the future recoverability of prepaid
royalties. In the event management does not expect to generate revenues
sufficient to recover the prepaid royalty under a particular contract, the
Partnership will reduce the carrying amount of its prepaid royalty to its fair
value on the date such a determination is made.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are recorded at cost for purchased assets
and net book value for contributed assets. Depreciation and amortization are
recognized using the straight-line method over the estimated useful lives of
such assets ranging from one to six years.
DEVELOPMENT EXPENSES
Development expenses relate to the development of new technologies that may
benefit the online service and consist principally of costs for labor,
facilities and equipment. Development expenses are charged to results of
operations as incurred. Once an online service is launched and available to
generate revenues, expenses associated with enhancements and development of new
features for the service are included in cost of online services.
ADVERTISING EXPENSES
Advertising and promotion costs are expensed as incurred. The Partnership
incurred advertising costs of $886 and $1,260 for the periods ended October 4,
1998 and September 28, 1997, respectively.
INCOME TAXES
Profits or losses of the Partnership are attributable directly to the partners
for income tax purposes. Consequently, an income tax provision has not been
reflected in these financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable, accounts
payable, and accrued compensation and due from partner approximates fair value
because of the short-term maturity of these instruments.
-90-
<PAGE>
ABC NEWS/STARWAVE PARTNERS
(D/B/A ABC NEWS INTERNET VENTURES)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 disclosures 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.
ACCOUNTING CHANGES
In June 1997, Statement of Financial Accounting Standards No. 130 (SFAS 130),
Reporting Comprehensive Income, was issued. This pronouncement requires
companies to report comprehensive income and its components prominently in the
financial statements. Comprehensive income includes both net income and charges
or credits to equity that are not the results of transactions with owners. SFAS
130 is required to be adopted for fiscal years beginning after December 15,
1997. The Partnership does not have any comprehensive income items other than
net income; therefore, SFAS 130 is not expected to impact the Partnership.
In June 1998, Statement of Financial Accounting Standards No. 133 (SFAS),
Accounting for Derivative Instruments and Hedging Activities, was issued. This
pronouncement standardizes the accounting for derivative instruments by
requiring that an entity recognize those items as assets or liabilities in the
financial statements and measure them at fair value. SFAS 133 is required to be
adopted for fiscal years beginning after June 15, 1999. Since the Partnership
does not hold any derivative instruments, SFAS 133 is not expected to impact
the Partnership.
In October 1997, Statement of Position No. 97-2 (SOP 97-2), Software Revenue
Recognition, was issued. This pronouncement outlines criteria which must be
satisfied before revenue selling or licensing software can be recognized. SOP
97-2 is required to be adopted for transactions entered into in fiscal years
beginning after December 15, 1997. Since the Partnership does not generate
revenue from selling or licensing software, SOP 97-2 is not expected to impact
the Partnership.
2. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
OCTOBER 4, SEPTEMBER 28,
1998 1997
---------- -------------
<S> <C> <C>
Computer hardware....... $ 660 $ 348
Software................ 44 3
Furniture and fixtures.. 19 19
Leasehold improvements.. 4,193 3,037
------ ------
4,916 3,407
Less: Accumulated
depreciation and
amortization........... (949) (273)
------ ------
Equipment and leasehold
improvements, net...... $3,967 $3,134
====== ======
</TABLE>
-91-
<PAGE>
ABC NEWS/STARWAVE PARTNERS
(D/B/A ABC NEWS INTERNET VENTURES)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Partnership shares office space and certain operating equipment with its
partners. Related rent in the amount of $12 and $29 was allocated to the
Partnership for the year ended October 4, 1998 and for the period from April 1,
1997 (inception) to September 28, 1997, respectively.
3. COMMITMENTS
The Partnership has production agreements with third parties (licensors) under
which the Partnership produces online services utilizing content licensed under
the production agreements. In exchange for content licenses, the licensors are
entitled to royalties calculated as a percentage of gross revenues from the
online services, as defined in the production agreements. During the term of
the production agreements, the Partnership is required to pay minimum
nonrefundable payments which are offset against the royalties as they are
earned. Future minimum royalty payments are $750 in 1999.
4. SUBSEQUENT EVENT
On November 18, 1998, the parent company of SVI completed a merger with
Infoseek Corporation (Infoseek), a developer and retailer of internet
technology. As a result of this acquisition, DOL Online Investments, Inc. and
Infoseek agreed to extend the Partnerships' joint venture terms for ten years
from the date of the acquisition.
-92-
<PAGE>
(b) PRO FORMA FINANCIAL INFORMATION
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial information for
Infoseek consists of the Unaudited Pro Forma Combined Condensed Statements of
Operations for the year ended December 31, 1997, and for the nine months ended
September 30, 1998 and the Unaudited Pro Forma Combined Condensed Balance Sheet
as of September 30, 1998 (collectively, the "Pro Forma Statements"). The Pro
Forma Statements give effect to Infoseek's acquisition of Starwave through a
merger and exchange of shares and the reincorporation of Infoseek California
into Delaware pursuant to which Infoseek California became a wholly-owned
subsidiary of Infoseek, both on November 18, 1998. In addition, the
Pro Forma Statements give effect to Disney's purchase of an additional 2,642,000
unregistered shares of Infoseek common stock and a warrant, subject to vesting,
to purchase an additional 15,720,000 unregistered shares of Infoseek common
stock in exchange for approximately $70.0 million in cash and $139.0 million in
a five-year promissory note. The Unaudited Pro Forma Combined Condensed
Statements of Operations for the year ended December 31, 1997 and the nine
months ended September 30, 1998 reflect these transactions as if they had taken
place on January 1, 1997. The Unaudited Pro Forma Combined Condensed Balance
Sheet gives effect to these transactions as if they had taken place on September
30, 1998.
On July 24, 1998, Infoseek entered into the Merger Agreement to acquire Quando
in exchange for approximately $17.0 million, subject to adjustment, in shares
of Infoseek's common stock. The transaction is subject to customary closing
conditions, including shareholder approval by Quando, and is expected to close
in December 1998. The Unaudited Pro Forma Combined Condensed Statements of
Operations for the year ended December 31, 1997 and the nine months ended
September 30, 1998 reflect this transaction as if it had taken place on January
1, 1997. The Unaudited Pro Forma Combined Condensed Balance Sheet gives effect
to the Quando acquisition as if it had taken place on September 30, 1998.
The Unaudited Pro Forma Combined Condensed Statements of Operations combine
Infoseek's historical results of operations for the year ended December 31,
1997 and the nine months ended September 30, 1998 with Starwave's historical
results for the year ended December 31, 1997 and the nine months ended October
4, 1998 and Quando's historical results of operations for the year ended
December 31, 1997 and the nine months ended September 30, 1998, respectively.
In addition, the Unaudited Pro Forma Combined Condensed Statements of Operations
include the impact of certain related agreements which become effective with the
mergers described above. These agreements are described more fully in the notes
to the Unaudited Pro Forma Combined Condensed Financial Statements. The Pro
Forma Statements are not necessarily indicative of what the actual financial
results would have been had the transactions taken place on January 1, 1997 or
September 30, 1998 and do not purport to indicate the results of future
operations.
The Starwave merger was accounted for using the purchase method of accounting.
The Quando acquisition will also be accounted for using the purchase method of
accounting. The Pro Forma Statements have been prepared on the basis of
assumptions described in the notes thereto.
In connection with the acquisitions of Starwave and Quando, Infoseek expects to
incur write-offs related to in-process research and development, currently
estimated at $72.6 million and $4.3 million,
-93-
<PAGE>
respectively. The Unaudited Pro Forma Combined Condensed Balance Sheet includes
the effect of the write-offs related to in-process research and development;
however, the Unaudited Pro Forma Combined Condensed Statements of Operations do
not reflect these charges. The charges related to in-process research and
development will be reflected in Infoseek's consolidated financial statements
when the Starwave merger and the Quando acquisition are consummated. In
addition, Infoseek expects to incur costs of integration estimated at up to
$7.0 million of which $1.4 of costs were included in the results of operations
of Infoseek for the nine months ended September 30, 1998. The Pro Forma
Statements do not include the remaining costs of integration of up to $5.6
million, as these costs will affect future operations and do not qualify as
liabilities in connection with a purchase business combination under EITF 95-3,
"Recognition of Liabilities in Connection with a Purchase Business Combination."
-94-
<PAGE>
The Pro Forma Statements should be read in conjunction with the related notes
included in this document and the audited consolidated financial statements of
Infoseek and the notes thereto, and the audited financial statements of
Starwave and Quando, including the notes thereto, included elsewhere in this
Proxy Statement/Prospectus.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
INFOSEEK STARWAVE QUANDO PRO FORMA
ACTUAL ACTUAL ACTUAL ADJUSTMENTS TOTAL
-------- -------- ------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues................. $ 35,082 $ 5,811 $ 256 $ 16,368 (3) $ 57,517
Costs and expenses:
Hosting, content and
website costs(10)..... 6,319 7,667 1 13,790 (3) 26,398
2,455 (3)
(3,834)(4)
Amortization of
intangibles related to
hosting, content and
website costs......... -- -- -- 34,866 (8) 38,524
3,658 (18)
Research and
development........... 7,900 1,840 161 995 (8) 10,937
41 (18)
Sales and marketing.... 34,320 1,598 12 2,907 (8) 75,674
3,834 (4)
33,000 (11)
3 (18)
General and
administrative........ 7,042 3,188 419 1,683 (8) 12,440
108 (18)
Goodwill amortization.. -- -- -- 65,625 (8) 70,266
4,641 (18)
Restructuring and other
charges............... 7,349 -- -- -- 7,349
-------- -------- ----- --------- ---------
Total costs and
expenses................ 62,930 14,293 593 163,772 241,588
-------- -------- ----- --------- ---------
Operating loss........... (27,848) (8,482) (337) (147,404) (184,071)
Loss from Joint
Ventures................ -- (10,932) -- (74)(3) (11,006)
Other income (expense),
net..................... 1,286 (1,111) (16) -- 159
-------- -------- ----- --------- ---------
Net loss................. $(26,562) $(20,525) $(353) $(147,478) $(194,918)
======== ======== ===== ========= =========
Basic and diluted net
loss per share.......... $ (1.00) $ (3.36)
Shares used in computing
basic and diluted net
loss per share.......... 26,627 31,307 57,934
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-95-
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
INFOSEEK STARWAVE QUANDO PRO FORMA
ACTUAL ACTUAL ACTUAL ADJUSTMENTS TOTAL
-------- -------- ------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues.................. $50,715 $ 4,348 $ 514 $ 21,626 (3) $ 77,203
Costs and expenses:
Hosting, content and
website costs (10)..... 7,956 2,661 5 18,220 (3) 30,756
3,244 (3)
(1,330)(4)
Amortization of
intangibles related to
hosting, content and
website costs.......... -- -- -- 24,601 (8) 28,893
1,549 (8)
2,743 (18)
Research and
development............ 7,432 990 413 746 (8) 9,612
31 (18)
Sales and marketing..... 35,144 85 1 2,180 (8) 63,492
1,330 (4)
24,750 (11)
2 (18)
General and
administrative......... 7,876 2,111 317 1,262 (8) 11,647
81 (18)
Goodwill amortization... -- -- -- 49,219 (8) 52,699
3,480 (18)
------- -------- ----- --------- ---------
Total operating
expenses............... 58,408 5,847 736 132,108 197,099
------- -------- ----- --------- ---------
Operating loss............ (7,693) (1,499) (222) (110,482) (119,896)
Loss from Joint Ventures.. -- (11,436) -- (284)(3) (11,720)
Interest income (expense),
net...................... 1,999 462 (59) -- 2,402
------- -------- ----- --------- ---------
Net loss.................. $(5,694) $(12,473) $(281) $(110,766) $(129,214)
======= ======== ===== ========= =========
Basic and diluted net loss
per share................ $ (0.19) $ (2.09)
Shares used in computing
basic and diluted net
loss per share........... 30,512 31,307 61,819
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-96-
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
INFOSEEK STARWAVE QUANDO PRO FORMA
ACTUAL ACTUAL ACTUAL ADJUSTMENTS TOTAL
-------- --------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 6,801 $ 1,415 $ 76 $ 70,013 (2) $ 78,305
Short-term
investments.......... 47,740 -- -- -- 47,740
Accounts receivable,
net.................. 7,619 1,072 101 -- 8,792
Receivables from
related parties...... -- 516 -- -- 516
Prepaid to service
providers............ 5,838 -- -- -- 5,838
Other current assets.. 998 803 8 -- 1,809
-------- --------- ------- --------- ----------
Total current
assets............. 68,996 3,806 185 70,013 143,000
Property and equipment,
net.................... 15,177 4,629 92 -- 19,898
Developed technology.... -- -- -- 29,900 (1) 37,216
7,316 (13)
Assembled workforce..... -- -- -- 15,300 (1) 15,603
303 (13)
Direct acquisition
costs.................. 2,825 -- -- -- 2,825
Deposits and other
assets................. 3,315 -- 4 -- 3,319
Goodwill................ -- -- -- 656,250 (1) 665,531
9,281 (13)
Joint Venture
relationships.......... -- 7,377 -- 178,500 (1) 185,877
-------- --------- ------- --------- ----------
Total assets........ $ 90,313 $ 15,812 $ 281 $ 966,863 $1,073,269
======== ========= ======= ========= ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...... $ 6,717 $ 1,816 $ 159 $ -- $ 8,692
Accrued payroll and
related expenses..... 2,191 3,365 -- -- 5,556
Accrued liabilities to
service providers.... 1,558 -- -- -- 1,558
Other accrued
liabilities.......... 2,418 663 -- 22,000 (5) 26,081
1,000 (14)
Due to affiliates..... -- 1,023 -- -- 1,023
Deferred revenue...... 4,789 60 -- -- 4,849
Short-term
obligations.......... 2,942 -- 400 -- 3,342
-------- --------- ------- --------- ----------
Total current
liabilities........ 20,615 6,927 559 23,000 51,101
Deferred tax liability.. -- -- -- 41,601 (9) 44,115
2,514 (19)
Long-term obligations... 2,981 -- 447 -- 3,428
Stockholders' equity:
Convertible preferred
stock................ -- -- 822 (822)(15) --
Common stock.......... 121,292 128,173 165 978,674 (6) 1,245,139
16,835 (16)
Accumulated deficit... (53,724) (115,689) (1,712) 43,089 (7) (130,663)
(2,627)(17)
Deferred
compensation......... (717) (3,599) -- 3,599 (12) (717)
Notes receivable from
stockholders......... (134) -- -- (139,000)(2) (139,134)
-------- --------- ------- --------- ----------
Total stockholders'
equity............. 66,717 8,885 (725) 899,748 974,625
-------- --------- ------- --------- ----------
Total liabilities
and stockholders'
equity............. $ 90,313 $ 15,812 $ 281 $ 966,863 $1,073,269
======== ========= ======= ========= ==========
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-97-
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1998
The Pro Forma Statements give effect to Infoseek's acquisition of Starwave
through a merger and exchange of shares. Disney purchased an additional
2,642,000 unregistered shares of Infoseek common stock and a warrant, subject to
vesting, to purchase an additional 15,720,000 unregistered shares of Infoseek
common stock in exchange for approximately $70.0 million in cash and a $139.0
million five-year promissory note. The Unaudited Pro Forma Combined Condensed
Statements of Operations for the year ended December 31, 1997 and the nine
months ended September 30, 1998 reflect these transactions as if they had taken
place on January 1, 1997. The Unaudited Pro Forma Combined Condensed Balance
Sheet gives effect to these transactions as if they had taken place on September
30, 1998.
In addition, the Unaudited Pro Forma Combined Condensed Statements of Operations
include the effect of certain related agreements that became effective upon
consummation of the merger, as described above. Under the Representation
Agreements, Starwave contracted for, and has exclusive rights to sell, all
advertising and other related items of the Joint Ventures. Starwave guarantees
its performance through minimum revenue commitments and is at risk if its
subsequent collection of the related receivables is insufficient to cover such
commitments. These Representation Agreements will result in Starwave recognizing
revenue for the sale of the advertising and of related items and a corresponding
representation fee for amounts due to the Joint Ventures. In addition, under a
five year Promotional Services Agreement, Infoseek has committed to spend $165.0
million to promote GO Network. These costs are reflected, on a straight-line
basis, in the Pro Forma Statements as increased sales and marketing expenses.
On July 24, 1998, Infoseek entered into the Merger Agreement to acquire Quando
in exchange for approximately $17.0 million, subject to adjustment, in shares
of Infoseek common stock. The transaction is subject to customary closing
conditions, including shareholder approval by Quando, and is expected to close
in December 1998. The Unaudited Pro Forma Condensed Statements of Operations
for the year ended December 31, 1997 and the nine months ended September 30,
1998 reflect the Quando acquisition as if it had taken place on January 1,
1997. The Unaudited Pro Forma Combined Condensed Balance Sheet gives effect to
this transaction as of it had taken place on September 30, 1998.
The Starwave merger was accounted for using the purchase method of accounting.
The Pro Forma Statements have been prepared on the basis of assumptions
described in the notes thereto and include assumptions relating to the
allocation of the consideration paid for the assets and liabilities of Starwave
based on actual fair value. The Quando acquisition will also be accounted for
using the purchase method of accounting. The Pro Forma Statements have been
prepared on the basis of assumptions described in the notes thereto and include
assumptions relating to the allocation of the consideration paid for the assets
and liabilities of Quando based on preliminary estimates of their fair value.
The actual allocation of such consideration may differ from that reflected in
the Pro Forma
-98-
<PAGE>
Statements after valuations and other procedures to be performed after the
closing of the Quando acquisition has been completed. Infoseek does not expect
that the final allocation of the purchase price will differ materially from the
preliminary allocations. In the opinion of Infoseek's management, all
adjustments necessary to present fairly such Pro Forma Statements have been
made on the proposed terms and structure of the Starwave merger and the Quando
merger.
In connection with the acquisitions of Starwave and Quando, Infoseek expects to
incur write-offs related to in-process research and development, currently of
approximately $72.6 million and $4.3 million, respectively. The Unaudited Pro
Forma Combined Condensed Balance Sheet includes the effect of the write-offs
related to in-process research and development; however, the Unaudited Pro
Forma Combined Condensed Statements of Operations do not reflect these
charges. The charges related to in-process research and development will be
reflected in Infoseek's consolidated financial statements when the Starwave
merger and the Quando merger are consummated. In addition, Infoseek
expects to incur costs of integration estimated at up to $7.0 million, of which
$1.4 million was included in the results of operations for the nine months
ended September 30, 1998. The Pro Forma Statements do not include the remaining
costs of integration of up to $5.6 million as they will affect future
operations.
The Pro Forma Statements are not necessarily indicative of what the actual
financial results would have been had the transactions taken place on January
1, 1997 or September 30, 1998 and do not purport to indicate the results of
future operations.
The Unaudited Pro Forma Statements give effect to the following pro forma
adjustments:
1. In accordance with the reorganization agreement for the Starwave merger,
(i) a wholly-owned subsidiary of Infoseek ("Infoseek Merger Sub") has merged
with and into Infoseek California, Infoseek California is a wholly-owned
subsidiary of Infoseek, and all outstanding shares of common stock of Infoseek
California have been converted into shares of the common stock of Infoseek, at
the rate of one share of Infoseek common stock for each share of Infoseek
California common stock, and (ii) a wholly-owned subsidiary of Starwave
("Starwave Merger Sub") has merged with and into Starwave, Starwave is a wholly-
owned subsidiary of Infoseek, and all outstanding shares of common stock of
Starwave were converted into shares of common stock of Infoseek.
The Starwave merger was accounted for using the purchase method of accounting.
The purchase price was based on $32.42 per share, which is the average of the
market price before and immediately after the announcement of the Starwave
merger.
The purchase price was determined as follows:
<TABLE>
<CAPTION>
STARWAVE INFOSEEK FAIR VALUE
SHARES SHARES (IN THOUSANDS)
----------- ---------- --------------
<S> <C> <C> <C>
Shares................................. 97,875,056 25,932,681 $840,738
Stock Options.......................... 8,323,301 2,205,316 57,096
----------- ---------- --------
Totals............................... 106,198,357 28,137,997 $897,834
=========== ========== ========
</TABLE>
-99-
<PAGE>
The Starwave shares were first converted to Infoseek equivalent shares by
taking the number of Starwave shares divided by the exchange ratio of
approximately 0.26 Starwave shares for each Infoseek share.
The fair value of "shares" was calculated by taking the fair value of the stock
($32.42 per share) times the number of Infoseek shares to be acquired.
With respect to stock options exchanged as part of the Starwave merger, all
vested Starwave options exchanged for vested Infoseek options are included as
part of the purchase price based on their fair value. Any unvested Starwave
options issued in exchange for unvested Infoseek options are also included as
part of the purchase price based on their fair value.
The fair value of the stock was calculated by taking the options to purchase
Infoseek shares (2,205,316 options) times the fair value of the stock ($32.42
per share) less the proceeds which will be received from the optionholder upon
exercise (approximately $14.4 million).
The Pro Forma Statements have been prepared on the basis of assumptions
described in the notes thereto and include assumptions relating to the
allocation of the consideration paid for the assets and liabilities of Starwave
based on their actual fair value. The actual allocation of such
consideration may differ from that reflected in the Pro Forma Statements after
valuations and other procedures to be performed after the closing of the
Starwave merger have been completed. Below is a table of the estimated
acquisition cost, purchase price allocation and annual amortization of the
intangible assets acquired (in thousands):
<TABLE>
<CAPTION>
ANNUAL
AMORTIZATION AMORTIZATION
LIFE OF INTANGIBLES
------------ --------------
<S> <C> <C> <C>
Estimated Acquisition Cost
Estimated purchase price............. $897,834
Acquisition expenses................. 22,000
--------
Total Estimated Acquisition
Cost.............................. $919,834
========
Purchase Price Allocation
Historical net book value of
Starwave at September 30, 1998...... $ 8,885
Intangible assets acquired:
Joint Venture relationships (ESPN
Joint Venture and ABCNews Joint
Venture)............................ 178,500 10 $ 17,850
Developed technology................. 29,900 2 14,950
Assembled workforce.................. 15,300 2 7,650
In-process technology................ 72,600
Goodwill............................. 656,250 10 65,625
Deferred tax liability............... (41,601)
--------
Total.............................. $919,834
========
</TABLE>
Tangible assets of Starwave acquired in the Starwave merger principally include
cash, fixed assets and investments in the affiliates (i.e., the Joint
Ventures). Liabilities of Starwave assumed in the Starwave merger principally
include accounts payable, accrued payroll and other current liabilities.
-100-
<PAGE>
To determine the value of the developed technology and the investment in the
Joint Ventures, the expected future cash flow attributable to all existing
technology was discounted, taking into account risks related to the
characteristics and applications of the technology, existing and future
markets, and assessments of the life cycle stage of the technology. The
analysis resulted in a valuation of approximately $29.9 million for developed
technology which had reached technological feasibility and therefore was
capitalizable. The developed technology is being amortized on a straight line
basis over a two year period. The fair value of the Joint Venture relationships
was determined to be $178.5 million, which is being amortized on a straight
line basis over the life of the Joint Venture agreements (10 years).
The value of the assembled workforce was derived by estimating the costs to
replace the existing employees, including recruiting and hiring costs and
training costs for each category of employee. The analysis determined a
valuation of approximately $15.3 million for the assembled workforce. The asset
is being amortized on a straight-line basis over a two year period.
The goodwill allocation is $656.3 million, which is being amortized on a
straight line basis concurrent with the life of the Joint Venture relationships
(10 years).
The projects identified as in-process technology at Starwave are those that were
underway at the time of the Starwave merger and will, after consummation of the
Starwave merger, require additional effort to establish technological
feasibility. These projects have identifiable technological risk factors which
indicate that even though successful completion is expected, it is not assured.
If an identified project is not successfully completed, there is no alternative
future use for the project and the expected future income will not be realized.
The in-process technology acquired from Starwave in the transaction consists
primarily of technology related to GO Network and to replacement and enhancement
of Starwave's core technology. Development of GO Network started in July 1998,
following the announcement of the Starwave merger. An initial, limited version
of GO Network is expected to be introduced in the fourth calendar quarter of
1998. The majority of the functionality planned for GO Network is not possible
with Starwave's current architecture and design. As a result, Starwave has
shifted a substantial portion of its development efforts toward redesigning its
core technologies. These efforts have been undertaken since July 1998 to
integrate the existing content and build a new infrastructure and new features.
These will include the ability for an individual to tailor content (such as
types of news, sports teams, etc.) to their own interests, and universal
registration, which will track user preferences and personal profiles (such as
name, address, billing information, etc.) across all the elements of GO Network.
This should provide users with a better experience by enabling them to find what
they want and, if desired, make purchases on-line from any site within GO
Network without having to re-input personal information. Infoseek believes these
are key features of GO Network, which will be composed of sites belonging to
different entities including Infoseek, Disney, and the Joint Ventures. Infoseek
estimates that costs incurred to complete the projects in-process as of the date
of closing will be $7.5 million, of which approximately $3.75 million will be
spent in calendar 1998, with the remaining $3.75 million spent in calendar 1999.
There can be no assurance that actual costs will not exceed these estimates.
Infoseek expects that the in-process technology will be successfully developed,
and that initial benefits from these projects will begin in the quarter ending
December 31, 1998, with the
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<PAGE>
introduction of the initial version of GO Network. The full functionality
intended for the planned GO Network will not be supported at introduction,
requiring a gradual introduction of new features over the next several months
or more following the initial launch. Notwithstanding Infoseek's expectation
that the in-process technology will be successfully developed, there remain
significant technical challenges which must be resolved in order to implement
many of the intended features of GO Network and to complete the in-process
technology. While Infoseek currently plans to launch GO Network in
accordance with the schedule outlined above, there can be no assurance that the
service can be successfully developed and launched within such schedule. If the
combined companies are unable to successfully develop, launch and promote
GO Network in a timely manner, or if the combined companies incur excessive
expenses in this connection or in an attempt to improve GO Network or
promote and maintain their brands, the combined companies' businesses,
financial condition and operating results will be materially adversely
affected.
2. Disney purchased 2,642,000 unregistered shares of common stock of Infoseek at
a price of $26.50 per share, and a Warrant to purchase 15,720,000 shares of
common stock of Infoseek, subject to certain vesting restrictions on its
exercisability, at certain prices and on certain conditions, in exchange for
cash in the amount of $70.0 million and a note in principal amount of $139.0
million.
At the closing, Infoseek delivered a Warrant to Disney to purchase 15,720,000
shares of Infoseek common stock. The shares subject to the Warrant vest and
become exercisable 33 1/3% at each of the first, second and third anniversaries
of the closing. The exercise price for each share of common stock of Infoseek
subject to the Warrant shall be equal to (i) 120% of the average closing sales
price of Infoseek common stock (as quoted on Nasdaq or another national market)
for the thirty trading days prior to the time such shares vest and become
exercisable or (ii) if not traded on any market, the fair market value thereof
as determined by unanimous determination of the Infoseek Board of Directors or
if the Infoseek Directors cannot agree, through an appraisal mechanism, subject
to a maximum, in each case, of $50.00 (subject to adjustment).
Disney delivered a promissory note in principal amount of $139.0 million payable
to Infoseek. The promissory note bears interest on the principal amount
outstanding at a rate of 6.5% per annum. The promissory note is repayable in
twenty quarterly principal installments, beginning on the three month
anniversary of the closing, of $6.9 million, with the final payment due on the
five year anniversary of the closing. The promissory note (together with accrued
and unpaid interest) may be repaid in whole or in part without premium or
penalty at any time.
3. Under each of the ESPN Representation Agreement by and among Infoseek,
Starwave and the ESPN Joint Venture, and the ABC Representation Agreement by and
among Infoseek, Starwave and the ABCNews Joint Venture, each entered into in
conjunction with the Starwave mergers (the "Representation Agreements"),
Starwave is engaged by the Joint Ventures on an exclusive basis in the sale of
advertising and other items as designated or approved by the Joint Ventures and
to provide additional services, if any, as the Joint Ventures may request
(collectively the "Services"). Activities with respect to the sale of
advertising on the Internet services and other related items includes the
negotiation, execution, renewal, amendment, modification or termination of
advertising and other related contracts. Starwave guarantees to the Joint
Ventures a minimum quarterly payment equal to the number of projected page
-102-
<PAGE>
views, multiplied by 80%, multiplied by the minimum revenue rate (the
"Guaranteed Minimum Payment"). The minimum revenue rate is based on the average
ad revenue rate per page view of the publicly traded internet companies involved
in activities comparable to those of the Joint Ventures.
Starwave will recognize revenue on the sale of advertising and other related
items of the Joint Ventures due to its obligations under the Representation
Agreements. Starwave bears the risk of loss, if it fails to bill and collect
amounts sufficient to cover its contractual Guaranteed Minimum Payments. The
pro forma adjustment reflects (i) 100% of each of the Joint Ventures' revenues
as Starwave made substantially all sales on behalf of the Joint Ventures for
the year ended December 31, 1997 and the nine months ended September 30, 1998,
as the Joint Ventures did not maintain a sales organization and (ii) the
assumption that the Representation Agreements were entered into January 1,
1997. The Representation Agreements are expected to have a continuing impact on
Starwave, although the amount of revenue Starwave will recognize will vary in
future periods.
Under the Representation Agreements, Starwave pays the Joint Ventures for the
right to render services the greater of (i) the Guaranteed Minimum Payment or
(ii) actual revenues billed to third parties for services, in each case less
only Starwave's actual and reasonably allocated costs of providing the services
and a profit margin of 5% of such costs ("Representation Rights Fees"). The
obligations of Starwave to pay the Representation Rights Fees are
unconditional. Starwave is required to pay the Joint Ventures regardless of
whether Starwave is able to collect the related outstanding receivables. The
pro forma adjustment for the Representation Rights Fee is the Joint Venture
revenues less allocated costs of 15% of revenue, plus a 5% profit margin on
allocated costs. In addition, a pro forma adjustment has been made for
additional costs Starwave would have incurred that were historically incurred
by the Joint Ventures.
Each of the Joint Ventures is accounted for under the equity method due to
neither Infoseek nor Starwave having a majority voting interest. The other
partners to these Joint Ventures, subsidiaries of ESPN and ABC, are
subsidiaries of Disney. A pro forma adjustment has been made to Starwave's
allocated (60%) losses from the Joint Ventures. This pro forma adjustment was
due to the Joint Ventures decreased revenues partially offset by decreased
costs under the Representation Agreement.
4. The pro forma adjustment is to reclassify certain hosting, content and
website costs of Starwave to sales and marketing expense to conform to
Infoseek's presentation.
5. The pro forma adjustment to "Other Accrued Liabilities" reflects the accrual
of acquisition costs arising from the Starwave merger, estimated to be
approximately $22.0 million. The $22.0 million includes approximately $5.0
million for liabilities related to involuntary employee termination benefits
(relocations) of Starwave employees and $5.0 million for costs to exit other
Starwave activities, primarily operating leases of Starwave.
6. The pro forma adjustment to "common stock" reflects the elimination of
Starwave's common stock ($128.2 million) and the impact of the issuance of
Infoseek common stock ($897.8 million) in connection with the Starwave merger,
and the issuance of stock and warrants to Disney for cash and a note receivable
($70.0 million and $139.0 million, respectively).
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<PAGE>
7. The pro forma adjustment to "Accumulated Deficit" reflects the elimination
of Starwave's accumulated deficit ($115.7 million) and the in-process
technology charge ($72.6 million).
8. The pro forma adjustment is for the amortization of goodwill, developed
technology, Infoseek's interest in the Joint Ventures and assembled workforce.
9. Goodwill has been increased and deferred tax liabilities have been recorded
in the amount of $41.6 million to reflect the net tax effect of book/tax basis
differences in the acquired intangibles, excluding goodwill and in-process
research and development. Deferred tax assets have been realized based on the
projected reversal of taxable temporary differences and have been netted
against deferred tax liabilities for purposes of allocating the purchase price.
10. Under a License Agreement entered into by and between Disney and Infoseek,
Disney has agreed to grant to Infoseek a worldwide license to exploit the
trademarks and World Wide Web addresses associated with GO Network and
Infoseek has agreed to pay Disney royalties. Royalties are calculated as one
percent (1%) of Infoseek's revenues other than revenues derived from software
sales and services. Royalties under the License Agreement will not be earned
nor paid until the end of any Infoseek fiscal year in which Infoseek has
positive earnings before interest, taxes, and amortization (EBITA) as defined
and royalty payments in any year will not exceed 15% of EBITA in such year as
defined. The Unaudited Pro Forma Combined Condensed Statements of Operations
do not include a pro forma adjustment for royalties under the License
Agreement as Infoseek would not be EBITA positive on a pro forma basis. The
components of the pro forma EBITA are shown below (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Net loss............................................. $(129,214) $(194,918)
Interest expense..................................... 619 2,782
Pro Forma Amortization of Intangibles:
Goodwill ........................................... 52,699 70,266
Developed technology................................ 13,956 18,608
Assembled workforce................................. 5,851 7,802
Joint Venture relationships......................... 13,388 17,850
--------- ---------
EBITA................................................ $ (42,701) $ (77,610)
========= =========
</TABLE>
11. Under a Promotional Services Agreement, ABC has agreed to provide, and
Infoseek has agreed to purchase $165.0 million in promotional services over a
five-year period for the planned GO Network. The Unaudited Pro Forma
Combined Condensed Statements of Operations include an adjustment to reflect
recognition of expense under this agreement, on a straight-line basis, for
promotional services for GO Network. See "Description of Related
Agreements--Licensing and Commercial Agreements."
12. The pro forma adjustment is to eliminate deferred compensation related to
Starwave stock options.
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<PAGE>
13. The Quando acquisition will be accounted for using the purchase method of
accounting. The purchase price is $17.0 million, subject to adjustment, in
shares of Infoseek's common stock. The Pro Forma Statements have been prepared
on the basis of assumptions described herein and include assumptions relating
to the allocation of the consideration paid for the assets and liabilities of
Quando based upon preliminary estimates of fair value. The actual allocation of
such consideration may differ from that reflected in the Pro Forma Statements
after valuations and other procedures to be performed after the closing of the
Quando acquisition have been completed. Below is a table of the estimated
acquisition cost, purchase price allocation and annual amortization of the
intangible assets acquired (in thousands):
<TABLE>
<CAPTION>
ANNUAL
AMORTIZATION AMORTIZATION
LIFE OF INTANGIBLES
------------ --------------
<S> <C> <C> <C>
Estimated Acquisition Cost
Estimated Purchase Price................. $17,000
Acquisition Expenses..................... 1,000
-------
Total Estimated Acquisition Cost........ $18,000
=======
Purchase Price Allocation
Historical net book value of Quando at
September 30, 1998...................... $ (725)
Intangible assets acquired:
Developed Technology..................... 7,316 2 $3,658
Assembled Workforce...................... 303 2 152
In-Process Technology.................... 4,339
Goodwill................................. 9,281 2 4,641
Deferred Tax Liability................... (2,514)
-------
Total................................... $18,000
=======
</TABLE>
Tangible assets of Quando to be acquired principally include cash and accounts
receivable. Liabilities of Quando assumed in the Quando acquisition principally
include accounts payable and short and long-term obligations.
To determine the value of the developed technology, the expected future cash
flow attributed to all existing technology was discounted, taking into account
risks related to the characteristics and applications of the technology,
existing and future markets, and assessments of the life cycle stage of
technology. The analysis resulted in a valuation of approximately $7.3 million
for developed technology which had reached technological feasibility and
therefore was capitalizable. The developed technology is being amortized on a
straight line basis over a two year period.
The value of the assembled workforce was derived by estimating the costs to
replace the existing employees, including recruiting and hiring costs and
training costs for each category of employee. The analysis yielded a valuation
of approximately $0.3 million for the assembled workforce. The asset is being
amortized on a straight line basis over a two year period.
The preliminary goodwill allocation is $9.3 million. Amortization of goodwill
is based on amortization over two years due to the rapid pace of technological
development of the Internet.
The projects identified as in-process technology at Quando are those that will
be underway at the time of the acquisition of Quando and would, after
consummation of the acquisition, require
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<PAGE>
additional effort to establish technological feasibility. These projects have
identifiable technological risk factors which indicate that even though
successful completion is expected, it is not assured. The estimated amount of
in-process research and development charge was revised from $9.4 million in the
original preliminary evaluation to $4.3 million primarily due to a decrease in
the in-process research and development that Infoseek anticipates using in the
future if successfully developed. The estimated amount of the in-process
research and development charge is still a preliminary estimate which could
materially differ from the actual results that will be experienced by Infoseek,
as final values will not be established until after the closing of the
acquisition of Quando.
In-process technology acquired in the transaction consists primarily of major
additions to and replacement of core technology, which is related to Infoseek's
planned development of on-line shopping and other new features. The majority of
the intended functionality of these new features is not supported by Quando's
current technology. As a result, Quando has shifted substantially all of its
new development efforts toward developing the necessary technology. Examples of
the types of intended new capabilities include the ability to gather
information from dynamically generated web pages and the development of
technology to manage detailed attributes of items offered for sale on-line.
Infoseek estimates that the completion of projects in-process as of the date of
closing will cost approximately $1.0 million of which approximately $0.4
million will be spent in calendar 1998, with the remaining $0.6 million spent
in calendar 1999.
Infoseek expects that the in-process technology will be successfully developed,
and that initial benefits from these projects will begin in December 1998, with
a gradual introduction of new features over approximately the nine months
following the close. Notwithstanding Infoseek's expectation that the in-process
technology will be successfully developed, there remain significant technical
challenges that must be resolved in order to complete the in-process
technology.
14. The pro forma adjustment to "Other Accrued Liabilities" reflects the
accrual of acquisition costs arising from the Quando acquisition, estimated to
be approximately $1.0 million.
15. The pro forma adjustment to "Convertible Preferred Stock" reflects the
elimination of Quando's convertible preferred stock ($0.8 million).
16. The pro forma adjustment to "Common Stock" reflects the elimination of
Quando's common stock ($0.2 million), and the impact of the issuance of
Infoseek Common Stock ($17.0 million).
17. The pro forma adjustment to "Accumulated Deficit" reflects the elimination
of Quando's accumulated deficit ($1.7 million) and the in-process technology
charge ($4.3 million).
18. The pro forma adjustment is for the amortization of goodwill, developed
technology and assembled workforce.
19. Goodwill has been increased and deferred tax liabilities have been recorded
in the amount of $2.5 million to reflect the net tax effect of book/tax basis
differences in the acquired intangibles, excluding goodwill and in-process
research and development. Deferred tax assets have been realized based on the
projected reversal of taxable temporary differences and have been netted
against deferred tax liabilities for purposes of allocating the purchase price.
-106-
<PAGE>
(b) PRO FORMA FINANCIAL INFORMATION
(c) EXHIBITS
2.1 Agreement and Plan of Reorganization dated as of June 18,
1998 among Infoseek Corporation, a California corporation,
Infoseek Corporation, a Delaware corporation, Starwave
Corporation, a Washington corporation, and Disney
Enterprises, Inc., a Delaware corporation. (1)
3.1 Amended and Restricted Certificate of Incorporation of
Registrant. (2)
3.2 Bylaws of Registrant. (3)
4.1 Specimen Stock Certificate of Registrant. (4)
4.2 Preferred Shares Rights Agreement dated October 2, 1998 by
and between Registrant and BankBoston, N.A. (5)
16.1 Letter of KPMG Peat Marwick LLP regarding change in
certifying accountant of Starwave. (6)
23.1 Consents of Independent Auditors (Ernst & Young LLP).
23.2 Consent of PricewaterhouseCoopers LLP / Starwave.
23.3 Consent of PricewaterhouseCoopers LLP / ESPN/Starwave
Partners.
23.4 Consent of PricewaterhouseCoopers LLP / ABC/Starwave
Partners.
23.5 Consent of KPMG Peat Marwick LLP / Starwave.
99.1 Infoseek Corporation Valuation and Qualifying Accounts
(Schedule II)
- ------------------------
(1) Incorporated by reference to Annex A-1 to Registrant's
Registration Statement on Form S-4, Registration No. 333-
65635, as filed with the Commission on October 14, 1998 (the
"Form S-4").
(2) Incorporated by reference to Exhibit 3.1 to the Form S-4.
(3) Incorporated by reference to Exhibit 3.2 to the Form S-4.
(4) Incorporated by reference to Exhibit 4.1 to the Form S-4.
(5) Incorporated by reference to Exhibit 4.2 to the Form S-4.
(6) Incorporated by reference to Exhibit 16.1 to the Form S-4.
-107-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INFOSEEK CORPORATION
Date: December 8, 1998 By: /s/ Harry M. Motro
---------------------------
Harry M. Motro
President and Chief Executive Officer
-108-
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 Nos. 333-67519, 333-67517, and 333-67507) pertaining to the Infoseek
Corporation - Amended and Restated 1996 Stock Option/Stock Issuance Plan,
Infoseek Corporation - Amended and Restated Employee Stock Purchase Plan,
Amended and Restated WebChat Communications, Inc. 1996 Stock Option Plan, 1998
Employee and Acquisition Nonqualified Stock Option Plan, Starwave Corporation
Revised 1992 Combined Incentive and Nonqualified Stock Option Plan, Amended and
Restated as of March 7, 1995 and Starwave Corporation 1997 Nonqualified Stock
Option Plan of Infoseek Corporation of our report dated January 16, 1998, except
for Note 8 as to which the date is February 12, 1998 and Note 2 as to which the
date is April 17, 1998, with respect to the consolidated financial statements of
Infoseek Corporation as of December 31, 1997 and 1996, and for each of the three
years in the period ended December 31, 1997 included in this Current Report
(Form 8-K/A) of Infoseek Corporation dated December 8, 1998.
Our audits also included the financial statement schedule of Infoseek
Corporation included in this Current Report. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
San Jose, California
December 4, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-67519, 333-67517, and 333-67507) of Infoseek
Corporation of our report dated November 18, 1998 relating to the consolidated
financial statements of Starwave Corporation, which appears in the Current
Report on Form 8-K/A of Infoseek Corporation dated December 8, 1998.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Seattle, Washington
December 4, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-67519, 333-67517, and 333-67507) of Infoseek
Corporation of our report dated November 18, 1998 relating to the financial
statements of ESPN/Starwave Partners, which appears in the Current Report on
Form 8-K/A of Infoseek Corporation dated December 8, 1998.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Seattle, Washington
December 4, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-67519, 333-67517, and 333-67507) of Infoseek
Corporation of our report dated November 18, 1998 relating to the financial
statements of ABCNews/Starwave Partners, which appears in the Current Report on
Form 8-K/A of Infoseek Corporation dated December 8, 1998.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Seattle, Washington
December 4, 1998
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Starwave Corporation:
We consent to the incorporation by reference in the Registration Statements
(Nos. 333-67507, 333-67517, and 333-67519) on Form S-8 of Infoseek Corporation
of our report dated February 7, 1997, with respect to the balance sheet of
Starwave Corporation as of December 31, 1996, and the related statements of
operations, shareholders' deficit, and cash flows for the year then ended, which
report appears in this Form 8-K/A of Infoseek Corporation dated December 7,
1998.
/s/ KPMG Peat Marwick LLP
Seattle, Washington
December 4, 1998
<PAGE>
EXHIBIT 99.1
SCHEDULE II
INFOSEEK CORPORATION VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
OF PERIOD EXPENSES WRITE-OFFS END OF PERIOD
---------- ---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1995.. $-- $ 42 $ -- $ 42
Year ended December 31, 1996.. $ 42 $ 651 $(343) $ 350
Year ended December 31, 1997.. $350 $ 930 $(300) $ 980
Nine months ended September
30, 1998 (unaudited)......... $980 $1,045 $(350) $1,675
</TABLE>
