<PAGE>
As filed with the Securities and Exchange Commission on January 12, 1999
Registration No. 333-68561
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------
Infoseek Corporation
(Exact name of Registrant as specified in its charter)
----------------
Delaware 7372 77-0494507
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
1399 Moffett Park Drive
Sunnyvale, California 94089
(408) 543-6000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
----------------
Harry M. Motro
President and Chief Executive Officer
Infoseek Corporation
1399 Moffett Park Drive
Sunnyvale, California 94089
(408) 543-6000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
<TABLE>
<S> <C> <C>
Aaron J. Alter, Esq. Andrew E. Newton, Esq. Jorge del Calvo, Esq.
David J. Segre, Esq. Vice President, General Counsel Allison Leopold Tilley, Esq.
Wilson Sonsini Goodrich & Rosati and Secretary Pillsbury Madison & Sutro LLP
Professional Corporation Infoseek Corporation 2550 Hanover Street
650 Page Mill Road 1399 Moffett Park Drive Palo Alto, CA 94304
Palo Alto, CA 94304 Sunnyvale, California 94089 (650) 233-4500
(650) 493-9300 (408) 543-6000
</TABLE>
----------------
Approximate date of commencement of proposed sale to the public: Upon
consummation of the merger described herein.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
----------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
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- -------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. INFOSEEK MAY NOT ISSUE ITS COMMON STOCK IN THE MERGER UNTIL THE
REGISTRATION STATEMENT CONTAINING THIS PROXY STATEMENT/PROSPECTUS IS
DECLARED EFFECTIVE BY THE SECURITIES AND EXCHANGE COMMISSION. THIS PROXY
STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
A SOLICITATION OF AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION DATED JANUARY 11, 1999
PROXY STATEMENT PROSPECTUS
OF QUANDO, INC. OF INFOSEEK CORPORATION
The Infoseek Corporation and Quando, Inc. boards of directors have approved a
merger agreement that would merge Quando with a subsidiary of Infoseek. Upon
the completion of the merger, each Quando shareholder will receive
approximately:
. 0.0494 shares of Infoseek common stock for each share of Quando common
stock held by such shareholder
. 0.0627 shares of Infoseek common stock for each share of Quando Series A
preferred stock held by such shareholder
. 0.0566 shares of Infoseek common stock for each share of Quando Series B
preferred stock held by such shareholder
A total of 421,640 shares of Infoseek common stock are expected to be issued in
the merger, approximately ten percent of which, or 42,164 shares, will be
placed into an escrow fund.
The Quando board of directors has called a special meeting of the Quando
shareholders to vote on the merger and the merger agreement on:
Wednesday, January 27, 1999 at 11:30 a.m.
at Quando corporate offices, 520 NW Davis Street, Portland, Oregon 97209
Whether or not you plan to attend the special meeting, please complete, sign
and mail the attached proxy card to Quando. The Quando board of directors is
also soliciting the written consent of all of the Quando shareholders to the
merger and merger agreement. Therefore, please also complete and sign the
attached consent and return it to Quando at the address above. If all of the
Quando shareholders consent in writing to the merger and the merger agreement
prior to Wednesday, January 27, 1999, the Quando shareholders meeting will not
be held. Only shareholders who held their shares of Quando capital stock at the
close of business on November 20, 1998 will be entitled to vote on or consent
on these matters. THE QUANDO BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU
VOTE FOR THE MERGER AND THE MERGER AGREEMENT.
YOU ARE URGED TO READ THIS ENTIRE PROXY STATEMENT/PROSPECTUS CAREFULLY,
INCLUDING THE "RISK FACTORS" SECTION BEGINNING ON PAGE 15. THE "RISK FACTORS"
SECTION DESCRIBES CERTAIN RISKS THAT YOU SHOULD CONSIDER IN DETERMINING WHETHER
TO APPROVE THE MERGER AND THE MERGER AGREEMENT.
Infoseek's common stock trades on the Nasdaq National Market under the symbol
SEEK.
In accordance with Sections 60.551 through 60.594 of the Oregon Business
Corporation Act, holders of Quando capital stock may be entitled to exercise
dissenters' rights in connection with the merger.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED THE INFOSEEK COMMON STOCK TO BE
ISSUED IN THE MERGER OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS
ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
This proxy statement/prospectus is dated January 11, 1999 and is expected to be
first sent to Quando shareholders on January 13, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY.................................................................. 1
SELECTED HISTORICAL CONDENSED FINANCIAL INFORMATION AND COMPARATIVE PER
SHARE DATA.............................................................. 6
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION.... 10
COMPARATIVE PER SHARE DATA............................................... 12
MARKET PRICE INFORMATION................................................. 13
RISK FACTORS............................................................. 15
Risks Related to the Combined Companies and the Merger................. 15
Risks Related to Quando................................................ 17
Risks Related to Infoseek.............................................. 20
WHERE YOU CAN FIND MORE INFORMATION...................................... 38
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE.......................... 38
TRADEMARKS............................................................... 39
DESCRIPTION OF INFOSEEK CORPORATE STRUCTURE.............................. 39
QUANDO'S SOLICITATION FOR SHAREHOLDER APPROVAL........................... 40
THE MERGER AND RELATED TRANSACTIONS...................................... 43
TERMS OF THE MERGER...................................................... 49
OTHER AGREEMENTS......................................................... 59
INFOSEEK UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS..... 60
INFOSEEK SELECTED CONSOLIDATED FINANCIAL DATA............................ 74
INFOSEEK MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 75
INFOSEEK BUSINESS........................................................ 102
INFOSEEK RELATIONSHIP WITH DISNEY........................................ 116
INFOSEEK MANAGEMENT...................................................... 118
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS OF INFOSEEK.. 125
CERTAIN TRANSACTIONS..................................................... 127
QUANDO SELECTED FINANCIAL DATA........................................... 130
QUANDO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 131
QUANDO BUSINESS.......................................................... 138
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS OF QUANDO.... 142
QUANDO MANAGEMENT ....................................................... 144
DISSENTERS' RIGHTS....................................................... 146
COMPARISON OF CAPITAL STOCK.............................................. 149
LEGAL MATTERS............................................................ 163
EXPERTS.................................................................. 163
INFOSEEK INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...................... F-1
STARWAVE INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...................... F-29
ESPN JOINT VENTURE INDEX TO FINANCIAL STATEMENTS......................... F-48
ABC NEWS JOINT VENTURE INDEX TO FINANCIAL STATEMENTS..................... F-58
QUANDO, INC. INDEX TO FINANCIAL STATEMENTS............................... F-68
ANNEX A--The Merger Agreement............................................ A-1
ANNEX B--Oregon Dissenters' Rights Statute............................... B-1
</TABLE>
i
<PAGE>
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. To understand the proposed merger fully and for a more
complete description of the terms of the proposed merger, you should carefully
read the entire proxy statement/prospectus and the documents we have referred
you to. See "Where You Can Find More Information" on page 38. The merger
agreement is attached as Annex A to this proxy statement/prospectus. We
encourage you to read the merger agreement. It is the legal document that
governs the proposed merger.
The Companies (pages 102 and 138)
Infoseek Corporation
1399 Moffett Park Drive
Sunnyvale, California 94089
Telephone: 408-543-6000
Infoseek provides leading Internet search and navigation technology, products
and services that use the Web to connect its viewers' personal, work and
community lives.
Quando, Inc.
520 NW Davis Street
Portland, Oregon 97209
Telephone: 503-225-1988
Quando provides search and navigational services for the Internet. To provide
these services, Quando creates constantly-updated directories of information
obtained from the Internet for use in searching the Web--including shopping
guides, event guides, contact directories, audio clip libraries, review guides
and website rating guides. Quando provides the use of these online directories
and guides as a service to its customers. Quando's customers then provide these
online directories and guides on their Internet websites for use by their
customers.
The Proposed Merger (page 49)
Infoseek, Quando and certain other parties have entered into a merger agreement
which provides that Quando will become a wholly-owned subsidiary of Infoseek.
What Quando Shareholders Will Receive in the Merger (page 49)
Upon the completion of the merger each Quando shareholder will receive
approximately:
. 0.0494 shares of Infoseek common stock for each share of Quando common
stock held by such shareholder
. 0.0627 shares of Infoseek common stock for each share of Quando Series A
preferred stock held by such shareholder
. 0.0566 shares of Infoseek common stock for each share of Quando Series B
preferred stock held by such shareholder
Infoseek will place approximately ten percent (10%) of these shares of Infoseek
common stock into escrow. Infoseek will not issue fractional shares of its
common stock in the merger--any fractional shares will be rounded up to the
nearest whole share.
Infoseek will send you separate written instructions for exchanging your Quando
stock certificates for Infoseek stock certificates in the merger.
The Escrow Fund (page 56)
At the time of the merger, Infoseek will place approximately ten percent (10%)
of the shares of Infoseek common stock to be issued in the
1
<PAGE>
merger into the escrow fund. A total of 42,164 shares of Infoseek common stock
will be placed in the escrow fund. The escrow fund will be held by U.S. Bank
Trust, N.A.
The escrow fund is similar to a security deposit. Quando has made various
representations to Infoseek in the merger agreement. If certain of these
representations turn out to be incorrect, Infoseek will be entitled to be
compensated from the escrow fund.
The Infoseek common stock remaining in the escrow fund is expected to be
distributed to Quando shareholders soon after June 30, 1999. If Infoseek has
filed a claim against the escrow fund prior to June 30, 1999, a portion of the
escrow fund equal to the claim will not be distributed unless and until the
claim is resolved in favor of Quando.
The Investor Representative (page 57)
Quando has appointed Stanton R. Koch, a director of Quando, as the shareholder
representative for the Quando shareholders. As such, Mr. Koch will represent
your interests after the merger and will be entitled to make certain decisions
regarding the escrow fund.
Resale of the Infoseek Common Stock Received in the Merger (page 59)
All of Quando's shareholders, other than Quando's executive officers, directors
and shareholders who own more than 10% of Quando's outstanding capital stock,
will generally be permitted to resell the Infoseek common stock they receive in
the merger without restriction. Quando's executive officers, directors and
significant shareholders will be able to resell their common stock only if they
comply with certain securities laws.
Comparative Per Share Market Price Information (page 13)
Infoseek's common stock is quoted on the Nasdaq National Market. On July 23,
1998, the last trading day before the signing of the merger agreement, Infoseek
common stock closed at $30.375 per share. On August 10, 1998, the last trading
day prior to the announcement of the proposed merger, Infoseek common stock
closed at $24.50 per share. On January 7, 1999, Infoseek common stock closed at
$52.78 per share.
Listing of Infoseek Common Stock (page 48)
The shares of Infoseek common stock issued in connection with the merger will
be listed on the Nasdaq National Market.
Dissenters' Rights (page 146)
If you do not vote for or consent to the merger and the merger agreement, you
will have the right under Oregon law to dissent to the merger and request an
appraisal of the value of your Quando capital stock in connection with the
merger.
Important Federal Income Tax Consequences (page 46)
Infoseek and Quando intend the exchange of Quando capital stock for Infoseek
common stock to be tax-free to Quando shareholders for federal income tax
purposes.
Tax matters are very complicated and the tax consequences to you from the
merger will depend on your own circumstances. You should consult your tax
advisors for a full understanding of all of the tax consequences to you from
the merger.
2
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Risks of the Merger (page 15)
In considering whether to approve the merger and merger agreement, you should
consider all of the risks of the merger, including the risks that the potential
benefits of the merger may not be realized, that Infoseek's business may not be
successful, and that the market price of Infoseek common stock will fluctuate
and could decline in the future. We encourage you to read the risk factors set
forth in this proxy statement/prospectus beginning on page 15.
Your Rights as a Holder of Infoseek Common Stock (page 149)
At the time of the merger, you will become an Infoseek stockholder. There are
important differences between the rights of shareholders of Quando and
stockholders of Infoseek. Please carefully review the description of these
differences beginning on page 149.
Quando Reasons for the Merger; Recommendation to Quando Shareholders (pages 42
and 45)
The Quando board of directors has determined that the terms of the merger and
the merger agreement are in the best interests of Quando and its shareholders.
In reaching its decision, the Quando board of directors identified several
potential benefits of the merger. These benefits include:
. the total consideration paid by Infoseek to the shareholders of Quando
. the potential to greatly improve the services Quando offers to customers
. the ability of Quando to gain market share
. the strategic alternatives likely to be available to Quando and
. the potential benefits to Quando's employees and existing customers
The Quando board of directors also considered that Quando shareholders would
have the opportunity to participate in the potential growth of Infoseek
following the merger. However, the Quando board of directors also recognized
that the potential benefits of the merger may not be realized and that there
are a number of other risks and uncertainties related to the merger.
The Quando board of directors recommends that you vote FOR approval of the
merger and the merger agreement.
Infoseek's Reasons for the Merger
Infoseek's board of directors has approved the merger. The Infoseek board of
directors believes that Quando possesses technology, resources and experienced
personnel that will contribute to the quality and range of Infoseek's products
and services following the merger.
Shareholders Meeting; Solicitation of Written Consents (page 40)
The Quando board of directors has called a special meeting of the Quando
shareholders to vote on the merger and merger agreement. The meeting is
scheduled for Wednesday, January 27, 1999 at 11:30 a.m., local time,
at Quando's corporate offices. Quando is soliciting proxies from its
shareholders prior to the shareholders meeting. Quando also intends to begin
seeking the written consent of its shareholders to the merger and the merger
agreement on Wednesday, January 13, 1999. Quando hopes to receive all of the
consents by Friday, January 15, 1999. If all of the Quando shareholders consent
in writing prior to Wednesday, January 27, 1999, the shareholders meeting will
not be held.
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Record Date for Voting or Consenting (page 40)
You are entitled to vote at the special meeting or sign a written consent if
you owned shares of Quando capital stock as of the close of business on
November 20, 1998, the record date. All of Quando's capital stock will vote or
consent together, as if all Quando preferred stock had converted to common
stock, on the merger and merger agreement. On the record date, there were
5,884,178 shares of Quando capital stock outstanding.
Shareholder Vote or Consent Required to Approve the Merger and Merger Agreement
(page 41)
The vote of Quando shareholders holding at least 90% of the outstanding shares
of Quando capital stock at the special meeting or the written consent of the
holders of 100% of the outstanding shares of Quando capital stock is required
to approve the merger and the merger agreement. Directors and executive
officers of Quando beneficially owning 90.33% of the outstanding shares of
Quando capital stock as of the record date have indicated their intent to vote
for approval of the merger and merger agreement and, if they vote as indicated,
the merger and merger agreement will be approved. Infoseek stockholders are not
required to vote on the merger or the merger agreement.
Revocability of Consents and Proxies (page 41)
You may revoke your proxy at any time prior to the Quando shareholders meeting
by executing a new proxy prior to the shareholders meeting or by attending the
meeting in person and voting. Merely attending the meeting will not revoke your
proxy. You may revoke your consent by delivering written notice to Quando's
Secretary of such revocation at any time prior to the closing of the merger.
Quando hopes to receive the written consent of all of its shareholders to the
merger and merger agreement by Friday, January 15, 1999 and to close the merger
on or about Tuesday, January 19, 1999.
Interests of Quando Officers and Directors in the Merger (page 46)
In considering the Quando board of directors' recommendation that you approve
the merger and the merger agreement, you should note that Quando's officers and
directors have interests in the merger that are different from, or in addition
to, your interests. Specifically, as a result of or in connection with the
merger:
. certain Quando directors who are also officers of Quando will become
employees of Infoseek,
. the Quando directors will receive continuing indemnification against
certain liabilities.
As a result, Quando's directors and officers could be more likely to vote to
approve the merger and the merger agreement than Quando shareholders generally.
Completion of Merger (page 49)
Infoseek and Quando expect to complete the merger as soon as practicable after
the Quando shareholders approve the merger and the other conditions to the
merger have been met.
Conditions to the Merger (page 53)
The merger will not be completed unless the closing conditions contained in the
merger agreement are met. Infoseek and Quando may
4
<PAGE>
each waive certain of the closing conditions of the other. Please review a
description of the closing conditions on page 53.
No Solicitation (page 53)
Quando has agreed, subject to some exceptions contained in the merger
agreement, not to initiate or engage in discussions regarding a business
combination with any party other than Infoseek until December 31, 1998.
Termination of the Merger Agreement (page 55)
Infoseek and Quando may together agree to terminate the merger agreement
without completing the merger. This is the case whether or not the Quando
shareholders have approved the merger and the merger agreement. In addition,
either company may terminate the merger agreement if the merger is not
completed before February 28, 1999 or if specified events occur before that
date.
Accounting Treatment (page 48)
Infoseek and Quando intend the merger to be accounted for as a purchase.
Forward-Looking Statements May Prove Inaccurate (page 38)
Each of Infoseek and Quando has made forward-looking statements in this
document that are subject to risks and uncertainties. Forward-looking
statements include expectations concerning matters that are not historical
facts. Words such as "projects," "believes," "anticipates," "plans," "expects,"
"intends" or similar words or expressions are intended to identify forward-
looking statements. For more information regarding factors that could cause
actual results to differ from these expectations, you should read the "Risk
Factors" section beginning on page 15.
Who Can Help Answer Your Questions
If you have questions about the merger you should contact:
David Billstrom
Chairman, President and
Chief Executive Officer
Quando, Inc.
520 NW Davis Street
Portland, Oregon 97209
503-225-1988
5
<PAGE>
SELECTED HISTORICAL CONDENSED FINANCIAL
INFORMATION AND COMPARATIVE PER SHARE DATA
The tables on the following three pages present selected historical condensed
financial information and comparative per share data for Infoseek, Starwave and
Quando. This information has been derived from their respective consolidated
financial statements and notes, certain of which are included in this proxy
statement/prospectus.
The financial information of Infoseek, except for the interim financial
information dated September 30, 1998 and 1997, has been derived from audited
financial statements. The financial information of Starwave, except for the
financial information dated December 31, 1994, has been derived from audited
financial statements. The financial information of Quando, except for the
financial information dated September 30, 1998 and 1997, December 31, 1994 and
1993, and the balance sheet data at December 31, 1995, has been derived from
audited financial statements.
All unaudited financial information presented has been derived from unaudited
consolidated financial statements, and in the opinion of Infoseek's, Quando's
and Starwave's management reflects all normal recurring adjustments necessary
for a fair presentation.
6
<PAGE>
INFOSEEK SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS
AUGUST 30, 1993 ENDED
YEARS ENDED DECEMBER 31, (INCEPTION) TO SEPTEMBER 30,
------------------------------------ DECEMBER 31, -----------------
1997 1996 1995 1994 1993 1998 1997
-------- -------- ------- ------- --------------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA(3):
Total revenues.......... $ 35,082 $ 15,095 $ 1,032 -- -- $50,715 $ 22,407
Costs and expenses
Hosting, content and
website costs......... 6,319 3,194 614 -- -- 7,956 4,397
Research and
development........... 7,900 4,550 1,175 $ 1,063 $ 8 7,432 5,879
Sales and marketing.... 34,320 20,455 1,488 97 -- 35,144 22,520
General and
administrative........ 7,042 4,177 1,148 360 19 7,876 5,242
Restructuring and other
charges(1)............ 7,349 -- -- -- -- -- 7,349
-------- -------- ------- ------- ---- ------- --------
Total costs and
expenses.............. 62,930 32,376 4,425 1,520 27 58,408 45,387
-------- -------- ------- ------- ---- ------- --------
Operating loss.......... (27,848) (17,281) (3,393) (1,520) (27) (7,693) (22,980)
Interest income, net.... 1,286 1,343 97 10 -- 1,999 1,066
-------- -------- ------- ------- ---- ------- --------
Net loss................ $(26,562) $(15,938) $(3,296) $(1,510) $(27) $(5,694) $(21,914)
======== ======== ======= ======= ==== ======= ========
Basic and diluted net
loss per share (pro
forma in 1995)(2)...... $ (1.00) $ (0.72) $ (0.21) $ (0.19) $ (0.83)
======== ======== ======= ======= ========
Shares used in computing
basic and diluted net
loss per share......... 26,627 22,120 15,535 30,512 26,270
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
SEPTEMBER 30,
1997 1996 1995 1994 1993 1998
------- ------- ------ ---- ---- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA(3):
Cash, cash equivalents and
short-term investments....... $31,439 $46,653 $1,626 $568 $177 $54,541
Working capital (deficit)..... 19,018 41,997 93 458 (99) 48,381
Total assets.................. 51,489 58,332 5,123 859 318 90,313
Long-term obligations......... 4,493 1,892 838 210 -- 2,981
Total shareholders' equity
(deficit).................... 27,006 48,985 2,142 520 (27) 66,717
</TABLE>
- --------
(1) During the second quarter of 1997, Infoseek recorded restructuring and
other charges of approximately $7.4 million related to the discontinuance
of certain business arrangements that were determined to be non-strategic
and to management changes.
(2) The earnings per share amounts prior to 1997 and for the nine months ended
September 30, 1997 have been restated as required to comply with Statement
of Financial Accounting Standards No. 128, Earnings per Share and Staff
Accounting Bulletin No. 98, Earnings per Share.
(3) Infoseek's consolidated financial statements have been restated to reflect
the acquisition of WebChat Communications, Inc., which has been accounted
for as a pooling-of-interests.
7
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STARWAVE SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
DECEMBER 31,
-------------------------------
FISCAL NINE
YEAR MONTHS
ENDED ENDED
OCTOBER 4, SEPTEMBER 28,
1998 1997 1996 1995 1994
---------- ------------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA(1):
Revenues................ $ 5,266 $ 4,892 $ 8,302 $ 1,111 $ --
Cost of online
services............... 3,143 7,185 18,170 6,577 --
Total operating
expenses............... 7,234 12,906 34,645 17,525 7,469
Loss from joint
ventures............... (14,159) (8,209) -- -- --
Net other income
(expense).............. 701 (1,350) (5,333) (3,015) (6,079)
Loss from continuing
operations............. (15,426) (17,573) (31,676) (19,429) (8,848)
Loss from discontinued
operations............. -- -- (4,289) (7,474) (4,700)
Net loss................ (15,426) (17,573) (35,965) (26,903) (13,548)
Basic and diluted net
loss per share from
continuing operations.. (0.16) (0.25) (0.99) (0.68) (0.50)
Basic and diluted net
loss per share from
discontinued
operations............. -- -- (0.14) (0.27) (0.27)
Basic and diluted net
loss per share......... (0.16) (0.25) (1.13) (0.95) (0.77)
Shares used in computing
basic and diluted net
loss per share......... 96,475 71,691 31,958 28,412 17,502
BALANCE SHEET DATA (AT
END OF PERIOD):
Total assets............ $15,812 $ 29,461 $ 9,713 $ 6,354 $ 5,955
Loans from shareholder.. -- -- 84,888 51,025 22,950
Total shareholders'
equity (deficit)....... 8,885 23,614 (82,456) (46,653) (19,751)
</TABLE>
- --------
(1) In April 1997 Starwave entered into the ESPN Joint Venture and the ABCNews
Joint Venture. Subsequently, Starwave continued its business of website
hosting, software development and research activities while revenue and
expenses associated with sites operated under contract with ESPN, ABC and
others were assumed by these Joint Ventures. As a result, periods prior to
and following April 1997 are not comparable.
8
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QUANDO SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 14,
1993 (INCEPTION) NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, THROUGH SEPTEMBER 30,
-------------------------------------------- DECEMBER 31, --------------------
1997 1996 1995 1994 1993 1998 1997
--------- --------- --------- ----------- ---------------- --------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues, net........... $ 255,723 $ 33,182 $ 71,186 $ 21,388 $ -- $ 513,713 $ 147,450
Cost of goods sold...... 654 19,373 32,212 8,881 -- 5,349 600
--------- --------- --------- --------- ----- --------- ---------
Gross margin........... 255,069 13,809 38,974 12,507 -- 508,364 146,850
--------- --------- --------- --------- ----- --------- ---------
Operating expenses:
Research and
development............ 161,339 115,782 127,273 8,473 -- 413,260 112,828
Sales and marketing..... 12,000 2,000 400 -- -- 699 2,901
General and
administrative......... 418,850 326,103 361,156 180,468 204 316,759 291,167
--------- --------- --------- --------- ----- --------- ---------
Total operating
expenses............. 592,189 443,885 488,829 188,941 204 730,718 406,896
Operating loss......... (337,120) (430,076) (449,855) (176,434) (204) (222,354) (260,046)
Other expenses, net.... (16,281) (12,671) (8,248) (151) -- (59,025) (18,424)
--------- --------- --------- --------- ----- --------- ---------
Net loss............... (353,401) (442,747) (458,103) (176,585) (204) (281,379) (278,470)
========= ========= ========= ========= ===== ========= =========
Basic and diluted net
loss per common
share(1)(2)........... $ (0.08) $ (0.08) $ (0.08) $ (0.06) $ (0.06)
Shares used in
computing net loss per
common share(1)(2).... 4,598,424 5,445,000 5,445,000 4,445,000 4,650,128
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
SEPTEMBER 30,
1997 1996 1995 1994 1993 1998
--------- --------- ----------- ----------- ----------- -------------
BALANCE SHEET DATA: (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash.................... $ 50,984 $ 2,935 $ 3,322 $50,270 $796 $ 75,779
Working capital
(deficit).............. (248,341) (266,461) (207,251) 24,497 796 (373,995)
Total assets............ 126,624 57,805 74,913 155,461 796 281,075
Shareholders' loans..... 67,658 66,991 51,364 -- -- 40,000
Convertible debt........ 247,000 -- -- -- -- 447,000
Total shareholders'
equity (deficit)....... (448,942) (211,591) (179,107) 103,995 796 (725,321)
</TABLE>
- --------
(1) The year ended December 31, 1995 was the first full year that Quando was
subject to federal and state corporate income taxes following the
termination of its Subchapter S election on October 21, 1994. Guidelines of
the Securities and Exchange Commission allow loss per share data to be
presented only when a company converts to a taxable status. Accordingly,
loss per share data have been presented only for the years ended December
31, 1997, 1996 and 1995 and the nine months ended September 30, 1998 and
1997.
(2) The earnings per share amounts prior to 1997 and for the nine months ended
September 30, 1997 have been restated as required to comply with Statement
of Financial Accounting Standards No. 128, Earnings Per Share and Staff
Accounting Bulletin No. 98, Earnings per Share.
9
<PAGE>
SELECTED UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION
The following selected unaudited pro forma combined condensed financial
information for Infoseek is derived from the Unaudited Pro Forma Combined
Condensed Statements of Operations for the nine months ended September 30, 1998
and for the year ended December 31, 1997 and the Unaudited Pro Forma Combined
Condensed Balance Sheet as of September 30, 1998 included elsewhere in this
proxy statement/prospectus. These pro forma financial statements give effect to
Infoseek's acquisition of Starwave through a merger and exchange of shares on
November 18, 1998. Disney purchased an additional 2,642,000 unregistered shares
of Infoseek common stock and a warrant to purchase an additional 15,720,000
unregistered shares of Infoseek common stock in exchange for approximately
$70.0 million in cash and a $139.0 million five-year promissory note. The
warrant vests, subject to certain acceleration events, and becomes exercisable
as to one-third of the shares subject to the warrant on each of the first three
anniversaries of November 18, 1998 at an exercise price equal to 120% of the
average of the closing sale prices of Infoseek common stock on the Nasdaq
National Market for the thirty trading days prior to each such vesting date,
subject to a maximum $50.00 per share exercise price. Further, Disney affiliate
ABC has agreed to provide, and Infoseek has agreed to purchase over a five year
period, $165.0 million in promotional support from ABC for GO Network. The
Unaudited Pro Forma Combined Condensed Statements of Operations for the year
ended December 31, 1997 and the nine months ended September 30, 1998 reflect
these transactions as if they had taken place on January 1, 1997. The Unaudited
Pro Forma Combined Condensed Balance Sheet gives effect to these transactions
as if they had taken place on September 30, 1998.
On July 24, 1998, Infoseek entered into the merger agreement to acquire Quando
in exchange for approximately $17 million, subject to adjustment, in shares of
Infoseek common stock. The Unaudited Pro Forma Combined Condensed Statements of
Operations for the year ended December 31, 1997 and the nine months ended
September 30, 1998 reflect the Quando acquisition as if it had taken place on
January 1, 1997. The Unaudited Pro Forma Combined Condensed Balance Sheet gives
effect to the Quando acquisition as if it had taken place on September 30,
1998.
The Unaudited Pro Forma Combined Condensed Statements of Operations combine
Infoseek's historical consolidated results of operations for the year ended
December 31, 1997 and the nine months ended September 30, 1998 with Starwave's
historical results of operations for the year ended December 31, 1997 and the
nine months ended October 4, 1998, and Quando's historical results of
operations for the year ended December 31, 1997 and the nine months ended
September 30, 1998, respectively. In addition, the Unaudited Pro Forma Combined
Condensed Statements of Operations include the impact of certain related
agreements which become effective with the mergers described above. These
agreements are described more fully in the notes to the Unaudited Pro Forma
Combined Condensed Financial Statements. The pro forma financial statements are
not necessarily indicative of what the actual financial results would have been
had the transaction taken place on January 1, 1997 or September 30, 1998 and do
not purport to indicate the results of future operations.
The acquisition of Starwave has been, and the acquisition of Quando will be,
accounted for using the purchase method of accounting. The pro forma financial
statements have been prepared on the basis
10
<PAGE>
of assumptions described in the notes thereto and includes assumptions relating
to the allocation of the consideration paid for the assets and liabilities of
Quando based on preliminary estimates of their fair value. The actual
allocation of such consideration may differ from that reflected in the pro
forma financial statements after valuations and other procedures to be
performed after the closing of the Quando acquisition have been performed.
Infoseek does not expect that the final allocation of the purchase price will
differ materially from the preliminary allocations. In the opinion of Infoseek,
all adjustments necessary to present fairly such pro forma financial statements
have been made on the proposed terms and structure of the Quando acquisition.
In connection with the acquisitions of Starwave and Quando, Infoseek expects to
incur one-time expenses, including a write-off related to in-process research
and development, currently estimated at $72.6 million and $4.3 million,
respectively. In addition, Infoseek expects to incur costs of integration of up
to $7.0 million of which $1.4 million of costs were included in the results of
operations for the nine months ended September 30, 1998. The pro forma
financial statements do not include the remaining costs of integration of up to
$5.6 million as these costs will affect future operations and do not qualify as
liabilities in connection with a purchase business combination under EITF
(Emerging Issues Task Force) 95-3, Recognition of Liabilities in Connection
with a Purchase Business Combination.
The pro forma financial statements should be read in conjunction with the
audited consolidated financial statements and notes of Infoseek and the audited
financial statements and notes of Starwave and Quando, included elsewhere in
this proxy statement/prospectus.
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................ $ 57,517 $ 77,203
Total costs and expenses................ 241,588 197,099
Operating loss.......................... (184,071) (119,896)
Net loss................................ (194,918) (129,214)
Basic and diluted net loss per share.... $ (3.36) $ (2.09)
Shares used in computing basic and
diluted net loss per share............. 57,934 61,819
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets............................ $1,073,269
Total stockholders' equity.............. 974,625
Book value per share.................... 15.54
</TABLE>
11
<PAGE>
COMPARATIVE PER SHARE DATA
Set forth below are historical net loss per share and book value per share data
of Infoseek, Starwave, and Quando, unaudited pro forma combined condensed per
share data of Infoseek and pro forma equivalent per share data of Quando. The
data set forth below should be read in conjunction with the Infoseek audited
consolidated financial statements and the unaudited interim consolidated
financial statements, the Starwave audited financial statements, the Quando
audited financial statements and the unaudited interim financial statements,
and the Unaudited Pro Forma Combined Condensed Financial Statements, including
the related notes, which are included in this proxy statement/prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
OR AS OF OR AS OF
DECEMBER 31, 1997 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
Historical--Infoseek
Basic and diluted net loss per share... $(1.00) $(0.19)
Book value per share................... $ 0.98 $ 2.12
<CAPTION>
NINE MONTHS ENDED FISCAL YEAR ENDED
OR AS OF OR AS OF
SEPTEMBER 28, 1997 OCTOBER 4, 1998
------------------ ------------------
<S> <C> <C>
Historical--Starwave
Basic and diluted net loss per share... $(0.25) $(0.16)
Book value per share................... $ 0.25 $ 0.09
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
OR AS OF OR AS OF
DECEMBER 31, 1997 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
Historical--Quando
Basic and diluted net loss per share... $(0.08) $(0.06)
Book value per share................... $(0.08) $(0.13)
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
OR AS OF OR AS OF
DECEMBER 31, 1997 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
Pro forma combined net loss per share(2)
Pro forma combined net loss per
Infoseek share........................ $(3.37) $(2.09)
Equivalent pro forma net loss per
Quando share(1)....................... $(0.17) $(0.10)
Pro forma combined book value per share
Pro forma book value per Infoseek
share................................. $15.54
Equivalent pro forma book value per
Quando share(1)....................... $ 0.77
</TABLE>
- --------
(1) The equivalent Quando pro forma share amounts are calculated by multiplying
the combined pro forma per share amounts by the estimated exchange ratio of
0.0494 shares of Infoseek common stock for each share of Quando common
stock, assuming the conversion of all Quando preferred stock into Quando
common stock.
(2) Pro forma combined net loss per share reflects Infoseek's, Starwave's, and
Quando's net loss for the year ended December 31, 1997 and the nine months
ended September 30, 1998 and is based upon (A) Infoseek's weighted average
common shares outstanding for the periods presented, (B) 28,137,997 shares
of Infoseek common stock assumed to be issued for all of the outstanding
shares and options of Starwave, (C) 2,642,000 shares of Infoseek common
stock purchased by Disney and (D) approximately 421,640 shares of Infoseek
common stock assumed to be issued for all of the outstanding shares and
options to purchase shares of Quando.
12
<PAGE>
MARKET PRICE INFORMATION
Infoseek's common stock has been traded on the Nasdaq National Market under the
symbol "SEEK" since June 11, 1996. The following table sets forth, for the
periods indicated, the high and low closing prices for Infoseek common stock as
reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1996 CALENDAR YEAR
Second Quarter (from June 11, 1996)......................... $16 1/2 $ 8 7/8
Third Quarter............................................... 10 5 1/4
Fourth Quarter.............................................. 11 1/2 7 3/8
1997 CALENDAR YEAR
First Quarter............................................... $11 $ 6 1/4
Second Quarter.............................................. 8 1/2 4 3/8
Third Quarter............................................... 9 11/16 4 11/16
Fourth Quarter.............................................. 14 1/2 7 1/8
1998 CALENDAR YEAR
First Quarter............................................... $22 7/8 $ 8 7/16
Second Quarter.............................................. 45 18 1/16
Third Quarter............................................... 39 5/8 14 7/8
Fourth Quarter.............................................. 55 7/8 18 1/2
1999 CALENDAR YEAR
First Quarter (through January 7, 1999)..................... $54 3/8 $46 1/4
</TABLE>
There is no established trading market for Quando capital stock.
As of January 7, 1999, Infoseek estimates that there were approximately 736
holders of record of Infoseek common stock and a substantially greater number
of beneficial owners. As of January 7, 1999, there were 16 holders of record of
Quando capital stock.
To date, Infoseek has not declared or paid dividends on its common stock. The
Board of Directors of Infoseek presently intends to retain all earnings for use
in Infoseek's business and therefore does not anticipate declaring or paying
any cash dividends in the foreseeable future. In addition, Infoseek's equipment
term loan facility restricts the payment of dividends when borrowings are
outstanding. To date, Quando has not declared or paid dividends on its common
stock. The Board of Directors of Quando presently intends to retain all
earnings for use in Quando's business and therefore does not anticipate
declaring or paying any cash dividends in the foreseeable future.
13
<PAGE>
The table below sets forth the high and low sales prices per share of Infoseek
common stock on the Nasdaq National Market on July 23, 1998, the last full
trading day prior to the signing of the merger agreement, August 10, 1998, the
last full trading date prior to the public announcement of the signing of the
merger agreement, and on January 7, 1998. Also set forth is the implied
equivalent value of one share of Quando common stock on each such date assuming
an exchange ratio of 0.0494 share of Infoseek common stock for each share of
Quando common stock and the conversion of all Quando preferred stock into
Quando common stock.
<TABLE>
<CAPTION>
APPROXIMATE QUANDO
INFOSEEK COMMON STOCK EQUIVALENT
--------------------- -------------------
HIGH LOW HIGH LOW
--------------------- --------- ---------
<S> <C> <C> <C> <C>
July 23, 1998......................... $33 $31 1/16 $1.63 $1.53
August 10, 1998....................... $25 1/2 $24 7/16 $1.26 $1.21
January 7, 1999....................... $54 3/8 $49 1/8 $2.69 $2.43
</TABLE>
- --------
As the table above indicates, fluctuations in the market price of Infoseek
common stock affect the value of the Quando shares for which they are
exchanged. The table illustrates that between July 23, 1998 and January 7,
1999, the value of a share of Quando common stock, had it been exchanged for
Infoseek common stock at the exchange ratio listed above, would have fluctuated
between $1.21 and $2.69.
However, the table shows only historical comparisons. These comparisons may not
provide meaningful information to you in determining whether to approve the
merger and the merger agreement. Because the number of shares of Infoseek to be
issued to the holders of Quando common stock is fixed, changes in the market
price of Infoseek common stock will affect the dollar value of Infoseek common
stock to be received by shareholders of Quando in the merger. Shareholders are
urged to obtain current market quotations for Infoseek common stock, and to
review carefully the other information contained in this proxy
statement/prospectus, prior to considering whether to approve the merger and
the merger agreement.
14
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making your
decision to consent to the merger and the merger agreement. The risks and
uncertainties described below are not the only ones facing Infoseek and Quando.
Additional risks and uncertainties not presently known to us or that we do not
currently believe are important to an investor may also harm our business
operations.
If any of the events, contingencies, circumstances or conditions described in
the following risks actually occur, our business, financial condition or our
results of operations could be seriously harmed. If that occurs, the trading
price of Infoseek common stock could decline, and you may lose part or all of
your investment.
RISKS RELATED TO THE COMBINED COMPANIES AND THE MERGER
IF THE CONDITIONS TO THE MERGER ARE NOT MET, THE MERGER WILL NOT OCCUR
Several conditions must be satisfied or waived to complete the merger. The
conditions are described under "Terms of the Merger--Conditions to the Merger"
and in detail in the merger agreement. Infoseek and Quando cannot assure you
that each of the conditions, including Quando shareholder approval, will be
satisfied. If the conditions are not satisfied or waived, the merger will not
occur or will be delayed, and Infoseek and Quando each may lose some or all of
the intended benefits of the merger.
DECREASES IN INFOSEEK'S TRADING PRICE WILL REDUCE THE VALUE OF WHAT QUANDO
SHAREHOLDERS RECEIVE IN THE MERGER
Any decrease in the market price of Infoseek after the date of this proxy
statement/prospectus will reduce the dollar value received by Quando
shareholders. Each of the exchange ratios for Quando shareholders is fixed by a
formula which is based on Quando's capitalization, which is not expected to
change before the merger, and the trading price of Infoseek common stock during
a certain period. The exchange ratios will not change if the price of Infoseek
stock changes after the date of this proxy statement/prospectus. Quando
shareholders are strongly encouraged to obtain the current market price of
Infoseek common stock before delivering their proxy and consent.
For a description of how Infoseek's market price has in the past fluctuated
greatly and may continue to fluctuate in the future, refer to "--Risks Related
to Infoseek--Infoseek's Stock Price Will Fluctuate." The market price of
Infoseek stock on a recent date is set forth under "Market Price Information."
IF INFOSEEK AND QUANDO FINANCIAL ANALYSES PROVE WRONG, THE MERGER MAY NOT BE
BENEFICIAL TO INFOSEEK OR QUANDO SHAREHOLDERS
Neither Quando nor Infoseek has received an opinion of an outside financial
advisor on the fairness of the transaction from a financial point of view.
Instead, Infoseek and Quando conducted their own analyses of the value of the
shares offered by Infoseek and the value of Quando in the merger. If Infoseek
or Quando's analyses prove wrong, the merger may not be beneficial to Infoseek
or Quando shareholders. Analysis of the value of private or public Internet
companies involves making numerous assumptions about the future. Infoseek and
Quando cannot assure you that they have correctly assessed these values at the
time they
15
<PAGE>
signed the merger agreement. Since the exchange ratios are fixed, Infoseek and
Quando also cannot assure you of these values any time after the signing of the
merger agreement, since the value of the shares offered by Infoseek depends on
the market price of Infoseek stock. See "--Decreases in Infoseek's Trading
Price Will Reduce the Value of What Quando Shareholders Receive in the Merger."
IF INFOSEEK AND QUANDO DO NOT INTEGRATE THEIR TECHNOLOGY AND OPERATIONS QUICKLY
AND EFFECTIVELY, ALL OF THE POTENTIAL BENEFITS OF THE MERGER MAY NOT OCCUR
Infoseek and Quando cannot assure you that they will be able to integrate their
technology and operations quickly and smoothly. In order to obtain the benefits
of the merger, the companies must make Quando's technology and services operate
together with Infoseek's technology, products and services. Infoseek and Quando
may need to replace or convert some of Quando's management information systems
in order to work with Infoseek's systems. Infoseek also expects to move Quando
from Portland, Oregon to Seattle, Washington. Infoseek may be required to spend
additional time or money on integration which would otherwise be spent on
developing its business and services or other matters. If Infoseek and Quando
do not integrate their operations and technology smoothly or if management
spends too much time on integration issues, it could harm the combined
companies' business, financial condition and prospects.
THE MERGER MAY RESULT IN LOSS OF QUANDO EMPLOYEES
Despite Infoseek's efforts to hire and retain quality employees, Infoseek might
lose some of Quando's key employees following the merger. Competition for
qualified management, engineering and technical employees in the Internet
industry is intense. Infoseek and Quando have different corporate cultures,
and, in connection with the merger, Quando expects to move its operations and
employees from Portland to Seattle. Quando employees may be unwilling to move
to Seattle or may not want to work for a larger, publicly-traded company
instead of a smaller, start-up company. In addition, competitors may recruit
employees prior to the merger and during integration, as is common in high
technology mergers. As a result, employees of Quando or the combined companies
could leave with little or no prior notice. Infoseek and Quando cannot assure
you that the combined companies will be able to attract, retain and integrate
employees to develop and use the Quando technology following the merger.
As a condition to the merger, certain key employees of Quando are required to
sign employment and non-competition agreements which will restrict their
ability to compete with Infoseek if they leave Infoseek voluntarily. Infoseek
and Quando cannot assure you of the enforceability of these non-competition
agreements or that these employees will continue to work at Infoseek under
their employment agreements after the merger.
THE MERGER MAY RESULT IN LOSS OF CUSTOMERS
Quando is currently dependent on certain key customers besides Infoseek. As a
result of the merger, however, some customers, particular those customers that
compete with Infoseek, may not continue to do business with Quando. In
addition, Infoseek may also elect to terminate certain customer relationships
Quando has with certain of Infoseek's key competitors. In either case, Quando
may lose significant revenue it would otherwise have received had the merger
not occurred.
16
<PAGE>
MERGER RELATED ACCOUNTING CHARGES WILL DELAY AND REDUCE INFOSEEK'S PROFITS
Accounting charges which will be incurred in connection with the merger will
delay Infoseek's future profitability and reduce profits if profits are
achieved. The Quando acquisition is being accounted for by Infoseek under the
"purchase" method of accounting. Under the purchase method, the purchase price
of Quando will be allocated to the assets and liabilities acquired from Quando.
As a result, Infoseek will incur accounting charges from the merger which will
delay and reduce Infoseek's profitability. These charges are currently
estimated to include:
. amortization of intangible assets relating to goodwill estimated to be
$16.9 million amortized over two years,
. in-process research and development of $4.3 million, expensed in the
quarter ended March 31, 1999,
. integration costs of up to $500,000, and
. other costs not currently known.
RISKS RELATED TO QUANDO
QUANDO IS AN EARLY STAGE COMPANY AND MAY NOT BE PROFITABLE IN THE NEAR FUTURE
Quando is an early stage company and its prospects must be considered in light
of the risks, costs and difficulties frequently encountered by such companies,
particularly by companies in the new and rapidly evolving Internet market.
Although Quando has achieved revenue growth from 1997 through 1998, Quando
cannot assure you that this growth will continue or that Quando will become
profitable. Quando has increased its operating expenses in connection with its
growth in revenues. Unless Quando is able to increase revenues while
controlling expenses, it will not become profitable. Quando has limited
operating history. This limited operating history makes it difficult to budget
or predict future results. Quando has incurred significant net losses since it
began business. Quando expects it will continue to have net losses in 1998 and
may have losses in later periods. As of September 30, 1998, Quando had an
accumulated deficit of approximately $1.7 million.
QUANDO NEEDS ADDITIONAL CAPITAL TO CONTINUE OPERATIONS
Quando has very little cash or other liquid assets. Quando's independent
auditors have included in their audit report an explanatory paragraph which
states that Quando's recurring losses from operations raise substantial doubt
about its ability to continue as a going concern. Additional financing may not
be available on satisfactory terms, if at all.
If the merger does not occur and Quando cannot raise enough funds, Quando's
business, results of operations, financial condition and prospects could be
seriously harmed and Quando may be unable to continue as a going concern. See
"Quando Management's Discussion and Analysis of Financial Condition and Results
of Operations."
17
<PAGE>
IF QUANDO IS UNABLE TO ADEQUATELY PROTECT ITS INTELLECTUAL PROPERTY, ITS
BUSINESS COULD SUFFER
Quando's success depends in part on its ability to protect its exclusive
technology. Quando cannot assure you it will be able to protect the features of
its technology from use by competitors. To protect its software, service
features, and technology, Quando relies on a combination of:
. patent, copyright, 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
Quando's technology.
Quando has not yet filed any patent applications for its technologies, but may
do so in the future. Quando has a federally registered trademark for the name
Quando and claims trademark rights in other marks. Quando will also evaluate
registering for additional service marks and trademarks as appropriate. Despite
these measures, Quando may not be able to protect its intellectual property.
Quando may not be able to protect its technology because:
. Patent applications and trademark registrations may not be allowed.
. Even if issued, new patents and trademarks may be challenged, invalidated
or designed around.
. Quando's new products and technologies may not be protected by existing
laws.
. Time-consuming and costly litigation may be necessary to protect Quando's
proprietary technologies.
. Policing unauthorized use of Quando's intellectual property is difficult
and expensive.
Further, the application of copyright and trademark laws to the Internet and
other digital media is very uncertain. If Quando fails to protect its
intellectual property, it could suffer serious harm to its business, results of
operations, or prospects.
THIRD PARTIES MAY PREVENT QUANDO FROM DEVELOPING ITS INTELLECTUAL PROPERTY
Quando may not be able to use its intellectual property to further develop its
business because third parties may:
. bring claims of intellectual property infringement against Quando,
. obtain patents or other intellectual property rights which may limit
Quando's ability to do business, require Quando to redesign products or
require Quando to obtain a license,
. claim Quando has misappropriated their creative ideas or formats or
otherwise infringed upon their proprietary rights,
. bring costly, time consuming lawsuits, or
. prevent or delay Quando from using important technologies.
18
<PAGE>
Any claims of infringement, whether successful or not, could seriously harm
Quando's business, results of operations or prospects.
IF QUANDO LOSES THE SERVICES OF CERTAIN KEY EMPLOYEES, ITS BUSINESS WILL BE
HARMED
Quando's ability to generate revenues and profits depends heavily on its key
employees, in particular David Billstrom, its Chief Executive Officer, William
Neuhauser, its Chief Technical Officer and Vice President of Development,
Hilary Lombard, its Vice President of Content, and Scott Maxson, its Vice
President of Data Technology, for research and development of Quando's
services. Quando also depends on other employees for engineering and marketing
ability. Loss of any of these employees could seriously harm Quando's business,
results of operations, financial condition and prospects. Competition for
employees, particularly in the Internet area, is intense. Although Quando
believes it offers competitive compensation to hire and retain qualified
employees, these officers or other key employees may leave at any time.
QUANDO MAY LOSE CUSTOMERS AFTER THE MERGER BECAUSE CUSTOMERS MAY NOT WANT TO DO
BUSINESS WITH INFOSEEK OR INFOSEEK MAY NOT WANT TO DO BUSINESS WITH CERTAIN
CUSTOMERS
Quando's revenues depend on contracts with key customers such as Infoseek, IBM,
and America Online. Such contracts usually range from three to twelve months,
and are typically paid in advance. Because these contracts are usually for a
short term, Quando cannot assure you that any key customers will continue to
renew their existing contracts or enter into new contracts with Quando. In
addition, Quando sells its services through its direct sales force. Quando
cannot assure you that its sales force will be successful in obtaining new
contracts, particularly given the increased competition in the industry.
QUANDO FACES INTENSE COMPETITION AND MAY NOT BE ABLE TO COMPETE EFFECTIVELY
The market for Internet products and services, including robot and data
management services, is highly competitive. Quando believes the competition for
robot services specifically and in the Internet market generally is increasing
and will continue to intensify. Furthermore, Quando's customers are themselves
subject to intense competition, which may strongly affect Quando and other
robot service companies. Quando cannot assure you that it will be able to
compete successfully or that these competitive pressures will not cause serious
harm to Quando's business, financial condition, results of operations or
prospects. Quando's competitors companies may have greater resources or the
ability to integrate robot technology into their other services. Other
competitors, like Inktomi, may begin to offer robot services. In addition, the
market for outsourced Internet services, and in particular robot services, has
only recently begun to develop. The market is rapidly evolving and has an
increasing number of new entrants. Many of Quando's customers have only limited
experience with the products Quando offers and have not devoted a large portion
of their budgets to outsourced robot sources. See "Quando Business."
QUANDO MAY NOT DEVELOP PRODUCTS IN TIME TO MEET CHANGING TECHNOLOGIES
Quando cannot assure you that its existing products will be accepted by the
market, that it will improve its services, or that it will be able to bring its
services to market in advance of competitors. The market for robot services is
new and rapidly changing. Many companies have recently introduced robot
services and other companies are expected to introduce robot services in the
future.
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To be successful, Quando must continue to develop its robot services and add
new features and functions to improve its service offerings. This development
could be expensive and time-consuming. If Quando does not continue to offer
services that are satisfactory to its customers and end users, it could suffer
serious harm to its business, financial results or prospects.
In order to succeed, Quando must:
. quickly complete products currently in development,
. design and use new technologies,
. keep pace with changes in external technology and standards on which
Quando depends, and
. develop and install enough features to serve its customers.
If Quando fails to do any of these, Quando may suffer serious harm to its
business, financial condition or prospects.
Quando May Not Be Prepared for Year 2000 Computer Problems
Certain businesses face issues relating to the inability of some computer
systems to correctly recognize dates starting January 1, 2000. Quando has
evaluated its products and believes they will function in the year 2000.
Although Quando management does not expect year 2000 compliance to have a
material impact on its business or future results of operations, Quando cannot
assure you that there will not be interruptions of operations or other
limitations of system functionality or that Quando will not incur significant
costs to avoid such interruptions or limitations. In addition, Quando does not
currently have information about the year 2000 compliance status of its
suppliers and customers. In the event that any of Quando's significant
suppliers or customers do not successfully and timely achieve year 2000
compliance, Quando's business or operations could be adversely affected. See
"Quando Management's Discussion and Analysis of Financial Condition and Results
of Operations--Year 2000 Compliance."
Risks Related to Infoseek
If GO Network is Not Successful, Infoseek's Business May Be Seriously Harmed
Infoseek believes that its new Internet service, GO Network is critical to its
business. If Infoseek does not finish developing GO Network, develop more
functions and services for GO Network, integrate more content into GO Network
or successfully promote GO Network, Infoseek's business, financial condition
and operating results could be seriously harmed.
In addition, particularly given the growing number of new Internet sites and
low barriers to entering the Internet market, Infoseek also cannot assure you
that users and advertisers will accept GO Network. If users and advertisers do
not accept GO Network or find it to be of high quality, Infoseek will
experience decreased revenues and may be required to incur additional expenses
to promote GO Network.
Further, Infoseek may transition users from the Infoseek Service to GO Network.
Infoseek cannot assure you this transition will occur effectively and without
disruption to its users, advertisers and partners. Current Infoseek advertisers
and content providers may not continue to advertise or provide
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content to either the Infoseek Service or GO Network. The launch and promotion
of GO Network may result in potential confusion or a decline in loyalty among
users or customers of the Infoseek Service or the ABCNEWS.com or ESPN.com
services, which are part of GO Network.
Finally, in order to attract users and build strong brand recognition and
loyalty for GO Network, Infoseek will be required to significantly increase
spending to promote GO Network, including the purchase of promotion from Disney
affiliate ABC. Infoseek may also be required to spend additional money to
purchase and produce new content. Such additional spending will result in
reduced profitability, if any.
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. See "Infoseek Business--GO Network."
GO NETWORK MAY NOT SUCCEED WITHOUT DISNEY'S COOPERATION
Infoseek and Disney plan to jointly promote GO Network. If Disney does not
effectively promote GO Network, GO Network may not be a success and Infoseek's
business may suffer.
Infoseek licenses the 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. Further, if Disney does not
protect the 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," and "Infoseek Relationship with Disney."
Although Disney has generally agreed to not 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.
IF INFOSEEK ENCOUNTERS DIFFICULTIES IN INTEGRATING STARWAVE, INFOSEEK WILL NOT
EXPERIENCE ALL OF THE EXPECTED BENEFITS OF THE ACQUISITION OF STARWAVE
To achieve benefits from Infoseek's recent acquisition of Starwave, Infoseek
must quickly and smoothly integrate its operations with the operations of
Starwave and its joint ventures with ESPN and ABC. Infoseek will be required to
coordinate Infoseek's and Starwave's respective product and service offerings.
Infoseek will also be required to combine Infoseek's and Starwave's sales,
marketing and research and development efforts. Infoseek cannot assure you that
the integration will occur quickly and successfully or that it will be able to
take full advantage of the combined companies' sales force, marketing and
research and development efforts. If Infoseek does not successfully integrate
its operations, Infoseek's business, results of operations, financial condition
and prospects could be seriously harmed.
Since Infoseek's principal office (Sunnyvale, California), Starwave's
headquarters (Seattle, Washington), the ABCNews Joint Venture (principally
located in New York City) and the ESPN Joint Venture (principally located in
Bristol, Connecticut and New York City), are geographically dispersed,
integrating these organizations and operating these businesses will be more
difficult. In addition, Infoseek has approximately 300 more employees now than
prior to the combination. Infoseek management will be required to spend a
significant amount of time on integration issues, which may distract their
attention from the day-to-day operations of Infoseek.
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ACCOUNTING CHARGES FROM THE STARWAVE ACQUISITION WILL DELAY AND REDUCE INFOSEEK
PROFITABILITY
Infoseek's acquisition of Starwave was 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: estimated to be $45.2
million amortized over a two year period
2. goodwill: estimated to be $656.3 million amortized over a ten year
period
3. joint ventures: estimated to be $178.5 million amortized over a ten
year period
. in-process research and development of Starwave: $72.6 million expensed
in the quarter ended December 31, 1998
. remaining integration costs: up to $5.6 million
. 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.
As a result of these acquisitions, management currently estimates that Infoseek
will not have profits until at least 2002. Excluding these merger related
charges, Infoseek would not have profits until at least 2000. The estimates of
when Infoseek will achieve profits are forward-looking-statements that are
subject to risks and uncertainties. For more information on merger charges,
please see "Unaudited Pro Forma Combined Condensed Financial Statements."
IN ORDER TO CONTINUE TO GROW, INFOSEEK WILL NEED MORE FINANCING
Infoseek currently anticipates that its cash 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 financing may not be available
on satisfactory terms, if at all.
Infoseek uses its funds to, among other things, continue expanding, develop new
and enhance existing services and products, promote GO Network and acquire
other businesses, products or technologies. If Infoseek does not raise enough
additional funds, Infoseek may not be able to continue to do any or all of
these activities and Infoseek's business, financial condition and prospects
could be seriously harmed. In addition, Infoseek may also decide to spend more
money than currently forecasted on any of these activities, and therefore may
be required to raise additional funds sooner than currently anticipated. See
"Infoseek Management's Discussion and Analysis of Financial Condition and
Results of Operations--Infoseek Liquidity and Capital Resources."
If any additional funds are raised through the sale of stock or convertible
debt, the percentage ownership of Infoseek's current stockholders will be
reduced. Such stock or convertible debt also may have rights, preferences or
privileges greater than Infoseek's common stock.
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INFOSEEK'S FINANCIAL RESULTS WILL VARY
Infoseek and its subsidiaries have limited operating histories. The Internet
and intranet markets addressed by Infoseek are new. Infoseek therefore does not
have internal or industry-based historical financial data for any significant
period of time upon which to base projections for revenues or to help budget
operating expenses. 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 rate of growth, usage and acceptance of the Internet, intranets and
online services,
. the rate of acceptance of the Internet as an advertising medium and the
demand for advertising,
. acceptance of the Internet for commerce,
. demand for Infoseek's products and services,
. the advertising budgeting cycles of individual advertisers,
. costs related to expansion and capital investments,
. results of acquisitions and strategic agreements,
. the introduction, marketing and acceptance of new, enhanced or
alternative products or services by Infoseek 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,
. 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, almost all of Infoseek's revenues come from advertising contracts,
most of which are for three months or less. Advertising prices are closely
related to the number of viewers on Infoseek's services, and Infoseek cannot
accurately predict the number of viewers on its sites for any given time. As a
result, Infoseek has difficulty forecasting future sales and operating results.
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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 generally become
exercisable over three years from November 1998 that will allow 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 its 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 currently is entitled to a
number of nominees sufficient to require the approval of the Disney
nominees for those transactions requiring supermajority board approval,
described below.
. Supermajority board approval is required for certain Infoseek
transactions, including:
. amendment of Infoseek's certificate of incorporation or bylaws,
. a transaction in which the ownership control of Infoseek changes,
. 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
. any appointment of a new Chief Executive Officer of Infoseek.
Disney May Be Able to Obtain Majority Control of Infoseek in the Future.
Although Disney has agreed for a three-year period to not acquire voting power
over more than 49.9% of Infoseek's stock, this "standstill" obligation may be
terminated earlier in certain limited circumstances. If the standstill
obligation terminates, Disney could quickly obtain majority control over
Infoseek.
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, in some cases, warrants
of Infoseek in order to maintain its ownership level if Infoseek issues
additional shares. In the event the merger is
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consummated, Disney will have a right to purchase shares of Infoseek common
stock and a warrant to purchase Infoseek common stock sufficient to maintain
its current ownership interest in Infoseek. Disney's purchase of additional
shares will dilute other Infoseek stockholders' ownership and could reduce
Infoseek's earnings per share, if any.
Disney's Ownership Reduces Opportunity for an Acquisition of Infoseek by a
Third Party.
Disney's substantial ownership position in Infoseek, as well the terms of the
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, it is
difficult for a person other than Disney to acquire all or a large portion of
Infoseek stock. See "Infoseek Relationship with Disney."
IF INFOSEEK CANNOT 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's success depends in great part 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 page views on the Infoseek Service were
generated by traffic derived from third party sources, principally Microsoft,
WebTV and Netscape. Infoseek's agreement with Netscape was renegotiated on
November 25, 1998, resulting in Infoseek receiving less traffic from Netscape.
When existing traffic agreements terminate, Infoseek may not be able to renew
them or find other agreements on good terms or at all. If Infoseek does not
renew these agreements or enter into similar agreements on good terms and does
not develop significant traffic to make up for the loss of these agreements,
Infoseek's advertising revenues will be reduced. Reduced advertising revenues
would likely seriously harm Infoseek's business, results of operations,
financial condition and prospects.
In addition, the products or services of those companies that provide access or
links to Infoseek's products or services, such as other website operators, may
not achieve market acceptance or commercial success, which would likely
seriously harm Infoseek's business, results of operations, financial condition
and prospects.
INFOSEEK'S FUTURE SUCCESS DEPENDS ON THE CONTINUATION AND INTEGRATION OF JOINT
VENTURE RELATIONSHIPS AND ON ENTERING INTO NEW THIRD PARTY RELATIONSHIPS
Infoseek's success also depends in great part on the continuation and
integration of its joint ventures and third party relationships, especially the
joint ventures with ESPN and ABC. Infoseek expects the ABC and ESPN joint
ventures to contribute a significant portion of its revenues in the future. 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 in turn could
seriously harm Infoseek's business, financial results and financial condition.
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INFOSEEK HAS HAD LOSSES IN THE PAST AND HAS DIFFICULTY PREDICTING FUTURE
RESULTS BUT EXPECTS FLUCTUATIONS AND LOSSES IN THE FUTURE
Infoseek has not yet been profitable and expects to have consolidated net
losses for a number of years. The limited operating histories of Infoseek and
Starwave make it difficult to budget or predict future results. Although
Infoseek has experienced significant revenue growth in 1997 and 1998, Infoseek
cannot assure you that this growth rate will be sustained, that revenues will
continue to grow or that Infoseek will achieve profitability.
Infoseek and its prospects must be considered in light of the risks, costs and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in the new and rapidly evolving Internet
market. Infoseek cannot assure you that it will be able to address any of these
challenges. As of September 30, 1998, Infoseek had an accumulated deficit of
$53.7 million. On a pro forma basis as of September 30, 1998, including
Infoseek, Starwave and Quando, Infoseek would have had an accumulated deficit
of approximately $130.7 million.
In addition, Infoseek may elect from time to time to make certain pricing,
service or marketing decisions or acquisitions 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 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,
. announcements of new technological innovations or new products and media
properties by Infoseek or its competitors,
. changes in financial estimates and recommendations by securities
analysts,
. the operating and stock price performance of other companies that
investors may deem comparable to Infoseek, and
. news relating to trends in Infoseek's markets or the economy generally.
In addition, the stock market and specifically the stock of Internet companies
have been very volatile. This volatility is often not related to the operating
performance of the companies. This broad market volatility and industry
volatility may reduce the price of Infoseek's common stock, without regard to
Infoseek's operating performance. In addition, Infoseek's operating results may
be below the expectations of public market analysts and investors. In such
event, the market price of Infoseek's common stock would likely significantly
decrease.
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IF INFOSEEK DOES NOT DEVELOP STRONG BRANDS, ITS BUSINESS COULD SUFFER
Infoseek believes that establishing and maintaining the GO Network and related
brands is crucial to its business. Infoseek believes that brand recognition
will be even more important as the number of Internet sites grows, due to the
relative ease of entering the Internet market. If Infoseek does not promote and
maintain its brands, its business, results of operations, financial condition
and prospects would be seriously harmed.
In order to promote and enhance its brands, Infoseek believes it must create
loyalty among consumers. This will require Infoseek to spend a large amount of
resources on developing high quality products and services and to design and
use effective media promotions. If Infoseek does not develop high quality
products and services or have effective promotions, it will not develop a
strong brand.
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, and
. electronic commerce.
If Infoseek is unable to compete effectively in theses areas, it could suffer
serious harm to its business.
Because the market for these services is new and developing, Infoseek cannot
predict how competition will affect Infoseek, its competitors or its customers.
Because developing new Internet technology is relatively inexpensive, it is
easy for new competitors to enter the Internet and intranet markets and these
markets are changing quickly. There is a large number of competitors currently
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 greater content and services than Infoseek, including better
multimedia content, search and directory services, on-line "communities" with
chat, e-mail and games, and electronic commerce. Infoseek may be unable to
develop these and other new services in advance of competitors.
See "Infoseek Business--Competition."
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IF INFOSEEK DOES NOT ACHIEVE REVENUE MINIMUMS UNDER REPRESENTATION AGREEMENTS,
IT MAY INCUR 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 has agreed to make quarterly 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 be able to collect the money due from these sales and services.
Failure to sell the predetermined minimum amount or collect enough money from
these sales services could result in losses, 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
To grow revenues, Infoseek depends on increased acceptance and use of the
Internet, intranets and other interactive online platforms as sources of
information, entertainment and sales of goods and services. If the Internet
grows more slowly than expected, or does not grow at all, Infoseek's business,
financial condition and operating results would be seriously harmed. If access
to the Internet or Infoseek's services is restricted, Infoseek's business,
financial condition and operating results would also be seriously harmed.
The Internet has grown very rapidly in recent years. Infoseek cannot assure you
that the Internet will continue to be accepted and widely used. In particular,
Infoseek cannot assure you that consumers will continue to use the Internet for
purchasing or selling goods and services or that advertisers will continue to
use it for advertising goods and services. Infoseek also cannot assure you that
a large base of users will support Infoseek's business. Significant structural
problems remain in using the Internet and conducting electronic commerce,
including:
. security
. reliability
. cost
. ease of use and access
. quality of service
. lack of network infrastructure to support increased use
. speed of Internet service
. limitations on access by corporations and schools
. privacy
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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 have become
established in the market. The Internet market might not continue developing or
develop more slowly than expected. Infoseek may be unable to modify its
business model rapidly enough to remain competitive. The Internet market might
become filled with competitors. Infoseek's products may not become accepted by
Internet users or advertisers. If any of these events occurs, Infoseek's
business, results of operations, financial condition and prospects would be
seriously harmed.
IF INTERNET ADVERTISNG AND RELATED SPONSORSHIP 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 Infoseek services as a source of revenue. Therefore, Infoseek depends on the
acceptance and success of advertising on the Internet. Infoseek cannot assure
you 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 prices 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, like television, radio and
newspapers are less costly or better at reaching customers than the Internet.
There are no widely accepted standards to measure the effectiveness of Internet
advertising.
Infoseek believes that advertising sales are generally lower in the winter and
summer of each year as compared with the fall and spring. Infoseek also
believes that advertising usage changes with the economy. Seasonal and economic
changes could more seriously affect Internet advertising sales. Any seasonal or
economic-based changes in advertising sales could seriously harm Infoseek's
business, financial condition and operating results.
IF INFOSEEK'S FUTURE ACQUISITIONS AND STRATEGIC TRANSACTIONS ARE NOT
SUCCESSFUL, INFOSEEK'S BUSINESS MAY SUFFER
Infoseek believes it may be necessary to acquire complementary products,
technologies or businesses to remain competitive. There are several risks of
acquisitions or other strategic transactions, including the Quando and Starwave
acquisitions, such as:
. difficulties integrating people and operations,
. difficulties integrating acquired technology or content into existing
businesses,
. potential disruption of Infoseek's ongoing businesses,
. expenses and other charges associated with transactions,
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. the necessity of establishing and implementing uniform standards,
controls, procedures and policies for acquired companies,
. impairment of relationships with employees, vendors and customers as a
result of any integration of new management personnel, technologies,
products and services,
. potential unknown liabilities associated with acquired businesses,
. 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.
INFOSEEK MAY NOT BE ABLE TO USE POOLING ACCOUNTING FOR FUTURE ACQUISITIONS AND
THIS MAY REDUCE ITS FUTURE PROFITABILITY
Because of 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 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,
customers 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.
One key element of Infoseek's strategy is to continue to develop new
technological innovations in order to enhance the user's experience and
strengthen relationships with advertisers. The success of GO Network and its
component sites will depend in part on how easy-to-use, functional and feature-
filled such services are.
Because Infoseek needs to continue to provide technological improvements to its
services, Infoseek faces many risks. Infoseek cannot assure you:
. Any of its new or proposed product or services will be accepted by the
market or will continue to meet the market's changing needs.
. It will successfully design, develop, test, market and introduce new and
enhanced technologies and services.
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. 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.
. It will not have large expenses in order to develop, improve or acquire
new technologies.
. Its new or enhanced products and services will be free of errors and will
not require significant design changes once introduced.
If any of these risks 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 growth of the Internet
and electronic commerce generally. 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. If Infoseek's revenue from electronic commerce increases
substantially, Infoseek will consider buying additional insurance. However, if
Infoseek does not or cannot obtain adequate insurance at that time, large or
repeated security breaches into Infoseek's systems could seriously harm
Infoseek's business, results of operations and financial condition.
Infoseek has agreements and expects to enter into other agreements with third
parties where Infoseek is entitled to receive part of the revenues received by
these third parties from the purchase of goods 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.
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
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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 which are not year 2000 compliant as part
of a conversion to an improved financial reporting system in connection with
regular upgrade programs in 1999. 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 they and their products are
prepared for the year 2000. Infoseek cannot assure you the assurances it
receives from vendors are reliable, since Infoseek has not independently
investigated its vendor's assertions about their products. In addition,
Infoseek has also not investigated year 2000 compliance by third parties who
are not vendors of Infoseek. Infoseek has no control over these third parties'
compliance. For example, if a link on GO Network or the Infoseek search service
points to a website which is not year 2000 compliant, that link may not be
available to users and therefore the Infoseek services will offer fewer
features. If many linked sites do not work, the value of user traffic and
advertising on Infoseek's websites could materially decrease. In addition, if
Infoseek's review of its year 2000 readiness did not uncover all year 2000
problems, Infoseek could suffer serious harm or be required to expend resources
to resolve those problems. See "Infoseek 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 "--Infoseek Relies on its Advertising Management System."
. Hire, train, motivate and manage its employees.
. 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 Expanded Electronic Commerce Capabilities, including an
infrastructure for security, delivery and financial reporting.
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If Infoseek fails to do any of these or experiences problems, delays or
unanticipated additional costs in addressing these concerns, 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 less traffic to Infoseek's
services. If the interruptions continue, they could reduce the number of users
of and advertisers on Infoseek's products and services. A reduction in the
number of users of 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 telecommunications 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
. May be damaged through physical or electronic break-ins or computer
viruses
Infoseek does not maintain a comprehensive disaster recovery plan and does not
have redundant systems for each of its services. Although Infoseek has
insurance for fires, floods, earthquakes (and, for the systems in Washington,
wind storms) and general business interruptions, the amount of coverage may not
be adequate to cover all losses which could occur. If losses occur from
failures of Infoseek systems and insurance does not fully cover such losses,
they could seriously harm Infoseek's business, results of operations, financial
condition and prospects.
Infoseek also depends on Web browser makers and Internet and online service
providers. Infoseek's viewers have experienced and may in the future experience
difficulties due to incompatibilities or other problems. Infoseek cannot
control these Web browser makers and online services providers and cannot
predict when these incompatibilities or problems will occur. Infoseek also
depends on computer hardware suppliers to promptly deliver, install and service
its servers and other equipment and services used to provide Infoseek's
products and services. If Infoseek's access to the Internet or computer systems
fail, it could result in serious harm to Infoseek's business, results of
operations, financial condition and prospects.
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 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.
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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 INTERNATIONALLY, ITS BUSINESS MAY
SUFFER
As part of its business strategy, Infoseek has begun to expand its products and
services into international markets and is exploring further opportunities to
expand internationally. If Infoseek fails to be successful 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 adequate to offset the
expense of establishing and maintaining international operations. Further, in
addition to the uncertainty of Infoseek's ability to establish an international
presence, there are difficulties and risks inherent in doing business
internationally, such as:
. compliance with regulatory requirements and changes in these requirements
. export restrictions
. export controls relating to technology
. tariffs and other trade barriers
. difficulty in protection of intellectual property rights
. difficulties in staffing and managing international operations
. longer payment cycles
. problems in collecting accounts receivable
. political instability
. fluctuations in currency exchange rates
. potentially adverse tax consequences
. 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 Chief Executive Officer, Les Wright, its
Chief Operating Officer and Chief Financial Officer, and Patrick Naughton, its
Chief Technical Officer. Infoseek also depends on many other employees, such as
employees with writing, editing, sales, management, marketing or technical
ability. Employees with these skills are difficult to find, and competition for
these employees is intense. Most
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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 protect its
intellectual property. Infoseek may not be able to protect its technology
because:
. Pending and new patent applications and trademark registrations may not
be approved.
. Even if issued, new patents and trademark registration may be challenged,
invalidated or designed around.
. Infoseek's new products or technologies may not be patentable.
. Time-consuming and costly litigation may be necessary to protect
Infoseek's proprietary technologies.
. Policing unauthorized use of Infoseek's intellectual property is
difficult and expensive.
. 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.
See "Infoseek Business--Intellectual Property."
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.
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Third parties:
. may bring claims of patent, copyright or trademark infringement against
Infoseek,
. 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, 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.
Infoseek has also from time to time received informal notices from copyright
and trademark holders regarding use of music, images and websites in their
services. Infoseek is also aware of other companies and/or services that employ
"Go" as a part of their names. Infoseek cannot assure you that Infoseek's use
of GO Network will be free from challenge or liability and Infoseek cannot
assure you it will always be able to operate GO Network under such name.
See "Infoseek Business--Intellectual Property."
CHANGES IN LAWS GOVERNING THE INTERNET COULD DECREASE THE DEMAND FOR INFOSEEK'S
SERVICES
If new laws or regulations are adopted or if courts apply or expand existing
laws in Internet cases, Internet use may decrease. This could in turn decrease
the demand for Infoseek's products and services or increase Infoseek's cost of
doing business. These effects or other effects of new laws and regulations
could seriously harm Infoseek's business, results of operations, financial
condition and prospects.
No government entity currently directly regulates Infoseek. Infoseek is,
however, subject to those general laws and regulations that apply to all
businesses. At present, there are few laws or regulations that apply to access
to or commerce on the Internet. However, proposals for regulation are presented
to federal, state, and foreign governments frequently. Laws or regulations may
be passed regarding the Internet on such issues as:
. user privacy (including sending of unsolicited e-mail, or "spamming"),
. consumer protection for products and services,
. media regulation, such as libel and obscenity,
. intellectual property, and
. liability of Internet service providers.
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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 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 expects to offer Web-based e-mail services in the near
future. E-mail may further expose Infoseek to potential risks. For example,
Infoseek may be subject to claims or liabilities from spamming, lost or
incorrectly delivered messages, use of e-mail for illegal purposes or fraud,
harassment or interruptions or delays in e-mail service.
Although Infoseek carries general liability insurance, such insurance may not
cover all claims or may not be sufficient to reimburse Infoseek for all
liabilities that may occur.
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WHERE YOU CAN FIND MORE INFORMATION
Infoseek files annual, quarterly and current reports, proxy solicitation
statements and other information with the Securities and Exchange Commission.
You may read and copy any reports, statements or other information filed by
Infoseek at the Securities and Exchange Commission's public reference rooms in
Washington, D.C., New York City and Chicago. Please call the Commission at
1-800-SEC-0330 for further information on the public reference rooms.
Infoseek's filings are also available to the public from commercial document
retrieval services and at the Internet website maintained by the Securities and
Exchange Commission at http://www.sec.gov.
Infoseek filed a Registration Statement on Form S-4 to register with the
Securities and Exchange Commission the Infoseek common stock to be issued to
Quando shareholders in the merger. This proxy statement/prospectus is a part of
that registration statement. As allowed by the Securities and Exchange
Commission's rules, this proxy statement/prospectus does not contain all of the
information you can find in the registration statement or the exhibits to the
registration statement. This proxy statement/prospectus summarizes some of the
documents that are exhibits to the registration statement, and you should refer
to the exhibits for a more complete description of the matters covered by those
documents.
Infoseek has supplied all information contained in this proxy
statement/prospectus relating to Infoseek, and Quando has supplied all such
information relating to Quando.
Neither Infoseek nor Quando has authorized anyone to give any information
regarding the solicitation of consents or the offering of shares of Infoseek
common stock that is different from what is contained in this proxy
statement/prospectus. This is not an offer to sell or a solicitation of anyone
to whom it would be unlawful to make an offer or solicitation. You should not
assume that the information contained in this proxy statement/prospectus is
accurate as of any time after the date of this proxy statement/prospectus, and
neither the delivery of this proxy statement/prospectus to Quando shareholders
nor the issuance of Infoseek common stock in the merger should create any
implication to the contrary.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
This proxy statement/prospectus 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. These
statements relate to expectations concerning matters that are not historical
facts. Words such as "projects," "believes," "anticipates," "plans," "expects,"
"intends," and similar words and expressions are intended to identify forward-
looking statements. Although each of Infoseek and Quando believes that such
forward-looking statements are reasonable, neither can assure you that such
expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from such expectations are disclosed
herein including, without limitation, in the "Risk Factors" beginning on page
15. All forward-looking statements are expressly qualified in their entirety by
these factors and all related cautionary statements. Neither Infoseek nor
Quando undertakes any obligation to update any forward-looking statements.
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TRADEMARKS
Infoseek, the Infoseek logo, Ultraseek, Ultramatch and Starwave are among the
registered trademarks of Infoseek. Quando is a registered trademark of Quando,
Inc., and QBot, EventBot, ShoppingBot, SchoolBot and WhoBot are trademarks of,
Quando, Inc. This proxy statement/prospectus also refers to other trademarks of
Infoseek, Quando and other companies.
DESCRIPTION OF INFOSEEK CORPORATE STRUCTURE
On November 18, 1998, Infoseek entered a significant transaction with Disney.
In this transaction, Infoseek Corporation, a Delaware corporation acquired
Starwave Corporation from Disney and became the parent holding company of
Infoseek Corporation, a California corporation, and Starwave. As part of this
transaction, Disney also became Infoseek's largest stockholder.
In order to make this proxy statement/prospectus easier for you to read, we use
certain defined terms to describe companies rather than using their full legal
names. In this proxy statement/prospectus, references to Infoseek on or after
November 18, 1998 are references to Infoseek, a Delaware corporation and its
subsidiaries, and references to Infoseek prior to November 18, 1998 are
references to Infoseek, a California corporation. When necessary, we sometimes
refer to Infoseek, a California corporation, as "Infoseek California." We also
refer to the wholly-owned subsidiary of Infoseek that is merging with Quando as
"Infoseek Sub." We also refer to The Walt Disney Company, together with its
affiliated companies, as "Disney" and to the ESPN Joint Venture and ABCNews
Joint Venture as the "Joint Ventures."
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QUANDO'S SOLICITATION FOR SHAREHOLDER APPROVAL
DATE, TIME AND PLACE OF SPECIAL MEETING
A special meeting of the shareholders of Quando will be held at the principal
executive offices of Quando, 520 NW Davis Street, Portland, Oregon 97209 on
Wednesday, January 27, 1999, at 11:30 A.M., local time.
PURPOSE OF THE SOLICITATION
Holders of shares of Quando common stock and preferred stock as of November 20,
1998, the record date, are being asked to consider and vote upon the approval
of the merger and the merger agreement. See "The Merger and Related
Transactions" and "Terms of the Merger."
VOTING BY WRITTEN CONSENT AND BY PROXY
The written consent and proxy card accompanying this proxy statement/prospectus
are solicited on behalf of the Board of Directors of Quando in an attempt to
consummate the merger as soon as possible. Please complete, date and sign the
accompanying written consent and proxy card and promptly return both of them to
Quando, first by facsimile and then in the enclosed, overnight courier package.
All proxies that are properly executed and returned, and that are not revoked,
will be voted at the special meeting of the shareholders in accordance with the
instructions indicated on the proxies. IF NO DIRECTION IS INDICATED ON THE
PROXY CARD, THE SHARES REPRESENTED THEREBY WILL BE VOTED FOR THE MERGER AND THE
MERGER AGREEMENT. In the event Quando receives written consents from all
shareholders of record as of the record date prior to Wednesday, January 27,
1999, Quando will consummate the merger as soon as practicable after its
receipt of the consents and the special meeting of the shareholders will not be
held.
For voting purposes at the special meeting, only shares affirmatively voted in
favor of the merger and the merger agreement will be counted as favorable votes
for such matters. THE FAILURE TO VOTE IN PERSON, BY PROXY, OR BY WRITTEN
CONSENT OR THE ABSTENTION FROM VOTING WITH RESPECT TO THE MERGER AND THE MERGER
AGREEMENT WILL HAVE THE SAME EFFECT AS A VOTE AGAINST SUCH MATTERS.
The management of Quando is not aware of any matters to be voted on at the
special meeting other than the merger and the merger agreement. If other
matters should properly come before the special meeting, the proxyholders will
vote on such matters in accordance with their judgment.
RECORD DATE; QUORUM
Only holders of record of shares of Quando common stock or Quando preferred
stock at the close of business on the record date, are entitled to notice of
the special meeting and will be entitled to vote at the special meeting or
alternatively consent in writing. The Quando common stock and Quando preferred
stock will vote or consent together as one class. As of the record date, there
were 5,884,178 shares of Quando common stock issued and outstanding and
entitled to vote at the special meeting, assuming the conversion of all of the
Quando preferred stock into Quando common stock. As of the record date, such
shares were held by 14 holders of record.
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The required quorum for the transaction of business at the special meeting is a
majority of the outstanding shares of capital stock issued and outstanding as
of the record date, which shares may be present in person or represented by
proxy.
VOTE REQUIRED
Approval of the merger and merger agreement at the special meeting will require
the affirmative vote of the holders of record of 90% of the outstanding shares
of common and preferred stock as of the record date. Approval of the merger and
merger agreement by written consent will require the consent of the holders of
record of 100% of the outstanding shares of common and preferred stock as of
the record date.
The holders of record of common stock and preferred stock will vote together on
the merger and merger agreement. The common stock and preferred stock will
effectively have the following number of votes per share on these matters:
<TABLE>
<C> <S>
. common stock 1 vote per share
. Series A preferred stock 1.2685 votes per share
. Series B preferred stock 1.1462 votes per share
</TABLE>
As of the record date, and assuming the conversion of all Quando preferred
stock as of that date, directors and executive officers of Quando beneficially
owned and were entitled to vote 5,315,143 shares of Quando common stock. These
shares represented approximately 90.33% of the outstanding voting shares on the
record date. Each director and executive officer has indicated his present
intention to vote the common and preferred stock owned by him for the approval
of the merger and the merger agreement. If these directors and executive
officers vote as they have indicated, the merger and merger agreement will be
approved.
REVOCABILITY OF CONSENTS AND PROXIES
You may revoke your proxy at any time prior to the Quando shareholders meeting
by executing a new proxy prior to the shareholders meeting or by attending the
meeting in person and voting. Merely attending the meeting will not revoke your
proxy. You may revoke your consent by delivering written notice of such
revocation to Quando's Secretary at any time prior to the closing of the
merger. Quando hopes to receive the written consent of all of its shareholders
to the merger and the merger agreement by Friday, January 15, 1999 and to close
the merger on or about Tuesday, January 19, 1999.
SOLICITATION OF SHAREHOLDER APPROVAL
All expenses of Quando's solicitation of shareholder approval, including the
cost of mailing this proxy statement/prospectus to Quando shareholders, will be
borne by Quando. In addition to solicitation by use of the mails, written
consents and proxies may be solicited from Quando shareholders by directors,
officers and employees of Quando or Infoseek in person or by telephone,
facsimile or other means of communication. Such directors, officers and
employees will not receive additional compensation for such solicitation, but
may be reimbursed for reasonable out-of-pocket expenses in connection
therewith.
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RECOMMENDATION OF QUANDO BOARD OF DIRECTORS
The Quando Board has unanimously approved the merger and merger agreement and
has determined that the merger and merger agreement are fair to, and in the
best interests of, Quando and its shareholders. THE QUANDO BOARD UNANIMOUSLY
RECOMMENDS A VOTE IN FAVOR OF THE MERGER AND THE MERGER AGREEMENT. See "The
Merger and Related Transactions--Background of the Merger and Related
Transactions" and "--Recommendation of Quando's Board of Directors and Reasons
for the Merger."
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THE MERGER AND RELATED TRANSACTIONS
Other than statements of historical fact, the statements made in this section,
including statements as to the benefits expected to result from the merger,
particularly regarding GO Network and future financial performance, are
forward-looking statements that are subject to risks and uncertainties. Actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in "Risk
Factors" and elsewhere in this proxy statement/prospectus.
BACKGROUND OF THE MERGER AND RELATED TRANSACTIONS
In March 1998, Quando's Board of Directors instructed its management to
investigate the possibility of a merger of Quando with an Internet portal such
as Infoseek. Both the Quando Board of Directors and Quando management believed
that it was in the best interests of Quando and its shareholders to combine the
technical capabilities of Quando with the marketing capabilities and relative
financial strength of an Internet portal.
Over the next three months and with the assistance of Lisa Gansky and Richard
Miller, consultants to Quando, several candidate companies were identified and
contacted.
On May 1, 1998, David Billstrom, President, Chief Executive Officer and
Chairman of the Board of Directors of Quando, spoke with Harry Motro, President
and Chief Executive Officer of Infoseek, to discuss the possibility of a
strategic transaction or business combination between the two companies.
On May 6, 1998, Steven Kirsch, Chairman of the Board of Directors of Infoseek,
met with Mr. Billstrom and Ms. Gansky at Infoseek's Sunnyvale offices to
further discuss a possible business combination involving the two companies.
On May 13, 1998, Mr. Kirsch, Mr. Billstrom, Ms. Gansky, William Neuhauser,
Chief Technology Officer of Quando, and other representatives of Infoseek and
Quando met at Infoseek's Sunnyvale offices to further discuss the possibility
of a business combination. Immediately prior to this meeting, both companies
executed non-disclosure agreements with each other.
On May 29, 1998, Ms. Gansky and Mr. Miller met with Eric Bochner, Infoseek's
Vice President of Corporate Business Development, at Infoseek's Sunnyvale
offices, to discuss the overall strategy of combining the technologies of the
two companies.
On May 30, 1998, Mr. Billstrom, Mr. Neuhauser, Ms. Gansky, Mr. Bochner, Mr.
Motro and Mr. Kirsch met in Sunnyvale to discuss specific strategies for a
business combination of the two companies.
On June 7, 1998, following negotiations regarding price, Infoseek offered
Infoseek common stock at a value of $17.0 million for all issued and
outstanding capital stock of Quando, along with the assumption of certain
liabilities and fees connected with the transaction.
On June 10, 1998, the Quando Board of Directors met informally and agreed to
continue negotiations with Infoseek.
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At various times from May 14, 1998 through July 22, 1998, Infoseek conducted
due diligence of Quando, which included examining financial reports, personnel
records, customer contracts and portions of source code. Infoseek personnel
visited Quando on June 2, July 6, and July 21, 1998, to conduct on-site due
diligence.
On June 25, 1998, Infoseek provided to Quando a non-binding term sheet relating
to the proposed merger. The Quando Board of Directors met informally by
telephone and agreed that Quando's management should continue to negotiate with
Infoseek on the basis of the non-binding term sheet.
On July 10, 1998, Infoseek and Quando executed a non-binding term sheet
relating to the proposed merger, which contemplated executing a definitive
agreement by July 24, 1998.
On July 22, 1998, the Infoseek Board of Directors met and discussed the
proposed terms of the merger and unanimously authorized and approved the merger
and merger agreement.
On July 24, 1998, the Quando Board of Directors met and concluded that the
merger was fair to and in the best interests of Quando and its shareholders,
and unanimously approved and adopted the merger agreement. Later that day,
Infoseek and Quando executed the merger agreement.
On August 11, 1998, Infoseek and Quando publicly announced their intent to
merge.
On October 20, 1998, Mr. Bochner and Mr. Billstrom began discussing by
telephone certain amendments to the merger agreement. On October 27, 1998, in a
meeting in Palo Alto at the offices of Wilson Sonsini Goodrich & Rosati,
outside counsel to Infoseek. Mr. Bochner, Mr. Billstrom and Ms. Gansky, as well
as counsel for both companies, continued to discuss several possible amendments
to the merger agreement. During the next four weeks, negotiations continued by
telephone on the proposed amendment to the merger agreement.
On December 7, 1998, Quando's Board of Directors agreed to accept the proposed
amendment to the merger agreement and to recommend that Quando's shareholders
approve the merger and merger agreement.
On December 7, 1998, Infoseek and Quando executed an amendment to the merger
agreement.
INFOSEEK REASONS FOR THE MERGER
The Infoseek Board has approved the merger and has identified several potential
benefits of the merger that it believes will contribute to the success of the
combined entity following the merger. The Infoseek Board believes that Quando
possesses technology that will be valuable to Infoseek's products and services.
In the process of approving the merger, the Infoseek Board considered a number
of factors, including:
. The proposed terms of the merger,
. The likelihood of realizing superior benefits through alternative
strategies,
. Information concerning Quando's business, historical performance and
operations, and competitive position,
. The value of Quando as a part of Infoseek's operations,
. The compatibility of the businesses and operations of Infoseek and Quando
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RECOMMENDATION OF QUANDO'S BOARD OF DIRECTORS AND REASONS FOR THE MERGER
On July 24, 1998 and December 7, 1998, Quando's Board of Directors held
telephonic Board meetings with all directors of Quando participating. At each
meeting, the Board of Directors of Quando weighed the relative merits of the
proposed merger with Infoseek and concluded that the sale of Quando to Infoseek
was in the best interests of Quando shareholders. By unanimous vote, the Quando
Board approved the merger agreement and the merger agreement, as amended, on
December 7, 1998, and authorized Quando's officers to solicit Quando
shareholders' approval of the merger agreement. The Quando Board of Directors
then scheduled a special meeting of shareholders to be held on January 27, 1999
in the event Quando's shareholders do not unanimously approve the merger
agreement by written consent.
In approving the merger and merger agreement, Quando's Board of Directors
considered a number of factors, including:
. The consideration to be paid to Quando shareholders represents a
significant premium over the price paid by investors between July 1996
and February 1997 for the purchase of Quando Series B preferred stock.
. The exchange of Quando capital stock for Infoseek common stock will give
current holders of Quando capital stock publicly listed shares that trade
on the Nasdaq National Market, providing them with liquidity as well as
the opportunity to participate in the potential growth of Infoseek.
. The financial resources of Infoseek are significantly greater than the
financial resources of Quando.
. Information available to them concerning Infoseek, its business, size and
market characteristics of Infoseek common stock.
. The opportunity to access Infoseek's sales channels for the distribution
of Quando's services.
. The terms of the merger agreement, including the proposed structure of
the merger as a tax-free reorganization under the Internal Revenue Code
of 1986, as amended.
. The business, results of operations, properties and financial condition
of Quando and the competitive nature of the industry in which it
operates.
. The business and financial prospects for Quando if it were to remain
independent, taking into account Quando's continued losses from
operations, its current position in the market and its size and resources
as compared to its competitors.
. The effect of the merger on Quando's employees and existing customers.
The Quando Board of Directors identified and considered a number of potentially
negative factors in its deliberations concerning the merger, including:
. The risk that the potential benefits sought in the merger might not be
fully realized.
. The possibility that the merger would not be consummated.
. The risk that despite the efforts of Infoseek, key technical, marketing
and management personnel of Quando might not choose to remain employed by
Infoseek.
. The other risks described above under "Risk Factors."
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The Quando Board of Directors believes that these risks are outweighed by the
potential benefits of the merger.
In reaching its decision to approve the merger agreement, the Quando Board of
Directors did not assign any relative or specific weights to the various
factors considered, and individual directors may have given differing weights
to different factors. Rather, the Quando Board of Directors based its position
and recommendations upon the totality of the information presented to them.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Quando Board of Directors with respect
to the merger and merger agreement, the Quando shareholders should be aware
that certain directors and officers of Quando have entered into employment
agreements with Infoseek with respect to employment following the merger. In
addition, the directors of Quando will receive continuing indemnification
against certain liabilities. These arrangements present the Quando directors
and officers with potential conflicts of interest. See "Terms of the Merger--
Indemnification of Officers and Directors" and "Other Agreements--Employment
and Non-Competition Agreements."
In addition, as of the record date, the directors and officers of Quando and
their affiliates owned 4,445,000 shares of Quando common stock, 86,000 shares
of Quando Series A preferred stock and 664,000 shares of the Quando Series B
preferred stock. Assuming the conversion of all Quando preferred stock into
common stock, the directors and officers of Quando and their affiliates owned
5,315,143 shares or 90.3% of the outstanding Quando common stock. See "Security
Ownership of Management and Principal Shareholders of Quando."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations of the merger that are generally applicable to holders of Quando
capital stock exchanging their Quando capital stock for Infoseek common stock.
Shareholders of Quando should be aware that the following discussion does not
deal with all federal income tax considerations that may be relevant to Quando
shareholders in light of their particular circumstances, such as shareholders
who are dealers in securities, who are foreign persons or who acquired their
Quando capital stock through stock option or stock purchase programs or in
other compensatory transactions. In addition, the following discussion does not
address the tax consequences of the merger under foreign, state or local tax
laws. Finally, the following discussion does not address the tax consequences
of transactions occurring prior to or after the merger (whether or not such
transactions are in connection with the merger) including, without limitation,
the exercise of options or rights to purchase Quando capital stock in
anticipation of the merger. ACCORDINGLY, QUANDO SHAREHOLDERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF
THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES TO THEM OF THE MERGER.
The following discussion is based on the Internal Revenue Code of 1986, as
amended (the "Code"), applicable Treasury Regulations, judicial authority and
administrative rulings and practice, all as of the date hereof. The IRS could
still adopt a contrary position. In addition, future legislative, judicial or
administrative changes or interpretations could adversely affect the accuracy
of the statements and
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conclusions set forth herein. Any such changes or interpretations could be
applied retroactively and could affect the tax consequences of the merger to
Infoseek, Infoseek Sub, Quando and/or their respective stockholders.
The merger is intended to qualify as a reorganization under Section 368(a) of
the Code. In the event the merger does qualify as a reorganization, subject to
the limitations and qualifications referred to herein:
. The holders of Quando capital stock will recognize no gain or loss upon
the receipt of Infoseek common stock solely in exchange for their Quando
capital stock in the merger.
. The aggregate tax basis of the Infoseek common stock received by the
Quando shareholders in the merger will be the same as the aggregate tax
basis of the Quando capital stock surrendered in exchange.
. The holding period of the Infoseek common stock received by each Quando
shareholder in the merger will include the deemed holding period of the
Quando capital stock surrendered in exchange, provided that the Quando
capital stock surrendered is held as a capital asset at the time of the
merger.
. None of Infoseek, Infoseek Sub or Quando will recognize gain or loss
solely as a result of the merger.
For federal income tax purposes, holders of Quando capital stock will be
treated as having received the escrow shares upon the consummation of the
merger. Accordingly, until the escrow shares are released, the interim basis of
the Infoseek common stock received by holders of Quando capital stock will be
determined as though the maximum number of shares of Infoseek common stock were
received by Quando shareholders. Because the number of escrow shares to be
released to Infoseek or any other beneficiary is based upon the value of the
Infoseek common stock at the time of the merger, Quando shareholders will not
recognize gain or loss upon the release of escrow shares to Infoseek or any
other beneficiary. The basis of such released shares will be added to the
adjusted basis of the remaining shares of Infoseek common stock received in the
merger by the Quando shareholders. No gain or loss will be recognized and no
amount will be included in the income of the Quando shareholders by reason of
any release of escrow shares to the Quando shareholders.
Neither Infoseek nor Quando has requested a ruling from the IRS in connection
with the merger. It is a condition to the consummation of the merger that
Infoseek and Quando each receive opinions from their respective counsel that
the merger will constitute a reorganization within the meaning of
Section 368(a) of the Code for federal income tax purposes. The tax opinions
neither bind the IRS nor preclude the IRS from adopting a contrary position.
The tax opinions are subject to certain assumptions and qualifications and are
based in part on the truth and accuracy of certain representations of Infoseek,
Quando and Infoseek Sub.
A successful IRS challenge to the reorganization status of the merger would
result in a Quando shareholder recognizing gain or loss. The amount of gain or
loss for each share of Quando capital stock surrendered would equal the
difference between the shareholder's basis in each share and the fair market
value, as of the time of the merger, of the Infoseek common stock received in
exchange. If so, a Quando shareholder's aggregate basis in the Infoseek common
stock so received would equal its fair market value, and the shareholder's
holding period for such stock would begin the day after
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the merger. However, even in that event, neither Infoseek, Infoseek Sub nor
Quando would recognize gain or loss solely as a result of the merger.
Even if the merger qualifies as a reorganization, a Quando shareholder
receiving shares of Infoseek common stock would recognize gain to the extent
that such shares were received in exchange for services or property (other than
solely Quando capital stock). All or a portion of such gain may be taxable as
ordinary income. Gain would also have to be recognized to the extent that a
Quando shareholder was treated as receiving consideration other than Infoseek
common stock in exchange for Quando capital stock.
ACCOUNTING TREATMENT
The Merger will be accounted for under the purchase method of accounting in
accordance with generally accepted accounting principles. Under the purchase
method of accounting, the aggregate consideration paid by Infoseek will be
allocated to the acquired assets and liabilities of Quando based on their fair
market values at the effective time with any excess consideration being treated
as goodwill. Results of operations of Quando, including the related
amortization of intangible assets and write-off of in-process research and
development associated with the merger, will be included in the results of
operations of Infoseek subsequent to the time of the merger.
STOCK EXCHANGE LISTING
The shares of Infoseek common stock to be issued in the merger will be approved
for listing on the Nasdaq National Market.
RIGHTS OF DISSENTING QUANDO SHAREHOLDERS
Quando shareholders who properly dissent from the merger will be entitled to
certain dissenters' rights. A shareholder that is a shareholder as of the
record date and entitled to vote on the merger may dissent from the merger and
obtain payment for the fair value of such shareholder's shares after completion
of the merger. A shareholder who wishes to assert dissenters' rights must
deliver to Quando, before a vote of the shareholders is completed, written
notice of such shareholder's intent to demand payment for the shareholder's
shares if the proposed merger is consummated. A Quando shareholder that
approves the merger will not have a right to dissent from the merger. See
"Dissenters' Rights."
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TERMS OF THE MERGER
The following is a summary of the material terms of the merger agreement. A
copy of the merger agreement is attached as Annex A to this proxy
statement/prospectus and is incorporated herein by reference. The following is
not a complete statement of all the terms of the merger agreement. Statements
made in this proxy statement/prospectus are qualified by reference to the more
detailed information set forth in the merger agreement. You are encouraged to
read the entire merger agreement.
THE MERGER
Upon the merger, Quando will become a wholly-owned subsidiary of Infoseek. The
closing of the merger will take place no later than five business days
following the approval of the merger by Quando's shareholders and the
satisfaction or waiver of the conditions set forth in the merger agreement
unless the parties agree otherwise. If all of the Quando shareholders give
their written consent to the merger and merger agreement, the closing is
anticipated to occur on or about Tuesday, January 19, 1999.
MERGER CONSIDERATION
The total number of shares of Infoseek common stock to be issued in the merger
to Quando shareholders and optionholders (the "Merger Consideration") is
expected to be approximately 421,640 shares of Infoseek common stock. The
Merger Consideration was calculated by dividing the approximately $17.2 million
adjusted purchase price for Quando by $40.78, the deemed price of Infoseek's
common stock for purposes of the merger. The exact terms of the Merger
Consideration formula is contained in the merger agreement.
DIRECTORS AND OFFICERS OF QUANDO AFTER THE MERGER
Upon the merger, the current directors and officers of Infoseek Sub, who are
each current directors or officers of Infoseek, will become the directors and
officers of Quando.
ARTICLES OF INCORPORATION AND BYLAWS OF QUANDO AFTER THE MERGER
The Articles of Incorporation and Bylaws of Infoseek Sub as in effect
immediately prior to the merger will become the Articles of Incorporation and
Bylaws of Quando upon the merger.
QUANDO STOCK OPTIONS
In the merger, each outstanding option or right to purchase shares of Quando
common stock shall be assumed by Infoseek and remain outstanding. However, each
Quando option will be exercisable for Infoseek common stock. The number of
shares of Infoseek common stock issuable upon exercise of a Quando option and
the exercise price of a Quando option will be adjusted to reflect the exchange
ratio of Infoseek common stock for Quando common stock in the merger.
CONVERSION OF QUANDO CAPITAL STOCK AS A RESULT OF THE MERGER
Under the terms of the merger agreement, each share of Quando capital stock
issued and outstanding immediately prior to the merger (other than any shares
held by a holder who has demanded and
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perfected dissenters' rights for such shares in accordance with the applicable
provisions of Oregon law and who has not withdrawn or lost such rights) will be
cancelled and extinguished and be converted automatically into the right to
receive a number of shares of Infoseek common stock. No fractional shares of
Infoseek common stock will be issued in the merger. Instead, any fractional
share shall be rounded up to the nearest whole share of Infoseek common stock.
The number of shares of Infoseek common stock to be received by Quando
shareholders is an approximation based on information available at this time.
The actual numbers may vary after the final calculations have been made.
Conversion of Quando Series A Preferred Stock
Holders of Quando Series A preferred stock will be entitled to receive
approximately 0.0627 shares of Infoseek common stock for each share of Quando
Series A preferred stock they hold.
Conversion of Quando Series B Preferred Stock
Holders of Quando Series B preferred stock will be entitled to receive
approximately 0.0566 shares of Infoseek common stock for each share of Quando
Series B preferred stock they hold.
Conversion of Quando Common Stock
Holders of Quando common stock will be entitled to receive approximately 0.0494
shares of Infoseek common stock for each share of Quando common stock they
hold.
PROCEDURE FOR CONVERTING QUANDO CAPITAL STOCK
At least one business day before the closing date, Quando shareholders will
receive a letter of transmittal. On or about the closing date the Quando
shareholders will surrender certificates representing Quando capital stock,
along with other customary documents described in the letter of transmittal.
Within five business days after the merger, Infoseek will issue to the Quando
shareholders certificates of Infoseek common stock representing their portion
of the Merger Consideration, subject to the escrow provisions of the merger
agreement described under the section entitled "--Escrow Fund and
Indemnification" below.
Exchange Agent
The merger agreement requires Infoseek, within three business days after the
merger, to deposit with Boston Equiserve or such other institution as it may
select (the "Exchange Agent"), for the benefit of the holders of shares of
Quando capital stock, certificates representing the shares of Infoseek common
stock to be issued in the merger. However, a portion of these shares will be
subject to the escrow provisions of the merger agreement. See "--Escrow Fund
and Indemnification."
Exchange Procedures
At least one business day prior to the closing date, Infoseek will mail to each
Quando shareholder a letter of transmittal. Once a Quando shareholder has
returned his Quando stock certificate to the Exchange Agent, together with an
executed letter of transmittal and such other documents as may reasonably be
required by the Exchange Agent, the Quando shareholder will receive his or her
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Infoseek stock certificates, less the ten percent portion placed in the escrow
fund. See "--Escrow Fund and Indemnification."
Quando shareholders should also note:
No dividends or other distributions on Infoseek common stock declared or
made after the merger will be paid to any holder of any unsurrendered
Quando stock certificate with respect to the shares of Infoseek common
stock represented thereby until such Quando stock certificate is
surrendered to the Exchange Agent.
If any certificate for shares of Infoseek common stock is to be issued in a
name other than that in which the Quando stock certificate surrendered in
exchange therefor is registered, the Quando stock certificate so
surrendered must be properly endorsed and otherwise in proper form for
transfer and the person requesting such exchange will have to pay Infoseek
or any agent designated by it any transfer or other taxes required by
reason of issuance of a certificate for shares of Infoseek common stock in
any name other than that of the registered holder of the Quando stock
certificate surrendered, or establish to the satisfaction of Infoseek or
any agent designated by it that such tax has been paid or is not payable.
In the event that any Quando stock certificates representing shares of
Quando capital stock have been lost, stolen or destroyed, the Exchange
Agent will issue shares of Infoseek common stock in exchange for such lost,
stolen, or destroyed Quando stock certificates upon the making of an
affidavit of that fact by the owner of such Quando stock certificates and,
at the request of Infoseek, upon delivery of a bond in such amount as
Infoseek may reasonably direct as indemnity against any claim that may be
made against Infoseek or the Exchange Agent with respect to the Quando
stock certificates alleged to have been lost, stolen or destroyed.
QUANDO SHAREHOLDERS SHOULD NOT FORWARD QUANDO STOCK CERTIFICATES TO THE
EXCHANGE AGENT UNTIL THEY HAVE RECEIVED A TRANSMITTAL LETTER. QUANDO
SHAREHOLDERS SHOULD NOT RETURN QUANDO STOCK CERTIFICATES WITH THEIR PROXY OR
CONSENT.
FORM S-8 FILING
Infoseek has agreed to file with the Securities and Exchange Commission, within
30 days after the merger, a registration statement on Form S-8 to register
shares of Infoseek common stock issuable as a result of the exercise of Quando
options assumed in the merger.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains customary representations and warranties made by
Quando and David Billstrom and William Neuhauser, the founders and principal
shareholders of Quando (the "Principal Shareholders"). These representations
and warranties relate to various aspects of Quando's business, including:
. Organization and good standing as a corporation
. Ownership of subsidiaries
. Capital structure
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. Authorization, execution, delivery and enforceability of the merger
agreement and related agreements
. Absence of conflict with, default under or violation of agreements and
laws, and the holding of permits necessary for the conduct of business
. Absence of need for waivers or consents from any governmental entity or
third party
. Accuracy of financial statements
. Absence of undisclosed liabilities
. Absence of certain changes in the business
. Tax matters
. Absence of restrictions on business activities
. Title to property
. Ownership of intellectual property
. Absence of certain types of agreements, contracts and commitments
. Litigation matters
. Compliance with environmental matters
. Employee benefit plans
. Absence of material misstatements or omissions in connection with the
merger
The representations and warranties of Quando and the Principal Shareholders
terminate as of June 30, 1999. Quando and the Principal Shareholders have an
indemnification obligation to Infoseek for breaches of the representations and
warranties. See "--Escrow Fund and Indemnification."
The merger agreement also contains customary representations and warranties
made by Infoseek and Infoseek Sub. These representations and warranties relate
to certain aspects of Infoseek's business, including:
. Organization and good standing as a corporation
. Capital structure
. Authorization, execution, delivery and enforceability of the merger
agreement and related agreements
. Authorization and issuance of the shares of Infoseek common stock to be
issued pursuant to the merger
. Absence of conflict with, default under or violation of agreements and
laws
. Absence of material misstatements or omissions in connection with the
merger
The representations and warranties of Infoseek and Infoseek Sub terminate one
year after the closing date.
CONDUCT OF BUSINESS OF QUANDO PENDING THE MERGER
Quando has agreed in the merger agreement to carry on its business in its usual
customary manner during the period from the date of the merger agreement and
continuing until the earlier of the
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termination of the merger agreement or the date of the merger. Quando has
committed to use its reasonable best efforts consistent with past practices and
policies:
. To preserve intact the present business organization of Quando
. To keep available the services of their present officers and key
employees
. To preserve its relationships with customers, suppliers, distributors,
licensors, licensees and others
Quando has also agreed to refrain from taking a variety of actions that could
affect Quando's business prior to the closing without Infoseek's prior consent.
A complete list of these actions is set out at Section 4.1 of the merger
agreement, which is included as Annex A to this proxy statement/ prospectus.
NO SOLICITATION BY QUANDO OF OTHER OFFERS
Quando has agreed that it shall not solicit or initiate any other offer or
proposal to acquire or invest in Quando until December 31, 1998. Quando has
further agreed that it will not provide information about itself to any other
party or enter into any agreements with any party in connection with a proposal
to acquire or invest in Quando.
If Quando receives an unsolicited acquisition proposal, Quando has agreed to
immediately notify Infoseek and disclose the identity of the offer or and the
terms of such proposal.
CONDITIONS TO THE MERGER
There are numerous conditions that have to be satisfied or waived before the
merger can be completed. These conditions are divided into three categories,
and are summarized below.
The Obligations of Each Party to Effect the Merger Agreement Are Subject to
the Following Conditions:
. No court order or other legal restraint or prohibition preventing the
consummation of the merger shall be in effect
. No proceeding brought by a governmental authority seeking to prohibit the
merger shall be in effect
. No action shall have been taken, or any statute, rule, regulation or
order enacted, entered, enforced or deemed applicable to the merger,
which makes the consummation of the merger illegal
. All appropriate or necessary governmental approvals shall have been
timely obtained
. There shall be no bona fide action, suit, claim or proceeding of any
nature pending, or overtly threatened, against Infoseek, Infoseek Sub,
Quando or the Principal Shareholders, their respective properties or any
of their officers or directors, relating to the merger or any related
transactions
. Infoseek and Quando shall each have received written opinions from their
respective tax counsel that the merger will be a tax-free reorganization
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The Obligations of Infoseek and Infoseek Sub to Effect the Merger Are Subject
to the Following Conditions:
. The representations and warranties of Quando and the Principal
Shareholders in the merger agreement shall be true and correct in all
material respects.
. Quando and the Principal Shareholders shall have performed and complied
in all material respects with all covenants and obligations of the merger
agreement required to be performed by them.
. There shall not have occurred any claims which may materially and
adversely affect the consummation of the transactions contemplated by the
merger agreement or may have a material adverse effect on Quando.
. Any and all consents, waivers, assignments and approvals required to
consummate the merger shall have been obtained.
. Infoseek shall have received a legal opinion from legal counsel to
Quando.
. Certain key employees of Quando shall have entered into an employment
agreement with Infoseek.
. Each key employee shall be an employee of Quando on the Closing Date.
. Except as disclosed in the merger agreement, there shall not have
occurred any material adverse change in the business, assets, results of
operations, liabilities or financial condition of Quando since the date
of the merger agreement.
. If Quando shareholders act by written consent, such shareholders have
unanimously approved the merger and merger agreement, and if Quando
shareholders act pursuant to a meeting, shareholders holding at least 90%
of the Quando capital stock have approved the merger and merger
agreement.
. Affiliates of Quando shall have entered into an affiliate agreement with
Infoseek.
. Certain contracts listed in the merger agreement shall be in effect and
Quando shall not have received notice of termination of any such
contract.
. Quando shall have terminated all registration rights relating to its
capital stock.
. All covenants of Quando contained in the Quando Series A Preferred Stock
Purchase Agreement and the Quando Series B Preferred Stock Purchase
Agreement shall have been terminated.
. All Quando warrants shall have been exercised or otherwise terminated,
and all convertible debt converted, and Infoseek shall have received
evidence of such termination, exercise or conversion prior to the merger.
. All employment agreements with Quando shall have been terminated.
. Infoseek shall have received from Quando at least three business days
prior to the Closing Date a certified, estimated balance sheet of Quando.
. Infoseek shall have received from Quando at least three business days
prior to the closing date a certified, detailed schedule of Quando's
estimated third party expenses.
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. Infoseek shall have been provided with a certificate to the effect that,
as of the date of the merger, all representations and warranties made by
Quando and the Principal Shareholders in the merger agreement are true
and correct in all material respects on and as of the date of the merger
as though such representations and warranties were made on and as of such
time, all covenants and obligations of the merger agreement to be
performed by Quando on or before such date have been so performed in all
material respects.
Any of the above conditions may be waived by Infoseek.
The Obligations of Quando to Effect the Merger Are Subject to the Following
Conditions:
. The representations and warranties of Infoseek and Infoseek Sub in the
merger agreement shall be true and correct in all material respects.
. Quando shall have received an opinion from legal counsel to Infoseek.
. Infoseek shall have executed and delivered to each key employee of Quando
his or her employment agreement.
. All material consents, waivers, approvals, authorizations or orders
required to be obtained, and all filings required to be made, by Infoseek
and Infoseek Sub shall have been obtained and made.
. Infoseek shall have made offers of employment as set forth in the merger
agreement and shall not have withdrawn such offers of employment.
. Quando shall have been provided with an officer's certificate of Infoseek
to the effect that, as of the date of the merger, all representations and
warranties made by Infoseek and Infoseek Sub in the merger agreement are
true and correct in all material respects on and as of the Effective Time
as though those representations and warranties were made on and as of
such time, and all covenants and obligations of the merger agreement to
be performed by Infoseek have been so performed in all material respects.
Any of the above conditions may be waived by Quando.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated and the merger abandoned at any time
prior to the merger in certain circumstances which are described below:
. By Quando and Infoseek, if they mutually agree,
. By Infoseek or Quando if:
. The merger has not occurred by February 28, 1999, unless such party
seeking to terminate the merger agreement had acted or failed to act
in such a manner to be the principal cause of or resulted in the
failure of the merger to occur on or before such date and such
action or failure to act constitutes a breach of the merger
agreement, or
. There is a final nonappealable order of a federal or state court in
effect preventing the merger, or
. There is any statute, rule or order issued or deemed applicable to
the merger by any governmental entity which would make consummation
of the merger illegal.
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. By Infoseek if:
. Any governmental entity has prohibited Infoseek's or Infoseek Sub's
ownership or operation of any portion of the business of Quando, or
require Infoseek or Quando to dispose of or hold separate all or a
portion of the business or assets of Quando or Infoseek as a result
of the merger, or
. Infoseek is not in material breach of its obligations under the
merger agreement and there has been a material breach of any
representation, warranty, covenant or agreement contained in the
merger agreement on the part of Quando and such breach has not been
cured within ten (10) days after written notice to Quando, or
. A majority of the Quando shareholders vote against the merger at the
Quando shareholders meeting, or
. An event having a material adverse effect on Quando shall have
occurred after the date of the merger agreement.
. By Quando if a majority of the Quando shareholders vote against the
merger at the Quando shareholders meeting.
ESCROW FUND AND INDEMNIFICATION
The escrow shares will automatically be contributed to the escrow fund on
behalf of each holder of Quando capital stock at the time of the merger in
proportion to the aggregate number of shares of Infoseek common stock that such
holder would otherwise be entitled under the merger agreement. The escrow fund
will be available to compensate Infoseek, Infoseek Sub and their officers,
directors and affiliates (the "Indemnified Parties") for:
. Any losses incurred by Infoseek or for which Infoseek would otherwise be
liable as a result of any inaccuracy or breach of a representation or
warranty of Quando or the Principal Shareholders contained in:
. The merger agreement,
. Any certificate of any officer of Quando delivered pursuant to the
merger agreement, or
. Any Shareholder Certificate,
. Any failure by Quando or a Quando shareholder to perform or comply with
any covenant relating to unresolved contingencies existing at the time of
the merger,
. Any dispute between Quando and a certain potential investor of Quando, as
described in the merger agreement,
. The amount that total liabilities minus total current assets of Quando
exceeds certain amounts,
. The actual third party expenses related to the merger, other than those
that Infoseek has agreed to pay, that exceed $50,000. For purposes of
compensating Infoseek for its losses, the escrow shares will be valued at
$40.78 per share.
In addition to the escrow fund, if certain losses have not been satisfied by
the escrow fund, each of the Principal Shareholders shall severally indemnify
the Indemnified Parties up to an amount equal to
56
<PAGE>
ten percent (10%) of their respective portions of the Merger Consideration for
losses incurred as a result of:
. Any inaccuracy or breach of a representation or warranty of Quando
relating to capital structure, tax matters, intellectual property, or
such Principal Shareholder's affiliate agreement
. Any dispute between Quando and a potential investor disclosed in the
merger agreement
Notwithstanding the above, in the event that an Indemnified Party incurs losses
as a result of a claim that Quando's intellectual property violated a third
party's patent rights, only 75% of such losses shall be subject to recovery
pursuant to the escrow and indemnification provisions of the merger agreement.
Shareholders will have voting rights with respect to the escrow shares while in
escrow, and will receive dividends, if any, attributable to the escrow shares.
Subject to resolution of unsatisfied claims by Infoseek, the escrow fund and
the indemnity will terminate on June 30, 1999. After the merger, the escrow
shares and the indemnity will be the exclusive remedy of the Indemnified
Parties to recover for any losses they suffer by reason of the breach of any
representation, warranty or covenant of Quando or the Principal Shareholders.
However, the Indemnified Party's remedy will not be so limited in the case of
fraud by Quando or the Principal Shareholders.
BY APPROVING THE MERGER AGREEMENT, QUANDO SHAREHOLDERS WILL HAVE CONSENTED TO
THE APPOINTMENT OF STANTON R. KOCH, A DIRECTOR OF QUANDO, TO ACT AS THE
SHAREHOLDER REPRESENTATIVE ON BEHALF OF QUANDO SHAREHOLDERS, TO AUTHORIZE
DELIVERY OF ESCROW SHARES TO THE INDEMNIFIED PARTIES IN SATISFACTION OF CLAIMS
BROUGHT BY THE INDEMNIFIED PARTIES, TO OBJECT TO SUCH DELIVERIES, TO AGREE TO,
TO NEGOTIATE AND TO ENTER INTO SETTLEMENTS AND COMPROMISES WITH RESPECT TO SUCH
CLAIMS, AND TO TAKE CERTAIN OTHER ACTION ON BEHALF OF QUANDO SHAREHOLDERS, ALL
AS MORE FULLY DESCRIBED IN ARTICLE VII OF THE MERGER AGREEMENT. QUANDO
SHAREHOLDERS ARE ENCOURAGED TO READ ARTICLE VII OF THE MERGER AGREEMENT FOR A
MORE DETAILED EXPLANATION OF THE ESCROW FUND AND RIGHTS WITH RESPECT THERETO.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The merger agreement provides that from and after the merger, Infoseek will
cause the Quando to fulfill its existing indemnification obligations to
Quando's directors and officers. If the action giving rise to indemnification
is a result of the representations and warranties made by Quando in the merger
agreement, then Infoseek shall have full recourse to the escrow fund to recover
any amounts payable by Infoseek or Quando pursuant to Infoseek's
indemnification obligations.
EMPLOYMENT MATTERS
Each employee of Quando who remains an employee of Infoseek after the merger
shall be eligible, upon completion of Infoseek's standard employee background
and reference check, to receive salary and benefits consistent with Infoseek's
standard human resource policies. Furthermore, in the event that Infoseek
relocates Quando's operations to the Seattle, Washington area within two (2)
years after the closing date, then Infoseek will pay the reasonable and
properly documented relocation expenses
57
<PAGE>
of all current employees of Quando that relocate to the Seattle, Washington
area with Quando. However, Infoseek's obligation to pay such relocation
expenses shall not exceed $100,000.
FEES AND EXPENSES
Regardless of whether the merger is consummated, all fees and expenses incurred
in connection with the merger incurred by a party in connection with the merger
agreement and the transactions contemplated thereby shall be the obligation of
the respective party incurring such fees and expenses. If the merger is
consummated, then Infoseek will pay certain third party expenses incurred by
Quando. Infoseek shall have full recourse to the escrow fund for payment of all
third party expenses incurred by Quando, other than those expenses that
Infoseek has agreed to pay, exceeding $50,000.
OTHER COVENANTS
The merger agreement also contains various other covenants and agreements that
are customary in transactions of this nature.
. Infoseek and Quando have agreed to prepare and cause to be filed with the
Securities and Exchange Commission this proxy statement/prospectus for
the solicitation and approval of the shareholders of Quando of the merger
agreement and the merger and to register the sale of the shares of
Infoseek common stock issuable in the merger.
. Infoseek and Quando have agreed to comply with applicable law and the
rules and regulations promulgated by the Securities and Exchange
Commission, to respond promptly to any comments of the Securities and
Exchange Commission or its staff and to have the Registration Statement
on Form S-4 declared effective under the Securities Act as promptly as
practicable after it is filed.
. Infoseek and Quando agreed to use all reasonable efforts to cause this
proxy statement/prospectus to be mailed to Quando's shareholders as
promptly as practicable after the Registration Statement on Form S-4 is
declared effective under the Securities Act.
. Quando agreed to notice, convene and hold a shareholders' meeting to vote
on the merger agreement and related transactions as promptly as possible
after the Registration Statement on Form S-4 is declared effective.
Pursuant to this provision, the Quando shareholders meeting has been
scheduled for January 27, 1999. Notwithstanding the above, the Quando
shareholders meeting may be held on another date upon the mutual
agreement of Quando and Infoseek, and the Quando shareholders meeting
need not be held if Quando receives the unanimous written consent of the
Quando shareholders on or before two business days prior to the proposed
Quando shareholders meeting.
. Infoseek and Quando have agreed to promptly furnish to the other party
all information concerning itself, its stockholders and its affiliates
that may be required or reasonably requested in connection with any
action contemplated by the foregoing provisions.
. If any event related to Infoseek or Quando occurs or if Infoseek or
Quando becomes aware of any information that should be disclosed in an
amendment or supplement to the Registration Statement or the proxy
statement/prospectus, then Infoseek or Quando, as applicable, shall
inform the other thereof and shall cooperate with each other in filing
such amendment or supplement with the Securities and Exchange Commission
and, if appropriate, in mailing such amendment or supplement to the
shareholders of Quando.
58
<PAGE>
OTHER AGREEMENTS
INFOSEEK LOAN TO QUANDO
At the time the merger agreement was executed, Infoseek loaned $360,000 to
Quando. A promissory note representing this loan bears interest, payable upon
default or maturity of the promissory note, at a rate of six percent (6%) per
year. The performance of the obligations of Quando under the promissory note is
secured by a security interest in Quando's assets. The note and interest is due
on March 31, 1999.
In the event of the termination of the merger agreement, Quando must within
sixty (60) days after the date of such termination pay the unpaid principal and
accrued interest due and owing on the note.
SERVICES AGREEMENT
On August 5, 1998, Quando entered into a services agreement with Infoseek. This
services agreement provides that Quando will use its Internet search related
technology and support to create certain directories for Infoseek in exchange
for monthly payments of seventy-five thousand dollars ($75,000) during the term
of the services agreement. The services agreement has an effective term of 180
days.
EMPLOYMENT AND NON-COMPETITION AGREEMENTS
On or prior to the date of the merger, certain founding shareholders and other
employee shareholders of Quando will enter into employment agreements with
Infoseek that provide, among other things, that such key employees shall not,
for a period of between 18 and 24 months from the date of the merger, engage in
certain competitive business activities in any country. The employment
agreements also provide that the key employees shall not (1) act as employees,
agents, advisors or consultants of any competitor of Infoseek or Quando, (2)
take any action to divert business from Infoseek or Quando, or (3) directly or
indirectly solicit, encourage or induce any employee of Infoseek or Quando to
terminate such employee's employment with Infoseek or Quando. The employment
agreements also provide for a period of employment with Infoseek or Quando for
each key employee for a period of between one to two years, and salaries,
bonuses, stock options and severance benefits.
AFFILIATE AGREEMENTS
All affiliates of Quando will enter into affiliate agreements with Infoseek and
Quando. Quando's affiliates include all of Quando's directors and officers and
any shareholder that owns 10% or more of Quando's outstanding capital stock.
The affiliate agreements provide, among other things, that Quando affiliates
will not sell, transfer or otherwise dispose of the shares of Infoseek issued
to such affiliate in connection with the merger other than in compliance with
Rule 145 of the Securities Act unless an affiliate delivers to Infoseek a
written opinion from counsel, reasonably acceptable to Infoseek, that such
sale, transfer or disposition is exempt from registration under the Securities
Act. Additionally, the affiliate agreements provide that Infoseek shall place
legends on the stock certificates and give stop transfer orders to its transfer
agent to ensure compliance with Rule 145.
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<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial information for
Infoseek consists of the Unaudited Pro Forma Combined Condensed Statements of
Operations for the year ended December 31, 1997, and for the nine months ended
September 30, 1998 and the Unaudited Pro Forma Combined Condensed Balance Sheet
as of September 30, 1998. These pro forma financial statements give effect to
Infoseek's acquisition of Starwave through a merger and exchange of shares on
November 18, 1998. In addition, the pro forma financial statements give effect
to Disney's purchase of an additional 2,642,000 unregistered shares of Infoseek
common stock and a warrant, subject to vesting, to purchase an additional
15,720,000 unregistered shares of Infoseek common stock in exchange for
approximately $70.0 million in cash and $139.0 million in a five-year
promissory note. The Unaudited Pro Forma Combined Condensed Statements of
Operations for the year ended December 31, 1997 and the nine months ended
September 30, 1998 reflect these transactions as if they had taken place on
January 1, 1997. The Unaudited Pro Forma Combined Condensed Balance Sheet gives
effect to these transactions as if they had taken place on September 30, 1998.
On July 24, 1998, Infoseek entered into the merger agreement to acquire Quando
in exchange for approximately $17 million, subject to adjustment, in shares of
Infoseek's common stock. The Unaudited Pro Forma Combined Condensed Statements
of Operations for the year ended December 31, 1997 and the nine months ended
September 30, 1998 reflect this transaction as if it had taken place on January
1, 1997. The Unaudited Pro Forma Combined Condensed Balance Sheet gives effect
to the Quando acquisition as if it had taken place on September 30, 1998.
The Unaudited Pro Forma Combined Condensed Statements of Operations combine
Infoseek's historical results of operations for the year ended December 31,
1997 and the nine months ended September 30, 1998 with Starwave's historical
results for the year ended December 31, 1997 and the nine months ended October
4, 1998 and Quando's historical results of operations for the year ended
December 31, 1997 and the nine months ended September 30, 1998, respectively.
In addition, the Unaudited Pro Forma Combined Condensed Statements of
Operations include the impact of certain related agreements which become
effective with the mergers described above. These agreements are described more
fully in the notes to the Unaudited Pro Forma Combined Condensed Financial
Statements. The pro forma financial statements are not necessarily indicative
of what the actual financial results would have been had the transactions taken
place on January 1, 1997 or September 30, 1998 and do not purport to indicate
the results of future operations.
The Starwave merger was accounted for using the purchase method of accounting.
The Quando acquisition will also be accounted for using the purchase method of
accounting. The pro forma financial statements have been prepared on the basis
of assumptions described in the notes thereto.
In connection with the acquisitions of Starwave and Quando, Infoseek expects to
incur write-offs related to in-process research and development, currently
estimated at $72.6 million and $4.3 million, respectively. The Unaudited Pro
Forma Combined Condensed Balance Sheet includes the effect of the write-offs
related to in-process research and development; however, the Unaudited Pro
Forma Combined Condensed Statements of Operations do not reflect these charges.
The charges related to
60
<PAGE>
in-process research and development will be reflected in Infoseek's
consolidated financial statements when the Starwave merger and the Quando
merger are consummated. In addition, Infoseek expects to incur costs of
integration estimated at up to $7.0 million of which $1.4 of costs were
included in the results of operations of Infoseek for the nine months ended
September 30, 1998. The pro forma financial statements do not include the
remaining costs of integration of up to $5.6 million, as these costs will
affect future operations and do not qualify as liabilities in connection with a
purchase business combination under EITF 95-3, "Recognition of Liabilities in
Connection with a Purchase Business Combination."
The pro forma financial statements should be read in conjunction with the
related notes included in this document and the audited consolidated financial
statements and notes of Infoseek, and the audited financial statements and
notes of Starwave and Quando, included elsewhere in this proxy
statement/prospectus.
61
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
INFOSEEK STARWAVE QUANDO PRO FORMA
ACTUAL ACTUAL ACTUAL ADJUSTMENTS TOTAL
-------- -------- ------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues................. $ 35,082 $ 5,811 $ 256 $ 16,368 (3) $ 57,517
Costs and expenses:
Hosting, content and
website costs(10)..... 6,319 7,667 1 13,790 (3) 26,398
2,455 (3)
(3,834)(4)
Amortization of
intangibles related to
hosting, content and
website costs......... -- -- -- 34,866 (8) 38,524
3,658 (18)
Research and
development........... 7,900 1,840 161 995 (8) 10,937
41 (18)
Sales and marketing.... 34,320 1,598 12 2,907 (8) 75,674
3,834 (4)
33,000 (11)
3 (18)
General and
administrative........ 7,042 3,188 419 1,683 (8) 12,440
108 (18)
Goodwill amortization.. -- -- -- 65,625 (8) 70,266
4,641 (18)
Restructuring and other
charges............... 7,349 -- -- -- 7,349
-------- -------- ----- --------- ---------
Total costs and
expenses................ 62,930 14,293 593 163,772 241,588
-------- -------- ----- --------- ---------
Operating loss........... (27,848) (8,482) (337) (147,404) (184,071)
Loss from Joint
Ventures................ -- (10,932) -- (74)(3) (11,006)
Other income (expense),
net..................... 1,286 (1,111) (16) -- 159
-------- -------- ----- --------- ---------
Net loss................. $(26,562) $(20,525) $(353) $(147,478) $(194,918)
======== ======== ===== ========= =========
Basic and diluted net
loss per share.......... $ (1.00) $ (3.37)
Shares used in computing
basic and diluted net
loss per share.......... 26,627 31,202 57,829
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
62
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
INFOSEEK STARWAVE QUANDO PRO FORMA
ACTUAL ACTUAL ACTUAL ADJUSTMENTS TOTAL
-------- -------- ------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues.................. $50,715 $ 4,348 $ 514 $ 21,626 (3) $ 77,203
Costs and expenses:
Hosting, content and
website costs (10)..... 7,956 2,661 5 18,220 (3) 30,756
3,244 (3)
(1,330)(4)
Amortization of
intangibles related to
hosting, content and
website costs.......... -- -- -- 24,601 (8) 28,893
1,549 (8)
2,743 (18)
Research and
development............ 7,432 990 413 746 (8) 9,612
31 (18)
Sales and marketing..... 35,144 85 1 2,180 (8) 63,492
1,330 (4)
24,750 (11)
2 (18)
General and
administrative......... 7,876 2,111 317 1,262 (8) 11,647
81 (18)
Goodwill amortization... -- -- -- 49,219 (8) 52,699
3,480 (18)
------- -------- ----- --------- ---------
Total operating
expenses............... 58,408 5,847 736 132,108 197,099
------- -------- ----- --------- ---------
Operating loss............ (7,693) (1,499) (222) (110,482) (119,896)
Loss from Joint Ventures.. -- (11,436) -- (284)(3) (11,720)
Interest income (expense),
net...................... 1,999 462 (59) -- 2,402
------- -------- ----- --------- ---------
Net loss.................. $(5,694) $(12,473) $(281) $(110,766) $(129,214)
======= ======== ===== ========= =========
Basic and diluted net loss
per share................ $ (0.19) $ (2.09)
Shares used in computing
basic and diluted net
loss per share........... 30,512 31,202 61,714
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
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<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
INFOSEEK STARWAVE QUANDO PRO FORMA
ACTUAL ACTUAL ACTUAL ADJUSTMENTS TOTAL
-------- --------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 6,801 $ 1,415 $ 76 $ 70,013 (2) $ 78,305
Short-term
investments.......... 47,740 -- -- -- 47,740
Accounts receivable,
net.................. 7,619 1,072 101 -- 8,792
Receivables from
related parties...... -- 516 -- -- 516
Prepaid to service
providers............ 5,838 -- -- -- 5,838
Other current assets.. 998 803 8 -- 1,809
-------- --------- ------- --------- ----------
Total current
assets............. 68,996 3,806 185 70,013 143,000
Property and equipment,
net.................... 15,177 4,629 92 -- 19,898
Developed technology.... -- -- -- 29,900 (1) 37,216
7,316 (13)
Assembled workforce..... -- -- -- 15,300 (1) 15,603
303 (13)
Direct acquisition
costs.................. 2,825 -- -- -- 2,825
Deposits and other
assets................. 3,315 -- 4 -- 3,319
Goodwill................ -- -- -- 656,250 (1) 665,531
9,281 (13)
Joint Venture
relationships.......... -- 7,377 -- 178,500 (1) 185,877
-------- --------- ------- --------- ----------
Total assets........ $ 90,313 $ 15,812 $ 281 $ 966,863 $1,073,269
======== ========= ======= ========= ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...... $ 6,717 $ 1,816 $ 159 $ -- $ 8,692
Accrued payroll and
related expenses..... 2,191 3,365 -- -- 5,556
Accrued liabilities to
service providers.... 1,558 -- -- -- 1,558
Other accrued
liabilities.......... 2,418 663 -- 22,000 (5) 26,081
1,000 (14)
Due to affiliates..... -- 1,023 -- -- 1,023
Deferred revenue...... 4,789 60 -- -- 4,849
Short-term
obligations.......... 2,942 -- 400 -- 3,342
-------- --------- ------- --------- ----------
Total current
liabilities........ 20,615 6,927 559 23,000 51,101
Deferred tax liability.. -- -- -- 41,601 (9) 44,115
2,514 (19)
Long-term obligations... 2,981 -- 447 -- 3,428
Stockholders' equity:
Convertible preferred
stock................ -- -- 822 (822)(15) --
Common stock.......... 121,292 128,173 165 978,674 (6) 1,245,139
16,835 (16)
Accumulated deficit... (53,724) (115,689) (1,712) 43,089 (7) (130,663)
(2,627)(17)
Deferred
compensation......... (717) (3,599) -- 3,599 (12) (717)
Notes receivable from
stockholders......... (134) -- -- (139,000)(2) (139,134)
-------- --------- ------- --------- ----------
Total stockholders'
equity............. 66,717 8,885 (725) 899,748 974,625
-------- --------- ------- --------- ----------
Total liabilities
and stockholders'
equity............. $ 90,313 $ 15,812 $ 281 $ 966,863 $1,073,269
======== ========= ======= ========= ==========
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
64
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1998
The pro forma financial statements give effect to Infoseek's acquisition of
Starwave through a merger and exchange of shares. Disney purchased an
additional 2,642,000 unregistered shares of Infoseek common stock and a
warrant, subject to vesting, to purchase an additional 15,720,000 unregistered
shares of Infoseek common stock in exchange for approximately $70.0 million in
cash and a $139.0 million five-year promissory note. The Unaudited Pro Forma
Combined Condensed Statements of Operations for the year ended December 31,
1997 and the nine months ended September 30, 1998 reflect these transactions as
if they had taken place on January 1, 1997. The Unaudited Pro Forma Combined
Condensed Balance Sheet gives effect to these transactions as if they had taken
place on September 30, 1998.
In addition, the Unaudited Pro Forma Combined Condensed Statements of
Operations include the effect of certain related agreements that became
effective upon consummation of the merger described above. 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 of related items and a
corresponding representation fee for amounts due to the Joint Ventures. In
addition, under a five year promotional services agreement, Infoseek has
committed to spend $165.0 million to promote GO Network. These costs are
reflected, on a straight-line basis, in the pro forma financial statements as
increased sales and marketing expenses.
On July 24, 1998, Infoseek entered into the merger agreement to acquire Quando
in exchange for approximately $17 million, subject to adjustment, in shares of
Infoseek common stock. The Unaudited Pro Forma Condensed Statements of
Operations for the year ended December 31, 1997 and the nine months ended
September 30, 1998 reflect the Quando acquisition as if it had taken place on
January 1, 1997. The Unaudited Pro Forma Combined Condensed Balance Sheet gives
effect to this transaction as of it had taken place on September 30, 1998.
The Starwave merger was accounted for using the purchase method of accounting.
The pro forma financial statements have been prepared on the basis of
assumptions described in the following notes and include assumptions relating
to the allocation of the consideration paid for the assets and liabilities of
Starwave based on actual fair value. The Quando acquisition will also be
accounted for using the purchase method of accounting. The pro forma financial
statements have been prepared on the basis of assumptions described in the
following notes and include assumptions relating to the allocation of the
consideration paid for the assets and liabilities of Quando based on
preliminary estimates of their fair value. The actual allocation of such
consideration may differ from that reflected in the pro forma financial
statements after valuations and other procedures to be performed after the
closing of the Quando acquisition has been completed. Infoseek does not expect
that the final allocation of the purchase price will differ materially from the
preliminary allocations. In the opinion of Infoseek's management, all
adjustments necessary to present fairly such pro forma
65
<PAGE>
financial statements have been made on the proposed terms and structure of the
Starwave merger and the Quando merger.
In connection with the acquisitions of Starwave and Quando, Infoseek expects to
incur write-offs related to in-process research and development, currently of
approximately $72.6 million and $4.3 million, respectively. The Unaudited Pro
Forma Combined Condensed Balance Sheet includes the effect of the write-offs
related to in-process research and development; however, the Unaudited Pro
Forma Combined Condensed Statements of Operations do not reflect these charges.
The charges related to in-process research and development will be reflected in
Infoseek's consolidated financial statements when the Starwave merger and the
Quando merger are consummated. In addition, Infoseek expects to incur costs of
integration estimated at up to $7.0 million, of which $1.4 million was included
in the results of operations for the nine months ended September 30, 1998. The
pro forma financial statements do not include the remaining costs of
integration of up to $5.6 million as they will affect future operations.
The pro forma financial statements are not necessarily indicative of what the
actual financial results would have been had the transactions taken place on
January 1, 1997 or September 30, 1998 and do not purport to indicate the
results of future operations.
The pro forma financial statements give effect to the following pro forma
adjustments:
1. In accordance with the reorganization agreement for the Starwave merger:
. Infoseek California became a wholly-owned subsidiary of Infoseek, and
all outstanding shares of its common stock were converted into shares of
the common stock of Infoseek at the rate of one share of Infoseek common
stock for each share of Infoseek California common stock,
. Starwave became a wholly-owned subsidiary of Infoseek, and all
outstanding shares of its common stock were converted into shares of
common stock of Infoseek.
The Starwave merger was accounted for using the purchase method of accounting.
The purchase price was based on $32.42 per share, which is the average of the
market price before and immediately after the announcement of the Starwave
merger.
The purchase price was determined as follows:
<TABLE>
<CAPTION>
STARWAVE INFOSEEK FAIR VALUE
SHARES SHARES (IN THOUSANDS)
----------- ---------- --------------
<S> <C> <C> <C>
Shares................................. 97,875,056 25,932,681 $840,738
Stock Options.......................... 8,323,301 2,205,316 57,096
----------- ---------- --------
Totals............................... 106,198,357 28,137,997 $897,834
=========== ========== ========
</TABLE>
The Starwave shares were first converted to Infoseek equivalent shares by
taking the number of Starwave shares divided by the exchange ratio of
approximately 0.26 Starwave shares for each Infoseek share.
The fair value of "shares" was calculated by taking the fair value of the stock
($32.42 per share) times the number of Infoseek shares to be acquired.
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<PAGE>
With respect to stock options exchanged as part of the Starwave merger, all
vested Starwave options exchanged for vested Infoseek options are included as
part of the purchase price based on their fair value. Any unvested Starwave
options issued in exchange for unvested Infoseek options are also included as
part of the purchase price based on their fair value.
The fair value of the stock was calculated by taking the options to purchase
Infoseek shares (2,205,316 options) times the fair value of the stock ($32.42
per share) less the proceeds which will be received from the optionholder upon
exercise (approximately $14.4 million).
The pro forma financial statements have been prepared on the basis of
assumptions described in the notes thereto and include assumptions relating to
the allocation of the consideration paid for the assets and liabilities of
Starwave based on their actual fair value. The actual allocation of such
consideration may differ from that reflected in the pro forma financial
statements after valuations and other procedures to be performed after the
closing of the Starwave merger have been completed. Below is a table of the
estimated acquisition cost, purchase price allocation and annual amortization
of the intangible assets acquired (in thousands):
<TABLE>
<CAPTION>
ANNUAL
AMORTIZATION AMORTIZATION
LIFE OF INTANGIBLES
------------ --------------
<S> <C> <C> <C>
Estimated Acquisition Cost
Estimated purchase price........... $897,834
Acquisition expenses............... 22,000
--------
Total Estimated Acquisition
Cost............................ $919,834
========
Purchase Price Allocation
Historical net book value of
Starwave at September 30, 1998.... $ 8,885
Intangible assets acquired:
Joint Venture relationships (ESPN
Joint Venture and ABCNews Joint
Venture).......................... 178,500 10 $ 17,850
Developed technology............... 29,900 2 14,950
Assembled workforce................ 15,300 2 7,650
In-process technology.............. 72,600
Goodwill........................... 656,250 10 65,625
Deferred tax liability............. (41,601)
--------
Total............................ $919,834
========
</TABLE>
Tangible assets of Starwave acquired in the Starwave merger principally include
cash, fixed assets and investments in the affiliates (i.e., the Joint
Ventures). Liabilities of Starwave assumed in the Starwave merger principally
include accounts payable, accrued payroll and other current liabilities.
To determine the value of the developed technology and the investment in the
Joint Ventures, the expected future cash flow attributable to all existing
technology was discounted, taking into account risks related to the
characteristics and applications of the technology, existing and future
markets, and assessments of the life cycle stage of the technology. The
analysis resulted in a valuation of approximately $29.9 million for developed
technology which had reached technological feasibility and therefore was
capitalizable. The developed technology is being amortized on a straight line
basis over a two year period. The fair value of the Joint Venture relationships
was determined to be
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$178.5 million, which is being amortized on a straight line basis over the life
of the Joint Venture agreements (10 years).
The value of the assembled workforce was derived by estimating the costs to
replace the existing employees, including recruiting and hiring costs and
training costs for each category of employee. The analysis determined a
valuation of approximately $15.3 million for the assembled workforce. The asset
is being amortized on a straight-line basis over a two year period.
The goodwill allocation is $656.3 million, which is being amortized on a
straight line basis concurrent with the life of the Joint Venture relationships
(10 years).
The projects identified as in-process technology at Starwave are those that
were underway at the time of the Starwave merger and will, after consummation
of the Starwave merger, require additional effort to establish technological
feasibility. These projects have identifiable technological risk factors which
indicate that even though successful completion is expected, it is not assured.
If an identified project is not successfully completed, there is no alternative
future use for the project and the expected future income will not be realized.
The in-process technology acquired from Starwave in the transaction consists
primarily of technology related to GO Network and to replacement and
enhancement of Starwave's core technology. Development of GO Network started in
July 1998, following the announcement of the Starwave merger. A preview version
of GO Network was introduced in late 1998. The majority of the functionality
planned for GO Network was not possible with Starwave's architecture and design
at the time of Infoseek's acquisition of Starwave. As a result, Starwave has
shifted a substantial portion of its development efforts toward redesigning its
core technologies. These efforts have been undertaken to integrate the existing
content and build a new infrastructure and new features. These will include the
ability for an individual to tailor content (such as types of news, sports
teams, etc.) to their own interests, and universal registration, which will
track user preferences and personal profiles (such as name, address, billing
information, etc.) across all the elements of GO Network. This should provide
users with a better experience by enabling them to find what they want and, if
desired, make purchases on-line from any site within GO Network without having
to re-input personal information. Infoseek believes these are key features of
GO Network, which will be composed of sites belonging to different entities
including Infoseek, Disney, and the Joint Ventures. Infoseek estimates that
costs incurred to complete the projects in-process as of the date of closing
will be $7.5 million which will be spent prior to March 31, 1999. There can be
no assurance that actual costs will not exceed these estimates.
Infoseek expects that the in-process technology will be successfully developed,
and that initial benefits from these projects will begin in the quarter ending
December 31, 1998, with the introduction of the initial version of GO Network.
The full functionality intended for the planned GO Network will not be
supported at introduction, requiring a gradual introduction of new features
over the next several months or more following the initial launch.
Notwithstanding Infoseek's expectation that the in-process technology will be
successfully developed, there remain significant technical challenges which
must be resolved in order to implement many of the intended features of GO
Network and to complete the in-process technology. While Infoseek currently
plans to launch GO Network in accordance with the schedule outlined above,
Infoseek cannot assure you that the service
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can be successfully developed and launched within such schedule. If the
combined companies are unable to successfully develop, launch and promote GO
Network in a timely manner, or if the combined companies incur excessive
expenses in this connection or in an attempt to improve GO Network or promote
and maintain their brands, the combined companies' businesses, financial
condition and operating results will be seriously harmed.
2. Disney purchased 2,642,000 unregistered shares of common stock of Infoseek
at a price of $26.50 per share, and a warrant to purchase 15,720,000 shares of
common stock of Infoseek, subject to certain vesting restrictions on its
exercisability, at certain prices and on certain conditions, in exchange for
cash in the amount of $70.0 million and a note in principal amount of $139.0
million.
The shares subject to the warrant vest and become exercisable 33 1/3% at each
of the first, second and third anniversaries of the closing. The exercise price
for each share of common stock of Infoseek subject to the warrant shall be
equal to (i) 120% of the average closing sales price of Infoseek common stock
(as quoted on Nasdaq or another national market) for the thirty trading days
prior to the time such shares vest and become exercisable or (ii) if not traded
on any market, the fair market value thereof as determined by unanimous
determination of the Infoseek Board of Directors or if the Infoseek Directors
cannot agree, through an appraisal mechanism, subject to a maximum, in each
case, of $50.00 (subject to adjustment).
Disney delivered a promissory note in principal amount of $139.0 million
payable to Infoseek. The promissory note bears interest on the principal amount
outstanding at a rate of 6.5% per annum. The promissory note is repayable in
twenty quarterly principal installments, beginning on the three month
anniversary of the closing, of $6.9 million, with the final payment due on the
five year anniversary of the closing. The promissory note, together with
accrued and unpaid interest, may be repaid in whole or in part without premium
or penalty at any time.
3. Under certain representation agreements by and among Infoseek, Starwave and
the ESPN Joint Venture, and by and among Infoseek, Starwave and the ABCNews
Joint Venture, each entered into in conjunction with the Starwave merger,
Starwave is engaged by the Joint Ventures on an exclusive basis in the sale of
advertising and other items as designated or approved by the Joint Ventures and
to provide additional services, if any, as the Joint Ventures may request.
Activities with respect to the sale of advertising on the Internet services and
other related items includes the negotiation, execution, renewal, amendment,
modification or termination of advertising and other related contracts.
Starwave guarantees to the Joint Ventures a minimum quarterly payment equal to
the number of projected page views, multiplied by 80%, multiplied by the
minimum revenue rate. The minimum revenue rate is based on the average ad
revenue rate per page view of the publicly traded internet companies involved
in activities comparable to those of the Joint Ventures.
Starwave will recognize revenue on the sale of advertising and other related
items of the Joint Ventures due to its obligations under the representation
agreements. Starwave bears the risk of loss, if it fails to bill and collect
amounts sufficient to cover its contractual guaranteed minimum Payments. The
pro forma adjustment reflects (i) 100% of each of the Joint Ventures' revenues
as Starwave made substantially all sales on behalf of the Joint Ventures for
the year ended December 31, 1997 and the nine months ended September 30, 1998,
as the Joint Ventures did not maintain a sales organization and (ii) the
assumption that the representation agreements were entered
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into January 1, 1997. The representation agreements are expected to have a
continuing impact on Starwave, although the amount of revenue Starwave will
recognize will vary in future periods.
Under the representation agreements, Starwave pays the Joint Ventures for the
right to render services the greater of (i) the guaranteed minimum payment or
(ii) actual revenues billed to third parties for services, in each case less
only Starwave's actual and reasonably allocated costs of providing the services
and a profit margin of 5% of such costs. The obligations of Starwave to pay
these representation rights fees are unconditional. Starwave is required to pay
the Joint Ventures regardless of whether Starwave is able to collect the
related outstanding receivables. The pro forma adjustment for the
representation rights fee is the Joint Venture's revenues less allocated costs
of 15% of revenue, plus a 5% profit margin on allocated costs. In addition, a
pro forma adjustment has been made for additional costs Starwave would have
incurred that were historically incurred by the Joint Ventures.
Each of the Joint Ventures is accounted for under the equity method due to
neither Infoseek nor Starwave having a majority voting interest. The other
partners to these Joint Ventures, subsidiaries of ESPN and ABC, are
subsidiaries of Disney. A pro forma adjustment has been made to Starwave's
allocated (60%) losses from the Joint Ventures. This pro forma adjustment was
due to the Joint Ventures decreased revenues partially offset by decreased
costs under the representation agreement.
4. The pro forma adjustment is to reclassify certain hosting, content and
website costs of Starwave to sales and marketing expense to conform to
Infoseek's presentation.
5. The pro forma adjustment to "Other Accrued Liabilities" reflects the accrual
of acquisition costs arising from the Starwave merger, estimated to be
approximately $22.0 million. The $22.0 million includes approximately $5.0
million for liabilities related to involuntary employee termination benefits
(relocations) of Starwave employees and $5.0 million for costs to exit other
Starwave activities, primarily operating leases of Starwave.
6. The pro forma adjustment to "common stock" reflects the elimination of
Starwave's common stock ($128.2 million) and the impact of the issuance of
Infoseek common stock ($897.8 million) in connection with the Starwave merger,
and the issuance of stock and warrants to Disney for cash and a note receivable
($70.0 million and $139.0 million, respectively).
7. The pro forma adjustment to "Accumulated Deficit" reflects the elimination
of Starwave's accumulated deficit ($115.7 million) and the in-process
technology charge ($72.6 million).
8. The pro forma adjustment is for the amortization of goodwill, developed
technology, Infoseek's interest in the Joint Ventures and assembled workforce.
9. Goodwill has been increased and deferred tax liabilities have been recorded
in the amount of $41.6 million to reflect the net tax effect of book/tax basis
differences in the acquired intangibles, excluding goodwill and in-process
research and development. Deferred tax assets have been realized based on the
projected reversal of taxable temporary differences and have been netted
against deferred tax liabilities for purposes of allocating the purchase price.
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10. Under a license agreement entered into by and between Disney and Infoseek,
Disney has agreed to grant to Infoseek a worldwide license to exploit the
trademarks and Web addresses associated with GO Network and Infoseek has agreed
to pay Disney royalties. Royalties are calculated as one percent (1%) of
Infoseek's revenues other than revenues derived from software sales and
services. Royalties under the license agreement will not be earned nor paid
until the end of any Infoseek fiscal year in which Infoseek has positive
earnings before interest, taxes, and amortization ("EBITA") as defined and
royalty payments in any year will not exceed 15% of EBITA in such year as
defined. The Unaudited Pro Forma Combined Condensed Statements of Operations do
not include a pro forma adjustment for royalties under the license agreement as
Infoseek would not be EBITA positive on a pro forma basis. The components of
the pro forma EBITA are shown below (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Net loss............................................. $(129,214) $(194,918)
Interest expense..................................... 619 2,782
Pro Forma Amortization of Intangibles:
Goodwill ........................................... 52,699 70,266
Developed technology................................ 13,956 18,608
Assembled workforce................................. 5,851 7,802
Joint Venture relationships......................... 13,388 17,850
--------- ---------
EBITA................................................ $ (42,701) $ (77,610)
========= =========
</TABLE>
11. Under a promotional services agreement, ABC has agreed to provide, and
Infoseek has agreed to purchase $165.0 million in promotional services over a
five-year period for GO Network. The Unaudited Pro Forma Combined Condensed
Statements of Operations include an adjustment to reflect recognition of
expense under this agreement, on a straight-line basis, for promotional
services for GO Network.
12. The pro forma adjustment is to eliminate deferred compensation related to
Starwave stock options.
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13. The Quando acquisition will be accounted for using the purchase method of
accounting. The purchase price is approximately $17 million, subject to
adjustment, in shares of Infoseek's common stock. The pro forma financial
statements have been prepared on the basis of assumptions described herein and
include assumptions relating to the allocation of the consideration paid for
the assets and liabilities of Quando based upon preliminary estimates of fair
value. The actual allocation of such consideration may differ from that
reflected in the pro forma financial statements after valuations and other
procedures to be performed after the closing of the Quando acquisition have
been completed. Below is a table of the estimated acquisition cost, purchase
price allocation and annual amortization of the intangible assets acquired (in
thousands):
<TABLE>
<CAPTION>
ANNUAL
AMORTIZATION AMORTIZATION
LIFE OF INTANGIBLES
------------ --------------
<S> <C> <C> <C>
Estimated Acquisition Cost
Estimated Purchase Price................. $17,000
Acquisition Expenses..................... 1,000
-------
Total Estimated Acquisition Cost........ $18,000
=======
Purchase Price Allocation
Historical net book value of Quando at
September 30, 1998...................... $ (725)
Intangible assets acquired:
Developed Technology..................... 7,316 2 $3,658
Assembled Workforce...................... 303 2 152
In-Process Technology.................... 4,339
Goodwill................................. 9,281 2 4,641
Deferred Tax Liability................... (2,514)
-------
Total................................... $18,000
=======
</TABLE>
Tangible assets of Quando to be acquired principally include cash and accounts
receivable. Liabilities of Quando assumed in the Quando acquisition principally
include accounts payable and short and long-term obligations.
To determine the value of the developed technology, the expected future cash
flow attributed to all existing technology was discounted, taking into account
risks related to the characteristics and applications of the technology,
existing and future markets, and assessments of the life cycle stage of
technology. The analysis resulted in a valuation of approximately $7.3 million
for developed technology which had reached technological feasibility and
therefore was capitalizable. The developed technology is being amortized on a
straight line basis over a two year period.
The value of the assembled workforce was derived by estimating the costs to
replace the existing employees, including recruiting and hiring costs and
training costs for each category of employee. The analysis yielded a valuation
of approximately $0.3 million for the assembled workforce. The asset is being
amortized on a straight line basis over a two year period.
The preliminary goodwill allocation is $9.3 million. Amortization of goodwill
is based on amortization over two years due to the rapid pace of technological
development of the Internet.
The projects identified as in-process technology at Quando are those that will
be underway at the time of the acquisition of Quando and would, after
consummation of the acquisition, require
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additional effort to establish technological feasibility. These projects have
identifiable technological risk factors which indicate that even though
successful completion is expected, it is not assured. The estimated amount of
in-process research and development charge was revised from $9.4 million in the
original preliminary evaluation to $4.3 million primarily due to a decrease in
the in-process research and development that Infoseek anticipates using in the
future if successfully developed. The estimated amount of the in-process
research and development charge is still a preliminary estimate which could
materially differ from the actual results that will be experienced by Infoseek,
as final values will not be established until after the closing of the
acquisition of Quando.
In-process technology acquired in the transaction consists primarily of major
additions to and replacement of core technology, which is related to Infoseek's
planned development of on-line shopping and other new features. The majority of
the intended functionality of these new features is not supported by Quando's
current technology. As a result, Quando has shifted substantially all of its
new development efforts toward developing the necessary technology. Examples of
the types of intended new capabilities include the ability to gather
information from dynamically generated web pages and the development of
technology to manage detailed attributes of items offered for sale on-line.
Infoseek estimates that the completion of projects in-process as of the date of
closing will cost approximately $1.0 million in calendar 1999.
Infoseek expects that the in-process technology will be successfully developed,
and that initial benefits from these projects will begin in January 1999, with
a gradual introduction of new features over approximately the nine months
following the close. Notwithstanding Infoseek's expectation that the in-process
technology will be successfully developed, there remain significant technical
challenges that must be resolved in order to complete the in-process
technology.
14. The pro forma adjustment to "Other Accrued Liabilities" reflects the
accrual of acquisition costs arising from the Quando acquisition, estimated to
be approximately $1.0 million.
15. The pro forma adjustment to "Convertible Preferred Stock" reflects the
elimination of Quando's convertible preferred stock ($0.8 million).
16. The pro forma adjustment to "Common Stock" reflects the elimination of
Quando's common stock ($0.2 million), and the impact of the issuance of
Infoseek Common Stock ($17.0 million).
17. The pro forma adjustment to "Accumulated Deficit" reflects the elimination
of Quando's accumulated deficit ($1.7 million) and the in-process technology
charge ($4.3 million).
18. The pro forma adjustment is for the amortization of goodwill, developed
technology and assembled workforce.
19. Goodwill has been increased and deferred tax liabilities have been recorded
in the amount of $2.5 million to reflect the net tax effect of book/tax basis
differences in the acquired intangibles, excluding goodwill and in-process
research and development. Deferred tax assets have been realized based on the
projected reversal of taxable temporary differences and have been netted
against deferred tax liabilities for purposes of allocating the purchase price.
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INFOSEEK SELECTED CONSOLIDATED FINANCIAL DATA
The following financial information of Infoseek, except for the interim
financial information dated September 30, 1998 and 1997, has been derived from
the consolidated financial statements of Infoseek which have been audited by
Ernst & Young LLP, independent auditors. The interim financial information
dated September 30, 1998 and 1997 are derived from unaudited consolidated
financial statements, and in the opinion of Infoseek's management, reflects
all adjustments, which are of a normal recurring nature, necessary for a fair
presentation. The results of operations for September 30, 1998 are not
necessarily indicative of results to be expected for a full fiscal year. The
financial information below should be read in conjunction with Infoseek's
consolidated financial statements and notes and with "Infoseek's Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
included in this proxy statement/prospectus.
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS
AUGUST 30, 1993 ENDED
YEARS ENDED DECEMBER 31, (INCEPTION) TO SEPTEMBER 30,
------------------------------------------ DECEMBER 31, -----------------
1997 1996 1995 1994 1993 1998 1997
---------------------- --------- --------- --------------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
STATEMENTS OF OPERATIONS DATA(3):
Total revenues........... $ 35,082 $ 15,095 $ 1,032 $ -- $ -- $50,715 $ 22,407
Costs and expenses
Hosting, content and
website costs.......... 6,319 3,194 614 -- -- 7,956 4,397
Research and
development............ 7,900 4,550 1,175 1,063 8 7,432 5,879
Sales and marketing..... 34,320 20,455 1,488 97 -- 35,144 22,520
General and
administrative......... 7,042 4,177 1,148 360 19 7,876 5,242
Restructuring and other
charges(1)............. 7,349 -- -- -- -- -- 7,349
---------- --------- -------- -------- ---- ------- --------
Total costs and
expenses............. 62,930 32,376 4,425 1,520 27 58,408 45,387
---------- --------- -------- -------- ---- ------- --------
Operating loss........... (27,848) (17,281) (3,393) (1,520) (27) (7,693) (22,980)
Interest income, net..... 1,286 1,343 97 10 -- 1,999 1,066
---------- --------- -------- -------- ---- ------- --------
Net loss................. $ (26,562) $ (15,938) $ (3,296) $ (1,510) $(27) $(5,694) $(21,914)
========== ========= ======== ======== ==== ======= ========
Basic and diluted net
loss per share (pro
forma in 1995)(2)....... $ (1.00) $ (0.72) $ (0.21) $ (0.19) $ (0.83)
========== ========= ======== ======= ========
Shares used in computing
basic and diluted net
loss per share.......... 26,627 22,120 15,535 30,512 26,270
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------- SEPTEMBER 30,
1997 1996 1995 1994 1993 1998
------- ------- ------ ---- ---- -------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA(3):
Cash, cash equivalents and
short-term investments....... $31,439 $46,653 $1,626 $568 $177 $54,541
Working capital (deficit)..... 19,018 41,997 93 458 (99) 48,381
Total assets.................. 51,489 58,332 5,123 859 318 90,313
Long-term obligations......... 4,493 1,892 838 210 -- 2,981
Total shareholders' equity
(deficit).................... 27,006 48,985 2,142 520 (27) 66,717
</TABLE>
- --------
(1) During the second quarter of 1997, Infoseek recorded restructuring and
other charges of approximately $7,400,000 related to the discontinuance of
certain business arrangements that were determined to be non-strategic and
to management changes.
(2) The earnings per share amounts prior to 1997 and for the nine months ended
September 30, 1997 have been restated as required to comply with Statement
of Financial Accounting Standards No. 128, Earnings per Share and Staff
Accounting Bulletin No. 98, Earnings per Share.
(3) Infoseek's financial statements have been restated to reflect the
acquisition of WebChat Communications, Inc., which has been accounted for
as a pooling-of-interests.
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INFOSEEK MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Infoseek Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements subject to risks and
uncertainties. 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 15 of this proxy statement/prospectus.
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 the third
quarter of 1997, Infoseek's strategic focus was on developing its capabilities
as an Internet search and navigation service. In response to rapid growth and a
change in the Internet search and navigation market, Infoseek's board of
directors, in the second quarter of 1997, hired a new chief executive officer,
Harry Motro, to evolve the strategic vision of Infoseek while continuing to
leverage Infoseek's core strength in search and navigation. Mr. Motro and
founder Steven Kirsch recruited a number of new members to the executive
management team to execute Infoseek's strategy of:
. building Infoseek brand awareness,
. creating a richer viewer experience,
. maximizing value for Infoseek's advertisers,
. providing intranet search products, and
. enhancing Infoseek's search and navigation service. In June 1997,
Infoseek took a restructuring charge of approximately $7.4 million
related to the discontinuance of certain non-strategic business
arrangements and management changes.
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. Such licensing revenues represented approximately 11% of total
revenues for the nine month period ended September 30, 1998. For the nine month
period ended September 30, 1997, licensing revenues represented approximately
6% of total revenues. Gross margins from licensing Ultraseek and advertising
revenues are not materially different; thus a change in the level of this
licensing business (either an increase or decrease in relative percentage of
revenue) is not expected to have a material effect on Infoseek's gross margin
or profit margin in the future.
In October 1997, Infoseek launched an enhanced version of the Infoseek service
with easy to navigate "channels" that integrate search results with relevant
information, services, products and communities on the Internet. The new
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.
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Beginning with the October 1997 launch of the enhanced version of the Infoseek
service, Infoseek began to sell channel sponsorships to advertisers, sponsors
and partners. Through the third quarter of 1998, Infoseek entered into various
sponsor and partnership agreements covering 12 of Infoseek's 18 channels. The
duration of Infoseek's sponsorship and partnership agreements range 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.
Infoseek's third quarter 1998 revenues of approximately $19.2 million represent
a 129% increase as compared to the third quarter 1997 revenues of approximately
$8.4 million. Average daily page views increased to 21.4 million in September
1998 from 20.3 million average daily page views in June 1998. Through September
1998, Infoseek derived a substantial majority of its revenues from the sale of
advertisements and sponsorships on its Web pages. These revenues accounted for
approximately 89% of total revenues during the third quarter of 1998 compared
with 90% during the third quarter of 1997. For the nine months ended September
30, 1998, advertising and sponsorship revenues accounted for approximately 89%
of total revenues compared with 94% for the same period of 1997. Most of
Infoseek's contracts with advertising customers have terms of three months or
less, with options to cancel at any time.
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 management currently estimates that Infoseek will not achieve profitability
until at least 2002. Excluding the amortization of goodwill and other
intangibles associated with Infoseek's acquisition of Starwave and related
transactions, Infoseek will not achieve profitability until at least 2000. As
of September 30, 1998, Infoseek had an accumulated deficit of approximately
$53.7 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. There can be no assurance that Infoseek will be able
to address any of these challenges. Although Infoseek has experienced
significant revenue growth in 1997 and 1998, there can be no assurance that
this growth rate will be sustained, that revenues will continue to grow or that
Infoseek will achieve profitability. In 1997 and 1998, Infoseek significantly
increased its operating expenses as a result of substantially increasing its
sales and marketing operations, developing new distribution channels,
broadening its customer support capabilities and funding greater levels of
research and development. Further increases in operating expenses are planned
in the future. To the extent that any such expenses are not timely followed by
increased revenues, Infoseek's business, results of operations, financial
condition and prospects would be materially adversely affected.
As a result of Infoseek's limited operating history as well as the recent
emergence 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 base planned
operating expenses. Infoseek expects that its results of operations may also
fluctuate significantly in the future as a result of a variety of factors,
including:
. the acquisition of Starwave, as described below,
. the launch of GO Network,
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. 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 advertising budgeting cycles of 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 Borders Online, Inc., AT&T, N2K, Microsoft, Netscape and
others,
. pricing changes by Infoseek or its competitors,
. specific economic conditions in the Internet and intranet markets, and
. general economic conditions.
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. Moreover, most of Infoseek's contracts with
advertising customers have terms of three months or less. Advertising revenues
are tightly related to the amount of traffic on Infoseek's Web site, which is
seasonal and inherently unpredictable. Accordingly, future sales and operating
results are difficult to forecast. In addition, Infoseek has relied on the
purchase of traffic from Netscape, Microsoft and others as a significant
portion of Infoseek's total traffic. As previously discussed, Infoseek entered
into an agreement with Netscape in June 1998. Under the June agreement,
Infoseek is purchasing 15% of Netscape's available search traffic, which
traffic had decreased from 30% a year ago. In November 1998, Infoseek and
Netscape renegotiated the terms of the June agreement to provide for the
purchase of 5% of Netscape's available search traffic beginning January 11,
1999 and through the duration of the agreement which terminates May 31, 1999.
Traffic on the core Infoseek search service increased 17% in September 1998
compared to June 1998 and saw reduced dependence on traffic purchased from
Netscape. September traffic from lower-revenue generating pages, namely chat
pages, were down 10% from the month of June 1998. In addition, page views
sourced from Netscape declined from 13% of total page views in June 1998 to 12%
of total page views in September 1998. While Infoseek believes that it now has
a better balance in the sources of its traffic, as Netscape comprised only 12%
of total traffic and Microsoft provided 9% of total traffic in the month of
September 1998, if total traffic declines or does not continue growing, it
could result in an adverse impact on Infoseek's business, results of operations
and financial condition and prospects.
Infoseek's expense levels are based, in part, on its expectations as to future
revenues and, to a significant extent, are relatively fixed at least in the
short term. Infoseek may not be able to adjust spending in a timely manner to
compensate for any future revenue shortfall. Accordingly, any
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significant shortfall in relation to Infoseek's expectations would have an
immediate material adverse impact on Infoseek's business, results of
operations, financial condition and prospects.
In addition, Infoseek may elect from time to time to make certain pricing,
service or marketing decisions or acquisitions that could have a short-term
material adverse effect on Infoseek's business, results of operations,
financial condition and prospects and which may not generate the long-term
benefits intended. From time to time, Infoseek has entered into and may
continue to enter into strategic relationships with companies for cross service
advertising, such as Infoseek's relationship with United Parcel Service of
America, Inc. Infoseek's revenues have in the past been, and may in the future
continue to be, partially dependent on its relationships with its strategic
partners. Such strategic relationships have and may continue to include
substantial one-time or up front payments from Infoseek's partners.
Accordingly, Infoseek believes that its quarterly revenues are likely to vary
significantly in the future, that period-to-period comparisons are not
necessarily meaningful and that such comparisons should not necessarily be
relied upon as an indication of Infoseek's future performance. Due to the
foregoing factors, it is likely that in future periods, Infoseek's operating
results may be below the expectations of public market analysts and investors.
In such event, the price of Infoseek's common stock would likely be materially
adversely affected. See "Risk Factors--Risks Related to Infoseek--Infoseek Has
Difficulty Predicting Future Results But Expects Losses In the Future," "--
Infoseek's Financial Results Will Vary," "--Infoseek's Future Success Depends
on the Continuation and Integration of Joint Venture Relationships and on
Entering Into New Third Party Relationships" and "--If the Internet and
Electronic Commerce Do Not Continue to Grow, Infoseek's Business Will Suffer."
WebChat Acquisition
On April 17, 1998, Infoseek acquired WebChat Communications, Inc. in a tax-free
reorganization in which a wholly-owned subsidiary of Infoseek was merged
directly into WebChat. Infoseek exchanged approximately 316,000 shares of
Infoseek common stock and reserved approximately 11,000 shares of Infoseek
common stock for WebChat options assumed by Infoseek. Merger related costs,
which were not significant, were expensed in the second quarter of 1998. The
WebChat merger has been accounted for under the pooling-of-interests method.
Disney Transaction
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
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 Starwave shares. 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. In addition, Infoseek incurred direct
acquisition costs of approximately $22.0 million, which were included in the
purchase price of Starwave. The total purchase price of Starwave was therefore
approximately $919.8 million. The Starwave acquisition is being accounted for
as a purchase transaction. In addition, Disney purchased an additional
2,642,000 unregistered shares of Infoseek common stock and a warrant, subject
to vesting, to purchase an additional 15,720,000 unregistered shares of
Infoseek common
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stock in exchange for approximately $70.0 million in cash and a $139.0 million
five-year promissory note. The warrants will enable Disney to achieve a
majority stake in Infoseek over time.
In addition, Infoseek and Disney have established a strategic relationship
concerning the development, launch and promotion of GO Network that will
combine certain content, promotion, brands and technologies of Infoseek,
Starwave and the Joint Ventures. In connection with GO Network, a subsidiary of
Disney has agreed to provide, and Infoseek has agreed to purchase,
$165.0 million in promotional support and activities over five years. See
"Infoseek Business."
Because the acquisition of Starwave is being accounted for under the purchase
method of accounting, 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 will be recorded in the quarter ended
December 31, 1998. In addition, intangible assets related to developed
technology and assembled workforce of approximately $45.2 million will be
amortized over two years. Intangible assets related to goodwill and the Joint
Ventures of approximately $656.3 million and $178.5 million, respectively, will
be amortized over ten years. In addition, 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.
Subject to adjustment by unanimous vote of the two member advisory committee
established pursuant to a product management agreement between Infoseek and
Disney, 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, 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. Management currently estimates that
Infoseek will not achieve profitability until at least 2002 and, excluding the
amortization of goodwill and other intangibles associated with the Starwave
merger, until at least 2000. The foregoing estimates of the time period in
which Infoseek would not achieve profitability and statements concerning GO
Network are forward-looking-statements that are subject to risks and
uncertainties. Actual results may vary materially as a result of a number of
factors, including but not limited to those set forth under "Risk Factors--
Risks Related to the Combined Companies and the Merger--If Infoseek and Quando
Do Not Integrate Their Technology and Operations Quickly and Effectively, All
of The Potential Benefits of The Merger May Not Occur," "--Risks Related to
Infoseek--If GO Network Is Not Successful, Infoseek's Business May Be Seriously
Harmed," "--GO Network May Not Succeed Without Disney's Cooperation" and "--If
Infoseek's Future Acquisitions and Strategic Transactions Are Not Successful,
Infoseek's Business May Suffer."
Quando Acquisition
Infoseek expects to account for the Quando acquisition as a purchase
transaction and expects to incur a write-off related to in-process research and
development of approximately $4.3 million in the quarter ending March 31, 1998
in connection with this transaction. In addition, intangible assets related to
goodwill, developed technology and assembled workforce are preliminarily
estimated at approximately $16.9 million and will be amortized over two years.
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WebTV Transaction
On August 28, 1998 Infoseek entered into an agreement with WebTV pursuant to
which Infoseek will be 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 totalling $26.0 million,
with $15.0 million of such amount is being paid in advance for the first five
quarters upon mutual acceptance of the technology by both parties. The
remaining $11.0 million is being paid ratably over the last three quarters of
the agreement term. Such payments by Infoseek are subject to reimbursement in
the event that WebTV is unable to deliver a minimum of 4.5 billion impressions
over the life of the agreement. 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. 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,
which could have a material adverse effect on Infoseek's business, results of
operations and financial condition.
INFOSEEK RESULTS OF OPERATIONS
For the Nine Months Ended September 30, 1998 and 1997
Total Revenue
For the nine months ended September 30, 1998 and 1997, total revenues were
$50,715,000 and $22,407,000, respectively. During the first nine months of 1998
and 1997, Infoseek derived a substantial majority of its revenues from the sale
of advertisements and sponsorships on its Web pages. For the nine months ended
September 30, 1998 and 1997, advertising revenues were $45,044,000 and
$21,062,000, respectively, representing 89% and 94% of total revenues in these
periods. The growth in advertising and related revenues is attributable to the
increased use of the Internet for information publication, distribution and
commerce coupled with the development and acceptance of the Internet as an
advertising medium and increased viewer traffic on the Infoseek service.
Infoseek expects to continue to derive a substantial majority of its revenues
for the foreseeable future from selling advertising and sponsorship space on
its websites. Advertising revenues are derived principally from short-term
advertising contracts in which Infoseek guarantees a minimum number of displays
of an advertisement to the viewer, known as "impressions," for a fixed fee.
Advertising revenues are recognized ratably over the term of the contract
during which services are provided and are stated net of customer discounts. To
the extent minimum guaranteed impressions are not met, Infoseek defers
recognition of the corresponding revenue until the remaining guaranteed
impression levels are achieved. Deferred revenue is comprised of billings in
excess of recognized revenue related to advertising contracts. Also included in
advertising revenues is the exchange by Infoseek of advertising space on
Infoseek's websites for reciprocal advertising space or traffic in other media
publications or other websites or receipt of applicable goods and services.
Revenues from these exchange transactions are recorded as advertising revenues
at the estimated fair value of the goods and services received and are
recognized when both Infoseek's advertisements
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and reciprocal advertisements are run or applicable goods or services are
received. Although such revenues have not exceeded 10% of total revenues in any
period to date, Infoseek believes these exchange transactions are of value,
particularly in the marketing of the Infoseek brand, and expects to continue to
engage in these transactions in the future. In late 1997, Infoseek released an
enhanced version of its service which now features 18 "channels," designed to
bring together topical information, services, products and communities on the
Web. The enhanced version of the service provides additional opportunities for
revenue from the sale of channel sponsorships and in some circumstances enables
Infoseek to share in a portion of the revenue generated by its viewers with
these channel sponsors. Revenue generated by channel sponsors is included in
advertising revenues and is recognized on a straight-line basis over the terms
of the agreements provided that minimum impressions are met. The balance of
total revenues was derived from the licensing of the Ultraseek Server product
to businesses for internal use in their intranets, extranets or public sites.
For the nine months ended September 30, 1998 and 1997, licensing revenue
represented approximately 11% and 6%, respectively, of total revenues.
Infoseek's current business model is to generate revenues through the sale of
advertising on the Internet. There can be no assurance that current advertisers
will continue to purchase advertising space and services from Infoseek or that
Infoseek will be able to successfully attract additional advertisers.
Costs and Expenses
Infoseek's operating expenses increased in absolute dollars during the first
nine months of 1998 compared to the first nine months of 1997 as Infoseek has
expanded its business and the marketing of its services and products. Infoseek
expects operating expenses to continue to increase in dollar amount in the
future as Infoseek continues to expand its business. Infoseek recorded
aggregate deferred compensation of $6,018,000 in connection with certain stock
options granted through September 30, 1998 of which $352,000 was recorded
during the nine months ended September 30, 1998. The amortization of such
deferred compensation is being charged to operations over the vesting periods
of the options, which are typically four years. For the nine months ended
September 30, 1998 and 1997, Infoseek amortized $314,000 and $717,000,
respectively. The amortization of this deferred compensation will continue to
have an adverse effect on Infoseek's results of operations, primarily through
1999. In addition, on August 28, 1998 Infoseek entered into an agreement with
WebTV pursuant to which Infoseek will be the exclusive provider of search and
directory services to WebTV. See "--Infoseek Overview--WebTV Transaction."
Hosting, Content and Website Costs
For the nine months ended September 30, 1998 and 1997, hosting, content and
website costs were $7,956,000 and $4,397,000, respectively. Hosting, content
and website costs consist primarily of costs associated with the enhancement,
maintenance and support of Infoseek's websites, including telecommunications
costs and equipment depreciation. Hosting, content and website costs also
include costs associated with the licensing of certain third-party
technologies. Hosting, content and website costs increased in the nine months
ended September 30, 1998 and 1997 as Infoseek added additional equipment and
personnel to support its websites and as royalties due to certain third parties
increased. Infoseek expects its hosting, content and website costs will
continue to increase in absolute dollars and possibly as a percentage of
revenues as it upgrades equipment and maintenance and support personnel and
adds content partners to meet the growing demands for Web services.
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Research and Development
For the nine months ended September 30, 1998 and 1997, research and development
expenses were $7,432,000 and $5,879,000, respectively. Research and development
expenses consist principally of personnel costs, consulting and equipment
depreciation. Costs related to research, design and development of products and
services have been charged to research and development expense as incurred. The
increase in research and development expenses for the nine months ended
September 30, 1998 over the comparable periods in 1997 was primarily the result
of on-going enhancements to the Infoseek service and the development and
implementation of new technology and products. Infoseek believes that a
significant level of product development expenses is required to continue to
remain competitive in its industry. Accordingly, Infoseek anticipates that it
will continue to devote substantial resources to product development and that
these costs will continue to increase in dollar amount in future periods.
Sales and Marketing
For the nine months ended September 30, 1998 and 1997, sales and marketing
expenses were $35,144,000 and $22,520,000, respectively. Sales and marketing
expenses consist primarily of advertising, promotional expenses and
compensation of sales and marketing personnel.
Sales and marketing expenses for the nine month periods ended September 30,
1998 and 1997 included payments made to Netscape pursuant to an arrangement for
the listing of Infoseek's service on the Netscape Web page. Through April 30,
1998, Infoseek's agreement with Netscape provided for payments up to an
aggregate of $12,500,000 in cash and reciprocal advertising, consisting of
$10,000,000 in cash and $2,500,000 in reciprocal advertising, to be one of four
non-exclusive premier providers of navigational services along with Excite,
Lycos, and Yahoo!. The Netscape arrangement was subsequently extended through
May 31, 1998. The payments to Netscape were being recognized ratably over the
term of the agreement.
As of June 1, 1998, Infoseek entered into a one-year agreement with Netscape
with terms that provide for Infoseek to pay, based on impressions delivered, up
to an aggregate of $12,500,000 in cash to be one of the six non-exclusive
premier providers of navigational services along with Excite, Netscape, Lycos,
Alta Vista, and LookSmart. Under terms of the agreement, Infoseek will receive
15% of premier provider rotations--the pages served to visitors who have not
selected a preferred provider. The payments to Netscape are being recognized
ratably over the term of the agreement. In November 1998, Infoseek and Netscape
renegotiated the terms of the June agreement to provide for the purchase of 5%
of Netscape's available search traffic beginning January 11, 1999 and through
the duration of the agreement, which terminates May 31, 1999. Pages sourced
from Netscape have declined from 30% a year ago to 13% in June 1998 and 12% in
September 1998. A loss of Netscape sourced pages could have an adverse impact
on Infoseek's business, results of operations and financial condition and
prospects. As of September 30, 1998, Infoseek has a cash commitment ranging
from a minimum of $4,150,000 to a maximum of $12,500,000 depending on the level
of traffic delivered by Netscape in connection with this agreement. Under the
terms of these agreements, during the nine month periods ended September 30,
1998 and 1997, Infoseek paid $6,595,000 and $5,416,000, respectively, to
Netscape.
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In addition, in July 1997, Infoseek entered into an agreement with Netscape
whereby it was designated as a premier provider of international search and
navigational guide services for the Netscape Net Search Program for ten
Netscape local websites. Infoseek's agreement with Netscape provides for
payments of up to a maximum aggregate of $1,219,000 in cash and reciprocal
advertising over the one-year term of the agreement. During the nine months
ended September 30, 1998 and 1997, Infoseek recognized sales and marketing
expenses of approximately $506,000 and $99,750, respectively, under this
agreement as a component of sales and marketing expense.
Infoseek also has an agreement with Microsoft to provide navigational services
on certain Microsoft websites through which Infoseek also receives traffic. In
exchange for such traffic, Infoseek makes available to Microsoft advertising
space on the Infoseek service free of charge. Effective October 1, 1998,
Infoseek terminated its existing agreement with Microsoft and entered into a
new agreement with Microsoft to become one of five premier providers of search
and navigation services on Microsoft's network of Internet products and
services. Under the terms of the new twelve month Microsoft agreement, Infoseek
is obligated to pay an aggregate of $10,675,000 for a guaranteed minimum number
of impressions on both Microsoft's Internet Explorer search feature and
Microsoft's website. Infoseek will also pay, based on the number of impressions
delivered, for additional impressions on both Internet Explorer and Microsoft's
website, up to a maximum of $18,000,000. The accounting treatment for the
Microsoft agreement will result in amortizing the obligated amount over the
one-year term of the agreement, beginning in the quarter ended December 31,
1998, the quarter when the service was launched.
At the end of the terms of the respective agreements with Netscape and
Microsoft, there can be no assurance that these agreements with Netscape and
Microsoft or other similar agreements can or will be renewed on terms
satisfactory to Infoseek. If Infoseek is unable to renew these or other similar
agreements on favorable terms, is otherwise unable to develop viable
alternative distribution channels to Netscape and Microsoft, or is otherwise
unable to offset a reduction in traffic from these or other third party
sources, advertising revenues would be adversely affected, resulting in
Infoseek's business, results of operations, financial condition and prospects
being materially and adversely affected. See "Risk Factors--Risks of Infoseek--
Infoseek's Future Success Depends on The Continuation and Integration of Joint
Venture Relationships and Entering Into Third Party Relationships" and "--If
Infoseek Cannot 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."
The increase in sales and marketing expenses for the nine months ended
September 30, 1998 over 1997 was also the result of hiring additional sales and
marketing personnel and an increase in promotional and advertising activity
including advertising campaigns in both 1998 and 1997, including television
advertising. Infoseek expects to increase the amount of promotional and
advertising expenses and anticipates hiring additional sales representatives in
future periods.
General and Administrative
For the nine months ended September 30, 1998 and 1997, general and
administrative expenses were $7,876,000 and $5,242,000, respectively. General
and administrative expenses consist primarily of compensation of administrative
and executive personnel, facility costs and fees for professional services. The
increase in general and administrative expenses for the nine months ended
September 30, 1998 over the comparable periods in 1997 was the result of hiring
additional administrative and executive staff and adding infrastructure to
manage the expansion of the business.
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Infoseek anticipates that its general and administrative expenses will continue
to increase in dollar amount as Infoseek continues to expand its administrative
and executive staff. In connection with the Disney transaction, Infoseek
incurred direct costs of approximately $2.8 million as of September 30, 1998
and estimates that it will incur total direct costs of approximately $22.0
million, which will be accounted for as part of the purchase price of the
transactions. The $22.0 million in merger costs includes approximately $5.0
million for liabilities related to involuntary employee termination benefits
and relocations of Starwave employees and $5.0 million for costs to exit other
Starwave activities, primarily operating leases of Starwave. Infoseek expects
to incur additional integration costs of up to $7.0 million, of which $1.4
million were included in the results for the quarter ended September 30, 1998.
The remaining integration costs of up to $5.6 million will affect future
operations and do not qualify as liabilities in connection with a purchase
business combination. There can be no assurance that Infoseek will not incur
additional material charges in subsequent quarters to reflect additional costs
associated with the Disney transaction or other transactions. See "Risk
Factors--Risks Related to the Combined Companies and the Merger--Merger Related
Accounting Charges Will Delay and Reduce Infoseek's Profits," "--If Infoseek
and Quando Do Not Integrate Their Technology and Operations Quickly and
Effectively, All of The Potential Benefits of The Merger May Not Occur," and
"--The Merger May Result in Loss of Quando Employees."
Restructuring and Other Charges
During the second quarter of 1997, Infoseek recorded restructuring and other
charges of approximately $7,400,000, of which approximately $6,200,000 related
to the discontinuance of certain business arrangements which were determined to
be non-strategic, and approximately $1,200,000 related to management changes.
Of these restructuring charges, approximately $5,000,000 involved cash
outflows, all of which were completed as of June 30, 1998. Non-cash
restructuring charges of approximately $2,400,000 related primarily to the
write-down of certain non-strategic business assets were written off in June
1997.
Income Taxes
Due to Infoseek's loss position, there was no provision for income taxes for
any of the periods presented. At December 31, 1997, Infoseek had federal and
state net operating loss carryforwards of approximately $45,000,000 and
$29,500,000, respectively. The federal net operating loss carryforwards will
expire beginning in 2009 through 2012, if not utilized, and the state net
operating loss carryforwards will expire in the years 1999 through 2002.
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 carry forwards. 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.
For the Years Ended December 31, 1997, 1996 and 1995
Total Revenues
For the years ended December 31, 1997, 1996 and 1995 total revenues were
$35,082,000, $15,095,000 and $1,032,000, respectively. During 1997, 1996 and
1995, Infoseek derived a substantial majority of its revenues from the sale of
advertisements on its Web pages. Advertising
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revenues in 1997, 1996 and 1995 were $32,941,000, $14,951,000 and $849,000,
respectively, representing 94%, 99% and 82% of total revenues in such periods.
The growth in advertising revenues since 1995 is attributable to the increased
use of the Internet for information publication, distribution and commerce
coupled with the development and acceptance of the Internet as an advertising
medium and increased viewer traffic on the Infoseek service. Infoseek expects
to continue to derive a substantial majority of its revenues for the
foreseeable future from selling advertising space on its websites.
Also included in advertising revenues is the exchange by Infoseek of
advertising space on Infoseek's websites for reciprocal advertising space or
traffic in other media publications or other websites or receipt of applicable
goods and services.
In late 1997, Infoseek released a new version of its service which now features
18 "channels," designed to bring together topical information, services,
products and communities on the Web. Revenues generated by channel sponsors is
included in advertising revenues and is generally recognized on a straight line
basis over the terms of the agreements provided that minimum impressions are
met.
In 1997, the balance of total revenues was derived from the licensing of the
Ultraseek Server product to businesses for internal use in their intranets,
extranets or public sites. Licensing of the Ultraseek Server commenced in early
1997 and represented approximately 6% of total revenues for the year. In 1996
and 1995, advertising revenues and other include $144,000 and $183,000,
respectively, of subscription fees for a premium service offered to business
and professional viewers, which was discontinued during the third quarter of
1996.
Costs and Expenses
Infoseek's operating expenses increased in absolute dollars during 1997, 1996
and 1995 as Infoseek has transitioned from the product development stage to the
marketing of its services and products and expansion of its business. Infoseek
recorded aggregate deferred compensation of $5,666,000 in connection with
certain stock options granted through 1997. The amortization of such deferred
compensation is being charged to operations over the vesting periods of the
options, which are typically four years. For the years ended December 31, 1997,
1996 and 1995, Infoseek amortized $832,000, $1,346,000 and $44,000,
respectively, related to stock options. At December 31, 1997, unamortized
deferred compensation totaled $753,000.
Hosting, Content and Website Costs
For the years ended December 31, 1997, 1996 and 1995, hosting, content and
website costs were $6,319,000, $3,194,000 and $614,000, respectively. Hosting,
content and website costs increased in 1997 and 1996 as Infoseek added
additional equipment and personnel to support its websites and as royalties due
to certain third parties increased.
Research and Development
For the years ended December 31, 1997, 1996 and 1995, research and development
expenses were $7,900,000, $4,550,000 and $1,175,000, respectively. The increase
in research and development
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expenses for 1997 and 1996 over 1995 was primarily the result of ongoing
enhancements to the Infoseek service and the development and implementation of
new technology and products. Ultraseek, Infoseek's core search engine, was
released in November 1996. The Ultramatch technology and channel products were
commercially released during the second and fourth quarters of 1997,
respectively.
Sales and Marketing
For the years ended December 31, 1997, 1996 and 1995, sales and marketing
expenses were $34,320,000, $20,455,000 and $1,488,000, respectively. The
increase in sales and marketing expenses for 1997 and 1996 was the result of
hiring additional sales and marketing personnel and increasing promotional and
advertising activity including advertising campaigns in both 1997 and 1996,
including television advertising.
Sales and marketing expenses for the years ended December 31, 1997 and 1996
included payments made to Netscape pursuant to an arrangement for the listing
of Infoseek's service on the Netscape Web page. The original agreement with
Netscape provided for payments of up to an aggregate of $5,000,000, $3,500,000
in cash and $1,500,000 in reciprocal advertising, over the course of the one-
year term of the agreement. At December 31, 1997, Infoseek had approximately
$7,555,000 of cash commitment remaining in connection with this agreement,
which includes $4,221,000 of accrued liabilities to service providers.
In addition, in July 1997, Infoseek entered into an agreement with Netscape
whereby it was designated as a premier provider of international search and
navigational guide services for the Netscape Net Search Program for ten
Netscape local websites. Infoseek's agreement with Netscape provides for
payments of up to a maximum aggregate of $1,219,000 in cash and reciprocal
advertising over the one-year term of the agreement. During the year ended
December 31, 1997, Netscape delivered at the minimum exposure level and
Infoseek as a result recognized sales and marketing expenses of approximately
$333,000 under this agreement.
General and Administrative
For the years ended December 31, 1997, 1996 and 1995, general and
administrative expenses were $7,042,000, $4,177,000 and $1,148,000,
respectively. The increase in general and administrative expenses for the years
ended 1997 and 1996 was the result of hiring additional administrative and
executive staff and adding infrastructure to manage the expansion of the
business.
Restructuring and Other Charges
During the second quarter of 1997, Infoseek recorded restructuring and other
charges of approximately $7,400,000, of which approximately $6,200,000 related
to the discontinuance of certain business arrangements which were determined to
be non-strategic, and approximately $1,200,000 related to management changes.
Of these restructuring charges, approximately $5,000,000 involved cash
outflows, of which $3,100,000 had been paid as of December 31, 1997. Non-cash
restructuring charges of approximately $2,400,000 related primarily to the
write-down of certain non-strategic business assets. There have been no
material changes to the restructuring plan or in the
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estimates of the restructuring costs. As of December 31, 1997, Infoseek had
approximately $1,900,000 remaining in its restructuring reserve.
INFOSEEK LIQUIDITY AND CAPITAL RESOURCES
From inception through May 1996, Infoseek financed its operations and met its
capital expenditure requirements primarily from proceeds derived from the
issuance of equity, convertible debt securities and equipment term loans. In
February 1998, Infoseek completed a follow-on public offering and received
approximately $43,015,000 net of underwriting discounts, commissions and other
offering costs. The proceeds have been and will be used for general corporate
purposes, including expansion of its sales and marketing efforts, and capital
expenditures.
For the first nine months ended September 30, 1998, operating activities used
cash of $10,970,000 due primarily to Infoseek's net loss and increases in
deposits and other current assets, direct acquisition costs and a decrease in
accrued liabilities to service providers offset by increases in depreciation
and amortization and deferred revenue. For the nine month period ended
September 30, 1997, operating activities used cash of $15,301,000 due primarily
to Infoseek's net loss partially offset by increases in accrued restructuring
and other charges, depreciation and amortization and deferred revenue. For the
nine months ended September 30, 1998, investing activities used cash of
$28,794,000 primarily related to the net purchases of short-term investments.
For the nine months ended September 30, 1997, investing activities provided net
cash of $7,282,000, primarily associated with the sale of short-term
investments. Financing activities generated cash of $43,242,000 and $6,772,000
in the nine months ended September 30, 1998 and 1997, respectively, primarily
from Infoseek's follow-on public offering in February 1998 and equipment term
loans in 1997.
For 1997, 1996 and 1995, operating activities used cash of $14,154,000,
$10,068,000 and $1,408,000, respectively. The net cash used during these
periods was primarily due to net losses and increases in accounts receivable,
partially offset by increases in accounts payable and accrued liabilities. For
1997, investing activities generated cash of $6,204,000 primarily related to
the sale of investments partially offset by purchases of short-term investments
and purchases of property and equipment. For 1996 and 1995, investing
activities used net cash of $49,827,000 and $3,326,000, respectively, primarily
associated with the purchase of short-term investments and purchase of property
and equipment partially offset by proceeds from the sale of short-term
investments. Financing activities generated net cash of $7,485,000, $62,552,000
and $5,295,000, in 1997, 1996 and 1995, respectively, primarily from repayment
of term loans in 1997, the initial public offering in June 1996, and preferred
stock sales in 1995.
Infoseek has commitments for its facilities under operating lease agreements
and expects to continue to incur significant capital expenditures to support
expansion of Infoseek's business. Furthermore, from time to time Infoseek
expects to evaluate the acquisition of products, businesses and technologies
that complement Infoseek's business.
Infoseek had $54,541,000 in cash, cash equivalents and short-term investments
at September 30, 1998. 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 at least December 31, 1999. Thereafter,
Infoseek may
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need to raise additional funds. Infoseek may need to raise additional funds
sooner, however, 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. 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,
stockholders may experience additional dilution and such 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, if 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
estimate of the period for which Infoseek expects its available funds to be
sufficient to meet its capital requirements 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--Risks Related to Infoseek--In Order to Continue to Grow,
Infoseek Will Need More Financing."
STARWAVE OVERVIEW
Starwave
Starwave is a producer of Internet-based online services in specific content
areas with broad consumer appeal. Starwave is recognized for its sports, news
and entertainment services. Starwave was organized in December 1991 and
commenced operations in January 1992. From that time through February 1993, the
operations of Starwave were limited to start-up activities, including
recruiting personnel, raising capital, and research and development concerning
the technical feasibility of providing content for delivery to the home over
high bandwidth digital communications, including satellite broadcast. From
March 1993 through December 1994, the primary operating activities of Starwave
included the development of CD-ROM products and the development of
online services.
In 1995, Starwave launched its first online services and also released its
first CD-ROM products. Additionally, Starwave began shifting its focus
primarily toward online services, as management perceived greater long-term
potential in that business segment. These services included, among others,
ESPN.com, NBA.com, NFL.com, NASCAR Online, Outside Online and Mr. Showbiz. This
shift of focus ultimately led to the decision in March 1996 to discontinue its
Multimedia CD-ROM business segment, which was phased out in 1996. See "--
Starwave Discontinued Operations" below. In March 1995, Starwave and ESPN
entered into an agreement whereby Starwave became the exclusive producer and
distributor of ESPN content on the Internet through April 1, 2000, which
agreement was superceded by the ESPN Joint Venture in connection with the
transactions described in the next paragraph.
Pursuant to a stock purchase agreement dated as of March 28, 1997 among
Starwave, Starwave's founder, Paul Allen, and Disney, Starwave issued and sold
to Disney 9,967,337 shares of Starwave common stock, or 39,869,348 shares after
adjustment for the four-for-one stock split of Starwave
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common stock declared on October 3, 1997, for aggregate consideration of $82
million. Starwave used approximately $50 million of those proceeds to repay the
then-outstanding indebtedness owed by it to Mr. Allen, and the remaining $45.7
million of indebtedness owed by Starwave to Mr. Allen was converted into
5,155,289 shares of Starwave common stock or 20,621,156 shares when adjusted
for the Starwave stock split. In connection with this transaction, effective
April 1997, Starwave formed its subsidiary, Starwave Partner, and Starwave
Partner entered into the ESPN Joint Venture and the ABCNews Joint Venture with
ESPN Partner and ABC Partner, respectively, with the ESPN Joint Venture
superceding the 1995 agreement between Starwave and ESPN pertaining to
ESPN.com. Following these transactions, Starwave continued its website hosting,
software development and research activities, while the majority of its website
operations costs were allocated to the Joint Ventures. Effective April 1, 1997,
Starwave and the Joint Ventures established a fiscal year end of the last
Sunday in September.
On May 1, 1998, pursuant to a shareholders agreement among Starwave, Mr. Allen
and Disney, Disney acquired all of the shares of Starwave common stock owned by
Mr. Allen, thereby increasing Disney's percentage ownership of Starwave's
outstanding capital stock from approximately 41% to approximately 91% on a
primary shares basis.
On November 18, 1998, Infoseek acquired all of the outstanding capital stock of
Starwave. See "--Infoseek Overview" and "Infoseek Relationship with Disney."
The ESPN Joint Venture
Effective April 1997, Starwave Partner and ESPN Partner entered into the ESPN
Joint Venture for the production of Internet-based services intended to appeal
to consumer interest in sports-related content areas. Starwave contributes
technical expertise, labor and infrastructure, and ESPN contributes licensed
content, branding and promotion. The ESPN Joint Venture has a ten-year term and
a 50/50 capital ownership structure, and provides ESPN Partner with credit for
on-air promotion. Required funding under the ESPN Joint Venture is split 60/40
between Starwave Partner and ESPN Partner in negative cash flow years and 50/50
in years in which the ESPN Joint Venture achieves positive cash flow. The ESPN
Joint Venture has inherited Starwave relationships with nationally prominent
content and branding partners, including the NBA, the NFL, and NASCAR. The ESPN
Joint Venture's flagship service is ESPN.com, which provides sports-related
content.
The ABCNews Joint Venture
Effective April 1997, Starwave Partner and ABC Partner entered into the ABCNews
Joint Venture for the production of Internet-based services intended to appeal
to consumer interest in news and entertainment-related content areas. Starwave
contributes the technical expertise, labor and infrastructure, and ABC Partner
contributes licensed content. The ABCNews Joint Venture has a ten-year term and
a 50/50 capital ownership structure and provides ABC Partner with credit for
ABC's on-air promotion. Required funding under the ABCNews Joint Venture is
split 60/40 between Starwave Partner and ABC Partner in negative cash flow
years and 50/50 in years in which the ABCNews Joint Venture achieves positive
cash flow. The ABCNews Joint Venture's flagship service is ABCNEWS.com, which
provides world, national, entertainment, health, technology and business
content. The ABCNews Joint Venture's other services include Mr. Showbiz, Wall
of Sound, CelebSite and Moneyscope.
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Under existing terms, the Joint Ventures expire on November 18, 2008 and may be
subject to earlier termination in certain circumstances.
Prior to the formation of the Joint Ventures in April 1997, Starwave had formed
relationships with co-branding partners for certain of its online services.
Starwave bore substantially all the production costs for the online services
and paid royalties to its co-branding partners. The royalties were generally
computed as a percentage of either advertising or gross revenues generated from
the related online service. Those percentages ranged from 30% to 50% of such
revenues. During this period, Starwave derived the majority of its revenues
from the sale of advertisements and subscription fees related to premium
subscription services and fantasy league services offered to users of the
ESPN.com service. Advertising revenues are derived principally from advertising
placements in which Starwave provides a minimum number of impressions for a
fixed fee. Advertising and subscription revenues are recognized ratably over
the term of the period during which services are provided and in the case of
advertising is stated net of commissions. In conjunction with the formation of
the Joint Ventures, the co-branding relationship with ESPN was discontinued.
The co-branding relationships with the NBA, the NFL, and NASCAR were assumed by
the ESPN Joint Venture.
Starwave expects the Joint Ventures to continue to derive the substantial
majority of their revenues from the sale of advertising. Most of the
advertising placements of Starwave and the Joint Ventures have terms of three
months or less, with options to cancel at any time. In addition, there is
intense competition among sellers of advertising space on the Internet and a
variety of pricing models offered.
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The following selected consolidated financial data are derived from the
consolidated financial statements of Starwave included elsewhere in this proxy
statement/prospectus and should be read in conjunction with such financial
statements, the related notes thereto and the other financial information
pertaining to Starwave included elsewhere in this proxy statement/prospectus.
STARWAVE SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED FISCAL YEAR ENDED
--------------------------- ------------------------- ------------------------
SEPTEMBER 28, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, OCTOBER 4, SEPTEMBER 28,
1997 1996 1996 1995 1998 1997
------------- ------------- ------------ ------------ ---------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data(1):
Revenues................ $ 4,892 $ 4,583 $ 8,302 $ 1,111 $ 5,266 $ 8,611
-------- -------- -------- -------- -------- --------
Operating expenses
Cost of online
services.............. 7,185 11,046 18,170 6,577 3,143 14,309
Development............ 1,605 5,586 6,138 5,771 1,225 2,157
Sales and marketing.... 1,589 2,872 5,492 1,789 94 4,209
General and
administrative........ 2,527 3,389 4,845 3,388 2,772 3,983
-------- -------- -------- -------- -------- --------
Total operating
expenses.............. 12,906 22,893 34,645 17,525 7,234 24,658
-------- -------- -------- -------- -------- --------
Operating loss.......... (8,014) (18,310) (26,343) (16,414) (1,968) (16,047)
-------- -------- -------- -------- -------- --------
Other income (expense)
Loss from affiliate--
ESPN Joint
Venture(2)............ (2,251) -- -- -- (4,139) (2,251)
Loss from affiliate--
ABC News Joint
Venture(2)............ (5,958) -- -- -- (10,020) (5,958)
Interest (expense)
income................ (1,814) (3,187) (4,675) (3,023) 748 (3,302)
Other, net............. 464 (52) (658) 8 (47) (142)
-------- -------- -------- -------- -------- --------
Net other expenses..... (9,559) (3,239) (5,333) (3,015) (13,458) (11,653)
-------- -------- -------- -------- -------- --------
Loss from continuing
operations............. (17,573) (21,549) (31,676) (19,429) (15,426) (27,700)
-------- -------- -------- -------- -------- --------
Loss from discontinued
operations............. -- (4,289) (4,289) (7,474) -- --
-------- -------- -------- -------- -------- --------
Net loss................ $(17,573) $(25,838) $(35,965) $(26,903) $(15,426) $(27,700)
======== ======== ======== ======== ======== ========
</TABLE>
- --------
(1) In April 1997 Starwave entered into the ESPN Joint Venture and the ABCNews
Joint Venture. Subsequently, Starwave continued its business of website
hosting, software development and research activities while revenue and
expenses associated with sites operated under contract with ESPN, ABC and
others were assumed by these Joint Ventures. As a result, periods prior to
and following April 1997 are not comparable.
(2) Represents Starwave's proportionate share of the loss (i.e., 60%).
STARWAVE RESULTS OF OPERATIONS
From Starwave's commencement of business activities in January 1992 through the
first quarter of 1995, Starwave's operations were limited and consisted
primarily of development of online services and CD-ROMs and other start-up
activities. Starwave first recognized online revenues in the second quarter of
1995. Thereafter until April 1997, the ESPN.com online revenues were the
primary source of Starwave's revenues.
Beginning April 1997, Starwave entered into the Joint Ventures. As a result of
the terms of the Joint Ventures, all business related advertising revenue and
operating expenses are reflected at the Joint
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Venture level. Accordingly, following the discussion of Starwave's results of
operations below is a discussion of the Joint Ventures' results of operations
in order to make comparative assessments of the results of operations more
meaningful.
Starwave has classified the results of operations of its multimedia CD-ROM
business segment as discontinued for all periods presented. Accordingly, except
as otherwise indicated, all results of operations information of Starwave
contained in this proxy statement/prospectus relate only to continuing
operations. See "--Starwave Discontinued Operations."
Starwave began a new line of business in February 1997 to provide website
hosting operations for Internet services produced by third parties. Revenues
from this line of business have been for consulting services and software
license revenues. The primary customer for such services is Disney.
COMPARISON OF STARWAVE'S TWELVE MONTHS ENDED OCTOBER 4, 1998 AND SEPTEMBER 28,
1997
Revenues
Revenues for the twelve months ended October 4, 1998 and September 28, 1997
were $5,266,000 and $8,611,000, respectively. Beginning April 1, 1997, the
majority of revenues were earned by the Joint Ventures, resulting in a decline
in the total revenue attributable to Starwave for comparable periods.
For the twelve months ended October 4, 1998, $3,139,000 of Starwave's revenues
were derived from website hosting services and $1,779,000 from software license
revenue.
For the twelve months ended September 28, 1997, Starwave recognized advertising
revenues of $5,210,000. Beginning April 1, 1997, all advertising revenue was
earned by the Joint Ventures.
Operating Expenses
Cost of Online Services. Cost of online services consists primarily of site
production and maintenance costs, royalties to co-branding partners, Web
operations and support costs, and fees and royalties paid to content providers.
Costs of online services for the twelve months ended October 4, 1998 and
September 28, 1997 were $3,143,000 and $14,309,000, respectively. Beginning
April 1, 1997, all costs incurred for the production of online services were
incurred by the Joint Ventures, which resulted in a decrease in the costs for
the comparable periods.
Development. Development expenses include expenses related to the development
and production of new online services and technologies, including payroll and
related expenses for development staff as well as costs for content, facilities
and equipment. Once an online service is launched and available to generate
revenue, costs associated with enhancements and development of new features for
the service are included with online services costs. Development costs for the
twelve months ended October 4, 1998 and September 28, 1997 were $1,225,000 and
$2,157,000, respectively, representing 23% and 25%, respectively, of total
revenues. Beginning April 1, 1997, all costs incurred for development relating
to the Joint Ventures were moved to the Joint Ventures. Starwave believes that
a significant level of development activity and expense is required in order to
remain competitive with other new and existing online services. Accordingly,
Starwave anticipates that it
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will continue to devote substantial resources to development and that the
absolute dollar amount of these costs will increase in future periods.
Sales and Marketing. Sales and marketing expenses consist primarily of payroll
and related expenses for sales and marketing personnel, advertising expenses,
as well as related facilities expenses. For the twelve months ended October 4,
1998 and September 28, 1997, sales and marketing expenses were $94,000 and
$4,209,000, respectively. Beginning April 1, 1997, all costs incurred for the
sales and marketing for the online services were incurred by the Joint
Ventures, resulting in a decrease in the costs for the comparable periods.
General and Administrative. General and administrative expenses consist
primarily of payroll and related expenses of executive, finance, legal, human
resources, and information systems personnel. In addition, these costs include
occupancy costs for Starwave, as well as fees for professional services. For
the twelve months ended October 4, 1998 and September 28, 1997, general and
administrative costs were $2,772,000 and $3,983,000, respectively, representing
53% and 46%, respectively, of total revenues. Beginning April 1, 1997 all costs
incurred for general and administrative relating to the Joint Ventures were
moved to the Joint Ventures. If Starwave continues to grow in size, it may find
it necessary to expand its information systems and to expand or relocate to new
or additional locations. As a result, Starwave anticipates that the absolute
dollar amount of general and administrative expenses will increase in future
periods.
Other Income (Expense). From inception through March 31, 1997, other income
(expense) consists primarily of interest expense incurred on the loans made to
Starwave by its majority shareholder. From April 1, 1997 to the current date,
other income (expense) consists mainly of Starwave's proportionate share (i.e.,
60%) of the earnings (losses) from the ABCNews Joint Venture and the ESPN Joint
Venture.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
----------------------------------
OCTOBER 4, 1998 SEPTEMBER 28, 1997
--------------- ------------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Loss from the ESPN Joint Venture(1)......... $ (4,139) $(2,251)
Loss from the ABCNews Joint Venture(1)...... (10,020) (5,958)
Interest income (expense)................... 748 (3,302)
Other expense............................... (47) (142)
</TABLE>
- --------
(1) Represents Starwave's proportionate share of the loss (i.e., 60%).
COMPARISON OF STARWAVE'S NINE MONTHS ENDED SEPTEMBER 28, 1997 AND SEPTEMBER 30,
1996
Revenues
Revenues for the nine months ended September 28, 1997 and September 30, 1996
were $4,892,000 and $4,583,000, respectively. Beginning April 1, 1997, the
majority of the revenue generating operations was included in the Joint
Ventures. The transfer of revenue generating operations to the Joint Ventures
was mitigated by an increase in revenue in the first three months of the period
resulting from increased acceptance of commerce on the Internet.
Advertising revenues for the nine months ended September 28, 1997 and September
30, 1996 were $2,446,000 and $3,475,000, respectively, representing 50% and
76%, respectively, of total revenues.
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Beginning April 1, 1997, all advertising revenue was earned at the Joint
Venture level, resulting in a decrease in advertising revenue for comparable
periods.
Cost of Online Services. Costs of online services for the nine months ended
September 28, 1997 and September 30, 1996 were $7,185,000 and $11,046,000,
respectively. Beginning April 1, 1997, all costs incurred for the production of
online services were incurred by the Joint Ventures, resulting in a decrease in
the costs for the comparable periods.
Development. Development costs for the nine months ended September 28, 1997 and
September 30, 1996 were $1,605,000 and $5,586,000 respectively, representing
33% and 122%, respectively, of total revenues. Development costs incurred on
behalf of the Joint Ventures' websites are allocated to the Joint Ventures,
decreasing Starwave's total development costs for the comparable periods.
Sales and Marketing. Sales and marketing expenses for the nine months ended
September 28, 1997 and September 30, 1996 were $1,589,000 and $2,872,000,
respectively, representing 32% and 63%, respectively, of total revenues.
Beginning April 1, 1997, all costs incurred for the sales and marketing for the
online services were incurred by the Joint Ventures, resulting in a decrease in
the total costs for the comparable periods. A total of $1,301,000 or 82% of the
sales and marketing costs incurred for the nine months ended September 30, 1997
was incurred before the formation of the Joint Ventures on April 1, 1997. The
remainder of the sales and marketing costs were incurred due to promotion of
the website hosting operations.
General and Administrative. For the nine months ended September 28, 1997 and
September 30, 1996, general and administrative costs were $2,527,000 and
$3,389,000, respectively, representing 52% and 74%, respectively, of total
revenues. Beginning April 1, 1997, general and administrative costs were
allocated to the Joint Ventures, thereby reducing the total expense for the
comparable periods.
Other Income (Expense). From inception through March 31, 1997, other income
(expense) consists primarily of interest expense incurred on the loans made to
Starwave by its majority shareholder. From April 1, 1997 to the current date,
other income (expense) consists mainly of Starwave's proportionate share (i.e.,
60%) of the earnings (losses) from the ABCNews Joint Venture and the ESPN Joint
Venture.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------------
SEPTEMBER 28, 1997 SEPTEMBER 30, 1996
------------------ ------------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Loss from the ESPN Joint Venture(1)...... $(2,251) --
Loss from the ABCNews Joint Venture(1)... (5,958) --
Interest expense, net.................... (1,814) $(3,187)
Other income (expense)................... 464 (52)
</TABLE>
- --------
(1) Represents Starwave's proportionate share of the loss (i.e., 60%).
COMPARISON OF STARWAVE'S YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues
Starwave began to generate revenues in the second quarter of 1995. Revenues for
the years ended December 31, 1996 and 1995 were $8,302,000 and $1,111,000,
respectively.
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For the years ended December 31, 1996 and 1995, advertising revenues were
$6,100,000 and $800,000, respectively, representing 73% and 72%, respectively,
of total revenues.
Operating Expenses
Cost of Online Services. Starwave did not incur any online services costs until
1995 when Starwave launched its first online services and began recognizing
revenues from these services. Costs of online services for the years ended
December 31, 1996 and 1995 were $18,170,000 and $6,577,000, respectively.
Development. Development expenses include expenses relating to the development
and production of new online services and technologies, including payroll and
related expenses for development staff as well as costs for content, facilities
and equipment. Once an online service is launched and available to generate
revenue, costs associated with enhancements and development of new features for
the service are included with cost of online services. Total development
expenses were $6,138,000 and $5,771,000 for the years ended December 31, 1996
and 1995, respectively, representing 74% and 519%, respectively, of total
revenues.
Sales and Marketing. Sales and marketing expenses consist primarily of payroll
and related expenses for sales and marketing personnel, advertising expenses,
as well as related facilities expenses. Sales and marketing expenses for the
years ended December 31, 1996 and 1995 were $5,492,000 and $1,789,000,
respectively, representing 66% and 161%, respectively, of total revenues.
General and Administrative. General and administrative expenses consist
primarily of payroll and related expenses of executive, finance, legal, human
resources, and information systems personnel. In addition, these costs include
occupancy costs for Starwave, as well as fees for professional services.
General and administrative expenses for the years ended December 31, 1996 and
1995 were $4,845,000 and $3,388,000, respectively, representing 58% and 305%,
respectively, of total revenues.
Other Income (Expense). In 1996 and 1995, other income (expense) consists
primarily of interest expense incurred on the loans made to Starwave by its
majority shareholder.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995
----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Interest expense..................................... $ (4,675) $ (3,023)
Other income (expense)............................... (658) 8
</TABLE>
Interest expense increased during each of the years ended December 31, 1996 and
1995, $3,023,000 during 1995 from $1,400,000 during 1994, due principally to
the increased magnitude of such loans. As of April 1, 1997, outstanding loans
from Paul Allen to Starwave totaled $95.7 million. As of December 31, 1996,
outstanding loans from Paul Allen to Starwave totaled $84.9 million, versus
$51.0 million as of December 31, 1995.
STARWAVE DISCONTINUED OPERATIONS
In 1994, Starwave began developing interactive multimedia CD-ROM products.
Starwave released its first CD-ROM product in November 1995 and released
additional CD-ROMs in 1995 and the first quarter of 1996. In March 1996,
Starwave made the decision to discontinue its multimedia CD-ROM business
segment, and to phase out these operations by December 31, 1996.
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Starwave has reflected the results of operations of the multimedia CD-ROM
business segment as a discontinued operation for all periods presented. During
the phase-out period, Starwave completed production of its final CD-ROM
product and disposed of its remaining inventory of CD-ROM products.
Losses from operations of the multimedia CD-ROM segment totaled $4,700,000 in
1994, $7,474,000 in 1995 and $1,046,000 in 1996. The loss on disposal of the
multimedia CD-ROM segment of $3,243,000 in 1996 included the provision for
operating losses through the phase-out period.
STARWAVE INCOME TAXES
Until December 31, 1995, Starwave utilized the provisions of Subchapter S of
the Code. As a result, Starwave's net losses for tax purposes, as well as tax
credits and other tax incidents, were distributed to and included on the
personal income tax returns of its shareholders. Starwave was not required to
record any provision for income taxes, and the net losses and tax incidents of
Starwave through December 31, 1995 will not be available to offset taxes on
Starwave's future net income, if any. Effective January 1, 1996, Starwave
elected to be taxed as a Subchapter C corporation under the Code. The
conversion from S Corporation status to C Corporation status had no impact on
the financial position or results of operations of Starwave. As of October 4,
1998, Starwave had incurred net operating losses of approximately $70.2
million for income tax purposes that may be available to offset a similar
amount of net income for income tax purposes in future periods through 2012.
Starwave has recorded a valuation allowance against the deferred tax asset
generated by the net operating losses and therefore has no deferred tax assets
or liabilities recorded on its balance sheet. Starwave expects that future
operating losses will result in additional net operating losses for income tax
purposes. The aggregate net operating losses are subject to certain
limitations.
STARWAVE LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 1997, Starwave financed its operations and
met its capital expenditure requirements primarily through loans received from
Paul Allen, which totaled approximately $95.7 million. In April 1997,
approximately $50 million of such indebtedness to Mr. Allen was repaid using
proceeds received by Starwave upon consummation of the transactions
contemplated by the Starwave stock purchase agreement, and the remaining $45.7
million of such indebtedness to Mr. Allen was converted into 5,155,289 shares
(20,621,156 shares when adjusted for the Starwave stock split) of Starwave
common stock. The remaining approximately $32 million of cash proceeds
received by Starwave upon consummation of the transactions contemplated by the
Starwave stock purchase agreement was used to fund Starwave operations.
Net cash used in operating activities of $27,190,000 and $30,060,000 for the
years ended December 31, 1995 and 1996, respectively, was primarily
attributable to net operating losses incurred in such periods. Net cash used
in operating activities for the nine months ended September 28, 1997 of
$6,807,000 was primarily attributable to net operating losses incurred in the
period. Net cash used in investing activities of $2,585,000 and $3,321,000 for
the years ended December 31, 1995 and 1996, respectively, was primarily
attributable to purchases of equipment and leasehold improvements. Net cash
used in investing activities of $13,873,000 for the nine months ended
September 28, 1997 was attributable to purchases of equipment and leasehold
improvements of $1,336,000, and for
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funding of the ESPN Joint Venture and the ABCNews Joint Venture of $12,537,000.
Net cash provided by operating activities for the year ended October 4, 1998 of
$3,334,000 was the result of net operating losses offset by non-cash items. Net
cash used in investing activities of $20,390,000 for the year ended October 4,
1998 was attributable to purchases of equipment and leasehold improvements of
$3,182,000 and for funding of the ESPN Joint Venture and the ABCNews Joint
Venture of $17,208,000. Starwave currently has a commitment for its facilities
under a noncancelable lease agreement that expires in May 2001, subject to
extension at Starwave's option. Starwave also has a commitment for facilities
under a noncancelable lease agreement that expires November 2000, subject to a
three-year extension at Starwave's option.
The ESPN Joint Venture and the ABCNews Joint Venture have entered into
agreements with certain co-branding partners that require the payment of
minimum royalties and/or royalty advances to the co-branding partners. At
October 4, 1998, the ESPN Joint Venture's minimum royalty liability totaled
$6,250,000 and the ABCNews Joint Venture's minimum royalty liability totaled
$750,000. Certain of the co-branding agreements provide for additional royalty
payments if specified targets are met.
From inception of the ESPN Joint Venture and the ABCNews Joint Venture on April
1, 1997, Starwave has provided 60% of the capital contributions necessary for
the operations of each Joint Venture. For the twelve months ended October 4,
1998 and for the six months ended September 28, 1997, capital contributed to
the ESPN Joint Venture was $5,735,000 and $5,377,000, respectively, and cash
provided for the ABCNews Joint Venture was $11,483,000 and $8,660,000,
respectively.
Starwave's cash requirements were funded by Disney through November 18, 1998
and are now funded by Infoseek.
THE JOINT VENTURES' RESULTS OF OPERATIONS
The following is a discussion of the Joint Ventures' results of operations in
order to make comparative assessments of the results of operations more
meaningful.
THE ESPN JOINT VENTURE
<TABLE>
<CAPTION>
APRIL 1, 1997 (INCEPTION) TO TWELVE MONTHS ENDED
SEPTEMBER 28, 1997 OCTOBER 4, 1998
---------------------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Revenues....................... $ 6,996 $19,193
Operating expenses
Cost of online services...... 7,168 15,715
Development.................. 515 1,847
Sales and marketing.......... 2,262 5,724
General and administrative... 811 3,055
------- -------
Total operating expenses....... 10,756 26,341
------- -------
Operating loss................. (3,760) (7,148)
Net other income............... 8 249
------- -------
Loss from operations........... $(3,752) $(6,899)
======= =======
</TABLE>
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Revenues
The ESPN Joint Venture began to generate revenues on April 1, 1997, after the
formation of the Joint Venture. Revenues for the six months ended September 28,
1997 and twelve months ended October 4, 1998 were $6,996,000 and $19,193,000,
respectively. Advertising revenues for the corresponding periods were
$4,868,000 and $13,459,000, respectively, representing 70%, and 70%,
respectively, of total revenue. The balance of revenue during those periods was
derived from subscription fees for premium services, fantasy leagues, and
merchandise sales.
Operating Expenses
The ESPN Joint Venture began incurring operating expenses upon formation of the
Joint Venture on April 1, 1997. These costs also include those costs paid by
its partners on behalf of the Joint Ventures. Starwave expects that ESPN Joint
Venture operating expenses will continue to increase in the future as the Joint
Venture seeks to expand its online services.
Cost of Online Services. Cost of online services consists primarily of site
production and maintenance costs, royalties to co-branding partners, Web
operations and support costs, and fees paid to content providers. Costs of
online services for the six months ended September 28, 1997 and twelve months
ended October 4, 1998 were $7,168,000 and $15,715,000, respectively.
Development. Development expenses include expenses related to the development
and production of new online services and technologies, including payroll and
related expenses for development staff as well as costs for facilities and
equipment. Total development costs for the six months ended September 28, 1997
and twelve months ended October 4, 1998 were $515,000 and $1,847,000,
respectively. These amounts represent 7% and 10%, respectively, of total
revenues in those periods. The increase in costs for the twelve months ended
October 4, 1998 is primarily due to additional costs incurred for increased
labor costs. The ESPN Joint Venture anticipates that it will continue to devote
substantial resources to development to remain competitive and that the
absolute dollar amount of these costs will increase in future periods.
Sales and Marketing. Sales and marketing expenses consist primarily of payroll
and related expenses for sales and marketing personnel, advertising expenses,
as well as related facilities expenses. Sales and marketing expenses for the
six months ended September 28, 1997, and twelve months ended October 4, 1998
were $2,262,000 and $5,724,000, respectively, representing 32% and 30%,
respectively, of total revenues. The ESPN Joint Venture anticipates that the
absolute dollar amount of sales and marketing expenses will increase in future
periods.
General and Administrative. General and administrative expenses consist
primarily of payroll and related expenses of executive, finance, legal, human
resources, and information systems personnel. In addition, these costs include
occupancy costs for the ESPN Joint Venture, as well as fees for professional
services. General and administrative expenses for the six months ended
September 28, 1997, and twelve months ended October 4, 1998 were $811,000 and
$3,055,000, respectively, representing 12% and 16%, respectively, of total
revenues. The ESPN Joint Venture opened offices in New York, New York and
Bristol, Connecticut, in addition to its operations in Starwave's existing
office in Bellevue, Washington, which contributed to the increased cost of
general and administrative expenses.
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Income Taxes. Profits or losses of the ESPN Joint Venture are attributable
directly to its partners for income tax purposes. Consequently, an income tax
provision has not been reflected in any financial information presented.
THE ABCNEWS JOINT VENTURE
<TABLE>
<CAPTION>
APRIL 1, 1997 (INCEPTION) TO TWELVE MONTHS ENDED
SEPTEMBER 28, 1997 OCTOBER 4, 1998
---------------------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Revenues....................... $ 1,929 $ 9,878
Operating expenses
Cost of online services...... 9,015 18,182
Development.................. 532 1,751
Sales and marketing.......... 1,777 3,959
General and administrative... 537 2,746
------- --------
Total operating expenses....... 11,861 26,638
------- --------
Operating loss................. (9,932) (16,760)
Net other income............... 2 61
------- --------
Loss from operations........... $(9,930) $(16,699)
======= ========
</TABLE>
Revenues
The ABCNews Joint Venture began generating revenues upon its formation on April
1, 1997. Revenues for the six months ended September 28, 1997, and the twelve
months ended October 4, 1998 were $1,929,000 and $9,878,000, respectively.
Advertising revenues for the corresponding periods were $937,000 and
$4,034,000, respectively, representing 49% and 41%, respectively, of total
revenue. The balance of revenue during those periods was derived from a
contract with a major online service for the use of ABCNEWS.com site
information on their proprietary service.
Operating Expenses
The ABCNews Joint Venture began incurring operating expenses upon its formation
on April 1, 1997. These costs also include those costs paid by its partners on
behalf of the ABCNews Joint Venture. Starwave expects that ABCNews Joint
Venture operating expenses will continue to increase in the future as the joint
venture seeks to expand its online services.
Cost of Online Services. Cost of online services consists primarily of site
production and maintenance costs, royalties to co-branding partners, Web
operations and support costs, and fees paid to content providers. Costs of
online services for the six months ended September 28, 1997, and the twelve
months ended October 4, 1998 were $9,015,000 and $18,182,000, respectively.
Development. Development expenses include expenses related to the development
and production of new online services and technologies, including payroll and
related expenses for development staff as well as costs for facilities and
equipment. Total development costs for the six months ended September 28, 1997
and the twelve months ended October 4, 1998 were $532,000 and $1,751,000,
respectively. These amounts represent 28% and 18%, respectively, of total
revenues in those periods. Starwave expects that the ABCNews Joint Venture will
continue to devote substantial resources to
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development to remain competitive and that the absolute dollar amount of these
costs will increase in future periods.
Sales and Marketing. Sales and marketing expenses consist primarily of payroll
and related expenses for sales and marketing personnel, advertising expenses,
as well as related facilities expenses. Sales and marketing expenses for the
six months ended September 28, 1997 and the twelve months ended October 4, 1998
were $1,777,000 and $3,959,000, respectively, representing 92% and 40%,
respectively, of total revenues. The ABCNews Joint Venture anticipates that the
absolute dollar amount of sales and marketing expenses will increase in future
periods.
General and Administrative. General and administrative expenses consist
primarily of payroll and related expenses of executive, finance, legal, human
resources, and information systems personnel. In addition, these costs include
occupancy costs for the ABCNews Joint Venture, as well as fees for professional
services. General and administrative expenses for the six months ended
September 28, 1997 and the twelve months ended October 4, 1998 were $537,000
and $2,746,000, respectively, representing 28% and 28%, respectively, of total
revenues. The ABCNews Joint Venture opened an office in New York, New York in
addition to the existing offices in Bellevue, Washington, which contributed to
the increased cost of general and administrative expenses.
Income Taxes. Profits or losses of the ABCNews Joint Venture are attributable
directly to its partners for income tax purposes. Consequently, an income tax
provision has not been reflected in any financial information presented.
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 to 2000, since the system may recognize
the year as 1900 instead of 2000. Computer systems that do not properly
recognize the year 2000 could generate incorrect data or cause a system to
fail.
Infoseek management has conducted a review of Infoseek's exposure to the year
2000 problem. Infoseek is working with its major computer system vendors, data
feed and software vendors to determine if they are prepared for the year 2000.
Based on Infoseek's internal review and discussions with these vendors,
Infoseek currently believes that its internal systems will be year 2000
compliant following a conversion to an improved financial reporting system in
connection with replacements scheduled to be installed in regular upgrade
programs prior to the end of 1999. Infoseek does not expect to incur
significant expenses or to have to purchase additional computer systems beyond
the regular upgrade to avoid the year 2000 problem, for either Infoseek's
internal information technology systems or Infoseek's products and services.
If the regular upgrades are not completed as planned, Infoseek will incur
additional expenses. Infoseek cannot assure you that its vendors'
representations are accurate. Infoseek has also not investigated year 2000
compliance by third parties who are not vendors of Infoseek. Infoseek has no
control over these third parties' compliance. For example, if a link on GO
Network or the Infoseek search service points to a website which is not year
2000 compliant, that link may not be available to
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users and therefore the Infoseek services will offer fewer features. If many
linked sites do not work, the value of user traffic and advertising on
Infoseek's websites could materially decrease.
If Infoseek or any of its viewers, customers, linked sites, advertisers,
vendors or other third parties are not year 2000 compliant, Infoseek's
business, results of operations, financial condition and prospects could be
seriously harmed.
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INFOSEEK BUSINESS
On November 18, 1998, Infoseek acquired Starwave and became the parent company
of Infoseek California. Infoseek's business currently consists primarily of
holding the capital stock of Infoseek California and Starwave, each of which
continues to operate its historic business as described below. In addition,
Infoseek has, in conjunction with Disney, begun to establish a strategic
relationship concerning the development, launch and promotion of GO Network,
also as described below. Infoseek plans to devote a substantial portion of its
resources in the future to developing and promoting GO Network.
GO Network
GO Network combines certain content, promotion, brands and technologies of
Infoseek, Starwave and the ABCNews and ESPN Joint Ventures. GO Network will
provide for universal navigation, registration, community and commerce services
across the Infoseek and Starwave websites, as well as ESPN.com, ABCNEWS.com and
certain Disney websites. Infoseek believes that GO Network will address
customers' needs by providing utility, ease of use, speed, personalization and
choice. Infoseek intends, through GO Network, to offer a broad selection of
popular branded content to audiences ranging from children, to families, to
business users. GO Network will contain content and customization, community,
search and directory, commerce, communication and connectivity intended to
create a complete online experience for its users. Infoseek launched a preview
version of GO Network in December 1998, with a full launch expected to follow
in January 1999.
In connection with GO Network, Infoseek is required to purchase $165 million in
promotional support and activities over five years from ABC, Inc., a wholly-
owned subsidiary of Disney. Such promotional activity is expected to include
print, outdoor, radio and television exposure nationally. In addition, Disney
has agreed to co-brand all ABCNEWS.com and ESPN.com owned non-traditional media
promotions with promotions for GO Network.
The Infoseek Business
Infoseek provides leading Internet search and navigation technology, products
and services that use the Web to connect its viewers' personal, work and
community lives. Infoseek is able to segment viewers by interest area,
providing advertisers with focused and targeted audiences. The Infoseek Service
is a comprehensive Internet gateway that combines search and navigation with
directories of relevant information sources and content sites, offers chat and
instant messaging for communicating shared interests and facilitates the
purchase of related goods and services.
The Infoseek branded search and navigation services integrate accurate search
results with relevant Internet and other resources to enhance the viewer's
interaction with information and content and create a more effective medium for
advertisers, sponsors and commerce partners. In order to further leverage its
core strength in technology and to diversify its revenue base, Infoseek
licenses its Ultraseek Server product to corporate customers for use on their
intranets and public websites.
The Infoseek Service and Product Offerings
Internet End-User Services and Products
The Infoseek Service is a free search and navigation service targeted to
viewers at home, in business and in schools. The Infoseek Service integrates
multiple methods of obtaining, organizing and
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sharing information on the Internet. Viewers are presented with four principal
means of obtaining information--search, channels, directory and service links--
from which they can launch specific queries, browse or access relevant content.
Search: The search function allows the viewer to launch query-based
searches of the Web, USENET News and other premium content databases,
including news and company collections. To perform a search, a viewer types
a query in the search box and is then presented a highly specific response
from a search of the entire database. A search can be effected using simple
keywords, phrases or full text. The search function utilizes sophisticated
techniques to allow viewers to obtain specific results for case sensitive,
numerical or singular letter aspects of certain queries, such as "49ers" or
"Vitamin C." Infoseek recently announced Extra Search Precision, a search
technology designed to improve the quality of search results by delivering
the most relevant results on the Internet. Infoseek also added an advanced
search feature to the Infoseek homepage that allows users to control the
specificity of their search.
Channels: Infoseek offers viewers 18 "channels" which are organized
topically much like sections of a newspaper. Current channels include
Automotive, Business, Careers, Communications, Computer, Education,
Entertainment, The Good Life, Health, Internet, Kids & Family, News,
Personal Finance, Real Estate, Shopping, Sports, Travel and Women's. Each
channel includes content teasers to full stories, reviews, databases and
other information on content providers' sites and other sites, best of the
Web links to interesting and relevant information, relevant directory
subtopics, news headlines, chat, transaction opportunities and classified
advertisements.
Directory: The Infoseek directory is a hierarchical listing of Web pages
that have been selected and abstracted by Infoseek and organized by
category, which can be accessed by Infoseek's home page or the relevant
channel. The directory enables a viewer to click on a directory entry, such
as Arts & Entertainment or Sports, and to look through a hierarchy of
relevant Internet sites for areas of interest. For example, under Sports
the viewer can proceed from "Baseball" to "Players," and finally, to "Ken
Griffey Jr." The directory assists the viewer by providing abstracts of
each directory entry. As of December 1, 1998, Infoseek had increased its
directory of websites to over 800,000 sites.
Service Links: Viewers can be directly linked to third party sites by
clicking on several different title bars listed at the side of the search
screen or icons presented on the Infoseek page. Pursuant to an arrangement
with United Parcel Services of America, Inc., viewers can access the UPS
tracking system by clicking on a link on the Infoseek home page. The
standard Internet advertising on Infoseek also contains direct links to the
advertisers' home page. Without direct hypertext links such as these a
viewer must either conduct a new search or know and enter a precise Uniform
Resource Locator, known as a "URL," to move to another site.
The Infoseek Service offers viewers access to content feeds from a variety of
well-known Internet sources, third party content sources and co-branded sites
between Infoseek and other providers of services and products such as UPS, to
provide viewers with high quality, up-to-date information whether a viewer is
navigating via search, channels or directory. For example, news that is
relevant to the viewer's query is made available as part of a search result. In
addition, the News channel
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offers viewers the latest business, world, political, technology and sports
news from a variety of data sources such as Reuters Holdings PLC, Business
Wire, Hoover's, Inc., PR Newswire and USENET news groups.
To enrich the viewer experience, the Infoseek Service allows the use of the
information gathered from a search to interact with viewers of similar
interests and purchase goods within the site through features such as chat,
instant messaging and transaction-based websites. For example, a consumer who
is interested in purchasing a Saturn automobile can conduct an online search,
compare notes with Saturn drivers in Infoseek's automobile chat room and even
purchase a Saturn through autobytel.com, a website for evaluating and making
car-buying decisions.
Corporate Intranet and Public Site Navigation Services and Products
In March 1997, Infoseek introduced Ultraseek Server, its first software product
targeted at the corporate market. Designed as an easy-to-install, simple-to-
manage spider and search engine, the product leverages the core technology
developed for the Infoseek Service. Key advantages of the Infoseek Service in
areas such as natural language support, relevance ranking algorithms, and
automated spider revisiting are augmented with an intuitive interface, support
for alternate document formats such as Microsoft Office or Adobe PDF, and
robust error recovery. The result is a solution for corporate webmasters that
enables the creation of a search capability on one site or across an intranet
with thousands of hosts, that is quick to implement, and manageable with
limited resources.
Infoseek views the Ultraseek Server product as a horizontal application, with a
strong fit across many industries. In 1997, Infoseek licensed this software to
customers in the following industries, among others:
. Publishing:
. International Data Group, Inc.
. National Geographic Society
. High technology:
. Sun Microsystems, Inc.
. 3Com Corporation
. Hewlett-Packard Company
. Lexmark International Group, Inc.
. Manufacturing
. Ford Motor Company
. The Boeing Company
. Merck & Co., Inc.
. Rohm & Haas Company
. Communications:
. BellSouth Corporation
. Ericsson LM Tel. Co. Ad.
. Worldcom Inc.
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. Government:
. NASA
. U.S. Department of Education
. Lawrence Livermore National Laboratory
. Finance:
. Morgan Stanley Dean Witter
. John Hancock Mutual Life Insurance Company
. Swiss Bank Corporation
. New York Stock Exchange
. Consumer goods:
. Sony Corporation
. NIKE, Inc.
. Sears, Roebuck and Co.
. Education:
. Stanford University
. Harvard University
. Pennsylvania State University
. Georgia Institute of Technology
. University of Sydney
. McGill University
Infoseek also announced that it had been selected as the intranet and public
site search application by CERN, the European Particle Physics Lab and creator
of the World Wide Web.
Advertising Services and Products
Infoseek derives a substantial majority of its revenues from the sale of
advertisements. Infoseek is focused on providing its advertisers with high
volume and targeted access to interested audiences and potential buyers. These
advertisements appear on the Infoseek Service Web page when a viewer enters the
service, receives search results, browses through the directory or accesses a
channel. Advertising revenues represented 89%, 94%, 94% and 99% of Infoseek's
total revenues for the nine months ended September 30, 1998 and 1997 and the
years ended December 31, 1997 and 1996, respectively. Infoseek believes it has
been able to achieve its advertising revenues to date primarily through its
direct sales force and through the products it offers advertisers.
Advertising Products and Pricing
Infoseek derives its revenue from several advertising options that may be
purchased individually or in packages--run of site rotations, directory and
channel rotations, key word rotations, cross service sponsorship, channel
sponsorship and Ultramatch targeting. These options may contain hypertext links
to the advertiser's home page.
Rotations
Run of Site: Run of site rotations are advertisements that rotate on a
random basis throughout the Infoseek Service, appealing to advertisers
seeking to establish brand recognition across the
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broadest reach of Infoseek viewers. Search results advertisements are
typically sold in blocks of one thousand impressions to be generated over a
four week period. Infoseek's current cost per one thousand impressions,
known as "CPM" for run of site rotations ranges from $18 to $29 depending
upon the number of impressions purchased.
Directory and Channel: Directory and channel rotations are advertisements
that appear when an Infoseek viewer browses through directory and channel
topic pages. Directory and channel rotations allow advertisers to target an
audience with a specific area of interest. Like run of site rotations,
directory and channel rotations are sold in blocks of impressions over a
four week period. Because of the greater selectivity of the audience,
Infoseek's current CPM for directory and channel rotations ranges from $30
to $60.
Keyword: Keyword rotations are advertisements that are displayed when an
Infoseek viewer's search contains a particular keyword selected by the
advertiser. This option offers the advertiser a highly targeted, self-
selected audience. Through its proprietary advertising management system,
Infoseek tracks every word that is queried by Infoseek viewers, from which
Infoseek has identified keywords that are most frequently queried by
Infoseek viewers and requested by advertisers. Infoseek's current four week
rate card CPM for a keyword is $55 to $60.
Channel and Cross-Service Sponsors and Partners
The channel version of the Infoseek Service, which was introduced in October
1997, now features 18 "channels" that allow a viewer to browse in an
environment that brings together the best topical information, service,
products and communities on the Web. In addition, this version of the Infoseek
Service dynamically wraps relevant content around answers to a viewer's
queries.
Sponsors and partners with whom Infoseek has executed agreements include the
following:
CHANNEL SPONSORS AND PARTNERS
Automotive autobytel.com, Insweb
Careers CareerPath
Communications AT&T
Computers CMP Media, Inc.
Entertainment N2K, DVD Express
Health Women.com, Onhealth, Vitamin Shoppe
Internet CMP Media, Inc.
Personal Finance Microsoft Investor, Datek Online
Travel Microsoft Expedia
Real Estate NetSelect, Apartments.com, HomeShark
Women's iVillage
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CROSS-SERVICE
UPS
Borders Online
Microsoft Sidewalk
Infoseek's enhanced channel version of the Infoseek Service provides a better
viewer experience and better segmentation of the target audience for
advertisers and sponsors. In addition, Infoseek has been able to supplement its
banner advertising business with media-based revenues for sponsorships in its
channels and sub-channels. A cross-service sponsor's content or service appears
on the Infoseek Service home page or on multiple channels across the Infoseek
Service.
Ultramatch Targeting
Infoseek currently sells Ultramatch, an advertising management product based
upon technology which is designed to create a viewer profile based on real,
observed viewer behavior to allow precise, targeted advertising. Infoseek and
its advertisers have found that this technology significantly increases viewer
click-throughs. This innovative advertising approach, which allows advertisers
to target advertisements to specific viewer types based on analysis of
searching behavior, serves to significantly differentiate Infoseek's services.
Infoseek's current CPM for this targeting is $75, and the net cost for an
Ultramatch behavioral report is $1,100.
Advertisers
During 1997, over 500 advertisers placed advertisements on Infoseek's service.
For the year ended December 31, 1997, one customer, Bell Atlantic Electronic
Commerce Services, Inc., which has a representative on Infoseek's board of
directors and during 1997 owned a substantial amount of Infoseek's common
stock, accounted for 8.2% of revenues. No one advertiser accounted for 10% or
more of Infoseek's revenues for the year ended December 31, 1997. To date, most
of Infoseek's contracts with advertisers have terms of three months or less.
Sales Force
As of September 30, 1998, Infoseek's advertising sales staff consisted of 54
representatives located in Atlanta, Chicago, Los Angeles, New York, San
Francisco and Sunnyvale. Infoseek believes that having an internal direct sales
force allows it to better understand and meet advertisers' needs, increase its
access to potential advertisers and maintain strong relationships with its
existing base of advertising clients.
International Operations
Infoseek offers its service internationally through partnerships with local
providers of directory and editorial content in Brazil, Denmark, Holland,
France, Germany, Italy, Japan, Mexico, Sweden and the United Kingdom, and has
been translated into Spanish. In addition, Infoseek's U.S. sales force sells
advertisements on Infoseek's foreign sites to U.S. advertisers who want to
reach a global audience. During 1995, 1996 and 1997 and through September 1998,
less than 10% of Infoseek's traffic was derived from international sources and
less than 10% of Infoseek's revenues were derived
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from advertising to international viewers. See "Risk Factors--Risks Related to
Infoseek--If Infoseek Is Not Successful in Expanding Internationally, Its
Business May Suffer."
THE STARWAVE BUSINESS
Overview
Starwave is a producer of Internet-based online services in specific content
areas with broad consumer appeal. Starwave is recognized for its prominent role
in sports, news and entertainment services. These services are offered through
the Joint Ventures.
The ESPN Joint Venture's flagship service is ESPN.com, which provides unique
sports-related content. The ESPN Joint Venture's other sports services include
NBA.com, NFL.com, NASCAR Online and Outside Online. The ABCNews Joint Venture's
flagship service is ABCNEWS.com, which provides a broad variety of news and
information, including world, national, entertainment, health, technology and
business news and information. The ABCNews Joint Venture's other wholly owned
services include Mr. Showbiz, which provides entertainment news, Wall of Sound,
which provides music news, CelebSite, which provides celebrity information, and
MoneyScope, which provides business news and information. The Joint Ventures
derive content from their staffs, partners, licensees, news services and
freelance writers and commentators. The Joint Ventures add additional value by
converting this content into interactive programming. To facilitate traffic to
its online services, each service has its own Internet address, or URL,
allowing direct Internet access by any viewer.
Starwave seeks to:
. provide comprehensive, entertaining programming that is constantly
updated,
. leverage its association with high-profile brands, including ESPN, ABC,
the NBA, the NFL and NASCAR,
. utilize and develop leading-edge technology that offers consumers
advanced and entertaining services,
. provide an attractive platform for mainstream, consumer-oriented
advertisers, and
. capitalize on emerging revenue opportunities.
ESPN and ABCNews Joint Ventures
The ESPN Joint Venture's sports services and the ABCNews Joint Venture's news
services are cross-linked, enabling users to move easily from one service to
another. The distinct URLs for ESPN.com, NBA.com, NFL.com, NASCAR Online and
Outside Online enable the ESPN Joint Venture to capture audiences having
specific interests in particular sports categories, while the distinct URLs for
ABCNEWS.com, Mr. Showbiz, Wall of Sound, CelebSite and MoneyScope enable the
ABCNews Joint Venture to capture audiences having specific interests in
particular news, entertainment and business categories. These URLs are
displayed in ESPN and ABC broadcasts in order to promote ESPN.com and
ABCNEWS.com, respectively.
The Joint Ventures have terms of ten years from November 18, 1998 and are
mutually exclusive with regard to U.S. and Canadian based online sports and
general news services, respectively. Required
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funding under the Joint Ventures is split 60/40 between the Starwave and Disney
entities in loss years and 50/50 in years in which the respective Joint
Ventures achieve net income. Under the Joint Ventures:
. Starwave provides a variety of services, including hosting, technology
development, usage tracking, infrastructure, production support, software
tools and engines.
. ESPN provides access to ESPN television and radio creative and editorial
content, advertising and promotion on ESPN cable television and radio
networks and access to the "ESPN" brand, properties and personalities.
. Disney provides access to ABC News creative and editorial content,
advertising and promotion on ABC News programs, and access to the "ABC
News" brand, properties and personalities.
Revenue Sources
Starwave and the Joint Ventures have historically derived their revenue
principally from advertising and subscription fees. Starwave believes that its
success in obtaining advertising revenue is primarily the result of high
consumer traffic, favorable demographics and innovative marketing approaches.
As of the date hereof, Starwave has introduced subscription services only on
ESPN.com, including a premium subscription, which provides enhanced coverage,
special editorial features, in-depth statistics and graphical analysis and
access to additional multimedia content, as well as a one-time subscription,
which provides access to fantasy games such as Fantasy Baseball and Fantasy
Football.
Starwave is also developing other revenue sources such as program bundling.
Services with branded content are able to bundle portions of their content with
third-party services, including online services, browsers, software vendors and
Internet service providers, in order to differentiate these products and
services from their competition. Starwave believes that bundling branded
services provides further distribution opportunities and generates additional
revenue through license fees, royalties and bounty payments. Starwave also
generates merchandising revenue through online sales and transactions in the
Zone Store within ESPN.com and the NBA Store within NBA.com. Finally, Starwave
provides hosting services and licenses some of its proprietary software to
Disney.
TECHNOLOGY
Core Search Engine Technology
Infoseek's current search engine technology is based on Ultraseek, an enhanced
search technology that provides users enhanced levels of accuracy, currency,
comprehensiveness and speed. Ultraseek includes built-in intelligence with
features such as phrase, capitalization and proper name recognition. Infoseek's
highly-rated search engine seeks to deliver accurate results, which are
characterized by the level of precision and the level of recall. In addition,
due to the dynamic nature of the Internet, the retrieval of up-to-date
information has become another key factor for the evaluation of Internet search
services. To bring current information to the viewer, Infoseek has developed
technology to regularly update its entire database of Web pages. This enables
the Infoseek service to deliver accurate, relevant and up-to-date search
results. To facilitate the ease of use of the service, Infoseek
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Service includes a sophisticated technology to interpret "natural language"
queries. Infoseek has also provided a proprietary Web spider which works to
enhance the performance of the search engine. A Web spider is software that
identifies and catalogs pages on the Web. This catalog, when indexed with text
retrieval software such as Infoseek's search engine, can be quickly accessed by
keyword or phrase. Together, the search engine technology and the Web spider
technology are used to index Web pages, the directory and other sources of
content. Infoseek is continually developing its core search engine technology,
including the Extra Search Precision technology described above.
Advertising Management
Infoseek has developed certain proprietary systems for the placement of
advertisements with targeted audiences on appropriate Infoseek service Web
pages. Infoseek's advertising management systems are capable of presenting in
real-time advertising that corresponds to a viewer's inquiry. If certain key
words have been purchased by more than one advertiser, the system automatically
determines which advertisement is displayed based upon the number of
impressions under contract and delivered to date. As part of Infoseek's
proprietary advertising management system, Infoseek also maintains a database
that tracks the number of searches of each word queried by Infoseek viewers,
the number of browses through each directory category and the number of
impressions of each advertisement. This system assists Infoseek in estimating
the number of expected impressions of specific advertisement options marketed
by Infoseek or otherwise sought by advertisers. Infoseek believes that it will
be necessary to significantly improve its internally developed advertising
management system or to implement a different advertising management system to
address increasing advertising volume. Infoseek is in the process of evaluating
Starwave's advertising management systems. To the extent that Infoseek
encounters material difficulties in utilizing Starwave's system, Infoseek will
need to devote sufficient resources to enhance its current system. Any extended
failure of, or material difficulties encountered in connection with, Infoseek's
advertising management system may expose Infoseek to "make good" obligations
with its advertising customers. These "make good" obligations, which, by
displacing advertising revenue among other consequences, would reduce revenue
and would have a material adverse effect on Infoseek's business, results of
operations, financial condition and prospects.
Starwave Technology
To date, Starwave has internally developed technologies that facilitate
authoring capabilities for text, audio, graphics and video that enhance the
speed and interactivity of its services, as well as technology designed to
enable consumers to make secure purchases using credit cards over the Internet.
MARKETING AND DISTRIBUTION
Marketing
Infoseek builds brand awareness through an integrated plan utilizing online and
traditional media, public relations and promotions. Infoseek's marketing plans
are currently being revised to reflect the upcoming launch of GO Network.
Infoseek also cross-promotes with content providers through advertising swaps
both in online media and traditional print and broadcast media.
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Distribution
Infoseek seeks to form relationships that maximize audience reach and create
alternate distribution channels to Infoseek's services. Infoseek has
relationships with Netscape and Microsoft, each of which distributes browser
software to its customers which is used to navigate the Web. Infoseek also has
distribution relationships with various Internet service providers and content
providers such as AT&T, Earthlink, Southwestern Bell and CNET. The Infoseek
Service is listed by each of these companies as a navigational service
available to their viewers. The terms of these relationships vary widely, both
in the prominence given to the Infoseek Service relative to other alternatives
and the compensation paid by Infoseek for advertising.
Starwave Marketing and Distribution
Starwave seeks to to build brand awareness for the Joint Ventures' services
through a variety of marketing techniques, including:
. Reciprocal advertising arrangements with Web search engines.
. ABC and ESPN broadcasts.
. Advertisements in other traditional media and online media (such as
broadcast e-mail).
. Trade advertisements.
Starwave and the Joint Ventures have built brand awareness through their
relationships with partners with strong brands, including the NFL, the NBA,
NASCAR, TheStreet and Outside magazine.
COMPETITION
The market for Internet and intranet products and services is very competitive.
Infoseek expects the market to become more competitive. Because the market for
search and portal services is new and developing, Infoseek cannot predict how
competition will affect Infoseek, its competitors or its customers. Infoseek
believes that the Internet market increasingly will require portal services to
deliver a large variety of multimedia content and services. Infoseek may not be
able to compete successfully. If Infoseek fails to respond to competitive
pressures, including those listed below, Infoseek's business, results of
operations, financial condition and prospects will be seriously harmed.
Infoseek believes that its future success partly depends on its ability to
deliver a broad variety of multimedia content and services. To attract
advertisers, Infoseek believes it must offer:
. A large number of viewers
. Viewers with attractive demographic profiles and
. Cost-effectiveness
Infoseek believes that the number of companies selling advertising on the Web
and the amount of advertising space on the Internet have greatly increased
recently. Infoseek may therefore face a market which demands lower prices for
the purchase of advertisements and this could result in a decline in Infoseek's
revenues.
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Infoseek believes it faces competition in numerous areas, including:
<TABLE>
<S> <C> <C> <C>
BUSINESS AREA KEY FEATURES KEY COMPETITORS KEY COMPETITIVE
FORCES
CONSOLIDATED Combined services Yahoo, America Control content
INTERNET including: On-Line, Excite, Provide
PRODUCTS . Search and directory Microsoft, additional
(GO Network) . Email listings Netscape, Lycos, features
. News information CNet Reduce viewer
. Internet commerce access to
. Chat and bulletin competing
boards services
SEARCH AND Ability to search DEC/AltaVista, Enhance search
NAVIGATION the web and find Excite, Inktomi, features
SERVICES information Lycos Use technology to
(Infoseek "push" a
Search) particular
service to users
Develop
"intelligent"
searching
SEARCH SOFTWARE Software to allow DEC/AltaVista, Enhance search
(Ultraseek Intranet and Lycos, OpenText, features
Server) Internet websites Verity Increase
to have search compatibility and
features ease of use
Develop
"intelligent"
searching
INTERNET MEDIA Creative and Deliver timely
(ABCNEWS.com, original content, and informative
ESPN.com) including: information and
multimedia
. Current events CNN, The New York content
Times, Washington Provide easy
Post, CBS News, access to
NBC information
. Sports Fox Sports,
CNNsi, CBS
Sportsline,
Yahoo! Sports
. Business and Microsoft
stocks Investor, Quicken
Financial
Network, Reuters,
Dow Jones, Yahoo
Finance
. Entertainment E! Online
Entertainment
Weekly/Pathfinder
INTERNET AND Traditional media Provide
OTHER sources, such as: interesting and
ADVERTISING popular
MEDIA . Broadcast ABC, NBC, CBS, interactive or
(GO Network, Television Fox traditional
ABCNEWS.com, programming
ESPN.com) . Cable Television ESPN, CNN Attract
advertisers
. Print Media The New York through viewers
(newspapers and Times, Washington
magazines) Post, USA Today,
Sports
Illustrated
ELECTRONIC Retail items for Yahoo, Establish
COMMERCE sale over the AOL/Netcenter, infrastructure to
(under Internet MSN, Lycos, stock and
development) Amazon.com, eBay deliver items
(GO Shopping) quickly
Develop brand
name in commerce
</TABLE>
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In order for Infoseek to compete successfully, Infoseek must overcome many
risks, including:
. Low Barriers to Entry to the Internet. Infoseek believes that it is
relatively inexpensive to develop new internet technologies, products and
services. It is likely that other companies may offer similar products
and services that compete with Infoseek for advertisers.
. Quickly Changing Market. Because the Internet market is new and changing
quickly, Infoseek cannot predict which companies are likely to offer
competitive services in the future.
. Reliance on Advertising Revenues. Infoseek depends on advertising sales
for revenue. Because the Internet is still a new advertising medium,
there is a risk that the number of advertisers purchasing advertisements
on the Internet could decrease. Such a decrease could result in lower
advertising revenues for Infoseek.
. Industry Consolidation. Some of Infoseek's competitors have engaged in
business combinations or other strategic relationships with one other.
These combinations often increase a competitor's power or make it more
difficult for users to find and use Infoseek's products and services.
If Infoseek does not compete effectively, it will suffer immediate harm to its
services, results of operations and prospects.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Infoseek's success depends heavily upon its exclusive technology, brand names
and Internet locations, known as "domain names." To protect its rights to its
software, systems, documentation and product features, Infoseek currently
relies on a combination of:
. Patent, copyright and trademark and service mark laws,
. Trade secret laws,
. Confidentiality procedures, and
. Contractual provisions.
These methods of protection may not be adequate to protect against others using
Infoseek's technology, brand names and content. Accordingly, Infoseek may not
be able to maintain the goodwill associated with its products and services or
competitive features.
Infoseek and its subsidiaries hold three U.S. patents and currently have 15
U.S. patent applications pending and six foreign patent applications pending.
Infoseek has registered and applied for registration for certain service marks
and trademarks and will continue to evaluate the registration of additional
service marks and trademarks, as appropriate. Infoseek generally enters into
confidentiality agreements with its employees and with its consultants and
customers.
Despite these measures, Infoseek may not be able to protect its intellectual
property due to risks related to application of intellectual property laws. The
application of copyright and trademark laws to the Internet and other digital
media is very uncertain. There has been a substantial amount of litigation in
the technology industry regarding intellectual property rights. See "Risk
Factors--Risks Related to Infoseek--If Infoseek Is Unable to Protect Its
Intellectual Property, Its Business Could Suffer."
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Further, Infoseek may not be able to use its intellectual property or further
develop its business because third parties may accuse Infoseek of infringing
their Intellectual Property. See "Risk Factors--Risks Related to Infoseek--
Third Parties May Prevent Infoseek from Developing Its Intellectual Property."
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. Infoseek has also from time to time received informal
notices from copyright and trademark holders regarding use of music, images and
websites in their services.
Infoseek has also from time to time received informal notices from copyright
and trademark holders regarding use of music, images and websites in their
services. Infoseek is also aware of other companies and/or services that employ
"Go" as a part of their names. Infoseek cannot assure you that Infoseek's use
of GO Network will be free from challenge or liability and Infoseek cannot
assure you it will always be able to operate GO Network under such name.
Infoseek cannot assure you that it can adequately protect its intellectual
property. If Infoseek fails to protect its intellectual property, it could
suffer serious harm to its business, results of operations or prospects.
Infoseek also cannot assure you that third parties will not in the future claim
infringement by Infoseek with respect to Infoseek's current or future products.
Any such claims or counterclaims could:
. Be time-consuming
. Result in costly litigation
. Cause product release delays
. Require Infoseek to redesign its products
. Require Infoseek to enter into royalty or licensing agreements.
These claims of infringement, whether successful or not, could seriously harm
Infoseek's business, results of operations or prospects.
Employees
As of September 30, 1998, Infoseek had 319 full-time employees, including 84 in
research and development, 141 in sales and marketing, 22 in operations and 72
in finance and administration. Also as of September 30, 1998, Starwave had a
total of 336 employees (including those employees supporting the Joint
Ventures), of which 43 were involved in Starwave's technology division, 41
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were in Web operations and management information systems, 35 were in general
administration and development and 217 were involved in the Joint Ventures.
None of these employees is represented by a labor union. None of Infoseek,
Starwave and the Joint Ventures has experienced any work stoppages and each
considers its relations with its employees to be good. Infoseek's performance
is substantially dependent on the continued services of the management teams of
Infoseek, Starwave and the Joint Ventures and on their continuing ability to
attract and retain highly qualified and motivated officers and key employees
and to attract and retain sufficient numbers of technical and production
personnel.
Properties
Infoseek's principal administrative, sales, marketing and research and
development facility is located in Sunnyvale, California. Infoseek leases
approximately 150,000 square feet (a section of which is currently subleased to
another tenant) in Sunnyvale pursuant to several lease agreements which
generally extend through October 2002. Infoseek is also in negotiations
regarding additional space in Sunnyvale. Infoseek also leases approximately
61,000 square feet in Seattle, Washington for the headquarters and principal
operations of Starwave and 6,000 square feet in Bellevue, Washington for
additional Starwave operations. Infoseek also leases approximately 12,000
square feet in San Francisco, California and approximately 3,000 square feet in
New York, New York. Infoseek also maintains several other offices throughout
the country. The ABCNews Joint Venture and ESPN Joint Venture maintain space in
New York, New York and Bristol, Connecticut pursuant to arrangements with ABC
and ESPN.
Infoseek believes that its existing facilities are adequate for its current
needs and that additional space will be available as needed. There can be no
assurance, however, that additional space will be available on satisfactory
terms, if at all.
Litigation
Infoseek is not currently a party to any material litigation. From time to
time, Infoseek 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, Infoseek believes that the final outcome of such
matters will not seriously harm its business, results of operations, financial
condition or prospects.
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INFOSEEK RELATIONSHIP WITH DISNEY
The following is a summary of certain business transactions and relationships
between Infoseek and Disney.
IN GENERAL
Infoseek California, Infoseek, Starwave and Disney entered into the Starwave
merger agreement. Pursuant to the Starwave merger agreement, Infoseek acquired
Starwave, which had been approximately 91% owned by Disney, and established a
new holding company structure which involved a reincorporation into Delaware.
As a result, each of Starwave and Infoseek California became wholly-owned
subsidiaries of Infoseek. This transaction closed on November 18, 1998.
Accordingly, the business of Infoseek consists primarily of holding the capital
stock of Infoseek California and Starwave. Each of Infoseek California and
Starwave continues to operate their current businesses. In addition, Infoseek
and Disney have established a strategic relationship concerning the
development, launch and promotion of GO Network. See "Risk Factors--Risks of
Infoseek--GO Network May Not Succeed Without Disney's Cooperation."
In light of Disney's ownership interest in Starwave, Disney received 23.5
million shares of Infoseek common stock as a result of Infoseek's acquisition
of Starwave. In addition, Disney purchased an additional 2,642,000 unregistered
shares of Infoseek common stock and a warrant, subject to vesting, to purchase
an additional 15,720,000 unregistered shares of Infoseek common stock at
certain times, at certain prices and subject to certain conditions, in exchange
for approximately $70.0 million in cash and a $139.0 million five-year
promissory note.
As a result of the transactions described above, Disney and its affiliates hold
approximately 43% of Infoseek's outstanding common stock. In addition, Disney
and its affiliates have the right to acquire, through the warrant, which
becomes exercisable over time, an additional 15,720,000 shares of Infoseek
common stock. If Disney exercises the warrant, Disney and its affiliates will
hold on an aggregate basis together with the shares owned by Disney,
approximately 50.1% of the outstanding Infoseek common stock on a fully-diluted
basis assuming exercise of all outstanding options, warrants and other rights
to acquire Infoseek common stock. 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. In the event the
merger with Quando is consummated, Disney will have a right to purchase shares
of Infoseek common stock and a warrant to purchase shares of Infoseek common
stock sufficient to maintain its current ownership interest in Infoseek. See
"Risk Factors--Risks of Infoseek--Disney Owns A Substantial Amount of Infoseek
Stock and Is Able to Significantly Influence Infoseek's Affairs." Further, upon
closing of the transactions described above, the Infoseek Board of Directors
was expanded from five to eight members, with three Disney designees, Steven
Bornstein, Robert Iger and Jake Winebaum, appointed to the Board. See "Infoseek
Management."
RELATED AGREEMENTS
Infoseek and Disney also entered into a governance agreement with respect to a
number of matters. Under the governance agreement, for a period of three years
following consummation of the date of
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the agreement, subject to earlier termination under certain circumstances,
Disney agreed, among other things, to standstill provisions to not acquire over
49.9% of Infoseek's outstanding voting stock, to not solicit proxies or act
with another party for purposes of voting or acquiring shares of
Infoseek voting stock, and to not transfer its Infoseek shares except under
certain circumstances. The governance agreement also provides, among other
things, for supermajority Board approval with respect to certain matters and,
together with Infoseek's certificate of incorporation, during the standstill
period, restricts Disney's ability to proceed with a tender offer for or merger
with Infoseek in certain cases without the approval of members of the Infoseek
Board not designated by Disney. During and following the standstill period any
Disney tender offer for Infoseek is required to be conditioned upon a majority
of disinterested Infoseek shareholders tendering their shares.
Infoseek and Disney also entered into a number of licensing and commercial
agreements contemplating the development, launch and promotion of GO Network.
GO Network is based, in part, upon certain intellectual property owned by
Disney licensed to Infoseek pursuant to the terms of a royalty-bearing license
agreement. This license agreement may terminate if certain events occur, such
as if another party acquires 25% or more of Infoseek's stock, Infoseek fails to
spend a certain amount of money to promote GO Network, or Infoseek files for
bankruptcy. While owned and operated by Infoseek, GO Network also is subject to
an advisory committee which consists of one Infoseek representative and one
Disney representative for oversight of activities relating to the service. In
connection with GO Network, Disney's wholly-owned subsidiary, ABC, Inc., agreed
to provide, and Infoseek agreed to purchase, $165 million in promotional
support and activities over five years. As part of such promotion, Disney
agreed to co-brand all ABCNEWS.com and ESPN.com owned non-traditional media
promotion with promotions for GO Network. Disney has also agreed to integrate
Infoseek's search and directory technology into its own Internet-based
services. See "Risk Factors--Risks of Infoseek--Disney Owns A Substantial
Amount of Infoseek Stock and Is Able to Significantly Influence Infoseek's
Affairs."
Disney also agreed to amend certain aspects of the Joint Ventures. Starwave
also agreed to act pursuant to representation agreements as the representative
of the ABCNews Joint Venture and ESPN Joint Venture for the sale of advertising
services. See "Risk Factors--Risks of Infoseek--Infoseek's Future Success
Depends on The Continuation and Integration of Joint Venture Relationships and
on Entering Into New Third Party Relationships" and "--If Infoseek Does Not
Achieve Revenue Minimums Under Representation Agreements, It May Incur Losses
Under These Agreements."
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INFOSEEK MANAGEMENT
The following table sets forth certain information concerning Infoseek's
current executive officers and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<C> <C> <S>
Harry M. Motro............... 38 President, Chief Executive Officer and
Director
Leslie E. Wright............. 45 Senior Vice President, Chief Operating
Officer and Chief Financial Officer
Barak Berkowitz.............. 45 Senior Vice President and General Manager,
GO Network
Bhagwan D. ("B.D.") Goel..... 35 Senior Vice President and General Manager,
Commerce
Beth A. Haggerty............. 39 Senior Vice President, Worldwide Sales and
Strategic Partnerships
Patrick Naughton............. 33 Senior Vice President and Chief Technical
Officer
Andrew E. Newton............. 55 Vice President, General Counsel and
Secretary
Steven T. Kirsch............. 42 Chairman of the Board of Directors
Steven Bornstein*............ 46 Director
Robert Iger*................. 47 Director
L. William Krause(1)......... 56 Director
Matthew J. Stover(2)......... 43 Director
Jake Winebaum*............... 38 Director
John E. Zeisler(1)(2)........ 46 Director
</TABLE>
- --------
* Messrs. Bornstein, Iger and Winebaum were appointed to the Infoseek Board
of Directors pursuant to the terms of a governance agreement entered into
between Infoseek and Disney in connection with Infoseek's acquisition of
Starwave and related transactions. See "Infoseek Relationship with Disney."
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Harry M. Motro joined Infoseek in April 1997 as its President and was appointed
Chief Executive Officer and a director of Infoseek in May 1997. From 1995 to
April 1997, Mr. Motro served as Senior Vice President of Cable News Network
Inc. in charge of CNN Interactive and News Business Development. From 1988 to
1995, Mr. Motro served in several executive positions with Turner Broadcasting
Inc. and CNN, including Director, Special Projects and External Reporting,
Assistant Vice President, Finance, and Vice President, Business Development and
Strategic Planning. From 1982 to 1988, Mr. Motro served as Manager, Audit
Services, with Coopers & Lybrand LLP. Mr. Motro holds a B.S. degree in Business
from the University of Virginia.
Leslie E. Wright joined Infoseek in August 1997 as Vice President, Finance and
Chief Financial Officer and was appointed Senior Vice President and Chief
Operating Officer in August 1998. In November 1998, Mr. Wright resumed the role
of Chief Financial Officer in addition to his role as Senior Vice President and
Chief Operating Officer. From 1994 to July 1997, Mr. Wright worked with Fractal
Design Corporation, a graphics software company, where from May 1995 to July
1997 he served as Chief Operating Officer. From 1984 to 1994, Mr. Wright worked
with The ASK Group, Inc., a software company, where from 1986 through 1994, he
served as Executive Vice President and Chief Financial Officer. Mr. Wright
holds a B.S. degree in Business from San Jose State University and is a
Certified Public Accountant in the State of California.
Barak Berkowitz joined Infoseek in October 1997 as Vice President, Marketing
and became Senior Vice President and General Manager, GO Network in November
1998. In August 1990,
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Mr. Berkowitz founded MarketCentrix, a marketing consulting firm servicing
technology-based companies. Mr. Berkowitz acted as President of MarketCentrix
from August 1990 to July 1994, and again from October 1996 until October 1997.
From July 1994 to October 1996, Mr. Berkowitz was Vice President and General
Manager for the American region of Logitech, Inc., a computer peripherals
company. Mr. Berkowitz studied Psychology and Biology at the City College of
New York.
Bhagwan D. ("B.D.") Goel joined Infoseek in September 1998 as Senior Vice
President and General Manager, Commerce. From 1996 to 1998, Mr. Goel served as
Vice President Products and Services of Internet Shopping Network, an internet
business infrastructure company and wholly-owned subsidiary of USA Networks,
Inc. From 1994 to 1996, Mr. Goel served as Vice President, Products Development
for Worldwide Systems Corporation, a publisher of online travel information and
a joint venture between Ameritech and Random House. From 1989 to 1994, Mr. Goel
was Director of Product Development for KnowledgeSet Corporation (now Banta
Intergrated Media), a developer of alternative electronic media applications.
Mr. Goel holds a Bachelor of Technology in Electrical Engineering from the
Indian Institute of Technology in New Delhi, India, and an M.S. degree in
Electrical Engineering from the University of Toledo and is a candidate for a
Ph.D. in Computer Science from Michigan State University.
Beth A. Haggerty joined Infoseek in August 1997 as Vice President, Worldwide
Advertising Sales. From 1995 to April 1997, Ms. Haggerty served as Publishing
Director of NetGuide Magazine, a CMP Media publication ("CMP"), and most
recently as Publishing Director of CMPnet, the Internet Media Group of CMP. In
August 1996, Ms. Haggerty also managed the launch of CMP's online product,
NetGuide Live. From 1994 to 1995, Ms. Haggerty was a partner and co-founder of
Interactive Enterprises, a Ziff Davis venture, and a Publisher of
Inter@ctiveWeek magazine. From 1986 to 1994, Ms. Haggerty served in various
capacities with CMP, including senior-level sales and marketing management
positions for Information Week magazine, National Sales Manager for Network
Computing magazine and Publisher of CommunicationsWeek magazine. Ms. Haggerty
holds a B.S. degree in Political Science from Rutgers University.
Patrick J. Naughton joined Infoseek in November 1998 as Senior Vice President
and Chief Technical Officer. Prior to joining Infoseek, Mr. Naughton was
President and Chief Technology Officer of Starwave, which position he had held
since April 1997. From July 1996 to April 1997, Mr. Naughton served as
Starwave's Senior Vice President, Technology. From October 1994 to July 1996,
Mr. Naughton served as Starwave's Vice President, Technology. From January 1993
to October 1994, Mr. Naughton served as Chief Technologist of First Person,
Inc., a Sun Microsystems subsidiary formed to commercialize Java technologies.
Beginning in June 1988, Mr. Naughton was employed by Sun Microsystems, where he
started a research project in December 1990 in the Sun Microsystems
Laboratories which conceived the Java programming language. Mr. Naughton holds
a B.S. degree in Computer Science from Clarkson University.
Andrew E. Newton, a founder of Infoseek, has served as Vice President and
General Counsel since January 1994 and Secretary since March 1994. From
February 1989 to November 1993, Mr. Newton was Vice President and General
Counsel of Frame Technology Corporation, a software engineering company. Mr.
Newton holds an A.B. degree in English from Dartmouth College and a J.D. degree
from Columbia University School of Law.
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Steven Bornstein became a director of Infoseek in November 1998. Mr. Bornstein
has been President and Chief Executive Officer of ESPN since September 1990 and
is also a director of ESPN.
Robert Iger became a director of Infoseek in November 1998. Mr. Iger is
President of ABC, Inc., a subsidiary of The Walt Disney Company, which position
he has held since February 1996. Prior thereto, Mr. Iger served as President
and Chief Operating Officer of Capital Cities/ABC, Inc. from September 1994 to
February 1996 and as President of the ABC Television Network from January 1993
to August 1994. Mr. Iger holds a B.S. in Communications from Ithaca College.
Steven T. Kirsch, a founder of Infoseek, has been a director of Infoseek since
August 1993 and Chairman of the Board of Directors since December 1995. From
September 1993 to November 1995, Mr. Kirsch also served as President and Chief
Executive Officer of Infoseek. From January 1990 to December 1993, Mr. Kirsch
served as Vice President, New Product Development of Frame Technology
Corporation, a software engineering company which he co-founded. Mr. Kirsch
holds a B.S. degree and an M.S. degree in Electrical Engineering and Computer
Science from the Massachusetts Institute of Technology.
L. William Krause has served as a director of Infoseek since July 1997. Since
October 1991, Mr. Krause has served as President, Chief Executive Officer and
as a director of Storm Technology, Inc., a provider of computer peripherals and
software for digital imaging. Prior to that, Mr. Krause spent ten years at 3Com
Corporation, a manufacturer of global data networking systems, where he served
as President and Chief Executive Officer until he retired in September 1990.
Mr. Krause continued as Chairman of the Board for 3Com Corporation until 1993.
Previously, Mr. Krause served in various marketing and general management
executive positions at Hewlett-Packard Company. Mr. Krause currently serves as
a director of Sybase, Inc. and Aureal Semiconductor, Inc.
Matthew J. Stover has served as a director of Infoseek since March 1996. Since
December 1997, Mr. Stover has served as President and Chairman of the Board of
Bell Atlantic Information Services Group, an international marketing
information services provider. Mr. Stover is also the Chairman of the Board of
Global Directory Services Company. Since January 1994, Mr. Stover has served as
President and Chief Executive Officer of Bell Atlantic Yellow Pages Company,
formerly known as NYNEX Information Resources Company. Since January 1998, Mr.
Stover has served as Chairman of the Board of Bell Atlantic Yellow Pages. Prior
to that, Mr. Stover served as President and Chief Executive Officer of AGS
Computers, Inc. from December 1992 to December 1993, Vice President, Public
Affairs and Corporate Communications of NYNEX Corporation from May 1990 to
December 1992 and Vice President, Communications for American Express Company
from 1987 to 1990. Mr. Stover holds a B.A. degree in English Language and
Literature from Yale University and a certificate from the Executive Program of
the University of Virginia, Colgate Darden Graduate School of Business
Administration.
Jake Winebaum became a director of Infoseek in November 1998. Mr. Winebaum is
Chairman of the Buena Vista Internet Group, a subsidiary of The Walt Disney
Company, which position he has held since April 1998. Prior thereto, Mr.
Winebaum was President of the Buena Vista Internet Group from March 1997 to
March 1998; President of Disney Online from July 1995 to March 1998; President
of Disney Magazine Publishing from April 1994 to June 1995; President of Family
PC from February
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1994 to June 1995; and President of Family Fun from February 1992 to June 1995.
Mr. Winebaum is also a member of the advisory committee which oversees GO
Network.
John E. Zeisler has served as a director of Infoseek since May 1995. Since
October 1996, Mr. Zeisler has served as a General Partner of InterWest
Partners, a venture capital firm. From August 1995 to September 1996, he served
as Senior Vice President, Marketing of NETCOM, an internet company. From 1992
to 1995, he served as President and Chief Executive Officer of Pensoft
Corporation, a software company. From 1987 to 1992, Mr. Zeisler was a co-
founder and Vice President, Marketing of Claris Corporation, a software
company. Mr. Zeisler holds a B.S. degree in Communications from Boston
University.
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EXECUTIVE COMPENSATION
The following summary compensation table sets forth certain information
concerning compensation paid by Infoseek for the fiscal years ended December
31, 1998, 1997 and 1996, unless otherwise noted below, to the individuals who
served as Infoseek's Chief Executive Officer during the last fiscal year and
the four other most highly compensated executive officers of Infoseek who were
serving as such at the end of the fiscal year ended December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES
FISCAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(L) OPTIONS COMPENSATION
- --------------------------- ------- -------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Harry M. Motro .......... 1998 $250,962 $ 51,197 125,000 --
President and Chief
Executive Officer 1997 $169,551 $ 69,230 1,000,000 $150,000(2)
1996 -- -- -- --
Leslie E. Wright......... 1998 $175,673 $ 38,397 140,000 --
Senior Vice President, 1997 $ 60,289 $ 20,000 137,500 --
Chief Operating Officer
and Chief Financial
Officer 1996 -- -- -- --
Patrick J. Naughton(3)... 1998 $253,631 -- 92,782 --
Senior Vice President
and Chief 1997(4) $205,006 -- 264,957(5) --
Technical Officer 1996 $163,164 -- 270,256(5)
Beth A. Haggerty......... 1998 $175,673 $116,880 85,000 --
Senior Vice President,
Worldwide Sales 1997 $ 72,355 $ 50,480 165,000 $ 50,000(6)
and Strategic 1996 -- -- -- --
Partnership
Barak Berkowitz.......... 1998 $180,692 $ 28,158 91,250 --
Senior Vice President
and General Manager, 1997 $ 39,993 $ 11,700 165,000 --
GO Network 1996 -- -- -- --
</TABLE>
- --------
(1) Represents bonus payments earned during 1998.
(2) Represents a one-time relocation payment to Mr. Motro.
(3) Mr. Naughton was President and Chief Technical Officer of Starwave prior to
Infoseek's acquisition of Starwave on November 18, 1998. Upon such
acquisition, Mr. Naughton became Senior Vice President and Chief Technical
Officer of Infoseek.
(4) Starwave's fiscal year 1997 ended September 28, 1997.
(5) Options were granted pursuant to Starwave's stock option plans, which were
assumed by Infoseek on November 18, 1998. Number reflects conversion from
options for shares of Starwave common stock to options for shares of
Infoseek common stock.
(6) Represents a one-time relocation payment to Ms. Haggerty.
122
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning stock option grants made
during 1998 to Infoseek's Chief Executive Officer and the four other most
highly compensated executive officers who were serving as such at the end of
the fiscal year ended December 31, 1998. No stock appreciation rights were
granted to these individuals during such year.
INDIVIDUAL GRANTS(1)
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL POTENTIAL REALIZABLE VALUE AT
SECURITIES OPTIONS ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED TO STOCK PRICE APPRECIATION
OPTIONS EMPLOYEES IN EXERCISE FOR OPTION TERM(4)
GRANTED FISCAL PRICE EXPIRATION -----------------------------
NAME (#)(1) YEAR(2) ($/SH)(3) DATE 5% ($) 10%($)
---- ---------- ------------ --------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Harry M. Motro.......... 125,000 2.96 $ 19.8125 03/13/08 $ 1,557,497 $ 3,947,003
Leslie E. Wright........ 90,000 2.13 $ 19.8125 03/13/08 $ 1,121,398 $ 2,841,842
50,000 1.18 $ 18.5000 10/08/08 $ 581,728 $1,474,212
Patrick Naughton(5)..... 92,782 2.20 $ 32.2500 11/19/08 $ 1,881,791 $ 4,768,827
Beth A. Haggerty........ 35,000 0.82 $ 19.8125 03/13/08 $ 436,099 $ 1,105,161
50,000 1.18 $ 18.5000 10/08/08 $ 581,728 $1,474,212
Barak Berkowitz......... 41,250 0.98 $ 19.8125 03/13/08 $ 513,974 $1,302,511
50,000 1.18 $ 18.5000 10/08/08 $ 581,728 $1,474,212
</TABLE>
- --------
(1) These options were granted under the Infoseek's 1996 Stock Option/Stock
Issuance Plan. The grant dates are as follows: Mr. Motro: March 13, 1998;
Mr. Wright: March 13, 1998 and October 8, 1998; Mr. Naughton: November 19,
1998; Ms. Haggerty: March 13, 1998 and October 8, 1998; Mr. Berkowitz:
March 13, 1998 and October 8, 1998. Each option has a maximum term of ten
years measured from the grant date, subject to earlier termination upon the
optionee's cessation of service with Infoseek.
(2) Infoseek granted options to purchase 4,226,356 shares of common stock from
January 1, 1998 through December 29, 1998, the date of the filing of this
proxy statement/prospectus with the Securities and Exchange Commission.
Such number reflects Infoseek's acquisition of Starwave and its assumption
of option grants under the 1997 Nonqualified Stock Option Plan which were
assumed by Infoseek on November 18, 1998.
(3) The exercise price may be paid in cash or in shares of Infoseek's common
stock valued at fair market value on the exercise date. Infoseek may also
finance the option exercise by loaning the optionee sufficient funds to pay
the exercise price for the purchased shares, together with any federal and
state income tax liability incurred by the optionee in connection with such
exercise.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the commission. There is no assurance that the
actual stock price appreciation over the ten-year option term will be at
the assumed 5% and 10% levels or at any other defined level. Unless the
market price of the common stock appreciates over the option term, no value
will be realized from the option grants made to the executive officers.
(5) Mr. Naughton became an executive officer of Infoseek upon Infoseek's
acquisition of Starwave on November 18, 1998. Prior to such acquisition,
Mr. Naughton was President and Chief Technology Officer of Starwave.
123
<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth information concerning option exercises and
option holdings during 1998 with respect to Infoseek's Chief Executive Officer
and its four other most highly compensated executive officers who were serving
as such at the end of the fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF POTENTIAL REALIZABLE VALUE
SECURITIES UNDERLYING AT ASSUMED ANNUAL RATES OF
SHARES UNEXERCISED OPTIONS STOCK PRICE APPRECIATION
ACQUIRED AT FISCAL YEAR END (#) FOR OPTION TERM ($) (1)
UPON VALUE ------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Harry M. Motro.......... -- -- 416,665 708,335 $ 20,624,918 $ 33,211,020
Leslie E. Wright........ -- -- 45,833 231,667 $ 2,268,734 $ 9,459,392
Patrick Naughton(2)..... 36,434 $311,802 368,953 275,602 $ 19,037,664 $ 2,064,399
Beth A. Haggerty........ -- -- 55,000 195,000 $ 2,722,500 $ 8,459,062
Barak Berkowitz......... -- -- 48,125 208,125 $ 2,135,547 $ 8,417,188
</TABLE>
- --------
(1) The value of an "in-the-money" stock option represents the difference
between the aggregate estimated fair market value of the underlying
securities, based on the closing price of $54.50 per share of Infoseek's
common stock on the Nasdaq National Market on December 29, 1998, the date
of the filing of this proxy statement/prospectus with the Securities and
Exchange Commission, and the aggregate exercise price of the subject stock
option.
(2) Numbers reflect Infoseek's assumption of option grants by Starwave pursuant
to Infoseek's acquisition of Starwave and the resulting conversion of such
option grants from options to purchase shares of Starwave common stock to
options to purchase shares of Infoseek common stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of Infoseek's Board of Directors was formed in April
1996 and is currently comprised of Messrs. Krause, Zeisler and Winebaum. None
of these individuals was at any time during 1998, or at any other time, an
officer or employee of Infoseek. No member of the Compensation Committee of
Infoseek serves as a member of the Board of Directors or compensation committee
of any entity that has one or more executive officers serving as a member of
Infoseek's Board of Directors or Compensation Committee.
124
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
AND PRINCIPAL STOCKHOLDERS OF INFOSEEK
The following table sets forth certain information regarding beneficial
ownership of Infoseek common stock as of November 30, 1998 (except as otherwise
noted) by (i) each director of Infoseek, (ii) Infoseek's Chief Executive
Officer and each of the four other most highly compensated executive officers
of Infoseek during the fiscal year ended December 31, 1998, (iii) all directors
and executive officers of Infoseek as a group, and (iv) all those known by
Infoseek to be beneficial owners of more than five percent of outstanding
shares of Infoseek common stock. This table is based on information provided to
Infoseek or filed with the Securities and Exchange Commission by Infoseek's
directors, executive officers and principal stockholders. Unless otherwise
indicated in the footnotes below, and subject to community property laws where
applicable, each of the named persons has sole voting and investment power with
respect to the shares shown as beneficially owned.
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
OUTSTANDING OUTSTANDING
NUMBER OF SHARES COMMON STOCK INFOSEEK DELAWARE
BENEFICIALLY OWNED OWNED PRIOR TO COMMON STOCK
BENEFICIAL OWNER (1) MERGER OWNED AFTER MERGER
---------------- ------------------ -------------- ------------------
<S> <C> <C> <C>
Steven T. Kirsch(2)...... 5,888,855 9.67% 9.60%
Harry M. Motro(3)........ 438,500 * *
Matthew J. Stover(4)..... 164,384 * *
John E. Zeisler(5)....... 69,374 * *
L. William Krause(6)..... 15,000 * *
Leslie E. Wright(7)...... 48,697 * *
Beth A. Haggerty(8)...... 59,559 * *
Barak Berkowitz(9)....... 52,492 * *
Patrick J. Naughton(10).. 438,128 * *
Steven Bornstein(11)..... 0 0 0
Robert Iger(11).......... 0 0 0
Jake Winebaum(11)........ 0 0 0
The Walt Disney
Company(12)............. 26,103,965(13) 42.86% 42.57%
All directors and
executive officers as a
group (14 persons)(14).. 33,278,954 53.70% 54.27%
</TABLE>
- --------
* Represents less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, the aggregate number of shares of common stock subject to options
held by that person that are currently exercisable or exercisable within
60 days of November 30, 1998 are deemed outstanding. Shares issuable
pursuant to such options are deemed outstanding for computing the
percentage of the person holding such options but are not deemed
outstanding for computing the percentage of any other person. To
Infoseek's knowledge, except as set forth in the footnote to this table
and subject to applicable community property laws, each party named in the
table has sole voting and investment power with respect to the shares set
forth opposite such party's name. The address for each of Messrs. Kirsch,
Motro, Stover, Zeisler, Krause, Wright, Berkowitz and Ms. Haggerty is as
follows: c/o Infoseek Corporation, 1399 Moffett Park Drive, Sunnyvale,
California 94089. The address for Mr. Naugton is as follows: c/o Starwave
Corporation, 13810 S.E. Eastgate Way, Suite 400, Bellevue, Washington
98005. The address for each of Messrs. Bornstein, Iger and Winebaum is as
follows: c/o The Walt Disney Company, 500 South Buena Vista Street,
Burbank, California 91521.
(2) Represents 5,888,855 shares held in the name of trusts for the benefit of
Mr. Kirsch and his family members.
125
<PAGE>
(3) Includes 437,500 shares issuable pursuant to stock options that may be
exercised within 60 days after November 30, 1998.
(4) Includes 15,000 shares issuable pursuant to stock options held in the name
of Mr. Stover for the benefit of Bell Atlantic which may be exercised
within 60 days after November 30, 1998, of which 10,313 shares would be
subject to Infoseek's right of repurchase. Also includes 149,384 shares
held by Bell Atlantic Electronic Commerce Services, Inc., 35 Village Road,
Middletown, Massachusetts 01949. Mr. Stover disclaims beneficial ownership
of such shares.
(5) Includes 56,875 shares issuable pursuant to stock options that may be
exercised within 60 days after November 30, 1998, of which 14,063 shares
would be subject to Infoseek's right of repurchase.
(6) Includes 15,000 shares issuable pursuant to stock options that may be
exercised within 60 days after November 30, 1998, of which 13,125 shares
would be subject to Infoseek's right of repurchase.
(7) Includes 48,697 shares issuable pursuant to stock options that may be
exercised within 60 days after November 30, 1998.
(8) Represents 1,122 shares held in the name of Ms. Haggerty's spouse.
Includes 58,437 shares issuable pursuant to stock options that may be
exercised within 60 days after November 30, 1998.
(9) Includes 51,562 shares issuable pursuant to stock options that may be
exercised within 60 days after November 30, 1998.
(10) Includes 380,103 shares which are issuable pursuant to stock options which
may be exercised within 60 days of November 30, 1998.
(11) Based on his employment as an officer of Disney, such director may be
deemed the owner of the shares held by Disney as indicated in the chart
above. However, each such director disclaims beneficial ownership of
Disney's shares.
(12) Includes both The Walt Disney Company and its wholly owned subsidiary,
Disney Enterprises, Inc. For federal securities law purposes, The Walt
Disney Company is deemed to have investment and voting power over shares
of Infoseek common stock held by itself as well as by Disney Enterprises,
Inc. In connection with the Merger and other transactions, Disney will
have the right to purchase shares of Infoseek common stock sufficient to
maintain an approximately 43.0% ownership interest in Infoseek as well as
a warrant to purchase additional shares of Infoseek common stock.
(13) Does not include 15,720,000 shares that Disney may purchase pursuant to a
warrant Disney holds which is not exercisable within 60 days unless
certain contingencies principally outside Disney's control occur.
(14) Includes 1,063,174 shares issuable pursuant to stock options that may be
exercised within 60 days after November 30, 1998, including those options
identified in footnotes (2) through (11).
126
<PAGE>
CERTAIN TRANSACTIONS
Disney
Infoseek and Disney entered into a number of business transactions in
connection with Infoseek's acquisition of Starwave. For a full description of
such transactions as well as ongoing relationships and transactions, see
"Infoseek Relationship with Disney" and "Infoseek Management's Discussion and
Analysis of Financial Results and Results of Operations--Infoseek Overview--
Disney Transaction."
Starwave
In addition, Infoseek's subsidiary, Starwave, has entered into several
transactions with Disney, its former majority shareholder. Pursuant to the
Starwave stock purchase agreement, Starwave issued and sold to Disney
39,869,348 shares of Starwave common stock for consideration of $82 million.
Pursuant to the Starwave stock purchase agreement, Starwave has certain
indemnification obligations to Disney, which Disney agreed to relinquish in
connection with Infoseek's acquisition of Starwave and related transactions.
In connection with the transactions contemplated by the Starwave stock purchase
agreement, the Joint Ventures were formed. The operations of the ESPN Joint
Venture currently include ESPN.com, NBA.com, NFL.com, NASCAR Online and Outside
Online. The operations of the ABCNews Joint Venture currently include
ABCNEWS.com, Mr. Showbiz, Wall of Sound, CelebSite and MoneyScope. See
"Infoseek Relationship with Disney."
The agreements relating to the Joint Ventures, as amended in connection with
Infoseek's acquisition of Starwave, have terms of ten years following such
acquisition and are mutually exclusive with regard to U.S.-based online sports
and general news services, respectively. Required funding under the Joint
Ventures are split 60/40 between the Starwave and Disney entities that are
parties to the Joint Ventures in negative cash flow years and 50/50 in years
when the respective Joint Ventures achieve positive cash flow. Under the Joint
Ventures:
. Starwave provides a variety of services, including hosting, technology
development, usage tracking, infrastructure, production support,
software tools and engines.
. ESPN provides access to all ESPN television and radio creative and
editorial content, advertising and promotion on ESPN cable television
and radio networks and access to the "ESPN" brand, properties and
personalities.
. Disney provides access to all ABC News creative and editorial content,
advertising and promotion on ABC News programs, access to the "ABC
News" brand, properties and personalities and ABC News Broadcast
Newsroom infrastructure.
ESPN and ABC have editorial, creative and overall marketing control of the
services. Upon termination of the Joint Ventures, ESPN and ABC will own all
URLs containing "ESPN," "ESPNET" and "ABC" as well as all editorial and
creative assets. Starwave will own all other assets.
127
<PAGE>
Pursuant to a hosting agreement between Starwave and Disney Online, a
subsidiary of Disney, Starwave provides Internet hosting services for "Disney's
Daily Blast," an online service of Disney Online, in exchange for monthly
payments from Disney Online to Starwave of $125,000. The hosting agreement
expires April 8, 1999. Pursuant to a software license agreement between
Starwave and Disney Online Starwave licenses certain Internet site development
and production software to Disney Online in exchange for cash license fees in
amounts specified in the agreement for each type of licensed technology. The
software license agreement is terminable by Disney at any time upon 30 days'
notice.
Netscape
Since March 1995, Infoseek's service has been listed as a navigational service
on the Netscape Web page accessible via the "NetSearch" button. Through April
30, 1998, Infoseek's agreement with Netscape provided for payments up to
$10,000,000 in cash and $2,500,000 in reciprocal advertising to be one of four
non-exclusive premiere providers of navigational services along with Excite,
Lycos, and Yahoo. The Netscape arrangement was subsequently extended through
May 31, 1998.
As of June 1, 1998, Infoseek entered into a one-year agreement with Netscape
with terms that provide for Infoseek to pay, based on impressions delivered, up
to an aggregate of $12,500,000 in cash to be one of the six non-exclusive
premier providers of navigational services along with Excite, Netscape, Lycos,
Alta Vista, and LookSmart. Under terms of the agreement, Infoseek will receive
15% of premiere provider rotations--the pages served to visitors who have not
selected a preferred provider. The payments to Netscape are being recognized
ratably over the term of the agreement. In November 1998, Infoseek and Netscape
renegotiated the terms of the June agreement to provide for the purchase of 5%
of Netscape's available search traffic beginning January 11, 1998 and through
the duration of the agreement which terminates May 31, 1999. Pages sourced from
Netscape have declined from 30% a year ago to 13% in June 1998 and 12% in
September 1998. A loss of Netscape sourced pages could have an adverse impact
on Infoseek's business, results of operations and financial condition and
prospects. As of September 30, 1998, Infoseek has a cash commitment ranging
from a minimum of $4,150,000 to a maximum of $12,500,000 depending on the level
of traffic delivered by Netscape in connection with this agreement. Mr.
Zeisler's wife, Jennifer Bailey, is a Senior Vice President of Netscape.
Other
Infoseek has granted options to certain of its directors and executive
officers. See "Infoseek Management--Option Grants in Last Fiscal Year" and "--
Security Ownership of Management and Principal Stockholders of Infoseek."
Infoseek has entered into indemnification agreements with its executive
officers, directors and certain significant employees. Infoseek's
indemnification agreements will require Infoseek, among other things, to
indemnify such persons against certain liabilities that may arise by reason of
their status or service as directors, executive officers or significant
employees and to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified.
At the present time, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of Infoseek in which indemnification
would be required or permitted.
128
<PAGE>
Infoseek is not aware of any threatened litigation or proceeding which may
result in a claim for such indemnification.
Infoseek believes that all of the transactions set forth above were made on
terms no less favorable to Infoseek and its affiliates than could have been
obtained from unaffiliated third parties. Any future transactions, including
loans, between Infoseek and any of its officers, directors, affiliates and
principal shareholders will be on terms no less favorable to Infoseek than can
be obtained from unaffiliated third parties. Any such transactions will be
subject to approval of a majority of the Infoseek board of directors, including
a majority of the independent, disinterested directors.
129
<PAGE>
QUANDO SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 1996 and 1997 and for
the three-year period ended December 31, 1997 are derived from the audited
financial statements of Quando included elsewhere in this proxy
statement/prospectus and should be read in conjunction with such financial
statements, the related notes thereto and the other financial information
pertaining to Quando included elsewhere in this proxy statement/prospectus. The
following selected financial data as of September 30, 1998 and for the nine
months ended September 30, 1997 and 1998 are derived from unaudited financial
statements of Quando included elsewhere in this proxy statement/prospectus. The
following selected financial data as of December 31, 1995, 1994 and 1993 and
for the period from December 14, 1993 (inception) through December 31, 1993 and
the year ended December 31, 1994 are derived from unaudited financial
statements of Quando not included elsewhere in this proxy statement/prospectus.
In the opinion of management, the unaudited information presented in the
following financial data reflects all adjustments, which are of a normal
recurring nature, necessary to present fairly the information as follows.
Operating results for the nine-months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998.
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 14,
1993 (INCEPTION) NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, THROUGH SEPTEMBER 30,
-------------------------------------------- DECEMBER 31, --------------------
1997 1996 1995 1994 1993 1998 1997
--------- --------- --------- ----------- ---------------- --------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues, net........... $ 255,723 $ 33,182 $ 71,186 $ 21,388 -- $ 513,713 $ 147,450
Cost of goods sold...... 654 19,373 32,212 8,881 -- 5,349 600
--------- --------- --------- --------- ----- --------- ---------
Gross margin........... 255,069 13,809 38,974 12,507 -- 508,364 146,850
--------- --------- --------- --------- ----- --------- ---------
Operating expenses:
Research and
development........... 161,339 115,782 127,273 8,473 -- 413,260 112,828
Sales and marketing.... 12,000 2,000 400 -- -- 699 2,901
General and
administrative........ 418,850 326,103 361,156 180,468 $ 204 316,759 291,167
--------- --------- --------- --------- ----- --------- ---------
Total operating
expenses............. 592,189 443,885 488,829 188,941 204 730,718 406,896
Operating loss.......... (337,120) (430,076) (449,855) (176,434) (204) (222,354) (260,046)
Other expenses, net..... (16,281) (12,671) (8,248) (151) -- (59,025) (18,424)
--------- --------- --------- --------- ----- --------- ---------
Net loss................ $(353,401) $(442,747) $(458,103) $(176,585) $(204) $(281,379) $(278,470)
========= ========= ========= ========= ===== ========= =========
Basic and diluted net
loss per common
share(1)(2)............ $ (0.08) $ (0.08) $ (0.08) $ (0.06) $ (0.06)
Shares used in computing
net loss per common
share(1)(2)............ 4,598,424 5,445,000 5,445,000 4,445,000 4,650,128
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994 1993 1998
--------- --------- ----------- ----------- ----------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.................... $ 50,984 $ 2,935 $ 3,322 $ 50,270 $796 $ 75,779
Working capital
(deficit).............. (248,341) (266,461) (207,251) 24,497 796 (373,995)
Total assets............ 126,624 57,805 74,913 155,461 796 281,075
Shareholders' loans..... 67,658 66,991 51,364 -- -- 40,000
Convertible debt........ 247,000 -- -- -- -- 447,000
Total shareholders'
equity (deficit)....... (448,942) (211,591) (179,107) 103,995 796 (725,321)
</TABLE>
- --------
(1) The year ended December 31, 1995 was the first full year that Quando was
subject to federal and state corporate income taxes following the
termination of its Subchapter S election effective October 21, 1994.
Guidelines of the Securities and Exchange Commission allow loss per share
data to be presented only when a company converts to a taxable status.
Accordingly, loss per share data have been presented only for the years
ended December 31, 1997, 1996 and 1995 and the nine months ended September
30, 1998 and 1997.
(2) The earnings per share amounts prior to 1997 and for the nine months ended
September 30, 1997 have been restated as required to comply with Statement
of Financial Accounting Standards No. 128, Earnings Per Share and Staff
Accounting Bulletin No. 98, Earnings per Share.
130
<PAGE>
QUANDO 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. Actual results could differ
materially from those projected in the forward-looking statements as a result
of, among other things, the factors set forth in "Risk Factors" beginning on
page 15 of this proxy statement/prospectus.
OVERVIEW
Quando develops and markets search and navigational services for the Internet.
Quando was originally organized under the name Media Mosaic in December 1993,
as a subchapter S corporation, and commenced operations in January 1994. From
inception through December 1995, Media Mosaic developed and published "how to"
CD-ROMs for several activities and hobbies. In October 1994 Media Mosaic
revoked its S corporation tax status election and began operations as a
subchapter C corporation. Effective September 27, 1996, Media Mosaic changed
its name to Quando, Inc.
By December 1995, management had determined that Quando's CD-ROM product was
not generating the sales necessary to sustain the business. At this point
management began focusing upon the development of a new product which would
allow the end-user to be able to search the Internet for information about a
particular subject. In December 1996, Quando completed the first version of
this product.
Quando's product searches the Internet with software robots to build custom
directories or information customized to each customers preferences. The
directories range from general and specialized event indexes to audio clip
libraries and shopping guides. The products are designed to be user friendly,
including full drag and drop personal information management capability and
branding capabilities. Quando began generating revenues from the sales of these
products in 1997.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Total Revenues, net
For the nine months ended September 30, 1998 and 1997, total net revenues were
$513,713 and $147,450, respectively.
During the first nine months of 1998 and 1997, Quando's revenues resulted
primarily from fees for search and navigational services and fees for
engineering or other customization of directory services. Search and
navigational service fee revenue is recognized monthly as it is earned and
custom engineering project revenue is recognized on a completed contract basis.
Quando's current business model is to generate revenues through the sale of
custom event search and navigational services and the engineering of these
services. There can be no assurance that current customers will continue to
purchase search and navigational services and custom engineering projects from
Quando or that Quando will be able to successfully attract additional
customers.
131
<PAGE>
Cost of Goods Sold
For the nine months ended September 30, 1998 and 1997, cost of goods sold were
$5,349 and $600, respectively. Cost of goods sold consist primarily of expenses
incurred related to software license fees.
Operating Expenses
Research and Development. For the nine months ended September 30, 1998 and
1997, research and development expenses were $413,260 and $112,828,
respectively. Research and development expenses consist principally of
personnel costs and fees paid to contract engineers. Costs related to research,
design and development of new or expanded search engine services have been
charged to research and development expense as incurred.
The increase in research and development expenses for the nine months ended
September 30, 1998 over the corresponding period in 1997 was primarily the
result of increased demand for product and additional personnel added to
continuously update Quando's search engines. Quando believes that a significant
level of product development expenses is required to continue to remain
competitive in its industry.
General and Administrative. For the nine months ended September 30, 1998 and
1997, general and administrative expenses were $316,759 and $291,167,
respectively. General and administrative expenses consist primarily of payroll
and related expenses, occupancy costs and professional services.
The increase in general and administrative expense for the nine months ended
September 30, 1998 over the comparable period in 1997 was the result of hiring
additional administrative and selling personnel to continue the expansion of
Quando's business.
Other Expense, net
For the nine months ended September 30, 1998 and 1997, other expense, net was
$59,025 and $18,424, respectively. Other expense, net consists primarily of
interest expense. The increase in interest expense is due to an increase in the
outstanding convertible debt balance. During the first nine months of 1997,
Quando issued $140,000 in convertible debt which was outstanding for the full
nine month period ending September 30, 1998. Additionally, Quando issued
$200,000 in convertible debt and obtained a loan for $360,000 in the first nine
months of 1998.
Income Taxes
Due to Quando's loss position, there was no provision for income taxes for any
of the periods presented.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996
During 1996 Quando changed their business focus from developing and publishing
"how to" CD-ROM's to developing and marketing custom search and navigational
services for the Internet. The change in the business focus should be
considered when reviewing the following discussion.
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Total Revenues, net
For the years ended December 31, 1997 and 1996, total revenues, net were
$255,723 and $33,182, respectively. During the year ended December 31, 1997,
Quando's revenues resulted primarily from fees for search and navigational
services and fees for engineering or other customization of search and
navigational services. Search and navigational service fee revenue is
recognized monthly as the fees are earned and custom engineering revenue is
recognized on a completed contract basis. During the year ended December 31,
1996, Quando's revenue was derived primarily from the sale of CD-ROM products.
CD-ROM product sales were recognized upon shipment.
Cost of Goods Sold
For the years ended December 31, 1997 and 1996, cost of goods sold were $654
and $19,373, respectively. Cost of goods sold consists primarily of software
license fees in 1997 and is comprised of the cost of manufacturing and
packaging CD-ROMs in 1996.
Operating Expenses
Research and Development. For the years ended December 31, 1997 and 1996,
research and development expenses were $161,339 and $115,782, respectively.
Research and development expenses consist principally of personnel costs
including fees paid to contract engineers. Costs related to research, design
and development of products and services have been charged to research and
development expense as incurred. The increase in research and development
expense for the year ended December 31, 1997 over the corresponding period in
1996 was primarily the result of the change in Quando's business focus.
Sales and Marketing. For the years ended December 31, 1997 and 1996, sales and
marketing expense were $12,000 and $2,000, respectively. Sales and marketing
expenses consist principally of advertising expenses. The increase in sales and
marketing expense for the year ended December 31, 1997 over the corresponding
period in 1996 was due to advertising expenses incurred to make the public
aware of Quando's new product offerings.
General and Administrative. For the years ended December 31, 1997 and 1996,
general and administrative expenses were $418,850 and $326,103, respectively.
The increase in general and administrative expense for the year ended December
31, 1997 over the comparable period in 1996 was the result of hiring additional
employees related to the change in Quando's business focus.
Other Expense, net
For the years ended December 31, 1997 and 1996, other expense, net was $16,281
and $12,671, respectively. Other expense, net consists primarily of interest
expense. Interest expense for the 1997 and 1996, totaled $26,151 and $14,897,
respectively. The increase in interest expense is due to Quando issuing
$247,000 in convertible debt during 1997. The convertible debt bears interest
at 10% to 12% per annum and is payable between January 1, 2000 and April 1,
2000. In 1997, a creditor of Quando forgave $10,000 of Quando's accounts
payable balance. This amount was included as other income and partially offsets
the interest expense incurred during the year.
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Income Taxes
Due to Quando's loss position, there was no provision for income taxes for any
of the periods presented. As December 31, 1997, Quando had federal and state
operating loss carryforwards and research and experimentation credits of
approximately $1,280,000 and $40,000, respectively. These carryforwards will
expire between 2000 and 2012 if not used by Quando to reduce income taxes
payable in future periods. Certain future changes in ownership of Quando 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 assets due to the lack of earnings history of
Quando.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 AND 1995
During 1996, Quando changed their business focus from developing and publishing
"how to" CD-ROMs to developing and marketing search and navigational directory
services for the Internet. The change in the business focus should be
considered when reviewing the following discussion.
Total Revenues, net
For the years ended December 31, 1996 and 1995, total revenues, net were
$33,182 and $71,186, respectively. During the year ended December 31, 1996,
Quando discontinued selling its CD-ROM products and concentrated upon
developing custom search and navigational services for the Internet or Web.
During the year ended December 31, 1995, Quando's revenues were derived
primarily from the sale of CD-ROM products. Quando developed and sold two CD-
ROM products for Windows and Macintosh: "Mountain Biking" and "Rock Climbing--
Freedom of the Hills." The CD-ROMs generally sold for $59.95 each retail and
approximately $22.00 each wholesale. The CD-ROMs were available through various
distribution channels including outdoor sports stores, book stores and computer
retail stores.
Cost of Goods Sold
Cost of goods sold for the years ended December 31, 1996 and 1995, were $19,373
and $32,212, respectively. Cost of goods sold consists primarily of costs to
manufacture and package CD-ROMs. Cost of goods sold decreased in 1996 due to
the reduction in sales. As a percentage of revenues cost of sales increased for
the year ended December 31, 1996 to 58%, compared to 45% for the year ended
December 31, 1995. The increase in cost of sales as a percentage of revenues is
due to lower selling prices on Quando's CD-ROM products and the write-down of
inventory which was not sold at the time of the change in the business focus.
Operating Expenses
Research and Development. For the years ended December 31, 1996 and 1995,
research and development expenses were $115,782 and $127,273, respectively.
Research and development expense consists principally of personnel costs
including contractors. The decrease in research and development expense for the
year ended December 31, 1996 over the corresponding period in 1995 was
primarily the result of Quando reducing the number of employees in the
beginning of 1996. Throughout 1996, additional contractors were hired, as
Quando needed, in order to complete development of its new product.
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Sales and Marketing. For the years ended December 31, 1996 and 1995, sales and
marketing expenses were $2,000 and $400, respectively. The increase in sales
and marketing expense for the year ended December 31, 1996 over the
corresponding period in 1995 was primarily the result of the effort to sell
Quando's remaining inventory of CD-ROMs.
General and Administrative. For the years ended December 31, 1996 and 1995,
general and administrative expenses were $326,103 and $361,156, respectively.
General and administrative expenses consist primarily of payroll and related
expenses, occupancy costs and professional services. The decrease in general
and administrative expense for the year ended December 31, 1996 over the
corresponding period in 1995 was primarily the result of Quando reducing the
number of employees in 1996. The decrease was also due to the spending
constraints implemented by Quando to control expenditures due to cash flow
problems during the change in business focus.
Other Expense, net
For the years ended December 31, 1996 and 1995, other expense, net was $12,671
and $8,248, respectively. Other expense, net consists primarily of interest
expense. The increase in interest expense is due to shareholders loans for
$51,364 being outstanding for the entire 1996 period while only being
outstanding for a part of the 1995 period. Total shareholder loans totaled
$66,991 at December 31, 1995 compared to $15,627 at December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
From inception through September 30, 1998, Quando financed its operations and
met its capital expenditure requirements primarily from proceeds derived from
the issuance of equity, convertible debt securities, notes payable and sales.
For the nine months ended September 30, 1998, operating activities used cash of
$445,262, primarily due to net losses offset by increases in accounts payable
and other accrued expenses. For the nine months ended September 30, 1998,
investing activities used cash of $67,285 related to the purchase of equipment.
Financing activities generated cash of $537,342 in the first nine months of
1998 from the issuance of $240,000 of convertible debt and a $360,000 note
payable.
For 1997, 1996 and 1995, operating activities used cash of $308,113, $386,975
and $292,218, respectively. The net cash used during these periods was
primarily due to net losses from operations, partially offset by increases in
accounts payable and accrued expenses. For 1997 and 1996, investing activities
used cash of $7,552 and $39,302, respectively, related to the purchase of
equipment. For 1995, investing activities provided cash of $18,905 due to the
sale of equipment partially offset by the purchase of equipment. Financing
activities generated cash of $363,717, $425,890 and $226,365 in 1997, 1996 and
1995, respectively, primarily from the issuance of preferred stock, shareholder
loans and the issuance of convertible debt.
Quando's independent auditors have included in their audit report an
explanatory paragraph which states that Quando's recurring losses from
operations raise substantial doubt about its ability to continue as a going
concern. Quando has generated operating cash losses from its inception.
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On July 24, 1998, Quando entered into the merger agreement with Infoseek and
certain other parties. Pursuant to the merger agreement, among other things,
all the issued and outstanding shares of Quando common stock shall be converted
into the right to receive shares of the common stock of Infoseek. Commensurate
with the closing, all outstanding preferred stock will be converted in
accordance with the respective preferred stock conversion ratios. Effective
upon the signing of the merger agreement, Infoseek loaned Quando $360,000
against a secured promissory note issued by Quando to Infoseek. All principal
and accumulated interest on this note is due and payable on March 31, 1999.
This note is secured by Quando's assets and bears interest at a rate of 6%
annually.
This acquisition is expected to provide Quando with the additional financial
resources to continue operations. If the acquisition is not completed, Quando
would have to find alternative financing sources to continue operations.
YEAR 2000 COMPLIANCE
Quando is aware of the issues associated with the programming code in existing
computer systems as the year 2000 approaches. The year 2000 problem is
pervasive and complex as virtually every computer operation will be affected in
some way by the rollover of the two digit year value to 00. The issue is
whether computer systems will properly recognize date sensitive information
when the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. In
general, Quando has evaluated its products and has determined that they are
currently year 2000 compliant. Although Quando management does not expect year
2000 issues to have a material impact on its business or future results of
operations, there can be no assurance that there will not be interruptions of
operations or other limitations of system functionality or that Quando will not
incur significant costs to avoid such interruptions or limitations. In
addition, Quando does not currently have information covering the year 2000
compliance status of its suppliers and customers. In the event that any of
Quando's significant suppliers or customers do not successfully and timely
achieve year 2000 compliance, Quando's business or operations could be
adversely affected.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income, which establishes requirements for
disclosure of comprehensive income. The objective of SFAS 130 is to report all
changes in equity that result from transactions and economic events other than
transactions with owners. Comprehensive income is the total of net income and
all other non-owner changes in equity. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of earlier financial
statements for comparative purposes is required. Quando does not expect
implementation to have a significant impact on its financial statements.
Also in June 1997, the FASB issued SFAS No. 131, Disclosure about Segments of
an Enterprise and Related Information. SFAS 131 requires public companies to
report certain information about their operating segments in a complete set of
financial statements to shareholders. It also requires reporting of certain
enterprise-wide information about the company's products and services, its
activities in different geographic areas and its reliance on major customers.
The basis for determining the
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company's operating segments is the manner in which management operates the
business. SFAS 131, is effective for fiscal years beginning after December 15,
1997. Quando does not expect implementation to have a significant impact on its
financial statements.
In October 1997, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 97-2, Software Revenue Recognition, which
provides guidance on applying generally accepted accounting principles in
recognizing revenue of software transactions. Quando adopted SOP 97-2 on
January 1, 1998. The impact to Quando's financial statements was not material.
Related to the SOP 97-2, the AICPA issued SOP 98-4 Deferral of the Effective
Date of a Provision of SOP 97-2, Software Revenue Recognition. SOP 98-4 defers
for one year, the application of several paragraphs and examples in SOP 97-2
that limit the definition of vendor specific objective evidence of the fair
value of various elements in a multiple element arrangement. The impact on
Quando's financial statements is not expected to be material.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability at its fair value. The
standard also requires that changes in the derivatives' fair value be
recognized currently in the results of operations unless specific hedge
accounting criteria are met. SFAS 133 is effective for fiscal years beginning
after June 15, 1999. Quando does not expect SFAS 133 to have a material impact
on its financial statements.
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QUANDO BUSINESS
Quando provides search and navigational services for the Internet. To provide
these services, Quando creates constantly-updated directories of information
obtained from the Internet for use in searching the Web--including shopping
guides, event guides, contact directories and audio clip libraries, review
guides and website rating guides. Quando builds the directories with a
proprietary robot technology and database processing techniques. Quando
provides the use of these online directories and guides as a service to its
customers, such as Infoseek, IBM and America Online. Quando's customers then
provide these online directories and guides on their Internet websites for use
by their customers who desire to obtain specific consumer information from the
Internet in an easy-to-use format.
Quando's technology collects data from the Web and converts it into a more
usable format for consumers. Quando's technology scans hundreds of websites and
can gather and process five different types of data collected from the Web.
PRODUCTS AND TECHNOLOGY
Quando's technology uses proprietary parsing and database techniques to gather,
process and deliver data content in a usable format to consumers in the form of
directories and guides. The technology architecture consists of three phases or
types of technology: data collection, data processing, and content delivery.
Data content is generally collected on websites available to the public, but
Quando can also obtain data via email, spreadsheets, flat files, and databases
from partners and customers. Quando has developed proprietary robot technology
named QBot to visit various websites and retrieve data. QBot can also be used
on email, spreadsheets, and other forms of manual entry.
After obtaining the "raw" data from the Web, Quando begins the second phase of
the technology architecture: processing of the data. Quando processes its data
using parsing techniques and database tools to refine the data content into a
usable format. For example, various events are advertised on many websites, but
each announcement of an event can be presented using different fonts, writing
styles and/or grammar to describe the date and time an event will be held. The
Quando processing technology recognizes nearly all of the possible ways to
describe such data and identifies duplicate announcements of the same event,
even when such event is described differently on various websites.
Similarly, products offered for sale at different e-commerce websites may
describe the same product using different names. For example, "Sony 27 inch
television" at one Website and "Sony27CTV" used at another Website both
describe the same product using different grammar. Quando's processing
technology identifies and eliminates such duplicates.
To date, Quando has established five technologies for collecting five different
types of data content and processing them into a usable format for consumers:
. events--EventBot
. venue information--WhoBot
. product information--ShoppingBot
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. website summary information--SchoolBot
. audio clips and live Webcasts on the internet
Quando believes the technology architecture can be applied to many more types
of data content on the Web.
The third phase of Quando's technology architecture is the delivery of the
data, which has been collected and processed, to provide the guides and
directories in a usable format for consumers. Quando's technology utilizes a
combination of database techniques and Javascript programming to enable Quando
to offer its users directories and "search engine"-like tools. Queries using
such directors and "search engine"-like tools are made directly to Quando's
high-speed database that provides search results without having to search the
Web because Quando's technology has already collected and processed the
requested data content.
SALES AND DISTRIBUTION
Quando sells constantly-updated, customized directories and guides assembled by
Quando to Internet websites such as Infoseek, America Online's Digital City
subsidiary and IBM. These customers then offer such directories and guides at
their own websites and pay Quando for such service. Contracts for this type of
service range from three to twelve months, and are typically paid in advance.
Quando does not license the technology to its customers or any other parties.
Quando also charges its customers for custom engineering and other
modifications required by a customer to meet such customer's specific service
needs. Quando typically retains all rights to any modified technology.
Quando's services are sold through a direct sales force. Product development,
marketing, administration, sales and support for Quando's customers are managed
through its 5,000 square foot corporate headquarters facility in Portland,
Oregon.
Online services are provided under contract by Easystreet Online, an internet
service provider in Beaverton, Oregon. All Quando software and hardware
directly accessed by customers resides in the Easystreet Online secure
facilities.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Quando relies on patent, trade secret and copyright laws to protect its
proprietary technologies. However, there can be no assurance that such trade
secret and copyright laws will provide sufficient protection to Quando, that
others will not develop or have not developed similar or superior technologies,
or that third parties will not copy or otherwise obtain and use the
technologies of Quando without authorization. After giving effect to the
merger, Quando's proprietary technologies may receive greater exposure in U.S.
and international markets. Effective patent, copyright, trademark and trade
secret protection may be unavailable or limited in certain markets.
Quando has not filed any patent applications to date, but it anticipates filing
patent applications with respect to certain of its software and online
technologies in the future. There can be no assurance, however, that patents
will issue with respect to such applications, that any issued patents will not
be
challenged, invalidated or circumvented, or that the patents will provide a
competitive advantage to
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Quando. Quando's success is also dependent in part on the protection of
existing trademarks, trade names, service marks and other proprietary rights. A
substantial amount of uncertainty exists concerning the application of
copyright and trademark laws to the Internet and other digital media. There can
be no assurance that existing laws provide adequate protection for Quando's
content or Internet addresses, commonly referred to as "domain names," such as
ShoppingBot.com. Quando has registered certain of its trademarks and will
continue to evaluate the registration of additional service marks and
trademarks, as appropriate. There can be no assurance that Quando's means of
protecting and maintaining its proprietary rights, including the goodwill
associated with its trademarks, trade names and service marks, will be
adequate. Any failure to protect and maintain such rights could have a material
adverse effect on Quando's business, financial condition and operating results.
COMPETITION
The market for Internet products and services is highly competitive,
particularly for the robot and data management services that Quando provides to
customers. Quando believes the competition for robot services in particular and
the Internet in general is increasing and will continue to intensify.
Furthermore, Quando's customers such as America Online and Infoseek are subject
to intense competition, which may strongly affect Quando and other robot
service companies. The market for Internet search and navigational services
such as those Infoseek provides has only recently begun to develop. Quando
cannot predict with any certainty how competition will affect Infoseek and
Quando, their competitors, or their customers. There can be no assurance that
Quando will be able to compete successfully or that the competitive pressures
faced by Quando, including those listed below, will not have a material adverse
effect on Quando's business, results of operations, financial condition and
prospects.
Competition from Consolidated Robot Companies
Some of Quando's competitors who offer similar technologies and products, such
as Junglee and Jango, have recently merged with major Internet companies.
Junglee merged with Amazon.com and Jango merged with Excite. This has created
stronger competition, since the parent companies can provide greater financial
and technical resources and abilities, leading to more successful robot-based
products and services. In addition, these combined companies have already begun
to integrate the robot technology into multiple facets of the parent company's
existing products, services, and markets. This integration can provide a higher
quality user experience, increase market share, and attract new customers and
partners. Quando expects that continued or increased competition from such
combined companies. The resulting increase in market share, customers and
strategic partners could have a material adverse effect on Quando's business,
results of operations, financial condition and prospects.
Competition from Robot Companies
Quando's competitors, such as Inktomi, offer or may soon offer similar
technologies and products to Quando's customers, such as America Online and
Infoseek. Inktomi already provides America Online with key services on an
outsourced basis under a multi-million dollar contract. Such competing
companies as Inktomi have greater resources and abilities to offer superior
products and services. In addition, entities that sponsor or maintain high-
traffic websites or that provide an initial
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point of entry for Internet viewers, such as Netscape, can be expected to
consider further development, acquisition or licensing of robot and data
management functions competitive with those offered by Quando. Further such
entities could take actions that make it more difficult for customers to
license Quando's products and services. Continued or increased competition from
such companies could have a material adverse effect on Quando's business,
results of operations, financial condition and prospects.
Acceptance of Quando's Business Model
Quando's future success is highly dependent upon the increased use of companies
like Quando to provide key services and products to Internet companies on an
outsourced basis. The market for such outsourced services has only recently
begun to develop and is rapidly evolving and characterized by an increasing
number of market entrants with products and services for use on the Internet
and intranets. Most of Quando's customers have only limited experience with the
products and services they offer via Quando. Most of Quando's customers have
not yet devoted a significant portion of their operational expenditures to
outsourced robot services, and such customers may not find such outsourcing to
be effective for winning customers and increasing revenue. Furthermore, many
Quando customers would regard outsourcing a key technology as a substantial and
significant disadvantage in comparison to creating, controlling, and owning
such technology in-house. There can be no assurance that Quando customers, once
they find Quando's services to be successful in winning customers and
increasing revenue, will not choose to create similar technology in house and
compete directly with Quando and with Quando's other customers.
EMPLOYEES
As of December 24, 1998, Quando had approximately 26 full-time employees.
Quando is not a party to any collective bargaining agreement and considers its
employee relations to be good.
LITIGATION
Quando is not currently a party to any litigation.
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SECURITY OWNERSHIP OF MANAGEMENT AND
PRINCIPAL SHAREHOLDERS OF QUANDO
The following table sets forth, as of December 28, 1998, certain information
with respect to the beneficial ownership of shares of Quando common stock by
(i) each Quando director, (ii) each of Quando's executive officers, (iii) all
directors and executive officers of Quando as a group, and (iv) each person (or
group of affiliated persons) known to Quando to be the beneficial owner or 5%
of more of Quando's outstanding shares. Except as otherwise noted, Quando
believes that the beneficial owners of the shares of Quando common stock listed
below, based on information furnished by them, have sole voting and investment
power with respect to such shares.
<TABLE>
<CAPTION>
SHARES OF QUANDO SHARES OF INFOSEEK
COMMON STOCK COMMON STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO MERGER (1)(2) AFTER MERGER (3)
------------------------------------------------
BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
---------------- ------------ ---------------------- ---------
<S> <C> <C> <C> <C>
David Billstrom............. 2,222,500 26.52% 109,792 *
William Neuhauser........... 2,222,500 26.52% 109,792 *
Hilary Lombard.............. 130,667(4) 1.56% 6,455 *
Scott Maxson................ 147,750(5) 1.76% 7,299 *
Stanton R. Koch............. 764,269(6) 9.12% 37,755 *
Daniel C. Lynch............. 1,318,639(7) 15.74% 65,141 *
Robert Woodell.............. 248,586(8) 2.97% 12,280 *
All directors and executive
officers as a group
(7 persons)................ 7,054,911 84.19% 348,512 *
</TABLE>
- --------
* Less than 1%
(1) The address for each of Messrs. Billstrom, Neuhauser, Koch, Maxson, Lynch
and Woodell and Mses. Allie and Lombard is c/o Quando, Inc., 520 NW Davis
Street, Portland, Oregon 97209.
(2) Percentage ownership calculations are based on 8,379,500 shares of Quando
common stock outstanding as of December 28, 1998, assuming the preferred
stock converts into common stock. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
includes voting and investment power with respect to shares. Shares of
Quando common stock subject to options or warrants currently exercisable or
exercisable within 60 days of December 28, 1998 are deemed outstanding for
computing the percentage ownership of the person holding such options or
warrants, but are not deemed outstanding for computing the percentage of
any other person.
(3) On an as-converted basis and based on the exchange ratios used in the
merger, 0.0494, 0.0627, and 0.0566 shares of Infoseek common stock shall be
issued for each outstanding share of Quando common stock, Quando Series A
preferred stock and Quando Series B preferred stock, respectively.
Percentage ownership calculations are based on an estimated 61,324,614
shares of Infoseek common stock outstanding following the merger, which is
subject to any additional shares of Infoseek common stock that may be
issued prior to the effective time of the merger in transactions (if any)
separate from those described herein.
(4) Includes 130,667 shares in the form of unexercised nonstatutory stock
options exercisable within 60 days of December 28, 1998.
(5) Includes 147,750 shares in the form of unexercised nonstatutory stock
options exercisable within 60 days of December 28, 1998.
(6) Includes 2,000 shares in the form of unexercised nonstatutory stock options
exercisable within 60 days of December 28, 1998.
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(7) Includes 750 shares in the form of unexercised nonstatutory stock options
exercisable within 60 days of December 28, 1998.
(8) Includes 500 shares in the form of unexercised nonstatutory stock options
exercisable within 60 days of December 28, 1998.
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QUANDO MANAGEMENT
The following table sets forth certain information concerning Quando's current
executive officers, directors and certain members of its senior management.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
David Billstrom......... 37 Chief Executive Officer, President and Chairman of the Board
Hilary Lombard.......... 36 Vice President of Content
Scott Maxson............ 37 Vice President of Data Technology
William Neuhauser....... 40 Chief Technical Officer, Vice President of Development, Director
Stanton R. Koch......... 39 Director
Daniel C. Lynch......... 57 Director
Robert Woodell.......... 54 Director
</TABLE>
David Billstrom has served as Chief Executive Officer, President and a director
of Quando since December 1993, and Chairman of the Board since March 1997. He
co-founded Quando with Mr. Neuhauser. Mr. Billstrom has worked in the computer
industry for 18 years in marketing, sales, product management, and engineering.
Prior to co-founding Quando, Mr. Billstrom held various positions with Intel
Corporation from 1986 until 1993, including management positions in the
Supercomputer Systems Division, in both the United States and in Europe. Mr.
Billstrom attended Reed College.
Hilary Lombard has served as Vice President of Content of Quando since March
1997. Ms. Lombard co-developed the original Quando concept. Ms. Lombard joined
Quando in March 1995 where she directed the development of Quando's consumer
CD-ROM, Rock Climbing/The Freedom of the Hills. Prior to joining Quando,
Ms. Lombard was an educator in corporate, secondary and higher education
environments, including The Southern Company and AT&T. She holds an M.Ed. in
Adult Education, and M.S. in Instructional Technology and a B.A. in English
from Tufts University.
Scott Maxson has served as Vice President of Data Technology of Quando since
March 1997. Mr. Maxson co-developed the original Quando concept and designed
the data architecture. He was also the lead developer in Quando's development
agreement with America Online and is an Oracle expert. Mr. Maxson joined Quando
in February 1995 where he directed the development of a joint project with
L.L.Bean to develop a CD-ROM on flyfishing. Prior to joining Quando, Mr. Maxson
developed user interfaces and databases for use in clinical trials of
pharmaceuticals with Clinical Trial Systems, Inc. from 1990 to 1995. Prior to
joining Clinical Trial Systems, Inc., Mr. Maxson was a design engineer for
Tektronix where he was awarded a U.S. patent for his work on electron beam
devices. Mr. Maxson holds a B.A. in Physics from Reed College.
William Neuhauser has served as Vice President of Development, Chief Technology
Officer and director of Quando since December 1993. Mr. Neuhauser co-founded
Quando with Mr. Billstrom and is the architect of the Quando technology. Prior
to co-founding Quando, Mr. Neuhauser was President of Chorus Systems, Inc., a
subsidiary of Chorus Systemes SA of France, which develops microkernel
operating system products from 1990 to 1993. From 1986 to 1990 Mr. Neuhauser
was a manager at the parent company, Chorus Systemes SA of France where he
directed product
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management and licensed technology to partners and customers. Mr. Neuhauser
holds a B.A. in Biology from Reed College. He has served on the board of
directors of Chorus Systemes, Oregon Software and the Software Association of
Oregon.
Stanton R. Koch has served as a director of Quando since December 1993. Mr.
Koch currently serves as World Wide Product Planning Manager for Word at
Microsoft Corporation, which he joined in 1986. At Microsoft Mr. Koch has
served in marketing, merchandising and product management roles. Prior to
joining Microsoft, Mr. Koch developed consumer software for small companies. He
holds a B.A. in Mathematics from Reed College.
Daniel C. Lynch has served as a director of Quando since March 1997 and has
advised Quando since June 1996. Mr. Lynch is a founder of CyberCash, Inc. and
has served as Chairman of the Board of Directors since CyberCash's formation in
1994. Prior to his tenure at CyberCash, Inc., Mr. Lynch was a private investor.
He also founded Interop Company, which is now a division of Softbank Expos, and
is an investor in a number of private startup companies in the Internet arena.
Mr. Lynch holds a B.A. from Loyola Marymount University and an M.S. in
Mathematics from University of California, Los Angeles.
Robert Woodell has served as a director of Quando since August 1996. Mr.
Woodell is a member of the board of directors of Oregon Brewing Company and
served as a Director of Rogue River Brewing Company from 1986 to 1997. From
1991 to 1996, Mr. Woodell was a private investor in various companies. From
1987 to 1991 he served as the Executive Director for the Port of Portland, and
prior to that, was appointed a Commissioner of the Port of Portland in 1987.
From 1968 to 1986, Mr. Woodell was an executive with NIKE, most recently as
President and a member of the Board of Directors. Mr. Woodell attended the
University of Oregon.
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DISSENTERS' RIGHTS
If the merger agreement is approved by the required percentage of the
shareholders of Quando and is not abandoned or terminated, any holder of Quando
capital stock may, by complying with Sections 60.551 through 60.594 of the
Oregon Business Corporation Act, be entitled to dissenters' rights as described
therein.
OREGON DISSENTERS' RIGHTS
The following discussion is not a complete statement of the Oregon Business
Corporation Act relating to dissenters' rights. The following discussion is
qualified in its entirety by reference to Sections 60.551 through 60.594 of the
Oregon Business Corporation Act attached to this proxy statement/prospectus as
Annex B and incorporated herein by reference. This discussion and Sections
60.551 through 60.594 of the Oregon Business Corporation Act should be reviewed
carefully by any holder who wishes to exercise statutory dissenters' rights or
wishes to preserve the right to do so, since failure to comply with the
required procedures will result in the loss of such rights.
ANNEX B SHOULD BE REVIEWED CAREFULLY BY ANY QUANDO SHAREHOLDER WHO WISHES TO
EXERCISE DISSENTERS' RIGHTS OR WHO WISHES TO PRESERVE THE RIGHT TO DO SO, SINCE
FAILURE TO COMPLY WITH THE PROCEDURES OF THE STATUTE WILL RESULT IN THE LOSS OF
DISSENTERS' RIGHTS.
Under the Oregon Business Corporation Act, a shareholder who is a record
shareholder or beneficial owner of shares held in a voting trust or a nominee
as the record shareholder may dissent from and obtain payment for the fair
value of the shareholder's shares in the event of consummation of a plan of
merger if the shareholder is entitled to vote on the merger. A shareholder who
wishes to assert dissenters' rights must perform the following:
. Deliver to the corporation, before the vote is taken, written notice of
the shareholder's intent to demand payment for the shareholder's shares
if the proposed merger is consummated, and
. Not vote such shares in favor of the merger.
Pursuant to Sections 60.551 through 60.594 of the Oregon Business Corporation
Act, Quando dissenting shareholders may require Quando to repurchase their
shares of Quando capital stock at a price equal to the fair value of such
shares determined as of the day before the first announcement of the terms of
the merger, excluding any appreciation or depreciation in consequence of the
proposed merger.
Within ten days following approval of the merger by the shareholders of Quando,
Quando is required to deliver a dissenters' notice to each person who provided
written notice prior to the vote of his or her intent to demand payment for his
or her dissenting shares and who did not vote in favor of the merger. The
dissenters' notice must contain the following:
. A statement describing:
. Where the payment demand will be sent,
. Where and when certificates for certificated shares will be
deposited, and
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. To what extent the transfer of uncertificated shares will be
restricted after the payment demand is received,
. A form for demanding payment which will include the date of the first
announcement of the terms of the proposed merger to the media or to the
shareholders and require that any person asserting dissenters' rights
certify whether the person acquired beneficial ownership of the shares
before that date,
. A date by which Quando must receive the payment demand, which date may
not be less than 30 nor more than 60 days after the dissenters' notice
is delivered, and
. A copy of Sections 60.551 through 60.594 of the Oregon Business
Corporation Act.
A shareholder who has received a dissenters' notice must:
. Demand payment,
. Certify whether the shareholder acquired beneficial ownership of the
shares before the date of the first announcement of the terms of the
proposed merger to the media or to shareholders, and
. Deposit the share certificates in accordance with the terms of the
dissenters' notice.
As soon as the merger is consummated or upon receipt of a payment demand,
Quando must pay to each Quando dissenting shareholder the amount Quando
estimates to be the fair value of the dissenting shareholder's shares, plus
accrued interest. The payment must be accompanied by:
. Quando's balance sheet as of the end of the fiscal year ending not more
than 16 months before the date of payment and an income statement for
that year and the latest available interim financial statements, if
any,
. A statement of Quando's estimate of the fair value of the shares,
. An explanation of how the interest was calculated,
. A statement of the dissenting shareholder's rights in the event the
dissenting shareholder is dissatisfied with the payment offer, and
. A copy of Sections 60.551 through 60.594 of the Oregon Business
Corporation Act.
If Quando does not consummate the merger within 60 days after the date set for
demanding payment and depositing share certificates, Quando must return the
share certificates and release transfer restrictions on uncertificated shares.
If Quando consummates the merger after such action, Quando must send a new
dissenters' notice and repeat the payment demand procedure.
Quando may elect to withhold payment from a dissenting shareholder who was not
the beneficial owner of the shares before the date set forth in the dissenters'
notice as the date of the first announcement of the proposed merger to the
media or to the shareholders. If Quando elects to withhold payment, then, after
consummation of the merger, Quando must estimate the fair value of the shares
held by such dissenting shareholder plus accrued interest and pay this amount
to each dissenting shareholder who agrees to accept it full satisfaction of
such demand.
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Within 30 days after Quando makes or offers payment for the dissenting shares,
a dissenting shareholder may notify Quando in writing of the dissenting
shareholder's own estimate of the fair value of such dissenting shares and the
amount of interest due and demand payment of such estimate less any payment
received from Quando for such dissenting shares, or if Quando has withheld
payment pursuant to the foregoing paragraph, reject Quando's offer and demand
payment of such estimate, if:
. The dissenting shareholder believes that the amount paid or offered is
less than the fair value of the dissenting shares or that the interest
was incorrectly calculated,
. Quando fails to make payment within 60 days after the date set for
demanding payment, or
. Quando, having failed to consummate the merger, does not return the
share certificates or release transfer restrictions on uncertificated
shares within 60 days after the date set for demanding payment.
In the event a demand for payment remains unsettled after the dissenting
shareholder exercises the rights as set forth in the foregoing paragraph,
Quando must either:
. Commence a proceeding within 60 days after receiving the dissenting
shareholder's payment demand and petition the court to determine the
fair value of the dissenting shares and accrued interest, or
. Pay the dissenting shareholder the amount demanded by such dissenting
shareholder. Quando must commence the proceeding in the circuit court of
the county where Quando's principal office is located and make all
dissenting shareholders whose demands remain unsettled parties to the
proceeding. The circuit court may appoint one or more appraisers to
receive evidence and recommend the fair value of the dissenting shares.
Each dissenting shareholder is entitled to judgment for either the
amounts, if any, by which the court finds fair value of the dissenting
shares exceeds the amount paid by the corporation, or for the fair value
plus accrued interest of the dissenting shareholders' after-acquired
shares for which the corporation elected to withhold payment. The court
in an appraisal proceeding shall assess all costs of the proceeding
against Quando except that the court may assess costs against dissenting
shareholders if the court finds that the dissenting shareholders acted
arbitrarily, vexatiously or not in good faith. The court may assess the
fees and expenses of counsel and experts of the respective parties in
amounts the court finds equitable.
Any shareholder who fails to follow the procedures detailed above will lose the
right to dissent from the merger. A negative vote, alone, will not constitute
written objection required prior to the special meeting of shareholders. Any
shareholder making a written demand for payment is thereafter entitled only to
payment as provided in the Oregon Business Corporation Act. He or she is no
longer entitled to vote or otherwise exercise any shareholder rights as to his
or her shares of Quando capital stock. Consent of Quando is required for the
withdrawal of demand for payment.
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COMPARISON OF CAPITAL STOCK
DESCRIPTION OF INFOSEEK CAPITAL STOCK
The authorized capital stock of Infoseek consists of 525,000,000 shares of
capital stock, of which 500,000,000 shares are designated as common stock and
25,000,000 shares are designated as preferred stock.
Infoseek Common Stock
As of November 30, 1998, 60,902,973 shares of Infoseek common stock were
outstanding. After giving effect to the transactions contemplated by the merger
agreement, and assuming no other issuances of common stock after November 30,
1998, there will be approximately 61,430,023 shares of Infoseek common stock
outstanding. The holders of Infoseek common stock are entitled to one vote per
share on all matters to be voted upon by the stockholders. Stockholders may not
cumulate votes in connection with the election of directors. The holders of
Infoseek common stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Board of Directors out of funds
legally available therefor. In the event of a liquidation, dissolution or
winding up of Infoseek, the holders of Infoseek common stock are entitled to
share ratably in all assets remaining after payment of liabilities and payment
of liquidation preferences to holders of Infoseek preferred stock, if any.
Infoseek common stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to Infoseek common stock. All outstanding shares of Infoseek common
stock are fully paid and non-assessable, and the shares of Infoseek common
stock to be outstanding upon completion of the merger will be fully paid and
non-assessable. Each share of Infoseek common stock has associated with it
certain rights to acquire shares of Infoseek capital stock pursuant to a
"poison pill" rights plan. See "--Infoseek Preferred Stock" and "--Infoseek
Stockholders Rights Plan; Infoseek Series A Participating Preferred Stock."
Infoseek Preferred Stock
Infoseek has 25,000,000 shares of Infoseek preferred stock authorized, of
which, as of November 30, 1998, no shares were outstanding. Subject to the
terms of the governance agreement, the Infoseek Board of Directors has the
authority to issue these shares of Infoseek preferred stock in one or more
series, to fix the rights, preferences, privileges and restrictions,
qualifications and limitations granted to or imposed upon any unissued and
undesignated shares of Infoseek preferred stock and to fix the number of shares
constituting any series and the designations of such series, without any
further vote or action by the stockholders (subject to applicable stock
exchange rules). The Infoseek Board of Directors, without stockholder approval
(subject to applicable stock exchange rules), may issue Infoseek preferred
stock with voting and conversion rights which could adversely affect the voting
power or other rights of the holders of Infoseek common stock, and the issuance
of Infoseek preferred stock may have the effect of delaying, deferring or
preventing a change in control of Infoseek. Infoseek has initially reserved
100,000 shares of Series A participating preferred stock, par value $0.001 per
share, for potential issuance pursuant to the exercise of rights under the
rights plan, as described below. See "--Infoseek Stockholders Rights Plan;
Infoseek Series A Participating Preferred Stock."
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Infoseek Stockholders Rights Plan; Infoseek Series A Participating Preferred
Stock
Pursuant to Infoseek's "poison pill" preferred shares rights plan, each share
of Infoseek common stock has associated with it certain rights to acquire
shares of Infoseek's Series A participating preferred stock, par value $0.001.
The rights are triggered and become exercisable upon the occurrence of either:
. The date of a public announcement of the acquisition of 15% or more
beneficial ownership of Infoseek common stock by a person or group,
referred to as an "acquiring person", or
. Ten business days after a public announcement of a tender or exchange
offer for 15% or more beneficial ownership of Infoseek common stock by
an acquiring person.
If the rights are triggered because an acquiring person beneficially owns 15%
or more of Infoseek common stock, each right will provide its holder, other
than a holder who is an acquiring person, the right to purchase that number of
shares of Infoseek common stock having a market value at the time equal to
twice the exercise price, upon payment of the exercise price of $150 per right.
In addition, in the event of certain business combinations, the rights permit
the purchase of shares of common stock of an acquiror at a 50% discount from
the market price at the time. The Infoseek Board of Directors has the right to
redeem the rights at a price of $0.001 per right at any time prior to the close
of business on the tenth day after the first public announcement that a person
has become an acquiring person or such later time as may be determined by the
Infoseek Board of Directors. If the rights are triggered under certain
circumstances, the Infoseek Board of Directors may elect to exchange each right
(other than rights held by an acquiring person) for one share of Infoseek
common stock. The rights expire on October 2, 2008. These provisions may have
the effect of deterring hostile takeovers or delaying changes in control or
management of Infoseek. For purposes of the rights plan, Disney shall not be
deemed to be an acquiring person, so long as Disney has not breached the
standstill provisions of the governance agreement.
Transfer Agent and Registrar
Boston EquiServe, L.P., serves as the transfer agent and registrar of Infoseek
common stock.
DESCRIPTION OF QUANDO CAPITAL STOCK
The authorized capital stock of Quando will consist, prior to the closing of
the merger, of 19,000,000 shares of capital stock, of which 15,000,000 shares
are common stock with no par value, and 4,000,000 shares are preferred stock
with no par value.
Quando Common Stock
As of December 28, 1998, 6,466,125 shares of Quando common stock were
outstanding. The holders of Quando common stock are entitled to one vote per
share on all matters to be voted upon by the shareholders. Shareholders may not
cumulate votes in connection with the election of directors. Subject to the
preferential rights of the Quando preferred stock, the holders of shares of
Quando common stock are entitled to receive dividends payable either in cash,
property or shares of capital stock, when and if declared by Quando's Board of
Directors out of funds legally available therefor. Quando may not issue
additional shares of Quando common stock without the prior written consent of
the holders of at least 50% of the then outstanding shares of Quando common
stock; provided, however, that such restriction will terminate at the earlier
of:
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. Ten days prior to the closing of an underwritten public offering in
which the aggregate net proceeds to Quando exceed $7,500,000, subject
to certain other limitations, or
. The date on which David Billstrom and William Neuhauser together cease
to own at least 50% of the outstanding shares of the Quando common
stock.
In the event of any dissolution, liquidation, or winding up of the affairs of
Quando, after distribution in full of the preferential amounts, if any, to be
distributed to the holders of shares of the Quando preferred stock, holders of
Quando common stock are entitled, unless otherwise required by law, to receive
all of the remaining assets of Quando of whatever kind available for
distribution to shareholders ratably in proportion to the number of shares of
Quando common stock held by them respectively. Quando common stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to Quando common stock. All
outstanding shares of Quando common stock are fully paid and non-assessable.
Quando Preferred Stock
As of December 28, 1998, 1,180,000 shares of Quando preferred stock were
outstanding of which 300,000 shares are Series A preferred stock and 880,000
shares are Series B preferred stock, referred to as the "convertible preferred
stock". No dividends will be declared any paid on any shares of the then
outstanding shares of convertible preferred stock except in the event that the
Quando Board of Directors declares a dividend payable upon the then outstanding
shares of the Quando common stock. In such an event, the holders of the
convertible preferred stock shall be entitled to the amount of dividends per
share of convertible preferred stock as would be declared payable on the
largest number of whole shares of common stock into which each share of
convertible preferred stock held by each holder thereof could be converted. In
the event of any liquidation, dissolution or winding up of Quando, holders of
each share of convertible preferred stock shall be entitled to be paid first
out of the assets of Quando available for distribution to holders of Quando
capital stock before any sums shall be paid or any assets distributed among the
holders of Quando common stock, an amount equal to the greater of:
. $1.00 per share of Series A preferred stock and $0.625 per share of
Series B preferred stock, plus an amount equal to all accrued and
unpaid dividends thereon, or
. The amount per share of convertible preferred stock that would have
been payable had each such share been converted to Quando common stock
immediately prior to such event of liquidation, dissolution or winding
up, plus an amount equal to all accrued but unpaid dividends thereon.
Each holder of convertible preferred stock has the right, at his or her option,
to convert his or her shares into shares of Quando common stock.
Each share of convertible preferred stock could initially be converted into one
share of Quando common stock. However the convertible preferred stock is
subject to certain antidilution protections, such that as of December 28, 1998,
each outstanding share of Series A preferred stock could be converted into
approximately 1.2685 shares of Quando common stock, and each outstanding share
of Series B preferred stock could be converted into 1.1462 shares of Quando
common stock. All shares of convertible preferred stock may, at Quando's
option, be converted into Quando common stock within ten days prior to the
closing of certain underwritten public offerings in which the aggregate
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proceeds to Quando exceed $7,500,000. Except as set forth above, the Quando
Board of Directors has the authority to:
. Issue the shares of Quando preferred stock in one or more series,
. Fix the preferences, limitations and relative rights granted to or
imposed upon any unissued and undesignated shares of Quando preferred
stock, and
. Fix the number of shares constituting any series and the designations
of such series without any further vote or action by the shareholders.
The Quando Board of Directors, without shareholder approval, can issue
Quando preferred stock with voting and conversion rights which could
adversely affect the voting power or other rights of the holders of
Quando common stock.
Transfer Agent and Registrar
Quando currently acts as the transfer agent and registrar of Quando capital
stock.
COMPARISON OF CAPITAL STOCK OF INFOSEEK AND QUANDO
Infoseek is incorporated in the State of Delaware and Quando is incorporated in
the State of Oregon. Following the effective time, Quando will continue to be
governed by the Oregon Business Corporation Act and Infoseek will continue to
be governed by the Delaware General Corporation Law. Shareholders of Quando,
however, will hold Infoseek common stock rather than Quando common stock.
Therefore, the rights of such shareholders will be governed by Delaware law,
and the provisions of the Infoseek amended and restated certificate of
incorporation and the Infoseek bylaws, rather than the Quando articles of
incorporation and the Quando bylaws. The following is a summary comparison of
certain provisions of Oregon law and Delaware law and the charters and bylaws
of the respective corporations. This summary does not purport to be complete
and is qualified in its entirety by reference to the corporate statutes of
those states and the corporate charters and bylaws of Infoseek and Quando. In
addition, the contractual terms of the governance agreement also affect
Infoseek's corporate governance. See "Risk Factors--Risks of Infoseek--Disney
Owns A Substantial Amount of Infoseek Stock and Is Able to Significantly
Influence Infoseek's Affairs" and "Infoseek's Management's Discussion and
Analysis of Financial Condition and Results of Operations--Infoseek Overview--
Disney Transaction."
Cumulative Voting
In an election of directors under cumulative voting, each share of stock
normally having one vote is entitled to a number of votes equal to the number
of directors to be elected. A shareholder may then cast all such votes for a
single candidate or may allocate them among as many candidates as the
shareholder may choose. Without cumulative voting, the holders of a majority of
the shares present at an annual meeting or any special meeting held to elect
directors would have the power to elect all the directors to be elected at that
meeting, and no person could be elected without the support of holders of a
majority of the shares voting at such meeting. Under Delaware law, cumulative
voting in the election of directors is not mandatory but is a permitted option.
The Infoseek certificate and the Infoseek bylaws do not permit cumulative
voting. Under Oregon law, shareholders do not have a right to cumulative voting
unless the articles of incorporation provide otherwise. The Quando articles do
not provide for cumulative voting.
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Power To Call Special Meeting of Shareholders
Under Delaware law, a special meeting of stockholders may be called by the
board of directors or any other person as may be provided in the certificate of
incorporation or bylaws. The Infoseek bylaws provide that special meetings of
the stockholders may be called at any time by the Board of Directors, the
Chairman of the Board of Directors, the President or by one or more
stockholders entitled to cast not less than ten percent of the votes at the
meeting. Under Oregon law, a special meeting of shareholders may be called by
the board of directors or by any other person authorized to do so in the
articles of incorporation or the bylaws or the holders of at least ten percent
of all votes entitled to be cast at such meeting. The Quando bylaws provide
that a special meeting of shareholders may be called at any time by the
President, the Board of Directors or by one or more shareholders holding not
less than ten percent of the outstanding shares entitled to vote at the
meeting.
Shareholder Action Without a Meeting
Under Delaware law, unless otherwise provided in the certificate of
incorporation, any action which may be taken at a meeting of the stockholders
may be taken without a meeting and without prior notice if a consent in writing
is signed by the holders of outstanding shares having at least the minimum
number of votes that would be necessary to take such action at a meeting at
which all shares entitled to vote thereon were present and voted. The Infoseek
certificate eliminates the ability of stockholders to vote by written consent.
Under Oregon law, any action required or permitted to be taken at a meeting of
the shareholders may be taken without a meeting if the action is taken by all
shareholders entitled to vote on the action. The Quando bylaws contain a
provision for shareholder action without a meeting.
Size of the Board of Directors
Under Delaware law, the number of directors is fixed by the bylaws, unless the
certificate of incorporation fixes the number of directors. The Infoseek
certificate does not specify the number of directors, and the Infoseek bylaws
allow Infoseek's Board of Directors to set the exact number of directors within
the range of six to eleven persons. The number of directors is currently fixed
at eight. Under Oregon law, the number of directors may be fixed in either the
articles of incorporation or bylaws. The board of directors or the shareholders
of an Oregon corporation may change the authorized number of directors within
the minimum and maximum range if the articles of incorporation or bylaws
establish a variable range for the size of the board of directors. If the
articles of incorporation establish a fixed or variable range, then, after
shares are issued, only the shareholders may change the range for the size of
the board or change from a fixed or variable-ranged size board by amendment to
the corporation's articles of incorporation. If the bylaws establish a fixed or
variable range, then either the board of directors or the shareholders may
change the range for the size of the board or change from a fixed or variable
range size board by amendment to the corporation's bylaws in the manner
provided in the bylaws unless the number of directors is fixed in the
corporation's articles of incorporation, in which case a change in the number
of directors may be made only by amendment to the articles of incorporation.
The Quando bylaws currently provide that Quando will have a minimum of one
director.
Classification of Board of Directors
A classified board is one with respect to which a certain number of directors,
but not necessarily all, are elected on a rotating basis each year. Delaware
law permits, but does not require, a classified
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board of directors, pursuant to which the directors can be divided into as many
as three classes with staggered terms of office, with only one class of
directors standing for election each year. The Infoseek certificate and bylaws
do not provide for a classified board. If there are six or more directors,
Oregon law permits, but does not require, an Oregon corporation to provide in
its articles of incorporation or bylaws for a classified board of directors,
pursuant to which the directors can be divided into up to two or three classes
of directors with staggered terms of office, with only one class of directors
to stand for election each year. The Quando articles do not provide for a
classified board of directors.
Special Meetings of the Board of Directors
Under the Infoseek bylaws, meetings of the Infoseek Board of Directors may be
called by the Chairman of the Board of Directors, the President, any vice
president, the secretary or any two directors upon two or four days' notice,
depending upon the method of notice. Oregon law provides that unless the
articles of incorporation or bylaws set forth a longer or shorter period,
special meetings of a company's board of directors must be preceded by at least
two days' notice of the date, time and place of the meeting. The Quando bylaws
stipulate that special meetings of the Board of Directors may be called by the
President or by a majority of the directors upon two business days' notice.
Removal of Directors
Under Delaware law, any director or the entire board of directors of a
corporation that does not have a classified board of directors or cumulative
voting may be removed with or without cause with the approval of a majority of
the outstanding shares entitled to vote at an election of directors. The
Infoseek certificate and bylaws do not provide for a classified board of
directors or cumulative voting. As a result, any director of Infoseek or the
entire Infoseek Board of Directors may be removed with or without cause with
the approval of a majority of the Infoseek outstanding shares entitled to vote
at an election of directors. Under Oregon law, any director of an Oregon
corporation may be removed with or without cause by the shareholders unless the
articles of incorporation provide that directors may only be removed for cause.
If a director is elected by a voting group of shareholders, only the
shareholders of that voting group may vote to remove the director. If
cumulative voting is authorized, a director may not be removed if the number of
votes cast against such a removal would be sufficient to elect the director
under cumulative voting. If cumulative voting is not authorized, a director may
be removed only if the number of votes cast to remove the director exceed the
votes cast not to remove the director. Furthermore, a director may be removed
by the shareholders only at a meeting called for the purpose of removing the
director. The Quando bylaws provide that any director may be removed, with or
without cause, at a meeting expressly called for such purpose unless the Quando
articles provide for removal only for cause. The Quando articles do not require
cause to remove a director.
Transactions Involving Officers or Directors
An Oregon corporation may loan money to, or guarantee any obligation incurred
by, its directors only if either:
. The loan or guarantee is approved by a majority of the votes represented
by the outstanding voting shares of all classes, voting as a single
group, excluding the voting shares owned by or voted under the control
of the benefited director, or
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. The board of directors and any affected officer determine such loan or
guarantee benefits the corporation and the board of directors approves
the loan or guarantee or general plan authorizing the loans and
guarantees.
With respect to any other contract or transaction between the corporation and
one or more of its directors, such transactions are neither void nor voidable
if either:
. The director's interest is made known to the board of directors, a
committee of the board of directors or the shareholders of the
corporation, who thereafter approve the transaction, or
. The contract or transaction is fair to the corporation.
Oregon law does not specifically regulate loans to officers or employees.
Under Delaware law, any corporation may lend money to, or guarantee any
obligation of, or otherwise assist any officer or other employee of the
corporation, including any officer or employee who is also a director of the
corporation, whenever, in the judgment of the directors, such loan, guaranty or
assistance may reasonably be expected to benefit the corporation. Furthermore,
under Delaware law, contracts or transactions between a corporation and either
any of its directors or a second corporation of which a director is also a
director, are not void or voidable if either:
. The material facts as to the transaction and as to the director's
interest are fully disclosed, and either the disinterested directors or
a majority of the disinterested shareholders approve or ratify the
transaction in good faith, or
. The person asserting the validity of the contract or transaction
sustains the burden of proving that the contract or transaction was just
and reasonable as to the corporation at the time it was authorized,
approved or ratified.
Limitation of Liability of Directors; Indemnification
Under Oregon law, a corporation's articles of incorporation may set forth a
provision eliminating or limiting the personal liability of a director to the
corporation or its shareholders for monetary damages for conduct as a director.
However, such provisions may not eliminate or limit a director's liability for:
. Breaches of the director's duty of loyalty to the corporation or its
shareholders,
. Acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law,
. The payment of unlawful distributions, or
. Any transaction from which the director derived an improper personal
benefit.
Under Oregon law, a corporation may, subject to the limitations described
below, indemnify a director against liability incurred if the conduct was in
good faith, the individual reasonably believed the individual's conduct was in
the best interests of the corporation and, in the case of a criminal
proceeding, the individual had no reasonable cause to believe the conduct was
unlawful. Under Oregon law, a director may not be indemnified in connection
with a proceeding in which the director was found liable to the corporation or
in connection with any other proceeding charging improper personal benefit to
the director in which the director was found liable on the basis that personal
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benefit was improperly received. The Quando articles contain provisions
limiting a director's liability to the fullest extent permitted by Oregon law.
Oregon law provides for mandatory indemnification of officers and directors
when the indemnified party is wholly successful on the merits or otherwise in
the defense of any proceeding to which the director was a party because of
being a director. Officers are entitled to the same mandatory indemnification
as are directors under the Oregon Business Corporation Act.
The Infoseek certificate eliminates the liability of directors to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director to the fullest extent permissible under Delaware law. Under
Delaware law, such provision may not eliminate or limit director monetary
liability for:
. Breaches of the director's duty of loyalty to the corporation or its
stockholders,
. Acts or omissions not in good faith or involving intentional misconduct
or knowing violations of law,
. The payment of unlawful dividends or unlawful stock repurchases or
redemptions, or
. Transactions in which the director received an improper personal
benefit.
Such limitation of liability provisions also may not limit a director's
liability for violation of, or otherwise relieve the company or its directors
from the necessity of complying with federal or state securities laws, or
affect the availability of nonmonetary remedies such as injunctive relief or
rescission.
Delaware law generally permits indemnification of expenses, including
attorneys' fees, actually and reasonably incurred in the defense or settlement
of a derivative or third-party action, provided there is a determination by a
majority vote of a disinterested quorum of the directors, by independent legal
counsel or by a majority vote of a quorum of the stockholders that the person
seeking indemnification acted in good faith and in a manner reasonably believed
to be in best interests of the corporation. Without court approval, however, no
indemnification may be made in respect of any derivative action in which such
person is adjudged liable for negligence or misconduct in the performance of
his or her duty to the corporation. Delaware law requires indemnification of
expenses to the extent the individual being indemnified has successfully
defended any action, claim, issue or matter therein, on the merits or
otherwise.
Expenses incurred by an officer or director in defending any action may be paid
in advance, under Delaware law, if such director or officer undertakes to repay
such amounts if it is ultimately determined that he or she is not entitled to
indemnification. In addition, Delaware law authorizes a corporation's purchase
of indemnity insurance for the benefit of its officers, directors, employees
and agents whether or not the corporation would have the power to indemnify
against the liability covered by the policy.
Delaware law also permits a Delaware corporation to provide indemnification in
excess of that provided by statute. Delaware law does not require authorizing
provisions in the certificate of incorporation. Limitations on indemnification
may be imposed by a court based on principles of public policy.
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<PAGE>
Dividends and Repurchases of Shares
Oregon law permits a corporation, unless otherwise restricted by its articles
of incorporation, to make distributions to its shareholders if both of the
following factors are satisfied:
. In the judgment of the directors, the corporation would be able to pay
its debts as they come due in the usual course of business, and
. The corporation's total assets would at least equal the sum of its total
liabilities plus, unless the articles permit otherwise, the amount that
would be needed if the corporation were dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving
the distribution.
The Quando articles do not otherwise restrict the ability of the Board of
Directors to make distributions to its shareholders. In addition, Oregon law
generally provides that a corporation may redeem or repurchase its shares.
Delaware law permits a corporation to declare and pay dividends out of surplus
or, if there is no surplus, out of net profits for the fiscal year in which the
dividend is declared and/or for the preceding fiscal year. However, if the
amount of capital of the corporation following the declaration and payment of
the dividend is less than the aggregate amount of the capital represented by
the issued and outstanding stock of all classes having a preference upon the
distribution of assets, the directors may not declare and pay out a dividend
from the corporation's net profits. In addition, Delaware law generally
provides that a corporation may redeem or repurchase its shares only if the
capital of the corporation is not impaired and such redemption or repurchase
would not impair the capital of the corporation.
Approval of Certain Corporate Transaction
Under both Oregon law and Delaware law, with certain exceptions, any merger,
consolidation or sale of all or substantially all the assets of a corporation
must be approved by the corporation's board of directors and a majority of the
outstanding shares entitled to vote. In addition, Infoseek's certificate
contains certain other approval provisions. See "--Supermajority and
Disinterested Approvals."
Supermajority and Disinterested Approvals
In addition to the general requirements of Delaware law on voting described
above, in connection with the transactions with Disney and the governance
agreement, Infoseek's certificate contains certain other approval requirements
as follows.
Events Requiring Disinterested Stockholder Approval. As required by the
governance agreement and the Infoseek certificate, until Disney owns at least
90% of the total current voting power of Infoseek, neither Infoseek, nor Disney
nor any affiliate of either, may effectuate an event requiring disinterested
shareholder approval, as defined below, without first obtaining disinterested
shareholder approval, as defined below, with respect to such event. However,
disinterested shareholder approval is not required if on the record date for
such approval of such event requiring disinterested shareholder approval,
Disney beneficially owns less than 25% of the total current voting power of
Infoseek. The following is a summary of certain definitions of terms more fully
defined in the governance agreement:
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. "Disinterested shareholder" means any shareholder of Infoseek who is not
Disney, an affiliate of Disney, or a member of a 13D Group, as defined
below, in which Disney or an affiliate of Disney is also a member.
. "Disinterested shareholder approval" means the affirmative vote or
written consent of greater than 50% of the total current voting power of
Infoseek held by all disinterested shareholders.
. "Event requiring disinterested shareholder approval" means any of the
following events:
. The amendment of any portion of Infoseek's certificate that
effectuates the provisions requiring disinterested board approval, as
defined below, and disinterested shareholder approval,
. A sale or disposition of all or substantially all of Infoseek's
assets,
. The issuance of securities of Infoseek representing 20% or more of
either Infoseek's then total outstanding equity or Infoseek's then
current voting power, or
. A merger, consolidation or other reorganization of Infoseek with or
into Disney or any affiliate of Disney.
. "13D Group" means any group of persons formed for the purpose of
acquiring, holding, voting or disposing of voting stock which would be
required under Section 13(d) of the Exchange Act to file a statement
either on Schedule 13D pursuant to Rule 13d-1(a) or Schedule 13G pursuant
to Rule 13d-1(c) with the Securities and Exchange Commission as a
"person" within the meaning of Section 13(d)(3) of the Exchange Act if
such group beneficially owned voting stock representing more than 5% of
any class of voting stock then outstanding.
Events Requiring Disinterested Board Approval. As required by the governance
agreement and the Infoseek certificate, until Disney owns at least 90% of
Infoseek's current voting stock, neither Infoseek nor Disney may effectuate an
event requiring disinterested board approval, as defined below, without first
having obtained disinterested board approval, as defined below, with respect to
such event. The following is a summary of certain definitions of terms more
fully defined in the governance agreement:
. "Disinterested board approval" means the affirmative vote or written
consent of a majority of the disinterested directors duly obtained in
accordance with the applicable provisions of Infoseek's bylaws and
applicable law.
. "Disinterested director" means, during the period of Disney's standstill
obligation, referred to as the "standstill period," a member of the
Infoseek board of directors who is not a Disney appointed director,
referred to as a "Disney director," and after the standstill period, a
member of the Infoseek board of directors who is an independent director.
. "Event requiring disinterested board approval" means any of the
following events:
. Any amendment to Infoseek's bylaws or certificate,
. Any transaction between Infoseek, or any affiliate of Infoseek, and
Disney, or any affiliate of Disney, which either requires payment by
any party in excess of $5 million or contemplates a term equal to or
in excess of three years,
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<PAGE>
. Adoption of a "poison pill" share repurchase rights plan by
Infoseek, or any amendment of, or redemption, or exchange of rights
issued pursuant to any such plan, if such plan excludes from the
definition of "acquiring person" Disney and wholly owned
subsidiaries of Disney, so long as both of the following are true:
. Neither Disney nor any affiliate of Disney has breached the
standstill restrictions described in the governance agreement,
and
. Disney beneficially owns at least 5% of the total current voting
power of Infoseek.
. Any transfer of any Infoseek shares or non-voting convertible
securities by Disney to a competitor of Infoseek, as defined in the
governance agreement, in a private placement, as opposed to a public
offering,
. During the standstill period, any transfer of 25% or more of
Infoseek voting stock by Disney in a private placement, as opposed
to a public offering, to any single person or 13D Group,
. Commencement of a tender offer or exchange offer by Disney or any
affiliate of Disney (or any 13D Group that includes Disney or any
affiliate of Disney) to purchase or exchange for cash or other
consideration any Infoseek voting stock, except for a Disney tender
offer, as defined in the governance agreement, made either during a
tender offer or following an event which terminates the standstill
period, so long as the cause of such termination was not a tender
offer by Disney,
. During the standstill period, Disney's solicitation of proxies with
respect to any Infoseek voting stock or becoming a "participant" in
any "election contest," as such terms are used in Rule 14(a)-11 of
Regulation 14A promulgated under the Exchange Act, relating to the
election of directors of Infoseek,
. Any termination by Disney of the trademark license agreement between
Disney and Infoseek, as a result of one or more of the following
events:
. Infoseek's failure to use commercially reasonable efforts to
meet certain spending requests for GO Network, at any time after
a majority of the members of Infoseek's Board of Directors are
Disney directors,
. The acquisition by any person or group of 25% or more of the
voting power of Infoseek thereof if the event that causes Disney
to have such termination right is either a transfer by Disney of
Infoseek shares, other than a transfer pursuant to a third party
tender offer, or after a majority of the members of Infoseek's
Board of Directors are Disney directors, an issuance of shares
by Infoseek which results in a third party owning 25% or more of
the total current voting power of Infoseek, or
. The bankruptcy or receivership of Infoseek if the event that
causes such termination right is that Disney, in its capacity as
a shareholder, and not as a creditor, of Infoseek, has applied
for or actively supported the appointment or receiver for
Infoseek and such receiver has been appointed.
. A transfer by Disney of Infoseek shares which results in a third
party owning 25% or more of the total current voting power of
Infoseek, other than a transfer pursuant to a third party tender
offer,
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<PAGE>
. During or after the standstill period, unless Disney owns 50% or
more of the total current voting power of Infoseek, the occurrence
of any of the first four items set forth in the above definition of
an event requiring disinterested shareholder approval,
. Any dissolution or liquidation of Infoseek,
. Voluntary filing of a petition for bankruptcy or receivership by
Infoseek, or the failure to oppose any other person's petition for
bankruptcy or any other person's action to appoint a receiver of
Infoseek, or
. Any amendment, modification or waiver, including a termination other
than in accordance with the various termination provisions contained
in the governance agreement, of any of the provisions of the
governance agreement.
Quando has no such provisions in its articles, bylaws or any other agreement.
Class Voting in Certain Corporate Transactions
Under Delaware law, certain amendments of a corporation's certificate of
incorporation must be approved by a majority of the outstanding shares of each
class of stock (without regard to limitations on voting rights). With certain
exceptions, any merger or sale of all or substantially all of the assets of a
corporation must be approved by the holders of a majority of the outstanding
stock of the corporation. Oregon law does not generally require separate class
votes of all voting classes in order to approve charter amendments and sales of
substantially all the corporate assets. Oregon law, however, provides that all
classes of stock, even nonvoting classes of stock, vote on charter amendments,
mergers and share exchanges that affect the rights of holders of such class.
See "--Supermajority and Disinterested Approvals."
Business Combinations/Merger
Under Section 203 of the Delaware General Corporation Law, a Delaware
corporation is prohibited from engaging in a business combination with an
interested shareholder, as defined below, for three years following the date
that such person or entity becomes an interested shareholder. With certain
exceptions, an interested shareholder is a person or entity who or which owns,
individually or with or through certain other persons or entities, 15% or more
of the corporation's outstanding voting stock, including any rights to acquire
stock pursuant to an option, warrant, agreement, arrangement or understanding,
or upon the exercise of conversion or exchange rights, and stock with respect
to which the person has voting rights only. The three-year moratorium imposed
by Section 203 on business combinations of Section 203 does not apply if one or
more of the following applies:
. Prior to the date on which such stockholder becomes an interested
stockholder, the board of directors of the subject corporation approves
either the business combination or the transaction that resulted in the
person or entity becoming an interested stockholder,
. Upon consummation of the transaction that made him or her an interested
stockholder, the interested stockholder owns at least 85% of the
corporation's voting stock outstanding at the time the transaction
commenced, excluding from the 85% calculation shares owned by directors
who are also officers of the subject corporation and shares held by
employee stock plans that do not give employee participants the right to
decide confidentially whether to accept a tender or exchange offer, or
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<PAGE>
. On or after the date such person or entity becomes an interested
stockholder, the board of directors approves the business combination
and it is also approved at a stockholder meeting by 66 2/3% of the
outstanding voting stock not owned by the interested stockholder.
Although a Delaware corporation to which Section 203 applies may elect not to
be governed by Section 203, the Infoseek Board of Directors intends that it be
governed by Section 203. Infoseek believes that most Delaware corporations have
availed themselves of this statute and have not opted out of Section 203.
Infoseek believes that Section 203 will encourage any potential acquiror to
negotiate with the Infoseek Board of Directors. Section 203 also might have the
effect of limiting the ability of a potential acquiror to make a two-tiered bid
for Infoseek in which all stockholders would not be treated equally.
Stockholders should note, however, that the application of Section 203 to
Infoseek will confer upon its Board of Directors the power to reject a proposed
business combination in certain circumstances, even though a potential acquiror
may be offering a substantial premium for Infoseek's shares over the then-
current market price. Section 203 would also discourage certain potential
acquirors unwilling to comply with its provisions.
Oregon law contains a "business combinations" provision that is essentially the
same as Section 203 of the Delaware law.
Appraisal Rights
Under Oregon law and Delaware law, a shareholder of a corporation participating
in certain major corporate transactions may, under varying circumstances, be
entitled to dissenters' rights or to appraisal rights pursuant to which such
shareholder may receive cash in the amount of the fair market value of the
shares held by such shareholder (as determined by a court or by agreement of
the corporation and the shareholder) in lieu of the consideration such
shareholder would otherwise receive in the transaction. The limitations on the
availability of appraisal rights under Oregon law are different from those
under Delaware law. Under Delaware law, such fair market value is determined
exclusive of any element of value arising from the accomplishment or
expectation of the merger or consolidation, and such appraisal rights are not
available in the following situations:
. With respect to the sale, lease or exchange of all or substantially all
of the assets of a corporation,
. With respect to a merger or consolidation by a corporation the shares of
which are either listed on a national securities exchange or are held of
record by more than 2,000 holders if such stockholders receive only
shares of the surviving corporation or shares of any other corporation
that are either listed on a national securities exchange or held of
record by more than 2,000 holders, plus cash in lieu of fractional
shares of such corporations, or
. To stockholders of a corporation surviving a merger if no vote of the
stockholders of the surviving corporation is required to approve the
merger under Delaware law.
Under Oregon law, appraisal rights are generally not available to holders of
shares of any class or series if the shares of the class or series were
registered with respect to a merger on a national securities exchange or quoted
on the Nasdaq National Market as a national market security on the record date
for the meeting at which the merger is to be approved.
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Dissenters' rights are available to the shareholders of Quando with respect to
the merger. See "Dissenters' Rights."
Inspection of Shareholder List
Delaware law allows any shareholder to inspect the shareholder list for a
purpose reasonably related to such person's interest as a shareholder. Delaware
law also provides for inspection rights as to a list of stockholders entitled
to vote at a meeting within a ten day period preceding a stockholders' meeting
for any purpose germane to the meeting. Oregon law allows any shareholder to
inspect the shareholder list beginning two days after notice of a meeting is
given for which the list was prepared and continuing through the meeting.
Bylaws
Under Delaware law, the corporation's bylaws may be adopted, amended or
repealed by the stockholders of the corporation. However, under Delaware law, a
corporation may, in its certificate of incorporation, confer the power to
adopt, amend, or repeal the bylaws upon the directors, subject to the
stockholders' right to do the same. The Infoseek certificate provides that the
board of directors has the right to adopt, amend, or repeal the bylaws. Under
Oregon law, a corporation's bylaws may be adopted, amended or repealed either
by the board of directors or the shareholders of the corporation, unless the
corporation's articles provide that the shareholders solely have the power to
amend or repeal the bylaws, or the shareholders, in amending or repealing a
particular bylaw, provide expressly that the board of directors may not amend
or repeal that bylaw. The Quando articles grant to its directors the power to
alter, amend or repeal any bylaws or adopt new bylaws, subject to repeal or
change of action by the shareholders.
Control Share Act
The Oregon Control Share Act generally provides that a person who acquires
"control shares" cannot vote the shares unless voting rights are approved by
the corporation's preexisting disinterested shareholders. Delaware law does not
contain an equivalent to the Control Share Act.
Dissolution
Under Oregon law, a dissolution must be approved by written consent of all
shareholders or the dissolution must be initiated by the board of directors
and, unless the articles of incorporation or the board requires a greater vote
or a vote by voting groups, approved by a majority of the votes entitled to be
cast on the proposal for dissolution. The Quando articles do not contain any
such supermajority or voting group requirement. Under Delaware law, unless the
board of directors approves the proposal to dissolve, the dissolution must be
unanimously approved by all the stockholders entitled to vote thereon. Only if
the dissolution is initially approved by the board of directors may the
dissolution be approved by a simply majority of the outstanding shares of the
corporation's stock entitled to vote. In the event of such a board-initiated
dissolution, Delaware law allows a Delaware corporation to include in its
certificate of incorporation a supermajority (greater than a simple majority)
voting requirement in connection with dissolutions. The Infoseek certificate
contains a supermajority voting requirement. See "--Supermajority and
Disinterested Approvals."
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LEGAL MATTERS
Certain legal matters in connection with the issuance of Infoseek common stock
in the merger, and certain federal income tax consequences of the merger will
be passed upon for Infoseek by Wilson Sonsini Goodrich & Rosati, Professional
Corporation. Certain federal income tax consequences of the merger will be
passed upon for Quando by Pillsbury Madison & Sutro LLP.
EXPERTS
The consolidated financial statements of Infoseek at December 31, 1997 and 1996
and for each of the three years in the period ended December 31, 1997 included
in this proxy statement/prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
The consolidated financial statements of Starwave as of October 4, 1998 and
September 28, 1997 and for the year ended October 4, 1998 and the period from
January 1, 1997 to September 28, 1997 included in this proxy
statement/prospectus have been so included in reliance on the report (which
contains explanatory paragraphs relating to transactions which changed
Starwave's capital and operating structure as described in Note 1 to the
consolidated financial statements) of PricewaterhouseCoopers LLP, independent
accountants, appearing elsewhere herein, given on the authority of said firm as
experts in auditing and accounting.
The financial statements of Starwave as of and for the year ended December 31,
1996 have been included in this proxy statement/prospectus in reliance upon the
report of KPMG Peat Marwick LLP, independent auditors, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
Effective April 24, 1997, Starwave's Board of Directors dismissed KPMG Peat
Marwick LLP as its independent accountants and engaged PricewaterhouseCoopers
LLP as its independent accountants. The reports of KPMG Peat Marwick LLP, as
Starwave's former accountants, on the financial statements of Starwave for the
fiscal years ended December 31, 1996 and 1995 contained no adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles. During the period of KPMG Peat Marwick
LLP's engagement as Starwave's accountants in Starwave's two most recent fiscal
years, there were no disagreements with KPMG Peat Marwick LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
KPMG Peat Marwick LLP would have caused them to make reference thereto in their
report on Starwave's financial statements. Prior to April 24, 1997, Starwave
had not consulted with PricewaterhouseCoopers LLP on items regarding the
application of accounting principles to a specific completed or contemplated
transaction, the type of audit opinion that might be rendered on Starwave's
financial statements, or any matter that was the subject of a disagreement or
reportable event.
The financial statements of Quando as of December 31, 1997 and 1996, and for
each of the years in the three-year period ended December 31, 1997, have been
included in this proxy statement/prospectus
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in reliance upon the report of KPMG Peat Marwick LLP, independent auditors,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing. The report of KPMG Peat Marwick LLP covering the
December 31, 1997, financial statements contains an explanatory paragraph that
states that Quando's recurring losses from operations and net capital
deficiency raise substantial doubt about the entity's ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of that uncertainty.
164
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INFOSEEK CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP................................................. F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations ...................................... F-4
Consolidated Statements of Cash Flows ...................................... F-5
Consolidated Statements of Shareholders' Equity ............................ F-6
Notes to Consolidated Financial Statements.................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Infoseek Corporation
We have audited the accompanying consolidated balance sheets of Infoseek
Corporation as of December 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Infoseek Corporation at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
San Jose, California
January 16, 1998,
except for Note 8, as to which the date is February 12, 1998
and Note 2, as to which the date is April 17, 1998
F-2
<PAGE>
INFOSEEK CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1997 1996 1998
-------- -------- -------------
ASSETS
------ (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................. $ 3,323 $ 3,786 $ 6,801
Short-term investments..................... 28,116 42,867 47,740
Accounts receivable, less allowance for
doubtful accounts of $1,675 in 1998, $980
in 1997, and $350 in 1996................. 6,921 2,428 7,619
Prepaid to service providers............... -- -- 5,838
Other current assets....................... 648 371 998
-------- -------- --------
Total current assets..................... 39,008 49,452 68,996
Property and equipment:
Computer and office equipment.............. 16,525 9,651 24,958
Furniture and fixtures..................... 935 307 1,546
Leasehold improvements..................... 1,323 108 2,153
-------- -------- --------
18,783 10,066 28,657
Less accumulated depreciation and
amortization.............................. 8,295 2,479 13,480
-------- -------- --------
Net property and equipment................... 10,488 7,587 15,177
Direct acquisition costs..................... -- -- 2,825
Deposits and other assets.................... 1,993 1,293 3,315
-------- -------- --------
Total assets............................. $ 51,489 $ 58,332 $ 90,313
======== ======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable........................... $ 4,861 $ 3,269 $ 6,717
Accrued payroll and related expenses....... 1,630 1,362 2,191
Accrued liabilities to service providers... 4,221 -- 1,558
Other accrued liabilities.................. 2,262 1,070 2,418
Deferred revenue........................... 2,564 760 4,789
Accrued restructuring and other charges.... 1,877 -- --
Short-term obligations..................... 2,575 994 2,683
Short-term portion of capital lease
obligations............................... -- -- 259
-------- -------- --------
Total current liabilities................ 19,990 7,455 20,615
Long-term obligations........................ 4,493 1,892 2,668
Long-term portion of capital lease
obligations................................. -- -- 313
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value:
Authorized shares--5,000,000
No shares issued and outstanding........... -- -- --
Common stock, no par value:
Authorized shares--60,000,000
Issued and outstanding shares--31,508,000
in 1998, 27,534,000 in 1997, and
25,691,000 in 1996........................ 76,000 73,754 121,292
Accumulated deficit.......................... (48,030) (20,771) (53,724)
Deferred compensation........................ (753) (3,546) (717)
Notes receivable from shareholders........... (211) (452) (134)
-------- -------- --------
Total shareholders' equity............... 27,006 48,985 66,717
-------- -------- --------
Total liabilities and shareholders'
equity.................................. $ 51,489 $ 58,332 $ 90,313
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
INFOSEEK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -------------------
1997 1996 1995 1998 1997
-------- -------- ------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Advertising revenues....... $ 32,941 $ 15,095 $ 1,032 $ 45,044 $ 21,062
Softwave licensing
revenues.................. 2,141 -- -- 5,671 1,345
-------- -------- ------- -------- ---------
Total revenues........... 35,082 15,095 1,032 50,715 22,407
COSTS AND EXPENSES
Hosting, content and
website costs............. 6,319 3,194 614 7,956 4,397
Research and development... 7,900 4,550 1,175 7,432 5,879
Sales and marketing........ 34,320 20,455 1,488 35,144 22,520
General and
administrative............ 7,042 4,177 1,148 7,876 5,242
Restructuring and other
charges................... 7,349 -- -- -- 7,349
-------- -------- ------- -------- ---------
Total costs and
expenses................ 62,930 32,376 4,425 58,408 45,387
-------- -------- ------- -------- ---------
Operating loss............... (27,848) (17,281) (3,393) (7,693) (22,980)
INTEREST INCOME (EXPENSE)
Interest income............ 1,943 1,771 115 2,516 1,502
Interest expense........... (657) (428) (18) (517) (436)
-------- -------- ------- -------- ---------
1,286 1,343 97 1,999 1,066
-------- -------- ------- -------- ---------
NET LOSS..................... $(26,562) $(15,938) $(3,296) $ (5,694) $ (21,914)
======== ======== ======= ======== =========
Basic and diluted net loss
per share................... $ (1.00) $ (0.72) $ (0.21) $ (0.19) $ (0.83)
Shares used in computing
basic and diluted net loss
per share (pro forma in
1995)....................... 26,627 22,120 15,535 30,512 26,270
</TABLE>
See accompanying notes.
F-4
<PAGE>
INFOSEEK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- -------------------
1997 1996 1995 1998 1997
-------- -------- ------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss..................... $(26,562) $(15,938) $(3,296) $ (5,694) $(21,914)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization............... 4,849 2,157 438 5,185 3,920
Provision for doubtful
accounts................... 930 651 42 1,045 242
Writedown of restructure
related assets............. 2,080 -- -- -- --
Amortization of unearned
compensation related to
stock options.............. 832 1,347 44 314 717
Amortization of warrants
issued in connection with
term loan.................. -- -- 21 -- --
Fair value assigned to
services provided by
Netscape................... -- -- 200 -- --
Changes in operating assets
and liabilities
Accounts receivable......... (5,420) (2,580) (541) (1,743) (2,070)
Other current assets........ (211) (260) (92) (350) (186)
Prepaid to service
providers.................. -- -- -- (5,838) --
Deposits and other current
assets..................... (1,490) -- -- (1,322) (898)
Direct acquisition costs.... -- -- -- (2,825) --
Accounts payable............ 1,491 2,047 1,211 1,856 (1,219)
Accrued payroll and related
expenses................... 253 1,291 67 561 (237)
Accrued liabilities to
service providers.......... 4,221 -- -- (2,663) 2,357
Other accrued liabilities... 1,192 457 498 156 229
Deferred revenue............ 1,804 760 -- 2,225 854
Accrued restructuring and
other charges.............. 1,877 -- -- (1,877) 2,904
-------- -------- ------- --------- --------
Net cash used in operating
activities................. (14,154) (10,068) (1,408) (10,970) (15,301)
INVESTING ACTIVITIES
Purchases of available-for-
sale investments............ (44,769) (92,966) (2,483) (147,907) (29,667)
Proceeds from sales of
available-for-sale
investments................. 59,520 50,596 1,986 128,283 44,428
Issuance of notes
receivable.................. (950) (600) -- -- --
Purchase of property and
equipment................... (7,597) (6,857) (2,829) (9,170) (7,479)
-------- -------- ------- --------- --------
Net cash provided by (used
in) investing activities... 6,204 (49,827) (3,326) (28,794) 7,282
FINANCING ACTIVITIES
Proceeds from term loan...... 5,265 2,573 967 133 5,000
Repayments of term loan...... (1,082) (763) (100) (1,850) (815)
Principal payments on capital
leases...................... -- -- -- (132) --
Proceeds from issuance of
convertible debt............ 305 -- -- -- --
Payment of deposit........... -- (693) -- -- --
Proceeds from sale of
convertible preferred stock,
net of issuance costs....... -- 17,619 4,430 -- --
Proceeds from sale of common
stock, net of issuance
costs....................... 1,217 43,785 -- 43,015 972
Proceeds from the exercise of
stock options............... 1,183 6 -- 1,520 1,018
Proceeds from employee stock
purchase plan............... 295 -- -- 479 295
Proceeds from repayment of
notes receivable from
shareholders................ 302 28 -- 77 302
Repurchase of common stock... -- (3) (2) -- --
-------- -------- ------- --------- --------
Net cash provided by
financing activities....... 7,485 62,552 5,295 43,242 6,772
-------- -------- ------- --------- --------
Net Increase (decrease) in
cash and cash equivalents... (465) 2,657 561 3,478 (1,247)
Cash and cash equivalents at
beginning of period......... 3,788 1,129 568 3,323 3,788
-------- -------- ------- --------- --------
Cash and cash equivalents at
end of period............... $ 3,323 $ 3,786 $ 1,129 $ 6,801 $ 2,541
======== ======== ======= ========= ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Unearned compensation related to stock options amounted to $440,000, $3,102,000
and $2,124,000 for the years ended December 31, 1997, 1996 and 1995,
respectively, and $352,000 (unaudited) and none (unaudited) for the nine months
ended September 30, 1998 and 1997, respectively. Cash paid for interest expense
amounted to $657,000, $428,000 and $18,000 for the years ended December 31,
1997, 1996 and 1995, respectively, and $517,000 (unaudited) and $436,000
(unaudited) for the nine months ended September 30, 1998 and 1997,
respectively. Assets acquired under capital leases totaled $704,000 (unaudited)
and none (unaudited) for the nine months ended September 30, 1998 and 1997,
respectively (none for the years ended December 31, 1997, 1996, and 1995).
See accompanying notes.
F-5
<PAGE>
INFOSEEK CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK RECEIVABLE TOTAL
----------------- ---------------- ACCUMULATED DEFERRED FROM SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT DEFICIT COMPENSATION SHAREHOLDERS EQUITY
------- -------- ------ -------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1994................... 9,421 $ 2,020 3,783 $ 38 $ (1,537) $ -- $ -- $ 521
Issuance of Series A
preferred stock for
purchased technology... 559 224 -- -- -- -- -- 224
Repurchase of common
stock from founder..... -- -- (155) (2) -- -- -- (2)
Issuance of Series C
convertible preferred
stock for cash, net of
issuance costs......... 5,600 4,430 -- -- -- -- -- 4,430
Issuance of warrants for
shares of series C
convertible preferred
stock.................. -- 21 -- -- -- -- -- 21
Issuance of common stock
to employee for note
receivable............. -- -- 372 50 -- -- (50) --
Unearned compensation
related to stock
options................ -- -- -- 2,124 -- (2,124) -- --
Amortization of unearned
compensation related to
stock options.......... -- -- -- -- -- 44 -- 44
Fair value assigned to
services provided by
Netscape............... -- -- -- 200 -- -- -- 200
Net loss and
comprehensive net
loss................... -- -- -- -- (3,296) -- -- (3,296)
------- -------- ------ -------- -------- ------- ----- --------
BALANCE AT DECEMBER 31,
1995................... 15,580 6,695 4,000 2,410 (4,833) (2,080) (50) 2,142
Cancellation of
convertible preferred
stock issued for
purchased technology... (280) -- -- -- -- -- -- --
Unearned compensation
related to stock
options................ -- -- -- 3,102 -- (3,102) -- --
Amortization of unearned
compensation........... -- -- -- -- -- 1,346 -- 1,346
Issuance of convertible
preferred stock for
cash, net of issuance
costs.................. 2,267 17,619 -- -- -- -- -- 17,619
Repurchases of common
stock.................. -- -- (325) (3) -- -- -- (3)
Issuance of common stock
to officers............ -- -- 787 910 -- -- (610) 300
Cancellation of note
receivable and
repurchase of shares... -- -- (365) (470) -- 290 180 --
Payment on shareholders'
notes receivable....... -- -- -- -- -- -- 28 28
Conversion of
convertible preferred
stock into common stock
upon the initial public
offering............... (17,567) (24,314) 17,567 24,314 -- -- -- --
Issuance of common stock
in connection with
initial public
offering, net of
issuance costs......... -- -- 3,973 43,485 -- -- -- 43,485
Exercise of common stock
options................ -- -- 54 6 -- -- -- 6
Net loss and
comprehensive net
loss................... -- -- -- -- (15,938) -- -- (15,938)
------- -------- ------ -------- -------- ------- ----- --------
BALANCE AT DECEMBER 31,
1996................... -- -- 25,691 73,754 (20,771) (3,546) (452) 48,985
Issuance of common stock
and activity from
merger with WebChat
Communications, Inc.... -- -- 167 571 (697) -- -- (126)
Issuance of common stock
for cash............... -- -- 58 1,217 -- -- -- 1,217
Unearned compensation
related to stock
options................ -- -- -- 440 -- (440) -- --
Amortization of unearned
compensation........... -- -- -- -- -- 832 -- 832
Reversal of unearned
compensation........... -- -- -- (2,071) -- 2,071 -- --
Writeoff deferred
compensation related to
restructure............ -- -- -- -- -- 330 -- 330
Repurchases of common
stock.................. -- -- (27) -- -- -- -- --
Issuance of common stock
for notes receivable... -- -- 38 61 -- -- (61) --
Payment on shareholders'
notes receivable....... -- -- -- -- -- -- 302 302
Conversion of debt into
common stock........... -- -- 27 550 -- -- -- 550
Exercise of common stock
options................ -- -- 1,445 1,183 -- -- -- 1,183
Issuance of common stock
through employee stock
purchase plan.......... -- -- 44 295 -- -- -- 295
Issuance of common stock
from exercise of
warrants............... -- -- 91 -- -- -- -- --
Net loss and
comprehensive net
loss................... -- -- -- -- (26,562) -- -- (26,562)
------- -------- ------ -------- -------- ------- ----- --------
BALANCE AT DECEMBER 31,
1997................... -- -- 27,534 76,000 (48,030) (753) (211) 27,006
Unearned compensation
related to stock
options (unaudited).... -- -- -- 352 -- (352) -- --
Amortization of unearned
compensation
(unaudited)............ -- -- -- -- -- 314 -- 314
Reversal of unearned
compensation
(unaudited)............ -- -- -- (74) -- 74 -- --
Payment on shareholders'
notes receivable
(unaudited)............ -- -- -- -- -- -- 77 77
Exercise of common stock
options (unaudited).... -- -- 480 1,520 -- -- -- 1,520
Issuance of common stock
through employee stock
purchase plan
(unaudited)............ -- -- 44 479 -- -- -- 479
Issuance of common stock
in connection with
follow-on public
offering, net of
issuance costs
(unaudited)............ -- -- 3,450 43,015 -- -- -- 43,015
Net loss and
comprehensive net loss
(unaudited)............ -- -- -- -- (5,694) -- -- (5,694)
------- -------- ------ -------- -------- ------- ----- --------
BALANCE AT SEPTEMBER 30,
1998 (UNAUDITED)....... -- $ -- 31,508 $121,292 $(53,724) $ (717) $(134) $ 66,717
======= ======== ====== ======== ======== ======= ===== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization--Infoseek Corporation, (the "Company"), provides leading Internet
search and navigation technology, products and services that use the Web to
connect its viewers' personal, work and community lives. As a "connected" media
company, Infoseek is able to segment viewers by interest area, providing
advertisers with focused and targeted audiences. The Infoseek Service is a
comprehensive Internet gateway that combines search and navigation with
directories of relevant information sources and content sites, offers chat and
instant messaging for communicating shared interest and facilitates the
purchase of related goods and services. The Company conducts its business
predominantly within one industry segment.
Basis of Presentation--The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary. All significant
intercompany transactions and balances have been eliminated. As more fully
described in Note 2, a wholly owned subsidiary of the Company merged with
WebChat Communications, Inc. ("WebChat") in April 1998 in a pooling of
interests transaction. The consolidated financial statements for 1997 have been
restated to include the financial position, results of operations and cash
flows of WebChat. Prior to 1997, these amounts for WebChat were not significant
compared to those of the Company and accordingly, the Company's previously
issued financial statements were not restated. An adjustment was made to the
beginning 1997 common stock and accumulated deficit as a result of not
restating the Company's financial statements prior to 1997.
Unaudited Interim Financial Information--The accompanying consolidated
financial statements at September 30, 1998 and for the nine months ended
September 30, 1998 and 1997 are unaudited but include all adjustments
(consisting of normal recurring accruals) which, in the opinion of management,
are necessary for a fair statement of the financial position and the operating
results and cash flows for the interim date and periods presented. Results for
the interim period ended September 30, 1998 are not necessarily indicative of
results for the entire fiscal year or future periods.
Cash and Cash Equivalents--The Company considers all highly liquid debt
instruments which are purchased with a maturity of three months or less to be
cash equivalents.
Short-Term Investments--The Company accounts for investments in accordance with
Financial Accounting Standards Board, Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Management determines the
appropriate classification of debt securities at the time of purchase and
reevaluates such designation as of each balance sheet date. The Company's
short-term investments, which consist primarily of commercial paper and
government agency notes with maturities of one year or less, are classified as
available-for-sale and are carried at amortized cost which approximates fair
market value. The amortized cost of debt securities in this category is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization, as well as any interest on the securities, is included in
interest income. Realized gains and losses and
F-7
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
declines in value judged to be other-than-temporary on available-for-sale
securities are included in interest income (expense). The cost of securities
sold is based on the specific identification method. The Company had no
investments in equity securities at September 30, 1998 and December 31, 1997
and 1996.
Property and Equipment--Property and equipment are carried at cost less
accumulated depreciation. The Company depreciates property and equipment using
the straight-line method over the estimated useful lives of three to five
years. Leasehold improvements are amortized using the straight-line method over
the shorter of the life of the related asset or the term of the lease.
Research and Development--Research and development expenditures are generally
charged to operations as incurred. Financial Accounting Standards Board,
Statement No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed," requires the capitalization of certain software
development costs subsequent to the establishment of technological feasibility.
In the Company's case, capitalization would begin upon completion of a working
model as the Company does not prepare detail program designs as part of the
development process. As of September 30, 1998 and December 31, 1997 and 1996,
capitalized costs of this nature were insignificant.
Stock-Based Compensation--The Company has elected to follow Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting of Stock Issued to
Employees" and related interpretations, in accounting for its employee stock
options because, as discussed below, the alternative fair value accounting
provided for under Financial Accounting Standards Board, Statement No. 123
(SFAS No. 123) "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, with the exception of certain options granted
during the nine months ended September 30, 1998 and 1997 and for the years
ended December 31, 1997, 1996 and 1995 as discussed in Note 9, no compensation
expense is recognized as the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant.
Long-Lived Assets--In 1995, the Financial Accounting Standards Board released
the Statement No. 121 (SFAS No. 121), "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. SFAS No. 121 has not had a material impact on the
consolidated financial statements of the Company.
Revenue Recognition--The Company's advertising revenues are derived principally
from short-term advertising contracts in which the Company guarantees a minimum
number of impressions for a fixed fee. Advertising revenues are recognized
ratably over the term of the contract provided that the monthly minimum
impressions are met, the Company does not have any remaining significant
F-8
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
obligations, and collection of the resulting receivable is probable. To the
extent the minimum guaranteed impressions are not met, the Company defers
recognition of the revenue until guaranteed impressions levels are met.
Also included in advertising revenues is the exchange by the Company of
advertising space on the Company's Web sites for reciprocal advertising space
in other media publications or other Web sites or receipt of applicable goods
and services. Revenues from these exchange transactions are recorded as
advertising revenue at the estimated fair value of the goods and services
received and are recognized when both the Company's advertisements and the
reciprocal advertisements are run, or goods or services are received.
Advertising revenues recognized under these trading activities were less than
10% of total revenues for all periods presented.
In late 1997, the Company released a new version of its service which now
features 18 "channels," and provides opportunities for revenue from the sale of
channel sponsorships, as well as to enable the Company to share in a portion of
the revenue generated by its viewers with these channel sponsors. Revenue
generated by channel sponsors is included in advertising revenues and is
generally recognized on a straight line basis over the term of the agreements
provided that minimum impressions are met.
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position No. 97-2, Software Revenue Recognition ("SOP 97-2"),
which superseded Statement of Position 91-1, Software Revenue Recognition, and
provides guidance on generally accepted accounting principles for recognizing
revenue on software transactions.
SOP 97-2 requires that revenue recognized from software arrangements be
allocated to each element of the arrangement based on the relative fair values
of the elements, such as software products, upgrades, enhancements, post
contract customer support, installation, or training. Under SOP 97-2, the
determination of fair value is based on objective evidence which is specific to
the vendor. If such evidence of fair value for each element of the arrangement
does not exist, all revenue from the arrangement is deferred until such time
that evidence of fair value does exist or until all elements of the arrangement
are delivered. SOP 97-2 was amended in February 1998 by Statement of Position
98-4 ("SOP 98-4"), Deferral of the Effective Date of a Provision of SOP 97-2,
which deferred for one year the specification of what was considered vendor
specific objective evidence of fair value for the various elements in a
multiple element arrangement. The Company has adopted the provisions of these
SOPs as of January 1, 1998.
The Company recognizes revenue allocable to software licenses and specified
upgrades upon delivery of the software product or upgrade to the end user,
unless the fee is not fixed or determinable or collectibility is not probable.
The Company considers all arrangements with payment terms extending beyond
twelve months and other arrangements with payment terms longer than normal not
to be
F-9
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
fixed or determinable. If the fee is not fixed or determinable, revenue is
recognized as payments become due from the customer.
Postcontract customer support ("PCS") includes telephone support, bug fixes,
and rights to upgrades on a when-and-if-available basis. In software
arrangements that include rights to multiple software products, specified
upgrades, PCS, and/or other services, the Company allocates the total
arrangement fee among each deliverable based on the relative fair value of each
deliverable based on vendor-specific objective evidence. Revenue allocable to
PCS is recognized on a straight-line basis over the period PCS is provided.
The Company derived revenues of $5,671,000 and $1,345,000 for the nine months
ended September 30, 1998 and 1997, respectively, and $2,141,000 for the year
ended December 31, 1997 from the licensing of its Ultraseek technology and the
sale of PCS.
During 1996 and 1995, the Company also derived revenues from fees related to a
premium subscription service offered to business and professional users.
Revenues from this service were recognized over the period the services were
provided. During the third quarter of 1996, the Company discontinued this
service.
Advertising Costs--Advertising costs are expensed as incurred. Advertising
costs, which include service provider fees and reciprocal advertising amounted
to $17,697,000 and $10,104,000 for the nine months ended September 30, 1998 and
1997, respectively, and were $15,104,000 and $8,523,000 for the years ended
December 31, 1997 and 1996, respectively. There were no advertising costs for
the year ended December 31, 1995. The Company does not incur any significant
direct response advertising costs.
Concentration of Credit Risk--Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of cash
equivalents, short-term investments, and trade receivables. The Company places
its cash equivalents and short-term investments with high-quality financial
institutions. Through September 30, 1998 and December 31, 1997, the Company
invested its excess cash in commercial paper, government agency notes and money
market funds. Through September 30, 1998 and December 31, 1997, the Company
operates predominantly in one business segment and sells advertising to various
companies across several industries. The Company generally does not require
collateral. The Company maintains allowances for credit losses, and such losses
have been within management's expectations. For the nine months ended September
30, 1998 and 1997 and for the year ended December 31, 1997, no customer
accounted for greater than 10% of revenues. For the year ended December 31,
1996, one customer (a related party, see Note 13) accounted for 13% of revenues
and for the year ended December 31, 1995, another customer accounted for 13% of
revenues.
Net Loss Per Share--In 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share ("SFAS No. 128"). SFAS No. 128 replaced
the calculation of primary and fully
F-10
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
diluted earnings per share with basic and diluted earnings per share. Unlike
primary and fully diluted earnings per share, outstanding nonvested shares are
not included in the computations of basic and diluted earnings per share until
the time-based vesting restriction has lapsed. Basic earnings per share also
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. In addition, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 98, Earnings Per Share in February 1998.
Staff Accounting Bulletin No. 98 effected the treatment of certain stock and
warrants ("cheap stock") issued within a one-year period prior to an initial
public offering. Earnings per share amounts presented have been restated to
conform to the requirements of SFAS No. 128 and Staff Accounting Bulletin No.
98.
Net loss per share information for 1997 has been adjusted on a retroactive
basis to give effect to the merger with WebChat (see Note 2), whereby each
share of WebChat was converted to 0.03 shares of Infoseek common stock. Share
information for 1996 and 1995 has not been restated due to WebChat amounts
being insignificant.
Pro Forma Net Loss Per Share--Pro forma net loss per share for the year ended
December 31, 1995 has been computed as described above and also gives effect,
even if antidilutive, to common equivalent shares from preferred stock that
automatically converted upon the closing of the Company's initial public
offering (using the as-if-converted method).
Use of Estimates in the Preparation of Financial Statements--The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported amounts of revenue and expenses during the reporting period. Actual
results inevitably will differ from those estimates, and such differences may
be material to the financial statements.
Comprehensive Income--During 1998, the Company adopted the Financial Accounting
Standards Board Statement No. 130, Reporting Comprehensive Income (SFAS No.
130). SFAS No. 130 establishes rules for reporting and displaying comprehensive
income or comprehensive loss. The Company's total comprehensive net loss was
the same as its net loss for the nine months ended September 30, 1998 and 1997
and for the years ended December 31, 1997, 1996 and 1995.
New Accounting Pronouncements--In June 1997, the Financial Accounting Standards
Board issued Statement No. 131, Disclosures About Segments of An Enterprise and
Related Information (SFAS No. 131). SFAS No. 131 is effective for the Company
for the year ended December 31, 1998 and requires the Company to use the
"management approach" in disclosing segment information. The Company does not
believe that the adoption of SFAS No. 131 will have a material impact on the
Company's results of operations, cash flows, or financial position.
F-11
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
Reclassifications--Certain reclassifications, none of which affected net loss,
have been made to prior year's amounts in order to conform to the current
year's presentation.
2. BUSINESS COMBINATION
On April 17, 1998, the Company acquired WebChat in a tax-free reorganization in
which a wholly owned subsidiary of the Company was merged directly into
WebChat. The Company has exchanged approximately 316,000 shares of Infoseek
Corporation common stock and has reserved approximately 11,000 shares for
WebChat options assumed by the Company. Each share exchanged represents 0.03
share of common stock of the Company for each share of the common, and
preferred stock of WebChat. Merger related expenses were not significant and
were recorded in the second quarter of 1998. The merger has been accounted for
under the pooling of interests method.
A reconciliation of revenues and net loss of the Company, as previously
reported, WebChat and combined for the year ended December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
REVENUES NET LOSS
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Infoseek................................................. $34,603 $24,623
WebChat.................................................. 479 1,939
------- -------
Combined................................................. $35,082 $26,562
======= =======
</TABLE>
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value amounts have been determined by the Company
using available market information and appropriate valuation methodologies.
However, considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998
------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
SHORT-TERM INVESTMENTS COST GAINS LOSSES FAIR VALUE
---------------------- --------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial paper.................. $43,323 $ 1 $-- $43,324
Money market fund................. 4,417 -- -- 4,417
------- --- --- -------
Total........................... $47,740 $ 1 $-- $47,741
======= === === =======
</TABLE>
F-12
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
SHORT-TERM INVESTMENTS COST GAINS LOSSES VALUE
---------------------- --------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial paper................... $23,007 $-- $-- $23,007
Government agency notes............ 4,003 2 -- 4,005
Money market fund.................. 1,106 -- -- 1,106
------- ---- ---- -------
Total............................ $28,116 $ 2 $-- $28,118
======= ==== ==== =======
<CAPTION>
AT DECEMBER 31, 1996
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
SHORT-TERM INVESTMENTS COST GAINS LOSSES VALUE
---------------------- --------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial paper................... $27,588 $ -- $ -- $27,588
Government agency notes............ 15,279 -- -- 15,279
------- ---- ---- -------
Total............................ $42,867 $ -- $ -- $42,867
======= ==== ==== =======
</TABLE>
Realized gains and losses were insignificant during the nine months ended
September 30, 1998 and 1997 and for the years ended December 31, 1997, 1996 and
1995.
F-13
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
4. OBLIGATIONS
In March 1997, the Company entered into a four year, $5,000,000 equipment term
loan facility. The loan bears interest at the bank's prime rate plus 0.25%
(8.75% at September 30, 1998 and December 31, 1997). Under the terms of the
agreement, the Company grants a security interest in certain assets of the
Company and must maintain financial covenants including minimum tangible net
worth and others based on monthly cash balances with which the Company was in
compliance as of September 30, 1998 and December 31, 1997. Under the equipment
term loan facility, the Company is restricted in its ability to pay dividends.
Interest only payments will be made during the first twelve months and
borrowings and interest will be repaid on a straight-line basis over 36 months
beginning in month thirteen of the facility. As of September 30, 1998 and
December 31, 1997, there was approximately $4,345,000 and $5,000,000,
outstanding against the term loan facility, respectively.
In February 1997, WebChat entered into a three and one half year $300,000
equipment term loan facility. The loan bears interest at the bank's prime rate
plus 2.5% (11% at December 31, 1997). Under the terms of the facility, WebChat
grants a security interest in certain assets and is restricted in its ability
to pay cash dividends. Interest-only payments will be made during the first six
months and principal and interest will be repaid on a straight-line basis over
36 months beginning in month seven of the facility. The Company repaid the
equipment term loan during the nine months ended September 30, 1998 and no
amount was outstanding under the equipment term loan facility as of September
30, 1998. As of December 31, 1997, there was approximately $265,000 outstanding
against the term loan facility.
In 1996 and 1995, the Company entered into term loan agreements with a lending
institution under which the Company borrowed approximately $3,540,000 to
finance the purchase of equipment. Borrowings made under the agreement are due
over 37 months, bear interest which ranges from 15.80% to 16.39%, and are
secured by certain assets of the Company. As of September 30, 1998, December
31, 1997 and December 31, 1996, approximately $1,006,000, $1,741,000 and
$2,886,000 were outstanding against the term loan agreements, respectively. In
connection with the term loan agreements, the Company paid a cash deposit of
$693,000 in 1996 to the lending institution which is included in deposits and
other assets on the balance sheet.
Maturities under these agreements as of September 30, 1998 and December 31,
1997 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
1998........................................... $1,023 $2,575
1999........................................... 2,245 2,344
2000........................................... 1,667 1,733
2001........................................... 416 416
------ ------
$5,351 $7,068
====== ======
</TABLE>
F-14
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
5. COMMITMENTS
The Company leases its facilities under operating lease agreements which expire
at various dates through 2002. Total rent expense for the nine months ended
September 30, 1998 and 1997 was $2,003,000 and $866,000, respectively, and for
the years ended December 31, 1997, 1996 and 1995 total rent expense was
$1,397,000, $379,000 and $86,000, respectively. In January 1998, the Company
signed an agreement to sublease approximately 20,500 square feet of its
Sunnyvale, California facility. In connection with the sublease agreement, the
Company will receive future rent payments of approximately $372,000 in 1998 and
$300,000 in 1999. For the nine months ended September 30, 1998, the Company
recorded sublease rental income of $279,000.
The Company leases certain equipment under noncancelable lease agreements that
are accounted for as capital leases. Equipment under capital lease arrangements
is included in property and equipment and aggregated $704,000 at September 30,
1998. Related accumulated amortization was $209,000 at September 30, 1998.
Amortization expense related to assets under capital leases is included in
depreciation expense. In addition, the capital leases are secured by the
related equipment, and the Company is required to maintain liability and
property damage insurance.
Future minimum lease payments under noncancelable operating leases and capital
leases are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
-------------------- -----------------
OPERATING CAPITAL OPERATING
LEASES LEASES LEASES
---------- -------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
1998.................... $ 723 $ 51 $ 2,128
1999.................... 2,720 307 2,099
2000.................... 2,366 215 2,089
2001.................... 1,950 44 1,985
2002.................... 1,589 -- 1,712
--------- -------- -------
Total minimum payments.. $ 9,348 617 $10,013
========= =======
Less amount representing
interest............... (45)
--------
572
Less current portion.... (259)
--------
$ 313
========
</TABLE>
NETSCAPE
Historically, a large portion of the Company's traffic was derived through the
Web page of Netscape Communications Corporation ("Netscape"). In March 1996,
the Company entered into an agreement with Netscape, which provided that the
Company would be listed as a Premier Provider on Netscape's Web page for the
period from April 10, 1996 to March 31, 1997. This agreement with
F-15
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
Netscape provided for payments of up to an aggregate of $5,000,000 in cash and
reciprocal advertising ($3,500,000 in cash and $1,500,000 in reciprocal
advertising) over the course of the one-year term of the agreement. In March
1997, Infoseek renewed its agreement with Netscape under terms that extended
the current contract through April 30, 1997 and thereafter provided for
Infoseek to be one of four premier providers displayed on Netscape's Web page
for the period of May 1, 1997 through April 30, 1998. The renewed agreement
with Netscape provided for payments of up to an aggregate of $12,500,000 in
cash and reciprocal advertising ($10,000,000 in cash and $2,500,000 in
reciprocal advertising) over the term of the agreement.
As of June 1, 1998, the Company had entered into an one-year agreement with
Netscape with terms that provide for the Company to pay, based on impressions
delivered, up to an aggregate of $12,500,000 in cash to be one of the six non-
exclusive premier providers of navigational services (along with Excite,
Netscape, Lycos, Alta Vista, and LookSmart). Under terms of the agreement, the
Company will receive 15% of premiere provider rotations--the pages served to
visitors who have not selected a preferred provider. The payments to Netscape
are being recognized ratably over the term of the agreement. The Company and
Netscape subsequently renegotiated the agreement (see Note 15).
During the nine months ended September 30, 1998 and 1997, the Company
recognized $6,595,000 and $5,416,000, respectively, of expense related to this
agreement and for the years ended December 31, 1997 and 1996, the Company
recognized $9,583,000 and $3,750,000, respectively, of expense related to this
agreement. The costs of the Netscape agreement are being recognized ratably
over the term of the agreement. As of September 30, 1998, the Company has a
cash commitment ranging from a minimum of $4,150,000 to a maximum of
$12,500,000 depending on the level of traffic delivered by Netscape in
connection with this agreement. At December 31, 1997, the Company had
$7,555,000 of cash commitment remaining in connection with the agreement. At
September 30, 1998 and December 31, 1997, $1,558,000 and $4,221,000 is included
in accrued liabilities to service providers, respectively.
In July 1997, the Company entered into an one-year agreement with Netscape
whereby it was designated as a premier provider of international search and
navigational guide services for the Netscape Net Search Program. Under the
terms of the agreement, the Company will provide services for 10 Netscape local
Web sites. The Company's agreement with Netscape provides for payments ranging
from a minimum of $666,000 ($400,000 in cash and $266,000 in reciprocal
advertising) to a maximum of $1,219,000 ($677,000 in cash and $542,000 in
reciprocal advertising) depending on the level of traffic delivered by
Netscape. For the nine months ended September 30, 1998 and 1997, the Company
incurred sales and marketing expenses of approximately $506,000 and $99,750
under this agreement, respectively. During the year ended December 31, 1997,
Netscape delivered traffic at the
F-16
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
minimum level and as a result the Company recognized sales and marketing
expenses of approximately $333,000 under this agreement. As of September 30,
1998, the Company had a cash commitment of $248,000. At December 31, 1997, the
Company had a cash commitment ranging from a minimum of $74,000 to a maximum of
$351,000 depending on the level of traffic delivered by Netscape in connection
with this agreement. This agreement originally expired on June 30, 1998, but
was subsequently extended to September 30, 1998 under similar terms.
MICROSOFT AND WEBTV NETWORKS
The Company also had an agreement with Microsoft Corporation ("Microsoft") to
provide navigational services on certain Microsoft web sites through which the
Company also receives traffic. In exchange for such traffic, the Company made
available to Microsoft advertising space on the Infoseek service free of
charge. Effective October 1, 1998, the Company terminated the agreement and
entered into a new agreement with Microsoft to become one of five premier
providers of search and navigation services on Microsoft's network of internet
products and services. Under the terms of the new twelve month Microsoft
agreement, the Company is obligated to pay an aggregate of $10,675,000 for a
guaranteed minimum number of impressions on both Microsoft's Internet Explorer
search feature and Microsoft's website. The Company will also pay, based on the
number of impressions delivered, for additional impressions on both Internet
Explorer and Microsoft's website, up to a maximum of $18,000,000. The
accounting treatment for the Microsoft agreement will result in amortizing the
obligation over the one-year term of the agreement, beginning in the quarter
ended December 31, 1998 which is the quarter that the service is launched. In
connection with the agreement, the Company made a prepayment of $5,338,000 as
of September 30, 1998, which is included in prepaid to service providers.
In addition, the Company recently entered into an agreement with WebTV
Networks, Inc. ("WebTV") pursuant to which the Company will be the exclusive
provider of search and directory services to WebTV. Under this two year
agreement, the Company is responsible for managing advertising sales for all of
WebTV's search traffic and the substantial majority of WebTV's current non-
search traffic. Pursuant to the agreement which was effective on August 28,
1998, the Company is obligated to make cash payments to WebTV totaling
$26,000,000, with $15,000,000 of such amount being payable in advance for the
first five quarters upon mutual acceptance of the technology by both parties.
The remaining $11,000,000 is being paid ratably over the last three quarters of
the agreement term. Such payments by the Company are subject to reimbursement
in the event that WebTV is unable to deliver a minimum of 4.5 billion
impressions over the life of the agreement. The Company is to receive all of
the revenue generated from such advertising sales up to a pre-determined amount
that is in excess of the Company's total payment obligations to WebTV under the
agreement, with allocations of such revenue between the Company and WebTV being
made beyond this pre-determined amount. In connection with the agreement, the
Company made a prepayment of $500,000 as of September 30, 1998, which is
included in prepaid to service providers.
F-17
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
CONTINGENCIES
From time to time, the Company may be a party of litigation and claims incident
to the ordinary course of its business. Although the results of litigation and
claims cannot be predicted with certainty, the Company believes that the final
outcome of such matters will not have a material adverse effect on the
Company's financial position results of operations, or cash flows.
6. RESTRUCTURING AND OTHER CHARGES
During the second quarter of 1997, the Company recorded restructuring and other
charges of approximately $7,400,000, of which approximately $6,200,000 related
to a program to discontinue certain business arrangements, which were
determined to be non-strategic, and approximately $1,200,000 related to
management changes. Of these restructuring charges, approximately $5,000,000
involves cash outflows, of which $3,100,000 has been completed as of December
31, 1997. Non-cash restructuring charges of approximately $2,400,000 relate
primarily to the write-down of certain non-strategic business assets. There
have been no material changes to the restructuring plan or in the estimates of
the restructuring costs. As of December 31, 1997, the Company has approximately
$1,900,000 remaining in its restructuring reserve, which was fully utilized as
of September 30, 1998.
7. SHAREHOLDERS' EQUITY
Preferred Stock--On May 15, 1996, the Board of Directors authorized 5,000,000
shares of undesignated preferred stock. In connection with this action, the
Board has the authority to issue in one or more series and to fix the rights,
preferences, privileges, and restrictions thereof, without further vote or
action by the shareholders. No such shares have been issued to date.
Convertible Preferred Stock--Through May of 1996, the Company issued series A,
B, C, and E convertible preferred stock. A portion of the Series E convertible
preferred stock was redeemable at the request of the holder. On June 11, 1996
the Company completed its initial public offering and at that time all
outstanding shares of convertible preferred stock were converted into common
stock on a one-for-one basis.
Common Stock--On May 15, 1996, the Company's Shareholders approved a 3-for-4
reverse stock split of the Company's preferred and common stock. All
outstanding preferred, common and common equivalent shares in the accompanying
financial statements have been retroactively adjusted to give effect to this
reverse stock split. At the same time, the Board of Directors approved the
increase of authorized common stock to 60,000,000 shares.
Founders' Common Stock--The Company has the right, at any time within sixty
days after termination of a founder's employment or service, to repurchase
certain common shares at the price per share paid by the founder. The Company's
right to repurchase lapses with respect to 25% of the total number of shares
held by the founder, commencing twelve months after purchase, and in
F-18
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
monthly increments of 2.08% of the total number of shares thereafter. There
were no founders' common shares subject to repurchase as of September 30, 1998
and at December 31, 1997 and 1996 there were 7,000 and 1,101,000 founders'
common shares subject to repurchase, respectively.
Shareholders' Notes Receivable--During 1997, 1996 and 1995, the Company entered
into agreements with certain officers and employees to sell approximately
38,000, 412,000 and 372,000 shares, respectively, of the Company's common stock
in exchange for full recourse promissory notes. The shares are subject to
repurchase by the Company, and such repurchase options lapse in monthly
increments of 2.08% of the total number of shares purchased. At September 30,
1998 and December 31, 1997 and 1996, there were approximately 53,000, 88,500
and 504,000 common shares, respectively, subject to repurchase by the Company.
Warrants--During 1995, in connection with an equipment financing transaction,
the Company issued warrants to purchase 100,000 shares of Series C convertible
preferred stock at an exercise price of $0.80 per share. These warrants are
exercisable at any time through October 2000. As of December 31, 1997, all
warrants had been exercised. The Company recorded additional interest expense
using the minimum value method to determine the value of the warrants.
Common Stock Reserved For Future Issuance--Shares of common stock reserved for
future issuance are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Preferred stock................................. 5,000 5,000
Stock option plan............................... 6,773 5,753
Employee stock purchase plan.................... 499 143
------ ------
12,272 10,896
====== ======
</TABLE>
8. FOLLOW-ON PUBLIC OFFERING
In February 1998, the Company completed a follow-on public offering of
3,450,000 shares of Common Stock and received proceeds of approximately
$43,015,000 net of underwriting discounts, commissions and other offering
costs.
9. STOCK OPTION/STOCK ISSUANCE PLAN
The Company's Stock Option Plan (the "Predecessor Plan") provides for the grant
of incentive stock options and non statutory stock options to employees and
consultants of the Company at prices ranging from 85% to 110% (depending on the
type of grant) of the fair market value of the common stock on the date of
grant as determined by the Board of Directors.
F-19
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
In April 1996, the Board of Directors adopted the 1996 Stock Option/Stock
Issuance Plan (the "1996 Plan") which was approved by the Company's
shareholders on May 15, 1996. The 1996 Plan is intended to serve as the
successor equity incentive stock issuance program to the Predecessor Plan.
Under the 1996 Plan, 7,225,000 shares of common stock have been authorized for
issuance. In June 1998, the Company's shareholders ratified and approved to
increase the number of shares available for grant by 1,500,000 to a total of
8,725,000 for the 1996 Stock Option/Stock Issuance Plan. The 1996 Plan is
divided into three separate components: the Discretionary Option Grant Program
under which eligible individuals may be granted options to purchase shares of
common stock at an exercise price of not less than 85% of their fair market
value on the grant date; the Stock Issuance Program under which eligible
individuals may be issued shares of common stock directly through the purchase
of such shares at a price of not less than 85% of their fair market value at
the time of issuance or as a bonus tied to the performance of services; and the
Automatic Option Grant Program under which option grants will automatically be
made at periodic intervals to eligible non employee Board members to purchase
shares of common stock at an exercise price equal to 100% of their fair market
value on the grant date.
The vesting and exercise provisions of the option grants are determined by the
Board of Directors. Options generally vest and become exercisable as to 25% of
the shares one year from the date of grant and the balance in monthly
increments over the subsequent three years of service. Options expire no later
than ten years from the date of grant. Options for the purchase of 1,171,000,
583,000 and 845,000 shares were exercisable as of September 30, 1998 and
December 31, 1997 and 1996, respectively.
The Company has elected to follow Accounting Principles Board Opinion No. 25
(APB No. 25), "Accounting of Stock Issued to Employees" and related
interpretations, in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Financial Accounting Standards Board, Statement No. 123 (SFAS No. 123)
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. The
Company, under APB No. 25, generally does not recognize compensation expense as
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant.
Through September 30, 1998 and December 31, 1997, the Company recorded
aggregate deferred compensation of $6,018,000 and $5,666,000, respectively,
representing the difference between the grant price and the deemed fair value
of the Company's common stock granted during those periods. The amortization of
deferred compensation is being charged to operations and is being amortized
over the vesting period of the options, which is typically four years. For the
nine months ended September 30, 1998 and 1997, amortized expenses were $314,000
and $717,000, respectively, and for the years ended December 31, 1997, 1996 and
1995, the amortized expenses were $832,000, $1,346,000 and $44,000,
respectively.
F-20
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
Pro forma information regarding net loss and loss per share is required by SFAS
No. 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of this statement. The fair value
for options granted during 1997 were estimated at the date of grant using the
Black-Scholes multiple option pricing model with the following weighted average
assumptions: risk-free interest rate ranging from 5.53% to 6.77%; a dividend
yield of 0.0%; a volatility factor of the expected market price of the
Company's common stock of .87; and a weighted-average expected life of the
option of five years for officers and four years for non officers. Subsequent
to the Company's initial public offering in June 1996, the fair value of
options granted during the balance of 1996 were estimated with the following
weighted average assumptions: risk-free interest rates ranging from 5.18% to
6.58% in 1996 and 5.34% to 7.03% in 1995; a dividend yield of 0.0%; a
volatility factor of the expected market price of the Company's common stock of
.80; and a weighted-average expected life of the option of five years for
officers and four years for non officers. The fair value for options granted
prior to the Company's initial public offering in June 1996 were estimated at
the date of grant using the minimum value method and have a volatility factor
of zero.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, the Company's net loss and
loss per share would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Pro forma net loss.......................... $(30,919) $(17,328) $(3,442)
Pro forma basic and diluted net loss per
share...................................... $ (1.16) $ (0.78) $ (0.22)
</TABLE>
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1999.
In July 1997, the Board of Directors authorized the repricing of options to
purchase 821,300 shares of common stock effective on July 23, 1997 to the then
fair market value of $6.13 per share. Under the terms of the repricing, the
repriced options maintain the same vesting and expiration terms, except they
may not be exercised until January 9, 1998. Executive officers, consultants and
members of the Board of Directors were not eligible to participate in the
repricing.
F-21
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
A summary of the Company's stock option activity and related information for
the nine months ended September 30, 1998 and the years ended December 31 are as
follows (amounts used in 1997 have been restated to reflect the April 17, 1998
merger with WebChat):
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------------------------------------
1998 1997 1996 1995
---------------- ----------------- ---------------- ----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA )
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding--beginning
of period.............. 4,158 $ 4.92 4,921 $2.10 3,074 $0.13 165 $0.07
Granted............... 2,451 $20.41 4,418 $6.61 2,851 $3.98 3,438 $0.13
Exercised............. (480) $ 3.17 (1,456) $0.79 (54) $0.11 -- $ --
Canceled.............. (337) $13.81 (3,725) $4.79 (957) $1.51 (529) $0.11
----- ------ ----- -----
Outstanding--end of
period................. 5,792 $11.12 4,158 $4.92 4,914 $2.10 3,074 $0.13
===== ====== ===== =====
Exercisable at end of
period................. 1,171 $ 3.99 583 $2.63 845 $0.35 155 $0.13
Weighted average fair
value of options
granted during the
period................. $4.48 $3.79 $0.40
</TABLE>
Outstanding and Exercisable By Price Range as of December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- -----------------------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AS OF REMAINING AVERAGE EXERCISABLE AS OF AVERAGE
RANGE OF EXERCISE PRICES DECEMBER 31, 1997 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1997 EXERCISE PRICE
------------------------ ----------------- ---------------- -------------- ----------------- --------------
(IN THOUSANDS) (YEARS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$ 0.00-$ 5.00........... 2,724 7.9 $ 3.47 386 $0.51
$ 5.01-$10.00........... 1,018 7.5 $ 6.64 197 $6.77
$10.01-$15.00........... 416 9.8 $10.26 -- --
----- ---
4,158 8.0 $ 2.10 583 $2.63
===== ===
</TABLE>
10. EMPLOYEE STOCK PURCHASE PLAN
In April 1996, the Board of Directors adopted the 1996 Employee Stock Purchase
Plan (the "Purchase Plan"), which is designed to allow eligible employees of
the Company to purchase shares of common stock at semiannual intervals through
their periodic payroll deductions. An aggregate of 187,500 shares of common
stock were originally reserved for the Purchase Plan. In June 1998, the
Company's shareholders increased the number of shares reserved by 400,000 to a
total of 587,500, of which 88,866 and 44,443 had been issued through September
30, 1998 and December 31, 1997, respectively. The Purchase Plan is implemented
in a series of successive offering periods, each with a maximum duration of 24
months. Eligible employees can have up to 10% (up to a maximum of 1,000 shares
per year) of their base salary deducted that is to be used to purchase shares
of the
F-22
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
common stock on specific dates determined by the Board of Directors. The price
of common stock purchased under the Purchase Plan will be equal to 85% of the
lower of the fair market value of the common stock on the commencement date of
each offering period or the specified purchase date. The Company does not
recognize compensation cost related to employee purchase rights under the Plan.
To comply with the pro forma reporting requirements of SFAS No. 123,
compensation cost is estimated for the fair value of the employees' purchase
rights using the Black-Scholes model with the following assumptions for those
rights granted in 1997: a risk free interest rate of 6.0%; dividend yield of
0.0%; expected volatility factor of .87; an expected life of six months; and
for those granted in 1996: a risk free interest rate of 5.0%; dividend yield of
0.0%; expected volatility factor of .80; an expected life of six months. The
weighted average estimated fair value of the Purchase Plan shares granted in
1997 was $4.05.
11. INCOME TAXES
Due to the Company's loss position, there was no provision for income taxes for
any period presented.
As of December 31, 1997, the Company has federal and state net operating loss
carryforwards of approximately $45,000,000 and $29,500,000, respectively. The
federal net operating loss carryforwards will expire in the years 2009 through
2012, and the state net operating loss carryforwards will expire in the years
1999 through 2002. The Company has federal and state research and
experimentation credits of approximately $300,000 each, that will expire in the
years 2009 through 2012. Utilization of the net operating losses and credits
may be subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986 and similar state
provisions. The annual limitation may result in the expiration of net operating
losses and credits before utilization.
Deferred taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets consisted of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating losses.................................... $ 17,448 $ 7,500
Research credit carryforwards........................... 406 200
Accrued royalties....................................... 37 60
Other individually immaterial items..................... 1,654 340
-------- -------
Total deferred tax assets............................. 19,545 8,100
Valuation allowance..................................... (19,545) (8,100)
-------- -------
Total net deferred tax assets......................... $ -- $ --
======== =======
</TABLE>
F-23
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
The change in the valuation allowance was a net increase of approximately
$6,409,000 and $1,030,000 for the years ended December 31, 1996 and 1995,
respectively.
12. EMPLOYEE BENEFIT PLAN
In January 1996, the Company adopted a plan to provide retirement and
incidental benefits for its eligible employees, known as the Infoseek
Corporation 401(k) Plan ("The Plan"). As allowed under Section 401(k) of the
Internal Revenue Code, the Plan provides tax-deferred salary deductions for
eligible employees. Participants in the Plan may make salary deferrals of up to
20% of their annual salary, limited by the maximum dollar amount allowed by the
Internal Revenue Code. The Company, at its discretion, may elect to make
contributions to the Plan on behalf of its eligible participants. The Company
has made no such contributions to date.
13. RELATED PARTY TRANSACTIONS
Bell Atlantic, with a representative on the Company's Board of Directors and
ownership of a substantial amount of the outstanding common stock of the
Company is considered a related party. In March 1996, the Company and Bell
Atlantic entered into a one-year agreement, which provided for the Company's
display of the Big Yellow logo within the Infoseek Service. According to the
terms of the agreement, Bell Atlantic agreed to pay to the Company up to an
aggregate of $4,600,000, in monthly payments, which amount would be decreased
proportionately if the number of impressions of the Big Yellow logo were below
a specified number. In February 1997, the Company signed an amendment with Bell
Atlantic extending the term of the original agreement, dated March 1996,
through June 1998 in exchange for an additional $1,400,000, for a total of
$6,000,000, in monthly payments. The terms of conditions of the amended
agreement were substantially the same, except for elimination of certain
exclusivity and reimbursement provisions. The Company recognized revenue of
$1,298,000 and $2,116,000 for the nine months ended September 30, 1998 and
1997, respectively, and $2,820,000 and $1,882,000 in connection with this
agreement for the years ended December 31, 1997 and 1996, respectively. Amounts
receivable from and payable to such related party were insignificant at
September 30, 1998 and December 31, 1997 and 1996.
F-24
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -------------------
1997 1996 1995 1998 1997
-------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Numerator:
Net Loss:............... $(26,562) $(15,938) $(3,296) $(5,694) $(21,914)
-------- -------- ------- -------- ---------
Numerator for basic and
diluted loss per share... $(26,562) $(15,938) $(3,296) $(5,694) $(21,914)
======== ======== ======= ======== =========
Weighted average of common
shares................... 26,627 14,076 1,635 30,512 26,270
Conversion of preferred
stock not included in
shares related to SEC
Staff Accounting Bulletin
98....................... -- 8,044 13,900 -- --
-------- -------- ------- -------- ---------
Denominator for basic and
diluted loss per share... 26,627 22,120 15,535 30,512 26,270
======== ======== ======= ======== =========
Basic and diluted loss per
share (pro forma in
1995).................... $ (1.00) $ (0.72) $ (0.21) $ (0.19) $ (0.83)
======== ======== ======= ======== =========
</TABLE>
15. SUBSEQUENT EVENTS (UNAUDITED)
On July 24, 1998, the Company entered into an agreement to acquire Quando, Inc.
("Quando") for approximately $17,000,000, subject to adjustment, in shares of
the Company's common stock. The Company expects to incur approximately
$1,000,000 in acquisition costs. The transaction is subject to customary
closing conditions, including shareholder approval by Quando, and is expected
to close in December 1998.
Based upon preliminary estimates of the fair value of Quando and the allocation
of the consideration paid for the assets and liabilities of Quando, the Company
will record approximately $16,900,000 in goodwill, joint ventures and other
intangibles which will be amortized on a straight-line basis over a two year
period. In addition, the Company expects to incur write-offs related to in-
process research and development, currently estimated at approximately
$4,300,000. The estimated amounts relating to goodwill and the in-process
research and development charges represent a preliminary estimate which could
materially differ from the actual results that will be experienced by the
Company as final values have not yet been established.
On November 9, 1998, the Company renewed the international agreement with
Netscape for which the Company will be one of the non-exclusive premier
providers for search and directory services in seven foreign sites for the
period of October 1, 1998 to September 30, 1999. Under the terms of the renewed
agreement, the Company will pay Netscape a one-time $120,000 nonrecurring
engineering fee with
F-25
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
additional quarterly payments being made based upon established rates for
impressions delivered by Netscape. The agreement may be terminated by either
party upon sixty days prior written notice to the other party.
On November 11, 1998, the Company received notice from Netscape of their intent
to either terminate the contract or negotiate a new agreement to afford
Infoseek with different positioning or a lower rotation percentage on the
Netscape site on pricing terms to be mutually agreed. On November 25, 1998, the
Company and Netscape renegotiated the terms of the June 1998 agreement to
provide for the purchase of 5% of Netscape's available search traffic beginning
January 11, 1999 and through the duration of the agreement which terminates May
31, 1999. Under the new agreement, the Company is charged a higher rate for
certain traffic received. The maximum payment cap is $12,500,000, less any
payments made under the prior agreement.
On November 18, 1998, the Company completed its acquisition of Starwave
Corporation ("Starwave"), a subsidiary of The Walt Disney Company ("Disney")
whereby the Company issued 25,932,681 shares of common stock in exchange for
all outstanding Starwave shares. The Company also reserved 2,205,316 shares of
common stock in connection with outstanding stock options of Starwave to be
assumed by the Company. The fair value of the Company's shares and options
issued was approximately $897,800,000.
A new holding company structure was established as a result of the acquisition.
Starwave and Infoseek Corporation, a California corporation, became wholly-
owned subsidiaries of the Infoseek Corporation, a Delaware corporation, (the
"Holding Company") which is a registered public company incorporated in
Delaware. The authorized capital stock of the Holding Company consists of
500,000,000 shares of $0.001 par value common stock and 25,000,000 shares of
$0.001 par value Preferred Stock. Disney also purchased an additional 2,642,000
unregistered shares of the Holding Company's common stock and a warrant,
subject to vesting, to purchase an additional 15,720,000 unregistered shares of
the Holding Company's common stock (the "Warrant") in exchange for
approximately $70,000,000 in cash and a $139,000,000 five-year promissory note.
The Warrant generally enables Disney to achieve a majority stake in the Company
over a three year period. The Company also committed to spend approximately
$165,000,000 to promote the GO Network, a new portal service established by the
Holding Company.
The Company expects to incur approximately $22,000,000 in acquisition costs
which will be included in the purchase price of Starwave. As of September 30,
1998, the Company had incurred approximately $2,800,000 of these direct
acquisition costs. The Company is accounting for the Starwave acquisition under
the purchase method of accounting. Based upon preliminary estimates of the fair
value of Starwave and the allocation of the consideration paid for the assets
and liabilities of Starwave, the Company expects to record approximately
$656,300,000 in goodwill and joint venture relationships which will be
amortized on a straight-line basis over a ten year period. Also, the
F-26
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
Company expects to record approximately $45,200,000 for developed technology
and assembled workforce which will be amortized on a straight-line basis over a
two-year period. In addition, the Company expects to incur write-offs related
to in-process research and development, currently estimated at $72,600,000. The
estimated amounts relating to goodwill, joint venture relationships, developed
technology, assembled workforce, and the in-process research and development
charges represent a preliminary estimate which could materially differ from the
actual results experienced by the Company as a final valuation has not been
completed.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------
MARCH 31, 1998 JUNE 30, 1998 SEPT. 30, 1998
-------------- ------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Total revenues................. $14,453 $17,066 $19,196
Costs and expenses
Hosting, content and website
costs....................... 2,154 2,524 3,278
Research and development..... 2,130 2,667 2,635
Sales and marketing.......... 10,577 11,863 12,704
General and administrative... 1,862 2,061 3,953
------- ------- -------
Total costs and expenses... 16,723 19,115 22,570
------- ------- -------
Operating loss................. (2,270) (2,049) (3,374)
Net interest income............ 470 782 747
------- ------- -------
Net loss....................... $(1,800) $(1,267) $(2,627)
======= ======= =======
Basic and diluted net loss per
share......................... $ (0.06) $ (0.04) $ (0.08)
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------
MARCH 31, 1997 JUNE 30, 1997 SEPT. 30, 1997 DEC. 31, 1997
-------------- ------------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues.......... $ 6,240 $ 7,786 $ 8,381 $12,675
Costs and expenses
Hosting, content and
website costs........ 1,297 1,533 1,567 1,922
Research and
development.......... 1,728 2,374 1,777 2,021
Sales and marketing... 6,650 7,541 8,329 11,800
General and
administrative....... 1,470 1,825 1,947 1,800
Restructuring and
other charges........ -- 7,349 -- --
------- -------- ------- -------
Total costs and
expenses........... 11,145 20,622 13,620 17,543
------- -------- ------- -------
Operating loss.......... (4,905) (12,836) (5,239) (4,868)
Net interest income..... 400 379 287 220
------- -------- ------- -------
Net loss................ $(4,505) $(12,457) $(4,952) $(4,648)
======= ======== ======= =======
Basic and diluted net
loss per share......... $ (0.17) $ (0.47) $ (0.19) $ (0.17)
======= ======== ======= =======
</TABLE>
F-27
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------
MARCH 31, 1996 JUNE 30, 1996 SEPT. 30, 1996 DEC. 31, 1996
-------------- ------------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues.......... $ 1,731 $ 3,286 $ 4,007 $ 6,071
Cost and expenses
Hosting, content and
website costs.......... 690 729 827 948
Research and
development.......... 934 950 1,218 1,448
Sales and marketing... 2,757 5,566 5,219 6,913
General and
administrative....... 860 919 1,091 1,307
------- ------- ------- -------
Total costs and
expenses........... 5,241 8,164 8,355 10,616
------- ------- ------- -------
Operating loss.......... (3,510) (4,878) (4,348) (4,545)
Net interest income
(expense).............. (58) 155 652 594
------- ------- ------- -------
Net loss................ $(3,568) $(4,723) $(3,696) $(3,951)
======= ======= ======= =======
Basic and diluted net
loss per share......... $ (0.18) $ (0.25) $ (0.15) $ (0.16)
======= ======= ======= =======
</TABLE>
The 1997 quarterly amounts have been restated to reflect the April 17, 1998
merger with Webchat. The 1996 quarterly amounts have not been restated due to
WebChat amounts being insignificant.
F-28
<PAGE>
STARWAVE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of PricewaterhouseCoopers LLP...................................... F-30
Report of KPMG Peat Marwick LLP........................................... F-31
Consolidated Balance Sheets as of October 4, 1998, September 28, 1997 and
December 31, 1996........................................................ F-32
Consolidated Statements of Operations for the Year Ended October 4, 1998,
Nine months Ended September 28, 1997 and Year Ended December 31, 1996 ... F-33
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for
the Year Ended October 4, 1998, Nine months Ended September 28, 1997 and
the Year Ended December 31, 1996......................................... F-34
Consolidated Statements of Cash Flows for the Year Ended October 4, 1998,
Nine months Ended September 28, 1997 and Year Ended December 31, 1996.... F-35
Notes to Consolidated Financial Statements................................ F-36
</TABLE>
F-29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Starwave Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Starwave Corporation and its subsidiaries at October 4,
1998 and September 28, 1997, and the results of their operations and their cash
flows for the year ended October 4, 1998 and the nine months ended September
28, 1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
As described in Note 1, in April 1997, May 1998 and November 1998 the Company
completed a number of transactions which significantly changed its capital and
operating structure.
PricewaterhouseCoopers LLP
Seattle, Washington
November 18, 1998
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Starwave Corporation:
We have audited the accompanying balance sheet of Starwave Corporation as of
December 31, 1996, and the related statements of operations, shareholders'
deficit, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Starwave Corporation as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Seattle, Washington
February 7, 1997
F-31
<PAGE>
STARWAVE CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 4, SEPTEMBER 28, DECEMBER 31,
1998 1997 1996
---------- ------------- ------------
<S> <C> <C> <C>
ASSETS
------
Cash and cash equivalents................ $ 1,415 $ 18,306 $ 305
Accounts receivable, net................. 165 163 2,950
Accounts receivable from related
parties................................. 897 611 --
Receivable from affiliate................ 516 1,292 --
Other receivables........................ 10 60 73
Deferred royalties, net.................. -- -- 783
Prepaid expenses and other assets........ 803 378 787
Equipment and leasehold improvements, net
(Note 3)................................ 4,629 4,323 4,815
Investment in affiliates................. 7,377 4,328
--------- --------- --------
$ 15,812 $ 29,461 $ 9,713
========= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
------------------------------------
Accounts payable......................... $ 1,816 $ 1,500 $ 3,277
Accrued compensation..................... 3,365 1,555 629
Accrued royalties........................ 250 500 2,087
Accrued liabilities of discontinued
operations (Note 9)..................... 347 359 519
Other accrued liabilities................ 66 118
Due to affiliates........................ 1,023 1,922 --
Deferred revenue......................... 60 11 651
Loans from shareholder (Note 4).......... -- -- 84,888
--------- --------- --------
Total liabilities.................... 6,927 5,847 92,169
--------- --------- --------
Commitments (Notes 6 and 8)
Shareholders' equity (deficit)
Common stock A, $.01 par value;
authorized 250,000 shares in 1998,
1997 and 1996; issued and outstanding
57,660 shares in 1998, 55,512 shares
in 1997 and 34,214 shares in 1996..... 576 555 342
Common stock B, $.01 par value;
authorized 80,000 shares in 1998, 1997
and 1996, issued and outstanding
39,869 shares in 1998 and 1997, and no
shares in 1996........................ 399 399 --
Additional paid-in capital............. 127,198 123,095 138
Deferred stock option compensation
expense............................... (3,599) (172) (246)
Accumulated deficit.................... (115,689) (100,263) (82,690)
--------- --------- --------
Total shareholders' equity
(deficit)........................... 8,885 23,614 (82,456)
--------- --------- --------
$ 15,812 $ 29,461 $ 9,713
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE>
STARWAVE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED NINE-MONTHS ENDED YEAR ENDED
OCTOBER 4, SEPTEMBER 28, DECEMBER 31,
1998 1997 1996
---------- ----------------- ------------
<S> <C> <C> <C>
Revenues............................ $ 5,266 $ 4,892 $ 8,302
-------- -------- --------
Operating expenses
Cost of online services........... 3,143 7,185 18,170
Development....................... 1,225 1,605 6,138
Sales and marketing............... 94 1,589 5,492
General and administrative........ 2,772 2,527 4,845
-------- -------- --------
Total operating expenses........ 7,234 12,906 34,645
-------- -------- --------
Operating loss...................... (1,968) (8,014) (26,343)
-------- -------- --------
Other income (expense)
Loss from affiliate--EIV.......... (4,139) (2,251) --
Loss from affiliate--AIV.......... (10,020) (5,958) --
Interest income (expense), net.... 748 (1,814) (4,675)
Other, net (Note 10).............. (47) 464 (658)
-------- -------- --------
Net other expense............... (13,458) (9,559) (5,333)
-------- -------- --------
Loss from continuing operations..... (15,426) (17,573) (31,676)
-------- -------- --------
Discontinued operations (Note 9)
Loss from operations of Multimedia
CD-ROM segment................... -- -- (1,046)
Loss on disposal of Multimedia CD-
ROM segment...................... -- -- (3,243)
-------- -------- --------
Loss from discontinued
operations..................... -- -- (4,289)
-------- -------- --------
Net loss............................ $(15,426) $(17,573) $(35,965)
======== ======== ========
Basic and diluted net loss per share
from continuing operations......... $ (.16) $ (0.25) $ (0.99)
Basic and diluted net loss per share
from discontinued operations....... -- -- (0.14)
-------- -------- --------
Basic and diluted net loss per
share.............................. $ (.16) $ (0.25) $ (1.13)
======== ======== ========
Shares used in computing basic and
diluted net loss per share......... 96,475 71,691 31,958
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE>
STARWAVE CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
OCTOBER 4, 1998, SEPTEMBER 28, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
DEFERRED TOTAL
COMMON STOCK ADDITIONAL STOCK OPTION SHAREHOLDERS'
-------------- PAID-IN COMPENSATION ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL EXPENSE DEFICIT (DEFICIT)
------ ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1995................... 28,683 $287 $ (215) $ (46,725) $(46,653)
Exercise of stock
options................ 5,531 55 (41) 14
Deferred compensation
expense related to
issuance of stock
options................ -- -- 394 $ (394) -- --
Amortization of deferred
stock option
compensation expense... -- -- -- 148 -- 148
Net loss................ (35,965) (35,965)
------ ---- -------- ------- --------- --------
Balance at December 31,
1996................... 34,214 342 138 (246) (82,690) (82,456)
Exercise of stock
options................ 2,612 26 (20) -- -- 6
Stock repurchase........ (1,935) (19) (3,950) -- -- (3,969)
Sale of common stock
Common Stock A........ 20,621 206 45,458 -- -- 45,664
Common Stock B........ 39,869 399 81,469 -- -- 81,868
Amortization of deferred
stock option
compensation expense... -- -- -- 74 -- 74
Net loss................ -- -- -- -- (17,573) (17,573)
------ ---- -------- ------- --------- --------
Balance at September 28,
1997................... 95,381 954 123,095 (172) (100,263) 23,614
Exercise of stock
options................ 2,148 21 144 -- -- 165
Deferred compensation
expense related to
issuance of stock
options................ -- -- 4,232 (4,232) -- --
Forfeitures of nonvested
stock options.......... -- -- (273) 273 -- --
Amortization of deferred
stock option
compensation expense... -- -- -- 532 -- 532
Net loss................ -- -- -- -- (15,426) (15,426)
------ ---- -------- ------- --------- --------
Balance at October 4,
1998................... 97,529 $975 $127,198 $(3,599) $(115,689) $ 8,885
====== ==== ======== ======= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE>
STARWAVE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE-MONTHS ENDED YEAR ENDED
OCTOBER 4, SEPTEMBER 28, DECEMBER 31,
1998 1997 1996
---------- ----------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................ $(15,426) $(17,573) $(35,965)
Adjustments to reconcile net loss to
net cash provided (used) by
operating activities
Depreciation and amortization of
equipment and leasehold
improvements...................... 2,855 1,629 2,170
Equity in losses from affiliates... 14,159 8,209 --
Loss on sale of equipment.......... 21 36 90
Amortization of deferred stock
compensation expense.............. 532 74 148
Change in certain assets and
liabilities
Accounts receivable (trade) and
accounts receivable from related
parties.......................... (288) 2,176 (2,216)
Receivable from affiliate and
other receivables................ 826 (1,279) 179
Deferred royalties................ 783 (755)
Prepaid expenses and other
assets........................... (425) 572 (253)
Net assets and accrued liabilities
of discontinued operations....... (12) (160) 1,571
Accounts payable.................. 316 (1,777) 2,567
Accrued interest on loans from
shareholder...................... -- -- (286)
Accrued compensation.............. 1,810 926 356
Accrued royalties................. (250) (1,587) 2,087
Due to affiliates................. (899) 1,922 (47)
Deferred revenue.................. 49 (640) 353
Other accrued liabilities......... 66 (118) (59)
-------- -------- --------
Net cash provided by (used) in
operating activities............ 3,334 (6,807) (30,060)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment and leasehold
improvements....................... (3,182) (1,336) (3,358)
Proceeds from sale of equipment..... -- -- 37
Expenses incurred on behalf of
affiliates......................... (17,208) (12,537) --
-------- -------- --------
Net cash used in investing
activities...................... (20,390) (13,873) (3,321)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in loans from shareholder.. -- 10,776 33,863
Repayment of loans from
shareholders....................... -- (50,000) --
Decrease in bank overdraft.......... -- -- (191)
Proceeds from sale of stock, net.... -- 81,868 --
Funds used for stock repurchase..... -- (3,969) --
Proceeds from exercise of stock
options............................ 165 6 14
-------- -------- --------
Net cash provided by financing
activities...................... 165 38,681 33,686
-------- -------- --------
Net (decrease) increase in cash and
cash equivalents.................... (16,891) 18,001 305
Cash and cash equivalents at
beginning of year................... 18,306 305 --
-------- -------- --------
Cash and cash equivalents at end of
year................................ $ 1,415 $ 18,306 $ 305
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the year for
interest............................ $ 41 $ 2,099 $ 4,889
SCHEDULE OF NONCASH FINANCING
ACTIVITIES
Equity issued to shareholder in
return for extinguishment of debt... -- $ 45,664 --
Issuance of stock options............ $ 4,232 -- --
Forfeitures of nonvested stock
options............................. $ 273 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-35
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 4, 1998, SEPTEMBER 28, 1997 AND DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. CHANGE IN CAPITAL AND OPERATING STRUCTURE
In April 1997, Starwave Corporation (the Company) completed a number of
transactions to recapitalize its equity structure and change its operating
structure as follows. As of April 22, 1997, The Walt Disney Company (Disney)
purchased a controlling interest in the Company (Note 7). A portion of the
proceeds from the sale of common stock to Disney was used to repay part of the
outstanding balance under the loan from the Company's primary shareholder. The
remaining balance of the loan from shareholder was converted to Class A common
stock (Note 4). Effective April 1, 1997, the Company established a wholly owned
subsidiary, Starwave Ventures, Inc. (SVI). Concurrent with the Disney equity
transaction, two new partnerships were formed and the majority of the Company's
operations were contributed to those partnerships. The Company maintains
website hosting, software development and research, and the majority of its
website operations costs are allocated to the partnerships. The structure and
purpose of the partnerships is summarized in Note 2. From April 1997,
substantially all of the Company's operations were transferred to the
partnerships. Certain expenses of the partnerships are incurred by the Company
and allocated to the partnerships.
In May 1998, Disney completed the recapitalization by purchasing the remaining
outstanding shares from the primary shareholder for a majority interest in the
Company (Note 7).
The Company and it shareholders have approved a merger of the Company and
Infoseek Corporation (Infoseek) as of November 18, 1998 (Note 11).
2. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company produces Internet-based services intended to appeal to broad
consumer interests in sports, news and entertainment.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history and the limited history of commerce on
the Internet. Future revenues from online services are dependent on the
continued growth and acceptance of the Internet, use of the Internet for
information, publication, distribution and commerce, and acceptance of the
Internet as an effective advertising medium. In 1997, the Company established
partnerships with related parties to produce the online services summarized as
follows:
ABC NEWS/STARWAVE PARTNERS
On April 1, 1997, SVI and DOL Online Investments, Inc. (DOL), entered into a
partnership for the production of Internet-based services intended to appeal to
a broad consumer interest in news and entertainment-related content areas. SVI
contributed the technical expertise, labor, and
F-36
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
infrastructure, and DOL contributed licensed content. SVI is allocated a 60%
economic interest in partnership losses, and a 50% interest in partnership
gains. DOL is allocated a 40% economic interest in partnership losses and a 50%
interest in partnership gains.
The partners make contributions to the partnership based on actual development
and production expenses incurred on behalf of the partnership or on formulas
and sharing ratios for general and administrative expenses as defined in the
partnership agreement. For the year ended October 4, 1998, contributions to the
partnership totaled $19,137, of which $11,483 was contributed by SVI during the
year and $1,023 is due to the partnership and is included in amounts due
affiliates. For the nine months ended September 28, 1997, contributions to the
partnership totaled $14,416, of which $8,660 was contributed by SVI during the
year and $1,922 was due to the partnership and is included in amounts due
affiliates. The Company considers the methodology of allocation of
contributions reasonable.
ESPN/STARWAVE PARTNERS
On April 1, 1997, SVI and ESPN Online Investments, Inc. (EOL), entered into a
partnership for the production of Internet-based services intended to appeal to
a broad consumer interest in sports-related content areas. SVI contributed the
technical expertise, labor and infrastructure, and EOL contributed licensed
content. SVI is allocated a 60% economic interest in partnership losses and a
50% economic interest in partnership gains. EOL is allocated a 40% economic
interest in partnership losses and a 50% economic interest in partnership
gains.
The partners make contributions to the partnership based on actual development
and production expenses incurred on behalf of the partnership or on formulas
and sharing ratios for general and administrative expenses as defined in the
partnership agreement. For the year ended October 4, 1998, contributions to the
partnership totaled $9,559, of which $5,735 was contributed by SVI during the
year and $516 is due from the partnership and is included in amounts receivable
from affiliates. For the nine months ended September 28, 1997, contributions to
the partnership totaled $7,972, of which $5,377 was contributed by SVI during
the period and $1,203 was due from the partnership and is included in amounts
receivable from affiliates. The Company considers the methodology of allocation
of contributions reasonable.
Included in other income (expense) for fiscal years 1998 and 1997 are losses
from these partnerships of $14,159 and $8,209, respectively. Certain assets
transferred by the Company to the partnerships upon formation were recorded at
book value.
F-37
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Summarized financial information from the financial statements of the
partnerships is as follows:
<TABLE>
<CAPTION>
ESPN/STARWAVE ABC NEWS/STARWAVE
PARTNERS PARTNERS
------------------------ ------------------------
OCTOBER 4, SEPTEMBER 28, OCTOBER 4, SEPTEMBER 28,
1998 1997 1998 1997
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Current assets.......... $ 8,823 $ 4,985 $ 6,505 $ 4,256
Noncurrent assets....... 479 84 3,967 3,134
Current liabilities..... 3,906 2,333 3,574 2,930
Noncurrent liabilities.. -- -- -- --
Revenues................ 19,193 6,996 9,878 1,929
Cost of online
services............... 15,715 7,168 18,182 9,015
Net loss................ (6,899) (3,752) (16,699) (9,930)
</TABLE>
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Starwave
Corporation and its wholly owned subsidiary, Starwave Ventures, Inc. All
significant intercompany transactions have been eliminated. Investments in
partnerships are accounted for using the equity method of accounting.
FISCAL YEAR CHANGE
Effective April 1, 1997, the Company changed its fiscal year-end from a
calendar year ended December 31 to a fiscal year ending the Sunday in the last
week of September. For the purposes of the consolidated financial statements,
fiscal year 1998 ended October 4, 1998.
The following is selected financial data for the year ended October 4, 1998 and
the comparable period ended September 28, 1997:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 4, 1998 SEPTEMBER 28, 1997
--------------- ------------------
(UNAUDITED)
<S> <C> <C>
Revenues............................... $ 5,266 $ 8,611
-------- --------
Operating expenses
Cost of online services.............. 3,143 14,309
Development.......................... 1,225 2,157
Sales and marketing.................. 94 4,209
General and administrative........... 2,772 3,983
-------- --------
Total operating expenses........... 7,234 24,658
-------- --------
Operating loss......................... (1,968) (16,047)
-------- --------
Other income (expense)
Earnings (loss) from affiliate EIV... (4,139) (2,251)
Earnings (loss) from affiliate AIV... (10,020) (5,958)
Interest income (expense), net....... 748 (3,302)
Other, net........................... (47) (142)
-------- --------
Net other expense.................. (13,458) (11,653)
-------- --------
Net loss............................... $(15,426) $(27,700)
======== ========
</TABLE>
F-38
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with an original
maturity of three months or less.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation and
amortization of equipment and leasehold improvements are provided on the
straight-line method over the estimated useful lives of the assets or the lease
term, whichever is shorter. Estimated useful lives range from one to six years.
DEFERRED ROYALTIES
Deferred royalties represent payments made or accrued to co-branding partners
and independent content providers under development and production agreements.
Amortization begins upon launch of the applicable online service and is based
on the greater of amounts determined by the contractual royalty rates or
amounts computed on a straight-line basis over the term of the agreements. In
April 1997, all significant deferred revenues were contributed to the
partnerships.
REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK
Revenues from subscriptions to the Company's online services and advertising
appearing on the Company's online services were recognized on the straight-line
method over the terms of the subscriptions and advertising contracts,
respectively. Advertising revenues were stated net of commissions. Deferred
revenue represented online subscriptions and customer advertising not yet
recognized as revenue.
The Company guaranteed to certain advertising customers a minimum number of
page impressions to be delivered to users of its online service for a specified
period. To the extent minimum guaranteed page impression deliveries are not
met, the Company defers recognition of the corresponding revenues until
guaranteed page impression delivery levels are achieved. As of October 4, 1998,
September 28, 1997 and December 31, 1996, no revenues had been deferred as a
result of these guarantees. As described above, beginning in April 1997 all
advertising and subscription revenues are recognized by the partnerships.
The Company has two software license arrangements with related parties. The
software licenses are one-time fees and are recognized at the time the software
master is delivered and when the criteria for fixed fee revenue recognition
under Statement of Position 91-1, Software Revenue Recognition, are satisfied.
The Company has contracted to provide for additional post-contract support for
a fee, which is recognized over the period of the contract. License and post
contract support revenues amounted to $1,779 and $401 for the periods ended
October 4, 1998 and September 28, 1997, respectively.
F-39
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During fiscal years 1998 and 1997, the Company had revenues from related
parties representing 58% and 52% of revenues, respectively. At October 4, 1998
and September 28, 1997, related party receivables represented 84% and 79%,
respectively of trade accounts receivable. The Company had no revenues or
accounts receivable from related parties as of and for the year ended December
31, 1996.
DEVELOPMENT EXPENSES
Development expenses relate to the development of new online services and
consist principally of compensation to company employees, as well as costs for
content, facilities and equipment. Development expenses are charged to results
of operations as incurred. Once an online service is launched and available to
generate revenues, expenses associated with enhancements and developments of
new features for the service are included in cost of online services, and
beginning in April 1997, are allocated to the partnerships. For the year ended
October 4, 1998, the development expenses consist mainly of the expenses
associated with the core technology software used to run the online services.
ADVERTISING EXPENSES
Advertising and promotion costs are expensed as incurred. The Company incurred
advertising costs of $80, $451 and $1,203 in fiscal years 1998, 1997 and 1996,
respectively.
FEDERAL INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to be recovered or settled. The effect on deferred income tax assets
and liabilities of changes in tax rates is recognized in income in the period
that includes the enactment date.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable, accounts
receivable from related parties, receivable from affiliate, other receivables,
accounts payable, accrued compensation, accrued royalties and due to affiliates
approximates fair value due to the short-term maturity of these instruments.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-40
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations. As
such, compensation expense would be recorded on the date of grant to employees
only if the current market price of the underlying stock exceeded the exercise
price. On January 1, 1996, the Company adopted the disclosure provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 for transactions with employees and
provide pro forma disclosures for employee stock option grants made in 1995 and
future years as if the fair value-based method defined in SFAS No. 123 had been
applied to these transactions. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 to these transactions and provide the pro
forma disclosure provisions of SFAS No. 123.
NET LOSS PER SHARE
Basic net loss per share represents net loss divided by the weighted average
number of shares outstanding during the period. Diluted net loss per share
represents net loss divided by the weighted average number of shares
outstanding including the potentially dilutive impact of the stock options.
Common stock options are converted using the treasury stock method. Basic and
diluted net loss per share are equal for the periods presented because the
impact of stock options is anti-dilutive.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current
presentation.
ACCOUNTING CHANGES
In June 1997, Statement of Financial Accounting Standards No. 130 (SFAS 130),
Reporting Comprehensive Income, was issued. This pronouncement requires
companies to report comprehensive income and its components prominently in the
financial statements. Comprehensive income includes both net income and charges
or credits to equity that are not the results of transactions with owners. SFAS
130 is required to be adopted for fiscal years beginning after December 15,
1997. The Company does not have any comprehensive income items other than net
income; therefore, SFAS 130 is not expected to impact the Company.
In June 1998, Statement of Financial Accounting Standards No. 133 (SFAS),
Accounting for Derivative Instruments and Hedging Activities, was issued. This
pronouncement standardizes the accounting for derivative instruments by
requiring that an entity recognize those items as assets or liabilities in the
financial statements and measure them at fair value. SFAS 133 is required to be
adopted for fiscal years beginning after June 15, 1999. Since the Company does
not hold any derivative instruments, SFAS 133 is not expected to impact the
Company.
F-41
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In October 1997, Statement of Position No. 97-2 (SOP 97-2), Software Revenue
Recognition, was issued. This pronouncement outlines criteria which must be
satisfied before revenue selling or licensing software can be recognized. SOP
97-2 is required to be adopted for transactions entered into in fiscal years
beginning after December 15, 1997. The Company is currently reviewing the
requirements of SOP 97-2 and assessing its impact on the Company's financial
statements.
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
OCTOBER 4, SEPTEMBER 28, DECEMBER 31,
1998 1997 1996
---------- ------------- ------------
<S> <C> <C> <C>
Equipment.......................... $11,510 $ 9,879 $ 9,171
Leasehold improvements............. 1,699 826 403
------- ------- -------
13,209 10,705 9,574
Less: Accumulated depreciation and
amortization...................... (8,580) (6,382) (4,759)
------- ------- -------
Net equipment and leasehold
improvements...................... $ 4,629 $ 4,323 $ 4,815
======= ======= =======
</TABLE>
4. LOANS FROM SHAREHOLDER
During 1995 and 1996, the Company's majority shareholder made unsecured loans
to the Company under a $100,000 credit agreement which did not require
repayment of principal until October 31, 1999, at which time the entire
outstanding balance was due. The loans accrued interest at a rate which varied
based on the higher of the Citibank, N.A. base rate or 0.5% above certain money
market rates. In April 1997, the balance of the loan was repaid via a cash
repayment of $50,000, and conversion of the remaining $45,664 to Class A common
stock.
5. INCOME TAXES
A current provision for income taxes has not been recorded for the year ended
October 4, 1998, the period ended September 28, 1997 or the year ended December
31, 1996 due to taxable losses incurred during such periods. A valuation
allowance has been recorded for deferred tax assets because realization is
primarily dependent on generating sufficient taxable income prior to expiration
of net operating loss carry-forwards. Deferred tax assets are summarized as
follows:
<TABLE>
<CAPTION>
OCTOBER 4, SEPTEMBER 28, DECEMBER 31,
1998 1997 1996
---------- ------------- ------------
<S> <C> <C> <C>
Capitalized "start-up" expenses..... $ 1,824 $ 2,635 $ 2,635
Net operating loss carry-forward.... 24,369 18,633 12,730
Other............................... 1,170 902 512
------- -------- --------
Gross deferred tax assets........... 27,363 22,170 15,877
Less: Valuation allowance........... (27,363) (22,170) (15,877)
------- -------- --------
Net deferred tax assets............. $ -- $ -- $ --
======= ======== ========
</TABLE>
F-42
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The reconciliation of expected income taxes at the federal statutory rate of
34% to the actual tax expense of $0 is:
<TABLE>
<CAPTION>
YEAR ENDED NINE-MONTHS ENDED YEAR ENDED
OCTOBER 4, SEPTEMBER 28, DECEMBER 31,
1998 1997 1996
---------- ----------------- ------------
<S> <C> <C> <C>
Tax at statutory rate........... $(5,245) $(5,975) $(12,228)
Change in valuation allowance... 5,193 6,293 12,126
Other........................... 52 (318) 102
------- ------- --------
$ -- $ -- $ --
======= ======= ========
</TABLE>
As of October 4, 1998, the Company has approximately $70,185 of net operating
loss carry-forwards available to offset future taxable income, if any, through
2012.
Under the provisions of the IRC, utilization of the Company's net operating
loss carry-forwards may be subject to limitation if it should be determined
that a greater than 50% ownership change were to occur in the future. The
Company has determined that such a change occurred in May 1998 and November
1998 and the annual utilization of loss carry-forwards generated through those
periods will be limited.
6. STOCK OPTION PLAN
The Company has a Combined Incentive and Nonqualified Stock Option Plan (the
Plan) for employees, directors, consultants or independent contractors whereby
140,000 shares of Class A common stock are reserved for stock option grants.
Pursuant to the Plan, the Board of Directors may grant nonqualified and
incentive stock options. The vesting period, exercise price and expiration
period of options are established at the discretion of the Board of Directors.
However, in no event shall the term of any incentive stock option exceed ten
years. All option grants to date vest over periods ranging from three to four
years, and expire ten years from the date of grant.
The per share weighted average fair value of stock options granted during 1998,
1997 and 1996 was $5.87, $1.62 and $0.11, respectively, on the date of grant
using the Black Scholes option-pricing model with the following weighted
average assumptions: fiscal years 1998, 1997 and 1996--expected dividend yield
0%; risk-free interest rate of 5.61%, 6.28% and 6.14%, respectively, and an
expected life of 4.26, 2.68 and 2.89 years, respectively.
The Company applies APB Opinion No. 25 in accounting for its plan and,
accordingly, compensation cost has been recognized for its stock options in the
financial statements only to the extent that the exercise price of the option
is less than the fair value of the underlying stock on the date of the grant.
In fiscal years 1998, 1997 and 1996 the Company recorded deferred compensation
relating to the issuance of stock options less than fair value of $4,232, $0
and $394, respectively. Amortization of these costs amounted to $532, $74, and
$148 for the fiscal years 1998, 1997 and 1996, respectively. Had the Company
determined compensation cost based on the fair value at the grant date for its
F-43
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
stock options under SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
OCTOBER 4, SEPTEMBER 28, DECEMBER 31,
1998 1997 1996
---------- ------------- ------------
<S> <C> <C> <C>
Net loss
As reported............. $(15,426) $(17,573) $(35,965)
Pro forma............... (16,595) (18,116) (36,049)
Basic and diluted net
loss per share
As reported............. (.16) (.25) (1.13)
Pro forma............... (.17) (.25) (1.13)
</TABLE>
Pro forma net loss reflects only options granted in fiscal years 1998, 1997,
1996 and 1995. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net loss and
net loss per share amounts presented above because compensation cost is
reflected over the options' vesting period of three to four years and
compensation cost for options granted prior to January 1, 1995 is not
considered.
The following summarizes the activity, restated for the common stock split
(Note 7), under the Company's plan:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
NUMBER AVERAGE FAIR VALUE
OF EXERCISE OF OPTIONS
SHARES PRICE GRANTED
------ -------- ----------
<S> <C> <C> <C>
Balances at December 31, 1995.................. 11,568 $0.003
Options granted:
Exercise price equal to fair value........... 3,420 0.27 $0.03
Exercise price less than fair value.......... 1,920 0.09 0.22
Options exercised............................ (5,531) 0.003
Options canceled............................. (1,300) 0.03
------
Balances at December 31, 1996.................. 10,077 0.105
Options granted:
Exercise price equal to fair value........... 4,383 2.27 1.62
Options exercised............................ (2,612) 0.01
Options canceled............................. (816) 0.12
------
Balances at September 28, 1997................. 11,032 0.99
Options granted:
Exercise price equal to fair value........... 935 3.79 8.32
Exercise price less than fair value.......... 740 2.95 2.95
Options exercised............................ (2,148) .08
Options canceled............................. (1,453) 1.24
------
Balances at October 4, 1998.................... 9,106 3.41
Options exercisable at:
December 31, 1996............................ 2,800 .025
September 28, 1997........................... 3,116 .38
October 4, 1998.............................. 3,941 1.04
</TABLE>
F-44
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At October 4, 1998, 143,447 shares remained reserved and available for grant
under the Plan.
The following table summarizes information about stock options outstanding
under the Plan at October 4, 1998:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.003 1,275 6.75 $0.003 673 $0.003
0.09 1,451 7.70 0.09 1,147 0.09
0.15-.44 945 7.84 .42 443 .42
2.27 4,182 8.52 2.27 1,678 2.27
2.95 1,013 9.09 2.95
4.47-8.81 221 9.91 7.06
9.32 2 9.73 9.32
9.85 11 9.75 9.85
9.94 6 9.74 9.94
----- -----
9,106 8.23 $ 3.41 3,941 $ 1.04
===== =====
</TABLE>
7. EQUITY
As of April 22, 1997, the Company amended its Articles of Incorporation to
authorize the issuance of two new classes of shares, designated, respectively,
Class A common stock and Class B common stock. As of October 4, 1998, the
Company had the authority to issue 250,000 shares and 80,000 shares of Class A
common stock and Class B common stock, respectively, at a par value of $.01 per
share. Each holder of Class A common stock is entitled to one vote per share
owned and each holder of Class B common stock is entitled to 2 1/2 votes per
share owned. Class B shares may be converted into one share of Class A common
stock at any time, and the transfer of Class B shares to a third party results
in its automatic conversion to Class A shares. Each outstanding share of common
stock on the date of amendment became one share of Class A common stock.
As established in the Stock Purchase Agreement dated March 28, 1997, effective
April 22, 1997 Disney obtained a controlling interest in the Company by
purchasing 39,869 shares of the Company's Class B common shares. The initial
purchase proceeds provided $31,868 in cash to the Company, and extinguished
loans from a key shareholder of $50,000 (Note 4). The agreement provides that
Disney has the option to acquire all of the outstanding Class A shares held by
key shareholders and employees at a predetermined price.
On May 1, 1998, Disney exercised this option and acquired all of the
outstanding Class A shares from the primary shareholder, thereby increasing its
percentage ownership of the Company's outstanding common stock from
approximately 41% to approximately 91% on a primary share basis.
COMMON STOCK SPLIT
On October 4, 1997, the Board of Directors declared a four-for-one stock split
on the Company's Class A and Class B common stock effected in the form of a
stock dividend to holders of record on
F-45
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
that date. Class A and Class B common stock issued, including stock option
information, and additional paid-in capital for all years have been restated to
reflect this split.
8. COMMITMENTS
The Company occupies its current facilities under terms of a noncancelable
operating lease that expires in May 2001, subject to extensions at the
Company's option. At October 4, 1998, future minimum rental payments under the
lease are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER,
----------------------
<S> <C>
1999.............................................................. $1,502
2000.............................................................. 1,206
2001.............................................................. 550
------
$3,258
======
</TABLE>
Rent expense under noncancelable operating leases amounted to $1,493, $871 and
$931 in fiscal years 1998, 1997 and 1996, respectively.
During fiscal year 1998, the Company entered into separation agreements with
certain employees. The terms of these agreements include severance payments
based on staff level and years of service, accelerated stock option vesting and
payment of post-employment insurance premiums. The termination of employees
under these separation agreements is contingent upon completion of the Infoseek
merger, and the Company's obligations under the agreements will transfer to
Infoseek at that time. Accordingly, no liability for these arrangements has
been recorded by the Company as of October 4, 1998.
9. DISCONTINUED OPERATIONS
In March 1996, the Company made the decision to discontinue its multimedia CD-
ROM segment. During the phase-out period, the Company completed production of
its final CD-ROM product and disposed of its remaining inventory of CD-ROM
products currently released. The phase-out period was completed by March 31,
1997. Operating results of the Multimedia CD-ROM segment for 1996 are shown
separately in the accompanying consolidated statements of operations. Any
activity subsequent to December 31, 1996 reduced the net liability.
Accrued liabilities of discontinued operations consist of the following:
<TABLE>
<CAPTION>
OCTOBER 4, SEPTEMBER 28, DECEMBER 31,
1998 1997 1996
---------- ------------- ------------
<S> <C> <C> <C>
Accounts payable and accrued
liabilities............................ $(347) $(359) $(500)
Accrual for expected losses during
phase-out period....................... (19)
----- ----- -----
$(347) $(359) $(519)
===== ===== =====
</TABLE>
F-46
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net revenues and expenses of the Multimedia CD-ROM segment consist of the
following:
<TABLE>
<CAPTION>
OCTOBER 4, SEPTEMBER 28, DECEMBER 31,
1998 1997 1996
---------- ------------- ------------
<S> <C> <C> <C>
Net revenues......................... $-- $-- $ 664
Expenses............................. (4,934)
Accrual for expected losses during
phase-out period.................... (19)
--- --- -------
Loss from discontinued operations.... $-- $-- $(4,289)
=== === =======
</TABLE>
The Company recognized revenues from CD-ROM product sales at the time of
shipment from the Company's distributor. The estimated effect of price
protection programs and product returns were recorded as reductions to revenue.
10. OTHER EXPENSE
During 1996, the Company incurred legal and accounting fees of $606 in
connection with a proposed initial public offering, which was not completed. As
a result, the costs were expensed in 1996 and included in other expenses.
11. SUBSEQUENT EVENT
On November 18, 1998, the Company's shareholders approved a merger with
Infoseek Corporation (Infoseek), a developer and retailer of Internet
technology. Under the terms of the agreement, Infoseek acquired 100% of the
Company's outstanding common stock for approximately 25,512 shares of Infoseek
common stock and assumed options outstanding under the Company's stock option
plans for an aggregate of approximately 2,626 options for Infoseek common
stock. In connection with this acquisition, the joint venture terms of the ABC
News/Starwave Partners and ESPN/Starwave Partners are extended for ten years
from the date of the acquisition.
Upon closing of the transaction, Infoseek and Starwave will become wholly owned
subsidiaries of a newly organized holding company, Infoseek Corporation
(Newco), incorporated in Delaware. Shares of Newco, a registered public
company, will trade on Nasdaq and will be held by the former shareholders of
Infoseek and Starwave.
F-47
<PAGE>
ESPN JOINT VENTURE INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of PricewaterhouseCoopers LLP...................................... F-49
ESPN/Starwave Partners Balance Sheets as of October 4, 1998 and September
28, 1997................................................................. F-50
ESPN/Starwave Partners Statements of Operations for the Year Ended October
4, 1998 and the Period from April 1, 1997 (Inception) to September 28,
1997..................................................................... F-51
ESPN/Starwave Partners Statement of Changes in Partners' Equity for the
Year Ended October 4, 1998 and the Period from April 1, 1997 (Inception)
to September 28, 1997.................................................... F-52
ESPN/Starwave Partners Statements of Cash Flows for the Year Ended October
4, 1998 and the Period from April 1, 1997 (Inception) to September 28,
1997..................................................................... F-53
ESPN/Starwave Partners Notes to Financial Statements...................... F-54
</TABLE>
F-48
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To ESPN/Starwave Partners
d/b/a ESPN Internet Ventures
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in partners' equity and of cash flows present fairly, in
all material respects, the financial position of ESPN/Starwave Partners d/b/a
ESPN Internet Ventures at October 4, 1998 and September 28, 1997, and the
results of its operations and its cash flows for the year ended October 4, 1998
and the period from April 1, 1997 (inception) to September 28, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
Subsequent to year-end, the Partnership completed a transaction which
significantly changed its partnership and operating structure as described in
Note 4.
PricewaterhouseCoopers LLP
Seattle, Washington
November 18, 1998
F-49
<PAGE>
ESPN/STARWAVE PARTNERS
(D/B/A ESPN INTERNET VENTURES)
BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 4, SEPTEMBER 28,
1998 1997
---------- -------------
<S> <C> <C>
ASSETS
------
Current assets
Cash and cash equivalents........................... $3,623 $1,900
Accounts receivable (net of allowance of $79 and
$71, respectively)................................. 3,244 2,555
Prepaid royalties................................... 1,956 530
------ ------
Total current assets.............................. 8,823 4,985
Property and equipment, net........................... 479 84
------ ------
Total assets...................................... $9,302 $5,069
====== ======
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
Current liabilities
Accounts payable.................................... $1,040 $ 506
Deferred revenue.................................... 2,866 1,718
Due to partner...................................... 109
------ ------
Total current liabilities......................... 3,906 2,333
Commitments (Note 3)
Partners' equity...................................... 5,396 2,736
------ ------
Total liabilities and partners' equity............ $9,302 $5,069
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE>
ESPN/STARWAVE PARTNERS
(D/B/A ESPN INTERNET VENTURES)
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 1, 1997
YEAR ENDED (INCEPTION) TO
OCTOBER 4, SEPTEMBER 28,
1998 1997
---------- --------------
<S> <C> <C>
Revenues:
Advertising revenue................................. $13,459 $ 4,868
Subscription revenue................................ 2,459 1,732
Fantasy games and other............................. 3,275 396
------- -------
Total revenues.................................... 19,193 6,996
------- -------
Operating expenses:
Cost of online services............................. 15,715 7,168
Development......................................... 1,847 515
Sales and marketing................................. 5,724 2,262
General and administrative.......................... 3,055 811
------- -------
Total operating expenses.......................... 26,341 10,756
------- -------
Interest income....................................... 249 8
------- -------
Net loss.............................................. $(6,899) $(3,752)
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
ESPN/STARWAVE PARTNERS
(D/B/A ESPN INTERNET VENTURES)
STATEMENT OF CHANGES IN PARTNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
STARWAVE ESPN ONLINE TOTAL
VENTURES, INC. INVESTMENTS INC. PARTNERS' EQUITY
-------------- ---------------- ----------------
<S> <C> <C> <C>
Initial capital contribution
April 1, 1997 (Note 1)..... $(1,484) $(1,484)
Capital contributions........ 5,377 $ 2,595 7,972
Net loss for the period...... (2,251) (1,501) (3,752)
------- ------- -------
Balance at September 28,
1997........................ 1,642 1,094 2,736
Capital contributions........ 5,735 3,824 9,559
Net loss for the period...... (4,139) (2,760) (6,899)
------- ------- -------
Balance at October 4, 1998... $ 3,238 $ 2,158 $ 5,396
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE>
ESPN/STARWAVE PARTNERS
(D/B/A ESPN INTERNET VENTURES)
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 1, 1997
YEAR ENDED (INCEPTION) TO
OCTOBER 4, SEPTEMBER 28,
1998 1997
---------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................ $(6,899) $(3,752)
Adjustments to reconcile net loss to net cash
provided by operating activities
Deferred revenue from contributed assets.......... 1,484
Operating expenses allocated from partners........ 9,559 5,004
Depreciation and amortization..................... 87 3
Change in accounts receivable..................... (689) (2,555)
Change in prepaid royalties....................... (1,426) (530)
Change in accounts payable........................ 534 506
Change in deferred revenue........................ 1,148 1,718
Change in due to partner.......................... (109) 109
------- -------
Net cash provided by operating activities....... 2,205 1,987
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment.................. (482) (87)
------- -------
Net increase in cash and cash equivalents........... 1,723 1,900
Cash and cash equivalents, beginning of period...... 1,900
------- -------
Cash and cash equivalents, end of period............ $ 3,623 $ 1,900
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE>
ESPN/STARWAVE PARTNERS
(D/B/A ESPN INTERNET VENTURES)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 4, 1998 AND SEPTEMBER 28, 1997
(IN THOUSANDS)
1. ORGANIZATION, BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
ESPN Internet Ventures (the Partnership) was formed on April 1, 1997 upon the
execution of a Joint Partnership agreement between Starwave Ventures, Inc.
(SVI) and ESPN Online Investments Inc. SVI and ESPN Online Investments Inc.
(the Partners) are allocated net losses and net profits of the Partnership
60%/40% and 50%/50%, respectively. In addition, the partners incur and pay
certain operating expenses on behalf of the Partnership. These expenses are
allocated to the Partnership and considered contributions to partners' equity.
Upon inception, SVI contributed a deferred revenue liability of $1,484 relating
to services subsequently performed by the Partnership.
BUSINESS
The Partnership was established to develop, produce and maintain Internet-based
services intended to appeal to broad consumer interests in sports-related
content areas. The Partnership generates revenue from advertisements sold for
display upon its services, and from fantasy games and subscriptions sold to the
end consumer.
Inherent in the Partnership's business are various risks and uncertainties,
including its limited operating history and the limited history of commerce on
the Internet. Future revenues from online services are dependent on the
continued growth and acceptance of the Internet, use of the Internet as an
information source, and acceptance of the Internet as an effective advertising
medium.
REVENUE RECOGNITION
Advertising, subscription and fantasy game revenues are recognized using the
straight-line method over the period of the related advertising contract,
subscription term or sports season. Merchandise revenue is recognized at the
time of sale. Advertising revenues are stated net of commissions. The
Partnership guarantees to certain advertising customers a minimum number of
page impressions to be delivered to users of its services for a specified
period. To the extent minimum guaranteed page impression deliveries are not
met, the Partnership defers recognition of the corresponding revenues until
guaranteed page impression delivery levels are achieved. As of October 4, 1998
and September 28, 1997, no revenues had been deferred as a result of these
guarantees. Deferred revenues represent advance payments received by the
Partnership which are deferred until earned. Deferred revenues are classified
based on the period of the related advertising contract or subscription.
CASH AND EQUIVALENTS
Cash and equivalents include highly liquid investments with an original
maturity of three months or less.
F-54
<PAGE>
ESPN/STARWAVE PARTNERS
(D/B/A ESPN INTERNET VENTURES)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
PREPAID ROYALTIES
Prepaid royalties represents payments made or accrued to independent content
providers under development and production agreements. Amortization begins upon
launch of the applicable online service and is based on the greater of amounts
determined by the contractual royalty rates or amounts computed on a straight-
line basis over the terms of the agreements. At October 4, 1998 and September
28, 1997, the Partnership had one contract for a total of $2,000 and $1,300,
respectively, which is being amortized on a straight-line basis over the
duration of the life of the contract.
Management periodically evaluates the future recoverability of prepaid
royalties. In the event management does not expect to generate revenues
sufficient to recover the prepaid royalty under a particular contract, the
Partnership will reduce the carrying amount of its prepaid royalty to its fair
value on the date such a determination is made.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost for purchased assets and net book
value for contributed assets. Depreciation and amortization are recognized
using the straight-line method over the estimated useful lives of such assets.
The estimated useful life used is three years.
DEVELOPMENT EXPENSES
Development expenses relate to the development of new technologies that may
benefit the existing online services and consist principally as costs for
content, facilities and equipment. Development expenses are charged to results
of operations as incurred. Once an online service is launched and available to
generate revenues, expenses associated with enhancements and development of new
features for the service are included in cost of online services.
ADVERTISING EXPENSES
Advertising and promotion costs are expensed as incurred. The Partnership
incurred advertising costs of $1,743 and $1,558 during the periods ended
October 4, 1998 and September 28, 1997, respectively.
INCOME TAXES
Profits or losses of the Partnership are attributable directly to the partners
for income tax purposes. Consequently, an income tax provision has not been
reflected in these financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable, and
accounts payable approximates fair value because of the short-term maturity of
these instruments.
F-55
<PAGE>
ESPN/STARWAVE PARTNERS
(D/B/A ESPN INTERNET VENTURES)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
ACCOUNTING CHANGES
In June 1997, Statement of Financial Accounting Standards No. 130 (SFAS 130),
Reporting Comprehensive Income, was issued. This pronouncement requires
companies to report comprehensive income and its components prominently in the
financial statements. Comprehensive income includes both net income and charges
or credits to equity that are not the results of transactions with owners. SFAS
130 is required to be adopted for fiscal years beginning after December 15,
1997. The Partnership does not have any comprehensive income items other than
net income; therefore, SFAS 130 is not expected to impact the Partnership.
In June 1998, Statement of Financial Accounting Standards No. 133 (SFAS),
Accounting for Derivative Instruments and Hedging Activities, was issued. This
pronouncement standardizes the accounting for derivative instruments by
requiring that an entity recognize those items as assets or liabilities in the
financial statements and measure them at fair value. SFAS 133 is required to be
adopted for fiscal years beginning after June 15, 1999. Since the Partnership
does not hold any derivative instruments, SFAS 133 is not expected to impact
the Partnership.
In October 1997, Statement of Position No. 97-2 (SOP 97-2), Software Revenue
Recognition, was issued. This pronouncement outlines criteria which must be
satisfied before revenue selling or licensing software can be recognized. SOP
97-2 is required to be adopted for transactions entered into in fiscal years
beginning after December 15, 1997. Since the Partnership does not generate
revenue from selling or licensing software, SOP 97-2 is not expected to impact
the Partnership.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
OCTOBER 4, SEPTEMBER 28,
1998 1997
---------- -------------
<S> <C> <C>
Computer hardware....... $569 $87
Less: Accumulated
depreciation and
amortization........... (90) (3)
---- ---
$479 $84
==== ===
</TABLE>
The Partnership shares office space and certain operating equipment with its
partners and the related rent of $0 and $88, and depreciation of $370 and $145,
respectively, was allocated to the Partnership for the year ended October 4,
1998 and the period from April 1, 1997 (inception) to September 28, 1997.
F-56
<PAGE>
ESPN/STARWAVE PARTNERS
(D/B/A ESPN INTERNET VENTURES)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. COMMITMENTS
The Partnership has production agreements with third parties (licensors) under
which the Partnership produces online services utilizing content licensed under
the production agreements. In exchange for content licenses, the licensors are
entitled to royalties calculated as a percentage of gross revenues from the
online services, as defined in the production agreements. During the term of
the production agreements, the Partnership is required to pay minimum
nonrefundable payments which are offset against the royalties as they are
earned. Future minimum royalty payments are summarized as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
------------------
<S> <C>
1999.............................................................. $3,250
2000.............................................................. 3,000
------
$6,250
======
</TABLE>
4. SUBSEQUENT EVENT
On November 18, 1998, the parent company of SVI completed a merger with
Infoseek Corporation (Infoseek), a developer and retailer of internet
technology. As a result of this acquisition, DOL Online Investments, Inc. and
Infoseek agreed to extend the Partnerships' joint venture terms for ten years
from the date of the acquisition.
F-57
<PAGE>
ABC NEWS JOINT VENTURE INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of PricewaterhouseCoopers LLP..................................... F-59
ABC News/Starwave Partners Balance Sheets as of October 4, 1998 and
September 28, 1997...................................................... F-60
ABC News/Starwave Partners Statements of Operations for the Year Ended
October 4, 1998 and the Period from April 1, 1997 (Inception) to
September 28, 1997 ..................................................... F-61
ABC News/Starwave Partners Statement of Changes in Partners' Equity for
the Year Ended October 4, 1998 and the Period from April 1, 1997
(Inception) to September 28, 1997 ...................................... F-62
ABC News/Starwave Partners Statements of Cash Flows for the Year Ended
October 4, 1998 and the Period from April 1, 1997 (Inception) to
September 28, 1997...................................................... F-63
ABC News/Starwave Partners Notes to Financial Statements................. F-64
</TABLE>
F-58
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To ABC News/Starwave Partners
d/b/a ABC News Internet Ventures
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in partners' equity and of cash flows present fairly, in
all material respects, the financial position of ABC News/Starwave Partners
d/b/a ABC News Internet Ventures at October 4, 1998 and September 28, 1997, and
the results of its operations and its cash flows for the year ended October 4,
1998 and the period from April 1, 1997 (inception) to September 28, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
Subsequent to year-end, the Partnership completed a transaction which
significantly changed its partnership and operating structure as described in
Note 4.
PricewaterhouseCoopers LLP
Seattle, Washington
November 18, 1998
F-59
<PAGE>
ABC NEWS/STARWAVE PARTNERS
(D/B/A ABC NEWS INTERNET VENTURES)
BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 4, SEPTEMBER 28,
1998 1997
---------- -------------
<S> <C> <C>
ASSETS
------
Current assets
Cash and cash equivalents............................. $ 1,941 $ 31
Accounts receivable (net of allowance of $42 and
$10, respectively)................................. 2,936 1,368
Prepaid royalties................................... 1,628 2,857
------- ------
Total current assets.............................. 6,505 4,256
Equipment and leasehold improvements, net............. 3,967 3,134
------- ------
Total assets...................................... $10,472 $7,390
======= ======
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
Current liabilities
Accounts payable.................................... $ 1,444 $2,605
Accrued compensation................................ 49 240
Deferred revenue.................................... 207 85
Other liabilities................................... 44 --
Due to partner...................................... 1,830 --
------- ------
Total current liabilities......................... 3,574 2,930
Commitments (Note 3)
Partners' equity...................................... 6,898 4,460
------- ------
Total liabilities and partners' equity............ $10,472 $7,390
======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
ABC NEWS/STARWAVE PARTNERS
(D/B/A ABC NEWS INTERNET VENTURES)
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 1, 1997
YEAR ENDED (INCEPTION) TO
OCTOBER 4, 1998 SEPTEMBER 28, 1997
--------------- ------------------
<S> <C> <C>
Revenues:
Advertising revenues....................... $ 4,034 $ 937
Royalties.................................. 5,844 992
-------- -------
Total revenues........................... 9,878 1,929
-------- -------
Operating expenses:
Cost of online services.................... 18,182 9,015
Development................................ 1,751 532
Sales and marketing........................ 3,959 1,777
General and administrative................. 2,746 537
-------- -------
Total operating expenses................. 26,638 11,861
-------- -------
Interest income.............................. 61 2
-------- -------
Net loss..................................... $(16,699) $(9,930)
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE>
ABC NEWS/STARWAVE PARTNERS
(D/B/A ABC NEWS INTERNET VENTURES)
STATEMENT OF CHANGES IN PARTNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
STARWAVE DOL ONLINE PARTNERS'
VENTURES, INC. INVESTMENTS, INC. EQUITY
-------------- ----------------- ---------
<S> <C> <C> <C>
Initial capital contribution, April
1, 1997........................... $ (26) $ (26)
Capital contributions.............. 8,660 $ 5,756 14,416
Net loss for the period............ (5,958) (3,972) (9,930)
-------- ------- --------
Balance at September 28, 1997...... 2,676 1,784 4,460
Capital contributions.............. 11,483 7,654 19,137
Net loss for the period............ (10,020) (6,679) (16,699)
-------- ------- --------
Balance at October 4, 1998......... $ 4,139 $ 2,759 $ 6,898
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE>
ABC NEWS/STARWAVE PARTNERS
(D/B/A ABC NEWS INTERNET VENTURES)
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 1, 1997
YEAR ENDED (INCEPTION) TO
OCTOBER 4, SEPTEMBER 28,
1998 1997
---------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................ $(16,699) $(9,930)
Adjustments to reconcile net loss to net cash
provided by operating activities
Deferred revenue from contributed assets.......... -- 26
Operating expenses allocated from partners........ 17,988 11,327
Depreciation and amortization..................... 676 273
Change in accounts receivable..................... (1,568) (1,368)
Change in prepaid royalties....................... 1,229 (2,857)
Change in accounts payable........................ (1,161) 2,605
Change in accrued compensation.................... (191) 240
Change in deferred revenue........................ 122 85
Change in other liabilities....................... 44 --
Change in due to partner.......................... 1,830 --
-------- -------
Net cash provided by operating activities....... 2,270 401
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment and leasehold improvements.. (360) (370)
-------- -------
Net increase in cash and cash equivalents........... 1,910 31
Cash and cash equivalents, beginning of period...... 31 --
-------- -------
Cash and cash equivalents, end of period............ $ 1,941 $ 31
======== =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Fixed assets contributed by partners................ $ 1,149 $ 3,037
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE>
ABC NEWS/STARWAVE PARTNERS
(D/B/A ABC NEWS INTERNET VENTURES)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 4, 1998 AND SEPTEMBER 28, 1997
(IN THOUSANDS)
1. ORGANIZATION, BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
ABC News Internet Ventures (the Partnership) was formed on April 1, 1997 upon
the execution of a Joint Partnership agreement between Starwave Ventures, Inc.
(SVI) and DOL Online Investments Inc. (DOL). SVI and DOL are allocated the net
losses and net profits of the Partnership 60%/40% and 50%/50%, respectively. In
addition, the partners incur and pay certain operating expenses on behalf of
the Partnership. These expenses are allocated to the Partnership and considered
contributions to partners' equity. Upon inception, SVI contributed a deferred
revenue liability of $26, relating to services subsequently performed by the
Partnership.
BUSINESS
The Partnership was established to develop, produce and maintain Internet-based
services intended to appeal to broad consumer interests in news and
entertainment content areas. The Partnership currently generates revenue from
advertisements sold for display upon its services, and royalties from certain
production agreements.
Inherent in the Partnership's business are various risks and uncertainties,
including its limited operating history and the limited history of commerce on
the Internet. Future revenues from online services are dependent on the
continued growth and acceptance of the Internet, use of the Internet as an
information source, and acceptance of the Internet as an effective advertising
medium.
REVENUE RECOGNITION
Advertising revenues are recognized using the straight-line method over the
period of the related advertising contract. Advertising revenues are stated net
of commissions. The Partnership guarantees to certain advertising customers a
minimum number of page impressions to be delivered to users of its services for
a specified period. To the extent minimum guaranteed page impression deliveries
are not met, the Partnership defers recognition of the corresponding revenues
until guaranteed page impression delivery levels are achieved. As of October 4,
1998 and September 28, 1997, no revenues have been deferred as a result of
these guarantees. Deferred revenues represent payments received in advance by
the Partnership which are deferred until earned. Deferred revenues are
classified based on the period of the related advertising or production
contract.
CASH AND EQUIVALENTS
Cash and equivalents include highly liquid investments with an original
maturity of three months or less.
F-64
<PAGE>
ABC NEWS/STARWAVE PARTNERS
(D/B/A ABC NEWS INTERNET VENTURES)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
PREPAID ROYALTIES
Prepaid royalties represents payments made or accrued to independent content
providers under development and production agreements. Amortization begins upon
launch of the applicable online service and is based on the greater of amounts
determined by the contractual royalty rates or amounts computed on a straight-
line basis over the terms of the agreements. At October 4, 1998 and September
28, 1997, the Partnership had one contract for a total of $3,750, which is
being amortized on a straight-line basis over the three-year life of the
contract.
Management periodically evaluates the future recoverability of prepaid
royalties. In the event management does not expect to generate revenues
sufficient to recover the prepaid royalty under a particular contract, the
Partnership will reduce the carrying amount of its prepaid royalty to its fair
value on the date such a determination is made.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are recorded at cost for purchased assets
and net book value for contributed assets. Depreciation and amortization are
recognized using the straight-line method over the estimated useful lives of
such assets ranging from one to six years.
DEVELOPMENT EXPENSES
Development expenses relate to the development of new technologies that may
benefit the online service and consist principally of costs for labor,
facilities and equipment. Development expenses are charged to results of
operations as incurred. Once an online service is launched and available to
generate revenues, expenses associated with enhancements and development of new
features for the service are included in cost of online services.
ADVERTISING EXPENSES
Advertising and promotion costs are expensed as incurred. The Partnership
incurred advertising costs of $886 and $1,260 for the periods ended October 4,
1998 and September 28, 1997, respectively.
INCOME TAXES
Profits or losses of the Partnership are attributable directly to the partners
for income tax purposes. Consequently, an income tax provision has not been
reflected in these financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable, accounts
payable, and accrued compensation and due from partner approximates fair value
because of the short-term maturity of these instruments.
F-65
<PAGE>
ABC NEWS/STARWAVE PARTNERS
(D/B/A ABC NEWS INTERNET VENTURES)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
ACCOUNTING CHANGES
In June 1997, Statement of Financial Accounting Standards No. 130 (SFAS 130),
Reporting Comprehensive Income, was issued. This pronouncement requires
companies to report comprehensive income and its components prominently in the
financial statements. Comprehensive income includes both net income and charges
or credits to equity that are not the results of transactions with owners. SFAS
130 is required to be adopted for fiscal years beginning after December 15,
1997. The Partnership does not have any comprehensive income items other than
net income; therefore, SFAS 130 is not expected to impact the Partnership.
In June 1998, Statement of Financial Accounting Standards No. 133 (SFAS),
Accounting for Derivative Instruments and Hedging Activities, was issued. This
pronouncement standardizes the accounting for derivative instruments by
requiring that an entity recognize those items as assets or liabilities in the
financial statements and measure them at fair value. SFAS 133 is required to be
adopted for fiscal years beginning after June 15, 1999. Since the Partnership
does not hold any derivative instruments, SFAS 133 is not expected to impact
the Partnership.
In October 1997, Statement of Position No. 97-2 (SOP 97-2), Software Revenue
Recognition, was issued. This pronouncement outlines criteria which must be
satisfied before revenue selling or licensing software can be recognized. SOP
97-2 is required to be adopted for transactions entered into in fiscal years
beginning after December 15, 1997. Since the Partnership does not generate
revenue from selling or licensing software, SOP 97-2 is not expected to impact
the Partnership.
2. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
OCTOBER 4, SEPTEMBER 28,
1998 1997
---------- -------------
<S> <C> <C>
Computer hardware....... $ 660 $ 348
Software................ 44 3
Furniture and fixtures.. 19 19
Leasehold improvements.. 4,193 3,037
------ ------
4,916 3,407
Less: Accumulated
depreciation and
amortization........... (949) (273)
------ ------
Equipment and leasehold
improvements, net...... $3,967 $3,134
====== ======
</TABLE>
F-66
<PAGE>
ABC NEWS/STARWAVE PARTNERS
(D/B/A ABC NEWS INTERNET VENTURES)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Partnership shares office space and certain operating equipment with its
partners. Related rent in the amount of $12 and $29 was allocated to the
Partnership for the year ended October 4, 1998 and for the period from April 1,
1997 (inception) to September 28, 1997, respectively.
3. COMMITMENTS
The Partnership has production agreements with third parties (licensors) under
which the Partnership produces online services utilizing content licensed under
the production agreements. In exchange for content licenses, the licensors are
entitled to royalties calculated as a percentage of gross revenues from the
online services, as defined in the production agreements. During the term of
the production agreements, the Partnership is required to pay minimum
nonrefundable payments which are offset against the royalties as they are
earned. Future minimum royalty payments are $750 in 1999.
4. SUBSEQUENT EVENT
On November 18, 1998, the parent company of SVI completed a merger with
Infoseek Corporation (Infoseek), a developer and retailer of internet
technology. As a result of this acquisition, DOL Online Investments, Inc. and
Infoseek agreed to extend the Partnerships' joint venture terms for ten years
from the date of the acquisition.
F-67
<PAGE>
QUANDO, INC. INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of KPMG Peat Marwick LLP........................................... F-69
Quando, Inc. Balance Sheets as of December 31, 1997 and 1996 and September
30, 1998................................................................. F-70
Quando, Inc. Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997 and the Nine Months Ended September 30, 1997 and
1998..................................................................... F-71
Quando, Inc. Statements of Shareholders' Equity (Deficit) for the Years
Ended December 31, 1995, 1996 and 1997, and the Nine Months Ended
September 30, 1998....................................................... F-72
Quando, Inc. Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997, and the Nine Months Ended September 30, 1997 and
1998..................................................................... F-73
Quando, Inc. Notes to Financial Statements................................ F-74
</TABLE>
F-68
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Quando, Inc.:
We have audited the accompanying balance sheets of Quando, Inc. (the Company)
as of December 31, 1996 and 1997, and the related statements of operations,
shareholders' equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Quando, Inc. as of December
31, 1996 and 1997, and the results of its operations and its cash flows for the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 12 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in note 12. The financial statements do not include any
adjustment that might result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
Portland Oregon
August 18, 1998
F-69
<PAGE>
QUANDO, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------ SEPTEMBER 30,
1996 1997 1998
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
------
Current assets:
Cash................................. $ 2,935 $ 50,984 $ 75,779
Accounts receivable, net............. -- 29,241 101,190
Other current assets................. -- -- 8,432
----------- ----------- -----------
Total current assets............... 2,935 80,225 185,401
Property and equipment, net............ 51,308 42,681 91,956
Other assets........................... 3,562 3,718 3,718
----------- ----------- -----------
Total assets....................... $ 57,805 $ 126,624 $ 281,075
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable and accrued
expenses............................ $ 202,405 $ 260,908 $ 159,396
Shareholders' loans.................. 66,991 67,658 40,000
Note payable......................... -- -- 360,000
----------- ----------- -----------
Total current liabilities.......... 269,396 328,566 559,396
Convertible debt....................... -- 247,000 447,000
----------- ----------- -----------
Total liabilities.................. 269,396 575,566 1,006,396
----------- ----------- -----------
Shareholders' deficit:
Preferred stock, no par value;
4,000,000 shares authorized:
Series A convertible preferred
stock; 300,000 shares authorized;
300,000 shares issued and
outstanding on December 31, 1996,
December 31, 1997 and
September 30, 1998 (liquidation
preference of $300,000)........... 295,575 295,575 295,575
Series B convertible preferred
stock; 880,000 shares authorized;
691,232, 880,000 and 880,000
shares issued and outstanding on
December 31, 1996, December 31,
1997 and September 30, 1998,
respectively (liquidation
preference of $550,000)........... 410,263 526,313 526,313
Common stock, no par value;
15,000,000 shares authorized;
5,445,000, 4,445,000 and 4,445,000
shares issued and outstanding on
December 31, 1996, December 31, 1997
and September 30, 1998,
respectively........................ 160,000 160,000 160,000
Additional paid-in capital........... 6 6 5,006
Accumulated deficit.................. (1,077,435) (1,430,836) (1,712,215)
----------- ----------- -----------
Total shareholders' deficit........ (211,591) (448,942) (725,321)
----------- ----------- -----------
Total liabilities and shareholders'
deficit........................... $ 57,805 $ 126,624 $ 281,075
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-70
<PAGE>
QUANDO, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31 SEPTEMBER 30
------------------------------- ----------------------
1995 1996 1997 1997 1998
--------- --------- --------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues, net........... $ 71,186 $ 33,182 $ 255,723 $ 147,450 $ 513,713
Cost of goods sold...... 32,212 19,373 654 600 5,349
--------- --------- --------- --------- ---------
Gross margin.......... 38,974 13,809 255,069 146,850 508,364
--------- --------- --------- --------- ---------
Operating expenses:
Research and
development.......... 127,273 115,782 161,339 112,828 413,260
Sales and marketing... 400 2,000 12,000 2,901 699
General and
administrative....... 361,156 326,103 418,850 291,167 316,759
--------- --------- --------- --------- ---------
488,829 443,885 592,189 406,896 730,718
--------- --------- --------- --------- ---------
Operating loss...... (449,855) (430,076) (337,120) (260,046) (222,354)
Other income (expense):
Interest expense...... (5,737) (14,897) (26,151) (18,424) (61,410)
Other income
(expense), net....... 1,232 2,226 9,870 -- 2,385
Loss on sale of fixed
assets............... (3,743) -- -- -- --
--------- --------- --------- --------- ---------
Loss before
provision for
income taxes....... (458,103) (442,747) (353,401) (278,470) (281,379)
Provision for income
taxes.................. -- -- -- -- --
--------- --------- --------- --------- ---------
Net loss.............. $(458,103) $(442,747) $(353,401) $(278,470) $(281,379)
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-71
<PAGE>
QUANDO, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK
---------------------------------- TOTAL
SERIES A SERIES B COMMON STOCK ADDITIONAL SHAREHOLDERS'
----------------- ---------------- -------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
------- --------- ------- -------- ---------- -------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... 125,000 $ 120,575 -- $ -- 5,445,000 $160,000 $ 5 $ (176,585) $ 103,995
Issuance of preferred
stock.................. 175,000 175,000 -- -- -- -- 1 -- 175,001
Net loss................ -- -- -- -- -- -- -- (458,103) (458,103)
------- --------- ------- -------- ---------- -------- ------ ------------ ----------
Balance, December 31,
1995................... 300,000 295,575 -- -- 5,445,000 160,000 6 (634,688) (179,107)
Issuance of preferred
stock, net of offering
costs.................. -- -- 691,232 410,263 -- -- -- -- 410,263
Net loss................ -- -- -- -- -- -- -- (442,747) (442,747)
------- --------- ------- -------- ---------- -------- ------ ------------ ----------
Balance, December 31,
1996................... 300,000 295,575 691,232 410,263 5,445,000 160,000 6 (1,077,435) (211,591)
Issuance of preferred
stock, net of offering
costs.................. -- -- 188,768 116,050 -- -- -- -- 116,050
Recision of common
stock.................. -- -- -- -- (1,000,000) -- -- -- --
Net loss................ -- -- -- -- -- -- -- (353,401) (353,401)
------- --------- ------- -------- ---------- -------- ------ ------------ ----------
Balance, December 31,
1997................... 300,000 295,575 880,000 526,313 4,445,000 160,000 6 (1,430,836) (448,942)
Issuance of warrants
(unaudited)............ -- -- -- -- -- -- 5,000 -- 5,000
Net loss (unaudited).... -- -- -- -- -- -- -- (281,379) (281,379)
------- --------- ------- -------- ---------- -------- ------ ------------ ----------
Balance, September 30,
1998 (unaudited)....... 300,000 $ 295,575 880,000 $526,313 4,445,000 $160,000 $5,006 $ (1,712,215) $ (725,321)
======= ========= ======= ======== ========== ======== ====== ============ ==========
</TABLE>
See accompanying notes to financial statements.
F-72
<PAGE>
QUANDO, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31 SEPTEMBER 30
------------------------------- ----------------------
1995 1996 1997 1997 1998
--------- --------- --------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(458,103) $(442,747) $(353,401) $(278,470) $(281,379)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization....... 22,146 12,567 16,179 12,134 18,010
Allowance for bad
debts.............. -- -- 1,618 -- --
Gain on forgiveness
of accounts
payable............ -- -- (10,000) -- --
Loss on sale of
fixed assets....... 3,743 -- -- -- --
Changes in assets
and liabilities:
Accounts
receivable....... (13,571) 26,909 (30,859) (25,094) (71,949)
Inventory......... (4,376) 16,538 -- -- --
Other assets...... 6,753 9 (156) (156) (8,432)
Accounts payable
and accrued
expenses......... 135,237 15,702 68,503 51,715 (101,512)
Other current
liabilities...... 15,953 (15,953) -- -- --
--------- --------- --------- --------- ---------
Net cash used in
operating
activities..... (292,218) (386,975) (308,116) (239,871) (445,262)
--------- --------- --------- --------- ---------
Cash flows from
investing activities:
Purchase of
equipment............ (17,277) (39,302) (7,552) (8,110) (67,285)
Proceeds from sale of
equipment............ 36,182 -- -- -- --
--------- --------- --------- --------- ---------
Net cash
provided by
(used in)
investing
activities..... 18,905 (39,302) (7,552) (8,110) (67,285)
--------- --------- --------- --------- ---------
Cash flows from
financing activities:
Proceeds from issuance
of convertible debt.. -- -- 240,000 140,000 200,000
Proceeds (payments)
from shareholder
loans, net........... 51,364 15,627 7,667 668 (27,658)
Proceeds from issuance
of preferred stock,
net.................. 175,000 410,263 116,050 125,592 --
Proceeds from sale of
warrants............. 1 -- -- -- 5,000
Proceeds from note
payable.............. -- -- -- -- 360,000
--------- --------- --------- --------- ---------
Net cash
provided by
financing
activities..... 226,365 425,890 363,717 266,260 537,342
--------- --------- --------- --------- ---------
Increase (decrease) in
cash................... (46,948) (387) 48,049 18,279 24,795
Cash at beginning of
year................... 50,270 3,322 2,935 2,935 50,984
--------- --------- --------- --------- ---------
Cash at end of year..... $ 3,322 $ 2,935 $ 50,984 $ 21,214 $ 75,779
========= ========= ========= ========= =========
Supplemental disclosures
of cash flow
information:
Cash paid during the
year for:
Interest (including
amounts paid to
shareholders of
$5,737, $14,897,
$16,825, $12,197 and
$7,684,
respectively......... $ 5,737 $ 14,897 $ 26,151 $ 12,188 $ 11,487
Income taxes.......... -- -- -- -- --
Supplemental disclosures
of non-cash financing
activities:
Convertible notes
issued upon
conversion of
shareholder loans.... $ -- $ -- $ 7,000 $ -- $ --
</TABLE>
See accompanying notes to financial statements.
F-73
<PAGE>
QUANDO, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Quando, Inc. (Quando or the Company) was incorporated as an S Corporation
on December 12, 1993 in the State of Oregon as Media Mosaic, Inc. (Media
Mosaic or the Company). Media Mosaic developed and published "how to" CD-
ROM's for several activities and hobbies. On October 10, 1994, Media Mosaic
revoked its S Corporation election of tax status and began operating as a C
Corporation. During 1994 and 1995, the Company's sales consisted entirely
of CD-ROM sales.
In 1996, due to lower than expected CD-ROM sales, Media Mosaic terminated
its CD-ROM development and publishing business. In March 1996, the Company
began developing custom event directory services for the Internet.
Effective September 27, 1996, the Company changed its name from Media
Mosaic, Inc. to Quando, Inc. and in March 1997, the Company began to sell
their search and navigational services to customers. During 1997, the
Company's sales consisted entirely of fees charged for search and
navigational services and fees charged for custom engineering projects.
UNAUDITED QUARTERLY INFORMATION
The financial information included herein for the nine-month periods ended
September 30, 1997 and 1998 is unaudited; however, such information
reflects all adjustments consisting only of normal recurring adjustments
which are, in the opinion of management, necessary for a fair presentation
of the financial position, results of operations and cash flows for the
interim periods. The interim consolidated financial statements should be
read in conjunction with the financial statements and the notes included in
the financial statements. The results of operations for the interim period
presented are not necessarily indicative of the results to be expected for
the full year.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
REVENUE RECOGNITION
In 1995 and 1996, revenue resulted primarily from CD-ROM product sales. CD-
ROM sales were recognized upon shipment. The Company generally provided for
a right of return, however, due to the termination of this line of business
in 1996, no sales reserve was considered necessary at December 31, 1996 or
1997.
F-74
<PAGE>
QUANDO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In 1997, revenue results primarily from fees for (a) directory services and
(b) engineering or other customization of directory services. Search and
navigational service fees are recognized monthly as they are earned and
custom engineering projects are recognized on a completed contract basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property and equipment are
depreciated using the straight-line method over the estimated useful lives
of the assets as follows: computers and software over three to five years,
furniture and equipment over five to seven years. Leasehold improvements
are amortized over the shorter of the useful life of the asset or the life
of the lease.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences of events that have been included in the financial statements
and tax returns. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to be recovered or settled.
Valuation allowances are established to reduce deferred tax assets to the
amount expected to be realized.
RESEARCH AND DEVELOPMENT
Expenditures for research and development are expensed as incurred.
CAPITALIZED SOFTWARE
Under Statement of Financial Accounting Standards No. 86, software
development costs are to be capitalized beginning when a product's
technological feasibility has been established and ending when a product is
made available for general release to customers. The establishment of
technological feasibility of the Company's products has occurred shortly
before general release and, accordingly, no costs have been capitalized.
ROYALTIES
Royalties are accrued based on certain product sales, pursuant to
contractual agreements with developers of software products published by
the Company.
ACCOUNTS RECEIVABLE
Accounts receivable is net of an allowance for doubtful accounts of $-0-
and $1,618 at December 31, 1996 and 1997, respectively.
F-75
<PAGE>
QUANDO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INTANGIBLE ASSETS
Intangible assets, which represent capitalized packaging design fees, are
amortized on a straight-line basis over the expected periods to be
benefited. The Company assesses the recoverability of this intangible asset
by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash
flows of the product sales. Due to the discontinuance of the associated
product, the remaining capitalized packaging design fees of $16,937 were
written off during 1995 and are included in cost of goods sold.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the Financial
Accounting Standard Board's Statement of Financial Accounting Standards No.
123 (SFAS 123), Accounting for Stock-Based Compensation. This statement
permits a company to choose either a fair-value based method of accounting
for its stock-based compensation arrangements or to comply with the current
Accounting Principles Board Opinion 25 (APB Opinion 25) intrinsic-value-
based method adding pro forma disclosures of net loss computed as if the
fair-value-based method had been applied in the financial statements. The
Company applies SFAS No. 123 by retaining the APB Opinion 25 method of
accounting for stock-based compensation for employees with annual pro forma
disclosures of net loss. Stock-based compensation for non-employees is
accounted for using the fair-value-based method.
ADVERTISING
The Company expenses the costs of advertising when the costs are incurred.
Advertising expense was approximately $12,000, $2,000 and $400 for the
years ended December 31, 1995, 1996 and 1997, respectively.
(2) PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
-------- -------
<S> <C> <C>
Leasehold improvements................................... $ 3,212 $ 3,212
Software................................................. 33,526 33,526
Furniture and fixtures................................... 6,792 7,152
Equipment................................................ 1,371 1,435
Computer equipment....................................... 29,245 36,373
-------- -------
74,146 81,698
-------- -------
Less accumulated depreciation and amortization........... 22,838 39,017
-------- -------
$ 51,308 $42,681
======== =======
</TABLE>
F-76
<PAGE>
QUANDO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3)INCOME TAXES
The Company incurred a loss for both financial reporting and tax return
purposes and, as such, there was no current or deferred tax provision for
the years 1995, 1996 and 1997.
The difference between the expected tax expense, computed by applying the
federal statutory rate of 34% to loss before taxes, and the actual tax
expense of $-0- is primarily due to the increase in the valuation allowance
for deferred tax assets.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liability at December
31 are approximately as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Federal and state operating loss carryforwards..... $334,000 $492,000
Research and experimentation credits............... 18,000 33,000
Other.............................................. 27,000 2,000
-------- --------
Total gross deferred tax assets.................. 379,000 527,000
Less valuation allowance............................. (379,000) (524,000)
-------- --------
Net deferred tax assets.......................... -- 3,000
Deferred tax liability:
Property and equipment, due to differences in
depreciation...................................... -- 3,000
-------- --------
$ -- $ --
======== ========
</TABLE>
The total valuation allowance for deferred tax assets as of December 31,
1995, 1996 and 1997 was $207,000, $379,000 and $524,000, respectively. The
net change in the total valuation allowance for the years ended December
31, 1995, 1996 and 1997 was an increase of $192,000, $172,000 and $145,000,
respectively.
At December 31, 1997, the Company has federal and state net operating loss
and research and experimentation credit carryforwards of approximately
$1,280,000 and $40,000, respectively. These carryforwards will expire
between 2000 and 2012 if not used by the Company to reduce income taxes
payable in future periods. These carryforwards will be subject to further
limitations upon closing of the proposed transaction discussed in note 12.
(4)SHAREHOLDERS' EQUITY
RECISION OF COMMON STOCK
On February 25, 1997, the two founders surrendered a total of 1,000,000
shares of common stock to the Company in exchange for no consideration. As
the Company has no par common stock, there is no statement of operations or
balance sheet effects of this transaction.
F-77
<PAGE>
QUANDO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SERIES A AND SERIES B PREFERRED STOCK
The Series A preferred stock has no stated value per share and a
liquidation preference over the holders of common stock of an amount per
share equal to $1.00 (the original issue price) plus all declared but
unpaid dividends. The Series B preferred stock has no stated value per
share and a liquidation preference over the holders of common stock of an
amount per share equal to $.625 (the original issue price) plus all
declared but unpaid dividends. No dividend declarations have been made for
Series A or Series B preferred stock as of December 31, 1995, 1996 and
1997.
Each share is convertible into common stock at any time at the option of
the holder. The initial conversion ratio for both Series A and Series B
preferred stock is one-to-one, but this ratio is subject to modification
under the Company's Articles of Incorporation in the event of certain
dilutive issuance of securities, stock splits, stock dividends, stock
distributions or other common stock equivalent distributions. Automatic
conversion to common stock at the then effective conversion rate will occur
upon the closing of the issuance of shares following an effective
registration statement under the Securities Act of 1933, in which the
aggregate price to the public at least $7,500,000 and in which the public
offering price per share of common stock equals or exceeds $4.00.
The holders of each share of Series A preferred stock and Series B
preferred stock has the right to the number of votes to which they would be
entitled if the shares were converted to common stock. The Series A
preferred stock, Series B preferred stock and the common stock vote
together, not as separate classes. The Company has reserved 300,000 shares
of the Company's common stock for the conversion of Series A preferred
stock and 880,000 shares of common stock for the conversion of Series B
preferred stock.
SHAREHOLDERS' AGREEMENT
The Company and its shareholders have entered into agreements that include
restrictions on the transfer of the Company's common stock. Except for
expressly provided exceptions, no shareholder is allowed to transfer
ownership of stock without the shares being first offered for sale to the
Company.
WARRANTS
The Company issued warrants to purchase 300,000 shares of the Company's
common stock in 1994 and 1995 in conjunction with the sale of the Series A
preferred stock. The warrants were issued with an exercise price of $.10
per share and initially expired three years from the date of grant. On
November 1, 1997, the Company extended the term of these warrants from
three to five years from the date of grant.
F-78
<PAGE>
QUANDO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On July 15, 1996, the Company granted a warrant to purchase 47,727 shares
of the Company's common stock to a related party at an exercise price of
$.55 per share. This warrant was issued in connection with an equipment
lease.
On December 1, 1997, the Company issued 16,000 warrants with an exercise
price of $.625 per share to a creditor.
(5)1994 STOCK INCENTIVE PLAN
In 1994, the Company adopted an incentive stock option plan (the Plan)
whereby a total of 1,000,000 shares of common stock have been reserved for
the grant of stock options to selected employees, officers, directors,
consultants and advisors. Options granted pursuant to the Plan may be
either incentive stock options as defined in Section 442A of the Internal
Revenue Code of 1986, as amended, or non-qualified stock options, at the
discretion of the Board. Additionally, the aggregate fair market value
(determined at the time the options are granted) of common stock which the
incentive stock options are exercisable for the first time by an optionee
during any calendar year shall not exceed $100,000.
Under the Plan, options generally vest ratably over three to five years.
Options granted under the Plan must be exercised within three months of the
optionee's termination of employment and within ten years of the date of
the grant. Option prices are generally not less than the fair market value
of the shares at the date of grant. At the time of the exercise of the
option, all optionee's must grant the Company or its designee a right of
first refusal with respect to all transfers.
The Company has elected to account for its stock-based compensation plans
under APB Opinion 25; however, the Company has computed, for proforma
disclosure purposes, the value of all options granted during 1995, 1996 and
1997 using the minimum value option-pricing model as prescribed by SFAS 123
using the following assumptions used for grants:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate....................... 6.00% 6.25% 6.50%
Expected dividend yield....................... $ -- $ -- $ --
Expected lives................................ 5 years 5 years 5 years
Weighted average grant date fair value per
option....................................... $ .10 $ .141 $ .15
</TABLE>
If the Company had accounted for these options in accordance with SFAS 123,
the Company's net loss for the years ended December 31 would have increased
to the following pro forma amounts:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Net loss:
As reported............................. $(458,103) $(442,747) $(353,401)
Proforma................................ (458,517) (445,212) (356,786)
</TABLE>
F-79
<PAGE>
QUANDO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A summary of the status of the Company's Plan at December 31, 1997 and
changes during the three-year period then ended is presented in the
following table:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------- ----------------
<S> <C> <C>
Outstanding December 31, 1994..................... 5,000 $ .10
Granted......................................... 202,550 .10
Exercised....................................... -- --
Canceled........................................ 100,000 .10
------- -----
Outstanding December 31, 1995..................... 107,550 .10
Granted......................................... 266,003 .141
Exercised....................................... -- --
Canceled........................................ 25,200 .10
------- -----
Outstanding December 31, 1996..................... 348,353 .131
Granted......................................... 210,243 .150
Exercised....................................... -- --
Canceled........................................ 103,650 .126
------- -----
Outstanding December 31, 1997..................... 454,946 $.141
======= =====
</TABLE>
The outstanding stock options have a weighted average remaining contractual
life of 5.9 years. At December 31, 1997, a total of 174,421 incentive and
non-qualified stock options were exercisable at an weighted average
exercise price of $.13 share and with a weighted average remaining
contractual live in years of 5.5.
(6)CONVERTIBLE PROMISSORY NOTES
In 1997, the Company issued $247,000 in convertible subordinated promissory
notes (the Notes). The Notes are due on January 1, 2000 through April 1,
2000 and bear interest at 10% to 12% per annum. Prior to January 1, 2000,
the Notes are convertible into common stock at a price per share of the
next equity financing by the Company or, if there is no equity financing
before January 1, 2000, at $.625 per share of common stock.
(7)COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases equipment and office space under non-cancelable
operating leases which expire at various dates through 2000.
Future minimum lease payments under operating leases are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1998........................................................... $ 50,692
1999........................................................... 46,800
2000........................................................... 42,900
--------
Total minimum lease payments................................. $140,392
========
</TABLE>
F-80
<PAGE>
QUANDO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Lease expense totaled $63,114, $70,765 and $80,397 in 1995, 1996 and 1997,
respectively. (See note 10)
(8)LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
(9)CUSTOMER INFORMATION
The Company had five, four and five significant customers in 1995, 1996 and
1997, respectively, that each account for greater than 10% of the Company's
revenues. These customers accounted for 100% and 79% of the Company's
accounts receivable at December 31, 1996 and 1997, respectively.
(10)RELATED PARTY TRANSACTION
In December 1994, the Company entered into a sales leaseback transaction
with a related party, which includes two Series A preferred shareholders
and one of the Company's founders and officers. The total payments under
this lease agreement totaled $40,040, $49,991 and $40,643 in 1995, 1996 and
1997, respectively.
The shareholders of the Company have made several loans to the Company. At
December 31, 1995, 1996 and 1997, the shareholder loan balances outstanding
totaled $51,364, $66,991 and $74,658, respectively. These loans have an
average interest rate of 22%, 22% and 24% during 1995, 1996 and 1997,
respectively and interest expense totaled $5,737, $14,897 and $16,825 in
each year, respectively.
(11)RISK OF TECHNOLOGICAL CHANGE
CONTINGENCIES AND FACTORS THAT COULD AFFECT FUTURE RESULTS
A substantial portion of the Company's revenues each year are generated
from the development and rapid release to market of Internet products and
services that are newly introduced during the year. In the extremely
competitive industry environment in which the Company operates, such
product generation, development and marketing processes are uncertain and
complex, requiring accurate prediction of market trends and demand as well
as successful management of various development risks inherent in such
products. Additionally, the Internet market is emerging and many companies
are introducing new Internet products and services. In light of these
dependencies, it is possible that failure to successfully manage a
significant product introduction or failure of certain key suppliers to
deliver as needed could have a severe near-term impact on the Company's
growth and results of operations.
F-81
<PAGE>
QUANDO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(12)TRANSACTION SUBSEQUENT TO DECEMBER 31, 1997
During the six month period ended June 30, 1998, the Company issued
$200,000 in convertible subordinated promissory notes (the 1998 Notes). The
1998 Notes are due on April 1, 2000 and bear interest at 10% per annum.
Prior to January 1, 2000, the 1998 Notes are convertible into common stock
at a price per share of the next equity financing by the Company, or if
there is no equity financing before January 1, 2000, at $.625 per share of
common stock.
The Company issued warrants to purchase 592,000 shares of the Company's
common stock in 1998 in conjunction with the issuance of the 1998 notes.
The warrants were issued with an exercise price of $.0001 per share and
expire five years from the date of grant.
On July 13, 1998, two of the Company's Series A preferred stock
shareholders exercised warrants to purchase a total of 50,000 shares of
common stock at $.01 per share.
On July 24, 1998, the Company entered into an Agreement and Plan of
Reorganization (the Agreement) with Steelhead Acquisition Corp., a wholly-
owned subsidiary of Infoseek Corporation (Infoseek). Pursuant to the
Agreement, among other things, all the issued and outstanding shares of the
Company shall be converted into the right to receive shares of the common
stock of Infoseek. Commensurate with the closing, all outstanding preferred
stock will be converted in accordance with the respective preferred stock
conversion ratios. Additionally, all outstanding options under the
Company's 1994 stock option plan, whether vested or unvested, will be
assumed by Infoseek.
Effective upon the signing of the Agreement, Infoseek loaned the Company
$360,000 in the form of a promissory note. The Company used the proceeds
from this note to pay down their outstanding accounts payable and accrued
liabilities. All principal and accumulated interest on this note shall be
due and payable on March 31, 1999. This note is secured by the Company's
assets and bears interest at a rate of 6% annually.
This acquisition is expected to provide the Company with the additional
financial resources to continue operations. If the acquisition is not
completed, there is substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
F-82
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
INFOSEEK CORPORATION
STEELHEAD ACQUISITION CORP.,
QUANDO, INC.
DAVID BILLSTROM, AND
WILLIAM NEUHAUSER
(AS PRINCIPAL SHAREHOLDERS)
AND, WITH RESPECT TO ARTICLE VII ONLY,
STANTON R. KOCH
AS SHAREHOLDER REPRESENTATIVE,
AND, WITH RESPECT TO ARTICLE VII ONLY,
U.S. BANK TRUST, N.A.
AS ESCROW AGENT
DATED AS OF JULY 24, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE I.--THE MERGER................................................. 1
1.1 The Merger .................................................... 1
1.2 Effective Time ................................................ 2
1.3 Effect of the Merger .......................................... 2
1.4 Articles of Incorporation; Bylaws.............................. 2
1.5 Directors and Officers ........................................ 2
1.6 Certain Definitions............................................ 2
1.7 Effect of Merger on the Capital Stock of the Constituent
Corporations................................................. 5
1.8 Dissenting Shares.............................................. 7
1.9 Surrender of Certificates...................................... 7
1.10 No Further Ownership Rights in Company Capital Stock........... 9
1.11 Dissenting Shares After Payment of Fair Value.................. 9
1.12 Tax and Accounting Consequences................................ 9
1.13 Taking of Necessary Action; Further Action .................... 9
ARTICLE II.--REPRESENTATIONS AND WARRANTIES OF THE COMPANY............. 10
2.1 Organization of the Company.................................... 10
2.2 Subsidiaries .................................................. 10
2.3 Company Capital Structure...................................... 10
2.4 Authority...................................................... 11
2.5 No Conflict.................................................... 12
2.6 Consents ...................................................... 12
2.7 Company Financial Statements .................................. 12
2.8 No Undisclosed Liabilities .................................... 13
2.9 No Changes .................................................... 13
2.10 Tax Matters.................................................... 14
2.11 Restrictions on Business Activities............................ 16
2.12 Title of Properties; Absence of Liens and Encumbrances;
Condition of Equipment ...................................... 16
2.13 Intellectual Property.......................................... 17
2.14 Agreements, Contracts and Commitments.......................... 20
2.15 Interested Party Transactions.................................. 21
2.16 Governmental Authorization .................................... 21
2.17 Litigation .................................................... 22
2.18 Accounts Receivable............................................ 22
2.19 Minute Books .................................................. 22
2.20 Environmental Matters.......................................... 22
2.21 Brokers' and Finders' Fees; Third Party Expenses .............. 23
2.22 Employee Matters and Benefit Plans ............................ 23
2.23 Insurance...................................................... 27
2.24 Compliance with Laws .......................................... 27
2.25 Warranties; Indemnities........................................ 27
2.26 Pooling of Interests .......................................... 27
2.27 Proxy Statement and Shareholder Information Statement.......... 27
2.28 Complete Copies of Materials .................................. 28
2.29 Representations Complete ...................................... 28
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE III.--REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB......... 28
3.1 Organization, Standing and Power .............................. 28
3.2 Charter and Bylaws............................................. 28
3.3 Authority...................................................... 29
3.4 Merger Shares.................................................. 29
3.5 No Conflict.................................................... 29
3.6 Consents ...................................................... 29
3.7 Proxy Statement and Shareholder Information Statement.......... 30
3.8 Other Matters.................................................. 30
ARTICLE IV.--CONDUCT PRIOR TO THE EFFECTIVE TIME....................... 31
4.1 Conduct of Business of the Company ............................ 31
4.2 No Solicitation................................................ 33
ARTICLE V.--ADDITIONAL AGREEMENTS ..................................... 34
5.1 Proxy Statement and Shareholder Information Statement.......... 34
5.2 Access to Information.......................................... 36
5.3 Confidentiality................................................ 36
5.4 Expenses ...................................................... 36
5.5 Public Disclosure.............................................. 37
5.6 Consents ...................................................... 37
5.7 FIRPTA Compliance.............................................. 37
5.8 Reasonable Efforts ............................................ 37
5.9 Notification of Certain Matters................................ 37
5.10 Additional Documents and Further Assurances.................... 37
5.11 Termination of Employment Agreements .......................... 37
5.12 Non-Disclosure Agreements...................................... 38
5.13 Employee Compensation; Relocation ............................. 38
5.14 Affiliate Agreements .......................................... 38
5.15 Tax-Free Reorganization........................................ 38
5.16 Pooling Accounting ............................................ 39
5.17 Loan .......................................................... 39
5.18 Directors' and Officers' Indemnification....................... 39
5.19 S-8 Registration .............................................. 39
ARTICLE VI.--CONDITIONS TO THE MERGER ................................. 39
6.1 Conditions to Obligations of Each Party to Effect the Merger... 39
6.2 Additional Conditions to Obligations of Company and the
Principal Shareholders ...................................... 40
6.3 Additional Conditions to the Obligations of Parent and Sub..... 41
ARTICLE VII.--SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION....................................................... 43
7.1 Survival of Representations and Warranties .................... 43
7.2 Indemnification; Escrow Arrangements .......................... 43
7.3 Escrow Agent .................................................. 47
7.4 Shareholder Representative..................................... 49
7.5 Maximum Payments; Remedy; Violation of Third Party Patent
Rights....................................................... 50
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE VIII.--TERMINATION, AMENDMENT AND WAIVER......................... 50
8.1 Termination....................................................... 50
8.2 Effect of Termination............................................. 51
8.3 Amendment......................................................... 51
8.4 Extension; Waiver................................................. 51
ARTICLE IX.--GENERAL PROVISIONS ......................................... 52
9.1 Notices........................................................... 52
9.2 Interpretation ................................................... 53
9.3 Counterparts ..................................................... 53
9.4 Entire Agreement; Assignment ..................................... 53
9.5 Severability ..................................................... 54
9.6 Other Remedies ................................................... 54
9.7 Governing Law..................................................... 54
9.8 Rules of Construction............................................. 54
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of July 24, 1998 among Infoseek Corporation, a California
corporation ("Parent"), Steelhead Acquisition Corp., an Oregon corporation and
a wholly-owned subsidiary of Parent ("Sub"), Quando, Inc., an Oregon
corporation (the "Company"), David Billstrom and William Neuhauser
(collectively, the "Principal Shareholders," and individually, the "Principal
Shareholder"), U.S. Bank Trust, N.A. as Escrow Agent and, with respect to
Article VII only, Stanton R. Koch as Shareholder Representative.
RECITALS
WHEREAS, the Boards of Directors of each of the Company, Parent and Sub
believe it is in the best interests of each company and their respective
shareholders that Parent acquire the Company through the statutory merger of
Sub with and into the Company (the "Merger") and, in furtherance thereof, have
approved the Merger.
WHEREAS, pursuant to the Merger, among other things, all of the issued and
outstanding shares of capital stock of the Company shall be converted into the
right to receive shares of common stock of Parent.
WHEREAS, a portion of the shares of common stock of Parent otherwise issuable
by Parent in connection with the Merger shall be placed in escrow by Parent for
purposes of satisfying damages, losses, expenses and other similar charges
which result from breaches of the representations, warranties and covenants of
the Company and the Principal Shareholders contained herein.
WHEREAS, the parties intend that the Merger shall (i) constitute a
reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code") and (ii) to the extent possible, qualify for
accounting treatment as a pooling of interests.
WHEREAS, the Company and the Principal Shareholders, on the one hand, and
Parent and Sub, on the other hand, desire to make certain representations,
warranties, covenants and other agreements in connection with the Merger.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties agree as follows:
ARTICLE I.
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and subject
to and upon the terms and conditions of this Agreement and the applicable
provisions of the Oregon Business Corporation Act ("Oregon Law"), Sub shall be
merged with and into the Company, the separate corporate existence of Sub shall
cease and the Company shall continue as the surviving corporation
A-1
<PAGE>
and as a wholly-owned subsidiary of Parent. The surviving corporation after the
Merger is hereinafter sometimes referred to as the "Surviving Corporation."
1.2 Effective Time. Unless this Agreement is earlier terminated pursuant to
Section 8.1, the closing of the Merger (the "Closing") will take place as
promptly as practicable, but no later than five (5) business days following the
approval of the Merger by the Company's Shareholders at the Company
Shareholders Meeting (as described in Section 5.1) and the satisfaction or
waiver of the conditions set forth in Article VI, at the offices of Wilson
Sonsini Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo
Alto, California, unless another place or time is agreed to in writing by
Parent and the Company. The date upon which the Closing actually occurs is
herein referred to as the "Closing Date." On the Closing Date, the parties
hereto shall cause the Merger to be consummated by filing an Agreement of
Merger (or like instrument) substantially in the form attached hereto as
Exhibit A (the "Merger Agreement") with the Secretary of State of the State of
Oregon, in accordance with the applicable provisions of Oregon Law (the time of
acceptance by the Secretary of State of the State of Oregon of such filing
being referred to herein as the "Effective Time").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in the applicable provisions of Oregon Law. Without
limiting the generality of the foregoing, and subject thereto, at the Effective
Time, all the property, rights, privileges, powers and franchises of the
Company and Sub shall vest in the Surviving Corporation, and all debts,
liabilities and duties of the Company and Sub shall become the debts,
liabilities and duties of the Surviving Corporation.
1.4 Articles of Incorporation; Bylaws.
(a) Unless otherwise determined by Parent prior to the Effective Time, at
the Effective Time, the Articles of Incorporation of Sub shall be the Articles
of Incorporation of the Surviving Corporation until thereafter amended as
provided by law and such Articles of Incorporation.
(b) The Bylaws of Sub, as in effect immediately prior to the Effective
Time, shall be the Bylaws of the Surviving Corporation until thereafter
amended.
1.5 Directors and Officers. The directors of Sub immediately prior to the
Effective Time shall be the directors of the Surviving Corporation immediately
after the Effective Time, each to hold the office of director of the Surviving
Corporation in accordance with the provisions of the applicable laws of the
State of Oregon and the Articles of Incorporation and Bylaws of the Surviving
Corporation until their successors are duly qualified and elected. The officers
of Sub immediately prior to the Effective Time shall be the officers of the
Surviving Corporation immediately after the Effective Time, each to hold office
in accordance with the provisions of the Bylaws of the Surviving Corporation.
1.6 Certain Definitions. For all purposes of this Agreement, the following
terms shall have the following meanings:
"Adjusted Dollar Amount" shall mean an amount equal to $17,000,000 minus:
(i) the amount by which the Estimated Net Liabilities (excluding Estimated
Third Party Expenses reflected on the Estimated Balance Sheet) exceeds $405,739
and (ii) the amount by which the Estimated Third Party Expenses exceed
$310,000.
A-2
<PAGE>
"Common Exchange Ratio" shall be equal to the quotient obtained by
dividing: (i) the Common Merger Consideration by (ii) the sum of (A) the total
number of shares of Company Common Stock that are issued and outstanding
immediately prior to the Effective Time and (B) the total number of shares of
Company Common Stock issuable upon conversion or exercise in full of all
options, warrants and other rights to acquire or receive Company Common Stock
that are outstanding immediately prior to the Effective Time (other than
preferred stock).
"Common Merger Consideration" shall mean the Merger Consideration less the
Preferred Merger Consideration.
"Company Capital Stock" shall mean shares of Company Common Stock, Company
Preferred Stock and any other capital stock of the Company (on an as converted
basis), exclusive of shares of Company Capital Stock issuable upon exercise of
Company Options.
"Company Common Stock" shall mean outstanding shares of common stock of the
Company.
"Company Options" shall mean all issued and outstanding and unexpired and
unexercised options and other rights to acquire or receive Company Capital
Stock (whether or not vested).
"Company Series A Preferred Stock" shall mean shares of Series A preferred
stock of the Company.
"Company Series B Preferred Stock" shall mean shares of Series B preferred
stock of the Company.
"Estimated Balance Sheet" shall mean the estimated unaudited balance sheet
of the Company dated the Closing Date which shall be: prepared in accordance
with GAAP (except that such unaudited balance sheet does not contain the
footnotes required by GAAP) based on reasonable assumptions certified as to
correctness by the Company and in a form reasonably satisfactory to Parent.
"Estimated Net Liabilities" shall mean the amount by which total
liabilities of the Company (excluding convertible debt and debt converted into
equity since the date of this Agreement) as determined in accordance with GAAP
("Total Liabilities") exceeds total current assets of the Company as determined
in accordance with GAAP ("Total Current Assets"), each as reflected in the
Estimated Balance Sheet.
"Estimated Third Party Expenses" shall mean Third Party Expenses (as
defined in Section 5.4) of the Company on the Closing Date as estimated by the
Company in good faith and based on reasonable assumptions.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"GAAP" shall mean United States generally accepted accounting principles.
"Key Employees" shall mean those employees of the Company listed on Exhibit
B.
A-3
<PAGE>
"Knowledge" of a person shall mean the actual knowledge of the person;
knowledge of the Company shall mean the actual knowledge of an officer or
director of the Company.
"Material Adverse Effect" shall mean any change, event or effect that is
materially adverse to the business, assets (including intangible assets),
financial condition or results of operations of the Company.
"Meeting Price" shall mean the average closing sale price of the Parent
Common Stock as reported on the Nasdaq National Market for the ten (10)
consecutive trading days ending on the third business day prior to the date of
the Company's Shareholders meeting at which the Merger is approved.
"Merger Consideration" shall mean that number of shares of Parent Common
Stock equal to the quotient obtained by dividing the Adjusted Dollar Amount by
the Trading Price.
"Net Liabilities" shall mean the amount equal to Total Liabilities minus
the Total Current Assets of the Company as of the Closing Date.
"Parent Common Stock" shall mean shares of the common stock, no par value
per share, of Parent.
"Preferred Merger Consideration" shall mean the sum of the Series A Merger
Consideration and the Series B Merger Consideration.
"Related Agreements" shall mean all such ancillary agreements required in
this Agreement to be executed and delivered in connection with the transactions
contemplated hereby.
"SEC" shall mean the Securities Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Series A Exchange Ratio" shall be equal to the quotient obtained by
dividing: (i) the Series A Merger Consideration by (ii) the total number of
shares of Series A Preferred Stock issued and outstanding immediately prior to
the Effective Time.
"Series A Liquidation Preference" shall mean the product of the per share
liquidation preference of the Company's Series A Preferred Stock as provided in
the Company's Articles of Incorporation, as amended to date, multiplied by the
total number of shares of Series A Preferred Stock issued and outstanding
immediately prior to the Effective Time.
"Series A Merger Consideration" shall mean the Merger Consideration
determined by dividing the Series A Liquidation Preference by the Trading
Price.
"Series B Exchange Ratio" shall be equal to the quotient obtained by
dividing: (i) the Series B Merger Consideration by (ii) the total number of
shares of Series B Preferred Stock issued and outstanding immediately prior to
the Effective Time.
"Series B Liquidation Preference" shall mean the product of: (i) the per
share liquidation preference of the Company's Series B Preferred Stock as
provided in the Company's Articles of
A-4
<PAGE>
Incorporation, as amended to date, multiplied by (ii) the total number of
shares of Company Series B Preferred Stock issued and outstanding immediately
prior to the Effective Time.
"Series B Merger Consideration" shall mean the Merger Consideration
determined by dividing the Series B Liquidation Preference by the Trading
Price.
"Signing Price" shall mean the average closing sale price of Parent Common
Stock as reported on the Nasdaq National Market for the ten (10) consecutive
trading days ending on the third business day prior to the date of this
Agreement.
"Shareholder" shall mean each holder of any Company Capital Stock
immediately prior to the Effective Time.
"Trading Price" shall be equal to the Signing Price, provided, however,
that if the Meeting Price is between twenty percent (20%) to twenty-five
percent (25%) higher or lower than the Signing Price, the Trading Price shall
be equal to the Meeting Price, provided, further, that if the Meeting Price is
greater than twenty-five percent (25%) higher than the Signing Price, the
Trading Price shall be equal to one hundred twenty-five percent (125%) of the
Signing Price, and provided, further, that if the Meeting Price is greater than
twenty-five percent (25%) lower than the Signing Price, the Trading Price shall
be equal to seventy-five percent (75%) of the Signing Price.
1.7 Effect of Merger on the Capital Stock of the Constituent Corporations.
(a) Effect on Capital Stock. At the Effective Time, by virtue of the Merger
and without any action on the part of Sub, the Company or the Shareholders:
(i) Each share of Company Common Stock issued and outstanding immediately
prior to the Effective Time (other than any Dissenting Shares (as defined in
Section 1.8)) will be canceled and extinguished and be converted automatically
into the right to receive, upon surrender of the certificate representing such
share of Company Common Stock in the manner provided for in this Section
1.9(c), a fraction of a share of Parent Common Stock equal to the Common
Exchange Ratio.
(ii) Each share of Company Series A Preferred Stock issued and
outstanding immediately prior to the Effective Time (other than any Dissenting
Shares (as defined in Section 1.8)) will be canceled and extinguished and be
converted automatically into the right to receive, upon surrender of the
certificate representing such share of Company Series A Preferred Stock in the
manner provided for in Section 1.9(c), a fraction of a share of Parent Common
Stock equal to the Series A Exchange Ratio.
(iii) Each share of Company Series B Preferred Stock issued and
outstanding immediately prior to the Effective Time (other than any Dissenting
Shares (as defined in Section 1.8)) will be canceled and extinguished and be
converted automatically into the right to receive, upon surrender of the
certificate representing such share of Company Series B Preferred Stock in the
manner provided for in Section 1.9(c), a fraction of a share of Parent Common
Stock equal to the Series B Exchange Ratio.
(iv) All shares of Parent Common Stock issued in exchange for shares of
Company Capital Stock subject to Company repurchase rights or vesting schedules
shall be subject to the same repurchase rights and/or vesting schedules and
other terms as applicable to such shares of Company
A-5
<PAGE>
Capital Stock, with Parent succeeding to the rights of the Company thereunder
and with a proportionate adjustment to any per share repurchase price
applicable to such shares to reflect the applicable Exchange Ratio.
(b) Company Stock Options; Warrants.
(i) Assumption of Company Options. At the Effective Time, each Company
Option under the Company's 1994 Stock Option Plan (the "Option Plan") or
otherwise, whether vested or unvested, will, in connection with the Merger, be
assumed by Parent. Each Company Option so assumed by Parent under this
Agreement shall continue to have, and be subject to, the same terms and
conditions, including vesting, set forth in the Option Plan and as provided in
the respective option agreements immediately prior to the Effective Time,
except that (A) such assumed Company Option will be exercisable for that number
of whole shares of Parent Common Stock equal to the product obtained by
multiplying the number of shares of Company Capital Stock that were issuable
upon exercise in full of such assumed Company Option immediately prior to the
Effective Time by the applicable Exchange Ratio, rounded down to the nearest
whole number of shares of Parent Common Stock and (B) the per share exercise
price for the shares of Parent Common Stock issuable upon exercise of such
assumed Company Option shall be equal to the quotient obtained by dividing the
exercise price per share of Company Capital Stock at which such Company Option
was exercisable immediately prior to the Effective Time by the applicable
Exchange Ratio, rounded up to the nearest whole cent.
(ii) Assumption Agreement. Promptly following the Effective Time, Parent
will issue to each holder of an outstanding Company Option a document
evidencing the foregoing assumption of such Company Option by Parent.
(iii) Option Status. It is the intention of the parties that Parent
Options issued by Parent following the Closing will, to the extent permitted by
applicable law, qualify as incentive stock options as defined in Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), to the extent
Company Options qualified as incentive stock options immediately prior to the
Closing.
(c) Capital Stock of Sub. Each share of common stock, no par value per
share, of Sub issued and outstanding immediately prior to the Effective Time
shall be converted into and exchanged for one validly issued, fully paid and
nonassessable share of common stock, no par value per share, of the Surviving
Corporation. Each stock certificate of Sub evidencing ownership of any such
shares shall continue to evidence ownership of such shares of capital stock of
the Surviving Corporation.
(d) Adjustment to Parent Common Stock. The number of shares of Parent
Common Stock issuable hereunder shall be adjusted to reflect fully the effect
of any stock split, reverse split, stock dividend (including any dividend or
distribution of securities convertible into Parent Common Stock or Company
Capital Stock), reorganization, recapitalization or other like change with
respect to Parent Common Stock or Company Capital Stock occurring after the
date hereof.
(e) Fractional Shares. No fractional share of Parent Common Stock shall be
issued in the Merger. In lieu thereof, any fractional share shall be rounded up
to the nearest whole share of Parent Common Stock.
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(f) Withholding Taxes. Any cash amount payable to any Shareholder pursuant
to Section 1.7(a) shall be subject to, and reduced by, the amount of any state
or federal withholding taxes incurred (and not previously paid by or on behalf
of such Shareholder or the Company) in connection with the Merger of Company
Capital Stock upon the exercise of Company Options or upon payment of a bonus
in the form of Company Capital Stock, if any, by such Shareholder.
1.8 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary, any
shares of Company Capital Stock issued and outstanding immediately prior to the
Effective Time that are held by a Shareholder who has exercised and perfected
appraisal rights for such shares in accordance with Oregon Law and who, as of
the Effective Time, has not effectively withdrawn or lost such appraisal rights
("Dissenting Shares"), shall not be converted into or represent a right to
receive Parent Common Stock pursuant to Section 1.7, but the holder thereof
shall only be entitled to such rights as are granted by Oregon Law.
(b) Notwithstanding the provisions of subsection 1.8(a), if any holder of
Dissenting Shares shall effectively withdraw or lose (through failure to
perfect or otherwise) his or her appraisal rights, then, as of the later of
Effective Time and the occurrence of such event, such holder's shares shall
automatically be converted into and represent only the right to receive the
shares of Parent Common Stock to which such Shareholder would otherwise be
entitled under Section 1.7(a) (less the number of shares allocable to such
Shareholder that have been deposited into the Escrow Fund on such holder's
behalf pursuant to Article VII), upon surrender of the certificate representing
such shares.
(c) The Company shall give Parent (i) prompt notice of any written demand
for appraisal received by the Company pursuant to the applicable provisions of
Oregon Law and (ii) the opportunity to participate in all negotiations and
proceedings with respect to such demands. The Company shall not, except with
the prior written consent of Parent, voluntarily make any payment with respect
to any such demands or offer to settle or settle any such demands. To the
extent that the Company makes any payment or payments in respect of any
Dissenting Shares prior to the Effective Time, Parent shall be entitled to
recover under the terms of Article VII hereof the aggregate amount by which
such payment or payments exceed the aggregate consideration that otherwise
would have been payable in respect of such shares.
1.9 Surrender of Certificates.
(a) Exchange Agent. Boston Equiserve (or such other entity as selected by
Parent) shall serve as exchange agent (the "Exchange Agent") in the Merger.
(b) Parent to Provide Common Stock. Within three (3) business days after
the Effective Time, Parent shall make available to the Exchange Agent for
exchange in accordance with this Article I the shares of Parent Common Stock
issuable pursuant to Section 1.7(a) in exchange for all the outstanding shares
of Company Capital Stock; provided, however, that on behalf of the
Shareholders, pursuant to Section 7.2 hereof, Parent shall deposit into an
escrow account ten percent (10%) of the Merger Consideration otherwise issuable
to the Shareholders pursuant to Section 1.7(a) (the "Escrow Amount"). The
portion of the Escrow Amount contributed on behalf of each Shareholder shall be
in proportion to the aggregate number of Merger Consideration which such
Shareholder would otherwise be entitled to receive in the Merger by virtue of
ownership of outstanding shares of Company Capital Stock.
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(c) Exchange Procedures. On the Closing Date, the Shareholders will
surrender the certificates representing their Company Capital Stock (the
"Certificates") to the Exchange Agent for cancellation together with the
Shareholder Certificate in the form of Exhibit C hereto and a letter of
transmittal in such form and having such provisions as Parent may reasonably
request. Parent shall provide such Shareholder Certificate and letter of
transmittal to the Shareholders at least three (3) business days prior to the
Closing Date. Upon surrender of a Certificate for cancellation to the Exchange
Agent or to such other agent or agents as may be appointed by Parent, together
with such letter of transmittal and a Shareholder Certificate, duly completed
and validly executed in accordance with the instructions thereto, the Exchange
Agent will promptly (but in no event more than five (5) business days after the
Effective Time) deliver to the holder of such Certificate in exchange therefor
a certificate representing the number of whole shares of Parent Common Stock
(less the number of shares of Parent Common Stock to be deposited in the Escrow
Fund on such holder's behalf pursuant to Section 1.9(b) and Article VII) to
which such Shareholder is entitled pursuant to Section 1.7, and the Certificate
so surrendered shall forthwith be canceled. Until so surrendered, each
outstanding Certificate that, prior to the Effective Time, represented shares
of Company Capital Stock will be deemed from and after the Effective Time, for
all corporate purposes, other than the payment of dividends, to evidence only
the right to receive the number of full shares of Parent Common Stock into
which such shares of Company Capital Stock shall have been converted pursuant
to this Article I (except as may otherwise be provided under Oregon Law with
respect to Dissenting Shares). As soon as practicable after the Effective Time
(but in no event more than five (5) business days after the Effective Time),
and subject to and in accordance with the provisions of Article VII hereof,
Parent shall cause to be distributed to the Escrow Agent (as defined in Article
VII) a certificate or certificates representing that number of shares of Parent
Common Stock equal to the Escrow Amount, which shall be registered in the name
of the Escrow Agent. Such shares shall be beneficially owned by the holder on
whose behalf such shares were deposited in the Escrow Fund and shall be
available to compensate Parent as provided in Article VII.
(d) Distributions with Respect to Unexchanged Shares. No dividends or other
distributions declared or made after the Effective Time with respect to Parent
Common Stock with a record date after the Effective Time will be paid to any
holder of any unsurrendered Certificate with respect to the shares of Parent
Common Stock represented thereby until the holder of record of such Certificate
shall surrender such Certificate. Subject to applicable law, following
surrender of any such Certificate, there shall be paid to the record holder of
the certificates representing whole shares of Parent Common Stock issued in
exchange therefor, without interest, at the time of such surrender, the amount
of dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Parent Common Stock.
(e) Transfers of Ownership. If any certificate for shares of Parent Common
Stock is to be issued in a name other than that in which the certificate
surrendered in exchange therefor is registered, it will be a condition to the
issuance thereof that the certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Parent or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares of
Parent Common Stock in any name other than that of the registered holder of the
certificate surrendered, or established to the satisfaction of Parent or any
agent designated by it that such tax has been paid or is not payable.
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(f) Lost, Stolen or Destroyed Certificates. In the event any certificates
evidencing shares of Company Capital Stock shall have been lost, stolen or
destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or
destroyed certificates, upon the making of an affidavit of that fact by the
holder thereof, the number of shares of Parent Common Stock, if any, as may be
required pursuant to Section 1.7; provided, however, that Parent may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificates to deliver a bond in such
sum as it may reasonably direct against any claim that may be made against
Parent or the Exchange Agent with respect to the certificates alleged to have
been lost, stolen or destroyed.
(g) No Liability. Notwithstanding anything to the contrary in this Section
1.9, none of the Exchange Agent, the Surviving Corporation or any party hereto
shall be liable to a holder of shares of Parent Common Stock or Company Capital
Stock for any amount properly paid to a public official pursuant to any
applicable abandoned property, escheat or similar law.
1.10 No Further Ownership Rights in Company Capital Stock. All shares of
Parent Common Stock issued upon the surrender for exchange of shares of Company
Capital Stock in accordance with the terms hereof shall be deemed to be issued
in full satisfaction of all rights pertaining to such shares of Company Capital
Stock, and there shall be no further registration of transfers on the records
of the Surviving Corporation of shares of Company Capital Stock that were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation for any reason,
they shall be canceled and exchanged as provided in this Article I.
1.11 Dissenting Shares After Payment of Fair Value. Dissenting Shares, if
any, after payments of fair value in respect thereto have been made to
dissenting shareholders of the Company pursuant to Oregon Law and this Article
I, shall be canceled.
1.12 Tax and Accounting Consequences. It is intended by the parties hereto
that the Merger shall: (i) constitute a reorganization within the meaning of
Section 368 of the Code and (ii) to the extent possible, qualify for accounting
treatment as a pooling of interests. Each party has consulted with its own tax
advisors and accountants with respect to the tax and accounting consequences,
respectively, of the Merger.
1.13 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to consummate the
Merger, to carry out the purposes of this Agreement and to vest the Surviving
Corporation with full right, title and possession to all assets, property,
rights, privileges, powers and franchises of the Company and Sub, the officers
and directors of the Company, Parent and Sub are fully authorized in the name
of their respective corporations or otherwise to take, and will take, all such
lawful and necessary action.
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ARTICLE II.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Sub, and each
Principal Shareholder severally but not jointly hereby represents and warrants
to Parent and Sub (but only to such Principal Shareholder's Knowledge), subject
to such exceptions as are specifically disclosed in the disclosure schedule
(referencing the appropriate section and paragraph numbers) supplied by the
Company to Parent (the "Disclosure Schedule") and dated as of the date hereof,
that on the date hereof and as of the Effective Time as though made at the
Effective Time as follows:
2.1 Organization of the Company. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Oregon.
The Company has the corporate power to own its properties and to carry on its
business as now being conducted. The Company is duly qualified to do business
and in good standing as a foreign corporation in each jurisdiction in which the
failure to be so qualified could have a Material Adverse Effect. The Company
has delivered a true and correct copy of its Articles of Incorporation and
Bylaws, each as amended to date, to Parent. Section 2.1 of the Disclosure
Schedule lists the directors and officers of the Company. The operations now
being conducted by the Company have not been conducted under any other name.
2.2 Subsidiaries. The Company does not have, and has never had, any
subsidiaries or affiliated companies and does not otherwise own, and has not
otherwise owned, any shares in the capital of or any interest in, or control,
directly or indirectly, any corporation, partnership, association, joint
venture or other business entity.
2.3 Company Capital Structure.
(a) The authorized capital stock of the Company consists of 15,000,000
shares of authorized Common Stock and 4,000,000 shares of authorized Preferred
Stock, 300,000 of which are designated Series A Preferred Stock ("Series A
Preferred") and 880,000 of which are designated Series B Preferred Stock
("Series B Preferred"). 4,495,000 shares of Common Stock, 300,000 shares of
Series A Preferred and 880,000 shares of Series B Preferred are issued and
outstanding as of the date hereof. Each share of Series A Preferred is
convertible into 1.274080 shares of Common Stock and each share of Series B
Preferred is convertible into 1.107634 shares of Common Stock. The Company
Capital Stock is held by the persons, with the domicile addresses and in the
amounts set forth in Section 2.3(a) of the Disclosure Schedule. All outstanding
shares of Company Capital Stock are duly authorized, validly issued, fully paid
and nonassessable and not subject to preemptive rights created by statute, the
Articles of Incorporation or Bylaws of the Company or any agreement to which
the Company is a party or by which it is bound and have been issued in
compliance with federal and state securities laws. There are no declared or
accrued unpaid dividends with respect to any shares of the Company's Capital
Stock. There are not outstanding any adjustments made or required to be made to
the conversion prices set forth in the Company's current Articles of
Incorporation. The Company has no other capital stock authorized, issued or
outstanding.
(b) Except for the Option Plan(s), the Company has never adopted or
maintained any stock option plan or other plan providing for equity
compensation of any person. The Company has
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reserved 1,000,000 shares of Company Common Stock for issuance to employees and
consultants pursuant to the Option Plan none of which have been exercised and
533,456 shares are subject to outstanding unexercised options. Section 2.3(b)
of the Disclosure Schedule sets forth for each outstanding Company Option, the
name of the holder of such option, the domicile address of such holder, the
number of shares of Company Common Stock subject to such option, the exercise
price of such option, the vesting schedule for such option, including the
extent vested to date and whether the exercisability of such option will be
accelerated by the transactions contemplated by this Agreement, and whether
such option is intended to qualify as an incentive stock option as defined in
Section 422 of the Code. Except for the Company Options, there are no options,
warrants, calls, rights, commitments or agreements of any character, written or
oral, to which the Company is a party or by which it is bound obligating the
Company to issue, deliver, sell, repurchase or redeem, or cause to be issued,
delivered, sold, repurchased or redeemed, any shares of the capital stock of
the Company or obligating the Company to grant, extend, accelerate the vesting
of, change the price of, otherwise amend or enter into any such option,
warrant, call, right, commitment or agreement. Except as set forth on Section
2.3(b) of the Disclosure Schedule, there is no outstanding Company Capital
Stock which is subject to vesting. Section 2.3(b) of the Disclosure Schedule
sets forth the name of the holder of any Company Capital Stock subject to
vesting, the number of shares of Company Capital Stock subject to vesting and
the vesting schedule for such Company Capital Stock, including the extent
vested to date and whether the vesting of such shares of Company Capital Stock
will be accelerated by the transactions contemplated by this Agreement. There
are no outstanding or authorized stock appreciation, phantom stock, profit
participation, or other similar rights with respect to the Company. There are
no voting trusts, proxies, or other agreements or understandings with respect
to the voting stock of the Company. As a result of the Merger, Parent will be
the record and sole beneficial owner of all outstanding Company Capital Stock
and all rights to acquire or receive any Company Capital Stock, whether or not
such Company Capital Stock is outstanding.
2.4 Authority. The Company has all requisite power and authority to enter
into this Agreement and the agreements delivered in connection with this
Agreement (the "Related Agreements") to which it is a party and to consummate
the transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and any Related Agreements to which it is a party and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by all necessary corporate action on the part of the Company, and no
further action is required on the part of the Company to authorize the
Agreement, any Related Agreements to which it is a party and the transactions
contemplated hereby and thereby, subject only to the approval of this Agreement
by the Shareholders. This Agreement and the Merger have been unanimously
approved by the Board of Directors of the Company. This Agreement has been, and
any Related Agreements to which the Company is a party have been or will have
been prior to the Effective Time, duly executed and delivered by the Company
and, assuming the due authorization, execution and delivery by the other
parties hereto and thereto, constitute the valid and binding obligation of the
Company, enforceable in accordance with their respective terms, except as such
enforceability may be limited by principles of public policy and subject to the
laws of general application relating to bankruptcy, insolvency and the relief
of debtors and to rules of law governing specific performance, injunctive
relief or other equitable remedies.
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2.5 No Conflict. Except as set forth in Section 2.5 of the Disclosure
Schedule, the execution and delivery of this Agreement and any Related
Agreements to which it is party by the Company do not, and, the consummation of
the transactions contemplated hereby and thereby will not, conflict with, or
result in any violation of, or default under (with or without notice or lapse
of time, or both), or give rise to a right of termination, cancellation,
modification or acceleration of any obligation or loss of any benefit (any such
event, a "Conflict") under (i) any provision of the Articles of Incorporation
and Bylaws of the Company, (ii) any mortgage, indenture, lease, contract or
other agreement or instrument, permit, concession, franchise or license to
which the Company or any of its properties or assets are subject, or (iii) any
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to the Company or its properties or assets; except for a Conflict under
subsection (ii) or (iii) above that would not have a Material Adverse Effect on
the Company or on the ability of the parties to consummate the Merger or the
other transactions contemplated by this Agreement.
2.6 Consents. Except as set forth in Section 2.6 of the Disclosure Schedule,
no consent, waiver, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other federal, state, county, local or other foreign governmental authority,
instrumentality, agency or commission ("Governmental Entity") or any third
party, including a party to any agreement with the Company (so as not to
trigger any Conflict), is required by or with respect to the Company in
connection with the execution and delivery of this Agreement and any Related
Agreements to which the Company is a party or the consummation of the
transactions contemplated hereby and thereby, except for (i) such consents,
waivers, approvals, orders, authorizations, registrations, declarations and
filings as may be required under applicable securities laws thereby, (ii) such
consents, waivers, approvals, orders, authorizations, registrations,
declarations and filings that have been obtained or made or will be obtained or
made prior to the Effective Time, (iii) consents, waivers, approvals, orders,
authorizations, registrations, declarations and filings which, if not obtained
or made, would not have a Material Adverse Effect on the Company or on the
ability of the parties to consummate the Merger or the other transactions
contemplated by this Agreement and (iv) the filing of the Merger Agreement with
the Secretary of State of the State of Oregon.
2.7 Company Financial Statements. Section 2.7 of the Disclosure Schedule sets
forth the Company's balance sheet as of December 31, 1997 and the related
statements of income and cash flow for the twelve-month period ended December
31, 1997 and the Company's balance sheet as of June 30, 1998, and the related
statements of income and cash flow for the six months then ended (the
"Financials"). The Financials are correct in all material respects and have
been prepared in accordance with GAAP, applied on a basis consistent throughout
the periods indicated and consistent with each other (except that the
Financials do not contain all the notes that may be required by GAAP). The
Financials present fairly the consolidated financial condition and consolidated
operating results of the Company and any consolidated subsidiaries as of the
dates and during the periods indicated therein, subject to normal year-end
adjustments, which will not be material in amount or significance. The
Company's Balance Sheet as of June 30, 1998 shall be hereinafter referred to as
the "Current Balance Sheet."
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2.8 No Undisclosed Liabilities. The Company has no liability, indebtedness,
obligation, expense, claim, deficiency, guaranty or endorsement of any type,
whether accrued, absolute, contingent, matured, unmatured or other (whether or
not required to be reflected in financial statements in accordance with GAAP),
which individually or in the aggregate (i) has not been reflected in the
Current Balance Sheet, (ii) has not arisen in the ordinary course of business
consistent with past practices since June 30, 1998 or (iii) exceed $25,000.
2.9 No Changes. Except as set forth in Section 2.9 of the Disclosure
Schedule, since June 30, 1998, there has not been, occurred or arisen any
(other than or contemplated by this Agreement or the Related Agreements):
(a) amendments or changes to the Articles of Incorporation or Bylaws of the
Company;
(b) capital expenditure or commitment by the Company, either individually
exceeding $25,000 or in the aggregate exceeding $100,000.
(c) destruction of, damage to or loss of any material assets, business or
customer of the Company (whether or not covered by insurance);
(d) labor trouble or claim of wrongful discharge or other unlawful labor
practice or action;
(e) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by the Company;
(f) revaluation by the Company of any of its assets;
(g) declaration, setting aside or payment of a dividend or other
distribution with respect to the Company Capital Stock or any direct or
indirect redemption, purchase or other acquisition by the Company of its
Capital Stock;
(h) increase in the salary or other compensation payable or to become
payable by the Company to any of its officers, directors, employees or
advisors, or the declaration, payment or commitment or obligation of any kind
for the payment, by the Company, of a bonus or other additional salary or
compensation to any such person;
(i) any agreement, contract, covenant, instrument, lease, license or
commitment to which the Company is a party or by which it or any of its assets
are bound or any termination, extension, amendment or modification the terms of
any agreement, contract, covenant, instrument, lease, license or commitment to
which the Company is a party or by which it or any of its assets are bound
other than in the ordinary course of the Company's business;
(j) sale, lease, license or other disposition of any of the assets or
properties of the Company or any creation of any security interest in such
assets or properties other than in the ordinary course of the Company's
business;
(k) loan by the Company to any person or entity, incurring by the Company
of any indebtedness, guaranteeing by the Company of any indebtedness, issuance
or sale of any debt securities of the Company or guaranteeing of any debt
securities of others, except for advances to employees for travel and business
expenses in the ordinary course of business, consistent with past practice;
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(l) incurrence by the Company of any liability in excess of $25,000
individually or $100,000 in the aggregate;
(m) waiver or release of any right or claim of the Company including any
write-off or other compromise of any account receivable of the Company;
(n) the commencement or notice or threat or reasonable basis therefor of
any lawsuit or, to the Company's Knowledge, proceeding or investigation against
the Company or its affairs;
(o) notice of any claim or potential claim of ownership by any person other
than the Company of the Company Intellectual Property (as defined in Section
2.13) or of infringement by the Company of any other person's Intellectual
Property (as defined in Section 2.13);
(p) issuance or sale, or contract to issue or sell, by the Company of any
shares of its capital stock or securities exchangeable, convertible or
exercisable therefor, or any securities, warrants, options or rights to
purchase any of the foregoing, except for options to purchase capital stock of
the Company granted to employees of the Company in the ordinary course of
business consistent with past practice;
(q) (i) selling or entering into any license agreement with respect to the
Company Intellectual Property with any third party or (ii) buying or entering
into any license agreement with respect to the Intellectual Property of any
third party or (iii) change in pricing or royalties set or charged by the
Company to its customers or licensees or in pricing or royalties set or charged
by persons who have licensed Intellectual Property (as defined in Section 2.13)
to the Company;
(r) any event or condition of any character that has had a Material Adverse
Effect on the Company;
(s) transaction by the Company except in the ordinary course of business as
conducted on that date and consistent with past practices; or
(t) negotiation or agreement by the Company or any officer or employee
thereof to do any of the things described in the preceding clauses (a) through
(s) (other than negotiations with Parent and its representatives regarding the
transactions contemplated by this Agreement).
2.10 Tax Matters.
(a) Definition of Taxes. For the purposes of this Agreement, "Tax" or,
collectively, "Taxes", means (i) any and all federal, state, local and foreign
taxes, assessments and other governmental charges, duties, impositions and
liabilities, including taxes based upon or measured by gross receipts, income,
profits, sales, use and occupation, and value added, ad valorem, transfer,
franchise, withholding, payroll, recapture, employment, excise and property
taxes, together with all interest, penalties and additions imposed with respect
to such amounts; (ii) any liability for the payment of any amounts of the type
described in clause (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group for any period; and (iii) any liability
for the payment of any amounts of the type described in clause (i) or (ii) as a
result of any express or implied obligation to indemnify any other person or as
a result of any obligations under any agreements or arrangements with any other
person with respect to such amounts and including any liability for taxes of a
predecessor entity.
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(b) Tax Returns and Audits.
(i) As of the Effective Time the Company will have prepared and timely
filed all required federal, state, local and foreign returns, estimates,
information statements and reports ("Returns") relating to any and all Taxes
concerning or attributable to the Company or its operations and such Returns
are true and correct and have been completed in accordance with applicable law.
(ii) As of the Effective Time the Company (A) will have paid all Taxes it
is required to pay and will have withheld with respect to its employees all
federal and state income taxes, Federal Insurance Contribution Act ("FICA"),
Federal Unemployment Tax Act ("FUTA") and other Taxes required to be withheld,
and (B) will have accrued on the Current Balance Sheet all Taxes attributable
to the periods covered by the Current Balance Sheet and will not have incurred
any liability for Taxes for the period prior to the Effective Time other than
in the ordinary course of business.
(iii) The Company has not been delinquent in the payment of any Tax nor
is there any Tax deficiency outstanding, assessed or proposed against the
Company, nor has the Company executed any waiver of any statute of limitations
on or extending the period for the assessment or collection of any Tax.
(iv) No audit or other examination of any Return of the Company is
presently in progress, nor has the Company been notified of any request for
such an audit or other examination.
(v) No adjustment relating to any Returns filed by the Company has been
proposed formally or informally by any Tax authority to the Company or any
representative thereof.
(vi) The Company has no liabilities for unpaid federal, state, local and
foreign Taxes which have not been accrued or reserved against in accordance
with GAAP on the Current Balance Sheet, whether asserted or unasserted,
contingent or otherwise, and the Company has not incurred any liability for
Taxes since the date of the Current Balance Sheet other than in the ordinary
course of business.
(vii) The Company has made available to Parent or its legal counsel,
copies of all foreign, federal and state income and all state sales and use
Returns for the Company filed for all periods since its inception.
(viii) There are (and immediately following the Effective Time there will
be) no liens, pledges, charges, claims, restrictions on transfer, mortgages,
security interests or other encumbrances of any sort (collectively, "Liens") on
the assets of the Company relating to or attributable to Taxes other than Liens
for Taxes not yet due and payable.
(ix) The Company does not have Knowledge of any basis for the assertion
of any claim relating or attributable to Taxes which, if adversely determined,
would result in any Lien on the assets of the Company.
(x) None of the Company's assets are treated as "tax-exempt use
property," within the meaning of Section 168(h) of the Code.
(xi) As of the Effective Time, there will not be any contract, agreement,
plan or arrangement, including but not limited to the provisions of this
Agreement, covering any employee or
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former employee of the Company that, individually or collectively, could give
rise to the payment of any amount that would not be deductible by the Company
as an expense under applicable law.
(xii) The Company has not filed any consent agreement under Section
341(f) of the Code or agreed to have Section 341(f)(4) of the Code apply to any
disposition of a subsection (f) asset (as defined in Section 341(f)(4) of the
Code) owned by the Company.
(xiii) The Company is not a party to any tax sharing, indemnification or
allocation agreement nor does the Company owe any amount under any such
agreement.
(xiv) The Company's tax basis in its assets for purposes of determining
its future amortization, depreciation and other federal income tax deductions
is accurately reflected on the Company's tax books and records.
(xv) The Company is not, and has not been at any time, a "United States
Real Property Holding Corporation" within the meaning of Section 897(c)(2) of
the Code.
(xvi) No adjustments relating to any Return filed by the Company have
been proposed formally or informally by any tax authority to the Company or any
representative thereof.
(c) Executive Compensation Tax. There is no contract, agreement, plan or
arrangement to which Company is a party, including but not limited to the
provisions of this Agreement, covering any employee or former employee of the
Company that, individually or collectively, could give rise to the payment of
any amount that would not be deductible pursuant to Sections 280G, 404 or
162(m) of the Code.
2.11 Restrictions on Business Activities. There is no agreement (noncompete
or otherwise), commitment, judgment, injunction, order or decree to which the
Company is a party or, to the Company's Knowledge, otherwise binding upon the
Company which has or may have the effect of prohibiting or impairing any
business practice of the Company, any acquisition of property (tangible or
intangible) by the Company or the conduct of business by the Company. Without
limiting the foregoing, the Company has not entered into any agreement under
which the Company is restricted from selling, licensing or otherwise
distributing any of its technology or products to or providing services to,
customers or potential customers or any class of customers, in any geographic
area, during any period of time or in any segment of the market.
2.12 Title of Properties; Absence of Liens and Encumbrances; Condition of
Equipment.
(a) The Company does not own any real property, and has never owned any
real property. Section 2.12(a) of the Disclosure Schedule sets forth a list of
all real property currently leased by the Company, the name of the lessor, the
date of the lease and each amendment thereto and, with respect to any current
lease, the aggregate annual rental and/or other fees payable under any such
lease. All such current leases are in full force and effect, are valid and
effective in accordance with their respective terms, and there is not, under
any of such leases, any existing default or event of default (or event which
with notice or lapse of time, or both, would constitute a default).
(b) The Company has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any Liens, except as reflected in the Current
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Balance Sheet and except for Liens for Taxes not yet due and payable and such
imperfections of title and encumbrances, if any, which are not material in
character, amount or extent, and which do not detract from the value, or
interfere with the present use, of the property subject thereto or affected
thereby.
(c) Section 2.12(c) of the Disclosure Schedule lists all material items of
equipment (the "Equipment") owned or leased by the Company and such Equipment
is, (i) adequate for the conduct of the business of the Company as currently
conducted and (ii) in acceptable operating condition, regularly and properly
maintained, subject to normal wear and tear.
(d) The Company has sole and exclusive ownership, free and clear of any
Liens, of all customer and end-user files and other customer and end-user
information it compiles relating to customers or end-users of the Company's
current and former customers or end-users (the "Customer Information"). To the
Company's Knowledge, no person other than the Company possesses any claims or
rights with respect to use of the Customer Information.
2.13 Intellectual Property.
(a) For the purposes of this Agreement, the following terms have the
following definitions:
(i) "Intellectual Property" shall mean any or all of the following and
all rights in, arising out of, or associated therewith: (i) all United States
and foreign patents and applications therefor and all reissues, divisions,
renewals, extensions, provisionals, continuations and continuations-in-part
thereof; (ii) all inventions (whether patentable or not), invention
disclosures, improvements, trade secrets, proprietary information, know how,
technology, technical data and customer lists, and all documentation relating
to any of the foregoing; (iii) all copyrights, copyrights registrations and
applications therefor and all other rights corresponding thereto throughout the
world; (iv) all mask works, mask work registrations and applications therefor;
(v) all industrial designs and any registrations and applications therefor
throughout the world; (vi) all trade names, logos, common law trademarks and
service marks; trademark and service mark registrations and applications
therefor and all goodwill associated therewith throughout the world; (vii) all
databases and data collections and all rights therein throughout the world; and
(viii) all computer software including all source code, object code, firmware,
development tools, files, records and data, all media on which any of the
foregoing is recorded, all Web addresses, sites and domain names, and (ix) any
similar, corresponding or equivalent rights to any of the foregoing and (x) all
documentation related to any of the foregoing.
(ii) "Company Intellectual Property" shall mean any Intellectual Property
that is owned by or exclusively licensed to the Company.
(iii) "Registered Intellectual Property" shall mean all United States,
international and foreign: (i) patents, patent applications (including
provisional applications); (ii) registered trademarks, applications to register
trademarks, intent-to-use applications, or other registrations or applications
related to trademarks; (iii) registered copyrights and applications for
copyright registration; (iv) any mask work registrations and applications to
register mask works; and (v) any other Company Intellectual Property that is
the subject of an application, certificate, filing, registration or other
document issued by, filed with, or recorded by, any state, government or other
public legal authority.
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(b) Section 2.13(b) of the Disclosure Schedule lists all Registered
Intellectual Property owned by, or filed in the name of, the Company (the
"Company Registered Intellectual Property") and lists any proceedings or
actions before any court, tribunal (including the United States Patent and
Trademark Office (the "PTO") or equivalent authority anywhere in the world)
related to any of the Company Registered Intellectual Property Rights.
(c) Except as set forth in Section 2.13(c) of the Disclosure Schedule, each
item of Company Intellectual Property, including all Company Registered
Intellectual Property listed in Section 2.13(b) of the Disclosure Schedule and
all Intellectual Property licensed to the Company, is free and clear of any
Liens. To the Company's Knowledge, the Company is the exclusive owner of all
trademarks and trade names used in connection with the operation or conduct of
the business of the Company, including the sale of any products or technology
or the provision of any services by the Company (other than with respect to
products acquired from third parties). The Company owns exclusively, and has
good title to, all copyrighted works that are Company products or other works
of authorship that the Company otherwise purports to own.
(d) To the extent that any Intellectual Property has been developed or
created by any person other than the Company for which the Company has,
directly or indirectly, paid, the Company has a written agreement with such
person with respect thereto and the Company thereby has obtained ownership of,
and is the exclusive owner of, by operation of law or by valid assignment, all
such Intellectual Property.
(e) Except as set forth in Section 2.13(e) of the Disclosure Schedule, the
Company has not transferred ownership of or granted any license of or right to
use or authorized the retention of any rights to use any Intellectual Property
that is or was Company Intellectual Property, to any other person.
(f) The Company Intellectual Property constitutes all the Intellectual
Property used in and/or necessary to the conduct of its business as it
currently is conducted, including, without limitation, the design, development,
manufacture, use, import and sale of the products, technology and services of
the Company (including products, technology or services currently under
development).
(g) Other than "shrink-wrap" and similar widely available commercial end-
user licenses, the contracts, licenses and agreements listed in Section 2.13(g)
of the Disclosure Schedule include all contracts, licenses and agreements to
which the Company is a party with respect to any license or assignment of
Intellectual Property. Except as listed in Section 2.13(g) of the Disclosure
Schedule, no person who has licensed Intellectual Property to the Company has
ownership rights or license rights to improvements made by the Company in such
Intellectual Property which has been licensed to the Company.
(h) Section 2.13(h) of the Disclosure Schedule lists all contracts,
licenses and agreements between the Company and any other person wherein or
whereby the Company has agreed to, or assumed, any obligation or duty to
warrant, indemnify, reimburse, hold harmless, guaranty or otherwise assume or
incur any obligation or liability or provide a right of rescission with respect
to the infringement or misappropriation by the Company or such other person of
the Intellectual Property of any person other than the Company.
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(i) (A) The operation of the business of the Company as it currently is
conducted, including but not limited to the Company's design, development, use,
import, manufacture and sale of the products, technology or services (including
products, technology or services currently under development) of the Company
does not infringe or misappropriate any Intellectual Property (other than
trademarks, trade names and service marks) of any person, violate the rights of
any person (including rights to privacy or publicity), or constitute unfair
competition or trade practices under the laws of any jurisdiction. The Company
has not received any notice from any person that the operation of the business
of the Company as it currently is conducted, including but not limited to the
Company's design, development, use, import, manufacture and sale of the
products, technology or services (including products, technology or services
currently under development) of the Company infringes or misappropriates the
Intellectual Property (other than trademarks, trade names and service marks) of
any person or constitutes unfair competition or trade practices under the laws
of any jurisdiction (nor is the Company aware of any basis therefor).
(B) To the Knowledge of the Company, the operation of the business of the
Company as it currently is conducted, including but not limited to the
Company's design, development, use, import, manufacture and sale of the
products, technology or services (including products, technology or services
currently under development) of the Company does not infringe or misappropriate
any trademark, trade name and service mark of any person.
(j) Each item of Company Registered Intellectual Property is valid and
subsisting, all necessary registration, maintenance and renewal fees in
connection with such Registered Intellectual Property have been paid and all
necessary documents and certificates in connection with such Company Registered
Intellectual Property have been filed with the relevant patent, copyright,
trademark or other authorities in the United States or foreign jurisdictions,
as the case may be, for the purposes of maintaining such Registered
Intellectual Property. Except as set forth in Disclosure Schedule 2.13(j), to
the Company's Knowledge, there are no actions that must be taken by the Company
within sixty (60) days of the Closing Date, including the payment of any
registration, maintenance or renewal fees or the filing of any documents,
applications or certificates for the purposes of maintaining, perfecting or
preserving or renewing any Company Intellectual Property. In each case in which
the Company has acquired any Intellectual Property rights from any person, the
Company has obtained a valid and enforceable assignment sufficient to
irrevocably transfer all rights in such Intellectual Property (including the
right to seek past and future damages with respect to such Intellectual
Property) to the Company and, to the maximum extent provided for by, and in
accordance with, applicable laws and regulations, the Company has recorded each
such assignment with the relevant governmental authorities, including the PTO,
the U.S. Copyright Office, or their respective equivalents in any relevant
foreign jurisdiction, as the case may be.
(k) There are no contracts, licenses or agreements between the Company and
any other person with respect to Company Intellectual Property under which
there is any dispute known to the Company regarding the scope of such
agreement, or performance under such agreement including with respect to any
payments to be made or received by the Company thereunder.
(l) To the Company's Knowledge, no person is infringing or misappropriating
any Company Intellectual Property.
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(m) The Company has taken all steps that are reasonably necessary to
protect the Company's rights in confidential information and trade secrets of
the Company or provided by any other person to the Company. Without limiting
the foregoing, the Company has, and enforces, a policy requiring each employee,
consultant and contractor to execute proprietary information, confidentiality
and assignment agreements substantially in the Company's standard forms, and
all current and former employees, consultants and contractors of the Company
have executed such an agreement.
(n) To the Company's Knowledge, after reasonable inquiry, no Company
Intellectual Property or product, technology or service of the Company is
subject to any proceeding or outstanding decree, order, judgment, agreement or
stipulation that restricts in any manner the use, transfer or licensing thereof
by the Company or may affect the validity, use or enforceability of such
Company Intellectual Property.
(o) To the Company's Knowledge, no: (i) product, technology, service or
publication of the Company, (ii) material published or distributed by the
Company, or (iii) conduct or statement of Company constitutes obscene material,
a defamatory statement or material, false advertising or otherwise violates any
law or regulation.
(p) Except as set forth in Disclosure Schedule 2.13(p), all of the
Company's products (including products currently under development) will
record, store, process, calculate and present calendar dates falling on and
after (and if applicable, spans of time including) January 1, 2000, and will
calculate any information dependent on or relating to such dates in the same
manner, and with the same functionality, data integrity and performance, as the
products record, store, process, calculate and present calendar dates on or
before December 31, 1999, or calculate any information dependent on or relating
to such dates.
2.14 Agreements, Contracts and Commitments.
(a) Except as set forth in Sections 2.13(g), 2.13(h) or 2.14(a) of the
Disclosure Schedule, the Company is not a party to nor is it bound by:
(i) any employment or consulting agreement, contract or commitment with
an employee or individual consultant or salesperson or consulting or sales
agreement, contract or commitment with a firm or other organization;
(ii) any agreement or plan, including, without limitation, any stock
option plan, stock appreciation rights plan or stock purchase plan, any of the
benefits of which will be increased, or the vesting of benefits of which will
be accelerated, by the occurrence of any of the transactions contemplated by
this Agreement or the value of any of the benefits of which will be calculated
on the basis of any of the transactions contemplated by this Agreement;
(iii) any fidelity or surety bond or completion bond;
(iv) any lease of personal property with fixed annual rental payments in
excess of $10,000;
(v) any agreement, contract or commitment containing any covenant
limiting the freedom of the Company to engage in any line of business or to
compete with any person;
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(vi) any agreement, contract or commitment relating to capital
expenditures and involving future payments in excess of $10,000 either
individually or $25,000 in the aggregate;
(vii) any agreement, contract or commitment relating to the disposition
or acquisition of assets or any interest in any business enterprise outside the
ordinary course of the Company's business;
(viii) any mortgages, indentures, loans or credit agreements, security
agreements or other agreements or instruments relating to the borrowing of
money or extension of credit;
(ix) any purchase order or contract for the purchase of materials
involving in excess of $10,000 individually or $25,000 in the aggregate;
(x) any construction contracts;
(xi) any dealer, distribution, joint marketing or development agreement;
(xii) any sales representative, original equipment manufacturer, value
added reseller, remarketer or other agreement for distribution of the Company's
products or services; or
(xiii) any other agreement, contract or commitment that involves $10,000
or more or is not cancelable without penalty within thirty (30) days.
(b) The Company is in compliance with and has not breached, violated or
defaulted under, or received notice that it has breached, violated or defaulted
under, any of the terms or conditions of any agreement, contract, covenant,
instrument, lease, license or commitment to which the Company is a party or by
which it is bound (collectively a "Contract"), nor is the Company aware of any
event that would constitute such a breach, violation or default with the lapse
of time, giving of notice or both. Each Contract is in full force and effect
and is not subject to any default thereunder by any party obligated to the
Company pursuant thereto. The Company has obtained, or will obtain prior to the
Closing Date, all necessary consents, waivers and approvals of parties to any
Contract as are required thereunder in connection with the Merger or for such
Contracts to remain in effect without modification after the Closing. Following
the Effective Time, the Company will be permitted to exercise all of the
Company's rights under the Contracts without the payment of any additional
amounts or consideration other than ongoing fees, royalties or payments which
the Company would otherwise be required to pay had the transactions
contemplated by this Agreement not occurred.
2.15 Interested Party Transactions. No officer, director or Shareholder of
the Company (nor any ancestor, sibling, descendant or spouse of any of such
persons, or any trust, partnership or corporation in which any of such persons
has or has had an interest), has or has had, directly or indirectly, (i) an
interest in any entity which furnished or sold, or furnishes or sells,
services, products or technology that the Company furnishes or sells, or
proposes to furnish or sell, or (ii) any interest in any entity that purchases
from or sells or furnishes to the Company any goods or services, or (iii) a
beneficial interest in any Contract; provided, that ownership of no more than
one percent (1%) of the outstanding voting stock of a publicly traded
corporation shall not be deemed an "interest in any entity" for purposes of
this Section 2.15.
2.16 Governmental Authorization. Section 2.16 of the Disclosure Schedule
accurately lists each consent, license, permit, grant or other authorization
issued to the Company by a Governmental
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Entity (i) pursuant to which the Company currently operates or holds any
interest in any of their properties or (ii) which is required for the operation
of its business or the holding of any such interest (herein collectively called
"Company Authorizations"). The Company Authorizations are in full force and
effect and constitute all Company Authorizations required to permit the Company
to operate or conduct its business or hold any interest in its properties or
assets.
2.17 Litigation. There is no action, suit or proceeding of any nature pending
nor has the Company received notice (oral or written) of any actions, suits or
proceedings threatened against the Company, its properties or any of its
officers or directors, nor to the Knowledge of the Company, is there any
reasonable basis therefor. There is no investigation pending or threatened
against the Company, its properties or any of its officers or directors (nor to
the Knowledge of the Company is there any reasonable basis therefor) by or
before any Governmental Entity. No Governmental Entity has at any time
challenged or questioned the legal right of the Company to conduct its
operations as presently or previously conducted.
2.18 Accounts Receivable.
(a)The Company has made available to Parent a list of all accounts
receivable of the Company ("Accounts Receivable") as of June 30, 1998, and will
provide to Parent a list of all Accounts Receivable of the Company as of the
Closing Date, along with a range of days elapsed since invoice.
(b) All Accounts Receivable of the Company arose in the ordinary course of
business, are carried at values determined in accordance with GAAP consistently
applied and are collectible except to the extent of reserves therefor set forth
in the Current Balance Sheet. No person has any lien, encumbrance or other
similar right with respect to any of such Accounts Receivable and no request or
agreement for deduction or discount has been made with respect to any of such
Accounts Receivable.
2.19 Minute Books. The minutes of the Company made available to counsel for
Parent are the only minutes of the Company and contain a reasonably accurate
summary of all meetings of the Board of Directors (or committees thereof) of
the Company and its shareholders or actions by written consent since the
incorporation of the Company.
2.20 Environmental Matters.
(a) Hazardous Material. The Company has not: (i) operated any underground
storage tanks at any property that the Company has at any time owned, operated,
occupied or leased; or (ii) illegally released any material amount of any
substance that has been designated by any Governmental Entity or by applicable
federal, state or local law to be radioactive, toxic, hazardous or otherwise a
danger to health or the environment, including, without limitation, PCBs,
asbestos, petroleum, and urea-formaldehyde and all substances listed as
hazardous substances pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, or defined as a hazardous
waste pursuant to the United States Resource Conservation and Recovery Act of
1976, as amended, and the regulations promulgated pursuant to said laws (a
"Hazardous Material"), but excluding office and janitorial supplies properly
and safely maintained. No Hazardous Materials are present as a result of the
deliberate actions of the Company in, on or under
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any property, including the land and the improvements, ground water and surface
water thereof, that the Company has at any time owned, operated, occupied or
leased.
(b) Hazardous Materials. The Company has not transported, stored, used,
manufactured, disposed of, released or exposed its employees or others to
Hazardous Materials in violation of any law in effect on or before the
Effective Time, nor has the Company disposed of, transported, sold, or
manufactured any product containing a Hazardous Material (any or all of the
foregoing being collectively referred to as "Hazardous Materials Activities")
in violation of any rule, regulation, treaty or statute promulgated by any
Governmental Entity in effect prior to or as of the date hereof to prohibit,
regulate or control Hazardous Materials or any Hazardous Material Activity.
(c) Permits. The Company currently holds all environmental approvals,
permits, licenses, clearances and consents (the "Environmental Permits")
necessary for the conduct of the Company's Hazardous Material Activities,
respectively, and other businesses of the Company as such activities and
businesses are currently being conducted.
(d) Environmental Liabilities. To the Company's Knowledge, no action,
proceeding, revocation proceeding, amendment procedure, writ, injunction or
claim is pending nor has the Company received notice (oral or written) of any
action, proceeding, revocation proceeding, amendment procedure, writ,
injunction or claim threatened concerning any Environmental Permit, Hazardous
Material or any Hazardous Materials Activity of the Company. The Company is not
aware of any fact or circumstance which could involve the Company in any
environmental litigation or impose upon the Company any environmental
liability.
2.21 Brokers' and Finders' Fees; Third Party Expenses. Except as set forth in
Section 2.21 of the Disclosure Schedule, the Company has not incurred, nor will
it incur, directly or indirectly, any liability for brokerage or finders' fees
or agents' commissions or any similar charges in connection with the Agreement
or any transaction contemplated hereby. Section 2.21 of the Disclosure Schedule
sets forth the principal terms and conditions of any agreement, written or
oral, with respect to such fees. Section 2.21 of the Disclosure Schedule sets
forth the Company's current reasonable estimate of all Third Party Expenses (as
defined in Section 5.4) expected to be incurred by the Company in connection
with the negotiation and effectuation of the terms and conditions of this
Agreement and the transactions contemplated hereby.
2.22 Employee Matters and Benefit Plans.
(a) Definitions. With the exception of the definition of "Affiliate" set
forth in Section 2.22(a)(i) below (which definition shall apply only to this
Section 2.22), for purposes of this Agreement, the following terms shall have
the meanings set forth below:
(i) "Affiliate" shall mean any other person or entity under common
control with the Company within the meaning of Section 414(b), (c), (m) or (o)
of the Code and the regulations issued thereunder;
(ii) "Company Employee Plan" shall mean any plan, program, policy,
practice, contract, agreement or other arrangement providing for compensation,
severance, termination pay, deferred compensation, performance awards, stock or
stock-related awards, fringe benefits or other employee benefits or
remuneration of any kind, whether written or unwritten or otherwise, funded or
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unfunded, including without limitation, each "employee benefit plan," within
the meaning of Section 3(3) of ERISA which is or has been maintained,
contributed to, or required to be contributed to, by the Company or any
Affiliate for the benefit of any Employee, or with respect to which the Company
or any Affiliate has or may have any liability or obligation;
(iii) "COBRA" shall mean the Consolidated Omnibus Budget Reconciliation
Act of 1985, as amended;
(iv) "DOL" shall mean the Department of Labor;
(v) "Employee" shall mean any current or former employee, consultant or
director of the Company or any Affiliate;
(vi) "Employee Agreement" shall mean each management, employment,
severance, consulting, relocation, repatriation, expatriation, visas, work
permit or other agreement, contract or understanding between the Company or any
Affiliate and any Employee;
(vii) "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended;
(viii) "FMLA" shall mean the Family Medical Leave Act of 1993, as
amended;
(ix) "International Employee Plan" shall mean each Company Employee Plan
that has been adopted or maintained by the Company or any Affiliate, whether
informally or formally, or with respect to which the Company or any Affiliate
will or may have any liability, for the benefit of Employees who perform
services outside the United States;
(x) "IRS" shall mean the Internal Revenue Service;
(xi) "Multiemployer Plan" shall mean any "Pension Plan" (as defined
below) which is a "multiemployer plan," as defined in Section 3(37) of ERISA;
(xii) "PBGC" shall mean the Pension Benefit Guaranty Corporation; and
(xiii) "Pension Plan" shall mean each Company Employee Plan which is an
"employee pension benefit plan," within the meaning of Section 3(2) of ERISA.
(b) Schedule. Schedule 2.22(b) contains an accurate and complete list of
each Company Employee Plan and each Employee Agreement under each Company
Employee Plan or Employee Agreement. The Company does not have any plan or
commitment to establish any new Company Employee Plan or Employee Agreement, to
modify any Company Employee Plan or Employee Agreement (except to the extent
required by law or to conform any such Company Employee Plan or Employee
Agreement to the requirements of any applicable law, in each case as previously
disclosed to Parent in writing, or as required by this Agreement), or to enter
into any Company Employee Plan or Employee Agreement.
(c) Documents. The Company has provided to Parent: (i) correct and complete
copies of all documents embodying each Company Employee Plan and each Employee
Agreement including (without limitation) all amendments thereto and all related
trust documents; (ii) the most recent annual actuarial valuations, if any,
prepared for each Company Employee Plan; (iii) the three (3) most recent annual
reports (Form Series 5500 and all schedules and financial statements attached
thereto), if any, required under ERISA or the Code in connection with each
Company Employee
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Plan; (iv) if the Company Employee Plan is funded, the most recent annual and
periodic accounting of Company Employee Plan assets; (v) the most recent
summary plan description together with the summary(ies) of material
modifications thereto, if any, required under ERISA with respect to each
Company Employee Plan; (vi) all IRS determination, opinion, notification and
advisory letters, and all applications and correspondence to or from the IRS or
the DOL with respect to any such application or letter; (vii) all material
written agreements and contracts relating to each Company Employee Plan,
including, but not limited to, administrative service agreements, group annuity
contracts and group insurance contracts; (viii) all communications material to
any Employee or Employees relating to any Company Employee Plan and any
proposed Company Employee Plans, in each case, relating to any amendments,
terminations, establishments, increases or decreases in benefits, acceleration
of payments or vesting schedules or other events which would result in any
liability to the Company; (ix) all correspondence to or from any governmental
agency relating to any Company Employee Plan; (x) all COBRA forms and related
notices; (xi) all policies pertaining to fiduciary liability insurance covering
the fiduciaries for each Company Employee Plan; (xii) all discrimination tests
for each Company Employee Plan for the most recent plan year; and (xiii) all
registration statements, annual reports (Form 11-K and all attachments thereto)
and prospectuses prepared in connection with each Company Employee Plan.
(d) Employee Plan Compliance. (i) The Company has performed all obligations
required to be performed by it under, is not in default or violation of, and
has no knowledge of any default or violation by any other party to each Company
Employee Plan, and each Company Employee Plan has been established and
maintained in accordance with its terms and in compliance with all applicable
laws, statutes, orders, rules and regulations, including but not limited to
ERISA or the Code; (ii) each Company Employee Plan intended to qualify under
Section 401(a) of the Code and each trust intended to qualify under Section
501(a) of the Code has either received a favorable determination, opinion,
notification or advisory letter from the IRS with respect to each such Plan as
to its qualified status under the Code, including all amendments to the Code
effected by the Tax Reform Act of 1986 and subsequent legislation, or has
remaining a period of time under applicable Treasury regulations or IRS
pronouncements in which to apply for such a letter and make any amendments
necessary to obtain a favorable determination as to the qualified status of
each such Company Employee Plan; (iii) no "prohibited transaction," within the
meaning of Section 4975 of the Code or Sections 406 and 407 of ERISA, and not
otherwise exempt under Section 408 of ERISA, has occurred with respect to any
Company Employee Plan; (iv) there are no actions, suits or claims pending or
threatened or reasonably anticipated (other than routine claims for benefits)
against any Company Employee Plan or against the assets of any Company Employee
Plan; (v) each Company Employee Plan can be amended, terminated or otherwise
discontinued after the Effective Time in accordance with its terms, without
liability to Parent, Sub, the Company or any Affiliate (other than ordinary
administration expenses); (vi) there are no audits, inquiries or proceedings
pending or, to the Knowledge of the Company or any Affiliates, threatened by
the IRS or DOL with respect to any Company Employee Plan; and (vii) neither the
Company nor any Affiliate is subject to any penalty or tax with respect to any
Company Employee Plan under Section 502(i) of ERISA or Sections 4975 through
4980 of the Code.
(e) Pension Plan. Neither the Company nor any Affiliate has ever
maintained, established, sponsored, participated in, or contributed to, any
Pension Plan which is subject to Title IV of ERISA or Section 412 of the Code.
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(f) Multiemployer Plans. At no time has the Company or any Affiliate
contributed to or been required to contribute to any Multiemployer Plan.
(g) No Post-Employment Obligations. No Company Employee Plan provides, or
reflects or represents any liability to provide, retiree life insurance,
retiree health or other retiree employee welfare benefits to any person for any
reason, except as may be required by COBRA or other applicable statute, and the
Company has never represented, promised or contracted (whether in oral or
written form) to any Employee (either individually or to Employees as a group)
or any other person that such Employee(s) or other person would be provided
with retiree life insurance, retiree health or other retiree employee welfare
benefit, except to the extent required by statute.
(h) COBRA. Neither the Company nor any Affiliate has, prior to the
Effective Time, violated any of the health care continuation requirements of
COBRA, the requirements of FMLA or any similar provisions of state law
applicable to its Employees.
(i) Effect of Transaction.
(i) The execution of this Agreement and the consummation of the
transactions contemplated hereby will not (either alone or upon the occurrence
of any additional or subsequent events) constitute an event under any Company
Employee Plan, Employee Agreement, trust or loan that will or may result in any
payment (whether of severance pay or otherwise), acceleration, forgiveness of
indebtedness, vesting, distribution, increase in benefits or obligation to fund
benefits with respect to any Employee.
(ii) No payment or benefit which will or may be made by the Company or
its Affiliates with respect to any Employee as a result of the transactions
contemplated by this Agreement or otherwise will be characterized as a
"parachute payment," within the meaning of Section 280G(b)(2) of the Code (but
without regard to clause (ii) thereof).
(j) Employment Matters. The Company: (i) is in compliance in all respects
with all applicable foreign, federal, state and local laws, rules and
regulations respecting employment, employment practices, terms and conditions
of employment and wages and hours, in each case, with respect to Employees;
(ii) has withheld and reported all amounts required by law or by agreement to
be withheld and reported with respect to wages, salaries and other payments to
Employees; (iii) is not liable for any arrears of wages or any taxes or any
penalty for failure to comply with any of the foregoing; and (iv) is not liable
for any payment to any trust or other fund governed by or maintained by or on
behalf of any governmental authority, with respect to unemployment compensation
benefits, social security or other benefits or obligations for Employees (other
than routine payments to be made in the normal course of business and
consistent with past practice). There are no pending, or to the Knowledge of
the Company, threatened or reasonably anticipated claims or actions against the
Company under any worker's compensation policy or long-term disability policy.
(k) Labor. No work stoppage or labor strike against the Company is pending,
threatened or reasonably anticipated. The Company does not know of any
activities or proceedings of any labor union to organize any Employees. There
are no actions, suits, claims, labor disputes or grievances pending or
threatened or reasonably anticipated against the Company relating to any labor,
safety or discrimination matters involving any Employee, including, without
limitation, charges of unfair labor practices or discrimination complaints,
which, if adversely determined, would, individually or in the
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aggregate, result in any liability to the Company, Parent, Sub or any
Affiliate. Neither the Company nor any of its subsidiaries has engaged in any
unfair labor practices within the meaning of the National Labor Relations Act.
The Company is not presently, nor has it been in the past, a party to, or bound
by, any collective bargaining agreement or union contract with respect to
Employees and no collective bargaining agreement is being negotiated by the
Company.
(l) No Interference or Conflict. No shareholder, officer, employee or
consultant of the Company is obligated under any contract or agreement subject
to any judgement, decree or order of any court or administrative agency that
would interfere with such person's efforts to promote the interests of the
Company or that would interfere with the Company's business. Neither the
execution nor delivery of this Agreement, nor the carrying on of the Company's
business as presently conducted or proposed to be conducted nor any activity of
such officers, directors, employees or consultants in connection with the
carrying on of the Company's business as presently conducted or proposed to be
conducted, will conflict with or result in a breach of the terms, conditions or
provisions of, or constitute a default under, any contract or agreement under
which any of such officers, directors, employees or consultants is now bound.
2.23 Insurance. Section 2.23 of the Disclosure Schedule lists all insurance
policies and fidelity bonds covering the assets, business, equipment,
properties, operations, employees, officers and directors of the Company. To
the Company's Knowledge, there is no claim pending under any of such policies
or bonds as to which coverage has been questioned, denied or disputed by the
underwriters of such policies or bonds. All premiums due and payable under all
such policies and bonds have been paid, and the Company and any covered parties
are otherwise in compliance with the terms of such policies and bonds (or other
policies and bonds providing substantially similar insurance coverage). To the
Company's Knowledge, there is no threatened termination of, or premium increase
with respect to, any of such policies.
2.24 Compliance with Laws. The Company has complied with, is not in violation
of, and has not received any notices of violation with respect to, any foreign,
federal, state or local statute, law or regulation.
2.25 Warranties; Indemnities. Except for the warranties and indemnities
contained in those contracts and agreements set forth in Section 2.13(h) of the
Disclosure Schedule, the Company has not given any warranties or indemnities
relating to products or technology sold or licensed or services rendered by the
Company.
2.26 Pooling of Interests. To the Knowledge of the Company, based on
consultation with its independent accountants, neither the Company nor any of
its directors, officers, affiliates or shareholders has taken any action which
would preclude the Parent's and Company's ability to account for the Merger as
a pooling of interests.
2.27 Proxy Statement and Shareholder Information Statement. The information
supplied by the Company for inclusion in the Proxy Statement or the Shareholder
Information Statement (each as defined below) will not on the date it (or any
amendment or supplement thereto) is first sent to Shareholders, at the time of
the Company Shareholders Meeting and at the Effective Time, contain any
statement which, at such time and in light of the circumstances under which it
is made, is false
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or misleading with respect to any material fact, or will omit to state any
material fact necessary in order to make the statements therein not false or
misleading. If at any time prior to the Effective Time any event relating to
the Company or any of its respective affiliates, officers or directors should
be discovered by the Company which should be set forth in an amendment or a
supplement to the Proxy Statement or the Shareholder Information Statement, the
Company will promptly inform the Parent and Sub. Notwithstanding the foregoing,
the Company makes no representation or warranty with respect to any information
supplied by Parent or Sub that is contained in any of the foregoing documents.
2.28 Complete Copies of Materials. The Company has delivered or made
available true and complete copies of each document (or summaries of same) that
has been reasonably requested by Parent or its counsel.
2.29 Representations Complete. None of the representations or warranties made
by the Company (as modified by the Disclosure Schedule), nor any statement made
in any Schedule or certificate furnished by the Company pursuant to this
Agreement or furnished in or in connection with documents mailed or delivered
to the Shareholders for use in soliciting their consent to this Agreement and
the Merger contains or will contain at the Effective Time (when read together
with the Proxy Statement and Shareholder Information Statement (as amended or
supplemented) at the Effective Time), any untrue statement of a material fact,
or omits or will omit at the Effective Time (when read together with the Proxy
Statement and Shareholder Information Statement (as amended or supplemented) at
the Effective Time), to state any material fact necessary in order to make the
statements contained herein or therein, in the light of the circumstances under
which made, not misleading.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub jointly and severally represent and warrant to the Company
that on the date hereof (except as expressly provided otherwise below and
except as may be modified to appropriately reflect the Parent's planned
reorganization into a Delaware corporation or a subsidiary of a Delaware
corporation) and as of the Effective Time as though made at the Effective Time
as follows:
3.1 Organization, Standing and Power. Parent is a corporation duly organized,
validly existing and in good standing under the laws of the State of
California. Sub is a corporation duly organized, validly existing and in good
standing under the laws of the State of Oregon. Each of Parent and Sub has the
corporate power to own its properties and to carry on its business as now being
conducted and is duly qualified to do business and is in good standing as a
foreign corporation in each jurisdiction in which the failure to be so
qualified would have a Material Adverse Effect on the ability of Parent and Sub
to consummate the Merger or the other transactions contemplated hereby.
3.2 Charter and Bylaws. Parent has heretofore furnished to the Company a
complete and correct copy of its Articles of Incorporation and Bylaws, as
amended to date. Such Articles of Incorporation and Bylaws are in full force
and effect. Neither parent nor Sub is in violation of any of the provisions of
its Articles of Incorporation or Bylaws.
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3.3 Authority. Each of Parent and Sub has all requisite power and authority
to enter into this Agreement and any Related Agreements to which it is a party
and to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and any Related Agreements to which it
is a party and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate action on the part
of Parent and Sub, and no further action is required on the part of Parent or
Sub to authorize this Agreement, any Related Agreements to which it is a party
and the transactions contemplated hereby and thereby. This Agreement has been,
and any Related Agreements to which Parent or Sub is a party have been or will
have been prior to the Effective Time, duly executed and delivered by Parent
and Sub and, assuming the due authorization, execution and delivery by the
other parties hereto, constitute the valid and binding obligations of Parent
and Sub, enforceable in accordance with their respective terms, except as such
enforceability may be limited by principles of public policy and subject to the
laws of general application relating to bankruptcy, insolvency and the relief
of debtors and rules of law governing specific performance, injunctive relief
or other equitable remedies.
3.4 Merger Shares. The shares of Parent Common Stock to be issued pursuant to
the Merger will be duly authorized, validly issued, fully paid, non-assessable
and will be issued in compliance with all applicable federal and state
securities laws.
3.5 No Conflict. The execution and delivery of this Agreement and any Related
Agreement to which Parent or Sub is a party by Parent or Sub, as the case may
be, do not, and the consummation of the transactions contemplated hereby and
thereby will not, conflict with, or result in any violation of, or default
under (with or without notice or lapse of time, or both), or give rise to a
Conflict under (i) any provision of the Articles of Incorporation, as amended,
and Bylaws of Parent or Sub, (ii) any mortgage, indenture, lease, contract or
other agreement or instrument, permit, concession, franchise or license to
which Parent or Sub or any of their respective properties or assets are subject
and that has been filed as an exhibit to Parent's filings under the Securities
Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or
(iii) any judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Parent or Sub or their respective properties or assets, except
for a Conflict under subsection (ii) or (iii) above that would not have a
Material Adverse Effect on the ability of the parties to consummate the Merger
or the other transactions contemplated by this Agreement.
3.6 Consents. No consent, waiver, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity or any third
party is required, including a party to any agreement with Parent or Sub (so as
not to trigger any Conflict) by or with respect to Parent or Sub in connection
with the execution and delivery of this Agreement and any Related Agreements to
which Parent or Sub is a party or the consummation of the transactions
contemplated hereby and thereby, except for (i) such consents, waivers,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable securities laws, (ii) such consents, waivers,
approvals, orders, authorizations, registrations, declarations and filings that
have been obtained or made or will be obtained or made prior to the Effective
Time, (iii) such consents, waivers, approvals, orders, authorizations,
registrations, declarations and filings which, if not obtained or made, would
not have a Material Adverse Effect on the Parent, Sub and Parent's other
subsidiaries taken as a whole, or on the ability of the parties to consummate
the Merger or the other
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transactions contemplated by this Agreement, and (iv) the filing of the Merger
Agreement with the Secretary of State of the State of Oregon.
3.7 Proxy Statement and Shareholder Information Statement. The information
supplied by Parent for inclusion in the Proxy Statement and Shareholder
Information Statement will not, on the date it (or any amendment or supplement
thereto) is first mailed to Shareholders, at the time of the Company
Shareholders Meeting and at the Effective Time, contain any statement which, at
such time and in light of the circumstances under which it is made, is false or
misleading with respect to any material fact, or will omit to state any
material fact necessary in order to make the statements therein not false or
misleading. If at any time prior to the Effective Time any event relating to
Parent, Sub or any of their respective affiliates, officers or directors should
be discovered by Parent or Sub which should be set forth in an amendment or a
supplement to the Proxy Statement or Shareholder Information Statement, Parent
or Sub will promptly inform the Company. Notwithstanding the foregoing, Parent
and Sub make no representation or warranty with respect to any information
supplied by the Company or the Shareholders that is contained in any of the
foregoing documents.
3.8 Other Matters. Sub has been formed for the sole purpose of effecting the
Merger and, except as contemplated by this Agreement, Sub has not conducted any
business activities and does not have any material liabilities or obligations.
3.9 SEC Filings; Financial Statements.
(a) Parent has filed all forms, reports and documents required to be filed
with the SEC (collectively, the "Parent SEC Reports"). The Parent SEC Reports
(i) at the time they were filed, complied as to form in all material respects
with the requirements of the Securities Act or the Exchange Act, as the case
may be, and (ii) did not at the time they were filed (or if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing) contain any untrue statement of a material fact or omit to state a
material fact require to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. Parent and Sub make no representation or warranty whatsoever
concerning the Parent SEC Reports as of any time other than the time they were
filed. None of the Parent's subsidiaries is required to file any forms, reports
or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) (the "Parent Financial Statements") contained
in the Parent SEC Reports has been prepared in accordance with GAAP applied on
a consistent basis throughout the period involved (except as may be indicated
in the notes thereto) and each fairly presents in all material respects the
consolidated financial position of Parent and its subsidiaries as at the
respective dates thereof and the consolidated results of its operations and
cash flows for the periods indicated, except that the unaudited interim
financial statements were or are subject to normal and recurring year-end
adjustments which were not or are not expected to be, individually or in the
aggregate, materially adverse to Parent and its subsidiaries taken as a whole.
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ARTICLE IV.
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of the Company. During the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, the Company agrees (except to the extent that
Parent shall otherwise consent in writing), to carry on the Company's business
in the usual, regular and ordinary course in substantially the same manner as
heretofore conducted, to pay the debts and Taxes of the Company when due, to
pay or perform other obligations when due consistent with the past practices of
the Company, and, to the extent consistent with such business, use its
reasonable best efforts consistent with past practice and policies to preserve
intact the Company's present business organizations, keep available the
services of the Company's present officers and Key Employees and preserve the
Company's relationships with customers, suppliers, distributors, licensors,
licensees, and others having business dealings with it (although the Company is
not required to continue any commercial agreements with any of its customers
other than Parent), all with the goal of preserving unimpaired the Company's
goodwill and ongoing businesses at the Effective Time. The Company shall
promptly notify Parent of any event or occurrence or emergency not in the
ordinary course of business of the Company and any material event involving the
Company. Except as expressly contemplated by this Agreement as set forth in
Section 4.1 of the Disclosure Schedule, the Company shall not, without the
prior written consent of Parent, which consent shall not be unreasonably
withheld or delayed (provided, however, that with respect to the items (c),
(d), (m), (n), (o), (q), (s) and (u), and with respect to item (g) to the
extent the Company has issued options to purchase less than 200,000 shares of
Company Capital Stock since the date of this Agreement, and with respect to (x)
as it applies to any of the aforementioned items, if Parent does not respond
within five (5) business days of a written request (in accordance with Section
9.1) from Company for consent to an action described in such item, such consent
shall be deemed to have been given):
(a) Except in the ordinary course of business and consistent with past
practice, (i) sell or enter into any license agreement with respect to the
Company Intellectual Property with any person or entity or (ii) buy or enter
into any license agreement with respect to the Intellectual Property of any
person or entity;
(b) Transfer to any person or entity any rights to the Company Intellectual
Property;
(c) Enter into or amend: (i) any Contract with a customer, (ii) any single
Contract (or series of related Contracts) with a potential obligation of
$25,000 or more or (iii) multiple Contracts in any calendar month with
aggregate potential obligation of $100,000 or more;
(d) Amend or otherwise modify (or agree to do so), except in the ordinary
course of business, or violate the terms of, any of the Contracts set forth or
described in the Disclosure Schedule;
(e) Commence any litigation or settle: (i) any litigation for $25,000 or
more or (ii) any litigation relating to intellectual property rights;
(f) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its
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capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of capital stock of the
Company, or repurchase, redeem or otherwise acquire, directly or indirectly,
any shares of the capital stock of the Company or options, warrants or other
rights exercisable therefor (except for the Company's repurchase of Company
Capital Stock from its employees at the purchase price paid by such employees
for such stock);
(g) Issue, grant, deliver or sell, contract to issue, grant, deliver or
sell, or authorize or propose the issuance, grant, delivery or sale of, or
purchase or propose the purchase of, any shares of its capital stock (other
than upon the exercise of currently outstanding stock options) or securities
convertible into or exchangeable for, or subscriptions, rights, warrants or
options to acquire, or other agreements or commitments of any character
obligating it to issue or purchase any such shares or other convertible
securities;
(h) Cause or permit any amendments to its Articles of Incorporation or
Bylaws or other organizational documents;
(i) Propose or discuss acquiring or acquire or agree to acquire by merging
or consolidating with, or by purchasing any assets or equity securities of, or
by any other manner, any business or any corporation, partnership, association
or other business organization or division thereof other than Parent, Sub or
any other Parent subsidiary, or otherwise acquire or agree to acquire any
assets which are material, individually or in the aggregate, to the Company's
business;
(j) Sell, lease, license or otherwise dispose of any of its properties or
assets, except in the ordinary course of business and consistent with past
practices;
(k) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or guarantee any debt
securities of others;
(l) Incur liabilities in excess of $390,000 (other than amounts borrowed
under the Company Loan (defined below));
(m) Grant any loans to others or purchase debt securities of others or
amend the terms of any outstanding loan agreement;
(n) Grant any severance or termination pay: (i) to any director or officer
or (ii) to any other employee except payments made pursuant to standard written
agreements outstanding on the date hereof and disclosed in the Disclosure
Schedule;
(o) Adopt any employee benefit plan, or enter into any employment contract
(other than a contract expressly providing for at-will employment), or pay or
agree to pay any special bonus or special remuneration to any director;
(p) Revalue any of its assets, including without limitation writing down
the value of inventory or writing off notes or accounts receivable other than
in the ordinary course of business;
(q) Pay, discharge or satisfy, in an amount in excess of $10,000 (in any
one case) or $25,000 (in the aggregate), any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction in the ordinary course of business
of liabilities reflected or reserved against in the Current Balance Sheet;
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(r) Make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to
any extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(s) Enter into any strategic alliance or joint marketing arrangement or
agreement;
(t) Accelerate the vesting schedule of any of the outstanding Company
Options or Company Capital Stock;
(u) (i) Terminate any Key Employee, (ii) encourage any employee to resign,
(iii) hire an employee with an annual salary and bonus in excess of $60,000 or
(iv) hire an officer;
(v) Take any action that would be reasonably likely to interfere with
Parent's ability to account for the Merger as a pooling of interests whether or
not otherwise permitted under this Section 4.1;
(w) Take any other action inconsistent with past practice or outside the
ordinary course of business; or
(x) Agree in writing or otherwise to take, any of the actions described in
Sections 4.1(a) through (w) above;
(y) Take, or agree in writing or otherwise to take, or any other action
that would prevent the Company from performing or cause the Company not to
perform its covenants hereunder.
4.2 No Solicitation.
(a) For purposes of this Section 4.2, the following terms shall have the
following meanings:
(i) "Acquisition Proposal" shall mean any offer or proposal (other than
an offer or proposal by Parent) contemplating or otherwise relating to any
Company Acquisition Transaction.
(ii) A party's "Associates" shall include such party's subsidiaries and
other affiliates and the respective directors, officers, employees, agents,
representatives, consultants, accountants, attorneys and advisors of such party
and its affiliates;
(iii) "Company Acquisition Transaction" shall mean any transaction not
contemplated by this Agreement involving:
(A) any sale, lease, exchange, transfer or other disposition of the
assets of the Company or any subsidiary of the Company constituting more than
50% of the consolidated assets of the Company or accounting for more than 50%
of the consolidated revenues of the Company in any one transaction or in a
series of related transactions; or
(B) any offer to purchase, tender offer, exchange offer or any similar
transaction or series of related transactions made by any person, group or
entity involving more than 50% of the outstanding shares of capital stock of
the Company; or
(C) any merger, consolidation, business combination, share exchange,
reorganization or similar transaction or series of related transactions
involving the Company other
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than any transaction which results in the Shareholders of the Company before
the transaction continuing to hold at least 50% of the outstanding voting
securities of the Company after such transaction.
(iv) For purposes of this Section 4.2, "Termination Date" shall mean the
earlier of (i) December 31, 1998, (ii) the Closing Date, (iii) the date Parent
terminates this Agreement, or (iv) the date Parent terminates the commercial
agreement between Parent and Company for any reason other than the Shareholders
of the Company voting against the Merger at the Company Shareholders Meeting
(as defined below).
(b) The Company agrees that prior to and through the Termination Date, it
shall not, directly or indirectly, and shall not authorize or permit any
Associate of the Company to (i) solicit, initiate, encourage or induce the
making, submission or announcement of any Acquisition Proposal or take any
action that could reasonably be expected to lead to an Acquisition Proposal,
(ii) furnish any information regarding the Company or any subsidiary of the
Company to any person, group or entity in connection with or in respect to any
Acquisition Proposal, (iii) continue or engage in discussions with any person,
group or entity with respect to any Acquisition Proposal, (iv) approve, endorse
or recommend any Acquisition Proposal or (v) enter into any letter of intent,
term sheet or similar document or any contract, commitment or other obligation
of any kind contemplating or otherwise relating to any Company Acquisition
Transaction (other than with Parent and Sub). Without limiting the generality
of the foregoing, the Company acknowledges and agrees that any violation of any
of the restrictions set forth in the preceding sentence by an Associate of the
Company shall be deemed to constitute a breach of this Section 4.2. In
addition, the Company agrees that any negotiations with respect to any of the
above activities (other than negotiations with Parent and Sub) in progress as
of the date hereof will be suspended during the period from the date hereof
through the Termination Date. In the event that the Company receives, directly
or indirectly, any Acquisition Proposal, the Company shall immediately notify
Parent thereof, including information as to the identity of the offeror or the
party making any such Acquisition Proposal and the specific terms of such
Acquisition Proposal. The Company agrees that its obligations under this
Section 4.2 are necessary and reasonable in order to protect Parent and its
business, and expressly agrees that monetary damages would be inadequate to
compensate Parent for any breach of this Section 4.2. Accordingly, the Company
agrees and acknowledges that any such violation of threatened violation will
cause irreparable injury to Parent and that, in addition to any other remedies
that may be available, in law, in equity or otherwise, Parent shall be entitled
to obtain injunctive relief against the threatened breach of this Agreement or
the continuation of any such breach, without the necessity of proving damages.
ARTICLE V.
ADDITIONAL AGREEMENTS
5.1 Proxy Statement and Shareholder Information Statement.
(a) The parties hereto acknowledge and agree that the shares of Parent
Common Stock issuable to the Shareholders pursuant to Section 1.7 shall
constitute "restricted securities" within the meaning of Rule 144 under the
Securities Act. The certificates for the shares of Parent Common
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Stock to be issued in the Merger shall bear appropriate legends to identify
such privately placed shares as being restricted under the Securities Act, to
comply with applicable state securities laws and, if applicable, to notice the
restrictions on transfer of such shares. It is acknowledged and understood that
Parent is relying upon certain written representations made by the Shareholders
in the Shareholder Certificate. In order to provide for the registration of the
shares of Parent Common Stock to be issued in the Merger, the parties hereto
shall enter into a separate registration rights agreement ("Registration Rights
Agreement") in the form attached hereto as Exhibit D. As provided in the
Registration Rights Agreement, Parent shall file a Registration Statement on
Form S-3 (to provide for the registered resales of such shares).
(b) Within 30 days prior to the Company Shareholders Meeting, the Company
shall have completed, with the cooperation of Parent, a proxy statement (the
"Proxy Statement"), and Parent shall have completed, with the cooperation of
the Company, a shareholder information statement (the "Shareholder Information
Statement"). Each of Parent and the Company shall provide promptly to the other
such information concerning its business and financial statements and affairs
as, in the reasonable judgment of the providing party or its counsel, may be
required or appropriate for inclusion in the Proxy Statement and the
Shareholder Information Statement, or in any amendments or supplements thereto,
and to cause its counsel and auditors to cooperate with the other's counsel and
auditors in the preparation of the Proxy Statement and Shareholder Information
Statement. The Proxy Statement and the Shareholder Information Statement shall
include information regarding the Company, the terms of the Merger and this
Agreement and the unanimous recommendation of the Board of Directors of the
Company in favor of the Merger. The Company will cause the Proxy Statement and
the Shareholder Information Statement to be delivered to the Shareholders, at
the earliest practicable time after such documents are completed and in no
event later than 20 days prior to the date of the Company Shareholders Meeting
(as defined below).
(c) The Company and Parent will prepare and file any other filings required
under any Blue Sky laws relating to the Merger and the transactions
contemplated by this Agreement (the "Other Filings"). Each of the Company and
Parent will notify the other promptly upon the receipt of any correspondence or
communications from any government officials concerning the Shareholder
Information Statement, the Proxy Statement or any Other Filing and will supply
the other with copies of all correspondence between such party or any of its
representatives, on the one hand, and any other government officials, on the
other hand, with respect to the Shareholder Information Statement, the Proxy
Statement, the Merger or any Other Filing. The Proxy Statement, the Shareholder
Information Statement and the Other Filings will comply in all material
respects with all applicable requirements of law and the rules and regulations
promulgated thereunder. Whenever any event occurs which is required to be set
forth in an amendment or supplement to the Proxy Statement, the Shareholder
Information Statement or any Other Filing, the Company or Parent, as the case
may be, will promptly inform the other of such occurrence and cooperate in
preparing, and mailing to the Shareholders, such amendment or supplement.
(d) The Company shall, pursuant to Oregon Law, and its Articles of
Incorporation and Bylaws, properly notice, convene and hold a shareholder's
meeting to vote on this Agreement and the transactions contemplated hereby on
October 9, 1998 (the "Company Shareholders Meeting"), provided, however, that
such date may be delayed up to sixty (60) days by Parent in the event Parent or
the Company reasonably requires additional time to complete, amend or
supplement the Proxy
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Statement or Shareholder Information Statement or to close the transactions
contemplated by the Agreement and Plan of Reorganization between the Parent,
Starwave Corporation and Disney Enterprises, Inc., as publicly announced on or
about June 18, 1998 (the "Disney Transaction"); provided, further, that the
Company Shareholders Meeting may be held on such other date as Parent and
Company mutually agree. The Company shall use its best efforts to obtain the
vote of its Shareholders sufficient to approve the Merger and this Agreement
and to enable the Closing.
5.2 Access to Information. The Company shall afford Parent and its
accountants, counsel and other representatives, reasonable access during normal
business hours and upon reasonable notice during the period prior to the
Effective Time to (a) all of the Company's properties, books, contracts,
commitments and records, (b) all other information concerning the business,
properties and personnel (subject to restrictions imposed by applicable law) of
the Company as Parent may reasonably request and (c) all Key Employees of the
Company. The Company agrees to provide to Parent and its accountants, counsel
and other representatives copies of internal financial statements (including by
returns and supporting documentation) promptly upon request. Parent shall, at
the Company's request, provide the Company with all documents filed by Parent
with the SEC on a nonconfidential basis prior to the Closing Date and will
respond to other reasonable requests from the Company for other specific,
relevant, nonconfidential information concerning Parent. No information or
knowledge obtained in any investigation pursuant to this Section 5.2 shall
affect or be deemed to modify any representation or warranty contained herein
or the conditions to the obligations of the parties to consummate the Merger.
5.3 Confidentiality. Each of the parties hereto hereby agrees that the
information obtained in any investigation pursuant to Section 5.2, or pursuant
to the negotiation and execution of this Agreement or the effectuation of the
transaction contemplated hereby shall be governed by the terms of the
Standstill Agreement effective as of July 10, 1998 between the Company and
Parent.
5.4 Expenses.
(a) Whether or not the Merger is consummated, except as set forth in
Section 5.4(b), all fees and expenses incurred in connection with the Merger
including, without limitation, all legal, accounting, investment banking,
broker, financial advisory, consulting and all other fees and expenses of third
parties ("Third Party Expenses") incurred by a party in connection with the
negotiation and effectuation of the terms and conditions of this Agreement and
the transactions contemplated hereby, shall be the obligation of the respective
party incurring such fees and expenses.
(b) In the event that the Merger is consummated, Parent agrees to pay those
Third Party Expenses incurred by the Company and paid by or payable to Lisa
Gansky, the Company's legal counsel and the Company's accountants, and Parent
shall have full recourse to the Escrow Fund (as defined herein) for payment of
all Third Party Expenses incurred by the Company exceeding the Estimated Third
Party Expenses (but only to the extent the actual Third Party Expenses exceed
$310,000). The Company shall not, however, be obligated to refund or otherwise
pay any amounts into the Escrow Fund or to the Shareholders in the event that
the actual Third Party Expenses are less than the Estimated Third Party
Expenses and/or less than $310,000.
(c) In the event that the Merger is consummated, the Parent agrees to pay
the Third Party Expenses incurred by the Company in connection with the audit
of the Company's financial statements and preparation of the letter described
in Section 6.3(p) (if requested).
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5.5 Public Disclosure. Unless otherwise required by law, prior to the
Effective Time, no disclosure (whether or not in response to an inquiry) of the
subject matter of this Agreement shall be made by any party hereto unless
approved by Parent regarding the subject matter of this Agreement prior to
release. Any public announcement by Parent regarding the subject matter of this
Agreement shall be delivered to the Company prior to release.
5.6 Consents. The Company shall use its best efforts to obtain the consents,
waivers, assignments and approvals under any of the Contracts as may be
required in connection with the Merger (all of such consents, waivers and
approvals are set forth in the Disclosure Schedule) so as to preserve all
rights of, and benefits to, the Company thereunder.
5.7 FIRPTA Compliance. On the Closing Date, the Company shall deliver to
Parent a properly executed statement in a form reasonably acceptable to Parent
for purposes of satisfying Parent's obligations under Treasury Regulation
Section 1.1445-2(c)(3).
5.8 Reasonable Efforts. Subject to the terms and conditions provided in this
Agreement, each of the parties hereto shall use commercially reasonable efforts
to take promptly, or cause to be taken, all actions, and to do promptly, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated hereby, to obtain all necessary waivers, consents and approvals
and to effect all necessary registrations and filings and to remove any
injunctions or other impediments or delays, legal or otherwise, in order to
consummate and make effective the transactions contemplated by this Agreement
for the purpose of securing to the parties hereto the benefits contemplated by
this Agreement; provided that Parent shall not be required to agree to any
divestiture by Parent or the Company or any of Parent's subsidiaries or
affiliates of shares of capital stock or of any business, assets or property of
Parent or its subsidiaries or affiliates or of the Company, its affiliates, or
the imposition of any material limitation on the ability of any of them to
conduct their businesses or to own or exercise control of such assets,
properties and stock.
5.9 Notification of Certain Matters. The Company shall give prompt notice to
Parent of: (i) the occurrence or nonoccurrence of any event, the occurrence or
nonoccurrence of which is likely to cause any representation or warranty of the
Company or the Principal Shareholders contained in this Agreement to be untrue
or inaccurate at or prior to the Effective Time and (ii) any failure of the
Company or the Principal Shareholders, as the case may be, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied
by it hereunder; provided, however, that the delivery of any notice pursuant to
this Section 5.9 shall not limit or otherwise affect any remedies available to
the party receiving such notice. No disclosure by the Company pursuant to this
Section 5.9, however, shall be deemed to amend or supplement the Disclosure
Schedule or prevent or cure any misrepresentations, breach of warranty or
breach of covenant.
5.10 Additional Documents and Further Assurances. Each party hereto, at the
request of another party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary
or desirable for effecting completely the consummation of this Agreement and
the transactions contemplated hereby.
5.11 Termination of Employment Agreements. The Company agrees to terminate
all employment agreements immediately prior to the Closing Date (other than the
employment
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agreements contemplated by this Agreement); provided, however, that all
provisions of such agreements relating to confidentiality and invention
assignment shall not be terminated and shall survive the termination of such
agreements indefinitely and provided that the Company shall not be required to
terminate any employment agreement with any at-will employee.
5.12 Non-Disclosure Agreements. Company agrees to use its best efforts to
cause all of its current employees and consultants to execute, to the extent
they have not already done so, a Non-Disclosure Agreement (with Intellectual
Property assignment provisions) in substantially the form currently used by the
Company.
5.13 Employee Compensation; Relocation. Each employee of the Company who
remains an employee of Parent after the Effective Time shall be eligible, upon
completion of Parent's standard employee background and reference check, to
receive salary and benefits (such as medical benefits, bonuses, 401(k) and
stock options) consistent with Parent's standard human resource policies. The
expected total employee compensation package to be given to each employee of
the Company after the Merger shall be substantially as described on Schedule A
hereto. In the event that Parent relocates the Company's operations to the Bay
Area within two (2) years after the Closing Date, Parent will pay the
reasonable and properly documented relocation expenses of all current employees
of the Company that relocate to the Bay Area with the Company and/or Surviving
Corporation; provided, however, that the Parent's aggregate obligation to pay
relocation expenses under this section shall not exceed $100,000.
5.14 Affiliate Agreements. Schedule 5.14 sets forth those persons who, in the
Company's reasonable judgment, are or may be "affiliates" of the Company within
the meaning of Rule 145 (each such person a "Rule 145 Affiliate") promulgated
under the Securities Act ("Rule 145"). The Company shall provide Parent such
information and documents as Parent shall reasonably request for purposes of
reviewing such list. The Company shall deliver or cause to be delivered to
Parent, concurrently with the execution of this Agreement (and in any case
prior to the Closing Date) from each of the Rule 145 Affiliates of the Company,
an executed Affiliate Agreement ("Affiliate Agreement") in the form attached
hereto as Exhibit E, each of which will be in full force and effect as of the
Effective Time. Parent and Sub shall be entitled to place appropriate legends
on the certificates evidencing any Parent Common Stock to be received by such
Affiliates pursuant to the terms of this Agreement, and to issue appropriate
stop transfer instructions to the transfer agent for Parent Common Stock,
consistent with the terms of such Affiliate Agreements.
5.15 Tax-Free Reorganization. The parties intend to adopt this Agreement and
the Merger as a tax-free plan of reorganization under Section 368(a)(1)(A) of
the Code by virtue of the provisions of Section 368(a)(2)(E) of the Code. The
Parent Common Stock issued in the Merger will be issued solely in exchange for
the Company Capital Stock, and no other transaction other than the Merger
represents, provides for or is intended to be an adjustment to the
consideration paid for the Company Capital Stock. No consideration that could
constitute "other property" within the meaning of Section 356(b) of the Code is
being transferred by Parent for the Company Capital Stock in the Merger. The
parties shall not take a position on any tax return inconsistent with this
Section 5.15. From and after the Closing, neither Parent, Sub nor the Company
shall take any action that could reasonably be expected to cause the Merger not
to be treated as a reorganization within the meaning of Section 368 of the
Code.
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5.16 Pooling Accounting. Company shall, to the extent possible, cause the
business combination to be effected by the Merger to be accounted for as a
pooling of interests. Company shall, to the extent possible, cause its
Affiliates not to take any action that would adversely affect the ability of
Parent to account for the business combination to be effected by the Merger as
a pooling of interests.
5.17 Loan. Upon the execution of this Agreement Parent shall loan $360,000 to
the Company (the "Company Loan") in the form of a check payable to the Company.
The Company Loan shall be evidenced by a secured promissory note substantially
in the form of Exhibit H (the "Promissory Note").
5.18 Directors' and Officers' Indemnification.
(a) From and after the Effective Time, Parent shall: (i) assume, as of the
Effective Time, all obligations of the Company under Article 7 of the Company's
Articles of Incorporation, as currently in effect, and (ii) to pay all amounts
that become due and payable under such provisions.
(b) This Section 5.18 shall survive the consummation of the Merger, is
intended to benefit the Company, the Surviving Company and each indemnified
party, shall be binding, jointly and severally, on all successors and assigns
of the Surviving Corporation and Parent, and shall be enforceable by the
indemnified parties.
5.19 S-8 Registration. Not later than thirty (30) days after the Closing
Date, Parent shall prepare and file with the Securities and Exchange Commission
a registration statement on Form S-8 (or another appropriate form) registering
a number of shares of Parent Common Stock equal to the number of shares of
Parent Common Stock subject to Assumed Options. Such registration statement
shall be kept effective (and the current status of the prospectus or
prospectuses required thereby shall be maintained) at least for so long as any
Assumed Options may remain outstanding.
ARTICLE VI.
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) No Injunction or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court
of competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Merger shall be in effect, nor shall any proceeding
brought by an administration, agency or commission or other governmental
authority or instrumentality, domestic or foreign, seeking any of the foregoing
be pending; nor shall there be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Merger, which makes the consummation of the Merger illegal.
(b) Governmental Approval. Approvals from Governmental Entities (if any)
deemed appropriate or necessary by any party to this Agreement shall have been
timely obtained.
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(c) Litigation. There shall be no bona fide action, suit, claim or
proceeding of any nature pending, or overtly threatened, against Parent, Sub,
the Company or the Principal Shareholders, their respective properties or any
of their officers, directors, arising out of, or in any way connected with, the
Merger or the other transactions contemplated by the terms of this Agreement.
(d) No Order; HSR Act. No Governmental Entity shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, executive
order, decree, injunction or other order (whether temporary, preliminary or
permanent) which is in effect and which has the effect of making the Merger
illegal or otherwise prohibiting consummation of the Merger. All waiting
periods under the HSR Act relating to the transactions contemplated hereby (if
any) will have expired or terminated early.
(e) Tax Opinions. Parent and the Company shall each have received written
opinions from their respective tax counsel (Wilson Sonsini Goodrich & Rosati,
P.C. and Pillsbury Madison & Sutro LLP, respectively), in form and substance
reasonably satisfactory to them, to the effect that the Merger will constitute
a reorganization within the meaning of Section 368(a) of the Code and such
opinions shall not have been withdrawn; provided, however, that if counsel to
either Parent or the Company does not render such opinion, this condition shall
nonetheless be deemed to be satisfied with respect to such party if the other
party's counsel renders such opinion to such party. The parties to this
Agreement agree to make reasonable representations as requested by such counsel
for the purpose of rendering such opinions.
6.2 Additional Conditions to Obligations of Company and the Principal
Shareholders. The obligations of the Company and the Principal Shareholders to
consummate and effect this Agreement and the transactions contemplated hereby
shall be subject to the satisfaction at or prior to the Closing Date of each of
the following conditions, any of which may be waived, in writing, exclusively
by the Company:
(a) Representations, Warranties and Covenants. The representations and
warranties of Parent and Sub in this Agreement shall be true and correct in all
material respects on and as of the Effective Time as though such
representations and warranties were made on and as of such time and each of
Parent and Sub shall have performed and complied in all material respects with
all covenants and obligations of this Agreement required to be performed and
complied with by it as of the Effective Time.
(b) Legal Opinion. Company shall have received a legal opinion from Wilson,
Sonsini, Goodrich & Rosati, Professional Corporation, in form and substance
reasonably satisfactory to the Company, concerning Parent's issuance of the
Parent Common Stock in the Merger.
(c) Registration Rights Agreement. The Parent shall have executed and
delivered the Registration Rights Agreement to the Shareholder Representative.
(d) Employment and Noncompetition Agreements. The Parent shall have
executed and delivered to each Key Employee his or her Employment Agreement and
all of such Employment Agreements shall be in full force and effect.
(e) Consents Obtained. All material consents, waivers, approvals,
authorizations or orders required to be obtained, and all filings required to
be made, by Parent and Sub for the due authorization, execution and delivery of
this Agreement and the consummation by them of the transactions contemplated
hereby shall have been obtained and made by Parent and Sub.
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(f) Employee Offers. Parent shall have made offers of employment as set
forth in Section 5.13 and shall not have withdrawn such offers of employment.
(g) Certificate of Parent. The Company shall have been provided with a
certificate executed on behalf of Parent by a Vice President of Parent to the
effect that, as of the Effective Time:
(i) all representations and warranties made by Parent and Sub in this
Agreement are true and correct in all material respects on and as of the
Effective Time as though such representations and warranties were made on and
as of such time; and
(ii) all covenants and obligations of this Agreement to be performed by
Parent on or before such date have been so performed in all material respects.
6.3 Additional Conditions to the Obligations of Parent and Sub. The
obligations of Parent and Sub to consummate and effect this Agreement and the
transactions contemplated hereby shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, exclusively by Parent:
(a) Representations, Warranties and Covenants. The representations and
warranties of the Company and the Principal Shareholders (as modified by the
Disclosure Schedule) in this Agreement shall be true and correct in all
material respects on and as of the Effective Time as though such
representations and warranties were made on and as of the Effective Time
(except to the extent such representations and warranties have been modified by
actions of the Company not prohibited by Section 4.1) and the Company and the
Principal Shareholders shall have performed and complied in all material
respects with all covenants and obligations of this Agreement required to be
performed and complied with by it as of the Effective Time.
(b) Claims. There shall not have occurred any claims (whether or not
asserted in litigation) which may materially and adversely affect the
consummation of the transactions contemplated hereby or may have a Material
Adverse Effect on the Company.
(c) Third Party Consents. Any and all consents, waivers, assignments and
approvals listed in the Disclosure Schedule shall have been obtained.
(d) Legal Opinion. Parent shall have received a legal opinion from counsel
to the Company in form and substance reasonably satisfactory to Parent.
(e) Registration Rights Agreement. Each Shareholder shall have executed
and delivered the Registration Rights Agreement to Parent.
(f) Employment and Noncompetition Agreements. Each of the Key Employees
shall each have executed and delivered to Parent their respective Employment
Agreement in the forms attached hereto as Exhibits G-1 and G-2 (the "Employment
Agreements") and all of such Employment Agreements shall be in full force and
effect. In addition, each of the Key Employees shall be an employee of the
Company on the Closing Date.
(g) Shareholder Certificate. Each Shareholder and holder of Company
Options shall have executed and delivered to Parent a Shareholder Certificate.
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(h) No Material Adverse Changes. Except as set forth in the Disclosure
Schedule, there shall not have occurred any material adverse change in the
business, assets (including intangible assets), results of operations,
liabilities (contingent or accrued) or financial condition of the Company since
the date of this Agreement.
(i) Shareholder Approval. Shareholders holding at least ninety percent
(90%) of the Company's Capital Stock shall have approved this Agreement, the
Merger and the transactions contemplated hereby and thereby, and holders of not
more than ten percent (10%) of Company Capital Stock shall continue to have a
right to exercise appraisal, dissenters or similar rights under applicable law
with respect to their Company Capital Stock by virtue of the Merger.
(j) Affiliate Agreements. Each of the persons listed in Section 5.14 of
the Disclosure Schedule shall have executed an Affiliate Agreement.
(k) Contracts. Except as set forth in paragraphs (1), (m), and (n) of this
Section 6.3 below and Schedule 6.3(k), each Contract listed in Sections 2.13(g)
and 2.14(a) of the Disclosure Schedule shall be in full force and effect and
the Company shall not have received notice of termination of any such Contract.
(l) Termination of Registration Rights and Covenants, Warrants and
Convertible Debt. All registration rights relating to the Company Capital Stock
and all covenants of the Company contained in the Series A Preferred Stock
Purchase Agreement(s) between the Company and certain investors and the Series
B Stock Purchase Agreement(s) between the Company and certain investors shall
have been terminated. All warrants and other rights to purchase Company Capital
Stock (other than assumed Company Options) shall have been exercised or
otherwise terminated and all debt of the Company convertible into Company
Capital Stock shall have been converted. Parent shall have received evidence
that as of the Effective Time each unexercised Company warrant shall have been
exercised or terminated and all convertible securities (debt or equity) shall
have been exercised or converted into Company Common Stock to the satisfaction
of Parent.
(m) Termination of Employment Agreements. All employment agreements
between the Company and any other person shall have been terminated as
contemplated in Section 5.11.
(n) Closing Balance Sheet. Parent shall have received from the Company at
least three business days prior to the Closing Date the Estimated Balance
Sheet.
(o) Estimated Third Party Expenses. Parent shall have received from the
Company at least three business days prior to the Closing Date a detailed
schedule of the Estimated Third Party Expenses paid or payable by the Company
certified as to correctness by the Company and the Principal Shareholders and
in a form reasonably satisfactory to Parent.
(p) Opinion of Accountants. If Parent determines that it is appropriate to
characterize the Merger as a pooling of interests, Parent and the Company shall
have received a letter from Ernst & Young LLP, dated within two (2) business
days prior to the Closing Date, regarding its concurrence with Parent's and the
Company's managements' conclusions as to the appropriateness of pooling of
interest accounting for the Merger under Accounting Principles Board Opinion
No. 16, if the Merger is consummated in accordance with this Agreement.
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(q) Certificate of the Company. Parent shall have been provided with a
certificate executed on behalf of the Company by its Chief Executive Officer
and its Chief Financial Officer to the effect that, as of the Effective Time:
(i) all representations and warranties made by the Company and the
Principal Shareholders in this Agreement are true and correct in all material
respects on and as of the Effective Time as though such representations and
warranties were made on and as of such time;
(ii) all covenants and obligations of this Agreement to be performed by
the Company on or before such date have been so performed in all material
respects; and
(iii) the provisions set forth in Sections 6.3(b), (c), (h), (i), (k),
(l) and (m) have been satisfied.
ARTICLE VII.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
7.1 Survival of Representations and Warranties. All of the Company's and
Shareholder's representations and warranties in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Merger and
continue until the earlier of: (a) the date which is the date of the auditor's
report for the first audit of Parent's financial statements after the Closing
Date or (b) the date which is one year following the Closing Date (the
"Expiration Date"). All of Parent's and Sub's representations and warranties
contained herein or in any instrument delivered pursuant to this Agreement
shall survive for one (1) year following the Closing.
7.2 Indemnification; Escrow Arrangements.
(a) Indemnification. Each Shareholder jointly and severally agrees to
indemnify and hold Parent, Sub and their officers, directors and affiliates
(the "Indemnified Parties") harmless against all claims, losses, liabilities,
damages, deficiencies, costs and expenses, including reasonable attorneys' fees
and expenses of investigation (hereinafter individually a "Loss" and
collectively "Losses") incurred by the Indemnified Parties directly or
indirectly as a result of: (i) any inaccuracy or breach of a representation or
warranty of the Company a certificate of any officer of the Company delivered
pursuant to this Agreement, or a Shareholder Certificate, (ii) any failure by
the Company or a Shareholder to perform or comply with any covenant contained
in this Agreement, (iii) any dispute between the Company and the individual
named in Section 2.9(n) of the Disclosure Schedule, (iv) the Net Liabilities
exceeding the greater of the Estimated Net Liabilities or $405,739, or (v) the
Third Party Expenses incurred by the Company exceeding the greater of the
Estimated Third Party Expenses or $310,000; provided, however, that, except as
set forth in Sections 7.2(b) and 7.5, the aggregate amount for which the
Shareholders are required to indemnify the Indemnified Parties shall not exceed
the amount deposited in the Escrow Fund (as defined below). The Escrow Fund
shall be available to compensate the Indemnified Parties for any such Losses.
The Shareholders shall not have any right of contribution from the Company with
respect to any Loss claimed by Parent after the Effective Time. Nothing herein
shall limit the liability of the Company or either of the Principal
Shareholders for any breach of any representation, warranty or covenant if the
Merger is not consummated.
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(b) Principal Shareholder's Indemnification Cap. In addition to the amounts
contained in the Escrow Fund, but only to the extent certain Losses (as
specified below) have not been satisfied by the Escrow Fund, each of the
Principal Shareholders shall severally but not jointly indemnify the
Indemnified Parties during the Escrow Period for Losses incurred directly or
indirectly as a result of: (i) any inaccuracy or breach of a representation or
warranty of the Company relating to Capital Structure (Section 2.3), Tax
Matters (Section 2.10) and Intellectual Property (Section 2.13) or such
Principal Shareholder's Affiliate Agreement, (ii) any dispute between the
Company and the individual named in Section 2.9(n) of the Disclosure Schedule,
up to an amount equal to ten percent (10%) of their respective portions of the
Merger Consideration (the "Principal Shareholders' Indemnification Cap"). At
the election of each individual Principal Shareholder, such indemnity may be
paid in cash or Parent Common Stock, which shall be valued at the Trading
Price.
(c) Escrow Fund. As partial security for the indemnity provided for in
Section 7.2(a) and by virtue of this Agreement, the Shareholders will be deemed
to have received and deposited with the Escrow Agent (as defined below) the
Escrow Amount (plus any additional shares as may be issued upon any stock
split, stock dividend or recapitalization effected by Parent after the
Effective Time with respect to the Escrow Amount) without any act of any
Shareholder. As soon as practicable after the Effective Time, the Escrow
Amount, without any act of any Shareholder, will be deposited with U.S. Bank
Trust, N.A. (or other institution acceptable to Parent and the Shareholder
Representative (as defined in Section 7.4) as Escrow Agent (the "Escrow
Agent"), such deposit to constitute an escrow fund (the "Escrow Fund") to be
governed by the terms set forth herein. The Escrow Agent may execute this
Agreement following the date hereof and prior to the Effective Time, and such
later execution, if so executed after the date hereof, shall not affect the
binding nature of this Agreement as of the date hereof between the other
signatories hereto. The portion of the Escrow Amount contributed on behalf of
each Shareholder shall be in proportion to the aggregate Parent Common Stock
which such holder would otherwise be entitled under Section 1.7.
(d) Escrow Period; Distribution upon Termination of Escrow Periods. Subject
to the following requirements, the Escrow Fund shall be in existence
immediately following the Effective Time and shall terminate at 5:00 p.m.,
Sunnyvale, California local time on the Expiration Date (the "Escrow Period");
provided, however, that the Escrow Period shall not terminate with respect to
any amount which, in reasonable judgement of Parent, is necessary to satisfy
any unsatisfied claims specified in any Officer's Certificate (as defined
below) delivered to the Escrow Agent prior to termination of such Escrow Period
with respect to facts and circumstances existing prior to the termination of
such Escrow Period. As soon as all such claims have been resolved, the Escrow
Agent shall deliver to the Shareholders the remaining portion of the Escrow
Fund not required to satisfy such claims. Deliveries of Escrow Amounts to the
Shareholders pursuant to this Section 7.2 shall be made in proportion to their
respective original contributions to the Escrow Fund.
(e) Protection of Escrow Fund.
(i) The Escrow Agent shall hold and safeguard the Escrow Fund during the
Escrow Period, shall treat such fund as a trust fund in accordance with the
terms of this Agreement and not as the property of Parent and shall hold and
dispose of the Escrow Fund only in accordance with the terms hereof.
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(ii) Any shares of Parent Common Stock or other equity securities issued
or distributed by Parent (including shares issued upon a stock split) ("New
Shares") in respect of Parent Common Stock in the Escrow Fund which have not
been released from the Escrow Fund shall be added to the Escrow Fund and become
a part thereof. New Shares issued in respect of shares of Parent Common Stock
which have been released from the Escrow Fund shall not be added to the Escrow
Fund but shall be distributed to the record holders thereof. Cash dividends on
Parent Common Stock shall not be added to the Escrow Fund but shall be
distributed to the record holders thereof.
(iii) Each Shareholder shall have voting rights and the right to
distributions of cash dividends with respect to the shares of Parent Common
Stock contributed to the Escrow Fund by such Shareholder (and on any voting
securities added to the Escrow Fund in respect of such shares of Parent Common
Stock). As the record holder of such shares, the Escrow Agent shall vote such
shares in accordance with the instructions of the Shareholders having the
beneficial interest therein and shall promptly deliver copies of all proxy
solicitation materials to such Shareholders.
(f) Claims Upon Escrow Fund.
(i) Upon receipt by the Escrow Agent at any time on or before the last
day of the Escrow Period of a certificate signed by any officer of Parent (an
"Officer's Certificate"): (A) stating that Parent has paid or properly accrued
or, with respect to third-party claims of which Parent, the Company or the
Surviving Corporation has received notice, reasonably anticipates that it will
have to pay or accrue Losses, and (B) specifying in reasonable detail the
individual items of Losses included in the amount so stated, the date each such
item was paid or properly accrued, or the basis for such anticipated liability,
and the nature of the misrepresentation, breach of warranty or covenant to
which such item is related, the Escrow Agent shall, subject to the provisions
of Section 7.2(e) hereof, deliver to Parent out of the Escrow Fund, as promptly
as practicable, shares of Parent Common Stock held in the Escrow Fund with a
value equal to such Losses; provided, however, that in the event of a third
party claim that is the subject of the demand on the Escrow Fund, no shares
shall be delivered out of the Escrow Fund until the claim is settled or
adjudicated.
(ii) For the purposes of determining the number of shares of Parent
Common Stock to be delivered to Parent out of the Escrow Fund as indemnity
pursuant to Section 7.2(f)(i) hereof, the shares of Parent Common Stock shall
be valued at the Trading Price.
(g) Objections to Claims. At the time of delivery of any Officer's
Certificate to the Escrow Agent, a duplicate copy of such certificate shall be
delivered to the Shareholder Representative, and for a period of thirty (30)
days after such delivery, the Escrow Agent shall make no delivery to Parent of
any Escrow Amounts pursuant to Section 7.2(d) hereof unless the Escrow Agent
shall have received written authorization from the Shareholder Representative
to make such delivery. After the expiration of such thirty (30) day period, the
Escrow Agent shall make delivery of shares of Parent Common Stock from the
Escrow Fund in accordance with Section 7.2(d) hereof; provided, however, that
no such payment or delivery may be made if the Shareholder Representative shall
object in a written statement to the claim made in the Officer's Certificate,
and such statement shall have been delivered to the Escrow Agent prior to the
expiration of such thirty (30) day period.
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(h) Resolution of Conflicts; Arbitration.
(i) In case the Shareholder Representative shall object in writing to any
claim or claims made in any Officer's Certificate, the Shareholder
Representative and Parent shall attempt in good faith to agree upon the rights
of the respective parties with respect to each of such claims. If the
Shareholder Representative and Parent should so agree, a memorandum setting
forth such agreement shall be prepared and signed by both parties and shall be
furnished to the Escrow Agent. The Escrow Agent shall be entitled to rely on
any such memorandum and distribute shares of Parent Common Stock from the
Escrow Fund in accordance with the terms thereof.
(ii) If no such agreement can be reached after good faith negotiation,
either Parent or the Shareholder Representative may demand arbitration of the
matter unless the amount of the damage or Loss is at issue in pending
Litigation with a third party, in which event arbitration shall not be
commenced until such amount is ascertained or both parties agree to
arbitration; and in either such event the matter shall be settled by
arbitration conducted by one arbitrator mutually agreeable to Parent and the
Shareholder Representative. In the event that within forty-five (45) days after
submission of any dispute to arbitration, Parent and the Shareholder
Representative cannot mutually agree on one arbitrator, Parent and the
Shareholder Representative shall each select one arbitrator, and the two
arbitrators so selected shall select a third arbitrator. The arbitrator or
arbitrators, as the case may be, shall set a limited time period and establish
procedures designed to reduce the cost and time for discovery while allowing
the parties an opportunity, adequate in the sole judgement of the arbitrator or
majority of the three arbitrators, as the case may be, to discover relevant
information from the opposing parties about the subject matter of the dispute.
The arbitrator or a majority of the three arbitrators, as the case may be,
shall rule upon motions to compel or limit discovery and shall have the
authority to impose sanctions, including attorneys' fees and costs, to the
extent as a competent court of law or equity, should the arbitrators or a
majority of the three arbitrators, as the case may be, determine that discovery
was sought without substantial justification or that discovery was refused or
objected to without substantial justification. The decision of the arbitrator
or a majority of the three arbitrators, as the case may be, as to the validity
and amount of any claim in such Officer's Certificate shall be binding and
conclusive upon the parties to this Agreement. Such decision shall be written
and shall be supported by written findings of fact and conclusions which shall
set forth the award, judgment, decree or order awarded by the arbitrator(s).
(iii) Judgment upon any award rendered by the arbitrator(s) may be
entered in any court having jurisdiction. Any such arbitration shall be held in
Santa Clara County, California, under the rules then in effect of the American
Arbitration Association. The arbitrator(s) shall determine how all expenses
relating to the arbitration shall be paid, including without limitation, the
respective expenses of each party, the fees of each arbitrator and the
administrative fee of the American Arbitration Association.
(i) Third-Party Claims. In the event Parent becomes aware of a third-party
claim which Parent believes may result in a demand against the Escrow Fund,
Parent shall notify the Shareholder Representative of such claim, and the
Shareholders shall be entitled, at their expense, to participate in any defense
of such claim. Parent may not settle any such claim without the consent of the
Shareholder Representative, which consent shall not be unreasonably withheld or
delayed. In the event that the Shareholder Representative has consented to any
such settlement, the Shareholders
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shall have no power or authority to object under any provision of this Article
VII to the amount of any claim by Parent against the Escrow Fund with respect
to such settlement.
7.3 Escrow Agent.
(a) Escrow Agent's Duties.
(i) The Escrow Agent shall be obligated only for the performance of such
duties as are specifically set forth herein, and as set forth in any additional
written escrow instructions which the Escrow Agent may receive after the date
of this Agreement which are signed by an officer of Parent and the Shareholder
Representative, and may rely and shall be protected in relying or refraining
from acting on any instrument reasonably believed to be genuine and to have
been signed or presented by the proper party or parties. The Escrow Agent shall
not be liable for any act done or omitted hereunder as Escrow Agent while
acting in good faith and in the exercise of reasonable judgment, and any act
done or omitted pursuant to the advice of counsel shall be conclusive evidence
of such good faith.
(ii) The Escrow Agent is hereby expressly authorized to disregard any and
all warnings given by any of the parties hereto or by any other person,
excepting only orders or process of courts of law or of the arbitrator(s)
appointed pursuant to Schedule 7.3(a)(ii), and is hereby expressly authorized
to comply with and obey orders, judgments or decrees of any court or of the
arbitrator(s) appointed pursuant to Schedule 7.3(a)(ii). In case the Escrow
Agent obeys or complies with any such order, judgment or decree of any court or
of the arbitration panel appointed by Schedule 7.3(a)(ii), the Escrow Agent
shall not be liable to any of the parties hereto or to any other person by
reason of such compliance, notwithstanding any such order, judgment or decree
being subsequently reversed, modified, annulled, set aside, vacated or found to
have been entered without jurisdiction.
(iii) The Escrow Agent shall not be liable in any respect on account of
the identity, authority or rights of the parties executing or delivering or
purporting to execute or deliver this Agreement or any documents or papers
deposited or called for hereunder.
(iv) The Escrow Agent shall not be liable for the expiration of any
rights under any statute of limitations with respect to this Agreement or any
documents deposited with the Escrow Agent.
(v) In performing any duties under the Agreement, the Escrow Agent shall
not be liable to any party for damages, losses, or expenses, except for
negligence or willful misconduct on the part of the Escrow Agent. The Escrow
Agent shall not incur any such liability for any action taken or omitted in
reliance upon any instrument, including any written statement of affidavit
provided for in this Agreement that the Escrow Agent shall in good faith
believe to be genuine, nor will the Escrow Agent be liable or responsible for
forgeries, fraud, impersonations, or determining the scope of any
representative authority. In addition, the Escrow Agent may consult with the
legal counsel in connection with Escrow Agent's duties under this Agreement and
shall be fully protected in any act taken, suffered, or permitted by him/her in
good faith in accordance with the advice of counsel. The Escrow Agent is not
responsible for determining and verifying the authority of any person acting or
purporting to act on behalf of any party to this Agreement.
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(vi) If any controversy arises between the parties to this Agreement, or
with any other party, concerning the subject matter of this Agreement, its
terms or conditions, the Escrow Agent will not be required to determine the
controversy or to take any action regarding it. The Escrow Agent may hold all
documents and shares of Parent Common Stock and may wait for settlement of any
such controversy by final appropriate legal proceedings or other means as, in
the Escrow Agent's discretion, the Escrow Agent may be required, despite what
may be set forth elsewhere in this Agreement. In such event, the Escrow Agent
will not be liable for damage. Furthermore, the Escrow Agent may at its option,
file an action of interpleader requiring the parties to answer and litigate any
claims and rights among themselves. The Escrow Agent is authorized to deposit
with the clerk of the court all documents and shares of Parent Common Stock
held in escrow, except all cost, expenses, charges and reasonable attorney fees
incurred by the Escrow Agent due to the interpleader action and which the
parties jointly and severally agree to pay. Upon initiating such action, the
Escrow Agent shall be fully released and discharged of and from all obligations
and liability imposed by the terms of this Agreement.
(vii) The parties and their respective successors and assigns agree
jointly and severally to indemnify and hold Escrow Agent harmless against any
and all losses, claims, damages, liabilities, and expenses, including
reasonable costs of investigation, counsel fees, including allocated costs of
in-house counsel and disbursements that may be imposed on Escrow Agent or
incurred by Escrow Agent in connection with the performance of his/her duties
under this Agreement, including but not limited to any Litigation arising from
this Agreement or involving its subject matter other than arising out of its
negligence or willful misconduct.
(viii) The Escrow Agent may resign at any time upon giving at least
thirty (30) days written notice to the parties; provided, however, that no such
resignation shall become effective until the appointment of a successor escrow
agent which shall be accomplished as follows: the parties shall use their best
efforts to mutually agree on a successor escrow agent within thirty (30) days
after receiving such notice. If the parties fail to agree upon a successor
escrow agent within such time, the Escrow Agent shall have the right to appoint
a successor escrow agent authorized to do business in the State of California.
The successor escrow agent shall execute and deliver an instrument accepting
such appointment and it shall, without further acts, be vested with all the
estates, properties, rights, powers, and duties of the predecessor escrow agent
as if originally named as escrow agent. Upon appointment of a successor escrow
agent, the Escrow Agent shall be discharged from any further duties and
liability under this Agreement.
(b) Fees. All fees of the Escrow Agent for performance of its duties
hereunder shall be paid by Parent in accordance with the standard fee schedule
of the Escrow Agent. It is understood that the fees and usual charges agreed
upon for services of the Escrow Agent shall be considered compensation for
ordinary services as contemplated by this Agreement. In the event that the
conditions of this Agreement are not promptly fulfilled, or if the Escrow Agent
renders any service not provided for in this Agreement, or if the parties
request a substantial modification of its terms, or if any controversy arises,
or if the Escrow Agent is made a party to, or intervenes in, any Litigation
pertaining to the Escrow Fund or its subject matter, the Escrow Agent shall be
reasonably compensated for such extraordinary services and reimbursed for all
costs, attorney's fees, including allocated costs of in-house counsel, and
expenses occasioned by such default, delay, controversy or Litigation.
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(c) Consequential Damages. In no event shall the Escrow Agent be liable
for special, indirect or consequential loss or damage of any kind whatsoever
(including but not limited to lost profits), even if the Escrow Agent has been
advised of the likelihood of such loss or damage and regardless of the form of
action.
(d) Successor Escrow Agents. Any corporation into which the Escrow Agent
in its individual capacity may be merged or converted or with which it may be
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Escrow Agent in its individual capacity shall be a
party, or any corporation to which substantially all the corporate trust
business of the Escrow Agent in its individual capacity may be transferred,
shall be the Escrow Agent under this Escrow Agreement without further act.
7.4 Shareholder Representative.
(a) In the event that the Merger is approved, effective upon such vote,
and without further act of any Shareholder, Stanton R. Koch shall be appointed
as agent and attorney-in-fact (the "Shareholder Representative") for each
Shareholder, for and on behalf of the Shareholders, to give and receive notices
and communications, to authorize delivery to Parent of shares of Parent Common
Stock from the Escrow Fund in satisfaction of claims by Parent, to object to
such deliveries, to agree to, negotiate, enter into settlements and compromises
of, and demand arbitration and comply with orders of courts and awards of
arbitrators with respect to such claims, and to take all actions necessary or
appropriate in the judgment of the Shareholder Representative for the
accomplishment of the foregoing. Such agency may be changed by the Shareholders
from time to time upon not less than thirty (30) days prior written notice to
Parent; provided, however, that the Shareholder Representative may not be
removed unless holders of a majority in interest in the Escrow Fund agree to
such removal and to the identity of the substituted agent. Any vacancy in the
position of Shareholder Representative may be filled by approval of the holders
of a majority in interest in the Escrow Fund. No bond shall be required of the
Shareholder Representative, and the Shareholder Representative shall not
receive compensation for his or her services. Notices or communications to or
from the Shareholder Representative shall constitute notice to or from each of
the Shareholders.
(b) The Shareholder Representative shall not be liable for any act done or
omitted hereunder as Shareholder Representative while acting without gross
negligence, bad faith and willful misconduct. The Shareholders on whose behalf
the Escrow Amount was contributed to the Escrow Fund shall severally indemnify
the Shareholder Representative and hold the Shareholder Representative harmless
against any loss, liability or expense incurred without gross negligence, bad
faith or willful misconduct on the part of the Shareholder Representative and
arising out of or in connection with the acceptance or administration of the
Shareholder Representative's duties hereunder, including the reasonable fees
and expenses of any legal counsel retained by the Shareholder Representative.
(c) A decision, act, consent or instruction of the Shareholder
Representative shall constitute a decision of all Shareholders for whom a
portion of the Escrow Amount otherwise issuable to them are deposited in the
Escrow Fund and shall be final, binding and conclusive upon each of such
Shareholders, and the Escrow Agent and Parent may rely upon any such decision,
act, consent or instruction of the Shareholder Representative as being the
decision, act, consent or instruction of each and every such Shareholder. The
Escrow Agent and Parent are hereby relieved from any liability to
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any person for any acts done by them in accordance with such decision, act,
consent or instruction of the Shareholder Representative.
7.5 Maximum Payments; Remedy; Violation of Third Party Patent Rights. Except
as otherwise provided in this Section 7.5, from and after the Effective Time
this Article VII shall provide the sole and exclusive remedy for any and all
damages or other liability sustained or incurred by the Indemnified Parties or
their successors and assigns as the result of any breach of any representation,
warranty or covenant contained in this Agreement or any claim of negligent
misrepresentation against the Company or the Principal Shareholders in
connection with this Agreement or the Merger. Notwithstanding anything to the
contrary herein, the existence of this Article VII and of the rights and
restrictions set forth herein do not limit any (i) equitable remedies or (ii)
any type of statutory or common law remedy (i.e., not based on any indemnity
right provided in this Article VII) with respect to any knowing (meaning actual
knowledge) or intentional breaches of the representations and warranties or
covenants of the Company or the Principal Shareholders contained in this
Agreement or a certificate of any officer of the Company delivered pursuant to
this Agreement, or of any Shareholder contained in a Shareholder Certificate or
in the event of fraud, provided such remedy may only be pursued against the
person who committed or authorized such knowing (meaning actual knowledge) or
intentional breaches of such representations, warranties or covenants. No
Shareholder shall have any right to contribution from the Company for any claim
made by Parent after the Effective Time. Notwithstanding anything to the
contrary in this Article VII, in the event that an Indemnified Party incurs
Losses as a result of a claim that the Company Intellectual Property violated a
third party's patent rights, only 75% of such Losses shall be subject to
recovery pursuant to the escrow and indemnification provisions of Section 7.2
ARTICLE VIII.
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. Except as provided in Section 8.2, this Agreement may be
terminated and the Merger abandoned at any time prior to the Effective Time:
(a) by mutual written consent of the Company and Parent;
(b) by Parent or the Company if the Effective Time has not occurred by
December 31, 1998; provided, however, that the right to terminate this
Agreement under this Section 8.1(b) shall not be available to any party whose
action or failure to act has been a principal cause of or resulted in the
failure of the Merger to occur on or before such date and such action or
failure to act constitutes a breach of this Agreement;
(c) by Parent or the Company if (i) there shall be a final nonappealable
order of a federal or state court in effect preventing consummation of the
Merger; or (ii) there shall be any statute, rule, regulation or order enacted,
promulgated or issued or deemed applicable to the Merger by any Governmental
Entity that would make consummation of the Merger illegal;
(d) by Parent if there shall be any action taken, or any statute, rule,
regulation or order enacted, promulgated or issued or deemed applicable to the
Merger by any Governmental Entity, which would: (i) prohibit Parent's or Sub's
ownership or operation of any portion of the business of
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the Company or (ii) compel Parent or the Company to dispose of or hold separate
all or a portion of the business or assets of the Company or Parent as a result
of the Merger;
(e) by Parent if it is not in material breach of its obligations under
this Agreement and there has been a material breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of the
Company and such breach has not been cured within ten (10) calendar days after
written notice to the Company; provided, however, that no cure period shall be
required for a breach which by its nature cannot be cured;
(f) by the Company if a majority of the Shareholders of the Company vote
against the Merger at the Company Shareholders Meeting;
(g) by Parent or Sub if a majority of the Shareholders of the Company vote
against the Merger at the Company Shareholders Meeting; or
(h) by Parent or Sub if an event having a Material Adverse Effect on the
Company shall have occurred after the date of this Agreement.
8.2 Effect of Termination. In the event of termination of this Agreement as
provided in Section 8.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Parent, Sub, the Company or
any Principal Shareholder, or their respective officers, directors or
shareholders, provided that each party shall remain liable for any breaches of
this Agreement prior to its termination; provided further that the provisions
of Sections 4.2, 5.3, 5.4, 5.5, Article IX and this Section 8.2 shall remain in
full force and effect and survive any termination of this Agreement.
8.3 Amendment. This Agreement may be amended by the parties hereto at any
time by execution of an instrument in writing signed on behalf of each of the
parties hereto.
8.4 Extension; Waiver. At any time prior to the Effective Time, Parent and
Sub, on the one hand, and the Company and the Shareholder Representative, on
the other hand, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations of the other party hereto, (ii) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto, and (iii) waive compliance
with any of the agreements or conditions for the benefit of such party
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
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<PAGE>
ARTICLE IX.
GENERAL PROVISIONS
9.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
messenger or courier service, or mailed by registered or certified mail (return
receipt requested) or sent via facsimile (with acknowledgment of complete
transmission) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice), provided, however,
that notices sent by mail will not be deemed given until received:
(a) if to Parent or Sub, to:
Infoseek Corporation
1399 Moffett Park Drive
Sunnyvale, California 94089
Attention: Andrew Newton, Esq., Leslie Wright and Eric Bochner
(with separate copies in separate envelopes to each)
Telephone No.: (408) 543-6000
Facsimile No: (408) 734-9350
with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Attention: Aaron J. Alter, Esq
Telephone No.: (650) 493-9300
Facsimile No.: (650) 496-7556
(b) if to the Company, to
Quando, Inc.
520 NW Davis Street
Portland, Oregon 97209-1987
Attention: David Billstrom
Telephone No.: (503) [225-1988]
Facsimile No.: (503) [225-1987]
with a copy to:
Pillsbury Madison & Sutro LLP
2550 Hanover Street
Palo Alto, California 94304
Attention: Jorge del Calvo
Telephone No.: (650) 233-4500
Facsimile No.: (650) 233-4545
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(c) if to the Principal Shareholders, to:
David Billstrom
3205 NE 21st Avenue
Portland, OR 97212
Telephone No.:503/970-8816
Facsimile No.:503/225-1987
William Neuhauser
3105 SE Clinton
Portland, OR 97202
Telephone No.: 503/235-1143
Facsimile No.: 503/225-1987
(d) if to the Shareholder Representative, to:
Stanton R. Koch
3411 East Mercer Street
Seattle, WA 98112
Telephone No.: 206/323-7358
Facsimile No.: 206/323-1418
(e) if to the Escrow Agent, to:
U.S. Bank Trust N.A.
One California Street, 4th Floor
San Francisco, CA 94111
Attn:
Telephone No.: 415/273-4532
Facsimile No.: 415/273-4593
9.2 Interpretation. The words "include," "includes" and "including" when used
herein shall be deemed in each case to be followed by the words "without
limitation." The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.3 Counterparts. This Agreement may be executed in one or more counterparts,
all of which shall be considered one and the same agreement and shall become
effective when one or more counterparts have been signed by each of the parties
and delivered to the other party, it being understood that all parties need not
sign the same counterpart.
9.4 Entire Agreement; Assignment. This Agreement, the Exhibits hereto, the
Disclosure Schedule, and the documents and instruments and other agreements
among the parties hereto referenced herein: (a) constitute the entire agreement
among the parties with respect to the subject matter hereof and supersede all
prior agreements and understandings both written and oral, among the parties
with respect to the subject matter hereof; (b) except as specifically provided
herein, are not intended to confer upon any other person any rights or remedies
hereunder; and (c) shall not be
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assigned (other than by operation of law), except that Parent and Sub may
assign their respective rights and delegate their respective obligations
hereunder to their respective affiliates (including any successor to Parent
resulting from its planned reorganization into a Delaware corporation or a
subsidiary of a Delaware corporation).
9.5 Severability. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
agree to replace such void or unenforceable provision of this Agreement with a
valid and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.
9.6 Other Remedies. Except as otherwise provided herein, any and all remedies
herein expressly conferred upon a party will be deemed cumulative with and not
exclusive of any other remedy conferred hereby, or by law or equity upon such
party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
9.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, regardless of the laws
that might otherwise govern under applicable principles of conflicts of laws
thereof. Each of the parties hereto irrevocably consents to the exclusive
jurisdiction and venue of any court within Santa Clara County, State of
California, in connection with any matter based upon or arising out of this
Agreement or the matters contemplated herein, agrees that process may be served
upon them in any manner authorized by the laws of the State of California for
such persons and waives and covenants not to assert or plead any objection
which they might otherwise have to such jurisdiction, venue and such process.
9.8 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefor, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
[The remainder of this page is intentionally left blank.]
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IN WITNESS WHEREOF, Parent, Sub, the Company, the Principal Shareholders, the
Shareholder Representatives and the Escrow Agent have caused this Agreement to
be signed, all as of the date first written above.
INFOSEEK CORPORATION
QUANDO, INC.
By___________________________________
By___________________________________
Name:
Name:
Title:
Title:
STEELHEAD ACQUISITION CORP.
PRINCIPAL SHAREHOLDERS
By___________________________________
_____________________________________
Name: David Billstrom
Title:
_____________________________________
William Neuhauser
SHAREHOLDER REPRESENTATIVE
(AS TO THE PROVISIONS OF ARTICLE VII ESCROW AGENT (AS TO THE PROVISIONS
ONLY) OF ARTICLE VII ONLY)
(AS TO THE PROVISIONS OF ARTICLE VII
_____________________________________ ONLY)
Name:
By___________________________________
Name:
Title:
[SIGNATURE PAGE TO AGREEMENT AND PLAN OF REORGANIZATION]
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AMENDMENT NO. 1 TO
AGREEMENT AND PLAN OF REORGANIZATION
THIS AMENDMENT NO. 1 (the "Amendment" to the Agreement and Plan of
Reorganization dated as of July 24, 1998 (the "Reorganization Agreement") by
and among Infoseek Corporation, a Delaware corporation ("Parent"), Steelhead
Acquisition Corp., an Oregon corporation and a wholly-owned subsidiary of
Parent ("Sub"), Quando, Inc., an Oregon corporation (the "Company"), David
Billstrom and William Neuhauser (individually, a "Principal Shareholder" and
collectively, the "Principal Shareholders"), and, with respect to Article VII
only, U.S. Bank Trust, N.A. as Escrow Agent (the "Escrow Agent"), and Stanton
R. Koch (the "Shareholder Representative") is effective as of December 7, 1998
by and among Parent, Sub, the Company, the Principal Shareholders, the Escrow
Agent and the Shareholder Representative.
RECITALS
A. Infoseek Corporation, a California corporation ("Infoseek California"),
Sub, the Company, the Principal Shareholders, the Escrow Agent and the
Shareholder Representative entered into the Reorganization Agreement providing
for the merger of Sub with and into the Company.
B. Infoseek California assigned all of its rights and delegated all of its
responsibilities to Parent prior to the date hereof pursuant to that certain
Assignment and Assumption Agreement dated December 4, 1998 (the "Assignment
Agreement").
C. Parent, Sub, the Company and the Principal Shareholders desire to make
certain amendments to the Reorganization Agreement as set forth in this
Amendment.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
A. The Reorganization Agreement shall be amended as follows:
1. The parties acknowledge that the Reorganization Agreement has been
assigned to and assumed by Parent pursuant to the Assignment Agreement. All
references to Parent in the Reorganization Agreement shall refer to Infoseek
California prior to the date of the Assignment Agreement and to Parent on and
after the date of the Assignment Agreement.
2. The fourth Recital of the Reorganization Agreement is hereby amended and
restated in full to read as follows:
"WHEREAS, the parties intend that the Merger shall constitute a
reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code").
3. The definition of "Adjusted Dollar Amount" under Section 1.6 of the
Reorganization Agreement is hereby amended and restated in full to read as
follows:
"Adjusted Dollar Amount" shall mean an amount equal to $17,310,000 minus:
(i) the amount by which the Estimated Net Liabilities (excluding Estimated
Third Party Expenses reflected
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on the Estimated Balance Sheet) exceeds $405,739 and (ii) the amount by which
the Estimated Third Party Expenses (excluding those Estimated Third Party
Expenses described in Section 5.4(d)) exceed $50,000."
4. The definition of "Meeting Price" under Section 1.6 of the
Reorganization Agreement is hereby amended and restated in full to read as
follows:
"Meeting Price" shall mean the average closing sale price of the Parent
Common Stock as reported on the Nasdaq National Market for the ten (10)
consecutive trading days ending on the third business day prior to the date of
the filing of the Registration Statement on Form S-4; provided, however, that
if the Registration Statement on Form S-4 receives full or partial review by
the SEC, the Meeting Price shall mean the average closing sale price of the
Parent Common Stock as reported on the Nasdaq National Market for the ten (10)
consecutive trading days ending on the third business day prior to the date of
effectiveness of the Registration Statement on Form S-4."
5. Section 1.6 of the Reorganization Agreement is hereby amended to include
the following new definition:
"Registration Statement on Form S-4" shall mean the Registration
Statement on Form S-4 to be filed by Parent with the SEC pursuant to Section
5.1(a) hereto.
6. The definition of "SEC" under Section 1.6 of the Reorganization
Agreement is hereby amended and restated in full to read as follows:
"SEC" shall mean the United States Securities and Exchange Commission."
7. Section 1.12 of the Reorganization Agreement is hereby amended and
restated in full to read as follows:
"Tax and Accounting Consequences. It is intended by the parties hereto
that the Merger shall constitute a reorganization within the meaning of Section
368 of the Code and shall be accounted for under the purchase method of
accounting under GAAP. Each party has consulted with its own tax advisors and
accountants with respect to the tax and accounting consequences, respectively,
of the Merger."
8. Section 2.26 of the Reorganization Agreement is hereby deleted and
replaced with the words "Intentionally Omitted."
9. The first sentence of Section 2.27 of the Reorganization Agreement is
hereby amended and restated in full to read as follows:
The information supplied by the Company for inclusion in the Registration
Statement on Form S-4 and the Proxy Statement (as defined in Section 5.1 below)
or Shareholder Information Statement (as defined in Section 5.1), as the case
may be, will not on the date it (or any amendment or supplement thereto) is
declared effective by the SEC, the date it is first sent to Company's
shareholders, at the time of the Company Shareholders Meeting, if any, and at
the Effective Time, contain any statement which, at such time and in the light
of the circumstances under which it is made, is false or misleading with
respect to any material fact, or will omit to state any material fact necessary
in order to make the statements therein not false or misleading."
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10. The first sentence of Section 3.1 of the Reorganization Agreement is
hereby amended and restated in full to read as follows:
"Parent is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware."
11. The first sentence of Section 3.2 of the Reorganization Agreement is
hereby amended and restated in full to read as follows:
"Parent has heretofore furnished to the Company a complete and correct
copy of its Certificate of Incorporation and Bylaws, each as amended to date."
12. The first sentence of Section 3.7 of the Reorganization Agreement is
hereby amended and restated in full to read as follows:
"The information supplied by Parent for inclusion in the Registration
Statement on Form S-4 and the Proxy Statement or Shareholder Information
Statement, as the case may be, will not, on the date it (or any amendment or
supplement thereto) is declared effective by the SEC, the date it is first
mailed to Company's shareholders, at the time of the Company Shareholders
Meeting, if any, and at the Effective Time, contain any statement which, at
such time and in the light of the circumstances under which it is made, is
false or misleading with respect to any material fact, or will omit to state
any material fact necessary in order to make the statements therein not false
or misleading."
13. Section 4.1(g) of the Reorganization Agreement is hereby amended and
restated in full to read as follows:
"Except for the issuance of no more than 160,000 shares of the Company
Common Stock in full payment of certain fees owing to Lisa Gansky, issue,
grant, deliver or sell, contract to issue, grant, deliver or sell, or authorize
or propose the issuance, grant, delivery or sale of, or purchase or propose the
purchase of, any shares of its capital stock (other than upon the exercise of
currently outstanding stock options) or securities convertible into or
exchangeable for, or subscriptions, rights, warrants or options to acquire, or
other agreements or commitments of any character obligating it to issue or
purchase any such shares or other convertible securities;"
14. Section 4.1(q) of the Reorganization Agreement is hereby amended and
restated in full to read as follows:
"Except for the issuance of no more than 160,000 shares of the Company
Common Stock in full payment of certain fees owing to Lisa Gansky, pay,
discharge or satisfy, in an amount in excess of $10,000 (in any one case) or
$25,000 (in the aggregate), any claim, liability or obligation (absolute,
accrued, asserted or unasserted, contingent or otherwise), other than the
payment, discharge or satisfaction in the ordinary course of business of
liabilities reflected or reserved against in the Current Balance Sheet;"
15. Section 4.1(v) of the Reorganization Agreement is hereby deleted and
replaced with the words "Intentionally Omitted."
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16. Section 5.1 is hereby amended and restated in full to read as follows:
"Registration Statement; Preparation of Shareholder Solicitation
Materials; Shareholder Consent or Meeting.
(a) As soon as practicable after the date of this Agreement, Parent and
the Company shall jointly prepare and cause to be filed with the SEC
preliminary shareholder solicitation materials, which shall be in the form of a
shareholder information statement (the "Shareholder Information Statement") or
a proxy statement (the "Proxy Statement"), as determined jointly by Parent and
the Company, for the solicitation of approval of the shareholders of the
Company of this Agreement, the Merger and the transactions contemplated hereby.
Parent shall also prepare and cause to be filed with the SEC the Registration
Statement on Form S-4, in which the Shareholder Information Statement or Proxy
Statement, as the case may be, will be included as a prospectus, with respect
to those shares of
Parent Common Stock issuable in the Merger. Each of Parent and the Company
shall provide promptly to the other such information concerning its business
and financial statements and affairs as, in the reasonable judgment of the
providing party or its counsel, may be required or appropriate for inclusion in
the Shareholder Information Statement or Proxy Statement, as the case may be,
or in any amendments or supplements thereto, and to cause its counsel and
auditors to cooperate with the other's counsel and auditors in the preparation
of the Shareholder Information Statement or Proxy Statement, as the case may
be. The Shareholder Information Statement or Proxy Statement, as the case may
be, shall include information regarding the Company, the terms of the Merger
and this Agreement and the unanimous recommendation of the Board of Directors
of the Company in favor of the Merger. Each of Parent and the Company shall use
all reasonable efforts to cause the Registration Statement on Form S-4 and the
Shareholder Information Statement or Proxy Statement, as the case may be, to
comply with applicable law and the rules and regulations promulgated by the
SEC, to respond promptly to any comments of the SEC or its staff, to have the
Registration Statement on Form S-4 declared effective under the Securities Act
as promptly as practicable after it is filed with the SEC and to cause the
Shareholder Information Statement or Proxy Statement, as the case may be, to be
mailed to the Company's shareholders as promptly as practicable after the
Registration Statement on Form S-4 is declared effective under the Securities
Act. If any event relating to Parent or the Company occurs, or if Parent or the
Company becomes aware of any information, that should be disclosed in an
amendment or supplement to the Registration Statement on Form S-4 or the
Shareholder Information Statement or Proxy Statement, as the case may be, then
Parent or the Company, as applicable, shall inform the other thereof and shall
cooperate with each other in filing such amendment or supplement with the SEC,
and, if appropriate, in mailing such amendment or supplement to the Company's
shareholders.
(b) Prior to the Effective Time, Parent shall use reasonable efforts to
obtain all regulatory approvals needed to ensure that the Parent Common Stock
to be issued in the Merger: (i) will be registered or qualified under the
securities law of every jurisdiction of the United States in which any
registered holder of the Company Capital Stock who is receiving shares of
registered Parent Common Stock has an address of record or be exempt from such
registration; and (ii) will be approved for quotation at the Effective Time on
the Nasdaq National Market; provided, however, that the Parent shall not,
pursuant to the foregoing, be required (I) to qualify to do business as a
foreign corporation in any jurisdiction in which it is not currently qualified
or (II) to file a general consent to
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service of process in any jurisdiction with respect to matters unrelated to the
issuance of Parent Common Stock pursuant hereto.
(c) The Company shall, pursuant to Oregon Law, and its Articles of
Incorporation and Bylaws, properly notice, convene and hold a shareholders'
meeting to vote on this Agreement and the transactions contemplated hereby on
or about December 21, 1998 (the "Company Shareholders Meeting"), provided,
however, that such date may be delayed up to forty-eight (48) days by Parent in
the event Parent or the Company reasonably required additional time to obtain
the effectiveness of, amend or supplement the Registration Statement on Form S-
4, or to close the transactions contemplated by this Agreement; provided,
further, that the Company Shareholders Meeting may be held on such other date
as Parent and the Company may mutually agree; and, provided, further, that in
the event that the Company receives the written consent of the holders of 100%
of the outstanding shares of Company Capital Stock on or before two business
days prior to the proposed date of the
Company Shareholder Meeting (as such date may be delayed pursuant to this
Section 5.1(c)), the Company Shareholders Meeting need not be held."
17. Section 5.4(a) of the Reorganization Agreement is hereby amended and
restated in full to read as follows:
"Whether or not the Merger is consummated, except as set forth in
Sections 5.4(b), (c) and (d), all fees and expenses incurred in connection with
the Merger including, without limitation, all legal, accounting, investment
banking, broker, financial advisory, consulting and fees paid to Lisa Gansky in
excess of $310,000 and all other fees expenses of third parties ("Third Party
Expenses") incurred by a party in connection with the negotiation and
effectuation of the terms and conditions of this Agreement and the transactions
contemplated hereby, shall be the obligation of the respective party incurring
such fees and expenses."
18. Section 5.4(b) of the Reorganization Agreement is hereby amended and
restated in full to read as follows:
"In the event that the Merger is consummated, Parent agrees to pay those
Third Party Expenses incurred by the Company and paid by or payable to Lisa
Gansky, the Company's legal counsel and the Company's accountants, and Parent
shall have full recourse to the Escrow Fund (as defined herein) for payment of
all Third Party Expenses (except for those Third Party Expenses described in
Section 5.4(d)) incurred by the Company exceeding the greater of (i) the
Estimated Third Party Expenses (other than those Third Party Expenses described
in Section 5.4(d)) and (ii) $50,000. The Company shall not, however, be
obligated to refund or otherwise pay any amounts into the Escrow Fund or to the
Company's shareholders in the event that the actual Third Party Expenses (not
including those Third Party Expenses described in Section 5.4(d)) are less than
the greater of (i) the Estimated Third Party Expenses (except for those Third
Party Expenses described in Section 5.4(d)) and (ii) $50,000."
19. Section 5.4 of the Reorganization Agreement is hereby amended to
include subsection (d), as follows:
"(d) In the event that the Merger is consummated, the Parent agrees to
pay up to $100,000 of the legal and accounting fees actually incurred (as
supported by proper documentation)
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by the Company in negotiating and executing the Amendment to the Reorganization
Agreement, and in the preparation and filing of the Registration Statement on
Form S-4.
20. The third sentence of Section 5.13 of the Reorganization Agreement is
hereby amended and restated in full to read as follows:
"In the event that Parent relocates the Company's operations to the
Seattle, Washington Area within two (2) years after the Closing Date, Parent
will pay the reasonable and properly documented relocation expenses of all
current employees of the Company that relocate to the Seattle, Washington Area
with the Company and/or Surviving Corporation; provided, however, that the
Parent's aggregate obligation to pay relocation expenses under this section
shall not exceed $100,000."
21. Section 5.16 of the Reorganization Agreement is hereby amended and
restated in full to read as follows:
"Purchase Accounting. The combination to be effected by the Merger shall
be accounted for under the purchase method of accounting."
22. Section 6.2 of the Reorganization Agreement shall be amended to remove
subsection (c), and to replace such subsection with the words "Intentionally
Omitted."
23. Section 6.3 of the Reorganization Agreement shall be amended to remove
subsections (e), (g) and (p), and to replace such subsections with the words
"Intentionally Omitted."
24. The first sentence of Section 7.1 of the Reorganization Agreement shall
be amended and restated in full to read as follows:
"All of the Company's and Principal Shareholders' representations and
warranties in this Agreement or in any instrument delivered pursuant to this
Agreement shall survive the Merger and continue until June 30, 1999 (the
"Expiration Date")."
25. The first sentence of Section 7.2(a) of the Reorganization Agreement
shall be amended and restated in full to read as follows:
"Each Shareholder jointly and severally agrees to indemnify and hold
Parent, Sub and their officers, directors and affiliates (the "Indemnified
Parties") harmless against all claims, losses, liabilities, damages,
deficiencies, costs and expenses, including reasonable attorneys' fees and
expenses of investigation (hereinafter individually a "Loss" and collectively
"Losses") incurred by the Indemnified Parties directly or indirectly as a
result of: (i) any inaccuracy or breach of a representation or warranty of the
Company a certificate of any officer of the Company delivered pursuant to this
Agreement, or a Shareholder Certificate, (ii) any failure by the Company or a
Shareholder to perform or comply with any covenant contained in this Agreement,
(iii) any dispute between the Company and the individual named in Section
2.9(n) of the Disclosure Schedule, (iv) the Net Liabilities exceeding the
greater of the Estimated Net Liabilities or $405,739, or (v) the Third Party
Expenses (excluding those Third Party Expenses described in Section 5.4(d))
incurred by the Company exceeding the greater of the Estimated Third Party
Expenses (excluding those Estimated Third Party Expenses described in Section
5.4(d)) or $50,000; provided, however, that,
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except as set forth in Sections 7.2(b) and 7.5, the aggregate amount for which
the Shareholders are required to indemnify the Indemnified Parties shall not
exceed the amount deposited in the Escrow Fund (as defined below)."
26. Section 8.1(b) is hereby amended to delete "December 31, 1998" and
replace it with "February 28, 1999."
27. Footnote "*" on Exhibit A--Compensation Table is hereby amended and
restated as follows.
"Annual Rate schedule reflects Bay Area based employee annual rate; such
rates may be adjusted to reflect Parent's standard ratio between the Bay Area
and the Seattle Area, but not by more than 15%."
28. Exhibit C--Form of Shareholder Certificate shall be deleted in full. In
addition, all references to the Shareholder Certificates and to the execution
and delivery of the Shareholder Certificates are hereby deleted in their
entirety.
29. Exhibit D--Form of Registration Rights Agreement of the Reorganization
Agreement shall be deleted in full.
B. This Amendment shall be governed by California law and may be executed in
counterparts each of which shall be deemed an original and all of which shall
constitute one instrument.
C. Except as expressly amended by this Amendment, all provisions of the
Reorganization Agreement shall remain in full force and effect.
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IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
referred to above.
<TABLE>
<S> <C>
INFOSEEK CORPORATION QUANDO, INC.
a Delaware corporation an Oregon corporation
By: _______________________________________ By: _________________________________________
Harry Motro, Chief Executive Officer David Billstrom, Chief Executive Officer
and President and President
STEELHEAD ACQUISITION CORP. PRINCIPAL SHAREHOLDERS
an Oregon corporation
By: _______________________________________ _____________________________________________
Andrew E. Newton, Vice President David Billstrom
_____________________________________________
William Neuhauser
SHAREHOLDER REPRESENTATIVE ESCROW AGENT
(as to the provisions of Article VII only) (as to the provisions of Article VII only)
___________________________________________ By: _________________________________________
Stanton R. Koch
Name: _______________________________________
Title: ______________________________________
</TABLE>
[Signature Page to Amendment No. 1 to Agreement and Plan of Reorganization]
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ANNEX B
DISSENTERS' RIGHTS
OREGON BUSINESS CORPORATION LAW
CHAPTER 60
RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
60.551 DEFINITIONS FOR 60.551 TO 60.594.C As used in ORS 60.551 to 60.594:
(1) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or a nominee as the record shareholder.
(2) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger or
share exchange of that issuer.
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under ORS 60.554 and who exercises that right when and in the
manner required by ORS 60.561 to 60.587.
(4) "Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to
which the dissenter objects excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(5) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loan or, if none, at a rate that is fair and
equitable under all the circumstances.
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares
to the extent of the rights granted by a nominee certificate on file with a
corporation.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
60.554 RIGHT TO DISSENT.-- (1) Subject to subsection (2) of this section, a
shareholder is entitled to dissent from, and obtain payment of the fair value
of the shareholder's shares in the event of, any of the following corporate
acts:
(a) Consummation of a plan of merger to which the corporation is a party
if shareholder approval is required for the merger by ORS 60.487 or the
articles of incorporation and the shareholder is entitled to vote on the
merger or if the corporation is a subsidiary that is merged with its parent
under ORS 60.491;
(b) Consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired, if the shareholder is
entitled to vote on the plan;
(c) Consummation of a sale or exchange of all or substantially all of the
property of the corporation other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially all
of the net proceeds of the sale will be distributed to the shareholders within
one year after the date of sale;
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(d) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
(A) Alters or abolishes a preemptive right of the holder of the shares to
acquire shares or other securities; or
(B) Reduces the number of shares owned by the shareholder to a fraction
of a share if the fractional share so created is to be acquired for cash under
ORS 60.141; or
(e) Any corporate action taken pursuant to a shareholder vote to the extent
the articles of incorporation, bylaws or a resolution of the board of directors
provides that voting or nonvoting shareholders are entitled to dissent and
obtain payment for their shares.
(2) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under ORS 60.551 to 60.594 may not challenge the corporate
action creating the shareholder's entitlement unless the action is unlawful or
fraudulent with respect to the shareholder or the corporation.
(3) Dissenters' rights shall not apply to the holders of shares of any class
or series if the shares of the class or series were registered on a national
securities exchange or quoted on the National Association of Securities
Dealers, Inc. Automated Quotation System as a National Market System issue on
the record date for the meeting of shareholders at which the corporate action
described in subsection (1) of this section is to be approved or on the date a
copy or summary of the plan of merger is mailed to shareholders under ORS
60.491, unless the articles of incorporation otherwise provide.
60.557 DISSENT BY NOMINEES AND BENEFICIAL OWNERS.--(1) A record shareholder
may assert dissenters' rights as to fewer than all the shares registered in the
shareholder's name only if the shareholder dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf the shareholder asserts
dissenters' rights. The rights of a partial dissenter under this subsection are
determined as if the shares regarding which the shareholder dissents and the
shareholder's other shares were registered in the names of different
shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares held
on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder does so with respect to all shares of which
such shareholder is the beneficial shareholder or over which such shareholder
has power to direct the vote.
PROCEDURE FOR EXERCISE OF RIGHTS
60.561 NOTICE OF DISSENTERS' RIGHTS.-- (1) If proposed corporate action
creating dissenters' rights under ORS 60.554 is submitted to a vote at a
shareholders' meeting, the meeting notice must state that shareholders are or
may be entitled to assert dissenters' rights under ORS 60.551 to 60.594 and be
accompanied by a copy of ORS 60.551 to 60.594.
(2) If corporate action creating dissenters' rights under ORS 60.554 is taken
without a vote of shareholders, the corporation shall notify in writing all
shareholders entitled to assert dissenters'
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rights that the action was taken and send the shareholders entitled to assert
dissenters' rights the dissenters' notice described in ORS 60.567.
60.564 NOTICE OF INTENT TO DEMAND PAYMENT.--(1) lf proposed corporate action
creating dissenters' rights under ORS 60.554 is submitted to a vote at a
shareholders' meeting, a shareholder who wishes to assert dissenters' rights
shall deliver to the corporation before the vote is taken written notice of the
shareholder's intent to demand payment for the shareholder's shares if the
proposed action is effectuated and shall not vote such shares in favor of the
proposed action.
(2) A shareholder who does not satisfy the requirements of subsection (1) of
this section is not entitled to payment for the shareholder's shares under this
chapter.
60.567 DISSENTERS' NOTICE.--(1) If proposed corporate action creating
dissenters' rights under ORS 60.554 is authorized at a shareholders' meeting,
the corporation shall deliver a written dissenters' notice to all shareholders
who satisfied the requirements of ORS 60.564.
(2) The dissenters' notice shall be sent no later than 10 days after the
corporate action was taken, and shall:
(a) State where the payment demand shall be sent and where and when
certificates for certificated shares be deposited;
(b) Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
(c) Supply a form for demanding payment that includes the date of the first
announcement of the terms of the proposed corporate action to news media or to
shareholders and requires that the person asserting dissenters' rights certify
whether or not the person acquired beneficial ownership of the shares before
that date;
(d) Set a date by which the corporation must receive the payment demand.
This date may not be fewer than 30 nor more than 60 days after the date the
subsection (1) of this section notice is delivered; and
(e) Be accompanied by a copy of ORS 60.551 to 60.594.
60.571 DUTY TO DEMAND PAYMENT.--(1) A shareholder sent a dissenters' notice
described in ORS 60.567 must demand payment, certify whether the shareholder
acquired beneficial ownership of the shares before the date required to be set
forth in the dissenters' notice pursuant to ORS 60.567(2)(c), and deposit the
shareholder's certificates in accordance with the terms of the notice.
(2) The shareholder who demands payment and deposits the shareholder's shares
under subsection (1) of this section retains all other rights of a shareholder
until these rights are canceled or modified by the taking of the proposed
corporate action.
(3) A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
chapter.
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60.574 SHARE RESTRICTIONS.--(1) The corporation may restrict the transfer of
uncertificated shares from the date the demand for their payment is received
until the proposed corporate action is taken or the restrictions released under
ORS 60.581.
(2) The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until these rights are
canceled or modified by the taking of the proposed corporate action.
60.577 PAYMENT.--(1) Except as provided in ORS 60.584, as soon as the
proposed corporate action is taken, or upon receipt of a payment demand, the
corporation shall pay each dissenter who complied with ORS 60.571, the amount
the corporation estimates to be the fair value of the shareholder's shares,
plus accrued interest.
(2) The payment must be accompanied by:
(a) The corporation's balance sheet as of the end of a fiscal year ending
not more than 16 months before the date of payment, an income statement for
that year and the latest available interim financial statements, if any;
(b) A statement of the corporation's estimate of the fair value of the
shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment under ORS
60.587; and
(e) A copy of ORS 60.551 to 60.594.
60.581 FAILURE TO TAKE ACTION.--(1) If the corporation does not take the
proposed action within 60 days after the date set for demanding payment and
depositing share certificates, the corporation shall return the deposited
certificates and release the transfer restrictions imposed on uncertificated
shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under ORS 60.567 and repeat the payment demand procedure.
60.584 AFTER-ACQUIRED SHARES.--(1) A corporation may elect to withhold
payment required by ORS 60.577 from a dissenter unless the dissenter was the
beneficial owner of the shares before the date set forth in the dissenters'
notice as the date of the first announcement to news media or to shareholders
of the terms of the proposed corporate action.
(2) To the extent the corporation elects to withhold payment under subsection
(1) of this section, after taking the proposed corporate action, it shall
estimate the fair value of the shares plus accrued interest and shall pay this
amount to each dissenter who agrees to accept it in full satisfaction of such
demand. The corporation shall send with its offer a statement of its estimate
of the fair value of the shares, an explanation of how the interest was
calculated and a statement of the dissenter's right to demand payment under ORS
60.587.
60.587 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.--(l) A
dissenter may notify the corporation in writing of the dissenter's own estimate
of the fair value of the dissenter's shares and amount of interest due, and
demand payment of the
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dissenter's estimate, less any payment under ORS 60.577 or reject the
corporation's offer under ORS 60.584 and demand payment of the dissenter's
estimate of the fair value of the dissenter's shares and interest due, if:
(a) The dissenter believes that the amount paid under ORS 60.577 or offered
under ORS 60.584 is less than the fair value of the dissenter's shares or that
the interest due is incorrectly calculated;
(b) The corporation fails to make payment under ORS 60.577 within 60 days
after the date set for demanding payment; or
(c) The corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions imposed
on uncertified shares within 60 days after the date set for demanding payment.
(2) A dissenter waives the right to demand payment under this section unless
the dissenter notifies the corporation of the dissenter's demand in writing
under subsection (1) of this section within 30 days after the corporation made
or offered payment for the dissenter's shares.
JUDICIAL APPRAISAL OF SHARES
60.591 COURT ACTION.--(1) If a demand for payment under ORS 60.587 remains
unsettled, the corporation shall commence a proceeding within 60 days after
receiving the payment demand under ORS 60.587 and petition the court under
subsection (2) of this section to determine the fair value of the shares and
accrued interest. If the corporation does not commence the proceeding within
the 60-day period, it shall pay each dissenter whose demand remains unsettled
the amount demanded.
(2) The corporation shall commence the proceeding in the circuit court of the
country where a corporation's principal office is located, or if the principal
office is not in this state, where the corporation's registered office is
located. If the corporation is a foreign corporation without a registered
office in this state, it shall commence the proceeding in the country in this
state where the registered office of the domestic corporation merged with or
whose shares were acquired by the foreign corporation was located.
(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled parties to the proceeding as in an
action against their shares. All parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(4) The jurisdiction of the circuit court in which the proceeding is
commenced under subsection (2) of this section is plenary and exclusive. The
court may appoint one or more persons as appraisers to receive evidence and
recommend decision on the question of fair value. The appraisers have the
powers described in the court order appointing them, or in any amendment to the
order. The dissenters are entitled to the same discovery rights as parties in
other civil proceedings.
(5) Each dissenter made a party to the proceeding is entitled to judgment
for:
(a) The amount, if any, by which the court finds the fair value of the
dissenter's shares, plus interest, exceeds the amount paid by the corporation;
or
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(b) The fair value, plus accrued interest, of the dissenter's after-
acquired shares for which the corporation elected to withhold payment under ORS
60.584.
60.594 COURT COSTS AND COUNSEL FEES.--(1) The court in an appraisal
proceeding commenced under ORS 60.591 shall determine all costs of the
proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters acted arbitrarily, vexatiously, or not in good faith in
demanding payment under ORS 60.587.
(2) The court may also assess the fees and expenses of counsel and experts of
the respective parties in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the requirements
of ORS 60.561 to 60.587; or
(b) Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses are
assessed acted arbitrarily, vexatiously or not in good faith with respect to
the rights provided by this chapter.
(3) If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court
may award to counsel reasonable fees to be paid out of the amount awarded the
dissenters who were benefited.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Delaware law authorizes corporations to eliminate the personal liability of
directors to corporations and their stockholders for monetary damages for
breach or alleged breach of the directors' "duty of care." While the relevant
statute does not change directors' duty of care, it enables corporations to
limit available relief to equitable remedies such as injunction or rescission.
The statute has no effect on directors' duty of loyalty, acts or omissions not
in good faith or involving intentional misconduct or knowing violations of law,
illegal payment of dividends and approval of any transaction from which a
director derives an improper personal benefit.
The Registrant has adopted provisions in its Certificate of Incorporation which
eliminate the personal liability of its directors to the Registrant and its
stockholders for monetary damages for breach or alleged breach of their duty of
care. The Bylaws of the Registrant provide for indemnification of its
directors, officers, employees and agents to the full extent permitted by the
General Corporation Law of the State of Delaware, the Registrant's state of
incorporation, including those circumstances in which indemnification would
otherwise be discretionary under Delaware Law. Section 145 of the General
Corporation Law of the State of Delaware provides for indemnification in terms
sufficiently broad to indemnify such individuals, under certain circumstances,
for liabilities (including reimbursement of expenses incurred) arising under
the Securities Act of 1933, as amended.
The Registrant has entered into agreements with each of its directors and
executive officers to indemnify such persons against expenses, judgments,
fines, settlements and other amounts actually and reasonably incurred
(including expenses of a derivative action) in connection with any proceeding,
whether actual or threatened, to which any such person may be made a party by
reason of the fact that such person is or was a director or officer of the
Registrant or any of its affiliated enterprises, provided such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Registrant and, with respect to any
criminal proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The indemnification agreements also set forth certain procedures that
will apply in the event of a claim for indemnification thereunder.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<C> <S>
(a) Exhibits
2.1* Agreement and Plan of Reorganization, dated July 24, 1998, by
and among Infoseek Corporation, a California corporation,
Steelhead Acquisition Corp., an Oregon corporation, Quando,
Inc., an Oregon corporation, David Billstrom and William
Neuhauser, and with respect to Article VII only, Stanton R.
Koch and U.S. Bank Trust, N.A. (the "Reorganization
Agreement").
2.2* Amendment No. 1 to Reorganization Agreement, dated December 7,
1998.
2.3* Form of Plan of Merger by and among the Registrant, Steelhead
Acquisition Corp., an Oregon corporation, and Quando, Inc., an
Oregon corporation.
2.4* Form of Employment and Non-Competition Agreement with David
Billstrom and William Neuhauser.
3.1(1) Amended and Restated Certificate of Incorporation of the
Registrant.
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
3.2(1) Bylaws of the Registrant.
4.1(1) Specimen Stock Certificate of the Registrant.
4.2(2) Third Amended and Restated Investors' Rights Agreement dated April
19, 1996 among the Registrant and the investors and founders named
therein.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, with respect to the securities being issued.
8.1* Tax Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
8.2* Tax Opinion of Pillsbury Madison & Sutro LLP.
10.1(2) Infoseek Corporation Stock Option Plan, as amended on March 20,
1996, subject to qualification by the State of California.
10.2(2) Form of Offer Letter among the Registrant and its officers.
10.3(1) Form of Indemnification Agreement entered into between the
Registrant and its directors and officers.
10.4(2) Founders Agreement dated February 1, 1994 among the Registrant and
the founders named therein, as amended June 30, 1994.
10.5(2) Employee Stock Purchase Agreement dated March 9, 1996 between the
Registrant and John Nauman.
10.6* Assignment and Assumption of Lease, dated May 12, 1998, by and
between Infoseek California and 280, Inc., a California
corporation.
10.7(2) Standard Form of Office Lease dated April 1996 between the
Registrant and Richfield Investment Company.
10.8(2) Software Development and Licensing Master Agreement dated July 8,
1994, as amended on February 13, 1995 and April 24, 1995, between
the Registrant and Applied Computing Systems Institute of
Massachusetts, Inc.
10.9(2) Internet Services and Products Master Agreement dated May 22, 1995
between the Registrant and BBN Planet Corporation.
10.10(2) Net Search Program--Premier Provider Agreement between the
Registrant and Netscape Communications Corporation dated March 22,
1996, as amended on that date.
10.11(3) Premier Provider Service Agreement between the Registrant and
Netscape Communications Corporation dated March 17, 1997.
10.12(2) Software License and Distribution Agreement between the Registrant
and Personal Library Software, Inc. dated June 17, 1994.
10.13(2) XSoft/Infoseek Software Distribution and License Agreement--
Lexicons, dated March 31, 1996 between the Registrant and XSoft, a
division of XEROX Corporation.
10.14(2) Customer Support Program Agreement for Infoseek among the
Registrant and SunService Corporation dated January 1, 1996.
10.15(2) Purchase Orders dated March 21, 1996, February 1, 1996, December 1,
1995, October 25, 1995, October 6, 1995 between the Registrant and
Sun Microsystems, Inc.
10.16(2) Form Consulting Services Agreement among the Registrant and its
consultants.
10.17(2) Joint Marketing Agreement dated effective April 15, 1996 between
the Registrant and Sun Microsystems Inc.
10.18(2) Online Service Agreement dated February 28, 1995 between the
Registrant and Reuters NewMedia, Inc., as amended January 4, 1996
and April 19, 1996.
10.19(3) Amendment No. 3 to Online Service Agreement between the Registrant
and Reuters NewMedia, Inc., dated October 30, 1996.
10.20(3) Fourth Amendment to the On-Line Directory Agreement between the
Registrant and Reuters NewMedia, Inc., dated August 30, 1996.
10.21(4) Office lease dated March 4, 1997 between the Registrant and Limar
Realty Corp. #8.
10.22(3) Amendment No. 1 to XSoft/Infoseek Software Distribution and License
Agreement, between the Registrant and XSoft, a division of XEROX
Corporation, dated December 16, 1996.
10.23(3) Amendment No. 2 to XSoft/Infoseek Software Distribution and License
Agreement, between the Registrant and XSoft, a division of XEROX
Corporation, dated December 16, 1996.
</TABLE>
II-2
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<TABLE>
<C> <S>
10.24(2) Memorandum of Understanding between the Registrant and IDG
Communications Inc. dated April 22, 1996.
10.25(5) Loan and Security Agreement between the Registrant and Silicon
Valley Bank dated March 31, 1997.
10.26(2) Amendment No. 3 to Software Development and Licensing Master
Agreement between the Registrant and Applied Computing Systems
Institute of Massachusetts, Inc. dated March 18, 1996.
10.27(6) Amendment No. 1 and 2 to Office Lease dated March 4, 1997 between
the Registrant and Limar Realty Corp.
10.28(1) Agreement and Plan of Reorganization, dated as of June 18, 1998, by
and among Infoseek Corporation, a California corporation ("Infoseek
California"), the Registrant, Starwave Corporation, a Washington
corporation ("Starwave"), and Disney Enterprises, Inc., a Delaware
corporation ("DEI").
10.29(1) Common Stock and Warrant Purchase Agreement by and between the
Registrant and The Walt Disney Company, a Delaware corporation.
10.30(1) Registrant Common Stock Warrant.
10.31(1) Form of The Walt Disney Company Promissory Note.
10.32(1) Form of Registrant's Directors' and Officers' Indemnification
Agreement.
10.33(1) Form of Registration Rights Agreement by and among the Registrant,
DEI and The Walt Disney Company.
10.34(1) Form of Tax Sharing Agreement by and among the Registrant and The
Walt Disney Company.
10.35(1) Governance Agreement by and among the Registrant, The Walt Disney
Company and DEI.
10.36(1) License Agreement by and between DEI and Infoseek California.
10.37(1) Licensing and Services Option Agreement by and between DEI and
Infoseek California.
10.38(1) Product Management Agreement by and between DEI and Infoseek
California.
10.39(1) Promotional Service Agreement by and between American Broadcasting
Companies, Inc. and Infoseek California.
10.40(1) Representation Agreement by and among ESPN/Starwave Partners, a New
York General Partnership ("ESPN Partners"), Starwave and the
Registrant.
10.41(1) Representation Agreement by and among ABC/Starwave Partners, a New
York General Partnership ("ABC News Partners"), Starwave and the
Registrant.
10.42(1) Preferred Shares Rights Agreement by and between the Registrant and
BankBoston N.A. Rights Agent (including Form of Certificate of
Designations of Rights, Preferences and Privileges of Series A
Preferred Stock and Form of Rights Certificate).
10.43(1) Amended and Restated ESPN/Starwave Partnership Agreement by and
between ESPN Online Investments, Inc. and Starwave Ventures, a
Washington corporation ("Starwave Partner").
10.44(1) Amended and Restated ESPN/Starwave Management and Services
Agreement by and between ESPN Enterprises Inc., a Delaware
corporation, Starwave and ESPN Starwave Partners.
10.45(1) Amended and Restated ABC News/Starwave Partnership Agreement by and
between DOL Online Investments, Inc., a California corporation, and
Starwave Partner.
10.46(1) Amended and Restated ABC News/Starwave Management and Services
Agreement by and between ABC, Inc., a Delaware corporation,
Starwave and ABC News Partners.
10.47(1) Employment Agreement by and between Starwave and Patrick J.
Naughton.
10.48(1) First Offer Letter Agreement between Disney and Steven T. Kirsch.
10.49(7) Starwave Corporation Revised 1992 Combined Incentive and
Nonqualified Stock Option Plan, Amended and Restated as of March 7,
1995.
10.50(7) Starwave Corporation 1997 Nonqualified Stock Option Plan.
10.51(8) Amended and Restated Infoseek Corporation 1996 Stock Option/Stock
Issuance Plan.
10.52(8) Amended and Restated Infoseek Corporation Employee Stock Purchase
Plan.
10.53(8) Infoseek Corporation 1998 Employee and Acquisition Nonqualified
Stock Option Plan.
10.54(9) Amended and Restated WebChat Communications, Inc. 1997 Stock Option
Plan.
10.55* Quando, Inc. Secured Promissory Note, dated July 24, 1998.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.56* Agreement of Lease, dated February 20, 1998, by and between Sixth &
Virginia Properties, a Washington General Partnership, and Starwave
Corporation, a Washington corporation.
10.57* Lease Agreement, dated March 4, 1992, between Vulcan Northwest,
Inc., a Washington corporation (later assigned to Starwave
Corporation, a Washington corporation) and Sunset Office Limited
Partnership, a Washington limited partnership (later assigned to
Obayashi Corporation, a Japan corporation), as amended December 1,
1998.
16.1(1) Letter of KPMG Peat Marwick LLP regarding change in certifying
accountant of Starwave.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors (Infoseek).
23.2 Consent of PricewaterhouseCoopers LLP / Starwave.
23.3 Consent of PricewaterhouseCoopers LLP / ESPN / Starwave Partners.
23.4 Consent of PricewaterhouseCoopers LLP / ABC / Starwave Partners.
23.5 Consent of KPMG Peat Marwick LLP / Starwave.
23.6 Consent of KPMG Peat Marwick LLP / Quando, Inc.
23.7* Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibits 5.1 and 8.1).
24.1* Power of Attorney.
99.1 Quando, Inc. Form of Proxy.
99.2 Quando, Inc. Form of Written Consent.
99.3* Schedule of Valuation and Qualifying Accounts.
</TABLE>
(b) Financial Statement Schedules
Valuation and Qualifying Accounts for the Nine Months Ended September 30,
1998 (unaudited) and the Years Ended December 31, 1995, 1996 and 1997.
- --------
* previously filed
(1) Incorporated by reference to the Registrant's Registration Statement Form
S-4 (File No. 333-65635) declared effective October 14, 1998.
(2) Incorporated by reference to the Registrant's Registration Statement Form
S-1, as amended, (File No. 333-04142) declared effective June 11, 1996.
(3) Incorporated by reference to the Registrant's Form S-3, as amended, (File
No. 333-45087) declared effective February 12, 1998.
(4) Incorporated by reference to the Registrant's Form 10-K for the year ended
December 31, 1997.
(5) Incorporated by reference to the Registrant's Quarterly Report on Form 10-
Q for the quarter ended March 31, 1997.
(6) Incorporated by reference to the Registrant's Quarterly Report on Form 10-
Q for the quarter ended September 30, 1997.
(7) Incorporated by reference to the Registrant's Form S-8 (File No. 333-
67507) declared effective November 18, 1998.
(8) Incorporated by reference to the Registrant's Form S-8 (File No. 333-
67517) declared effective November 18, 1998.
(9) Incorporated by reference to the Registrant's Form S-8 (File No. 333-
67519) declared effective November 18, 1998.
II-4
<PAGE>
ITEM 22. UNDERTAKINGS
(a) (A) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the Registration Statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(B) The undersigned Registrant hereby undertakes that prior to any
public reoffering of the securities registered hereunder through use of
a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such reoffering prospectus will
contain the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed underwriters,
in addition to the information called for by the other Items of the
applicable form.
(C) The undersigned Registrant undertakes that every prospectus: (i)
that is filed pursuant to paragraph (B) immediately preceding, or (ii)
that purports to meet the requirements of Section 10(a)(3) of the Act
and is used in connection with an offering of securities subject to Rule
415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and
that, for purposes of determining any liability under the Act, each such
post-effective amendment shall be deemed to be a new
II-5
<PAGE>
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(4) Insofar as indemnification for liabilities arising under the Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Certificate of Incorporation, as amended,
and the Bylaws, as amended, of the Registrant and the Delaware General
Corporation Law, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Proxy
Statement/Prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form S-4,
within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding
to the request.
(c) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-4 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Sunnyvale, State of California, on the 11th day
of January, 1999.
Infoseek Corporation
a Delaware corporation
/s/ Harry M. Motro
By: _________________________________
Harry M. Motro
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Harry M. Motro President, Chief Executive January 11, 1999
______________________________________ Officer (Principal
Harry M. Motro Executive Officer) and
Director
* Senior Vice President, January 11, 1999
______________________________________ Chief Operating Officer
Leslie E. Wright and Chief Financial
Officer (Principal
Accounting Officer)
* Chairman of the Board of January 11, 1999
______________________________________ Directors
Steven T. Kirsch
* Director January 11, 1999
______________________________________
Steven Bornstein
* Director January 11, 1999
______________________________________
Robert Iger
* Director January 11, 1999
______________________________________
Matthew J. Stover
* Director January 11, 1999
______________________________________
Jake Winebaum
* Director January 11, 1999
______________________________________
John E. Zeisler
Director
______________________________________
L. William Krause
</TABLE>
<TABLE>
<S> <C> <C>
/s/ Harry M. Motro
*By: _________________________________
Harry M. Motro
Attorney-in-Fact
</TABLE>
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<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGE
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<C> <S> <C>
2.1* Agreement and Plan of Reorganization, dated July 24,
1998, by and among Infoseek Corporation, a California
corporation, Steelhead Acquisition Corp., an Oregon
corporation, Quando, Inc., an Oregon corporation,
David Billstrom and William Neuhauser, and with
respect to Article VII only, Stanton R. Koch and U.S.
Bank Trust, N.A. (the "Reorganization Agreement").
2.2* Amendment No. 1 to Reorganization Agreement, dated
December 7, 1998.
2.3* Form of Plan of Merger by and among the Registrant,
Steelhead Acquisition Corp., an Oregon corporation,
and Quando, Inc., an Oregon corporation.
2.4* Form of Employment and Non-Competition Agreement with
David Billstrom and William Neuhauser.
3.1(1) Amended and Restated Certificate of Incorporation of
the Registrant.
3.2(1) Bylaws of the Registrant.
4.1(1) Specimen Stock Certificate of the Registrant.
4.2(2) Third Amended and Restated Investors' Rights Agreement
dated April 19, 1996 among the Registrant and the
investors and founders named therein.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation, with respect to the
securities being issued.
8.1* Tax Opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation.
8.2* Tax Opinion of Pillsbury Madison & Sutro LLP.
10.1(2) Infoseek Corporation Stock Option Plan, as amended on
March 20, 1996, subject to qualification by the State
of California.
10.2(2) Form of Offer Letter among the Registrant and its
officers.
10.3(1) Form of Indemnification Agreement entered into between
the Registrant and its directors and officers.
10.4(2) Founders Agreement dated February 1, 1994 among the
Registrant and the founders named therein, as amended
June 30, 1994.
10.5(2) Employee Stock Purchase Agreement dated March 9, 1996
between the Registrant and John Nauman.
10.6* Assignment and Assumption of Lease, dated May 12,
1998, by and between Infoseek California and 280,
Inc., a California corporation.
10.7(2) Standard Form of Office Lease dated April 1996 between
the Registrant and Richfield Investment Company.
10.8(2) Software Development and Licensing Master Agreement
dated July 8, 1994, as amended on February 13, 1995
and April 24, 1995, between the Registrant and Applied
Computing Systems Institute of Massachusetts, Inc.
10.9(2) Internet Services and Products Master Agreement dated
May 22, 1995 between the Registrant and BBN Planet
Corporation.
10.10(2) Net Search Program--Premier Provider Agreement between
the Registrant and Netscape Communications Corporation
dated March 22, 1996, as amended on that date.
10.11(3) Premier Provider Service Agreement between the
Registrant and Netscape Communications Corporation
dated March 17, 1997.
10.12(2) Software License and Distribution Agreement between
the Registrant and Personal Library Software, Inc.
dated June 17, 1994.
10.13(2) XSoft/Infoseek Software Distribution and License
Agreement--Lexicons, dated March 31, 1996 between the
Registrant and XSoft, a division of XEROX Corporation.
10.14(2) Customer Support Program Agreement for Infoseek among
the Registrant and SunService Corporation dated
January 1, 1996.
</TABLE>
<PAGE>
EXHIBIT INDEX--(CONTINUED)
<TABLE>
<CAPTION>
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EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGE
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<C> <S> <C>
10.15(2) Purchase Orders dated March 21, 1996, February 1,
1996, December 1, 1995, October 25, 1995, October 6,
1995 between the Registrant and Sun Microsystems, Inc.
10.16(2) Form Consulting Services Agreement among the
Registrant and its consultants.
10.17(2) Joint Marketing Agreement dated effective April 15,
1996 between the Registrant and Sun Microsystems Inc.
10.18(2) Online Service Agreement dated February 28, 1995
between the Registrant and Reuters NewMedia, Inc., as
amended January 4, 1996 and April 19, 1996.
10.19(3) Amendment No. 3 to Online Service Agreement between
the Registrant and Reuters NewMedia, Inc., dated
October 30, 1996.
10.20(3) Fourth Amendment to the On-Line Directory Agreement
between the Registrant and Reuters NewMedia, Inc.,
dated August 30, 1996.
10.21(4) Office lease dated March 4, 1997 between the
Registrant and Limar Realty Corp. #8.
10.22(3) Amendment No. 1 to XSoft/Infoseek Software
Distribution and License Agreement, between the
Registrant and XSoft, a division of XEROX Corporation,
dated December 16, 1996.
10.23(3) Amendment No. 2 to XSoft/Infoseek Software
Distribution and License Agreement, between the
Registrant and XSoft, a division of XEROX Corporation,
dated December 16, 1996.
10.24(2) Memorandum of Understanding between the Registrant and
IDG Communications Inc. dated April 22, 1996.
10.25(5) Loan and Security Agreement between the Registrant and
Silicon Valley Bank dated March 31, 1997.
10.26(2) Amendment No. 3 to Software Development and Licensing
Master Agreement between the Registrant and Applied
Computing Systems Institute of Massachusetts, Inc.
dated March 18, 1996.
10.27(6) Amendment No. 1 and 2 to Office Lease dated March 4,
1997 between the Registrant and Limar Realty Corp.
10.28(1) Agreement and Plan of Reorganization, dated as of June
18, 1998, by and among Infoseek Corporation, a
California corporation ("Infoseek California"), the
Registrant, Starwave Corporation, a Washington
corporation ("Starwave"), and Disney Enterprises,
Inc., a Delaware corporation ("DEI").
10.29(1) Common Stock and Warrant Purchase Agreement by and
between the Registrant and The Walt Disney Company, a
Delaware corporation.
10.30(1) Registrant Common Stock Warrant.
10.31(1) Form of The Walt Disney Company Promissory Note.
10.32(1) Form of Registrant's Directors' and Officers'
Indemnification Agreement.
10.33(1) Form of Registration Rights Agreement by and among the
Registrant, DEI and The Walt Disney Company.
10.34(1) Form of Tax Sharing Agreement by and among the
Registrant and The Walt Disney Company.
10.35(1) Governance Agreement by and among the Registrant, The
Walt Disney Company and DEI.
10.36(1) License Agreement by and between DEI and Infoseek
California.
10.37(1) Licensing and Services Option Agreement by and between
DEI and Infoseek California.
10.38(1) Product Management Agreement by and between DEI and
Infoseek California.
</TABLE>
<PAGE>
EXHIBIT INDEX--(CONTINUED)
<TABLE>
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EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGE
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<C> <S> <C>
10.39(1) Promotional Service Agreement by and between American
Broadcasting Companies, Inc. and Infoseek California.
10.40(1) Representation Agreement by and among ESPN/Starwave
Partners, a New York General Partnership ("ESPN
Partners"), Starwave and the Registrant.
10.41(1) Representation Agreement by and among ABC/Starwave
Partners, a New York General Partnership ("ABC News
Partners"), Starwave and the Registrant.
10.42(1) Preferred Shares Rights Agreement by and between the
Registrant and BankBoston N.A. Rights Agent (including
Form of Certificate of Designations of Rights,
Preferences and Privileges of Series A Preferred Stock
and Form of Rights Certificate).
10.43(1) Amended and Restated ESPN/Starwave Partnership
Agreement by and between ESPN Online Investments, Inc.
and Starwave Ventures, a Washington corporation
("Starwave Partner").
10.44(1) Amended and Restated ESPN/Starwave Management and
Services Agreement by and between ESPN Enterprises
Inc., a Delaware corporation, Starwave and ESPN
Starwave Partners.
10.45(1) Amended and Restated ABC News/Starwave Partnership
Agreement by and between DOL Online Investments, Inc.,
a California corporation, and Starwave Partner.
10.46(1) Amended and Restated ABC News/Starwave Management and
Services Agreement by and between ABC, Inc., a
Delaware corporation, Starwave and ABC News Partners.
10.47(1) Employment Agreement by and between Starwave and
Patrick J. Naughton.
10.48(1) First Offer Letter Agreement between Disney and Steven
T. Kirsch.
10.49(7) Starwave Corporation Revised 1992 Combined Incentive
and Nonqualified Stock Option Plan, Amended and
Restated as of March 7, 1995.
10.50(7) Starwave Corporation 1997 Nonqualified Stock Option
Plan.
10.51(8) Amended and Restated Infoseek Corporation 1996 Stock
Option/Stock Issuance Plan.
10.52(8) Amended and Restated Infoseek Corporation Employee
Stock Purchase Plan.
10.53(8) Infoseek Corporation 1998 Employee and Acquisition
Nonqualified Stock Option Plan.
10.54(9) Amended and Restated WebChat Communications, Inc. 1997
Stock Option Plan.
10.55* Quando, Inc. Secured Promissory Note, dated July 24,
1998.
10.56* Agreement of Lease, dated February 20, 1998, by and
between Sixth & Virginia Properties, a Washington
General Partnership, and Starwave Corporation, a
Washington corporation.
10.57* Lease Agreement, dated March 4, 1992, between Vulcan
Northwest, Inc., a Washington corporation (later
assigned to Starwave Corporation, a Washington
corporation) and Sunset Office Limited Partnership, a
Washington limited partnership (later assigned to
Obayashi Corporation, a Japan corporation), as amended
December 1, 1998.
16.1(1) Letter of KPMG Peat Marwick LLP regarding change in
certifying accountant of Starwave.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors
(Infoseek).
23.2 Consent of PricewaterhouseCoopers LLP / Starwave.
23.3 Consent of PricewaterhouseCoopers LLP / ESPN /
Starwave Partners.
23.4 Consent of PricewaterhouseCoopers LLP / ABC / Starwave
Partners.
23.5 Consent of KPMG Peat Marwick LLP / Starwave.
23.6 Consent of KPMG Peat Marwick LLP / Quando, Inc.
23.7* Consent of Wilson Sonsini Goodrich & Rosati,
Professional Corporation (included in Exhibits 5.1 and
8.1).
</TABLE>
<PAGE>
EXHIBIT INDEX--(CONTINUED)
<TABLE>
<CAPTION>
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EXHIBIT NUMBERED
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<C> <S> <C>
24.1* Power of Attorney.
99.1 Quando, Inc. Form of Proxy.
99.2 Quando, Inc. Form of Written Consent.
99.3* Schedule of Valuation and Qualifying Accounts.
</TABLE>
- --------
* Previously filed
(1) Incorporated by reference to the Registrant's Registration Statement Form
S-4 (File No. 333-65635) declared effective October 14, 1998.
(2) Incorporated by reference to the Registrant's Registration Statement Form
S-1, as amended, (File No. 333-04142) declared effective June 11, 1996.
(3) Incorporated by reference to the Registrant's Form S-3, as amended, (File
No. 333-45087) declared effective February 12, 1998.
(4) Incorporated by reference to the Registrant's Form 10-K for the year ended
December 31, 1997.
(5) Incorporated by reference to the Registrant's Quarterly Report on Form 10-
Q for the quarter ended March 31, 1997.
(6) Incorporated by reference to the Registrant's Quarterly Report on Form 10-
Q for the quarter ended September 30, 1997.
(7) Incorporated by reference to the Registrant's Form S-8 (File No. 333-
67507) declared effective November 18, 1998.
(8) Incorporated by reference to the Registrant's Form S-8 (File No. 333-
67517) declared effective November 18, 1998.
(9) Incorporated by reference to the Registrant's Form S-8 (File No. 333-
67519) declared effective November 18, 1998.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 16, 1998, except for Note 8, as to which the
date is February 12, 1998 and Note 2, as to which the date is April 17, 1998,
in the Proxy Statement/Prospectus included in Amendment No. 2 to the
Registration Statement (Form S-4) of Infoseek Corporation for the registration
of shares of its common stock.
Our audits also included the financial statement schedule of Infoseek
Corporation included in the Registration Statement. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
-------------------------------
Ernst & Young LLP
San Jose, California
January 8, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Proxy Statement/Prospectus constituting
part of this Registration Statement on Form S-4/A of Infoseek Corporation of
our report dated November 18, 1998 relating to the financial statements of
Starwave Corporation, which appears in such Proxy Statement/Prospectus. We also
consent to the references to us under the headings "Experts" in such Proxy
Statement/ Prospectus.
/s/ PricewaterhouseCoopers LLP
-------------------------------------
PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Seattle, Washington
January 8, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Proxy Statement/Prospectus constituting
part of this Registration Statement on Form S-4/A of Infoseek Corporation of
our report dated November 18, 1998 relating to the financial statements of
ESPN/Starwave Partners, which appears in such Proxy Statement/ Prospectus.
/s/ PricewaterhouseCoopers LLP
-------------------------------------
PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Seattle, Washington
January 8, 1999
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Proxy Statement/Prospectus constituting
part of this Registration Statement on Form S-4/A of Infoseek Corporation of
our report dated November 18, 1998 relating to the financial statements of ABC
News/Starwave Partners, which appears in such Proxy Statement/ Prospectus.
/s/ PricewaterhouseCoopers LLP
-------------------------------------
PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Seattle, Washington
January 8, 1999
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Starwave Corporation:
We consent to the use of our report dated February 7, 1997 included in the
Proxy Statement/ Prospectus on Form S-4 (No. 333-68561) of Infoseek Corporation
relating to the balance sheet of Starwave Corporation as of December 31, 1996,
and the related statements of operations, shareholders' deficit, and cash flows
for the year then ended and to the reference to our firm under the heading
"Experts" in the Proxy Statement/Prospectus.
/s/ KPMG PEAT MARWICK LLP
-------------------------------------
KPMG Peat Marwick LLP
Seattle, Washington
January 8, 1999
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Quando, Inc.:
We consent to the use of our report dated August 18, 1998 included in the Proxy
Statement/ Prospectus on Form S-4A filed on or about January 7, 1999 of
Infoseek, Inc. relating to the balance sheets of Quando, Inc. as of December
31, 1997 and 1996, and the related statements of operations, stockholders'
equity (deficit), and cash flows for each of the years in the three-year period
ended December 31, 1997 and to the reference to our firm under the heading
"Experts" in the Information Statement/Prospectus.
Our report dated August 18, 1998, contains an explanatory paragraph that states
that the Company has suffered recurring losses from operations and has a net
capital deficiency, which raises substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of that uncertainty.
/s/ KPMG PEAT MARWICK LLP
-------------------------------------
KPMG Peat Marwick LLP
Portland, Oregon
January 7, 1999
<PAGE>
PROXY EXHIBIT 99.1
QUANDO, INC.
520 NW Davis Street
Portland, OR 97209
Proxy solicited by Board of Directors for Special Meeting of the Shareholders--
January 27, 1999
The undersigned hereby appoints David Billstrom and William Neuhauser, or
each of them, proxies, each with the power of substitution, to vote the shares
of the undersigned at the Special Meeting of the Shareholders of QUANDO, INC.
on January 27, 1999, and any adjournments or postponements thereof, upon all
matters that may properly come before the meeting. Without otherwise limiting
the foregoing general authorization, the proxies are instructed to vote as
indicated herein.
This proxy, which is solicited on behalf of the Board of Directors, will be
voted FOR the matters described below unless the shareholder specifies
otherwise, in which case it will be voted as specified. If you wish to vote in
accordance with the Board of Directors' recommendations, please sign the proxy.
You need not mark any boxes. In their discretion, the proxies are authorized to
vote upon such other business as may properly come before the meeting.
The Board of Directors recommends a vote FOR the following matters to come
before the meeting:
To take the following actions:
A. To approve and adopt the Agreement and Plan of Reorganization, dated as
of July 24, 1998, as amended December 7, 1998, by and among Infoseek
Corporation, Steelhead Acquisition Corp., Quando, Inc.,
David Billstrom, William Neuhauser, Stanton R. Koch and U.S. Bank
Trust, N.A.
B. To appoint Stanton R. Koch as the Shareholder Representative in
connection with the escrow provisions and pursuant to the Agreement and
Plan of Reorganization.
C. To approve the merger of Steelhead Acquisition Corp., a wholly owned
subsidiary of Infoseek Corporation, with and into Quando, Inc. pursuant
to the Agreement and Plan of Reorganization by which Quando would become
a wholly owned subsidiary of Infoseek Corporation.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C>
[_] [_] [_]
</TABLE>
Dated: January , 1999
----------------------------------------
Signature(s) of Shareholder or
Shareholders, (Executors,
Administrators, Trustees, etc. should
give full title).
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING OF THE SHAREHOLDERS, YOU
ARE URGED TO MARK, SIGN, DATE AND PROMPTLY RETURN THIS PROXY, FIRST BY
FACSIMILE AND THEN BY USING THE ENCLOSED, POSTAGE-PAID ENVELOPE. ALL SHARES
HELD BY THE UNDERSIGNED, WHETHER COMMON OR PREFERRED, SHALL BE DEEMED VOTED AS
SET FORTH HEREIN.
<PAGE>
EXHIBIT 99.2
QUANDO, INC.
WRITTEN CONSENT
The undersigned shareholders of Quando, Inc. ("Quando") hereby consent to the
proposals set forth below in the manner indicated.
VOTING INSTRUCTION--ALL SHAREHOLDERS SHOULD VOTE.
WHERE A SEPARATE VOTE OF ANY PARTICULAR CLASS OF STOCK IS REQUIRED, THIS
CONSENT SHALL BE TREATED AS A CLASS VOTE.
PLEASE RETURN YOUR COMPLETED WRITTEN CONSENT TO: QUANDO, INC.; ATTENTION: ZACK
SMITH (FACSIMILE: 503-225-1987) A POSTAGE-PAID RETURN ENVELOPE HAS BEEN
INCLUDED FOR YOUR CONVENIENCE.
TO ALL QUANDO SHAREHOLDERS, PLEASE MARK VOTES, AS IN THIS EXAMPLE [X]
To take the following actions:
A. To approve and adopt the Agreement and Plan of Merger (the
"Reorganization Agreement"), dated as of July 24, 1998, as amended
December 7, 1998, by and among Infoseek Corporation ("Infoseek"),
Steelhead Acquisition Corp. ("Merger Sub"), Quando, David Billstrom,
William Neuhauser and U.S. Bank Trust, N.A.
B. To appoint Stanton R. Koch as the Shareholder Representative in
connection with the escrow provisions and pursuant to the Reorganization
Agreement.
C. To approve the merger of Merger Sub, a wholly owned subsidiary of
Infoseek, with and into Quando pursuant to the Reorganization Agreement
by which Quando would become a wholly owned subsidiary of Infoseek.
[_] FOR [_] AGAINST
THE SHARES REPRESENTED BY THIS CONSENT WILL BE TREATED AS DIRECTED OR, IF NO
DIRECTION IS GIVEN AND THIS CONSENT IS PROPERLY SIGNED AND DELIVERED TO QUANDO,
WILL BE TREATED AS CONSENTING "FOR" THE PROPOSAL SET FORTH ABOVE. ALL SHARES
HELD BY THE UNDERSIGNED, WHETHER COMMON OR PREFERRED, SHALL BE DEEMED VOTED AS
SET FORTH HEREIN.
[_] MARK HERE FOR ADDRESS CHANGE AND NOTE BELOW.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
If signing as attorney, executor, trustee or guardian, please give your full
title as such. If stock is held jointly, each owner should sign.
Dated: January , 1999
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------- -------------------------------------------
(Please Type or Print Name) (Please Type or Print Name)
- ------------------------------------------- -------------------------------------------
(Signature) (Signature)
</TABLE>
