<PAGE>
- --------------------------------------------------------------------------------
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):
January 15, 1999
INFOSEEK CORPORATION
----------------------
(Exact name of the Registrant as specified in its charter)
Delaware 000-25071 77-0494507
---------------------- ----------- ------------------
(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
------------------------------------------------------------
(Former name or former address, if changed since last report)
- --------------------------------------------------------------------------------
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
The following financial statements and exhibits are filed as part of this
report.
(a) FINANCIAL STATEMENTS OF QUANDO, INC.:
Included herein are the balance sheets of Quando, Inc. ("Quando") as
of December 31, 1996 and 1997, and the related statements of operations,
shareholders' equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 1997.
-2-
<PAGE>
QUANDO, INC. INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of KPMG Peat Marwick LLP......................................................... 4
Quando, Inc. Balance Sheets as of December 31, 1997 and 1996 and September 30, 1998..... 5
Quando, Inc. Statements of Operations for the Years Ended December 31, 1995, 1996 and
1997 and the Nine Months Ended September 30, 1997 and 1998............................ 6
Quando, Inc. Statements of Shareholders' Equity (Deficit) for the Years Ended
December 31, 1995, 1996 and 1997, and the Nine Months Ended September 30, 1998........ 7
Quando, Inc. Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and
1997, and the Nine Months Ended September 30, 1997 and 1998........................... 8
Quando, Inc. Notes to Financial Statements.............................................. 9
</TABLE>
-3-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Quando, Inc.:
We have audited the accompanying balance sheets of Quando, Inc. (the Company)
as of December 31, 1996 and 1997, and the related statements of operations,
shareholders' equity (deficit), and cash flows for each of the years in the
three-year 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 financial statements referred to above present fairly, in
all material respects, the financial position of Quando, Inc. as of December
31, 1996 and 1997, and the results of its operations and its cash flows for the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 12 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in note 12. The financial statements do not include any
adjustment that might result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
Portland Oregon
August 18, 1998
-4-
<PAGE>
QUANDO, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
------------------------- September 30,
1996 1997 1998
----------- ----------- -------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
------
Current assets:
Cash............................................ $ 2,935 $ 50,984 $ 75,779
Accounts receivable, net........................ -- 29,241 101,190
Other current assets............................ -- -- 8,432
----------- ----------- -----------
Total current assets.......................... 2,935 80,225 185,401
Property and equipment, net....................... 51,308 42,681 91,956
Other assets...................................... 3,562 3,718 3,718
----------- ----------- -----------
Total assets.................................. $ 57,805 $ 126,624 $ 281,075
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable and accrued expenses........... $ 202,405 $ 260,908 $ 159,396
Shareholders' loans............................. 66,991 67,658 40,000
Note payable.................................... -- -- 360,000
----------- ---------- -----------
Total current liabilities..................... 269,396 328,566 559,396
Convertible debt.................................. -- 247,000 447,000
----------- ---------- -----------
Total liabilities............................. 269,396 575,566 1,006,396
----------- ---------- -----------
Shareholders' deficit:
Preferred stock, no par value; 4,000,000 shares
authorized:
Series A convertible preferred stock; 300,000
shares authorized; 300,000 shares issued and
outstanding on December 31, 1996, December
31, 1997 and September 30, 1998 (liquidation
preference of $300,000)...................... 295,575 295,575 295,575
Series B convertible preferred stock; 880,000
shares authorized; 691,232, 880,000 and
880,000 shares issued and outstanding on
December 31, 1996, December 31, 1997 and
September 30, 1998, respectively
(liquidation preference of $550,000)......... 410,263 526,313 526,313
Common stock, no par value; 15,000,000 shares
authorized; 5,445,000, 4,445,000 and
4,445,000 shares issued and outstanding on
December 31, 1996, December 31, 1997 and
September 30, 1998, respectively............... 160,000 160,000 160,000
Additional paid-in capital...................... 6 6 5,006
Accumulated deficit............................. (1,077,435) (1,430,836) (1,712,215)
----------- ----------- -----------
Total shareholders' deficit................... (211,591) (448,942) (725,321)
----------- ----------- -----------
Total liabilities and shareholders' deficit... $ 57,805 $ 126,624 $ 281,075
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE>
QUANDO, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine months ended
Years ended December 31 September 30
--------------------------------- -----------------------
1995 1996 1997 1997 1998
--------- --------- --------- ---------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues, net...................... $ 71,186 $ 33,182 $ 255,723 $ 147,450 $ 513,713
Cost of goods sold................. 32,212 19,373 654 600 5,349
--------- --------- --------- --------- ---------
Gross margin..................... 38,974 13,809 255,069 146,850 508,364
--------- --------- --------- --------- ---------
Operating expenses:
Research and development......... 127,273 115,782 161,339 112,828 413,260
Sales and marketing.............. 400 2,000 12,000 2,901 699
General and administrative....... 361,156 326,103 418,850 291,167 316,759
--------- --------- --------- --------- ---------
488,829 443,885 592,189 406,896 730,718
--------- --------- --------- --------- ---------
Operating loss................. (449,855) (430,076) (337,120) (260,046) (222,354)
Other income (expense):
Interest expense................. (5,737) (14,897) (26,151) (18,424) (61,410)
Other income (expense), net...... 1,232 2,226 9,870 -- 2,385
Loss on sale of fixed assets..... (3,743) -- -- -- --
--------- --------- --------- --------- ---------
Loss before provision for
income taxes.................. (458,103) (442,747) (353,401) (278,470) (281,379)
Provision for income taxes......... -- -- -- -- --
--------- --------- --------- --------- ---------
Net loss......................... $(458,103) $(442,747) $(353,401) $(278,470) $(281,379)
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
-6-
<PAGE>
QUANDO, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Preferred stock
---------------------------------- Total
Series A Series B Common stock Additional shareholders'
------------------ ----------------- ------------------- paid-in Accumulated equity
Shares Amount Shares Amount Shares Amount capital deficit (deficit)
------- --------- ------- -------- --------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994.... 125,000 $ 120,575 -- $ -- 5,445,000 $160,000 $ 5 $ (176,585) $ 103,995
Issuance of preferred stock... 175,000 175,000 -- -- -- -- 1 -- 175,001
Net loss...................... -- -- -- -- -- -- -- (458,103) (458,103)
------- --------- ------- -------- --------- -------- ------ ----------- ----------
Balance, December 31, 1995.... 300,000 295,575 -- -- 5,445,000 160,000 6 (634,688) (179,107)
Issuance of preferred stock,
net of offering costs........ -- -- 691,232 410,263 -- -- -- -- 410,263
Net loss...................... -- -- -- -- -- -- -- (442,747) (442,747)
------- --------- ------- -------- --------- -------- ------ ----------- ----------
Balance, December 31, 1996.... 300,000 295,575 691,232 410,263 5,445,000 160,000 6 (1,077,435) (211,591)
Issuance of preferred stock,
net of offering costs........ -- -- 188,768 116,050 -- -- -- -- 116,050
Recision of common stock...... -- -- -- -- (1,000,000) -- -- -- --
Net loss...................... -- -- -- -- -- -- -- (353,401) (353,401)
------- --------- ------- -------- --------- -------- ------ ----------- ----------
Balance, December 31, 1997.... 300,000 295,575 880,000 526,313 4,445,000 160,000 6 (1,430,836) (448,942)
Issuance of warrants
(unaudited).................. -- -- -- -- -- -- 5,000 -- 5,000
Net loss (unaudited).......... -- -- -- -- -- -- -- (281,379) (281,379)
------- --------- ------- -------- --------- -------- ------ ----------- ----------
Balance, September 30, 1998
(unaudited).................. 300,000 $ 295,575 880,000 $526,313 4,445,000 $160,000 $5,006 $(1,712,215) $ (725,321)
======= ========= ======= ======== ========= ======== ====== =========== ==========
</TABLE>
See accompanying notes to financial statements.
-7-
<PAGE>
QUANDO, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
Years ended December 31 September 30
------------------------------------- -------------------------
1995 1996 1997 1997 1998
--------- --------- --------- ----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(458,103) $(442,747) $(353,401) $(278,470) $(281,379)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization................. 22,146 12,567 16,179 12,134 18,010
Allowance for bad debts....................... -- -- 1,618 -- --
Gain on forgiveness of accounts payable....... -- -- (10,000) -- --
Loss on sale of fixed assets.................. 3,743 -- -- -- --
Changes in assets and liabilities:
Accounts receivable......................... (13,571) 26,909 (30,859) (25,094) (71,949)
Inventory................................... (4,376) 16,538 -- -- --
Other assets................................ 6,753 9 (156) (156) (8,432)
Accounts payable and accrued expenses....... 135,237 15,702 68,503 51,715 (101,512)
Other current liabilities................... 15,953 (15,953) -- -- --
--------- --------- --------- --------- ---------
Net cash used in operating activities..... (292,218) (386,975) (308,116) (239,871) (445,262)
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchase of equipment........................... (17,277) (39,302) (7,552) (8,110) (67,285)
Proceeds from sale of equipment................. 36,182 -- -- -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities............................... 18,905 (39,302) (7,552) (8,110) (67,285)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of convertible debt...... -- -- 240,000 140,000 200,000
Proceeds (payments) from shareholder loans,
net........................................... 51,364 15,627 7,667 668 (27,658)
Proceeds from issuance of preferred stock, net.. 175,000 410,263 116,050 125,592 --
Proceeds from sale of warrants.................. 1 -- -- -- 5,000
Proceeds from note payable...................... -- -- -- -- 360,000
--------- --------- --------- --------- ---------
Net cash provided by financing
activities.............................. 226,365 425,890 363,717 266,260 537,342
--------- --------- --------- --------- ---------
Increase (decrease) in cash....................... (46,948) (387) 48,049 18,279 24,795
Cash at beginning of year......................... 50,270 3,322 2,935 2,935 50,984
--------- --------- --------- --------- ---------
Cash at end of year............................... $ 3,322 $ 2,935 $ 50,984 $ 21,214 $ 75,779
========= ========= ========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (including amounts paid to
shareholders of $5,737, $14,897, $16,825,
$12,197 and $7,684, respectively............... $ 5,737 $ 14,897 $ 26,151 $ 12,188 $ 11,487
Income taxes.................................... -- -- -- -- --
Supplemental disclosures of non-cash financing
activities:
Convertible notes issued upon conversion of
shareholder loans.............................. $ -- $ -- $ 7,000 $ -- $ --
</TABLE>
See accompanying notes to financial statements.
-8-
<PAGE>
QUANDO, INC.
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Description of Business
Quando, Inc. (Quando or the Company) was incorporated as an S Corporation on
December 12, 1993 in the State of Oregon as Media Mosaic, Inc. (Media Mosaic
or the Company). Media Mosaic developed and published "how to" CD-ROM's for
several activities and hobbies. On October 10, 1994, Media Mosaic revoked
its S Corporation election of tax status and began operating as a C
Corporation. During 1994 and 1995, the Company's sales consisted entirely of
CD-ROM sales.
In 1996, due to lower than expected CD-ROM sales, Media Mosaic terminated
its CD-ROM development and publishing business. In March 1996, the Company
began developing custom event directory services for the Internet.
Effective September 27, 1996, the Company changed its name from Media
Mosaic, Inc. to Quando, Inc. and in March 1997, the Company began to sell
its search and navigational services to customers. During 1997, the
Company's sales consisted entirely of fees charged for search and
navigational services and fees charged for custom engineering projects.
Unaudited Quarterly Information
The financial information included herein for the nine-month periods ended
September 30, 1997 and 1998 is unaudited; however, such information reflects
all adjustments consisting only of normal recurring adjustments which are,
in the opinion of management, necessary for a fair presentation of the
financial position, results of operations and cash flows for the interim
periods. The interim consolidated financial statements should be read in
conjunction with the financial statements and the notes included in the
financial statements. The results of operations for the interim period
presented are not necessarily indicative of the results to be expected for
the full year.
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Revenue Recognition
In 1995 and 1996, revenue resulted primarily from CD-ROM product sales. CD-
ROM sales were recognized upon shipment. The Company generally provided for
a right of return, however, due to the termination of this line of business
in 1996, no sales reserve was considered necessary at December 31, 1996 or
1997.
-9-
<PAGE>
QUANDO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In 1997, revenue results primarily from fees for (a) directory services and
(b) engineering or other customization of directory services. Search and
navigational service fees are recognized monthly as they are earned and
custom engineering projects are recognized on a completed contract basis.
Property and Equipment
Property and equipment are stated at cost. Property and equipment are
depreciated using the straight-line method over the estimated useful lives
of the assets as follows: computers and software over three to five years,
furniture and equipment over five to seven years. Leasehold improvements
are amortized over the shorter of the useful life of the asset or the life
of the lease.
Income Taxes
The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences of events that have been included in the financial statements
and tax returns. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to be recovered or settled.
Valuation allowances are established to reduce deferred tax assets to the
amount expected to be realized.
Research and Development
Expenditures for research and development are expensed as incurred.
Capitalized Software
Under Statement of Financial Accounting Standards No. 86, software
development costs are to be capitalized beginning when a product's
technological feasibility has been established and ending when a product is
made available for general release to customers. The establishment of
technological feasibility of the Company's products has occurred shortly
before general release and, accordingly, no costs have been capitalized.
Royalties
Royalties are accrued based on certain product sales, pursuant to
contractual agreements with developers of software products published by
the Company.
Accounts Receivable
Accounts receivable are net of an allowance for doubtful accounts of $-0-
and $1,618 at December 31, 1996 and 1997, respectively.
-10-
<PAGE>
QUANDO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Intangible Assets
Intangible assets, which represent capitalized packaging design fees, are
amortized on a straight-line basis over the expected periods to be
benefited. The Company assesses the recoverability of this intangible asset
by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash
flows of the product sales. Due to the discontinuance of the associated
product, the remaining capitalized packaging design fees of $16,937 were
written off during 1995 and are included in cost of goods sold.
Stock-Based Compensation
The Company accounts for stock-based compensation using the Financial
Accounting Standard Board's Statement of Financial Accounting Standards No.
123 (SFAS 123), Accounting for Stock-Based Compensation. This statement
permits a company to choose either a fair-value based method of accounting
for its stock-based compensation arrangements or to comply with the current
Accounting Principles Board Opinion 25 (APB Opinion 25) intrinsic-value-
based method adding pro forma disclosures of net loss computed as if the
fair-value-based method had been applied in the financial statements. The
Company applies SFAS No. 123 by retaining the APB Opinion 25 method of
accounting for stock-based compensation for employees with annual pro forma
disclosures of net loss. Stock-based compensation for non-employees is
accounted for using the fair-value-based method.
Advertising
The Company expenses the costs of advertising when the costs are incurred.
Advertising expense was approximately $12,000, $2,000 and $400 for the years
ended December 31, 1995, 1996 and 1997, respectively.
(2) Property and Equipment, Net
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
-------- -------
<S> <C> <C>
Leasehold improvements................................... $ 3,212 $ 3,212
Software................................................. 33,526 33,526
Furniture and fixtures................................... 6,792 7,152
Equipment................................................ 1,371 1,435
Computer equipment....................................... 29,245 36,373
-------- -------
74,146 81,698
-------- -------
Less accumulated depreciation and amortization........... 22,838 39,017
-------- -------
$ 51,308 $42,681
======== =======
</TABLE>
-11-
<PAGE>
QUANDO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(3) Income Taxes
The Company incurred a loss for both financial reporting and tax return
purposes and, as such, there was no current or deferred tax provision for
the years 1995, 1996 and 1997.
The difference between the expected tax expense, computed by applying the
federal statutory rate of 34% to loss before taxes, and the actual tax
expense of $-0- is primarily due to the increase in the valuation allowance
for deferred tax assets.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liability at December
31 are approximately as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Federal and state operating loss carryforwards..... $334,000 $492,000
Research and experimentation credits............... 18,000 33,000
Other.............................................. 27,000 2,000
-------- --------
Total gross deferred tax assets.................. 379,000 527,000
Less valuation allowance............................. (379,000) (524,000)
-------- --------
Net deferred tax assets.......................... -- 3,000
Deferred tax liability:
Property and equipment, due to differences in
depreciation...................................... -- 3,000
-------- --------
$ -- $ --
======== ========
</TABLE>
The total valuation allowance for deferred tax assets as of December 31,
1995, 1996 and 1997 was $207,000, $379,000 and $524,000, respectively. The
net change in the total valuation allowance for the years ended December 31,
1995, 1996 and 1997 was an increase of $192,000, $172,000 and $145,000,
respectively.
At December 31, 1997, the Company has federal and state net operating loss
and research and experimentation credit carryforwards of approximately
$1,280,000 and $40,000, respectively. These carryforwards will expire
between 2000 and 2012 if not used by the Company to reduce income taxes
payable in future periods. These carryforwards will be subject to further
limitations upon closing of the proposed transaction discussed in note 12.
(4) Shareholders' Equity
Recision of Common Stock
On February 25, 1997, the two founders surrendered a total of 1,000,000
shares of common stock to the Company in exchange for no consideration. As
the Company has no par common stock, there are no statement of operations
or balance sheet effects due to this transaction.
-12-
<PAGE>
QUANDO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Series A and Series B Preferred Stock
The Series A preferred stock has no stated value per share and a
liquidation preference over the holders of common stock of an amount per
share equal to $1.00 (the original issue price) plus all declared but
unpaid dividends. The Series B preferred stock has no stated value per
share and a liquidation preference over the holders of common stock of an
amount per share equal to $.625 (the original issue price) plus all
declared but unpaid dividends. No dividend declarations have been made for
Series A or Series B preferred stock as of December 31, 1995, 1996 and
1997.
Each share is convertible into common stock at any time at the option of
the holder. The initial conversion ratio for both Series A and Series B
preferred stock is one-to-one, but this ratio is subject to modification
under the Company's Articles of Incorporation in the event of certain
dilutive issuance of securities, stock splits, stock dividends, stock
distributions or other common stock equivalent distributions. Automatic
conversion to common stock at the then effective conversion rate will occur
upon the closing of the issuance of shares following an effective
registration statement under the Securities Act of 1933, in which the
aggregate price to the public is at least $7,500,000 and in which the public
offering price per share of common stock equals or exceeds $4.00.
The holders of each share of Series A preferred stock and Series B
preferred stock has the right to the number of votes to which they would be
entitled if the shares were converted to common stock. The Series A
preferred stock, Series B preferred stock and the common stock vote
together, not as separate classes. The Company has reserved 300,000 shares
of the Company's common stock for the conversion of Series A preferred
stock and 880,000 shares of common stock for the conversion of Series B
preferred stock.
Shareholders' Agreement
The Company and its shareholders have entered into agreements that include
restrictions on the transfer of the Company's common stock. Except for
expressly provided exceptions, no shareholder is allowed to transfer
ownership of stock without the shares being first offered for sale to the
Company.
Warrants
The Company issued warrants to purchase 300,000 shares of the Company's
common stock in 1994 and 1995 in conjunction with the sale of the Series A
preferred stock. The warrants were issued with an exercise price of $.10
per share and initially expired three years from the date of grant. On
November 1, 1997, the Company extended the term of these warrants from
three to five years from the date of grant.
-13-
<PAGE>
QUANDO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
On July 15, 1996, the Company granted a warrant to purchase 47,727 shares of
the Company's common stock to a related party at an exercise price of $.55
per share. This warrant was issued in connection with an equipment lease.
On December 1, 1997, the Company issued 16,000 warrants with an exercise
price of $.625 per share to a creditor.
(5) 1994 Stock Incentive Plan
In 1994, the Company adopted an incentive stock option plan (the Plan)
whereby a total of 1,000,000 shares of common stock have been reserved for
the grant of stock options to selected employees, officers, directors,
consultants and advisors. Options granted pursuant to the Plan may be either
incentive stock options as defined in Section 442A of the Internal Revenue
Code of 1986, as amended, or non-qualified stock options, at the discretion
of the Board. Additionally, the aggregate fair market value (determined at
the time the options are granted) of common stock which the incentive stock
options are exercisable for the first time by an optionee during any
calendar year shall not exceed $100,000.
Under the Plan, options generally vest ratably over three to five years.
Options granted under the Plan must be exercised within three months of the
optionee's termination of employment and within ten years of the date of the
grant. Option prices are generally not less than the fair market value of
the shares at the date of grant. At the time of the exercise of the option,
all optionee's must grant the Company or its designee a right of first
refusal with respect to all transfers.
The Company has elected to account for its stock-based compensation plans
under APB Opinion 25; however, the Company has computed, for proforma
disclosure purposes, the value of all options granted during 1995, 1996 and
1997 using the minimum value option-pricing model as prescribed by SFAS 123
using the following assumptions used for grants:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate....................... 6.00% 6.25% 6.50%
Expected dividend yield....................... $ -- $ -- $ --
Expected lives................................ 5 years 5 years 5 years
Weighted average grant date fair value per
option....................................... $ .10 $ .141 $ .15
</TABLE>
If the Company had accounted for these options in accordance with SFAS 123,
the Company's net loss for the years ended December 31 would have increased
to the following pro forma amounts:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Net loss:
As reported............................. $(458,103) $(442,747) $(353,401)
Proforma................................ (458,517) (445,212) (356,786)
</TABLE>
-14-
<PAGE>
QUANDO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
A summary of the status of the Company's Plan at December 31, 1997 and
changes during the three-year period then ended is presented in the
following table:
<TABLE>
<CAPTION>
Weighted average
Options exercise price
------- ----------------
<S> <C> <C>
Outstanding December 31, 1994..................... 5,000 $ .10
Granted......................................... 202,550 .10
Exercised....................................... -- --
Canceled........................................ 100,000 .10
------- -----
Outstanding December 31, 1995..................... 107,550 .10
Granted......................................... 266,003 .141
Exercised....................................... -- --
Canceled........................................ 25,200 .10
------- -----
Outstanding December 31, 1996..................... 348,353 .131
Granted......................................... 210,243 .150
Exercised....................................... -- --
Canceled........................................ 103,650 .126
------- -----
Outstanding December 31, 1997..................... 454,946 $.141
======= =====
</TABLE>
The outstanding stock options have a weighted average remaining contractual
life of 5.9 years. At December 31, 1997, a total of 174,421 incentive and
non-qualified stock options were exercisable at a weighted average exercise
price of $.13 share and with a weighted average remaining contractual life
in years of 5.5.
(6) Convertible Promissory Notes
In 1997, the Company issued $247,000 in convertible subordinated promissory
notes (the Notes). The Notes are due on January 1, 2000 through April 1,
2000 and bear interest at 10% to 12% per annum. Prior to January 1, 2000,
the Notes are convertible into common stock at a price per share of the next
equity financing by the Company or, if there is no equity financing before
January 1, 2000, at $.625 per share of common stock.
(7) Commitments and Contingencies
Leases
The Company leases equipment and office space under non-cancelable
operating leases which expire at various dates through 2000.
Future minimum lease payments under operating leases are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1998........................................................... $ 50,692
1999........................................................... 46,800
2000........................................................... 42,900
--------
Total minimum lease payments................................. $140,392
========
</TABLE>
-15-
<PAGE>
QUANDO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Lease expense totaled $63,114, $70,765 and $80,397 in 1995, 1996 and 1997,
respectively. (See note 10)
(8) Legal Proceedings
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
(9) Customer Information
The Company had five, four and five significant customers in 1995, 1996 and
1997, respectively, that each account for greater than 10% of the Company's
revenues. These customers accounted for 100% and 79% of the Company's
accounts receivable at December 31, 1996 and 1997, respectively.
(10) Related Party Transaction
In December 1994, the Company entered into a sales leaseback transaction
with a related party, which includes two Series A preferred shareholders
and one of the Company's founders and officers. The total payments under
this lease agreement totaled $40,040, $49,991 and $40,643 in 1995, 1996 and
1997, respectively.
The shareholders of the Company have made several loans to the Company. At
December 31, 1995, 1996 and 1997, the shareholder loan balances outstanding
totaled $51,364, $66,991 and $74,658, respectively. These loans have an
average interest rate of 22%, 22% and 24% during 1995, 1996 and 1997,
respectively and interest expense totaled $5,737, $14,897 and $16,825 in
each year, respectively.
(11) Risk of Technological Change
Contingencies and Factors That Could Affect Future Results
A substantial portion of the Company's revenues each year are generated
from the development and rapid release to market of Internet products and
services that are newly introduced during the year. In the extremely
competitive industry environment in which the Company operates, such
product generation, development and marketing processes are uncertain and
complex, requiring accurate prediction of market trends and demand as well
as successful management of various development risks inherent in such
products. Additionally, the Internet market is emerging and many companies
are introducing new Internet products and services. In light of these
dependencies, it is possible that failure to successfully manage a
significant product introduction or failure of certain key suppliers to
deliver as needed could have a severe near-term impact on the Company's
growth and results of operations.
-16-
<PAGE>
QUANDO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(12) Transactions Subsequent to December 31, 1997
During the six month period ended June 30, 1998, the Company issued
$200,000 in convertible subordinated promissory notes (the 1998 Notes). The
1998 Notes are due on April 1, 2000 and bear interest at 10% per annum.
Prior to January 1, 2000, the 1998 Notes are convertible into common stock
at a price per share of the next equity financing by the Company, or if
there is no equity financing before January 1, 2000, at $.625 per share of
common stock.
The Company issued warrants to purchase 592,000 shares of the Company's
common stock in 1998 in conjunction with the issuance of the 1998 notes.
The warrants were issued with an exercise price of $.0001 per share and
expire five years from the date of grant.
On July 13, 1998, two of the Company's Series A preferred stock
shareholders exercised warrants to purchase a total of 50,000 shares of
common stock at $.01 per share.
On July 24, 1998, the Company entered into an Agreement and Plan of
Reorganization (the Agreement) with Steelhead Acquisition Corp., a wholly-
owned subsidiary of Infoseek Corporation (Infoseek). Pursuant to the
Agreement, among other things, all the issued and outstanding shares of the
Company shall be converted into the right to receive shares of the common
stock of Infoseek. Commensurate with the closing, all outstanding preferred
stock will be converted in accordance with the respective preferred stock
conversion ratios. Additionally, all outstanding options under the
Company's 1994 stock option plan, whether vested or unvested, will be
assumed by Infoseek.
Effective upon the signing of the Agreement, Infoseek loaned the Company
$360,000 in the form of a promissory note. The Company used the proceeds
from this note to pay down their outstanding accounts payable and accrued
liabilities. All principal and accumulated interest on this note shall be
due and payable on March 31, 1999. This note is secured by the Company's
assets and bears interest at a rate of 6% annually.
This acquisition is expected to provide the Company with the additional
financial resources to continue operations. If the acquisition is not
completed, there is substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
-17-
<PAGE>
(b) INFOSEEK CORPORATION UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS
The following unaudited pro forma combined condensed financial information for
Infoseek Corporation, a Delaware corporation ("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. These pro forma financial statements give effect to Infoseek's acquisition
of Starwave Corporation ("Starwave") through a merger and exchange of 25,952,681
shares on November 18, 1998. 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. In addition, the pro forma financial statements give
effect to The Walt Disney Company's ("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 a merger agreement to acquire Quando,
Inc. ("Quando"), in exchange for approximately $17.0 million, subject to
adjustment, in shares of Infoseek's Common Stock. The transaction was completed
on January 15, 1999. In accordance with the merger agreement, Infoseek issued
396,591 shares of Infoseek Common Stock for all outstanding Quando shares.
Infoseek also reserved approximately 26,000 shares of Infoseek Common Stock
for Quando stock options assumed by Infoseek. The fair value of Infoseek's
shares and options issued was approximately $17.0 million. In addition,
Infoseek incurred direct acquisition costs of approximately $1.5 million,
which was included in the purchase price of Quando. 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 financial 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 and Quando acquistion were accounted for using the purchase
method of accounting. The pro forma financial statements have been prepared on
the basis of assumptions described in the notes thereto.
In connection with the Starwave merger, Infoseek recorded $45.2 million in
goodwill, developed technology and assembled workforce intangibles which will be
amortized over a two year period. The Company also recorded $178.5 million
relating to the fair value of the joint ventures acquired which will be
amortized on a straight-line basis over a ten year period. As of September 30,
1998, the estimated amount of goodwill is $656.3 million which is to be
amortized on a straight-line basis over a ten year period. Infoseek also
incurred write-offs related to in-process research and development of $72.6
million in the quarter ended January 2, 1999. In connection with the Quando
acquisition, Infoseek recorded approximately $8.7 million in developed
technology and assembled workforce intangibles which will be amortized on a
straight-line basis over a two year period. As of September 30, 1998, the
estimated amount of goodwill is $9.7 million which is to be amortized on a
straight-line basis over a ten year period. Infoseek also incurred in-process
research and development write-offs of $4.3 million in the quarter ended April
3, 1999. 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
-18-
<PAGE>
the Starwave in-process research and development was reflected in Infoseek's
consolidated financial statements for the period ending January 2, 1999. The
charges related to the Quando in-process research and development will be
reflected in Infoseek's consolidated financial statements for the period ending
April 3, 1999. 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 financial 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."
The unaudited pro forma combined condensed financial statements should be read
in conjunction with the related notes included in this document and the audited
consolidated financial statements and notes of Infoseek, and the audited
financial statements and notes of Starwave and Quando.
-19-
<PAGE>
Infoseek Corporation
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) 39,037
4,171 (18)
Research and
development........... 7,900 1,840 161 995 (8) 10,939
43 (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) 12,445
113 (18)
Goodwill amortization.. -- -- -- 65,625 (8) 70,470
4,845 (18)
Restructuring and other
charges............... 7,349 -- -- -- 7,349
--------- --------- --------- ----------- ----------
Total costs and
expenses................ 62,930 14,293 593 164,496 242,312
--------- --------- --------- ----------- ----------
Operating loss........... (27,848) (8,482) (337) (148,128) (184,795)
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) $ (148,202) $ (195,642)
========= ========= ========= =========== ==========
Basic and diluted net
loss per share.......... $ (1.00) $ (3.38)
Shares used in computing
basic and diluted net
loss per share.......... 26,627 31,177 57,804
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-20-
<PAGE>
Infoseek Corporation
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) 29,278
1,549 (8)
3,128 (18)
Research and
development............ 7,432 990 413 746 (8) 9,613
32 (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) 11,651
85 (18)
Goodwill amortization... -- -- -- 49,219 (8) 52,853
3,634 (18)
--------- --------- --------- ----------- ----------
Total operating
expenses............... 58,408 5,847 736 132,652 197,643
--------- --------- --------- ----------- ----------
Operating loss............ (7,693) (1,499) (222) (111,026) (120,440)
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) $ (111,310) $ (129,758)
========= ========= ========= =========== ==========
Basic and diluted net loss
per share................ $ (0.19) $ (2.10)
Shares used in computing
basic and diluted net
loss per share........... 30,512 31,177 61,689
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-21-
<PAGE>
Infoseek Corporation 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) 38,242
8,342 (13)
Assembled workforce..... -- -- -- 15,300 (1) 15,618
318 (13)
Direct acquisition
costs.................. 2,825 -- -- -- 2,825
Deposits and other
assets................. 3,315 -- 4 -- 3,319
Goodwill................ -- -- -- 656,250 (1) 665,940
9,690 (13)
Joint Venture
relationships.......... -- 7,377 -- 178,500 (1) 185,877
--------- --------- --------- ----------- ----------
Total assets........ $ 90,313 $ 15,812 $ 281 $ 968,313 $1,074,719
========= ========= ========= =========== ==========
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) 26,581
1,500 (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 23,500 51,601
Deferred tax liability.. -- -- -- 41,601 (9) 45,065
3,464 (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 $ 968,313 $1,074,719
========= ========= ========= =========== ==========
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-22-
<PAGE>
INFOSEEK CORPORATION
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 financial 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 give 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 described above. Under certain
representation agreements, Starwave contracted for, and has exclusive rights to
sell, all advertising and other related items of Infoseek's joint venture with
ESPN (the "ESPN Joint Venture") and Infoseek's joint venture with ABCNews (the
"ABCNews Joint Venture")(collectively, 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 combined condensed
statements of operations as increased sales and marketing expenses.
On July 24, 1998, Infoseek entered into a merger agreement to acquire Quando,
Inc. ("Quando"), in exchange for approximately $17.0 million, subject to
adjustment, in shares of Infoseek's Common Stock. The transaction was completed
on January 15, 1999. In accordance with the merger agreement, Infoseek issued
396,591 shares of Infoseek Common Stock for all outstanding Quando shares.
Infoseek also reserved 26,000 shares of Infoseek Common Stock for Quando stock
options assumed by Infoseek. The fair value of Infoseek's shares and options
issued was approximately $17.0 million. In addition, Infoseek incurred direct
acquisition costs of approximately $1.5 million, which was included in the
purchase price of Quando.
The Starwave merger was accounted for using the purchase method of accounting.
The pro forma financial statements have been prepared on the basis of
assumptions described in the following notes 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 was also accounted
for using the purchase method of accounting. The unaudited pro forma combined
condensed financial statements have been prepared on the basis of assumptions
described in the following notes and include assumptions relating to the
allocation of the consideration paid for the assets and liabilities of Quando
based on actual fair value. In the opinion of Infoseek's management, all
adjustments necessary to present fairly such unaudited pro forma
-23-
<PAGE>
INFOSEEK CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS - (Continued)
combined condensed financial statements have been made on the proposed terms and
structure of the Starwave merger and the Quando merger.
In connection with the Starwave merger, Infoseek recorded $45.2 million in
goodwill, developed technology and assembled workforce intangibles which will be
amortized over a two year period. The Company also recorded $178.5 million
relating to the fair value of the joint ventures acquired which will be
amortized on a straight-line basis over a ten year period. As of September 30,
1998, the estimated amount of goodwill is $656.3 million which is to be
amortized on a straight-line basis over a ten year period. Infoseek also
incurred write-offs related to in-process research and development of $72.6
million in the quarter ended January 2, 1999. In connection with the Quando
acquisition, Infoseek recorded approximately $3.7 million in developed
technology and assembled workforce intangibles which will be amortized on a
straight-line basis over a two year period. As of September 30, 1998, the
estimated amount of goodwill is $9.7 million which is to be amortized on a
straight-line basis over a ten year period. Infoseek also incurred in-process
research and development write-offs of $4.3 million in the quarter ended April
3, 1999. 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 in
the period 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 financial statements do not
include the remaining costs of integration of up to $5.6 million as they will
affect future operations.
The unaudited pro forma combined condensed financial 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 combined condensed financial statements give effect to
the following pro forma adjustments:
1. In accordance with the reorganization agreement for the Starwave merger:
. Infoseek California became a wholly-owned subsidiary of Infoseek, and
all outstanding shares of its common stock were 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,
. Starwave became a wholly-owned subsidiary of Infoseek, and all
outstanding shares of its Common Stock 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>
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 acquired.
-24-
<PAGE>
INFOSEEK CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS--(Continued)
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 unaudited pro forma combined condensed financial 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. Below is a table
of the actual acquisition cost, purchase price allocation and annual
amortization of the intangible assets acquired. The historical net book value
of Starwave and the goodwill presented are as of September 30, 1998 and were
updated to $6.6 million and $658.6 million, respectively, upon the closing of
the acquisition on November 18, 1998 (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.
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
-25-
<PAGE>
INFOSEEK CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS--(Continued)
$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 as of September 30, 1998 is estimated at $656.3 million,
which is being amortized on a straight line basis concurrent with the life of
the Joint Venture relationships (10 years). The goodwill allocation changed to
$658.5 million upon the closing of the acquisition on November 18, 1998.
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. A preview version
of GO Network was introduced in late 1998. The majority of the functionality
planned for GO Network was not possible with Starwave's architecture and design
at the time of Infoseek's acquisition of Starwave. As a result, Starwave has
shifted a substantial portion of its development efforts toward redesigning its
core technologies. These efforts have been undertaken 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 which will be spent prior to March 31, 1999. There can be
no assurance that actual costs will not exceed these estimates.
The in-process technology was successfully developed, and the initial benefits
from these projects began in the quarter ending January 2, 1999, with the
introduction of the initial version of GO Network. The full functionality
intended for the planned GO Network was not 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, Infoseek cannot assure you that the service
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<PAGE>
INFOSEEK CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS-(Continued)
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 seriously harmed.
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.
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 is 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 certain representation agreements by and among Infoseek, Starwave and
the ESPN Joint Venture, and by and among Infoseek, Starwave and the ABCNews
Joint Venture, each entered into in conjunction with the Starwave merger,
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.
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 views, multiplied by 80%, multiplied by the
minimum revenue rate. 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
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<PAGE>
INFOSEEK CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS-(Continued)
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. The obligations of Starwave to pay
these 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's 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 $8.6
million for liabilities related to involuntary employee termination benefits
(relocations) of Starwave employees and 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).
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.
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<PAGE>
INFOSEEK CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS--(Continued)
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 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............................................. $ (129,758)$ (195,642)
Interest expense..................................... 619 2,782
Pro forma amortization of intangibles:
Goodwill ........................................... 52,853 70,470
Developed technology................................ 14,341 19,121
Assembled workforce................................. 5,857 7,809
Joint Venture relationships......................... 13,388 17,850
------------- -----------
EBITA................................................ $ (42,700)$ (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 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.
12. The pro forma adjustment is to eliminate deferred compensation related to
Starwave stock options.
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<PAGE>
INFOSEEK CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS--(Continued)
13. The Quando acquisition was accounted for using the purchase method of
accounting. The purchase price was approximately $17.0 million, in shares of
Infoseek's Common Stock. The unaudited pro forma combined condensed financial
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 actual fair value. Below is a
table of the actual acquisition cost, purchase price allocation and annual
amortization of the intangible assets acquired. The historical net book value
of Quando and the goodwill presented are as of September 30, 1998 and changed
to $(0.1) million and $9.1 million, respectively, upon the closing of the
acquisition on January 15, 1999 (in thousands):
<TABLE>
<CAPTION>
Annual
Amortization Amortization
Life of Intangibles
------------ --------------
<S> <C> <C> <C>
Estimated Acquisition Cost
Estimated purchase price................. $17,000
Acquisition expenses..................... 1,500
-------
Total estimated acquisition cost........ $18,500
=======
Purchase Price Allocation
Historical net book value of Quando at
September 30, 1998...................... $ (725)
Intangible assets acquired:
Developed Technology..................... 8,342 2 $4,171
Assembled Workforce...................... 318 2 159
In-Process Technology.................... 4,339
Goodwill................................. 9,690 2 4,845
Deferred Tax Liability................... (3,464)
-------
Total................................... $18,500
=======
</TABLE>
Tangible assets of Quando that were 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 $8.3 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 goodwill allocation as of September 30, 1998 is $9.7 million. Amortization
of goodwill is based on amortization over two years due to the rapid pace of
technological development of the Internet. The goodwill allocation changed to
$9.1 million upon the closing of the acquisition on January 15, 1999.
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>
INFOSEEK CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONSENSED
FINANCIAL STATEMENTS--(Continued)
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 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.
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 $1.5 million in fiscal 1999.
Infoseek expects that the in-process technology will be successfully developed,
and that initial benefits from these projects will begin in the quarter ending
April 3, 1999, 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 $1.5 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 $3.5 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.
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<PAGE>
(c) EXHIBITS
2.1 Agreement and Plan of Reorganization, dated as of July 24,
1998, among Infoseek Corporation, a California corporation, Steelhead
Acquisition Corp., an Oregon corporation, Quando, Inc., an Oregon
corporation, David Billstrom and William Neuhauser, and with respect to
Article VII only, Stanton R. Koch and U.S. Bank Trust, N.A. (the
"Reorganization Agreement") (1)
2.2 Amendment No. 1 to the Reorganization Agreement, dated
December 7, 1998 (2)
4.1 Specimen Stock Certificate of the Registrant (3)
4.2 Preferred Shares Rights Agreement dated October 2, 1998 by
and between the Registrant and BankBoston, N.A. (4)
23.1 Consent of KPMG Peat Marwick LLP
(1) Incorporated by reference to Exhibit 2.1 to the Registrant's
Registration Statement on Form S-4 (File No. 333-68561) declared
effective January 13, 1999.
(2) Incorporated by reference to Exhibit 2.2 to the Registrant's
Registration Statement on Form S-4 (File No. 333-68561) declared
effective January 13, 1999.
(3) Incorporated by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form S-4 (File No. 333-65635) declared
effective October 14, 1998.
(4) Incorporation by reference to the Registrant's Registration
Statement on Form 8-A, filed with the Commission on November 17, 1998.
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<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: February 11, 1999 By: /s/ Leslie E. Wright
________________________________
Leslie E. Wright
Senior Vice President, Chief
Administrative Officer and Chief Financial
Officer
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<PAGE>
Exhibit 23.1
Consent of Independent Auditors
The Board of Directors and Stockholders
Infoseek Corporation:
We consent to the inclusion of our report dated August 18, 1998, with respect
to the balance sheets of Quando, Inc. as of December 31, 1996 and 1997, and
the related statements of operations, stockholders' equity (deficit), and cash
flows for each of the years in the three-year period ended December 31, 1997,
which report appears in the Form 8-K/A of Infoseek Corporation dated on or
about February 10, 1999.
Our report dated August 18, 1998, contains an explanatory paragraph that
states that the Company has suffered recurring losses from operations and has
a net capital deficiency, which raises substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of that uncertainty.
/s/ KPMG Peat Marwick LLP
Portland, Oregon
February 10, 1999
