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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 3, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-25071
INFOSEEK CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 77-0494507
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1399 MOFFETT PARK DRIVE
SUNNYVALE, CA 94089
(Address of principal executive offices)
408-543-6000
(Registrant's telephone number, including area code)
Indicate by check (X) whether the registrant: (1) filed all reports required
to be filed by Section 13 or 15 (d) of the Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes /X/ No / /
As of May 12, 1999 there were 61,789,081 shares of the registrant's Common
Stock outstanding.
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TABLE OF CONTENTS
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PAGE
NUMBER
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Unaudited Interim Balance Sheets as of April 3, 1999 and October
3, 1998............................................................................... 3
Condensed Consolidated Unaudited Interim Statements of Operations for the Three and Six
Months Ended April 3, 1999 and March 31, 1998......................................... 4
Condensed Consolidated Unaudited Interim Statements of Cash Flows for the Six Months
Ended April 3, 1999 and March 31, 1998................................................ 5
Notes to Condensed Consolidated Unaudited Interim Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations... 16
Risk Factors............................................................................ 25
PART II OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 42
Item 6. Exhibits and Reports on Form 8-K........................................................ 42
Signatures.............................................................................. 43
</TABLE>
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INFOSEEK CORPORATION
CONDENSED CONSOLIDATED UNAUDITED INTERIM BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 3, 1999 OCTOBER 3, 1998
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<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................. $ 59,715 $ 628
Short-term investments.................................... 19,383 51,240
Accounts receivable, net.................................. 39,870 6,942
Prepaid to service providers.............................. 14,249 20,338
Other current assets...................................... 1,225 998
-------------- -------
Total current assets.................................. 134,442 80,146
Property and equipment, net................................. 26,161 15,370
Direct acquisition costs.................................... -- 2,825
Investment in Joint Ventures................................ 2,993 --
Intangibles and other assets................................ 861,349 3,315
-------------- -------
Total assets.......................................... $1,024,945 $101,656
-------------- -------
-------------- -------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.......................................... $ 13,572 $ 3,560
Accrued payroll and related expenses...................... 12,534 2,191
Accrued liabilities to service providers.................. 3,730 16,058
Other accrued liabilities................................. 9,111 2,418
Deferred revenue.......................................... 24,941 4,789
Short-term obligations.................................... 2,029 2,942
-------------- -------
Total current liabilities............................. 65,917 31,958
Long-term obligations....................................... 2,604 2,981
Deferred tax liabilities.................................... 45,065 --
Stockholders' equity:
Preferred stock........................................... -- --
Common stock.............................................. 1,258,566 121,292
Accumulated deficit....................................... (214,618) (53,724)
Deferred compensation..................................... (531) (717)
Notes receivable from stockholders........................ (132,058) (134)
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Total stockholders' equity............................ 911,359 66,717
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Total liabilities and stockholders' equity............ $1,024,945 $101,656
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</TABLE>
See notes to condensed consolidated unaudited interim financial statements.
3
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INFOSEEK CORPORATION
CONDENSED CONSOLIDATED UNAUDITED INTERIM STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
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<S> <C> <C> <C> <C>
APRIL 3, 1999 MARCH 31, 1998 APRIL 3, 1999 MARCH 31, 1998
-------------- --------------- -------------- ---------------
Revenues:
Advertising revenues................................. $ 26,683 $12,783 $ 54,695 $24,751
Software licensing revenues.......................... 2,954 1,670 5,117 2,377
------- ------ -------------- ------
Total revenues................................... 29,637 14,453 59,812 27,128
------- ------ -------------- ------
Costs and expenses:
Hosting, content and website costs................... 12,509 2,154 21,419 4,076
Amortization of intangibles related to hosting,
content and website costs.......................... 9,585 -- 13,942 --
------- ------ -------------- ------
Total hosting, content and website costs......... 22,094 2,154 35,361 4,076
Research and development............................. 7,871 2,130 12,352 4,151
Sales and marketing.................................. 27,772 10,577 57,215 22,377
General and administrative........................... 6,066 1,862 12,996 3,662
Amortization of goodwill............................. 17,407 -- 25,640 --
In-process research and development.................. 4,339 -- 76,939 --
------- ------ -------------- ------
Total costs and expenses......................... 85,549 16,723 220,503 34,266
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Operating loss......................................... (55,912) (2,270) (160,691) (7,138)
Loss from Joint Ventures............................... (4,137) -- (5,419) --
Interest income, net................................... 3,203 470 5,216 690
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Net loss............................................... $(56,846) $(1,800) $(160,894) $(6,448)
------- ------ -------------- ------
------- ------ -------------- ------
Basic and diluted net loss per share................... $ (0.93) $ (0.06) $ (3.00) $ (0.23)
Shares used in computing basic and diluted net loss per
share................................................ 61,261 28,822 53,699 28,082
</TABLE>
See notes to condensed consolidated unaudited interim financial statements.
4
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INFOSEEK CORPORATION
CONDENSED CONSOLIDATED UNAUDITED INTERIM STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------------
APRIL 3, 1999 MARCH 31, 1998
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Cash flows from operating activities:
Net loss.................................................... $(160,894) $ (6,448)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Write-off of in-process technology........................ 76,939 --
Depreciation and amortization............................. 47,620 2,627
Equity in losses from Joint Ventures...................... 5,419 --
Write down of restructure related assets.................. -- 2,080
Changes in assets and liabilities:
Accounts receivable, net.................................... (31,972) (3,264)
Prepaid to service providers................................ 6,089 --
Other current assets........................................ 248 (15)
Direct acquisition costs.................................... (10,549) --
Deposits and other assets................................... 230 (592)
Accounts payable............................................ 7,209 1,851
Accrued payroll and related expenses........................ 7,990 174
Accrued liabilities to service providers.................... (12,328) 2,778
Other accrued liabilities................................... 1,693 1,353
Deferred revenue............................................ 20,152 1,897
Accrued restructuring and other charges..................... -- (1,488)
-------------- -------
Net cash provided by (used in) operating activities... (42,154) 953
Cash flows from investing activities:
Investment in Joint Ventures................................ (2,836) --
Purchases of available-for-sale securities.................. (47,041) (73,332)
Proceeds from sales and maturities of available-for-sale
securities................................................ 78,898 30,028
Purchases of property and equipment......................... (11,533) (2,381)
Cash received from Starwave and Quando acquisitions......... 767 --
Issuance of notes receivable................................ -- (950)
-------------- -------
Net cash provided by (used in) investing activities... 18,255 (46,635)
Cash flows from financing activities:
Proceeds from term loan..................................... -- 398
Repayments of term loan..................................... (1,829) (545)
Proceeds from issuance of convertible debt.................. -- 305
Repayments of shareholders' note receivable................. 7,076 --
Proceeds from issuance of common stock...................... 77,739 44,055
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Net cash provided by financing activities............. 82,986 44,213
-------------- -------
Net increase/(decrease) in cash and cash equivalents........ 59,087 (1,469)
Cash and cash equivalents at beginning of period............ 628 2,541
-------------- -------
Cash and cash equivalents at end of period.................. $ 59,715 $ 1,072
-------------- -------
-------------- -------
Cash paid for interest...................................... $ 230 $ 368
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</TABLE>
See notes to condensed consolidated unaudited interim financial statements.
5
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INFOSEEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED UNAUDITED INTERIM FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
In this Quarterly Report on Form 10-Q, references to "Infoseek" or "the
Company" on or after November 18, 1998 are references to Infoseek Corporation, a
Delaware corporation and its subsidiaries including Starwave Corporation
("Starwave"), and references to Infoseek prior to November 18, 1998 are
references to Infoseek Corporation, a California corporation. When necessary for
clarity, Infoseek Corporation, a California corporation, is referred to as
"Infoseek California" and Infoseek Corporation, a Delaware corporation, is
referred to as "Infoseek Delaware." References to "Disney" refer to The Walt
Disney Company and its affiliated companies. References to the "ABCNews Joint
Venture" and the "ESPN Joint Venture" refer to the joint ventures Starwave
maintains with affiliates of Disney and ESPN, respectively. The ABCNews Joint
Venture and the ESPN Joint Venture are together referred to as the "Joint
Ventures."
Infoseek Corporation was incorporated in California in August 1993 to
develop and provide Internet and World Wide Web search and navigation services.
On November 18, 1998, Infoseek entered into a significant transaction with The
Walt Disney Company. In this transaction, Infoseek acquired Starwave Corporation
from Disney and formed a holding company incorporated in Delaware on June 12,
1998, for purposes of holding the capital stock of Infoseek Corporation, a
California corporation, and Starwave.
Infoseek is a leading provider of Internet services and software products.
Infoseek produces GO Network (home page: go.com), and the Infoseek Service (home
page: infoseek.go.com), comprehensive Internet gateways that combine branded
content from media leaders, search and navigation with directories of relevant
information sources and content sites, community applications for communicating
shared interests such as chat and instant messaging, and which facilitate the
purchase of related goods and services. In January 1999, Infoseek launched GO
Network, an enhanced version of the Infoseek Service. The Company conducts its
business predominantly within one industry segment.
On January 28, 1999, the Company changed to a fiscal year with 52 or 53 week
periods ending on the Saturday nearest September 30. This Quarterly Report
presents financial information for the second quarter of fiscal 1999, beginning
January 3, 1999 and ending April 3, 1999. This Quarterly Report also presents
financial information for the first six month period of fiscal 1999, beginning
October 4, 1998 and ending April 3, 1999. The unaudited results of operations of
the Company for the three month period ended April 3, 1999 contained 91 days and
compare to the unaudited results of operations for the three month period ended
March 31, 1998, which contained 90 days. The unaudited results of operations and
cash flows of the Company for the six month period ended April 3, 1999 contained
182 days and compare to the unaudited results of operations and cash flows for
the six month period ended March 31, 1998, which also contained 182 days.
Prior to November 18, 1998, Infoseek Delaware was a wholly owned subsidiary
of Infoseek California that was created for conducting the transactions
described above. Infoseek Delaware, the Registrant with the Securities and
Exchange Commission, did not conduct business activities prior to November 18,
1998. Since November 18, 1998, Infoseek Delaware's business has primarily
consisted of holding the capital stock of Infoseek California and Starwave and,
after January 15, 1999, Quando, Inc. ("Quando"). Accordingly, this Quarterly
Report on Form 10-Q presents financial information of Infoseek for the three and
six month periods ended April 3, 1999, the combined operations of Starwave from
November 18, 1998 and the combined operations of Quando from January 15, 1999.
The acquisitions of Starwave and Quando were accounted for under the purchase
method of accounting. As a result, information presented herein may not be
comparable to results in previous periods.
6
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INFOSEEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED UNAUDITED INTERIM FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
GO Network and the Infoseek Service are Internet portal sites that combine
search and directory services, including 18 easy to navigate "centers" that
integrate search results with relevant information, services, products and
communities on the Internet, and the content of ABC.com, ABCNEWS.com, ESPN.com,
Disney and others. Both services contain unique features like universal
navigation, follow-me tabs, universal registration, universal personalization
and security. Infoseek has a strategic relationship with Disney concerning GO
Network, including its promotion and content. Infoseek also produces other
leading Internet sites, such as ESPN.com and ABCNEWS.com, in partnership with
Disney affiliates.
The condensed consolidated financial information as of April 3, 1999 and for
the three and six month periods ended April 3, 1999 and March 31, 1998 included
herein is unaudited and has been prepared by the Company in accordance with
generally accepted accounting principles and reflects all adjustments,
consisting only of normal recurring adjustments, which in the opinion of
management are necessary to state fairly the Company's financial position,
results of operations, and cash flows for the periods presented. The October 3,
1998 balance sheet was derived from audited financial statements at that date.
All significant intercompany transactions and balances have been eliminated.
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. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in Infoseek's Transition Report on Form 10-K for the nine month period
ended October 3, 1998, and Form 10-Q for the three month period ended January 2,
1999, both filed with the Securities and Exchange Commission on February 16,
1999. The results of operations for the three and six month periods ended April
3, 1999 are not necessarily indicative of the results to be expected for any
future periods.
NOTE 2. NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128
("SFAS No. 128"), "Earnings per Share." 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
non-vested 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 net loss per share does not include options,
warrants or convertible securities, as they would be anti-dilutive for all
periods presented due to the net loss for each period. Diluted net loss per
share is very similar to the previously reported fully diluted net loss per
share.
NOTE 3. NEW ACCOUNTING PRONOUNCEMENTS
During fiscal 1998, the Company adopted the Financial Accounting Standards
Board Statement No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income." SFAS
No. 130 establishes rules for reporting and display of comprehensive income or
comprehensive net loss. The Company's total comprehensive net loss was the same
as its net loss for the three and six month periods ended April 3, 1999 and
March 31, 1998.
7
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INFOSEEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED UNAUDITED INTERIM FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
During fiscal 1998, the Company adopted the Financial Accounting Standards
Board Statement No. 131 ("SFAS No. 131"), "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires the Company to use
the "management approach" in disclosing segment information (see Note 8). The
Company conducts its business predominantly within one industry segment for all
periods presented. Management assesses the Company's performance and measures
the Company's net loss and total assets on a single segment basis. The single
segment generates revenues predominantly from the United States for all periods
presented.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133") "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through net
income. If the derivative is designated as a hedge, depending on the nature of
the hedge, changes in the fair value of the derivative are either offset against
the change in fair value of assets, liabilities, or firm commitments through
earnings or recognized in comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings. SFAS No. 133 is effective for
years beginning after June 15, 1999, but companies can adopt as early as of the
beginning of any fiscal quarter that begins after June 1998. The Company is
evaluating the requirements of SFAS No. 133, but does not expect this
pronouncement to materially impact the Company's results of operations.
During the quarter ended April 3, 1999, the Company early adopted the
American Institute of Certified Public Accountants' Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 provides guidance on when costs related to
software developed or obtained for internal use should be capitalized or
expensed. Costs that should be capitalized include only the external direct
costs of services consumed in developing the software, payroll and
payroll-related costs for employees who are directly associated with the
computer software project, and interest costs incurred while developing the
software. As of April 3, 1999, the Company has capitalized approximately $1.3
million of system integration costs under SOP 98-1.
NOTE 4. BUSINESS COMBINATIONS
STARWAVE
In June 1998, Infoseek entered into agreements with Starwave and Disney
relating to an acquisition by Infoseek of Starwave, of which Disney was the
principal shareholder, through a merger and exchange of shares. The Starwave
merger and related transactions were completed on November 18, 1998. In
accordance with the Starwave merger agreement, Infoseek issued 25,932,681 shares
of Infoseek Common Stock for all outstanding shares of Starwave capital stock.
Infoseek also reserved 2,205,316 shares of Infoseek Common Stock for Starwave
stock options assumed by Infoseek. The fair value of Infoseek's shares and
options issued was approximately $897.8 million. Infoseek estimated direct
acquisition costs of approximately $22.0 million, which were included in the
purchase price of Starwave. In the second quarter of fiscal 1999, the Company
adjusted its estimates of direct acquisition costs to approximately $20.0
million. In addition, Disney purchased 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 at certain times, and
subject to certain conditions, in exchange for approximately $70.0 million in
8
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INFOSEEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED UNAUDITED INTERIM FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4. BUSINESS COMBINATIONS (CONTINUED)
cash and a $139.0 million five-year promissory note. The warrant is intended to
enable Disney to achieve a majority stake in Infoseek over time. In addition, as
part of the agreement with Disney, Infoseek may be required to sell to Disney
certain shares of its Common Stock and issue warrants to purchase its Common
Stock at prices below fair market value which may result in future material
charges adversely affecting Infoseek's results of operations.
The acquisition was accounted for under the purchase method of accounting.
The purchase price was allocated to the assets acquired and liabilities assumed
based on a determination from an independent appraisal of their respective fair
values as follows:
The approximate purchase price (in thousands):
<TABLE>
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Purchase price.................................................... $ 897,834
Estimated transaction and other direct acquisition costs.......... 20,000
---------
$ 917,834
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---------
</TABLE>
The allocation of the approximate purchase price was determined as follows
(in thousands):
<TABLE>
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Tangible assets acquired and liabilities assumed:
Tangible assets............................................... $ 12,751
Liabilities................................................... (6,163)
Intangible assets and liabilities acquired:
Joint Ventures relationships (ESPN and ABCNews)............... 178,500
Developed technology.......................................... 29,900
Assembled workforce........................................... 15,300
In-process research and development........................... 72,600
Goodwill...................................................... 656,547
Deferred tax liability........................................ (41,601)
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$ 917,834
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---------
</TABLE>
To determine the fair value of the developed technology and the investment
in the Joint Ventures, 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 the technology. 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. Based on a third-party appraisal, management determined
that $72.6 million of the purchase price represented acquired in-process
research and development that had not yet reached technological feasibility and
had no alternative future use. This amount was expensed during the quarter ended
January 2, 1999 as a non-recurring charge upon consummation of the acquisition.
Goodwill is determined based on the residual difference between the amount paid
and the values assigned to identified tangible and intangible assets. In
November 1998, the Company began amortizing the Joint Venture relationships and
goodwill over an estimated useful life of 10 years, and developed technology and
assembled workforce over an estimated useful life of two years. Amortization
expense of intangible assets
9
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INFOSEEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED UNAUDITED INTERIM FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4. BUSINESS COMBINATIONS (CONTINUED)
purchased was approximately $26.6 million and $39.9 million during the three and
six month periods ended April 3, 1999, respectively.
In connection with the Starwave acquisition, Infoseek accrued approximately
$22.0 million in costs related to the acquisition. In the second quarter of
fiscal 1999, the Company adjusted its estimates of direct acquisition costs to
approximately $20.0 million. The direct acquisition costs consist of transaction
costs of approximately $13.4 million and costs of approximately $6.6 million
associated with the elimination of redundant operations and closure of duplicate
facilities. These costs qualify as liabilities in connection with a purchase
business combination under the Financial Accounting Standards Board's Emerging
Issues Task Force Issue No. 95-3 ("EITF 95-3"), "Recognition of Liabilities in
Connection with a Purchase Business Combination." Transaction costs consist of
fees for investment bankers, attorneys, accountants, financial printing and
other related charges. As of April 3, 1999, the Company has made cash payments
related to transaction costs and elimination of redundant operations of
approximately $13.2 million and $0.7 million, respectively. In addition, the
Company incurred non-cash charges of approximately $5.7 million. The remaining
accrued balance of approximately $0.4 million is expected to be used during the
remainder of fiscal 1999. Infoseek also expects to incur additional costs
related to the Starwave acquisition, due mainly to integration of operations and
computer systems, of approximately $7.0 million, of which approximately $3.7
million was expensed as of April 3, 1999. Integration costs do not qualify as
liabilities in connection with a purchase business combination under EITF 95-3
and will be charged to operations as incurred.
Under certain representation agreements by and among Infoseek, Starwave and
each of the Joint Ventures, 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 include 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
advertising revenue rate per page view of publicly traded Internet companies
involved in activities comparable to those of the Joint Ventures. If a mutually
agreeable rate cannot be determined, then the rate will be based on the Joint
Ventures' 12 month trailing average.
Starwave recognizes 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.
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.
Each of the Joint Ventures is accounted for under the equity method since
neither Infoseek nor Starwave have a majority voting interest. Under each of the
joint venture agreements, required funding and profits/losses under the Joint
Ventures are split 60/40 between Starwave and Disney entities, respectively,
10
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INFOSEEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED UNAUDITED INTERIM FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4. BUSINESS COMBINATIONS (CONTINUED)
in loss years and 50/50 in years in which the respective Joint Ventures each
have net income. The other partners of these Joint Ventures are subsidiaries of
ESPN and Disney.
Under a license agreement entered into by and between Disney and Infoseek,
Disney granted to Infoseek a license to exploit the trademarks and web addresses
associated with GO Network worldwide, and Infoseek has in return 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 or 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 EBITA calculation, which includes amortization expense resulting from
the acquisition of both Starwave and Quando, for the three and six month periods
ended April 3, 1999, is as follows (in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 3, 1999 APRIL 3, 1999
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<S> <C> <C>
Net loss.......................................... $(56,846) $(160,894)
Interest expense.................................. 104 229
Amortization of intangibles:
Goodwill...................................... 17,407 25,640
Developed technology.......................... 4,608 6,476
Assembled workforce........................... 1,945 2,901
Joint Venture relationships................... 4,463 6,694
------- --------
EBITA............................................. $(28,319) $(118,954)
------- --------
------- --------
</TABLE>
Since the license agreement was not in effect for the three and six month
periods ended March 31, 1998, EBITA for these periods is not presented.
QUANDO
In July 1998, the Company entered into an agreement to acquire Quando for
shares of Infoseek Common Stock. On January 15, 1999, Infoseek completed its
acquisition of Quando. Quando creates constantly updated directories of
information obtained from the Internet for users to search the Web-- including
shopping guides, event guides, contact directories, audio clip libraries, review
guides and website rating guides. Infoseek issued approximately 396,591 shares
of its Common Stock and reserved approximately 35,000 shares of Common Stock for
Quando options assumed by Infoseek.
The acquisition was accounted for under the purchase method of accounting.
In the second quarter of fiscal 1999, the Company adjusted its estimate of the
purchase price to approximately $19.0 million. The
11
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INFOSEEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED UNAUDITED INTERIM FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4. BUSINESS COMBINATIONS (CONTINUED)
purchase price was allocated to the assets acquired and liabilities assumed
based on a determination from an independent appraisal of their respective fair
values, as follows:
The approximate purchase price (in thousands):
<TABLE>
<S> <C>
Purchase price..................................................... $ 19,000
Estimated transaction and other direct Acquisition costs........... 1,500
---------
$ 20,500
---------
---------
</TABLE>
The allocation of the approximate purchase price was determined as follows
(in thousands):
<TABLE>
<S> <C>
Tangible assets acquired and liabilities assumed:
Tangible assets................................................ $ 663
Liabilities.................................................... (753)
Intangible assets and liabilities acquired:
Developed technology........................................... 8,342
Assembled workforce............................................ 318
In-process research and development............................ 4,339
Goodwill....................................................... 11,055
Deferred tax liability......................................... (3,464)
---------
$ 20,500
---------
---------
</TABLE>
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 the
technology. 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. Based on a third-party
appraisal, management determined that approximately $4.3 million of the purchase
price represented acquired in-process research and development that had not yet
reached technological feasibility and had no alternative future use. This amount
was expensed during the quarter ended April 3, 1999 as a non-recurring charge
upon consummation of the acquisition. Goodwill is determined based on the
residual difference between the amount paid and the values assigned to identify
tangible and intangible assets. In January 1999, the Company began amortizing
goodwill, developed technology and assembled workforce over an estimated useful
life of two years. Amortization expense of intangible assets purchased was
approximately $1.8 million during the quarter ended April 3, 1999.
In connection with the acquisition, the Company accrued approximately $1.5
million in costs related to the acquisition, including estimated transaction
costs of approximately $1.1 million and Quando's note payable to Infoseek of
approximately $0.4 million. As of April 3, 1999, the Company incurred
approximately $1.0 million in transaction costs. The remaining accrued balance
of approximately $0.1 million is expected to be used during the remainder of
fiscal 1999. Integration costs due to the Quando acquisition are immaterial and
will be charged to operations as incurred.
12
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED UNAUDITED INTERIM FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4. BUSINESS COMBINATIONS (CONTINUED)
SELECTED UNAUDITED PRO FORMA COMBINED INFORMATION
The following selected unaudited pro forma combined results of operations of
Infoseek, Starwave and Quando for the three and six month periods ended April 3,
1999 and March 31, 1998 have been prepared assuming that the acquisitions had
occurred at the beginning of the periods presented. The following selected
unaudited pro forma information is not necessarily indicative of the results
that would have occurred had the acquisitions been completed at the beginning of
the periods indicated nor is it indicative of future operating results (in
thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ -----------------------------
APRIL 3, 1999 MARCH 31, 1998 APRIL 3, 1999 MARCH 31,1998
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Total revenues.................................... $ 29,761 $ 23,124 $ 66,179 $ 44,268
Operating loss (1)(2)............................. $(51,908) $(39,296) $(104,482) $(81,425)
Net loss(1)(2)(3)................................. $(52,842) $(41,417) $(105,560) $(85,842)
Basic and diluted net loss per share(1)(2)(3)..... $ (0.86) $ (0.71) $ (1.97) $ (1.47)
Shares used in computing basic and diluted net
loss per share.................................. 61,261 58,543 53,698 58,543
</TABLE>
- ------------------------
(1) The loss from operations, net loss and net loss per share do not include the
$72.6 million and $4.3 million in-process research and development charges
relating to the Starwave and Quando acquisitions, respectively.
(2) 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
to reflect additional costs Starwave would have incurred that were
historically incurred by the Joint Ventures.
(3) A pro forma adjustment has been made to reflect Starwave's allocated (60%)
losses from the Joint Ventures.
NOTE 5. INTANGIBLE AND OTHER ASSETS
Intangible and other assets are comprised of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 3, 1999 OCTOBER 3, 1998
------------- ---------------
<S> <C> <C>
Developed technology.............................. $ 38,242 $ --
Assembled workforce............................... 15,618 --
Goodwill.......................................... 667,602 --
Joint Venture relationships....................... 178,500 --
Other assets...................................... 3,116 3,315
Accumulated amortization.......................... (41,729) --
------------- -----
$861,349 $3,315
------------- -----
------------- -----
</TABLE>
13
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED UNAUDITED INTERIM FINANCIAL STATEMENTS
(CONTINUED)
NOTE 6. SIGNIFICANT AGREEMENTS
On October 1, 1998, the Company entered into an 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
12-month Microsoft agreement, the Company 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. 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 $18.0
million. The obligated amount under the Microsoft agreement is being amortized
on a straight-line basis over the one-year term of the agreement, beginning in
the quarter ended January 2, 1999, the quarter in which the service was
launched. Payments were made in the quarters ended January 2, 1999 and April 3,
1999 in two equal installments, and were included in "Prepaid to Service
Providers." For the three and six month periods ended April 3, 1999, the Company
amortized approximately $2.8 million and $5.4 million, respectively, leaving a
prepaid balance of approximately $5.3 million as of April 3, 1999.
On August 28, 1998, Infoseek entered into an agreement with WebTV Networks,
Inc. ("WebTV") pursuant to which Infoseek is the exclusive provider of search
and directory services to WebTV. Under this two year agreement, Infoseek 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, Infoseek is obligated to make cash payments to WebTV totaling $26.0
million over a two year period, with $0.5 million paid upon the signing of the
agreement, $14.5 million paid in advance for the first five quarters upon mutual
acceptance of the technology by both parties, and the remaining $11.0 million to
be paid ratably over the last three quarters of the agreement term. On October
1, 1998, Infoseek and WebTV agreed on the technology; however, cash was not paid
until the quarter ended January 2, 1999. The payments under the WebTV agreements
are being amortized on a straight-line basis over the period covered by the
payment. Such payments by Infoseek are subject to reimbursement depending on the
number of impressions delivered over the life of the agreement. Infoseek is to
receive all of the revenue generated from such advertising sales up to a
pre-determined amount that is in excess of Infoseek's total payment obligations
to WebTV under the agreement, with allocations of such revenue between Infoseek
and WebTV being made beyond this pre-determined amount. For the three and six
month periods ended April 3, 1999, the Company incurred approximately $3.3
million and $6.5 million of sales and marketing expenses, respectively, related
to the WebTV agreement. There can be no assurance that Infoseek will be able to
sell the available advertising inventory of WebTV under this agreement or be
able to collect the receivables resulting from such advertising sales. This
could have a material adverse effect on Infoseek's business, results of
operations and financial condition.
NOTE 7. PROMISSORY NOTE
In conjunction with the Starwave acquisition, Disney, a 43% shareholder of
Infoseek, delivered a promissory note in the 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 and is payable in twenty quarterly
principal installments, beginning on February 18, 1999, of $6.9 million, with
the final payment due on November 18, 2003. The promissory note, together with
accrued and unpaid interest, may be paid in whole or in part without premium or
penalty at any time. The Company earned approximately $2.2 million and $3.3
million of interest income related to this promissory note in the three and six
month periods ended April 3, 1999.
14
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED UNAUDITED INTERIM FINANCIAL STATEMENTS
(CONTINUED)
NOTE 8. SEGMENT INFORMATION
The Company predominantly operates in one business segment--providing
Internet search and navigation products and services for which the Company
receives advertising revenues from its customers. Advertising revenues for the
three month periods ended April 3, 1999 and March 31, 1998 were approximately
$26.7 million and $12.8 million, respectively. Advertising revenues for the six
month periods ended April 3, 1999 and March 31, 1998, were approximately $54.7
million and $24.8 million, respectively.
The Chief Executive Officer has been identified as the Chief Operating
Decision Maker (CODM) because he has final authority over resource allocation
decisions and performance assessment. The CODM does not receive discrete
financial information about asset allocation, expense allocation, or
profitability from the Company's Internet search navigation products and
services or from its Ultraseek software license and support.
Total revenues generated from U.S. customers for the three month periods
ended April 3, 1999 and March 31, 1998 were approximately $29.0 million and
$14.3 million, respectively. Total revenues generated from U.S. customers for
the six month periods ended April 3, 1999 and March 31, 1998 were approximately
$58.1 million and $26.8 million, respectively. Total revenues generated from
foreign customers for each of the three month periods ended April 3, 1999 and
March 31, 1998 totaled approximately $0.6 million and $0.2 million,
respectively. Total revenues generated from foreign customers for the six month
periods ended April 3, 1999 and March 31, 1998 were approximately $1.7 million
and $0.3 million, respectively.
NOTE 9. CONTINGENCIES
From time to time, the Company may be a party to 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.
On February 18, 1999, GoTo.Com, Inc. filed a complaint GOTO.COM, INC. V. THE
WALT DISNEY COMPANY, DISNEY ENTERPRISES, INC., INFOSEEK CORPORATION, AND
MONTROSE CORPORATION, Civ. No. 99-01674 TJH, in the United States District Court
for the Central District of California ("Trademark Action"). The complaint
alleges that the defendants' use of the GO NETWORK Green Traffic Light Logo is
confusingly similar to the plaintiff's unregistered GOTO.COM Logo. The complaint
seeks an unspecified amount of damages and a preliminary and permanent
injunction against the use of the logo. The Company denies all the material
allegations of the complaint and is defending against them.
The costs of defending the Trademark Action and its ultimate outcome are
uncertain and cannot be estimated. There can be no assurance that Infoseek will
prevail in the Trademark Action, or that the result will not have a material
adverse effect on Infoseek's financial position or results of operations. As the
outcome of these cases cannot reasonably be determined, Infoseek has not accrued
for any potential loss contingencies.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations 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 are subject to risks and uncertainties.
These forward-looking statements are typically denoted in this Report by the
phrases "anticipates," "believes," "expects," "plans" and similar phrases.
Actual results could differ materially from those projected in the
forward-looking statements as a result of the factors set forth in "Risk
Factors" beginning on page 25 of this Quarterly Report on Form 10-Q, including,
without limitation, those entitled "--Accounting Charges From Acquisitions Will
Delay and Reduce Profitability," "--In Order to Continue to Grow, Infoseek Will
Need More Financing," "--Infoseek's Financial Results Will Vary," "--If Infoseek
Does Not Renew Existing or Enter Into New Agreements Which Result in User
Traffic, or If Sites That Provide Traffic to Infoseek are Not Successful,
Infoseek's Advertising Revenue Will Decrease," "--Infoseek Has Had Losses in the
Past and Has Difficulty Predicting Future Results But Expects Fluctuations and
Losses in the Future," "--If Infoseek Does Not Achieve Revenue Minimums Under
Representation Agreements, It May Incur Losses Under These Agreements," and
"--If Internet Advertising and Related Sponsorship of Infoseek Services Are Not
Accepted, Infoseek's Revenues Will Be Adversely Affected." The discussion of
those risk factors is incorporated herein by this reference as if said
discussion was fully set forth at this point.
EXPLANATORY NOTE
On January 28, 1999, the Company changed to a fiscal year with 52 or 53 week
periods ending on the Saturday nearest September 30. This Quarterly Report
presents financial information for the second quarter of fiscal 1999, beginning
January 3, 1999 and ending April 3, 1999. This Quarterly Report also presents
financial information for the first six month period of fiscal 1999, beginning
October 4, 1998, and ending April 3, 1999. The unaudited results of operations
of the Company for the three month period ended April 3, 1999 contained 91 days
and compare to the unaudited results of operations for the three month period
ended March 31, 1998, which contained 90 days. The unaudited results of
operations and cash flows of the Company for the six month period ended April 3,
1999 contained 182 days and compare to the unaudited results of operations and
cash flows for the six month period ended March 31, 1998 which also contained
182 days.
Prior to November 18, 1998, Infoseek Delaware was a wholly owned subsidiary
of Infoseek California. Infoseek Delaware, the Registrant with the Securities
and Exchange Commission, did not conduct business activities prior to November
18, 1998. Since November 18, 1998, Infoseek Delaware's business has primarily
consisted of holding the capital stock of Infoseek California and Starwave and,
after January 15, 1999, Quando. Accordingly, this Quarterly Report on Form 10-Q
presents financial information of Infoseek for the three and six month periods
ended April 3, 1999, including the combined result of operations of Starwave
from November 18, 1998, and including the combined operations of Quando from
January 15, 1999. The acquisitions of Starwave and Quando were accounted for
under the purchase method of accounting. As a result, information presented
herein may not be comparable to results in previous quarters.
INFOSEEK OVERVIEW
Infoseek was formed in August 1993 to develop and provide Internet and World
Wide Web search and navigational services. From inception to March 31, 1995,
Infoseek's operations were limited and consisted primarily of start-up
activities, including recruiting personnel, raising capital, research and
development, and the negotiation and execution of an agreement to license an
information retrieval search engine.
Infoseek introduced its first products and services in 1995. Through
September 1997, Infoseek's strategic focus was on developing its capabilities as
an Internet search and navigation service. After that time, the Company began to
execute a new strategy of building Infoseek brand awareness; creating a richer
16
<PAGE>
viewer experience; maximizing value for Infoseek's advertisers; providing
intranet search products; and enhancing Infoseek's search and navigation
service.
Beginning in early 1997, Infoseek began to license its Ultraseek Server
product to corporate customers for use on their intranet and public web site
search applications. Gross margins from licensing Ultraseek are somewhat higher
than those for advertising revenues.
In October 1997, Infoseek launched an enhanced version of the Infoseek
Service, with easy to navigate "centers" (formerly called "channels" and now
numbering 18) that integrate search results with relevant information, services,
products and communities on the Internet. The Infoseek Service provides Infoseek
with a platform for creating content and marketing partnerships that enrich the
viewer's experience while enabling advertisers, sponsors and partners to more
effectively target viewers.
Beginning with the October 1997 launch of the enhanced version of the
Infoseek Service, Infoseek began to sell center sponsorships to advertisers,
sponsors and partners. The duration of Infoseek's sponsorship and partnership
agreements generally ranges from two months to three years. Revenues are
generally recognized ratably over the term of the agreements, provided that
minimum impressions are met, and are included in advertising revenues. Most of
Infoseek's contracts with advertising customers can be canceled at any time.
Substantially all of Infoseek's revenues have been generated from the sale
of advertising and sponsorships. Infoseek expects to continue to derive
substantially all of its revenues from selling advertising and related products
for the foreseeable future. Advertising revenues are tightly related to the
amount of traffic on Infoseek's services, which is seasonal and inherently
unpredictable. Accordingly, future sales and operating results are difficult to
forecast.
Infoseek has in the past relied on the purchase of traffic from Netscape,
Microsoft and others as a significant portion of Infoseek's total traffic.
Infoseek entered into an agreement with Netscape in June 1998. Under the June
1998 agreement, Infoseek purchased 15% of Netscape's available search traffic,
which traffic had decreased from 30% in earlier period. In November 1998,
Infoseek and Netscape renegotiated the terms of the June 1998 agreement to
provide for the purchase of 5% of Netscape's available search traffic from
January 11, 1999 and through the duration of the agreement which terminates May
31, 1999. Average daily pageviews for Infoseek.go.com, go.com (discussed below)
and the Joint Ventures in the month of March 1999 were approximately 45 million,
an increase of approximately 12 million from December 1998. Purchased traffic,
including traffic from Microsoft, WebTV and Netscape, accounted for 20% of total
daily pageviews in the quarter ended April 3, 1999. Infoseek's traffic purchase
agreements generally have terms of one year or less. The agreements with
Netscape and Microsoft are scheduled to terminate in May 1999 and October 1999,
respectively. In order to increase brand awareness of GO Network, build brand
loyalty and develop alternative traffic sources, the Company is planning to
increase its promotional program for GO Network. The Company has been successful
in generating traffic from GO Network and the Infoseek Service and will continue
to build brand-awareness to generate non-purchased traffic.
In June 1998, Infoseek entered into agreements with Starwave and Disney
relating to an acquisition of Starwave, of which Disney was the principal
shareholder, by Infoseek through a merger and exchange of shares (the "Starwave
Acquisition") pursuant to an Agreement and Plan of Reorganization (the "Starwave
Merger Agreement"). The transactions contemplated by the Starwave Merger
Agreement were completed on November 18, 1998. The Starwave Acquisition is being
accounted for as a purchase transaction. The purchase price is being allocated
to the acquired assets and liabilities of Starwave. An in-process research and
development charge of approximately $72.6 million was recorded in the quarter
ended January 2, 1999. In addition, intangible assets related to developed
technology and assembled workforce of approximately $45.2 million are being
amortized over two years. Intangible assets relating to goodwill and the Joint
Ventures of approximately $656.5 million and $178.5 million, respectively, are
being amortized over ten years. Infoseek began the amortization of each of these
intangible assets in the quarter ended January 2, 1999.
17
<PAGE>
Disney also has certain contractual rights to maintain its initial
percentage stock and warrant ownership through direct purchases from Infoseek in
the event of dilutive issuances, including issuances pursuant to financings,
acquisitions and employee benefit plans. Infoseek may be required to sell to
Disney certain shares of Common Stock and issue warrants at prices below fair
market value at the time of purchase which may result in future material charges
adversely affecting Infoseek's results of operations.
Infoseek expects to incur increased operating expenditures associated with
the expanded operations resulting from the transaction, as well as the
development, launch and promotion of GO Network. In this regard, Infoseek has
agreed to use commercially reasonable efforts to meet certain spending
requirements for GO Network pursuant to the terms of a license agreement between
Infoseek and Disney related to GO Network (the "License Agreement"). These
spending requirements for GO Network for the first three years are $40.5
million, $58.3 million and $64.8 million, respectively. In addition, pursuant to
a promotional services agreement (the "Promotional Services Agreement"),
Infoseek has agreed to purchase $165.0 million in promotional services over a
five-year period for GO Network. The amounts spent on the purchase of
promotional services under the Promotional Services Agreement apply towards the
spending requirements under the License Agreement. As a result, Infoseek's
profitability is expected to be delayed beyond the time when Infoseek, prior to
consummating the Disney Transaction, may have otherwise achieved profitability.
In addition, the size and complexity of the Disney Transaction, the launch of GO
Network and the rapid pace of change and development in the Internet market make
it difficult to predict the future results. See "Risk Factors--Infoseek Has Had
Losses in the Past and Has Difficulty Predicting Future Results But Expects
Fluctuations and Losses in the Future."
In connection with the acquisition of Starwave, Infoseek acquired Starwave's
interests in the ABCNews Joint Venture and ESPN Joint Venture with affiliates of
Disney and ESPN, respectively. Under each of the joint venture agreements,
required funding and profits/losses under the Joint Ventures are split 60/40
between the Starwave and Disney entities, respectively, in loss years and 50/50
in years in which the respective Joint Ventures each have net income.
Infoseek (through Starwave) has also agreed to act as a representative of
the Joint Ventures for the sale of advertising and related services for the
Joint Ventures. Under representation agreements by and among Infoseek, Starwave
and each of the Joint Ventures, each entered into in conjunction with the
acquisition of Starwave, 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 and other related items include 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 pageviews, multiplied by the
minimum revenue rate. The minimum revenue rate is based on the average
advertising revenue rate per pageview of the publicly traded internet companies
involved in activities comparable to those of the Joint Ventures.
Starwave recognizes 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. 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.
Each of the Joint Ventures is accounted for under the equity method since
neither Infoseek nor Starwave have a majority voting interest in either Joint
Venture.
In July 1998, the Company entered into an agreement to acquire Quando for
shares of Infoseek's Common Stock. On January 15, 1999 Infoseek completed its
acquisition of Quando in a tax-free
18
<PAGE>
reorganization in which a wholly-owned subsidiary of Infoseek was merged
directly into Quando. The acquisition of Quando was accounted for as a purchase
transaction. Infoseek incurred an in-process research and development charge of
approximately $4.3 million in the quarter ended April 3, 1999 in connection with
this transaction. In addition, intangible assets related to goodwill, developed
technology and assembled workforce were approximately $19.7 million, which are
being amortized over two years. Infoseek began the amortization of each of these
intangible assets in the quarter ended April 3, 1999.
The acquisitions of Starwave and Quando are large and complex. Infoseek has
and may further be required to reorganize its operations in order to operate
more efficiently. Due to the complexity and scale of Infoseek's recent
acquisitions, Infoseek's operating plans and forecasts, including its projected
business outlook, and Infoseek's operating objectives, are subject to frequent
revision. Although Infoseek has recently begun a new multi-year planning cycle,
future events and plans may cause Infoseek to dramatically revise its business
objectives and estimates of profitability. Infoseek cannot assure you it will be
able to adequately address the challenges of the Internet market and the
complexity of its recent acquisitions.
In January 1999, Infoseek launched the premier version of GO Network and an
enhanced interest version of the Infoseek Service. GO Network and the enhanced
Infoseek Service are comprehensive Internet gateways that combine branded
content from media leaders, search and navigation with directories of relevant
information and content sites, and community applications for communicating
shared interests such as chat and instant messaging. In addition, GO Network
facilitates the purchase of related goods and services. GO Network and the
enhanced Infoseek Service have several unique features, such as universal
registration and navigation, universal personalization, and GOguardian-TM- and
security. GO Network and the enhanced Infoseek Service also offer content from
Disney and its affiliates, including ABC News and ESPN.
In the quarter ended April 3, 1999, GO Network introduced several additional
features in various centers such as GO Shop, GO Money and GO Computing by
establishing strategic relationships with partners such as MBNA Corporation,
ZDNet and Universal Tax Systems, Inc. Subsequent to the end of the quarter, the
Company was engaged in negotiations to establish strategic relationships with
other partners, such as drkoop.com, FTD and NetSelect. These strategic
relationships are expected to replace existing strategic relationships that are
terminating in the near term. In April 1999, Infoseek expanded its international
presence by launching "Infoseek.de"--a German version of many of the existing
features currently offered in the Infoseek Service. GO Network also plans to
launch Event Guide, which will allow users to search, browse and track public
events such as music, theater and sports within a metropolitan area, in the next
few months. In addition, the Company plans to introduce and integrate features
such as GO Auction, GO Stores, and others into GO Network before Christmas 1999.
For the quarter ending July 3, 1999, the Company expects a modest increase
in revenues and expenses compared to the quarter ended April 3, 1999. Since
1997, Infoseek significantly increased its operating expenses as a result of a
substantial increase in its sales and marketing operations, development of new
distribution channels, broadening of its customer support capabilities and
funding greater levels of research and product development. Infoseek's ability
to resume and sustain revenue growth is substantially reliant, among other
things, on:
- Its ability to acquire and retain users on GO Network and the Infoseek
Service through effective promotions and improvement of the service and
user experience.
- Converting this increased number of users to more pageviews and revenue.
- Disney's continued focus on its internet strategy and GO Network's key
role in that strategy.
- Successfully launching various elements of its commerce strategy.
There can be no assurance that Infoseek will be successful in implementing
or continuing the above actions. If Infoseek is not able to implement or
continue the above, its business, results of operations, financial condition and
prospects could be seriously harmed.--see Risk Factors on page 25.
19
<PAGE>
Further increases in research and development, and sales and marketing
expenses are planned in the future. The Company plans to continue to enhance the
features in GO Network and devote substantial resources to develop e-commerce.
In addition, the Company anticipates that it will incur significant promotional
expenses to build brand loyalty. Although Infoseek has experienced significant
revenue growth since 1997, there can be no assurance that this growth rate will
be sustained, that revenues will continue to grow or that Infoseek will achieve
profitability. Infoseek's estimates of revenue and expenses for future periods
are forward-looking statements subject to risks and uncertainties. Actual
results may vary as a result of a number of factors, including those set forth
below and including "Risk Factors--If GO Network is Not Successful, Infoseek's
Business Would Be Seriously Harmed," "--If Infoseek Encounters Difficulties in
Integrating Starwave and Quando, Infoseek Will Not Experience All of the
Expected Benefits of these Acquisitions, "and "--Infoseek's Financial Results
Will Vary."
Infoseek's significant growth and limited operating history in a rapidly
evolving industry make it difficult to manage operations and predict future
operating results. Infoseek has incurred significant net losses since inception
and expects to incur substantial additional losses. As of April 3, 1999,
Infoseek had an accumulated deficit of approximately $214.6 million. 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.
As a result of Infoseek's limited operating history as well as the recent
emergence and rapid pace of change and development of both the Internet and
intranet markets addressed by Infoseek, Infoseek has neither internal nor
industry-based historical financial data for any significant period of time upon
which to project revenues or plan operating expenses. Infoseek expects that its
results of operations may also fluctuate significantly in the future as a result
of a variety of factors. These factors includes: the Starwave Acquisition; the
development of GO Network; the continued rate of growth; usage and acceptance of
the Internet and intranets as information media; the rate of acceptance of the
Internet as an advertising medium and a channel of commerce; demand for
Infoseek's products and services; the budgeting cycle on advertising for
individual advertisers; the introduction and acceptance of new, enhanced or
alternative products or services by Infoseek or by its competitors; Infoseek's
ability to anticipate and effectively adapt to a developing market and to
rapidly changing technologies; Infoseek's ability to attract, retain and
motivate qualified personnel; initiation, implementation, renewal or expiration
of significant contracts with MBNA, Microsoft, Netscape and others; pricing
changes by Infoseek or its competitors; specific economic conditions in the
Internet and intranet markets; general economic conditions; and other factors.
RESULTS OF OPERATIONS
For the Three and Six Month periods ended April 3, 1999 and March 31, 1998
TOTAL REVENUES
Infoseek's total revenues for the three and six month periods ended April 3,
1999 were approximately $29.6 million and $59.8 million, respectively. Revenues
consisted primarily of advertising derived from banner and sponsorship sales,
and revenues Starwave recognizes on the sale of advertising and other services
for the Joint Ventures under the representation agreements. Infoseek also earned
revenue from licensing its Ultraseek server product. Total revenues for the
three and six month periods represent a 105% and 120% increase over total
revenues for the three and six month periods ended March 31, 1998 of
approximately $14.5 million and $27.1 million, respectively. The revenue growth
over the respective prior year periods is primarily attributable to increased
advertising revenue due to increased use of the Internet by consumers and
acceptance of the Internet as an advertising and commerce medium, and increased
viewer traffic on GO Network and the Infoseek Service. Compared to the first
quarter ended January 2, 1999, total revenue for the quarter ended April 3, 1999
decreased by two percent. The Company believes that the decrease in revenue was
due to seasonal fluctuations in advertising purchase by customers and the delays
in the consummation of advertising and sponsorship agreements as a result of the
GO Network launch in January 1999. Infoseek's current business model is to
generate revenues through the sale of
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advertising and related items on the Internet. There can be no assurance that
current advertisers will continue to purchase advertising space, sponsorships
and services from Infoseek or that Infoseek will be able to successfully attract
additional advertisers.
For the three month periods ended April 3, 1999 and March 31, 1998, average
daily pageviews were approximately 42 million and 16 million, respectively. For
the six month periods ended April 3, 1999 and March 31, 1998, average daily
pageviews were approximately 39 million and 14 million, respectively.
Historically, Infoseek has relied on purchased traffic from companies such as
Microsoft and Netscape. For the three and six month periods ended April 3, 1999,
purchased traffic accounted for 20% of total daily pageviews, as compared to 39%
and 40% for the three and six month periods ended March 31, 1998, respectively.
HOSTING, CONTENT AND WEBSITE COSTS
Hosting, content and website costs were approximately $22.1 million and
$35.4 million for the three and six month periods ended April 3, 1999,
respectively. Hosting, content and website costs consist primarily of
representation rights fees paid to the Joint Ventures, amortization of
intangibles relating to hosting, content and website costs and the costs
associated with the enhancement, maintenance and support of Infoseek's websites
and the Joint Ventures' websites, including telecommunications costs, equipment
depreciation and related support services. Hosting, content and website costs
also include costs associated with the licensing of certain third-party
technologies and content. Hosting, content and website costs for the three and
six month periods ended April 3, 1999, represent a 926% and 768% increase over
the costs for the three and six month periods ended March 31, 1998 of
approximately $2.2 million and $4.1 million, respectively. The increase over the
respective prior year periods was primarily due to amortization charges from the
Starwave and Quando acquisitions, the representation right fees and increases in
royalties due to additional traffic. Compared to the first quarter of fiscal
1999, hosting, content and website costs increased by 67%, mainly due to the
first full quarter of intangibles amortization charges relating to the Starwave
acquisition, the additional intangibles amortization charges relating to the
Quando acquisition, an increase in representation rights fees paid by Starwave
to the Joint Ventures and increase in traffic hosted by the Company. Management
expects its hosting, content and website costs will continue to increase due to
obligations under the representation agreements. In addition, management plans
to continue to upgrade equipment and maintenance, provide personnel support, add
content partners to meet the growing demands for web services, and provide
additional services for the Joint Ventures.
RESEARCH AND DEVELOPMENT
Research and development costs were approximately $7.9 million and $12.4
million for the three and six month periods ended April 3, 1999, respectively.
Research and development expenses primarily consist of personnel costs,
consulting fees and equipment depreciation. Research and development costs for
the three and six month periods ended April 3, 1999 represent a 270% and 198%
increase over the costs for the three and six month periods ended March 31, 1998
of approximately $2.1 million and $4.2 million, respectively. The increase over
the respective prior year periods is attributable to the development and launch
of GO Network, on-going enhancements to the Infoseek Service, enhancements
related to the Joint Ventures' websites and the development and implementation
of new technology and products. Compared to the first quarter of fiscal 1999,
research and development costs increased by 76%, primarily due to the increase
in additional intangibles amortization charges resulting from the Starwave and
Quando acquisitions, the increase in headcount and expenses related to
development of additional features in GO Network such as GO Shop, GO Money and
GO Computing. Management plans to continue to add new features to GO Network.
The Company devoted significant resources to the development of e-commerce in
the quarter ended April 3, 1999. Management believes development of additional
e-commerce features is vital for the Company to remain competitive in its
industry. Management anticipates that it will continue to devote substantial
resources to product development, especially related to GO Network and
e-commerce. These costs are expected to continue to increase in dollar amount in
future periods.
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SALES AND MARKETING
Sales and marketing costs were approximately $27.8 million and $57.2 million
for the three and six month periods ended April 3, 1999, respectively. Sales and
marketing expenses primarily consist of compensation of sales and marketing
personnel, advertising, promotional expenses and other marketing related costs.
Sales and marketing costs for the three and six month periods represent a 163%
and 156% increase over the costs for the three and six month periods ended March
31, 1998, of approximately $10.6 million and $22.4 million, respectively. The
increase over the respective prior year periods is primarily the result of
expenses related to the WebTV transaction, costs related to purchased traffic,
the hiring of additional sales and marketing personnel and an increase in
promotional and advertising activity including television and other media
advertising campaigns. Compared to the first quarter of fiscal 1999, sales and
marketing costs decreased by 6%. The decrease is due to additional expenses
relating to the launch of the marketing campaign for GO Network during the first
quarter of fiscal 1999. Management expects to increase promotional and
advertising spending, especially related to GO Network, and anticipates hiring
additional sales representatives in future periods.
GENERAL AND ADMINISTRATIVE
General and administrative costs were approximately $6.1 million and $13.0
million for the three and six month periods ended April 3, 1999, respectively.
General and administrative expenses consist primarily of compensation of
administrative and executive personnel, facility costs and fees for professional
services. General and administrative costs for the three and six month periods
ended April 3, 1999 represent a 226% and 255% increase over the costs for three
and six month periods ended March 31, 1998, of approximately $1.9 million and
$3.7 million, respectively. The increase over the respective prior year periods
is the result of the integration costs associated with the Starwave acquisition,
costs associated with modifications to financial and business systems,
additional administrative and executive headcount and additional infrastructure
to manage the expansion of the business. Compared to the first quarter of fiscal
1999, general and administrative expenses decreased by 12%. The decrease is due
to the increase of consulting expenses relating to system integration and
reorganization of the Company as a result of the Starwave acquisition during the
first quarter of fiscal 1999. Management anticipates that its general and
administrative expenses will continue to increase as Infoseek continues to
expand its administrative and executive staff.
AMORTIZATION OF INTANGIBLES
As the Starwave and Quando acquisitions were accounted for using the
purchase method, the Company recorded a total of approximately $656.5 million
related to Goodwill, and approximately $178.5 million related to the Joint
Ventures (in the Starwave acquisition), each of which are being amortized over
10 years. The Company also recorded approximately $11.1 million related to
Goodwill for the Quando acquisition which is being amortized over two years. In
addition, approximately $53.9 million of intangible assets related to Developed
Technology and Assembled Workforce were recorded. Developed Technology and
Assembled Workforce are being amortized over two years. For the three and six
month periods ended April 3, 1999, the Company incurred approximately $28.4
million and $41.7 million, respectively, in amortization expenses related to
intangibles. Of the $28.4 million and $41.7 million amortization charges for the
three and six month periods ended April 3, 1999, approximately $9.6 million and
$13.9 million, respectively, related to Hosting, Content and Website costs;
approximately $0.7 million and $1.1 million, respectively, related to Sales and
Marketing costs; approximately $0.4 million and $0.7 million, respectively,
related to General and Administrative costs; approximately $0.3 million and $0.4
million, respectively, related to Research and Development costs; and
approximately $17.4 million and $25.6 million, respectively, related to
Goodwill. Management anticipates that amortization of intangibles will increase
in future periods due to the effect of a full quarter of amortization charges
relating to the Quando acquisition beginning in the third quarter of fiscal
1999. Any future acquisitions may increase the amortization of intangibles.
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IN-PROCESS RESEARCH AND DEVELOPMENT
For the three and six month periods ended April 3, 1999, Infoseek incurred
charges for in-process research and development of approximately $4.3 million
and $76.9 million, respectively, as a result of the Starwave and Quando
acquisitions.
LOSS FROM JOINT VENTURES
Each of the Joint Ventures is accounted for under the equity method since
neither Infoseek nor Starwave have a majority voting interest in either Joint
Venture. Under each of the joint venture agreements, losses from the Joint
Ventures are split 60/40 between Starwave and Disney entities, respectively. For
the three and six month periods ended April 3, 1999, Infoseek's share of losses
were approximately $4.1 million and $5.4 million, respectively.
INTEREST INCOME, NET
For the three month periods ended April 3, 1999 and March 31, 1998, Infoseek
earned net interest income of approximately $3.2 million and $0.5 million,
respectively. For the six month periods ended April 3, 1999 and March 31, 1998,
Infoseek earned net interest income of approximately $5.2 million and $0.7
million, respectively. The increase in net interest income for the three and six
month periods ended April 3, 1999 is primarily the result of an increase in
available cash resulting from proceeds from the Disney transaction and interest
earned from the Disney note receivable.
INCOME TAXES
Due to Infoseek's loss position, no provision for income taxes was provided
for any of the periods presented. At October 3, 1998, Infoseek had federal and
state net operating loss carryforwards of approximately $40.0 million and $17.0
million, respectively. The federal net operating loss carryforwards will expire
beginning in 2009 through 2013, and the state net operating loss carryforwards
will expire in the years 1999 through 2013. Certain future changes in the share
ownership of Infoseek, as defined in the Tax Reform Act of 1986 and similar
state provisions may restrict the utilization of these carryforwards. A
valuation allowance has been recorded for the entire deferred tax asset as a
result of uncertainties regarding the realization of the asset due to the lack
of earnings history of Infoseek. As of April 3, 1999, the Company recorded
deferred tax liabilities totaling $45.1 million, related primarily to the
recording of certain intangibles resulting from the Starwave and Quando
acquisitions.
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 "00" 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 systems, 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 or will be
made so with only minor modifications. However, Infoseek does plan to replace
several internal systems as part of a conversion to improved financial and
business systems in fall 1999. 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 is in the process of investigating
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year 2000 compliance by third parties, in situations where, if possible, vendors
that are not year 2000 compliant will be replaced by alternate sources that are
year 2000 compliant. However, Infoseek does not have any 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. Thus, the Infoseek services may offer fewer
features. If many linked sites fail, the value of user traffic and advertising
on Infoseek's websites could materially decrease. In addition, if Infoseek's
review of its year 2000 readiness did not uncover all year 2000 problems,
Infoseek's business and operations could suffer serious harm or be required to
expend resources to resolve these problems. Infoseek does not currently have a
contingency plan to address this risk. However, a contingency plan is in the
process of being developed, and is expected to be completed by September 1999.
If Infoseek's systems are not year 2000 compliant, although Infoseek does not
expect any of the following to occur, it may not be able to input financial data
or generate reports and could lose data in its management information and
advertising management systems. In addition, users of its services could
experience reduced functionality and potentially lose stored user data.
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.
LIQUIDITY AND CAPITAL RESOURCES
At April 3, 1999, Infoseek had approximately $79.1 million in cash, cash
equivalents and short-term investments, an increase of approximately $27.2
million from October 3, 1998.
For the six month period ended April 3, 1999, operating activities used cash
of approximately $42.2 million due primarily to Infoseek's net loss, which
included non-cash charges for depreciation and amortization and the write-off of
in-process technology. For the six month period ended March 31, 1998, operating
activities provided cash of approximately $1.0 million due primarily to
increases in the Company's liabilities and partially offset by Infoseek's net
loss. For the six month period ended April 3, 1999, investing activities
provided cash of approximately $18.3 million primarily related to the proceeds
from sales and maturities of available-for-sale securities, partially offset by
the purchase of property and equipment. For the six month period ended March 31,
1998, investing activities used cash of approximately $46.6 million primarily
related to the purchase of available-for-sale securities and property and
equipment. Financing activities generated cash of approximately $83.0 million in
the six month period ended April 3, 1999, primarily from the issuance of Common
Stock. Financing activities generated cash of approximately $44.2 million in the
six month period ended March 31, 1998, primarily from the issuance of Common
Stock.
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Infoseek has cash commitments to Netscape, Microsoft and WebTV in connection
with certain agreements. Infoseek also has commitments to promote GO Network
pursuant to a promotional services agreement with Disney and to make guaranteed
minimum payments under representation agreements with the Joint Ventures. In
addition, Infoseek has minimum funding commitments for GO Network pursuant to a
product management agreement with Disney. Further, Infoseek has license royalty
commitments to Disney when it obtains positive EBITA, and has obligations to
provide funding to the Joint Ventures. Infoseek also has funding commitments
under operating lease agreements and expects to continue to incur significant
capital expenditures to support its business. In the quarter ended April 3,
1999, Infoseek entered into a revenue contract with a strategic partner, MBNA,
which required MBNA to pay a nonrefundable up-front payment of $20.0 million.
Infoseek currently anticipates that its cash, cash equivalents, short-term
investments and cash flows generated from advertising revenues will be
sufficient to meet its anticipated needs for working capital and other cash
requirements through December 31, 1999. However, Infoseek may need to raise
additional funds sooner in order to fund more rapid expansion, to develop new or
enhance existing services or products, to respond to competitive pressures or to
acquire complementary products, businesses or technologies. Infoseek's estimate
of the time period through which its cash and other sources of funds will be
sufficient to fund its operations is a forward-looking statement subject to
risks and uncertainties. The actual time period may vary as a result of a number
of factors including those set forth under "Risk Factor--In Order to Continue to
Grow, Infoseek Will Need More Financing."
If additional funds are raised through the issuance of equity or convertible
debt securities, the percentage ownership of the stockholders of Infoseek will
be reduced. Newly issued securities may have rights, preferences or privileges
senior to those of the holders of Infoseek's Common Stock. There can be no
assurance that additional financing will be available on terms favorable to
Infoseek, or at all. If adequate funds are not available or are not available on
acceptable terms, Infoseek's ability to fund expansion, take advantage of
acquisition opportunities, develop or enhance services or products, or respond
to competitive pressures would be significantly limited. Such limitation could
have a material adverse effect on Infoseek's business, results of operations,
financial condition and prospects. The estimated period of available funds to
meet its capital requirements and other commitments is a forward-looking
statement that involves risks and uncertainties. There can be no assurance that
Infoseek will be able to meet its working capital and other cash requirements
for this period as a result of a number of factors including but not limited to
those described under "Risk Factors--In Order to Continue to Grow, Infoseek Will
Need More Financing."
RISK FACTORS
You should carefully consider the risks described below before making your
decision to invest in Infoseek. The risks and uncertainties described below are
not the only factors facing Infoseek. Additional risks and uncertainties not
presently known to us or that we do 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 results of operations could be seriously harmed. If this occurs, the trading
price of Infoseek Common Stock could decline, and you may lose part or all of
your investment.
IF GO NETWORK IS NOT SUCCESSFUL, INFOSEEK'S BUSINESS WOULD BE SERIOUSLY
HARMED
Infoseek believes that GO Network is critical to its business. If Infoseek
does not further enhance, develop more functionalities and services, integrate
more content or successfully promote GO Network, Infoseek's business, financial
condition and operating results would be seriously harmed.
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Given the growing number of new Internet sites and low barriers to entering
the Internet market, Infoseek cannot assure you that users and advertisers will
accept GO Network. If users and advertisers do not continue to accept GO Network
or do not find it to be of high quality, Infoseek will experience a decrease or
insufficient growth in revenues and may be required to incur additional expenses
to promote GO Network.
In order to attract new users and build strong brand recognition and loyalty
for GO Network, Infoseek will be required to increase spending to promote GO
Network. This will include the purchase of promotion from Disney affiliate, ABC.
Infoseek may also be required to spend additional resources to purchase and
produce new content. Such additional expenditures will result in continued
operating losses and delays to Infoseek's achievement of profitability.
As a result of these risks, Infoseek cannot assure you that GO Network will
be successful or result in greater revenues, cash flows or any profits to
Infoseek.
GO NETWORK MAY NOT SUCCEED WITHOUT DISNEY'S COOPERATION
Infoseek and Disney promote GO Network together. If Disney does not
effectively promote GO Network, Infoseek's business will suffer.
Infoseek licenses GO Network trademark from Disney. This license may be
terminated by Disney under certain circumstances. If Disney terminates the
license, GO Network would be severely harmed. Also, if Disney does not protect
GO Network trademark against infringement or if this trademark infringes the
rights of others, the value of the trademark would be diminished and GO Network
would be harmed. See "--Third Parties May Prevent Infoseek From Developing Its
Intellectual Property."
Although Disney has generally agreed not to compete with Infoseek in certain
limited geographic and product areas, Disney may enter into transactions with
any of Infoseek's competitors or provide 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 or the Infoseek Service.
Disney and Infoseek are currently engaged in litigation brought by a
competitor regarding the GO Network logo. Although Disney and Infoseek deny all
the material allegations of complaint and is defending against it. Infoseek
cannot assure you that Infoseek will continue to be able to use the GO Network
name and logo. In addition, there can be no assurance that Disney and Infoseek
will succeed in defending the complaint; and even if successful, without
incurring significant litigation costs which will result in continued operating
losses and delay to Infoseek's achievement of profitability.
IF INFOSEEK ENCOUNTERS DIFFICULTIES IN INTEGRATING STARWAVE, QUANDO AND
FUTURE ACQUISITIONS, INFOSEEK WILL NOT EXPERIENCE ALL OF THE EXPECTED BENEFITS
OF THESE ACQUISITIONS
Infoseek believes it may be necessary to acquire complementary products,
technologies or businesses to remain competitive. There are several risks in
acquisitions or other strategic transactions, including the Quando and Starwave
acquisitions, such as:
- difficulties in the integration of personnel and operations,
- difficulties in the integration of acquired technology or content into
existing businesses,
- potential disruption of Infoseek's ongoing businesses,
- expenses and other related charges associated with these transactions,
- the necessity to establish and implement uniform standards, controls,
procedures and policies for the acquired companies,
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- impairment in 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 business combinations,
- use of limited cash resources,
- dilutive issuances of stock, and
- loss of key personnel.
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 any acquisition or strategic transaction
will be worth the time, effort and expense required to complete any acquisition
or transaction.
ACCOUNTING CHARGES FROM ACQUISITIONS WILL DELAY AND REDUCE PROFITABILITY
Infoseek's acquisitions of Starwave and Quando were accounted for under the
purchase method of accounting. As a result, Infoseek will have reduced
profitability for at least several years due to accounting charges relating to:
- amortization of intangible assets:
1. developed technology and assembled workforce of Starwave: $45.2
million amortized over a two-year period beginning November 18, 1998
2. developed technology and assembled workforce of Quando: $8.7 million
amortized over a two-year period beginning January 15, 1999
3. goodwill of Starwave: $656.5 million amortized over a ten-year period
beginning November 18, 1998
4. goodwill of Quando: $11.1 million amortized over a two-year period
beginning January 15,1999
5. joint venture relationships: $178.5 million amortized over a ten-year
period beginning November 18, 1998
- in-process research and development of Starwave and Quando: $72.6 million
expensed in the quarter ended January 2, 1999 and $4.3 million expensed in
the quarter ended April 3, 1999, respectively,
- remaining integration costs: up to $3.3 million,
- significant future charges relating to sales of shares and warrants which
Infoseek may be required to make to Disney below fair market value at the
time of purchase in connection with Disney's exercise of its rights to
maintain its ownership interest in Infoseek,
- increased operating expenses due to Infoseek's expanded business,
including GO Network,
- other costs not currently known,
If these expenses are not timely followed by increased revenues, Infoseek's
business, results of operations, financial condition and prospects would be
seriously harmed.
IN ORDER TO CONTINUE TO GROW, INFOSEEK WILL NEED MORE FINANCING
Infoseek anticipates that its current cash level and other available sources
of funds will last through at least December 31, 1999. After that time, Infoseek
may need to raise additional funds. Additional
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financing may not be available on satisfactory terms, if at all. Infoseek's
estimate of the time period through which its cash and other sources of funds
will be sufficient to fund its operations is a forward-looking statement subject
to risks and uncertainties. The actual time period may vary as a result of a
number of factors including those set forth below.
Infoseek expects to use its funds to, among other plans, continue to expand
the Company's operations, develop new and enhance existing services and
products, promote GO Network and acquire other businesses, products or
technologies. Infoseek may decide to dedicate more financial resources than
currently forecasted for any of these activities; therefore, Infoseek may need
to raise additional funds sooner than currently anticipated. If Infoseek is
unable to raise the required funds, Infoseek may not be able to continue these
activities. Infoseek's business, financial condition and prospects could be
seriously harmed. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-- Infoseek Liquidity and Capital Resources."
If the 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.
INFOSEEK'S FINANCIAL RESULTS WILL VARY
Infoseek and its subsidiaries have limited operating history. 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 budget future
operating expenses. As a result, Infoseek cannot assure you it will have profits
in any given period or in the long term.
Infoseek expects that its results will vary significantly in the future due
to a number of reasons, including:
- the growth rate, usage and acceptance of the Internet, intranets and
online services,
- the acceptance rate of the Internet as an advertising medium and the
demand for advertising,
- increased seasonality in Internet advertising,
- acceptance of the Internet for commerce,
- demand for Infoseek's products and services,
- individual advertisers budgeting cycle,
- costs related to expansion and capital investments,
- results of acquisitions and strategic agreements, including amortization
of intangible assets,
- charges relating to the issuance of stock or warrants below market price
in connection with Disney's right to maintain its ownership interest,
- the introduction, marketing and acceptance of new, enhanced or alternative
products or services by Infoseek 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,
- 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,
- seasonal fluctuations in Internet use and the markets for news and sports
events,
- general economic conditions, and
- other factors.
In addition, most of Infoseek's revenues are generated from advertising
contracts and related sponsorship agreements which generally range from two
months to three years in duration. Most of Infoseek's contracts with advertising
customers can be canceled at any time. Advertising prices are closely related to
the number of viewers on Infoseek's services. Infoseek cannot accurately predict
the number of viewers on its sites for any given time. As a result, Infoseek has
difficulty in forecasting future sales and operating results.
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.
DISNEY OWNS A SUBSTANTIAL AMOUNT OF INFOSEEK STOCK AND IS ABLE TO
SIGNIFICANTLY INFLUENCE INFOSEEK'S AFFAIRS
Disney is the principal stockholder of Infoseek, owning approximately 43% of
Infoseek's outstanding stock. Disney also owns warrants which become exercisable
over three years from June 1998, allowing Disney to own a total of 50.1% or more
of Infoseek's outstanding Common Stock. Infoseek and its stockholders face
several specific risks as a result of Disney's ownership of Infoseek's Common
Stock, including the following:
Disney Has Certain Control Over Infoseek's Governance.
Through its substantial ownership of and agreements with Infoseek, Disney
may exercise significant control over Infoseek. Specifically:
- Disney may be able to exercise effective control over certain matters
requiring stockholder approval.
- Disney has the right to have its nominees for director submitted to a vote
of stockholders of Infoseek. Disney is entitled to a number of nominees
sufficient to require the approval of the Disney nominees for those
transactions requiring supermajority board approval as described below.
Supermajority board approval is required for certain Infoseek
transactions, including:
- amendments to Infoseek's certificate of incorporation or bylaws,
- a transaction in which the ownership control of Infoseek changes,
- sale 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,
and
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- appointment of a new Chief Executive Officer.
Disney May Be Able to Obtain Majority Control of Infoseek in the Future.
Although Disney has agreed for a three-year period not acquire voting power
of more than 49.9% in Infoseek's stock, this "standstill" obligation may be
terminated earlier in certain limited circumstances. If the standstill
obligation terminates, Disney could obtain majority control over Infoseek any
time it wishes.
Disney Has a Right to Purchase Additional Shares in Future Infoseek
Offerings Which Could Further Dilute Other Shareholders' Ownership.
Disney has a right to purchase additional shares and warrants of Infoseek in
order to maintain its ownership level if Infoseek issues additional shares or
options. Disney's purchase of additional shares will dilute other Infoseek
stockholders' ownership and could reduce Infoseek's earnings per share, if any.
Disney's purchase of additional shares and warrants could also result in
material charges if the purchase of shares or warrants, or the price of the
warrants, to Disney are below fair market value at the time of purchase; these
charges may materially adversely affect Infoseek's results of operations.
Disney's Ownership Reduces Opportunities for an Acquisition on Infoseek by a
Third Party.
Disney's substantial ownership position in Infoseek, as well as the terms of
GO Network trademark license agreement between Infoseek and Disney, 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, third
party investors, other than Disney, will find it difficult to acquire all or a
large portion of Infoseek stock. See "Business--Relationship with Disney."
IF INFOSEEK DOES NOT RENEW EXISTING OR ENTER INTO NEW AGREEMENTS WHICH
RESULT IN USER TRAFFIC, OR IF SITES THAT PROVIDE TRAFFIC TO INFOSEEK ARE NOT
SUCCESSFUL, INFOSEEK'S REVENUE WILL DECREASE
Infoseek's success depends greatly on strategic relationships with 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. A
significant portion of the aggregate pageviews on the Infoseek Service is
generated by traffic derived from third party sources, principally Microsoft,
WebTV and Netscape. The agreement with Netscape and Microsoft are scheduled to
terminate in May 1999 and October 1999, respectively. In order to increase brand
awareness of GO Network, build brand loyalty and develop alternative traffic
sources, the Company is planning to increase its promotional program for GO
Network. However, Infoseek cannot assure you that it can successfully build
brand loyalty by increasing promotional campaigns nor can it assure you that
traffic will increase as a result of these promotional campaigns.
When existing traffic agreements terminate, Infoseek may not be able or
willing to renew them. Infoseek may not be able to enter into other agreements
on good terms or at all. If Infoseek does not renew these agreements or enter
into similar agreements on good terms or 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 FUTURE SUCCESS DEPENDS ON THE CONTINUATION AND INTEGRATION OF
JOINT VENTURE RELATIONSHIPS AND ON ENTERING INTO NEW THIRD PARTY RELATIONSHIPS
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Infoseek's success also depends on the continuation and integration of its
joint ventures and third party relationships, especially the joint ventures with
ESPN and ABC. Under certain 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 related items, with a corresponding representation fee for
amounts due to the Joint Ventures. If Infoseek is unable to continue its joint
ventures with its joint venture partners, integrate these joint ventures into
its business or enter into new joint ventures, Infoseek may not be able to keep
or create interactive services and products that are attractive to users and
advertisers. This could seriously harm Infoseek's business, financial results
and financial condition.
During and after the quarter ended April 3, 1999, Infoseek entered into
several strategic agreements with advertisers; if these advertisers do not make
the obligated contractual payments on these agreements, Infoseek's business,
results of operations and financial condition would be seriously harmed. In
addition, Infoseek entered into a strategic agreement with drkoop.com in April
1999. The payments under the drkoop.com agreement are conditioned on the
completion of financing by drkoop.com.
INFOSEEK HAS HAD LOSSES IN THE PAST AND HAS DIFFICULTY PREDICTING FUTURE
RESULTS BUT EXPECTS FLUCTUATIONS AND LOSSES IN THE FUTURE
Infoseek has not achieved profitability in the past and expects to have
consolidated net losses for a number of years. The limited operating history of
Infoseek and its subsidiaries make it difficult to budget or predict future
results. Although Infoseek experienced significant revenue growth since 1997,
Infoseek cannot assure you that revenues will continue to grow or that Infoseek
will achieve profitability.
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. Since the acquisitions of Starwave and Quando are large and complex,
Infoseek may be required to reorganize its operations in order to operate more
effectively. Due to the complexity and scale of Infoseek's recent acquisitions
and the rapid pace of change and development of the Internet market, Infoseek's
operating plans and forecasts, including its projected business outlook, and
Infoseek's operating objectives, are subject to frequent revision. Although
Infoseek recently began a new multi-year planning cycle, future events and plans
may cause Infoseek to dramatically revise its business objectives and estimates
of profitability. Infoseek cannot assure you it will be able to adequately
address the challenges of the Internet market and the complexity of its recent
acquisitions.
As of April 3, 1999, Infoseek had an accumulated deficit of $214.6 million,
including the accumulated deficit of Starwave and Quando from their respective
dates of acquisition.
From time to time, Infoseek may elect to make certain pricing, service,
marketing or acquisitions decisions that could seriously harm Infoseek's
business, results of operations, financial condition and prospects in the
short-term or long-term. Infoseek's agreements with its strategic partners have
included and may in the future include substantial one-time or up-front payments
to or from these 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.
INFOSEEK'S STOCK PRICE WILL FLUCTUATE
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,
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- announcements of new technological innovations, 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, and
- news relating to trends in Infoseek's markets or general economic
condition.
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. In addition, Infoseek's operating results may be below
the expectations of public market analysts and investors. In such event, there
would be high possibility that the market price of Infoseek's Common Stock would
decrease.
INFOSEEK FACES INTENSE COMPETITION AND MAY NOT BE ABLE TO COMPETE
EFFECTIVELY
The market for Internet and intranet products is very competitive and
Infoseek expects these markets to become more competitive in the future.
Infoseek believes it faces competition in numerous areas, including:
- consolidated Internet ("Portal") products,
- search and navigation services,
- search software,
- Internet media,
- advertising media,
- electronic commerce, and
- broadband portal products.
If Infoseek is unable to compete effectively in these areas, it could suffer
serious harm to its business.
The market for these services is new and developing. As a result, Infoseek
cannot predict how competition will affect Infoseek, its competitors or its
customers. Since the development of new Internet technology is relatively
inexpensive, it is easy for new competitors to enter the Internet and intranet
markets, and this causes rapid changes to these markets. At present, there are a
large number of competitors in these markets and new competitors are entering
these markets everyday. In addition, some of Infoseek's competitors have engaged
in business combinations or other strategic relationships in order to increase
their power and market share.
Many of Infoseek's competitors have greater resources, including financial,
marketing and technical resources, than Infoseek. These companies may be able to
offer more varied content and services than Infoseek, including broadband and
multimedia content, search and directory services, on-line "communities" with
chat, e-mail and games, electronic commerce and high speed home Internet access.
Infoseek may be unable to develop these and other new services in advance of its
competitors.
IF INFOSEEK DOES NOT ACHIEVE REVENUE MINIMUMS UNDER REPRESENTATION
AGREEMENTS, IT MAY INCUR ADDITIONAL LOSSES UNDER THESE 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 agreed to make quarterly
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payments to the Joint Ventures. These payments will be the greater of a
predetermined minimum amount or 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 to collect the amounts due from these sales and services.
Failure to sell the predetermined minimum amount or collection of amounts due
could result in additional losses to Infoseek, and seriously harm Infoseek's
business, results of operations and financial condition.
IF THE INTERNET AND ELECTRONIC COMMERCE DO NOT CONTINUE TO GROW, INFOSEEK'S
BUSINESS WILL SUFFER
For revenue growth, Infoseek depends on increased acceptance and use of the
Internet, intranets and other interactive online platforms as sources of
information, entertainment and sale of goods and services. If the Internet
growth is slower than expected, or fails to 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 has grown 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 the purchase and sale of 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 of Internet service,
- limitations on access by corporations and schools, and
- 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.
The Internet industry is young. The business model of Infoseek and its
competitors changes frequently and very few products and services are
established in the market. The development of the Internet market may stop or
may continue at a rate slower than expected. Infoseek may be unable to modify
its business model rapidly enough to remain competitive. The Internet market is
becoming 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.
IF GO SHOP IS NOT SUCCESSFUL, INFOSEEK'S BUSINESS WOULD BE SERIOUSLY HARMED
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Infoseek believes that its e-commerce service, GO Shop, is critical to its
business. If Infoseek does not further enhance, develop more GO Shop services,
attract more merchants and customers or successfully promote GO Shop, Infoseek's
business, financial condition and operating results would be seriously harmed.
Given the growing number of Internet sites which have features similar to GO
Shop, Infoseek cannot assure you that merchants and customers will accept GO
Shop. If merchants and customers do not accept GO Shop or do not find it to be
of high quality, Infoseek will experience a decrease in revenues and may be
required to incur additional expenses to promote GO Shop. In addition, if
e-commerce is not successful, the Company may need to write down its assets
resulting in additional charges.
As a result of these risks, Infoseek cannot assure you that GO Shop will be
successful or result in greater revenues, cash flows or any profits to Infoseek.
IF INTERNET ADVERTISING AND RELATED SPONSORSHIPS OF INFOSEEK'S SERVICES ARE
NOT ACCEPTED, INFOSEEK'S REVENUES WILL BE ADVERSELY AFFECTED
Infoseek depends heavily on the sale of advertisements and related
sponsorships of GO Network and the Infoseek Service as a source of revenue.
Therefore, Infoseek depends on the acceptance and success of advertising on the
Internet. Infoseek cannot assure you that Internet advertising will be widely
accepted. The Internet market is changing quickly. 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 price levels for the purchase of
advertisements and this could result in a decline in Infoseek's revenues. Many
of the advertisers on Infoseek's services are relatively new to Internet
advertising and have not devoted significant amounts of their advertising
budgets to Internet advertising. Advertisers may determine that traditional
sources of advertising, such as television, radio and newspapers are more cost
effective than the Internet. There are no widely accepted standards to measure
the effectiveness of Internet advertising.
Infoseek also believes that advertising usage changes with the economy and
are subject to seasonal variations. Any seasonal or economic-based changes in
advertising sales could seriously harm Infoseek's business, financial condition
and operating results.
INFOSEEK MAY NOT BE ABLE TO USE THE POOLING-OF-INTERESTS ACCOUNTING METHOD
FOR FUTURE ACQUISITIONS WHICH MAY REDUCE ITS FUTURE PROFITABILITY
Due to Infoseek's acquisition of Starwave and its transactions with Disney,
Infoseek may not be able to account for future acquisitions as
pooling-of-interests transactions 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. Charges for the amortization of goodwill
incurred in acquisitions will reduce Infoseek's profits, if any, 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.
IF INFOSEEK DOES NOT IMPROVE ITS PRODUCTS TO KEEP PACE WITH CHANGING
TECHNOLOGY, IT WILL LOSE USERS
Infoseek may not be able to respond to changing Internet technologies,
consumer needs and industry standards. Infoseek may not be able to introduce new
products and services before competitors or improve existing products to match
competitors' 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.
A key element of Infoseek's strategy is to continue in the development of
new technological innovations in order to enhance user's experience and
strengthen relationships with advertisers. The success of GO Network and its
component sites will depend in part on how easy-to-use, functional and
feature-filled such services are.
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Due to Infoseek's continuous need to provide technological improvements in
its services, including GO Network and the Infoseek Service, Infoseek faces many
risks. Infoseek cannot assure you:
- Any of its new or proposed products 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.
- 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.
- In order to develop, improve or acquire new technologies, it will not
spend a large portion of its resources.
- 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 occur, customers may become dissatisfied with
Infoseek's products and services. In turn, Infoseek could lose viewers and could
experience delayed or lost advertising revenues.
COMPUTER INTRUSIONS OR ELECTRONIC COMMERCE LIABILITIES MIGHT RESULT IN
LOSSES TO INFOSEEK
Consumers' lack of faith in and lapses in the privacy and security of the
Internet and online transactions may also prevent the general growth of the
Internet and electronic commerce. Infoseek's business, which depends on this
growth, may be harmed as a result.
Despite Infoseek's efforts to prevent intruders from breaking into
Infoseek's systems and stealing information or interrupting service, Infoseek
cannot assure you that it will be able to protect itself from computer security
intrusions. Infoseek and its contractors store and transmit confidential
information, such as computer software or credit card numbers. 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. Infoseek is in the process of reviewing its insurance coverage
to cover potential claims and losses from e-commerce transactions. However, if
Infoseek does not or cannot obtain adequate insurance, 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 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.
These activities may expose us to a number of additional risks and
uncertainties, including:
- potential liabilities for illegal activities that may be conducted by
participating merchants;
- consumer fraud and false or deceptive advertising or sales practices;
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- breach of contract claims relating to merchant transactions;
- claims that materials included in merchant sites or sold by merchants
through these sites infringe third-party patents, copyrights, trademarks
or other intellectual property rights, or are libelous, defamatory or in
breach of third-party confidentiality or privacy rights;
- claims relating to any failure of merchants to appropriately collect and
remit sales or other taxes arising from e-commerce transactions; and
- claims that may be brought by merchants as a result of their exclusion
from our commerce services or losses resulting from any downtime or other
performance failures in our hosting services.
INFOSEEK MAY EXPERIENCE YEAR 2000 COMPUTER PROBLEMS THAT HARM ITS BUSINESS
Certain computer systems may not correctly recognize dates when the year
changes from 1999 to 2000. Infoseek management has reviewed Infoseek's exposure
to this problem and does not believe that it will incur significant expenses as
a result of the effect of this problem on its products, services or information
technology. However, Infoseek does plan to replace several systems as part of a
conversion to improved financial and business systems in connection with regular
upgrade programs during 1999 and will make minor software alterations to certain
of its systems to ensure full year 2000 readiness. Infoseek may not be able to
implement these upgrades successfully, and its belief that it will not incur
significant expenses may be incorrect due to unknown defects in its systems. If
any of these were to occur, Infoseek could suffer serious harm to its business,
results of operations, financial condition and prospects due to year 2000
computer system problems.
Infoseek is relying on assurances from vendors that their systems and
products are prepared for the year 2000. Infoseek cannot assure you that its
vendors' representations are accurate. Infoseek is in the process of
investigating year 2000 compliance by vendors of Infoseek, in situations where
if possible vendors that are not year 2000 compliant will be replaced by
alternate sources that are year 2000 compliant. However, Infoseek does not have
any 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. If many linked sites
fail, the value to users and advertisers on Infoseek's websites could materially
decrease. In addition, if Infoseek's review of its year 2000 readiness did not
uncover all year 2000 problems, or if Infoseek fails to develop a contingency
plan to address this risk, Infoseek's business and operations could suffer
serious harm or Infoseek could be required to expend resources to resolve those
problems. See "--Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000 Compliance."
IN ORDER TO ACCOMMODATE FUTURE GROWTH, INFOSEEK MUST MAKE IMPROVEMENTS TO
ITS OPERATIONS
Infoseek may not be able to manage its rapid growth effectively. In order to
take advantage of market opportunities, Infoseek may be required to expand.
Infoseek's 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.
In order to succeed, Infoseek must continue to:
- Invest in and improve operational, financial and management information
systems which affect planning, advertising sales, management, finance and
accounting.
- Enhance its advertising inventory management analysis system discussed
further under "--If Infoseek's Advertising Management Systems Fail,
Infoseek Could Lose Advertising Sales Opportunities."
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- Hire, train, motivate and manage its staff.
- Maintain relationships with various partners, advertising customers,
advertising agencies, Internet sites and services, Internet service
providers and other third parties.
- Retain control by management over the operations and strategic direction
of Infoseek in a rapidly changing environment and locate new business
activities.
- Develop and expand electronic commerce capabilities, including an
infrastructure for security, order processing and financial reporting.
If Infoseek fails to, or experiences unscheduled delays, or encounters
unexpected additional costs, in addressing these issues, Infoseek's business,
results of operations, financial condition and prospects could be seriously
harmed.
FAILURES OR LACK OF CAPACITY IN INFOSEEK'S COMPUTER SYSTEMS COULD RESULT IN
LOSS OF USERS
If Infoseek's systems, the majority of which are located in Sunnyvale,
California, and Bellevue and Seattle, Washington, fail or function poorly for
any reason, these interruptions would result in a reduction of traffic to the
Infoseek services. If the interruptions continue, they could reduce the number
of users and advertisers on Infoseek's products and services. A reduction in the
number of users and advertisers on Infoseek's products and services could
seriously harm Infoseek's business, results of operations, financial condition
and prospects.
Infoseek relies on computer, network and telecommunication systems to
provide its products and services. Such systems:
- may fail to operate correctly,
- may be strained by too many users or demands,
- may be damaged by earthquakes, fires, floods, wind storms, power loss,
lightning, electrical and telecommunication failures or similar events,
and
- may be damaged through physical or electronic break-ins or computer
viruses.
Infoseek does not maintain a comprehensive disaster recovery plan or have
redundant systems for each of its services. Although Infoseek has insurance
coverage 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 failure
of Infoseek systems and insurance does not cover such lose, 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 service
providers, nor can it 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.
IF INFOSEEK'S ADVERTISING MANAGEMENT SYSTEMS FAIL, INFOSEEK COULD LOSE
ADVERTISING SALES OPPORTUNITIES
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
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reporting and customer feedback on advertising. If Infoseek has serious
difficulties in utilizing these systems, Infoseek will need to devote more
resources to enhance these systems.
If Infoseek fails to properly display advertising because of problems with
its advertising management systems 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.
IF INFOSEEK IS NOT SUCCESSFUL IN EXPANDING INTO THE INTERNATIONAL MARKET,
ITS BUSINESS MAY SUFFER
As part of the business strategy, Infoseek began offering its products and
services to international users and advertisers, and is actively searching for
further expansion opportunities in the international market. If Infoseek fails
to succeed in international markets, Infoseek's business could suffer.
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 sufficient to
cover the cost of establishing and maintaining its international operations. 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 environments,
- 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 revenue collection,
- political instability,
- exposure to currency exchange risks,
- potentially adverse tax consequences, and
- increased competition.
Any one or more of these factors could prevent Infoseek from being
successful in international markets.
INFOSEEK MAY NOT BE ABLE TO ATTRACT OR RETAIN THE KEY PERSONNEL IT NEEDS TO
SUCCEED
If Infoseek is unable to attract and retain key and other skilled employees,
its business, results of operations, financial condition and prospects would be
seriously harmed. 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 President and Chief Executive Officer, Les
Wright, its Senior Vice President and Chief Financial Officer, and Patrick
Naughton, its Executive Vice President of Products. 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.
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Most of Infoseek's key employees do not have employment contracts. Infoseek may
also require even more skilled employees because of the launch of GO Network and
acquisition of Starwave.
IF INFOSEEK IS UNABLE TO PROTECT ITS INTELLECTUAL PROPERTY, ITS BUSINESS
COULD SUFFER
Infoseek's success depends heavily upon its exclusive technology, brand
names and Internet locations ("domain names"). Infoseek cannot assure you that
it can adequately protect this intellectual property. If Infoseek fails to
protect its intellectual property, its business could suffer.
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.
Despite Infoseek's efforts to patent and trademark its intellectual property
and keep information confidential, Infoseek may not be able to do so. 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.
- The laws of some foreign countries do not protect proprietary rights to as
great an extent as do the laws of the United States.
- Infoseek's competitors may independently develop similar technology or
design around Infoseek intellectual property.
- The application of copyright and trademark laws to the Internet and other
digital media is very uncertain.
THIRD PARTIES MAY PREVENT INFOSEEK FROM DEVELOPING ITS INTELLECTUAL PROPERTY
Infoseek may not be able to use its intellectual property or further develop
its business because of third parties. Infoseek cannot assure you that third
parties will not in the future claim infringement by Infoseek with respect to
Infoseek's current or future products. These claims of infringement, whether
successful or not, could seriously harm Infoseek's business, results of
operations or prospects.
Third parties:
- may bring claims of patent, copyright or trademark infringement against
Infoseek,
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- 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, or
- may bring costly and time-consuming lawsuits.
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
and licensed to Lycos related to Web spider technology. 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.
From time to time Infoseek will receive informal notices from copyright and
trademark holders regarding use of music, images and websites in its services.
On February 18, 1999, GotTo.Com, Inc. filed a complaint GOTO.COM V. THE WALT
DISNEY COMPANY, DISNEY ENTERPRISES, INC., INFOSEEK CORPORATION, AND MONTROSE
CORPORATION, Civ No. 99-01674 TJH, the United States District Court for the
Central District of California ("Trademark Action"). The complaint alleges that
the defendants' use of the GO NETWORK Green Traffic Light Logo is confusingly
similar to the plaintiff's unregistered GOTO.COM Logo. The complaint seeks an
unspecified amount of damages and a preliminary permanent injunction against the
use of the logo. The Company denies all the material allegations of Complaint
and is defending against them.
The costs of defending the Trademark Action and its ultimate outcome are
uncertain and cannot be estimated. There can be no assurance that Infoseek will
prevail in the Trademark Action, or that the result will not have a material
adverse effect on Infoseek's financial position or results of operations. As the
outcome of these cases cannot reasonably be determined, Infoseek has not accrued
for any potential loss contingencies.
Infoseek may be contingently liable with respect to certain asserted and
unasserted claims that arise during the normal course of business. In the
opinion of management, the outcome of such matters presently known to management
will not have a material adverse effect on Infoseek's business, financial
position or results of operations. (see--"Notes to Condensed Consolidated
Unaudited Interim Financial Statements--Note 9. Contingencies.")
CHANGES IN LAWS GOVERNING THE INTERNET COULD DECREASE THE DEMAND FOR
INFOSEEK'S SERVICES
At present there are few laws and regulations that apply to the access or
commerce on the Internet, both in the United States and overseas. Infoseek is,
however, subject to general laws and regulations that apply to all businesses.
Proposals for regulation are presented to federal, state and foreign governments
frequently. If any of these proposals are adopted, Internet use may decrease,
and in turn demands for Infoseek's products and services may decrease.
Similarly, Infoseek's operating expenses may increase as a result of new
regulations. These effects could seriously harm Infoseek's business, results of
operations, financial condition and prospects.
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,
40
<PAGE>
- media regulation, such as libel and obscenity,
- intellectual property, and
- liability of Internet service providers.
In addition, courts are still determining how existing laws regarding
property, copyrights, trade secrets, libel and defamation, and privacy apply to
the Internet.
Infoseek may face copyright claims for materials distributed through its
online or Internet services to others, such as the chat room. Infoseek has
little control over these users' content,
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 users' 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 also offers Web-based e-mail services. 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.
41
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Company may be a party to 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.
On February 18, 1999, GoTo.Com, Inc. filed a complaint GOTO.COM, INC. V. THE
WALT DISNEY COMPANY, DISNEY ENTERPRISES, INC., INFOSEEK CORPORATION, AND
MONTROSE CORPORATION, Civ. No. 99-01674 TJH, in the United States District Court
for the Central District of California ("Trademark Action"). The complaint
alleges that the defendants' use of the GO NETWORK Green Traffic Light Logo is
confusingly similar to the plaintiff's unregistered GOTO.COM Logo. The complaint
seeks an unspecified amount of damages and a preliminary and permanent
injunction against the use of the logo. The Company denies all the material
allegations of the complaint and is defending against them.
The costs of defending the Trademark Action and its ultimate outcome are
uncertain and cannot be estimated. There can be no assurance that Infoseek will
prevail in the Trademark Action, or that the result will not have a material
adverse effect on Infoseek's financial position or results of operations. As the
outcome of these cases cannot reasonably be determined, Infoseek has not accrued
for any potential loss contingencies.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibit
27.1 Financial Data Schedule
b) Reports on Form 8-K
1. Infoseek filed a current report on Form 8-K dated January 15, 1999 on
January 29, 1999, reporting Infoseek's acquisition of Quando, Inc.
("Quando"). Such current report was amended on February 12, 1999 to
further include (i) the financial statements of Quando and (ii) pro forma
financial information reflecting the purchase combinations of Infoseek,
Starwave, and Quando.
2. Infoseek filed a current report on Form 8-K dated January 28, 1999 on
February 4, 1999 reporting that Infoseek had changed to a 52/53 week
fiscal year ending on the Saturday closest to September 30 and indicated
Infoseek would file a Transition Report on Form 10-K for the nine-month
fiscal period ended October 3, 1998.
Items 2, 3, 4 and 5 have been omitted as they are not applicable.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
INFOSEEK CORPORATION
Date: May 14, 1999 By: /s/ LESLIE E. WRIGHT
-----------------------------------------
Leslie E. Wright
Senior Vice President and Chief Financial
Officer
</TABLE>
43
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-02-1999
<PERIOD-START> OCT-04-1998
<PERIOD-END> APR-03-1999
<CASH> 59,715
<SECURITIES> 19,383
<RECEIVABLES> 39,870
<ALLOWANCES> 0
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<CURRENT-ASSETS> 134,442
<PP&E> 53,997
<DEPRECIATION> (27,836)
<TOTAL-ASSETS> 1,024,945
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<BONDS> 0
0
0
<COMMON> 1,258,566
<OTHER-SE> (347,207)
<TOTAL-LIABILITY-AND-EQUITY> 1,024,945
<SALES> 59,812
<TOTAL-REVENUES> 59,812
<CGS> 0
<TOTAL-COSTS> 220,503
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<INCOME-PRETAX> (160,894)
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<EPS-PRIMARY> (3.00)
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</TABLE>
