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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 3, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-25071
INFOSEEK CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 77-0494507
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1399 MOFFETT PARK DRIVE
SUNNYVALE, CA 94089
(Address of principal executive offices)
408-543-6000
(Registrant's telephone number, including area code)
Indicate by check (X) whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15 (d) of the Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes : X No
As of August 11, 1999 there were 62,555,726 shares of the registrant's
Common Stock outstanding.
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TABLE OF CONTENTS
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NUMBER
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Unaudited Balance Sheets as of July 3, 1999 and October 3,
1998................................................................................... 3
Condensed Consolidated Unaudited Interim Statements of Operations for the Three and
Nine Months Ended July 3, 1999 and June 30, 1998....................................... 4
Condensed Consolidated Unaudited Interim Statements of Cash Flows for the Nine Months
Ended July 3, 1999 and June 30, 1998................................................... 5
Notes to Condensed Consolidated Unaudited Interim Financial Statements................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 15
Risk Factors........................................................................... 24
PART II OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 42
Item 4. Submission of Matters to a Vote of Security Holders.................................... 43
Item 6. Exhibits and Reports on Form 8-K....................................................... 44
Signatures............................................................................. 45
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INFOSEEK CORPORATION
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
JULY 3, 1999 OCTOBER 3, 1998
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Assets
Current assets:
Cash and cash equivalents............................................ $ 33,252 $ 628
Short-term investments............................................... 53,213 51,240
Accounts receivable, net............................................. 22,409 6,942
Prepaid to service providers......................................... 7,919 20,338
Other current assets................................................. 6,704 998
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Total current assets............................................ 123,497 80,146
Property and equipment, net............................................. 26,630 15,370
Direct acquisition costs................................................ 114 2,825
Investments in Joint Ventures and others................................ 9,774 550
Intangible and other assets............................................. 836,163 2,765
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Total assets.................................................... $ 996,178 $ 101,656
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Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable..................................................... $ 15,408 $ 3,560
Accrued payroll and related expenses................................. 10,067 2,191
Accrued liabilities to service providers............................. 4,413 16,058
Other accrued liabilities............................................ 10,126 2,418
Deferred revenue..................................................... 35,970 4,789
Short-term obligations............................................... 3,568 2,942
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Total current liabilities....................................... 79,552 31,958
Long-term obligations................................................... 979 2,981
Deferred tax liabilities................................................ 45,065 --
Commitments and Contingencies
Stockholders' equity:
Preferred stock...................................................... -- --
Common stock......................................................... 1,262,026 121,292
Accumulated deficit.................................................. (265,910) (53,724)
Deferred compensation................................................ (421) (717)
Notes receivable from stockholders................................... (125,108) (134)
Unrealized loss on currency translation.............................. (5) --
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Total stockholders' equity...................................... 870,582 66,717
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Total liabilities and stockholders' equity...................... $ 996,178 $ 101,656
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</TABLE>
See notes to condensed consolidated unaudited interim financial statements.
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INFOSEEK CORPORATION
CONDENSED CONSOLIDATED UNAUDITED INTERIM STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
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THREE MONTHS ENDED NINE MONTHS ENDED
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JULY 3, 1999 JUNE 30, 1998 JULY 3, 1999 JUNE 30, 1998
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<S> <C> <C> <C> <C>
Revenues:
Advertising revenues....................... $ 33,210 $ 15,269 $ 87,905 $ 40,020
Software licensing revenues................ 2,932 1,797 8,049 4,174
-------- --------- -------- ---------
Total revenues........................ 36,142 17,066 95,954 44,194
-------- --------- -------- ---------
Costs and expenses:
Hosting, content and website costs......... 17,057 2,524 38,476 6,600
Amortization of intangibles related to
hosting, content and website costs.... 9,759 -- 23,701 --
-------- --------- -------- ---------
Total hosting, content and website costs 26,816 2,524 62,177 6,600
Research and development................... 9,536 2,667 21,888 6,818
Sales and marketing........................ 28,830 11,863 86,045 34,240
General and administrative................. 5,089 2,061 18,085 5,723
Amortization of goodwill................... 17,756 -- 43,396 --
In-process research and development -- -- 76,939 --
-------- --------- -------- ---------
Total costs and expenses.............. 88,027 19,115 308,530 53,381
-------- --------- -------- ---------
Operating loss................................ (51,885) (2,049) (212,576) (9,187)
Loss from Joint Ventures...................... (2,575) -- (7,994) --
Interest and other income, net................ 3,168 782 8,384 1,472
-------- --------- -------- ---------
Net loss...................................... $(51,292) $(1,267) $(212,186) $(7,715)
-------- --------- -------- ---------
-------- --------- -------- ---------
Basic and diluted net loss per share.......... $ (0.83) $ (0.04) $ (3.76) $ (0.26)
Shares used in computing basic and
diluted net loss per share.................. 61,952 31,294 56,450 29,152
</TABLE>
See notes to condensed consolidated unaudited interim financial statements.
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INFOSEEK CORPORATION
CONDENSED CONSOLIDATED UNAUDITED INTERIM STATEMENTS OF CASH FLOWS
(In thousands)
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<CAPTION>
NINE MONTHS ENDED
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JULY 3, 1999 JUNE 30, 1998
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Cash flows from operating activities:
Net loss........................................................................ $(212,186) $(7,715)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash consideration from Dr. Koop agreement............................... (691) --
Write-off of in-process technology........................................... 76,939 --
Depreciation and amortization................................................ 80,908 4,589
Losses from Joint Ventures................................................... 7,994 --
Write down of restructure related assets..................................... -- 2,080
Changes in assets and liabilities:
Accounts receivable, net........................................................ (14,511) (4,500)
Prepaid to service providers.................................................... 12,419 --
Other current assets............................................................ (5,231) (25)
Direct acquisition costs........................................................ (10,663) --
Intangible and other assets..................................................... (4,085) (2,519)
Accounts payable................................................................ 9,045 1,334
Accrued payroll and related expenses............................................ 5,523 884
Accrued liabilities to service providers........................................ (11,645) 2,750
Other accrued liabilities....................................................... 2,169 2,603
Deferred revenue................................................................ 25,216 3,180
Accrued restructuring and other charges......................................... -- (2,904)
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Net cash used in operating activities................................... (38,799) (243)
Cash flows from investing activities:
Investments in Joint Ventures and others........................................ (4,986) --
Purchases of available-for-sale securities...................................... (112,630) (102,962)
Proceeds from sales and maturities of available-for-sale securities............. 110,657 64,404
Purchases of property and equipment............................................. (16,248) (6,265)
Cash received from Starwave and Quando acquisitions............................. 767 --
Issuance of notes receivable.................................................... (950)
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Net cash used in investing activities................................... (22,440) (45,773)
Cash flows from financing activities:
Proceeds from term loan......................................................... -- 398
Repayments of term loan......................................................... (1,376) (1,581)
Proceeds from issuance of convertible debt...................................... -- 305
Repayments of shareholders' note receivable..................................... 14,026 --
Proceeds from issuance of common stock.......................................... 81,218 45,021
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Net cash provided by financing activities............................... 93,868 44,143
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Effect of exchange rate fluctuations on cash and cash equivalents.............. (5) --
Net increase/(decrease) in cash and cash equivalents............................ 32,624 (1,873)
Cash and cash equivalents at beginning of period................................ 628 2,541
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Cash and cash equivalents at end of period...................................... $33,252 $ 668
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Cash paid for interest.......................................................... $ 323 $ 546
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</TABLE>
See notes to condensed consolidated unaudited interim financial statements.
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INFOSEEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED UNAUDITED INTERIM FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
In this Quarterly Report on Form 10-Q, references to "Infoseek" or
the "Company" on or after November 18, 1998 are references to Infoseek
Corporation, a Delaware corporation and its wholly owned subsidiaries
including Infoseek Corporation, a California corporation, Starwave
Corporation ("Starwave"), Quando, Inc. ("Quando"), and Infoseek Japan Holding
Corporation and Infoseek Japan KK (collectively, "Infoseek Japan"), and
references to Infoseek prior to November 18, 1998 are references to Infoseek
Corporation, a California corporation. When necessary for clarity, Infoseek
Corporation, a California corporation, is referred to as "Infoseek
California" and Infoseek Corporation, a Delaware corporation, is referred to
as "Infoseek Delaware." References to "Disney" refer to The Walt Disney
Company and its affiliated companies. References to the "ABCNews Joint
Venture" and the "ESPN Joint Venture" refer to the joint ventures Starwave
maintains with affiliates of Disney and ESPN, respectively. The ABCNews Joint
Venture and the ESPN Joint Venture are together referred to as the "Joint
Ventures."
Infoseek Corporation was incorporated in California in August 1993
to develop and provide Internet and World Wide Web search and navigation
services. On November 18, 1998, Infoseek entered into a significant
transaction with The Walt Disney Company (see Note 7). In this transaction,
Infoseek acquired Starwave Corporation from Disney and formed a holding
company incorporated in Delaware on June 12, 1998, for purposes of holding
the capital stock of Infoseek Corporation, a California corporation, and
Starwave. On July 10, 1999, Infoseek agreed to be acquired by The Walt Disney
Company, subject to conditions to closing (see Note 14).
Infoseek is a leading provider of Internet services and software
products. Infoseek produces GO Network (home page: go.com), an Internet
portal site that combines search and directory services, including 19 easy to
navigate "centers" that integrate search results with relevant information,
services, products and communities on the Internet, and the content of
ABC.com, ABCNEWS.com, ESPN.com, Disney and others. The service contains
unique features like universal navigation, follow-me tabs, universal
registration, universal personalization and security. Infoseek has a
strategic relationship with Disney concerning GO Network, including its
promotion and content. Infoseek also produces other leading Internet sites,
such as ESPN.com and ABCNEWS.com, in partnership with Disney affiliates.
On January 28, 1999, the Company changed to a fiscal year with 52 or
53 week periods ending on the Saturday nearest September 30. This Quarterly
Report presents financial information for the third quarter of fiscal 1999,
beginning April 4, 1999 and ending July 3, 1999. This Quarterly Report also
presents financial information for the first nine month period of fiscal
1999, beginning October 4, 1998 and ending July 3, 1999. The unaudited
results of operations of the Company for the three month periods ended July
3, 1999 and June 30, 1998 both contained 91 days. The unaudited results of
operations and cash flows of the Company for the nine month periods ended
July 3, 1999 and June 30, 1998 both contained 273 days.
Prior to November 18, 1998, Infoseek Delaware was a wholly owned
subsidiary of Infoseek California that was created for conducting the
transactions described above. Infoseek Delaware, the Registrant with the
Securities and Exchange Commission, did not conduct business activities prior
to November 18, 1998. Since November 18, 1998, Infoseek Delaware's business
has primarily consisted of holding the capital stock of Infoseek California,
Starwave, Quando, and, after June 28, 1999, Infoseek Japan (See Note 6).
Accordingly, this Quarterly Report on Form 10-Q presents financial
information of Infoseek for the three and nine month periods ended July 3,
1999, including the combined results of operations of Starwave from November
18, 1998, the combined results of
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operations of Quando from January 15, 1999 and the combined results of
operations of Infoseek Japan from June 28, 1999. The acquisitions of Starwave
and Quando were accounted for under the purchase method of accounting (see
Note 7). As a result, information presented herein may not be comparable to
results in previous periods.
The condensed consolidated financial information as of July 3, 1999
and for the three and nine month periods ended July 3, 1999 and June 30, 1998
included herein is unaudited and has been prepared by the Company in
accordance with generally accepted accounting principles and reflects all
adjustments, consisting only of normal recurring adjustments, which in the
opinion of management are necessary to state fairly the Company's financial
position, results of operations, and cash flows for the periods presented.
The October 3, 1998 balance sheet was derived from audited financial
statements at that date. All significant intercompany transactions and
balances have been eliminated. The Company conducted its business
predominantly within one industry segment for all periods presented.
Management assesses the Company's performance and measures the Company's net
loss and total assets on a single segment basis.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements as well as the reported amounts of revenue and expenses
during the reporting period. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in Infoseek's Transition Report on Form
10-K for the nine month period ended October 3, 1998, and quarterly reports
on Form 10-Q for the quarterly periods ended January 2, 1999 and April 3,
1999, filed with the Securities and Exchange Commission. The results of
operations for the three and nine month periods ended July 3, 1999 are not
necessarily indicative of the results to be expected for any future periods.
Certain prior year items have been reclassified in order to conform
to the current year's presentation.
NOTE 2. NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"),
"Earnings per Share." SFAS No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary and fully diluted earnings per share, outstanding non-vested
shares are not included in the computations of basic and diluted earnings per
share until the time-based vesting restriction has lapsed. Basic earnings per
share also excludes any dilutive effects of options, warrants and convertible
securities. Diluted net loss per share does not include options, warrants or
convertible securities, as they would be anti-dilutive for all periods
presented due to the net loss for each period. Diluted net loss per share is
very similar to the previously reported fully diluted net loss per share.
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, FASB issued Statement of Financial Accounting
Standards No. 133 ("SFAS No. 133") "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 requires the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through net income. If the derivative
is designated as a hedge, depending on the nature of the hedge, changes in
the fair value of the derivative are either offset against the change in fair
value of assets, liabilities, or firm commitments through earnings or
recognized in comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will
be immediately recognized in earnings. SFAS No. 133 was scheduled to be
effective for years beginning after June 15, 1999. However, in June 1999, the
FASB issued Statement of Financial Accounting Standards No. 137 "Accounting
for Derivative Instruments and Hedging Activities Deferral of the Effective
Date of FASB Statement No. 133" which delays the effective date of SFAS No.
133 to fiscal years beginning after June 15, 2000. The Company is evaluating
the requirements of SFAS
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No. 133 and No. 137, but does not expect these pronouncements to materially
impact the Company's results of operations.
NOTE 4. COMPREHENSIVE NET LOSS
The components of the Company's comprehensive net loss are as
follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
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<S> <C> <C> <C> <C>
JULY 3, 1999 JUNE 30, 1998 JULY 3, 1999 JUNE 30, 1998
------------ ------------- ------------ -------------
Net loss....................................... $(51,292) $(1,267) $(212,186) $(7,715)
Foreign currency translation loss.............. (5) -- (5) --
------------ ------------- ------------ -------------
Comprehensive net loss......................... $(51,297) $(1,267) $(212,191) $(7,715)
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</TABLE>
Due to the Company's net loss for each of the periods presented
above, there are no tax effects allocated to any components of comprehensive
net loss for each of the periods presented above.
NOTE 5. CAPITALIZED INTERNAL USE SOFTWARE COSTS
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," which
establishes guidelines for the accounting for the costs of all computer
software developed or obtained for internal use. The Company adopted SOP 98-1
effective for the year ended October 2, 1999.
The Company is in the process of developing and implementing an
internal use software system which will integrate certain modules, such as
order entry, customer billing, human resources, purchasing and accounting.
During the second quarter of fiscal 1999, the Company began the development
phase of this software system and, as a result, has capitalized approximately
$4.0 million in development costs through July 3, 1999.
NOTE 6. JAPAN ASSET PURCHASE
On June 28, 1999, the Company completed the purchase of certain
assets from Digital Garage, Inc., a commercial distribution partner in Japan.
The acquired assets are held by the newly established Infoseek Japan. Total
consideration was $0.8 million in cash, the issuance of a note payable for
$3.3 million due in June 2000 and the forgiveness of $2.1 million of
indebtedness owed by Digital Garage, Inc. to Infoseek. The value of the
acquired assets is based on their fair values at the date of purchase.
The fair values of the acquired assets are as follows and are included as
part of intangible and other assets (in thousands):
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Tangible and intangible assets acquired:
Tangible assets..................................................... $ 423
Assembled workforce................................................. 2,222
Customer relationships.............................................. 3,592
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$ 6,237
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</TABLE>
The fair value of assembled workforce and customer relationships was
determined by management based upon a third-party appraisal and will be
amortized over an estimated life of two years. Amortization expense of these
intangible assets was insignificant for the three and nine month periods
ended July 3, 1999.
NOTE 7. BUSINESS COMBINATIONS
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STARWAVE
In June 1998, Infoseek entered into agreements with Starwave and
Disney relating to an acquisition by Infoseek of Starwave, of which Disney
was the principal shareholder, through a merger and exchange of shares. The
Starwave merger and related transactions were completed on November 18, 1998.
The acquisition was accounted for under the purchase method of
accounting. The purchase price of $917.8 million included $20.0 million of
transaction and direct acquisition costs and was allocated to the tangible
and intangible assets acquired and liabilities assumed. Intangible assets
include the Joint Venture relationships and goodwill which are amortized over
an estimated life of 10 years, and developed technology and assembled
workforce which are amortized over an estimated useful life of two years.
Based on a third-party appraisal, management determined that $72.6 million of
the purchase price represented acquired in-process research and development
that had not yet reached technological feasibility and had no alternative
future use. This amount was expensed during the quarter ended January 2, 1999
as a non-recurring charge upon consummation of the acquisition. Amortization
expense of intangible assets purchased was approximately $26.5 million and
$66.4 million during the three and nine month periods ended July 3, 1999,
respectively. Integration costs due to the integration of operations and
computer systems are estimated at $7.0 million, of which $3.7 million were
expensed as of July 3, 1999. Integration costs do not qualify as liabilities
in connection with a purchase business combination and are expensed as
incurred.
Under certain representation agreements by and among Infoseek,
Starwave and each of the Joint Ventures entered into in conjunction with the
Starwave merger, Starwave is engaged by the Joint Ventures on an exclusive
basis in the sale of advertising and other items as designated or approved by
the Joint Ventures and to provide additional services, if any, as the Joint
Ventures may request. Activities with respect to the sale of advertising on
the Joint Ventures' Internet services and other related items include the
negotiation, execution, renewal, amendment, modification or termination of
advertising and other related contracts. Starwave guarantees to the Joint
Ventures a minimum quarterly payment equal to the number of projected page
views, multiplied by 80%, multiplied by the minimum revenue rate. The minimum
revenue rate is based on the average advertising revenue rate per page view
of publicly traded Internet companies involved in activities comparable to
those of the Joint Ventures. If a mutually agreeable rate cannot be
determined, then the rate will be based on the Joint Ventures' 12 month
trailing average.
Starwave recognizes revenue on the sale of advertising and other
related items of the Joint Ventures due to its obligations under the
representation agreements. Starwave bears the risk of loss if it fails to
bill and collect amounts sufficient to cover its contractual guaranteed
minimum payments.
Under the representation agreements, Starwave pays the Joint
Ventures for the right to render services the greater of (i) the guaranteed
minimum payment or (ii) actual revenues billed to third parties for services,
in each case less only Starwave's actual and reasonably allocated costs of
providing the services and a profit margin of 5% of such costs. The
obligations of Starwave to pay these representation rights fees are
unconditional. Starwave is required to pay the Joint Ventures regardless of
whether Starwave is able to collect the related outstanding receivables.
Each of the Joint Ventures is accounted for under the equity method
since neither Infoseek nor Starwave has a majority voting interest in either
Joint Venture. Under each of the respective joint venture agreements,
required funding and profits/losses under each Joint Venture are split 60/40
between Starwave and Disney entities, respectively, in loss years and 50/50
in years in which the Joint Venture has net income. The other partners of
these Joint Ventures are subsidiaries of ESPN and Disney.
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Under a license agreement entered into by and between Disney and
Infoseek, Disney granted to Infoseek a license to exploit the trademarks and
web addresses associated with GO Network worldwide, and Infoseek has in
return agreed to pay Disney royalties. Royalties are calculated as one
percent (1%) of Infoseek's revenues other than revenues derived from software
sales and services. Royalties under the license agreement will not be earned
or paid until the end of any Infoseek fiscal year in which Infoseek has
positive earnings before interest, taxes, and amortization ("EBITA") as
defined and royalty payments in any year will not exceed 15% of EBITA in such
year.
The EBITA calculation, which includes amortization expense resulting
from the acquisition of both Starwave and Quando, for the three and nine
month periods ended July 3, 1999, is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 3, 1999 JULY 3, 1999
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<S> <C> <C>
Net loss............................................... $(51,292) $(212,186)
Interest expense....................................... 93 322
Amortization of intangibles:
Goodwill......................................... 17,756 43,396
Developed technology............................. 4,780 11,256
Assembled workforce.............................. 1,952 4,855
Joint Venture relationships...................... 4,463 11,157
---------- ----------
EBITA.................................................. $(22,248) $(141,200)
---------- ----------
---------- ----------
</TABLE>
Since the license agreement was not in effect for the three and nine
month periods ended June 30, 1998, EBITA for these periods is not presented.
QUANDO
On January 15, 1999, Infoseek completed its acquisition of Quando.
Quando creates constantly updated directories of information, including
shopping guides, event guides, contact directories, audio clip libraries,
review guides and Website rating guides, obtained from the Internet for users
to search the Web.
The acquisition was accounted for under the purchase method of
accounting. The purchase price of $20.5 million included $1.5 million of
transaction and direct acquisition costs and was allocated to the tangible
and intangible assets acquired and liabilities assumed. Intangible assets
include developed technology, assembled workforce and goodwill which are
amortized over an estimated useful life of two years. Based on a third-party
appraisal, management determined that $4.3 million of the purchase price
represented acquired in-process research and development that had not yet
reached technological feasibility and had no alternative future use. This
amount was expensed during the quarter ended April 3, 1999 as a charge upon
consummation of the acquisition. Amortization expense of intangible assets
purchased was approximately $2.5 million and $4.3 million during the three
and nine month periods ended July 3, 1999, respectively. Integration costs
due to the Quando acquisition are insignificant and are charged to expense as
incurred.
SELECTED UNAUDITED PRO FORMA COMBINED INFORMATION
The following selected unaudited pro forma combined results of
operations of Infoseek, Starwave and Quando for the three and nine month
periods ended July 3, 1999 and June 30, 1998 have been prepared assuming that
the acquisitions had occurred at the beginning of the periods presented. The
following selected unaudited pro
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forma information is not necessarily indicative of the results that would
have occurred had the acquisitions been completed at the beginning of the
periods indicated nor is it indicative of future operating results (in
thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JULY 3, 1999 JUNE 30, 1998 JULY 3, 1999 JUNE 30, 1998
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Total revenues................................. $ 36,142 $ 25,308 $ 102,321 $ 69,576
Operating loss (1)(2).......................... $(51,885) $(39,623) $(156,367) $(121,048)
Net loss(1)(2)(3).............................. $(51,292) $(42,316) $(156,852) $(128,158)
Basic and diluted net loss per share(1)(2)(3)..
$(0.83) $(0.68) $(2.54) $(2.15)
Shares used in computing basic and diluted net
loss per share.............................. 61,952 62,496 61,862 59,720
</TABLE>
(1) The operating loss, net loss and net loss per share amounts do not
include the $72.6 million and $4.3 million in-process research and
development charges relating to the Starwave and Quando acquisitions,
respectively.
(2) A pro forma adjustment has been made to operating loss, net loss and
net loss per share amounts for the representation rights fee
representing the Joint Ventures' revenues less allocated costs of 15%
of revenues, plus a 5% profit margin on allocated costs. In addition,
a pro forma adjustment has been made to reflect additional costs
Starwave would have incurred that were historically incurred by the
Joint Ventures.
(3) A pro forma adjustment has been made to reflect Starwave's allocated
(60%) losses from the Joint Ventures. The Joint Ventures combined
net losses totaled approximately $4.3 million and $16.7 million for
the three and nine months ended July 3, 1999, respectively, and
approximately $5.7 million and $15.1 million for the three and nine
months ended June 30, 1998, respectively. The Joint Ventures
combined total assets were approximately $5.6 million and $19.8
million at July 3, 1999 and October 3, 1998, respectively.
NOTE 8. FAIR VALUE OF FINANCIAL INSTRUMENTS
In April 1999, the Company entered into a distribution agreement
with Dr. Koop.com, Inc. ("Dr. Koop") under which Dr. Koop became the
exclusive provider of health and related content on certain websites of
Go Network. In addition, Dr. Koop also became the exclusive pharmacy and
drugstore, health insurance and clinical trials partner in the Go.com Health
Center and users on Go Network are able to access various health
information, services, interactive tools and commerce opportunities through a
Go Network/Dr. Koop co-branded website. The term of the distribution
agreement is for three years, except that either party may elect to terminate
the relationship after two years.
In consideration for the Company's exclusivity commitment with Dr.
Koop and the advertising impressions to be provided to Dr. Koop by the
Company, the Company is to receive certain cash payments as defined within
the distribution agreement. In addition, the Company also received two
warrants to purchase up to 625,000 shares of Dr. Koop common stock at an
exercise price of $8.60 per share. Neither warrant is exercisable prior to
one year after issuance. The Company recorded the fair value associated with
these warrants using a Black-Scholes option-pricing model and will recognize
revenues from the amortization of the warrants' fair value ratably over the
distribution agreement's commitment period. For the three and nine months
ended June 30, 1999, the Company recognized approximately $1.6 million of
advertising revenues in connection with the Dr. Koop distribution agreement,
of which approximately $0.7 million represented non-cash consideration.
NOTE 9. INTANGIBLE AND OTHER ASSETS
Intangible and other assets are comprised of the following (in thousands):
<TABLE>
<CAPTION>
JULY 3, 1999 OCTOBER 3, 1998
------------ ---------------
<S> <C> <C>
Developed technology........................................... $38,242 $ --
Assembled workforce............................................ 17,840 --
</TABLE>
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<TABLE>
<S> <C> <C>
Goodwill....................................................... 667,602 --
Joint Venture relationships.................................... 178,500 --
Customer relationships......................................... 3,592 --
Other assets................................................... 1,049 2,765
------------ ---------------
906,825 2,765
Accumulated amortization....................................... (70,662) --
------------ ---------------
$836,163 $2,765
------------ ---------------
------------ ---------------
</TABLE>
NOTE 10. SIGNIFICANT AGREEMENTS
On October 1, 1998, the Company entered into an agreement with
Microsoft to become one of five premier providers of search and navigation
services on Microsoft's network of Internet products and services. Under the
terms of the 12 month Microsoft agreement, the Company is obligated to pay an
aggregate of $10.7 million for a guaranteed minimum number of impressions on
both Microsoft's Internet Explorer search feature and Microsoft's website.
The Company will also pay, based on the number of impressions delivered, for
additional impressions on both Internet Explorer and Microsoft's website, up
to a maximum of $18.0 million. The obligated amount under the Microsoft
agreement is being amortized on a straight-line basis over the one-year term
of the agreement, beginning in the quarter ended January 2, 1999, the quarter
in which the service was launched. Payments were made in the quarters ended
January 2, 1999 and April 3, 1999 in two equal installments, and were
included in "Prepaid to Service Providers." For the three and nine month
periods ended July 3, 1999, the Company amortized approximately $2.6 million
and $8.0 million, respectively.
On August 28, 1998, Infoseek entered into an agreement with WebTV
Networks, Inc. ("WebTV") pursuant to which Infoseek is the exclusive provider
of search and directory services to WebTV. Under this two year agreement,
Infoseek is responsible for managing advertising sales for all of WebTV's
search traffic and the substantial majority of WebTV's current non-search
traffic. Pursuant to the agreement, Infoseek is obligated to make cash
payments to WebTV totaling $26.0 million over a two year period, with $0.5
million paid upon the signing of the agreement, $14.5 million paid in advance
for the first five quarters upon mutual acceptance of the technology by both
parties, and the remaining $11.0 million to be paid ratably over the last
three quarters of the agreement term. On October 1, 1998, Infoseek and WebTV
agreed on the technology; however, cash was not paid until the quarter ended
January 2, 1999. The payments under the WebTV agreements are being amortized
on a straight-line basis over the period covered by the payment. Such
payments by Infoseek are subject to reimbursement depending on the number of
impressions delivered over the life of the agreement. Infoseek is to receive
all of the revenue generated from such advertising sales up to a
pre-determined amount that is in excess of Infoseek's total payment
obligations to WebTV under the agreement, with allocations of such revenue
between Infoseek and WebTV being made beyond this pre-determined amount. For
the three and nine month periods ended July 3, 1999, the Company incurred
approximately $3.2 million and $9.7 million of sales and marketing expenses,
respectively, related to the WebTV agreement. There can be no assurance that
Infoseek will be able to sell the available advertising inventory of WebTV
under this agreement or be able to collect the receivables resulting from
such advertising sales. This could have a material adverse effect on
Infoseek's business, results of operations and financial condition.
NOTE 11. PROMISSORY NOTE FROM STOCKHOLDER
In conjunction with the Starwave acquisition, Disney, an
approximately 42% stockholder of Infoseek, delivered a promissory note in the
principal amount of $139.0 million payable to Infoseek. The promissory note
bears interest on the principal amount outstanding at a rate of 6.5% per
annum and is payable in twenty quarterly principal installments, beginning on
February 18, 1999, of $6.9 million, with the final payment due on November
18, 2003. The promissory note, together with accrued and unpaid interest, may
be paid in whole or in
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part without premium or penalty at any time. The Company earned approximately
$2.1 million and $5.4 million of interest income related to this promissory
note in the three and nine month periods ended July 3, 1999.
NOTE 12. SEGMENT INFORMATION
The Company predominantly operates in one business segment-providing
Internet search and navigation products and services for which the Company
receives advertising revenues from its customers. Advertising revenues for
the three month periods ended July 3, 1999 and June 30, 1998 were
approximately $33.2 million and $15.3 million, respectively. Advertising
revenues for the nine month periods ended July 3, 1999 and June 30, 1998,
were approximately $87.9 million and $40.0 million, respectively.
The Chief Executive Officer has been identified as the Chief
Operating Decision Maker (CODM) because he has final authority over resource
allocation decisions and performance assessment. The CODM does not receive
discrete financial information about asset allocation, expense allocation, or
profitability from the Company's Internet search navigation products and
services or from its Ultraseek software license and support.
Total revenues generated from U.S. customers for the three month
periods ended July 3, 1999 and June 30, 1998 were approximately $35.3 million
and $16.8 million, respectively. Total revenues generated from U.S. customers
for the nine month periods ended July 3, 1999 and June 30, 1998 were
approximately $93.4 million and $43.6 million, respectively. Total revenues
generated from foreign customers for each of the three month periods ended
July 3, 1999 and June 30, 1998 totaled approximately $0.8 million and $0.3
million, respectively. Total revenues generated from foreign customers for
the nine month periods ended July 3, 1999 and June 30, 1998 were
approximately $2.5 million and $0.6 million, respectively.
NOTE 13. CONTINGENCIES, RISKS AND UNCERTAINTIES
From time to time, the Company may be a party to litigation and
claims incident to the ordinary course of its business. Although the results
of litigation and claims cannot be predicted with certainty, the Company
believes that the final outcome of such matters will not have a material
adverse effect on the Company's financial position, results of operations, or
cash flows.
On January 26, 1999, Civix-DDI, LLC, filed a complaint against
Infoseek Corporation and nineteen other defendants, Civil Action No. 99-B-172
in the United States District court for the District of Colorado claiming
patent infringement of U.S. Patent No. 5,682,525. The patent suit claims
infringement of an electronic mapping system and seeks unspecified damages
and a preliminary injunction. Infoseek denies any infringement and continues
to defend against the claims.
On February 18, 1999, GoTo.Com, Inc. filed a complaint GOTO.COM,
INC. V. THE WALT DISNEY COMPANY, DISNEY ENTERPRISES, INC., INFOSEEK
CORPORATION, AND MONTROSE CORPORATION, Civ. No. 99-01674 TJH, in the United
States District Court for the Central District of California. The complaint
alleges that the defendants' use of the GO NETWORK Green Traffic Light Logo
is confusingly similar to the plaintiff's unregistered GOTO.COM Logo. The
complaint seeks an unspecified amount of damages and a preliminary and
permanent injunction against the use of the logo. The Company denies all the
material allegations of the complaint and is defending against them.
On May 11, 1999, Internet Shopping Network, LLC filed a complaint
against Infoseek Corporation, Steven Kirsch, Harry Motro, Bhagwan D. Goel,
Civ. No. CV 781824, in the Superior Court of California, Santa Clara County
alleging misappropriation of trade secrets; breach of fiduciary duty; breach
of contract; tortious interference with contract; unfair competition,
conversion, and conspiracy. The suit demands an unspecified amount of damages
and a preliminary injunction. The Company and the individual defendants deny
all claims.
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The costs of defending these cases and their ultimate outcomes are
uncertain and cannot be estimated. There can be no assurance that Infoseek
will prevail in these cases, or that the result will not have a material
adverse effect on Infoseek's financial position or results of operations.
Infoseek anticipates that its current cash and other available
sources of funds will last through December 31, 1999. If the merger with
Disney does not occur, then Infoseek will need to raise additional funds. If
additional funds are raised through the issuance of equity or convertible
debt securities, the percentage ownership of the stockholders of Infoseek
will be reduced. Newly issued securities may have rights, preferences or
privileges senior to those of the holders of Infoseek's Common Stock. There
can be no assurance that additional financing will be available on terms
favorable to Infoseek, or at all. If adequate funds are not available or are
not available on acceptable terms, Infoseek's ability to fund current
operations, fund expansion, take advantage of acquisition opportunities,
develop or enhance services or products, or respond to competitive pressures
would be significantly limited. Such limitation could have a material
adverse effect on Infoseek's business, results of operations, financial
condition and prospects. The estimated period of available funds to meet its
capital requirements and other commitments is a forward-looking statement
that involves risks and uncertainties. There can be no assurance that
Infoseek will be able to meet its working capital and other cash requirements
after December 31, 1999 without Disney's support.
NOTE 14. SUBSEQUENT EVENTS
On July 10, 1999, Disney, Bingo Acquisition Corp. ("Acquisition
Company"), a wholly owned subsidiary of Disney, and Infoseek entered into an
Agreement and Plan of Reorganization, pursuant to which, subject to the terms
and conditions set forth therein, Acquisition Company will merge (the
"Merger") with and into Infoseek, with Infoseek as the surviving corporation
in the Merger. As a result of the Merger, (i) each outstanding share of
Infoseek common stock, par value $0.001 per share ("Infoseek Common Stock"),
other than shares of Infoseek Common Stock owned by Disney and Disney
Enterprises, Inc. ("DEI"), a wholly owned subsidiary of Disney, will be
converted into 1.15 shares of a new class of Disney common stock, par value
$0.01 per share, which will track the economic performance of Infoseek and
certain Disney assets to be contributed by Disney and its affiliates (the
"Internet Group"), (ii) each outstanding share of Infoseek Common Stock owned
by Disney will remain outstanding, (iii) each outstanding share of Infoseek
Common Stock owned by DEI will be converted into shares of a new series of
Disney voting preferred stock and (iv) Infoseek will become a direct wholly
owned subsidiary of Disney. Disney will retain an approximately 72% interest
in the economic performance of the Internet Group.
On July 12, 1999, KOTRIN V. INFOSEEK CORP., ET AL., Civ. A.
No.17285NC, one of a number of similar purported stockholder class action
complaints, was filed in the Delaware Court of Chancery against Infoseek, its
board of directors, and Disney. On July 15 and July 16, 1999, respectively,
MICHAEL RICHARDS V. INFOSEEK CORP., ET AL, Case No. CV783265 and MICHAEL
BASTA V. INFOSEEK CORP., ET AL., Case No. CV783282, both of which are
stockholder class action complaints, were filed in the Superior Court of the
State of California, Santa Clara County. All actions allege similar breaches
of fiduciary duty and seek to enjoin the proposed merger and the related
transactions as unfair to Infoseek's stockholders. Infoseek believes that
each of the stockholder class action complaints received to date is without
merit, and Infoseek intends to vigorously defend itself against each of such
claims.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended, that are subject to risks
and uncertainties. These forward-looking statements are typically denoted in
this Report by the phrases "anticipates," "believes," "expects," "plans" and
similar phrases. Actual results could differ materially from those projected
in the forward-looking statements as a result of the factors set forth in
"Risk Factors" beginning on page 24 of this Quarterly Report on Form 10-Q,
including, without limitation, those entitled "-The Proposed Merger with
Disney Involves Risks and Uncertainties and May Not Be Completed,"
"-Accounting Charges From Acquisitions Will Delay and Reduce Profitability,"
"-Infoseek's Financial Results Will Vary," "-If Infoseek Does Not Renew
Existing or Enter Into New Agreements Which Result in User Traffic, or If
Sites That Provide Traffic to Infoseek are Not Successful, Infoseek's
Revenues May Decrease," "-Infoseek Has Had Losses in the Past and Has
Difficulty Predicting Future Results But Expects Fluctuations and Losses in
the Future," "-If Infoseek Does Not Achieve Revenue Minimums Under
Representation Agreements, It May Incur Additional Losses Under These
Agreements," and "-If Internet Advertising and Related Sponsorships of
Infoseek's Services Are Not Accepted, Infoseek's Revenues Will Be Adversely
Affected." The discussion of those risk factors is incorporated herein by
this reference as if said discussion was fully set forth at this point.
EXPLANATORY NOTE
On January 28, 1999, the Company changed to a fiscal year with 52 or
53 week periods ending on the Saturday nearest September 30. This Quarterly
Report presents financial information for the third quarter of fiscal 1999,
beginning April 4, 1999 and ending July 3, 1999. This Quarterly Report also
presents financial information for the first nine-month period of fiscal
1999, beginning October 4, 1998, and ending July 3, 1999. The unaudited
results of operations of the Company for the three month periods ended July
3, 1999 and June 30, 1998, both contained 91 days. The unaudited results of
operations and cash flows of the Company for the nine month periods ended
July 3, 1999 and June 30, 1998, both contained 273 days.
Prior to November 18, 1998, Infoseek Delaware was a wholly owned
subsidiary of Infoseek California. Infoseek Delaware, the Registrant with the
Securities and Exchange Commission, did not conduct business activities prior
to November 18, 1998. Since November 18, 1998, Infoseek Delaware's business
has primarily consisted of holding the capital stock of Infoseek California,
Starwave Corporation ("Starwave"), Quando, Inc. ("Quando"), and after June
28, 1999, Infoseek Japan Holding Corporation and Infoseek Japan KK
(collectively, "Infoseek Japan"). Accordingly, this Quarterly Report on Form
10-Q presents financial information of Infoseek for the three and nine month
periods ended July 3, 1999, including the combined results of operations of
Starwave from November 18, 1998, the combined results of operations of Quando
from January 15, 1999, and the combined results of operations of Infoseek
Japan from June 28, 1999. The acquisitions of Starwave and Quando were
accounted for under the purchase method of accounting. As a result,
information presented herein may not be comparable to results in previous
quarters.
INFOSEEK OVERVIEW
Infoseek was formed in August 1993 to develop and provide Internet
and World Wide Web search and navigational services. From its 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.
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Infoseek introduced its first products and services in 1995. Through
September 1997, Infoseek's strategic focus was on developing its capabilities
as an Internet search and navigation service. After that time, the Company
began to execute a new strategy of building Infoseek brand awareness;
creating a richer viewer experience; maximizing value for Infoseek's
advertisers; providing intranet search products; and enhancing Infoseek's
search and navigation services, (the "Infoseek Service").
Beginning in early 1997, Infoseek began to license its Ultraseek
Server product to corporate customers for use on their intranet and public
website search applications. Gross margins from licensing Ultraseek are
somewhat higher than those for advertising revenues.
In October 1997, Infoseek launched an enhanced version of the
Infoseek Service, with easy to navigate "centers" (formerly called "channels"
and now numbering 19) that integrate search results with relevant
information, services, products and communities on the Internet. The Infoseek
Service provides Infoseek with a platform for creating content and marketing
partnerships that enrich the viewer's experience while enabling advertisers,
sponsors and partners to more effectively target viewers.
Beginning with the October 1997 launch of the enhanced version of
the Infoseek Service, Infoseek began to sell center sponsorships to
advertisers, sponsors and partners. The duration of Infoseek's sponsorship
and partnership agreements generally ranges from two months to three years.
Revenues are generally recognized ratably over the term of the agreements,
provided that minimum impressions are met, and are included in advertising
revenues. Most of Infoseek's contracts with advertising customers can be
canceled at any time.
A majority of Infoseek's revenues have been generated from the sale
of advertising and sponsorships. Infoseek expects to continue to derive a
majority of its revenues from selling advertising and related products and
engaging in electronic commerce activities for the foreseeable future.
Advertising revenues are tightly related to the amount of traffic on
Infoseek's services, which is seasonal and inherently unpredictable.
Accordingly, future sales and operating results are difficult to forecast.
Infoseek has in the past relied on the purchase of traffic from
entities such as Netscape, Microsoft, WebTV and others as a significant
portion of Infoseek's total traffic. Average daily pageviews for the three
month period ended July 3, 1999 averaged 52 million for go.com and the
Company's other sites including Infoseek's Joint Ventures, ABCNews.com and
ESPN.com. For the three and nine month periods ended July 3, 1999, purchased
traffic including traffic from Netscape, Microsoft and WebTV and others,
accounted for 16% and 18% of total daily pageviews, respectively, compared to
30% and 35% for the three and nine month periods ended June 30, 1998,
respectively. Infoseek's traffic purchase agreements generally have terms of
one year or less. The agreement with Netscape was terminated in June 1999.
The Microsoft agreement is scheduled to terminate on September 30, 1999. In
order to increase brand awareness of GO Network, (the successor to the
Infoseek Service), build brand loyalty and develop alternative traffic
sources, Infoseek is planning to continue its promotional program for GO
Network. Although Infoseek has been successful in generating traffic from GO
Network, Infoseek cannot assure you that the loss of traffic from Microsoft
and Netscape will not result in reduced advertising revenues in the short
term.
In June 1998, Infoseek entered into agreements with Starwave and
Disney relating to an acquisition of Starwave, of which Disney was the
principal shareholder, by Infoseek through a merger and exchange of shares
(the "Starwave Acquisition") pursuant to an Agreement and Plan of
Reorganization (the "Starwave Merger Agreement"). The transactions
contemplated by the Starwave Merger Agreement were completed on November 18,
1998. The Starwave Acquisition is being accounted for as a purchase
transaction. The purchase price is being allocated to the acquired assets and
liabilities of Starwave. An in-process research and development charge of
approximately $72.6 million was recorded in the quarter ended January 2,
1999. In addition, intangible assets related to developed technology and
assembled workforce of approximately $45.2 million are being amortized over
two years. Intangible assets relating to goodwill and the Joint Ventures of
approximately $656.5 million and $178.5 million, respectively,
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are being amortized over ten years. Infoseek began the amortization of each
of these intangible assets in the quarter ended January 2, 1999.
Infoseek is incurring increased operating expenditures associated
with the expanded operations resulting from the transaction, as well as the
continued development and promotion of GO Network. In this regard, Infoseek
has agreed to use commercially reasonable efforts to meet certain spending
requirements for GO Network pursuant to the terms of a license agreement
between Infoseek and Disney related to GO Network (the "License Agreement").
These spending requirements for GO Network for the first three years are
$40.5 million, $58.3 million and $64.8 million, respectively. In addition,
pursuant to a promotional services agreement (the "Promotional Services
Agreement"), Infoseek has agreed to purchase $165.0 million in promotional
services over a five-year period for GO Network. The amounts spent on the
purchase of promotional services under the Promotional Services Agreement
apply towards the spending requirements under the License Agreement. As a
result, Infoseek's profitability is expected to be delayed beyond the time
when Infoseek, prior to consummating the Disney Transaction, may have
otherwise achieved profitability. In addition, the size and complexity of the
Disney Transaction, the launch of GO Network and the rapid pace of the change
and development in the Internet market make it difficult to predict future
results. See "Risk Factors-Infoseek Has Had Losses in the Past and Has
Difficulty Predicting Future Results But Expects Fluctuations and Losses in
the Future."
In connection with the acquisition of Starwave, Infoseek acquired
Starwave's interests in the ABCNews Joint Venture and ESPN Joint Venture with
affiliates of Disney and ESPN, respectively. Under each of the respective
joint venture agreements, required funding and profits/losses under such
Joint Ventures are split 60/40 between the Starwave and Disney entities,
respectively, in loss years and 50/50 in years in which the Joint Ventures
each has net income.
Infoseek (through Starwave) has also agreed to act as a
representative of the Joint Ventures for the sale of advertising and related
services for the Joint Ventures. Under representation agreements by and among
Infoseek, Starwave and each of the Joint Ventures, each entered into in
conjunction with the acquisition of Starwave, Starwave is engaged by the
Joint Ventures on an exclusive basis in the sale of advertising and other
items as designated or approved by the Joint Ventures and to provide
additional services, if any, as the Joint Ventures may request. Activities
with respect to the sale of advertising on the Internet and other related
items include the negotiation, execution, renewal, amendment, modification or
termination of advertising and other related contracts. Starwave guarantees
to the Joint Ventures a minimum quarterly payment equal to the number of
projected pageviews, multiplied by the minimum revenue rate. The minimum
revenue rate is based on the average advertising revenue rate per pageview of
the publicly traded Internet companies involved in activities comparable to
those of the Joint Ventures.
Starwave recognizes revenue on the sale of advertising and other
related items of the Joint Ventures due to its obligations under the
representation agreements. Starwave bears the risk of loss if it fails to
bill and collect amounts sufficient to cover its contractual guaranteed
minimum payments. Under the representation agreements, Starwave pays the
Joint Ventures for the right to render services the greater of (i) the
guaranteed minimum payment or (ii) actual revenues billed to third parties
for services, in each case less only Starwave's actual and reasonably
allocated costs of providing the services and a profit margin of 5% of such
costs. The obligations of Starwave to pay these representation rights fees
are unconditional. Starwave is required to pay the Joint Ventures regardless
of whether Starwave is able to collect the related outstanding receivables.
Each of the Joint Ventures is accounted for under the equity method
since neither Infoseek nor Starwave has a majority voting interest in either
Joint Venture.
In July 1998, the Company entered into an agreement to acquire
Quando for shares of Infoseek's Common Stock. On January 15, 1999, Infoseek
completed its acquisition of Quando in a tax-free reorganization in which a
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wholly-owned subsidiary of Infoseek was merged directly into Quando. The
acquisition of Quando was accounted for as a purchase transaction. Infoseek
incurred an in-process research and development charge of approximately $4.3
million in the quarter ended April 3, 1999 in connection with this
transaction. In addition, intangible assets related to goodwill, developed
technology and assembled workforce were approximately $19.7 million, which
are being amortized over two years. Infoseek began the amortization of each
of these intangible assets in the quarter ended April 3, 1999.
In January 1999, Infoseek launched the premier version of GO
Network. GO Network is a comprehensive Internet gateway that combines branded
content from media leaders, search and navigation with directories of
relevant information and content sites, and community applications for
communicating shared interests such as chat and message boards. In addition,
GO Network facilitates the purchase of related goods and services. GO Network
has several unique features, such as universal registration and navigation,
universal personalization, and GOguardianTM and security. GO Network also
offers content from Disney and its affiliates, including ABC News and ESPN.
Infoseek incorporated the contents of the Infoseek Service in GO Network and
transferred users from the Infoseek Service to GO Network over time.
During the quarter ended July 3, 1999, Infoseek launched, upgraded
and expanded a number of GO Network's content centers to provide users with
richer and easier-to-find content. For example, GO Broadcast taps into the
vast array of streaming video and audio news and entertainment from ESPN
cable television and ABC Radio. GO Food and Drink allows members to search
the extensive CuisineNet database to find restaurants by price range, cuisine
type and neighborhood. GO Health, in association with drkoop.com, offers
users across multiple sites in GO Network the ability to search reliable
health information. In addition, the Company expanded its international
presence by launching Infoseek Germany (http://www.infoseek.de). The new full
portal gives German Internet users leading content and services from local
media partners, as well as leading search and navigation capabilities from
Infoseek. Further, Infoseek also acquired certain assets of Digital Garage,
Inc., its commercial distribution partner in Japan. Along with the business
assets, Infoseek gained key local management and significant market presence.
In the quarter ending October 2, 1999, the Company expects to further enhance
GO Network users' experience by offering new services, such as personal/group
calendaring, an invitation service, an Education Center, a
Romance/Relationship Center, and a significant upgrade to its e-mail product.
For the quarter ending October 2, 1999, the Company expects a modest
increase in revenue compared to the quarter ended July 3, 1999. However,
management expects a significant sequential increase in advertising expenses
in the quarter ending October 2, 1999 as the Company expands its brand
awareness efforts. Since 1997, Infoseek has significantly increased its
operating expenses as a result of a substantial increase in its sales and
marketing operations, development of new distribution channels, broadening of
its customer support capabilities and funding greater levels of research and
product development. Infoseek's ability to resume and sustain revenue growth
is substantially reliant, among other things, on:
- Its ability to acquire and retain users on GO Network through
effective promotions and improvement of the service and user
experience.
- Converting this increased number of users to more pageviews and
revenue.
- Disney's continued focus on its Internet strategy and GO Network's
key role in that strategy.
- Successfully launching various elements of its commerce strategy.
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There can be no assurance that Infoseek will be successful in
implementing or continuing these actions. If Infoseek is not able to
implement or continue the above, its business, results of operations,
financial condition and prospects could be seriously harmed. See Risk Factors
on page 24.
On July 10, 1999, Disney, Bingo Acquisition Corp. ("Acquisition
Company"), a wholly owned subsidiary of Disney, and Infoseek entered into an
Agreement and Plan of Reorganization, pursuant to which, subject to the terms
and conditions set forth therein, Acquisition Company will merge (the
"Merger") with and into Infoseek, with Infoseek as the surviving corporation
in the Merger. As a result of the Merger, (i) each outstanding share of
Infoseek common stock, par value $0.001 per share ("Infoseek Common Stock"),
other than shares of Infoseek Common Stock owned by Disney and Disney
Enterprises, Inc. ("DEI"), a wholly owned subsidiary of Disney, will be
converted into 1.15 shares of a new class of Disney common stock, par value
$0.01 per share, which will track the economic performance of Infoseek and
certain Disney assets to be contributed by Disney and its affiliates (the
"Internet Group"), (ii) each outstanding share of Infoseek Common Stock owned
by Disney will remain outstanding, (iii) each outstanding share of Infoseek
Common Stock owned by DEI will be converted into shares of a new series of
Disney voting preferred stock and (iv) Infoseek will become a direct wholly
owned subsidiary of Disney. Disney will retain an approximately 72% interest
in the economic performance of the Internet Group.
The acquisitions of Starwave, Quando, and the combination with
Disney's Internet business are large and complex. Infoseek has and may
further be required to reorganize its operations in order to operate more
efficiently. Due to the complexity and scale of Infoseek's recent
acquisitions and proposed future combination with Disney's Internet business,
Infoseek's operating plans and forecasts, including its projected business
outlook, and Infoseek's operating objectives, are subject to frequent
revision. Future events and plans may cause Infoseek to dramatically revise
its business objectives and estimates of profitability. Infoseek cannot
assure you it will be able to adequately address the challenges of the
Internet market and the complexity of its recent acquisitions and proposed
future combination with Disney's Internet business.
Further increases in research and development, and sales and
marketing expenses are planned in the future. The Company plans to continue
to enhance the features in GO Network and devote substantial resources to
develop e-commerce. In addition, the Company anticipates that it will
continue to incur significant promotional expenses to build brand loyalty.
Although Infoseek has experienced significant revenue growth since 1997,
there can be no assurance that this growth rate will be sustained, that
revenues will continue to grow or that Infoseek will achieve profitability.
Infoseek's estimates of revenue and expenses for future periods are
forward-looking statements subject to risks and uncertainties. Actual results
may vary as a result of a number of factors, including those set forth below
and including "Risk Factors-If GO Network is Not Successful, Infoseek's
Business Would Be Seriously Harmed," "-Infoseek May Encounter Difficulties in
Integrating Future Acquisitions", and "-Infoseek's Financial Results Will
Vary".
Infoseek's significant growth and limited operating history in a
rapidly evolving industry make it difficult to manage operations and predict
future operating results. Infoseek has incurred significant net losses since
inception and expects to incur substantial additional losses. As of July 3,
1999, Infoseek had an accumulated deficit of approximately $265.9 million.
Infoseek and its prospects must be considered in light of Disney's continued
focus on its Internet strategy, and the risks, costs and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in the new and rapidly evolving Internet market.
As a result of Infoseek's limited operating history as well as the
recent emergence and rapid pace of change and development of both the
Internet and intranet markets addressed by Infoseek, Infoseek has neither
internal nor industry-based historical financial data for any significant
period of time upon which to project revenues or plan operating expenses.
Infoseek expects that its results of operations may also fluctuate
significantly in the future as a result of a variety of factors. These
factors include: Disney's continued focus on its Internet strategy; the
Starwave
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and Quando Acquisitions; the continued development of GO Network; the
continued rate of growth; usage and acceptance of the Internet and intranets
as information media; the rate of acceptance of the Internet as an
advertising medium and a channel of commerce; demand for Infoseek's products
and services; the budgeting cycle on advertising for individual advertisers;
the introduction and acceptance of new, enhanced or alternative products or
services by Infoseek or by its competitors; Infoseek's ability to anticipate
and effectively adapt to a developing market and to rapidly changing
technologies; Infoseek's ability to attract, retain and motivate qualified
personnel, initiation, implementation, renewal or expiration of significant
contracts with significant customers and service providers; pricing changes
by Infoseek or its competitors; specific economic conditions in the Internet
and intranet markets; general economic conditions; and other factors.
RESULTS OF OPERATIONS
For the Three and Nine Month periods ended July 3, 1999 and June 30,
1998.
TOTAL REVENUES
Infoseek's total revenues for the three and nine month periods ended
July 3, 1999 were approximately $36.1 million and $96.0 million,
respectively. Revenues consisted primarily of advertising derived from banner
and sponsorship sales, and revenues Starwave recognizes on the sale of
advertising and other services for the Joint Ventures under the
representation agreements. Infoseek also earned revenue from licensing its
Ultraseek server product. Total revenues for the three and nine month periods
ended July 3, 1999 represent a 112% and 117% increase, respectively, over
total revenues for the three and nine month periods ended June 30, 1998, of
approximately $17.1 million and $44.2 million, respectively. The revenue
growth over the respective prior year periods is primarily attributable to
increased advertising revenues resulting from increased use of the Internet
by consumers and acceptance of the Internet as an advertising and commerce
medium, and increased viewer traffic on GO Network. For the three month
periods ended July 3, 1999 and June 30, 1998, average daily pageviews were
approximately 52 million and 21 million, respectively. For the nine month
periods ended July 3, 1999 and June 30, 1998, average daily pageviews were
approximately 43 million and 18 million, respectively. Compared to the second
quarter ended April 3, 1999, total revenues for the quarter ended July 3,
1999 increased by 22%. The increase in revenues was due to increase in
advertising and sponsor revenues. Infoseek's current business model is to
generate revenues through the sale of advertising and related items on the
Internet. There can be no assurance that current advertisers will continue to
purchase advertising space, sponsorships and services from Infoseek or that
Infoseek will be able to successfully attract additional advertisers.
HOSTING, CONTENT AND WEBSITE COSTS
Hosting, content and website costs were approximately $26.8 million
and $62.2 million for the three and nine month periods ended July 3, 1999,
respectively. Hosting, content and website costs consist primarily of
representation rights fees paid to the Joint Ventures, amortization of
intangibles relating to hosting, content and website costs and the costs
associated with the enhancement, maintenance and support of Infoseek's
websites and the Joint Ventures' websites, including telecommunications
costs, equipment depreciation and related support services. Hosting, content
and website costs also include costs associated with the licensing of certain
third-party technologies and content. Hosting, content and website costs for
the three and nine month periods ended July 3, 1999, represent a 962% and
842% increase, respectively, over the costs for the three and nine month
periods ended June 30, 1998 of approximately $2.5 million and $6.6 million,
respectively. The increase over the respective prior year periods was
primarily due to amortization charges from the Starwave and Quando
acquisitions, the representation rights fees and increases in royalties due
to additional traffic during the period. Compared to the second quarter of
fiscal 1999, hosting, content and website costs increased by 21%, mainly due
to an increase in representation rights fees paid by Starwave to the Joint
Ventures and an increase in traffic hosted by the Company. Management expects
its hosting, content and website costs will continue to increase due to
obligations under the
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representation agreements. In addition, management plans to continue to
upgrade equipment and maintenance, provide personnel support, and to add
content partners to meet the growing demands for web services.
RESEARCH AND DEVELOPMENT
Research and development costs were approximately $9.5 million and
$21.9 million for the three and nine month periods ended July 3, 1999,
respectively. Research and development expenses consist of personnel costs,
consulting fees and equipment depreciation. Research and development costs
for the three and nine month periods ended July 3, 1999 represent a 258% and
221% increase, respectively, over the costs for the three and nine month
periods ended June 30, 1998 of approximately $2.7 million and $6.8 million,
respectively. The increase over the respective prior year periods is
attributable to the development and launch of GO Network, enhancements
related to the Joint Ventures' websites and the development and
implementation of new technology and products. Compared to the second quarter
of fiscal 1999, research and development costs increased by 21%, primarily
due to the increase in headcount and expenses related to development of
additional features in GO Network such as GO Shopping, GO Money and GO
Computing. Management plans to continue to add new features to GO Network.
The Company devoted significant resources to the development of e-commerce in
the quarter ended July 3, 1999. Management believes development of additional
e-commerce features is vital for the Company to remain competitive in its
industry. Management anticipates that it will continue to devote substantial
resources to product development, especially related to GO Network and
e-commerce. These costs are expected to continue to increase in dollars in
future periods.
SALES AND MARKETING
Sales and marketing costs were approximately $28.8 million and $86.0
million for the three and nine month periods ended July 3, 1999,
respectively. Sales and marketing expenses primarily consist of compensation
of sales and marketing personnel, advertising, promotional expenses and other
marketing related costs. Sales and marketing costs for the three and nine
month periods represent a 143% and 151% increase, respectively, over the
costs for the three and nine month periods ended June 30, 1998, of
approximately $11.9 million and $34.2 million, respectively. The increase
over the respective prior year periods is primarily the result of expenses
related to an increase in promotional and advertising activity including
television and other media advertising campaigns in the amount of $4.6
million and $8.6 million for the three and nine month periods ended July 3,
1999, respectively; the WebTV transaction, costs related to purchased traffic
from Netscape and Microsoft; and the hiring of additional sales and marketing
personnel. Compared to the second quarter of fiscal 1999, sales and marketing
costs increased by 4%. Management expects to increase promotional and
advertising spending, and anticipates hiring additional sales representatives
in future periods.
GENERAL AND ADMINISTRATIVE
General and administrative costs were approximately $5.1 million and
$18.1 million for the three and nine month periods ended July 3, 1999,
respectively. General and administrative expenses consist primarily of
compensation of administrative and executive personnel, facility costs and
fees for professional services. General and administrative costs for the
three and nine month periods ended July 3, 1999 represent a 147% and 216%
increase, respectively, over the costs for three and nine month periods ended
June 30, 1998, of approximately $2.1 million and $5.7 million, respectively.
The increase over the respective prior year periods is the result of the
integration costs associated with the Starwave acquisition, costs associated
with enhancements to financial and business systems, additional
administrative and executive headcount and additional infrastructure to
manage the expansion of the business. Compared to the second quarter of
fiscal 1999, general and administrative expenses decreased by 16%. The
decrease is primarily due to the lower consulting expenses relating to system
integration and reorganization of the Company as a result of the Starwave
acquisition in the third quarter of 1999 compared with
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the second quarter of fiscal 1999, and the reduction of headcount due to the
elimination of redundancies as a result of the Starwave acquisition during
the third quarter of fiscal 1999.
AMORTIZATION OF INTANGIBLES
As the Starwave and Quando acquisitions were accounted for using the
purchase method, the Company recorded intangible assets of approximately
$656.5 million related to goodwill, and approximately $178.5 million related
to the Joint Ventures (in the Starwave acquisition), each of which are being
amortized over 10 years. The Company also recorded intangible assets of
approximately $11.1 million related to goodwill for the Quando acquisition,
which is being amortized over two years. In addition, approximately $53.9
million of intangible assets related to developed technology and assembled
workforce were recorded. Developed technology and assembled workforce are
being amortized over two years. For the three and nine month periods ended
July 3, 1999, the Company incurred approximately $29.0 million and $70.7
million, respectively, in amortization expenses related to intangibles. Of
the $29.0 million and $70.7 million amortization charges for the three and
nine month periods ended July 3, 1999, approximately $9.8 million and $23.7
million, respectively, related to hosting, content and website costs;
approximately $0.7 million and $1.8 million, respectively, related to sales
and marketing costs; approximately $0.4 million and $1.1 million,
respectively, related to general and administrative costs; approximately $0.3
million and $0.7 million, respectively, related to research and development
costs; and approximately $17.8 million and $43.4 million, respectively,
related to goodwill.
In connection with the acquisition of certain assets from Digital
Garage, Inc. on June 28, 1999, the Company recorded intangible assets of
approximately $2.2 million related to assembled workforce and approximately
$3.6 million related to customer relationships as of July 3, 1999. These
intangible assets are being amortized over a two year useful life. The
amortization of these intangible assets resulted in insignificant expense
during the three and nine month periods ended July 3, 1999.
IN-PROCESS RESEARCH AND DEVELOPMENT
For the nine month period ended July 3, 1999, Infoseek incurred
charges for in-process research and development of approximately $76.9
million, as a result of the Starwave and Quando acquisitions.
LOSS FROM JOINT VENTURES
Each of the Joint Ventures is accounted for under the equity method
since neither Infoseek nor Starwave have a majority voting interest in either
Joint Venture. Under each of the joint venture agreements, losses from the
Joint Ventures are split 60/40 between Starwave and Disney entities,
respectively. For the three and nine month periods ended July 3, 1999,
Infoseek's share of losses were approximately $2.6 million and $8.0 million,
respectively.
INTEREST INCOME, NET
For the three month periods ended July 3, 1999 and June 30, 1998,
Infoseek earned net interest income of approximately $3.2 million and $0.8
million, respectively. For the nine month periods ended July 3, 1999 and June
30, 1998, Infoseek earned net interest income of approximately $8.4 million
and $1.5 million, respectively. The increase in net interest income for the
three and nine month periods ended July 3, 1999 is primarily the result of an
increase in available cash resulting from proceeds from the Disney
transaction and interest earned from the Disney note receivable.
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INCOME TAXES
Due to Infoseek's loss position, no provision for income taxes was
provided for any of the periods presented. At October 3, 1998, Infoseek had
federal and state net operating loss carryforwards of approximately $40.0
million and $17.0 million, respectively. The federal net operating loss
carryforwards will expire beginning in 2009 through 2013, and the state net
operating loss carryforwards will expire in the years 1999 through 2013.
Certain future changes in the share ownership of Infoseek, as defined in the
Tax Reform Act of 1986 and similar state provisions may restrict the
utilization of these carryforwards. A valuation allowance has been recorded
for the entire deferred tax asset as a result of uncertainties regarding the
realization of the asset due to the lack of earnings history of Infoseek. As
of July 3, 1999, the Company recorded deferred tax liabilities totaling $45.1
million, related primarily to the recording of certain intangibles resulting
from the Starwave and Quando acquisitions.
YEAR 2000 COMPLIANCE
Infoseek is aware of the issues associated with the programming code
in existing computer systems as the year 2000 approaches. Virtually every
computer operation will be affected by the "year 2000 problem." Many computer
systems only provide for a two digit date and therefore will not properly
recognize dates when the year changes from 1999 ("99" in most systems) to
2000, since the system may recognize the year "00" as 1900 instead of 2000.
Computer systems that do not properly recognize the year 2000 could generate
incorrect data or cause a system to fail.
Infoseek management has conducted a review of Infoseek's exposure to
the year 2000 problem. Infoseek is working with its major computer systems,
data feed and software vendors to determine if they are prepared for the year
2000. Based on Infoseek's internal review and discussions with these vendors,
Infoseek currently believes that its internal systems are year 2000 compliant
or will be made so with only minor modifications. However, Infoseek has begun
replacing several internal systems as part of a conversion to improved
financial and business systems in fall 1999. Infoseek does not expect to
incur significant expenses or to have to purchase additional computer systems
to avoid the year 2000 problem for either Infoseek's internal information
technology systems or Infoseek's products and services.
Despite Infoseek's review, the effects of the year 2000 problem are
still very uncertain. Infoseek cannot assure you that its vendors'
representations are accurate. Infoseek is in the process of investigating
year 2000 compliance by third parties. In situations where vendors are not
year 2000 compliant, they will be replaced, if possible, by alternate sources
that are year 2000 compliant. However, Infoseek does not have any control
over these third parties' compliance. For example, if a link on GO Network or
the Infoseek search service points to a website that is not year 2000
compliant, that link may not be available to users. Thus, the Infoseek
services may offer fewer features. If many linked sites fail, the value of
user traffic and advertising on Infoseek's websites could materially
decrease. In addition, if Infoseek's review of its year 2000 readiness did
not uncover all year 2000 problems, Infoseek's business and operations could
suffer serious harm or be required to expend resources to resolve these
problems. Infoseek does not currently have a contingency plan to address this
risk. However, a contingency plan is in the process of being developed, and
is expected to be completed by September 1999. If Infoseek's systems are not
year 2000 compliant, although Infoseek does not expect any of the following
to occur, it may not be able to input financial data or generate reports and
could lose data in its management information and advertising management
systems. In addition, users of its services could experience reduced
functionality and potentially lose stored user data.
If Infoseek or any of its viewers, customers, linked sites,
advertisers, vendors or other third parties are not year 2000 compliant,
Infoseek's business, results of operations, financial condition and prospects
could be seriously harmed.
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LIQUIDITY AND CAPITAL RESOURCES
At July 3, 1999, Infoseek had approximately $86.5 million in cash,
cash equivalents and short-term investments, an increase of approximately
$34.6 million from October 3, 1998.
For the nine month period ended July 3, 1999, operating activities
used cash of approximately $38.8 million due primarily to Infoseek's net loss
partially offset by non-cash charges for depreciation and amortization and
the write-off of in-process technology. For the nine month period ended June
30, 1998, operating activities used cash of approximately $0.2 million due
primarily to the Company's net loss and increase in accounts receivable,
partially offset by increases in the Company's current liabilities. For the
nine month period ended July 3, 1999, investing activities used cash of
approximately $22.4 million primarily related to the purchase of
available-for-sale securities and property and equipment, partially offset by
the proceeds from sales and maturities of available-for-sale securities. For
the nine month period ended June 30, 1998, investing activities used cash of
approximately $45.8 million primarily related to the purchase of
available-for-sale securities. Financing activities generated cash of
approximately $93.9 million in the nine month period ended July 3, 1999,
primarily from the issuance of Common Stock. Financing activities generated
cash of approximately $44.1 million in the nine month period ended June 30,
1998, primarily from the issuance of Common Stock.
Infoseek has cash commitments to Microsoft and WebTV in connection
with certain agreements. Infoseek also has commitments to promote GO Network
pursuant to a promotional services agreement with Disney and to make
guaranteed minimum payments under representation agreements with the Joint
Ventures. In addition, Infoseek has minimum funding commitments for GO
Network pursuant to a product management agreement with Disney. Further,
Infoseek has license royalty commitments to Disney when it obtains positive
EBITA, and has obligations to provide funding to the Joint Ventures. Infoseek
also has funding commitments under operating lease agreements and expects to
continue to incur significant capital expenditures to support its business.
Infoseek currently anticipates that its cash, cash equivalents, short-term
investments and cash flows generated from advertising revenues will be
sufficient to meet its anticipated needs for working capital and other cash
requirements through December 31, 1999. However, Infoseek may need to raise
additional funds sooner in order to fund more rapid expansion, to develop new
or enhance existing services or products, to respond to competitive pressures
or to acquire complementary products, businesses or technologies. Infoseek's
estimate of the time period through which its cash and other sources of funds
will be sufficient to fund its operations is a forward-looking statement
subject to risks and uncertainties. See "Risk Factor - Infoseek Will Need
More Financing."
Infoseek anticipates that its current cash and other available
sources of funds will last through December 31, 1999. If the merger does not
occur, then Infoseek will need to raise additional funds. If additional funds
are raised through the issuance of equity or convertible debt securities, the
percentage ownership of the stockholders of Infoseek will be reduced. Newly
issued securities may have rights, preferences or privileges senior to those
of the holders of Infoseek's Common Stock. There can be no assurance that
additional financing will be available on terms favorable to Infoseek, or at
all. If adequate funds are not available or are not available on acceptable
terms, Infoseek's ability to fund current operations, fund expansion, take
advantage of acquisition opportunities, develop or enhance services or
products, or respond to competitive pressures would be significantly limited.
Such limitation could have a material adverse effect on Infoseek's business,
results of operations, financial condition and prospects. The estimated
period of available funds to meet its capital requirements and other
commitments is a forward-looking statement that involves risks and
uncertainties. There can be no assurance that Infoseek will be able to meet
its working capital and other cash requirements after December 31, 1999
without Disney's support.
RISK FACTORS
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You should carefully consider the risks described below before
making your decision to invest in Infoseek. The risks and uncertainties
described below are not the only factors facing Infoseek. Additional risks
and uncertainties not presently known to us or that we do not currently
believe are important to an investor may also harm Infoseek's business
operations.
If any of the events, contingencies, circumstances or conditions
described in the following risks actually occur, Infoseek's business,
financial condition or results of operations could be seriously harmed. If
this occurs, the trading price of Infoseek Common Stock could decline, and
you may lose part or all of your investment.
THE PROPOSED MERGER WITH DISNEY INVOLVES RISKS AND UNCERTAINTIES
AND MAY NOT BE COMPLETED
Infoseek has recently entered into an agreement with Disney under
which Disney proposes to acquire the remaining shares of Infoseek in a merger
transaction, in exchange for a newly issued class of Disney common stock
which will track the economic performance of Infoseek and certain Disney
assets to be contributed by Disney and its affiliates. Details of the merger
and the related risks and uncertainties related to the merger and the new
class of Disney common stock will be described in a proxy statement which
will be mailed to all Infoseek and Disney stockholders in the future. The
merger is subject to a number of conditions which must be satisfied or waived
before the merger can take place, including approval by Infoseek and Disney
stockholders. Infoseek cannot assure you that the merger will occur or the
performance of the combined company will be favorable to Infoseek
stockholders, and that the pendency of the merger will not have an adverse
effect on Infoseek in the interim.
IF GO NETWORK IS NOT SUCCESSFUL, INFOSEEK'S BUSINESS WOULD BE
SERIOUSLY HARMED
Infoseek believes that GO Network is critical to its business. If
Infoseek does not further enhance, develop more functionalities and services,
integrate more content or successfully promote GO Network, Infoseek's
business, financial condition and operating results would be seriously harmed.
Given the growing number of new Internet sites and low barriers to
entering the Internet market, Infoseek cannot assure you that users and
advertisers will accept GO Network. If users and advertisers do not continue
to accept GO Network or do not find it to be of high quality, Infoseek will
experience a decrease or insufficient growth in revenues and may be required
to incur additional expenses to promote GO Network.
In order to attract new users and build strong brand recognition and
loyalty for GO Network, Infoseek will be required to increase spending to
promote GO Network. This will include the purchase of promotion from Disney
affiliate, ABC. Infoseek may also be required to spend additional resources
to purchase and produce new content. Such additional expenditures will result
in continued operating losses and delays to Infoseek's achievement of
profitability.
As a result of these risks, Infoseek cannot assure you that GO
Network will be successful or result in greater revenues, cash flows or any
profits to Infoseek.
GO NETWORK MAY NOT SUCCEED WITHOUT DISNEY'S COOPERATION
Infoseek and Disney promote GO Network together. If Disney does not
effectively promote GO Network, Infoseek's business will suffer.
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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. Also, 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."
Although Disney has generally agreed not to compete with Infoseek in
certain limited geographic and product areas, Disney may enter into
transactions with any of Infoseek's competitors or provide Disney content to
Infoseek's competitors. Disney currently provides some of its content to
competitors of Infoseek and maintains a number of websites which are not
expected to be linked to GO Network. Infoseek cannot assure you that Disney
will not compete with GO Network.
Disney and Infoseek are currently engaged in litigation brought by a
competitor regarding the GO Network logo. Although Disney and Infoseek deny
all the material allegations of the complaint and are defending against it,
Infoseek cannot assure you that Infoseek will continue to be able to use the
GO Network name and logo. There can be no assurance that Disney and Infoseek
will succeed in defending against the complaint; and even if successful, will
not incur significant litigation costs which will result in continued
operating losses and delay in Infoseek's achievement of profitability.
ACCOUNTING CHARGES FROM ACQUISITIONS WILL DELAY AND REDUCE
PROFITABILITY
Infoseek's acquisitions of Starwave and Quando were accounted for
under the purchase method of accounting. As a result, Infoseek will have
reduced profitability for at least several years due to accounting charges
relating to:
- amortization of intangible assets:
1. developed technology and assembled workforce of
Starwave: $45.2 million amortized over a two-year
period beginning November 18, 1998
2. developed technology and assembled workforce of
Quando: $8.7 million amortized over a two-year
period beginning January 15, 1999
3. goodwill of Starwave: $656.5 million amortized over
a ten-year period beginning November 18, 1998
4. goodwill of Quando: $11.1 million amortized over a
two-year period beginning January 15, 1999
5. joint venture relationships: $178.5 million
amortized over a ten-year period beginning November
18, 1998
6. assembled workforce: $2.2 million, and customer
relationships: $3.6 million to be amortized over a
two-year period beginning July 4, 1999 resulting
from Infoseek's recent purchase of certain assets
from Digital Garage, Inc.
- in-process research and development of Starwave and Quando:
$72.6 million expensed in the quarter ended January 2, 1999
and $4.3 million expensed in the quarter ended April 3, 1999,
respectively,
- remaining integration costs: up to $3.3 million,
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- significant future charges relating to sales of shares and
warrants which Infoseek may be required to make to Disney
below fair market value at the time of purchase in connection
with Disney's exercise of its rights to maintain its
ownership interest in Infoseek,
- increased operating expenses due to Infoseek's expanded
business, including GO Network,
- other costs not currently known,
If these expenses are not timely followed by increased revenues,
Infoseek's business, results of operations, financial condition and prospects
would be seriously harmed.
INFOSEEK MAY ENCOUNTER DIFFICULTIES IN INTEGRATING FUTURE
ACQUISITIONS
Infoseek believes it may be necessary to acquire complementary
products, technologies or businesses to remain competitive. There are many
risks in acquisitions or other strategic transactions, such as:
- difficulties in the integration of personnel and operations,
- difficulties in the integration of acquired technology or
content into existing businesses,
- potential disruption of Infoseek's ongoing businesses,
- expenses and other related charges associated with these
transactions,
- the necessity to establish and implement uniform standards,
controls, procedures and policies for the acquired companies,
- impairment in relationships with employees, vendors and
customers as a result of any integration of new management
personnel, technologies, products and services,
- potential unknown liabilities associated with business
combinations,
- use of limited cash resources,
- dilutive issuances of stock, and
- loss of key personnel.
There can be no assurance that Infoseek will be successful in
overcoming these risks. Infoseek may also encounter other problems in
connection with acquisition transactions.
Infoseek cannot assure you that any acquisition or strategic
transaction will be worth the time, effort and expense required for its
completion.
INFOSEEK WILL NEED MORE FINANCING
Infoseek anticipates that its current cash level and other available
sources of funds will last through at least December 31, 1999. After that
time, Infoseek may need to raise additional funds. Additional financing may
not be available on satisfactory terms, if at all. Infoseek's estimate of
the time period through which its cash and other sources of funds will be
sufficient to fund its operations is a forward-looking statement subject to
risks and uncertainties. The actual time period may vary as a result of a
number of factors including those set forth below.
Infoseek expects to use its funds to, among other plans, continue
its current operation, to expand the Company's operations, develop new and
enhance existing services and products, promote GO Network and acquire other
businesses, products or technologies. Infoseek may decide to dedicate more
financial resources than currently forecasted for any of these activities;
therefore, Infoseek may need to raise additional funds sooner than currently
anticipated. If Infoseek is unable to raise the required funds, Infoseek may
not be able to continue these activities. Infoseek's business, financial
condition and prospects could be seriously harmed. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Infoseek Liquidity and Capital Resources."
If the additional funds are raised through the sale of stock or
convertible debt, the percentage ownership of Infoseek's current stockholders
will be reduced. Such stock or convertible debt also may have rights,
preferences or privileges greater than Infoseek's Common Stock.
INFOSEEK'S FINANCIAL RESULTS WILL VARY
Infoseek and its subsidiaries have limited operating history. The
Internet and intranet markets addressed by Infoseek are new. Infoseek
therefore does not have internal or industry-based historical financial data
for any
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significant period of time upon which to base projections for revenues or to
budget future operating expenses. As a result, Infoseek cannot assure you
that it will have profits in any given period or in the long term.
Infoseek expects that its results will vary significantly in the
future due to a number of reasons, including:
- the growth rate, usage and acceptance of the Internet,
intranets and online services,
- the acceptance rate of the Internet as an advertising medium
and the demand for advertising,
- increased seasonality in Internet advertising,
- acceptance of the Internet for commerce,
- demand for Infoseek's products and services,
- budgeting cycles of advertisers,
- costs related to expansion and capital investments,
- results of acquisitions and strategic agreements, including
amortization of intangible assets,
- charges relating to the issuance of stock or warrants below
market price in connection with Disney's right to maintain
its ownership interest,
- the introduction, marketing and acceptance of new, enhanced or
alternative products or services by Infoseek or by its
competitors,
- Infoseek's ability to anticipate and effectively adapt to and
expand in a developing market,
- Infoseek's ability to adapt to rapidly changing technologies
and develop new technologies,
- technical difficulties or system outages,
- Infoseek's ability to integrate operations and manage
expansion,
- Infoseek's ability to attract, retain and motivate qualified
personnel,
- 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,
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- general economic conditions, and
- other factors.
In addition, most of Infoseek's revenues are generated from
advertising contracts and related sponsorship agreements which generally
range from two months to three years in duration. Most of Infoseek's
contracts with advertising customers can be canceled at any time. Advertising
prices are closely related to the number of viewers on Infoseek's services.
Infoseek cannot accurately predict the number of viewers on its sites for any
given time. As a result, Infoseek has difficulty in forecasting future sales
and operating results.
Infoseek cannot assure you that it will be able to adjust spending
quickly to compensate for any reduction in future revenues. Accordingly, if
revenues do not meet Infoseek's expectations, there would be an immediate and
serious impact on Infoseek's business, results of operations, financial
condition and prospects.
IF INFOSEEK DOES NOT RENEW EXISTING OR ENTER INTO NEW AGREEMENTS
WHICH RESULT IN USER TRAFFIC, OR IF SITES THAT PROVIDE TRAFFIC TO INFOSEEK
ARE NOT SUCCESSFUL, INFOSEEK'S REVENUES MAY DECREASE
Infoseek's success depends in part on strategic relationships with
third parties as sources of traffic and as providers of content to its
Website. Infoseek's traffic agreements generally have terms of one year or
less. A significant portion of the aggregate pageviews on GO Network is
generated by traffic derived from third party sources, principally Microsoft
and WebTV. The Microsoft agreement is scheduled to terminate on September 30,
1999. In order to increase brand awareness of GO Network, build brand loyalty
and develop alternative traffic sources, the Company is increasing its
promotional spending for GO Network. However, Infoseek cannot assure you that
it can successfully build brand loyalty by increasing promotional
expenditures nor can it assure you that traffic will increase as a result of
its promotional campaigns. Infoseek also cannot assure you that it will be
able to replace lost traffic from agreements with Netscape, which agreement
has been terminated, or Microsoft.
When existing traffic agreements expire, Infoseek may not be able or
willing to renew them. Infoseek may not be able to enter into other
agreements on favorable terms or at all. If Infoseek does not renew these
agreements or enter into similar agreements on favorable terms or does not
develop significant traffic to make up for the loss of these agreements,
Infoseek's advertising revenues may 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 on the continuation and integration
of its joint ventures and third party relationships, especially the joint
ventures with ESPN and ABC. Under certain representation agreements, Starwave
contracted for, and has exclusive rights to sell, all advertising and other
related items of the Joint Ventures. Starwave guarantees its performance
through minimum revenue commitments and is at risk if its subsequent
collection of the related receivables is insufficient to cover such
commitments. These representation agreements will result in Starwave
recognizing revenue for the sale of the advertising and related items, with a
corresponding representation fee for amounts due to the Joint Ventures. If
Infoseek is unable to continue its joint ventures with its joint venture
partners, integrate these joint ventures into its business or enter into new
joint ventures, Infoseek may not be able
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to keep or create interactive services and products that are attractive to
users and advertisers. This could seriously harm Infoseek's business,
financial results and financial condition.
During and after the quarter ended July 3, 1999, Infoseek entered
into several strategic agreements with advertisers; if these advertisers do
not make the obligated contractual payments on these agreements, Infoseek's
business, results of operations and financial condition would be seriously
harmed.
INFOSEEK HAS HAD LOSSES IN THE PAST AND HAS DIFFICULTY PREDICTING
FUTURE RESULTS BUT EXPECTS FLUCTUATIONS AND LOSSES IN THE FUTURE
Infoseek has not achieved profitability in the past and expects to
have consolidated net losses for a number of years. The limited operating
history of Infoseek and its subsidiaries make it difficult to budget or
predict future results. Although Infoseek experienced significant revenue
growth since 1997, Infoseek cannot assure you that revenues will continue to
grow or that Infoseek will achieve profitability.
Infoseek and its prospects must be considered in light of the risks,
costs and difficulties frequently encountered by companies in their early
stage of development, particularly companies in the new and rapidly evolving
Internet market. Since the acquisitions of Starwave and Quando are large and
complex, Infoseek may be required to reorganize its operations in order to
operate more effectively. Due to the complexity and scale of Infoseek's
recent acquisitions and the rapid pace of change and development of the
Internet market, Infoseek's operating plans and forecasts, including its
projected business outlook, and Infoseek's operating objectives, are subject
to frequent revision. Future events and plans may cause Infoseek to
dramatically revise its business objectives and estimates of profitability.
Infoseek cannot assure you it will be able to adequately address the
challenges of the Internet market and the complexity of its recent
acquisitions.
As of July 3, 1999, Infoseek had an accumulated deficit of $265.9
million, including the results of operations of Starwave and Quando from
their respective dates of acquisition.
From time to time, Infoseek may elect to make certain pricing,
service, marketing or acquisitions decisions that could seriously harm
Infoseek's business, results of operations, financial condition and prospects
in the short-term or long-term. Infoseek's agreements with its strategic
partners have included and may in the future include substantial one-time or
up-front payments to or from these partners. Accordingly, Infoseek believes
that its quarterly revenues are likely to vary significantly in the future,
that period-to-period comparisons are not necessarily meaningful and that
such comparisons should not necessarily be relied upon as an indication of
Infoseek's future performance.
INFOSEEK'S STOCK PRICE WILL FLUCTUATE
The market price of Infoseek's Common Stock has fluctuated and may
continue to fluctuate widely. Such changes are in response to a number of
events and factors such as:
- quarterly changes in results of operations,
- announcements of new technological innovations, new products
and media properties by Infoseek or its competitors,
- changes in financial estimates and recommendations by
securities analysts,
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- the operating and stock price performance of other companies
that investors may deem comparable to Infoseek, and
- news relating to trends in Infoseek's markets or general
economic condition.
The stock market and specifically the stock of Internet companies
have been very volatile. This volatility is often not related to the
operating performance of the companies. This broad market volatility and
industry volatility may reduce the price of Infoseek's Common Stock, without
regard to Infoseek's operating performance. In addition, Infoseek's operating
results may be below the expectations of public market analysts and
investors. In such event, there would be a high possibility that the market
price of Infoseek's Common Stock would decrease.
INFOSEEK FACES INTENSE COMPETITION AND MAY NOT BE ABLE TO COMPETE
EFFECTIVELY
The market for Internet and intranet products is very competitive
and Infoseek expects these markets to become more competitive in the future.
Infoseek believes it faces competition in numerous areas, including:
- consolidated Internet ("Portal") products,
- search and navigation services,
- search software,
- Internet media,
- advertising media,
- electronic commerce (e-commerce), and
- broadband portal products.
If Infoseek is unable to compete effectively in these areas, it
could suffer serious harm to its business.
The market for these services is new and developing. As a result,
Infoseek cannot predict how competition will affect Infoseek, its competitors
or its customers. Since the development of new Internet technology is
relatively inexpensive, it is easy for new competitors to enter the Internet
and intranet markets, and this causes rapid changes to these markets. At
present, there are a large number of competitors in these markets and new
competitors are entering these markets everyday. In addition, some of
Infoseek's competitors have engaged in business combinations or other
strategic relationships in order to increase their power and market share.
Many of Infoseek's competitors have greater resources, including
financial, marketing and technical resources, than Infoseek. These companies
may be able to offer more varied content and services than Infoseek,
including broadband and multimedia content, search and directory services,
on-line "communities" with chat, e-mail and games, electronic commerce and
high speed home Internet access. Infoseek may be unable to develop these and
other new services in advance of its competitors.
IF INFOSEEK DOES NOT ACHIEVE REVENUE MINIMUMS UNDER REPRESENTATION
AGREEMENTS, IT MAY INCUR ADDITIONAL LOSSES UNDER THESE AGREEMENTS
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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 to collect the amounts due from these sales and
services. Failure to sell the predetermined minimum amount or collection of
amounts due could result in additional losses to Infoseek, and seriously harm
Infoseek's business, results of operations and financial condition.
IF THE INTERNET AND ELECTRONIC COMMERCE DO NOT CONTINUE TO GROW,
INFOSEEK'S BUSINESS WILL SUFFER
For revenue growth, Infoseek depends on increased acceptance and use
of the Internet, intranets and other interactive online platforms as sources
of information, entertainment and sale of goods and services. If the Internet
growth is slower than expected, or fails to grow at all, Infoseek's business,
financial condition and operating results would be seriously harmed. If
access to the Internet or Infoseek's services is restricted, Infoseek's
business, financial condition and operating results would also be seriously
harmed.
The Internet industry has grown rapidly in recent years. Infoseek
cannot assure you that the Internet will continue to be accepted and widely
used. In particular, Infoseek cannot assure you that consumers will continue
to use the Internet for the purchase and sale of goods and services, or that
advertisers will continue to use it for advertising goods and services.
Infoseek also cannot assure you that a large base of users will support
Infoseek's business. Significant structural problems remain in using the
Internet and conducting electronic commerce, including:
- security,
- reliability,
- cost,
- ease of use and access,
- quality of service,
- lack of network infrastructure to support increased use,
- speed of Internet service,
- limitations on access by corporations and schools, and
- privacy.
These problems may slow the growth of Internet use or the
attractiveness of the Internet for advertising and online transactions. In
addition, the use of the Internet could be reduced due to delays in the
development or
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adoption of new standards and protocols required to handle increased levels
of Internet activity or as the result of increased government regulation.
The Internet industry is young. The business model of Infoseek and
its competitors changes frequently and very few products and services are
established in the market. The development of the Internet market may stop or
may continue at a rate slower than expected. Infoseek may be unable to modify
its business model rapidly enough to remain competitive. The Internet market
is becoming filled with competitors. Internet users or advertisers may not
accept Infoseek's products. If any of these events occurs, Infoseek's
business, results of operations, financial condition and prospects would be
seriously harmed.
IF GO SHOPPING IS NOT SUCCESSFUL, INFOSEEK'S BUSINESS PROSPECTS
WOULD BE SERIOUSLY HARMED
Infoseek believes that its e-commerce service, GO Shopping, is
critical to its business prospects. If Infoseek does not further enhance GO
Shopping, develop more GO Shopping services, attract more merchants and
customers to GO Shopping or successfully promote GO Shopping, Infoseek's
business prospects, financial condition and operating results would be
seriously harmed.
Given the growing number of Internet sites which have features
similar to GO Shopping, Infoseek cannot assure you that merchants and
customers will accept GO Shopping. If merchants and customers do not accept
GO Shopping or do not find it to be of high quality, Infoseek will experience
a decrease in revenues and may be required to incur additional expenses to
promote GO Shopping. In addition, if e-commerce is not successful, the
Company may need to write off certain of its assets resulting in additional
charges.
As a result of these risks, Infoseek cannot assure you that GO
Shopping will be successful or result in greater revenues, cash flows or any
profits to Infoseek.
IF INTERNET ADVERTISING AND RELATED SPONSORSHIPS OF INFOSEEK'S
SERVICES ARE NOT ACCEPTED, INFOSEEK'S REVENUES WILL BE ADVERSELY AFFECTED
Infoseek depends heavily on the sale of advertisements and related
sponsorships of GO Network as a source of revenue. Therefore, Infoseek
depends on the acceptance and success of advertising on the Internet.
Infoseek cannot assure you that Internet advertising will be widely accepted.
The Internet market is changing quickly. Infoseek believes that the number of
companies selling advertising on the Web and the amount of advertising space
on the Internet have greatly increased recently. Infoseek may therefore face
a market which demands lower price levels for the purchase of advertisements
and this could result in a decline in Infoseek's revenues. Many of the
advertisers on Infoseek's services are relatively new to Internet advertising
and have not devoted significant amounts of their advertising budgets to
Internet advertising. Advertisers may determine that traditional sources of
advertising, such as television, radio and newspapers are more cost effective
than the Internet. There are no widely accepted standards to measure the
effectiveness of Internet advertising.
Infoseek also believes that advertising usage changes with the
economy and is subject to seasonal variations. Any seasonal or economic-based
changes in advertising sales could seriously harm Infoseek's business,
financial condition and operating results.
INFOSEEK MAY NOT BE ABLE TO USE THE POOLING-OF-INTERESTS ACCOUNTING
METHOD FOR FUTURE ACQUISITIONS WHICH MAY REDUCE ITS FUTURE PROFITABILITY
Due to Infoseek's acquisition of Starwave and its transactions with
Disney, Infoseek may not be able to account for future acquisitions as
pooling-of-interests transactions for a period of time. Charges for the
amortization
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of goodwill incurred in acquisitions will reduce Infoseek's profits, if any,
in the periods over which they are amortized. Infoseek may also take charges
for acquired in-process research and technology when acquisitions occur. Such
charges for acquired in-process research and technology would reduce
Infoseek's profits in such period.
IF INFOSEEK DOES NOT IMPROVE ITS PRODUCTS TO KEEP PACE WITH CHANGING
TECHNOLOGY, IT WILL LOSE USERS
Infoseek may not be able to respond to changing Internet
technologies, consumer needs and industry standards. Infoseek may not be able
to introduce new products and services before competitors or improve existing
products to match competitors' products and services. If it does not continue
to timely and continually improve its products and services and introduce new
ones, Infoseek could suffer serious harm to its business, results of
operations and prospects.
A key element of Infoseek's strategy is to continue in the
development of new technological innovations in order to enhance users'
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.
Due to Infoseek's continuous need to provide technological
improvements in its services, including GO Network, Infoseek faces many
risks. Infoseek cannot assure you:
- Any of its new or proposed products or services will be
accepted by the market or will continue to meet the market's
changing needs.
- It will successfully design, develop, test, market and
introduce new and enhanced technologies and services.
- It will successfully improve its existing and planned
products and services.
- It will not experience difficulties that delay or prevent the
successful development, introduction or marketing of new or
enhanced technologies, products and services.
- It will bring its technological innovations to the market
quickly and in advance of its competitors.
- In order to develop, improve or acquire new technologies, it
will not spend a large portion of its resources.
- Its new or enhanced products and services will be free of
errors and will not require significant design changes once
introduced.
If any of these risks occur, customers may become dissatisfied with
Infoseek's products and services. In turn, Infoseek could lose viewers and
could experience delayed or lost advertising revenues.
COMPUTER INTRUSIONS OR ELECTRONIC COMMERCE LIABILITIES MIGHT RESULT
IN LOSSES TO INFOSEEK
Consumers' lack of faith in and lapses in the privacy and security
of the Internet and online transactions may also prevent the general growth
of the Internet and electronic commerce. Infoseek's business, which depends
on this growth, may be harmed as a result.
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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 that are designed to limit
Infoseek's liability for losses, these agreements may not be enforceable.
Even if they are, the agreements may not be successful in limiting Infoseek's
liability. Also, Infoseek may not be able to negotiate these agreements with
all parties.
Infoseek does not have insurance against these security risks,
although it does have standard business interruption and crime insurance
which might cover certain losses. Infoseek is in the process of reviewing its
insurance coverage to cover potential claims and losses from e-commerce
transactions. However, if Infoseek does not or cannot obtain adequate
insurance, large or repeated security breaches into Infoseek's systems could
seriously harm Infoseek's business, results of operations and financial
condition.
Infoseek has agreements and expects to enter into other agreements
with third parties where Infoseek is entitled to receive part of the revenues
received by these third parties from the purchase of goods and services by
users referred from Infoseek's products and services. Infoseek may also
directly sell goods and services on the Internet. These arrangements may
expose Infoseek to additional risks and uncertainties, including potential
liabilities to consumers of such products and services.
These activities may expose us to a number of additional risks and
uncertainties, including:
- potential liabilities for illegal activities that may be
conducted by participating merchants;
- consumer fraud and false or deceptive advertising or sales
practices;
- breach of contract claims relating to merchant transactions;
- claims that materials included in merchant sites or sold by
merchants through these sites infringe third-party patents,
copyrights, trademarks or other intellectual property rights,
or are libelous, defamatory or in breach of third-party
confidentiality or privacy rights;
- claims relating to any failure of merchants to appropriately
collect and remit sales or other taxes arising from e-commerce
transactions; and
- claims that may be brought by merchants as a result of their
exclusion from our commerce services or losses resulting from
any downtime or other performance failures in our hosting
services.
INFOSEEK MAY EXPERIENCE YEAR 2000 COMPUTER PROBLEMS THAT HARM ITS
BUSINESS
Certain computer systems may not correctly recognize dates when the
year changes from 1999 to 2000. Infoseek management has reviewed Infoseek's
exposure to this problem and does not believe that it will incur significant
expenses as a result of the effect of this problem on its products, services
or information technology. However, Infoseek has begun replacing several
systems as part of a conversion to improved financial and business systems in
connection with regular upgrade programs in fall 1999 and will make minor
software alterations to certain of its systems to ensure full year 2000
readiness. Infoseek may not be able to implement these upgrades successfully,
and its belief that it will not incur significant expenses may be incorrect
due to unknown defects in its
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systems. If any of these were to occur, Infoseek could suffer serious harm to
its business, results of operations, financial condition and prospects due to
year 2000 computer system problems.
Infoseek is relying on assurances from vendors that their systems
and products are prepared for the year 2000. Infoseek cannot assure you that
its vendors' representations are accurate. Infoseek is in the process of
investigating year 2000 compliance by vendors of Infoseek. In situations
where vendors are not year 2000 compliant, they will be replaced, if
possible, by alternate sources that are year 2000 compliant. However,
Infoseek does not have any control over these third parties' compliance. For
example, if a link on GO Network or the Infoseek search service points to a
website that is not year 2000 compliant, that link may not be available to
users. If many linked sites fail, the value to users and advertisers on
Infoseek's websites could materially decrease. In addition, if Infoseek's
review of its year 2000 readiness did not uncover all year 2000 problems, or
if Infoseek fails to develop a contingency plan to address this risk,
Infoseek's business and operations could suffer serious harm or Infoseek
could be required to expend resources to resolve those problems. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Year 2000 Compliance."
IN ORDER TO ACCOMMODATE FUTURE GROWTH, INFOSEEK MUST MAKE
IMPROVEMENTS TO ITS OPERATIONS
Infoseek may not be able to manage its rapid growth effectively. In
order to take advantage of market opportunities, Infoseek will likely 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.
- Hire, train, motivate and manage its staff.
- Maintain relationships with various partners, advertising
customers, advertising agencies, Internet sites and services,
Internet service providers and other third parties.
- Retain control by management over the operations and
strategic direction of Infoseek in a rapidly changing
environment and locate new business activities.
- Develop and expand electronic commerce capabilities,
including an infrastructure for security, order processing
and financial reporting.
If Infoseek fails to, or experiences unscheduled delays, or
encounters unexpected additional costs, in addressing these issues,
Infoseek's business, results of operations, financial condition and prospects
could be seriously harmed.
FAILURES OR LACK OF CAPACITY IN INFOSEEK'S COMPUTER SYSTEMS COULD
RESULT IN LOSS OF USERS
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If Infoseek's systems, the majority of which are located in
Sunnyvale, California, and Bellevue and Seattle, Washington, fail or function
poorly for any reason, these interruptions would result in a reduction of
traffic to the Infoseek services. If the interruptions continue, they could
reduce the number of users and advertisers on Infoseek's products and
services. A reduction in the number of users and advertisers on Infoseek's
products and services could seriously harm Infoseek's business, results of
operations, financial condition and prospects.
Infoseek relies on computer, network and telecommunication systems
to provide its products and services. Such systems:
- may fail to operate correctly,
- may be strained by too many users or demands,
- may be damaged by earthquakes, fires, floods, wind storms,
power loss, lightning, electrical and telecommunication
failures or similar events, and may be damaged through
physical or electronic break-ins or computer viruses.
Infoseek does not maintain a comprehensive disaster recovery plan or
have redundant systems for each of its services. Although Infoseek has
insurance coverage for fires, floods, earthquakes (and, for the systems in
Washington, wind storms) and general business interruptions, the amount of
coverage may not be adequate to cover all losses which could occur. If losses
occur from failure of Infoseek systems and insurance does not cover such
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 service
providers, nor can it predict when these incompatibilities or problems will
occur. Infoseek also depends on computer hardware suppliers to promptly
deliver, install and service its servers and other equipment and services
used to provide Infoseek's products and services. If Infoseek's access to the
Internet or computer systems fail, it could result in serious harm to
Infoseek's business, results of operations, financial condition and prospects.
IF INFOSEEK'S ADVERTISING MANAGEMENT SYSTEMS FAIL, INFOSEEK COULD
LOSE ADVERTISING SALES OPPORTUNITIES
In order to generate revenues, Infoseek must manage the advertising
on its large, high traffic websites. Infoseek relies on internal advertising
inventory management and analysis systems to provide internal reporting and
customer feedback on advertising. If Infoseek has serious difficulties in
utilizing these systems, Infoseek will need to devote more resources to
enhance these systems.
If Infoseek fails to properly display advertising because of
problems with its advertising management systems or other technical problems,
Infoseek would be required to deliver additional advertising displays which
otherwise could have been sold to other advertisers. Significant amounts of
these "make good" obligations could result in serious harm to Infoseek's
business, results of operations, financial condition and prospects.
IF INFOSEEK IS NOT SUCCESSFUL IN EXPANDING INTO THE INTERNATIONAL
MARKET, ITS BUSINESS MAY SUFFER
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As part of the business strategy, Infoseek began offering its
products and services to international users and advertisers, and is actively
searching for further expansion opportunities in the international market. If
Infoseek fails to succeed in international markets, Infoseek's business could
suffer.
Infoseek may not be successful in creating localized versions of its
products and services or marketing or distributing its products abroad. Even
if Infoseek is successful, its international revenues may not be sufficient
to cover the cost of establishing and maintaining its international
operations. In addition to the uncertainty of Infoseek's ability to establish
an international presence, there are difficulties and risks inherent in doing
business internationally, such as:
- compliance with regulatory requirements and changes in these
environments,
- export restrictions,
- export controls relating to technology,
- tariffs and other trade barriers,
- difficulty in protection of intellectual property rights,
- difficulties in staffing and managing international
operations,
- longer payment cycles,
- problems in revenue collection,
- political instability,
- exposure to currency exchange risks,
- potentially adverse tax consequences, and
- increased competition.
Any one or more of these factors could prevent Infoseek from being
successful in international markets.
INFOSEEK MAY NOT BE ABLE TO ATTRACT OR RETAIN THE KEY PERSONNEL IT
NEEDS TO SUCCEED
The Company's future operating results depend in significant part
upon the continued contributions of its officers and personnel, many of whom
would be difficult to replace. The loss of its officers or other key
personnel, who are critical to the Company's success, could have a material
adverse effect on the business, operating results and financial condition of
the Company. 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 of Infoseek's key employees do not have employment
contracts. In addition, the announcement of the proposed merger with Disney
may adversely affect Infoseek's ability to attract and retain employees
because of the differences in Infoseek's and Disney's corporate cultures.
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IF INFOSEEK IS UNABLE TO PROTECT ITS INTELLECTUAL PROPERTY, ITS
BUSINESS COULD SUFFER
Infoseek's success depends heavily upon its exclusive technology,
brand names and Internet locations ("domain names"). Infoseek cannot assure
you that it can adequately protect this intellectual property. If Infoseek
fails to protect its intellectual property, its business could suffer.
To protect its rights to its software, systems, documentation and
product features, Infoseek currently relies on a combination of:
- patent, copyright and trademark and service mark laws,
- trade secret laws,
- confidentiality procedures, and
- contractual provisions.
These methods of protection may not be adequate to protect against
others using Infoseek's technology, brand names and content. Accordingly,
Infoseek cannot assure you that it will be able to maintain the goodwill
associated with its products and services or competitive features.
Despite Infoseek's efforts to patent and trademark its intellectual
property and keep information confidential, Infoseek may not be able to do
so. Infoseek may not be able to protect its technology because:
- Pending and new patent applications and trademark
registrations may not be approved.
- Even if issued, new patents and trademark registration may be
challenged, invalidated or designed around.
- Infoseek's new products or technologies may not be
patentable.
- Time-consuming and costly litigation may be necessary to
protect Infoseek's proprietary technologies.
- Policing unauthorized use of Infoseek's intellectual property
is difficult and expensive.
- The laws of some foreign countries do not protect proprietary
rights to as great an extent as do the laws of the United
States.
- Infoseek's competitors may independently develop similar
technology or design around Infoseek intellectual property.
- The application of copyright and trademark laws to the
Internet and other digital media is very uncertain.
THIRD PARTIES MAY PREVENT INFOSEEK FROM DEVELOPING ITS INTELLECTUAL
PROPERTY
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Infoseek may not be able to use its intellectual property or further
develop its business because of third parties. Infoseek cannot assure you
that third parties will not in the future claim infringement by Infoseek with
respect to Infoseek's current or future products. These claims of
infringement, whether successful or not, could seriously harm Infoseek's
business, results of operations or prospects.
Third parties:
- may bring claims of patent, copyright or trademark
infringement against Infoseek,
- 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, and/or
- may bring costly and time-consuming lawsuits.
Infoseek is aware of a number of issued patents which cover
interactive programming, Internet programming and techniques, and electronic
commerce. For example, Infoseek is aware of a U.S. patent recently issued to
Carnegie Mellon and licensed to Lycos related to Web spider technology. While
Infoseek currently believes, based on a preliminary review of such issued
patent and consultation with its patent counsel, that its products and
services do not infringe the Carnegie Mellon patent, Infoseek cannot assure
you it would prevail if Lycos or Carnegie Mellon claimed Infoseek infringed
such patent. Infoseek expects patent infringement regarding Internet
technologies to increase as the number of products and competitors in this
market grows and as new patents are issued. Infoseek expects that patents,
particularly in the areas of real-time or "streaming" audio and video, online
commerce and "digital cash," and other technologies may issue in the future.
Some of these technologies may be considered to be critical to long-term
success in the Internet marketplace.
From time to time Infoseek receives informal notices from copyright
and trademark holders regarding use of music, images and websites in its
services. For example, Infoseek and Disney are currently defending against a
complaint brought by Goto.com, Inc. relating to the use of the GO Network
Green Traffic Light logo. Although Infoseek denies all of the material
allegations of Goto.com, Inc.'s complaint, Infoseek cannot assure you it will
prevail in this action. Infoseek is also aware of other companies and/or
services that employ "GO" as part of their names. Infoseek cannot assure you
that it will be able to continue to use the GO Network name and logo. In
addition, Disney is not obligated to indemnify Infoseek against claims of
infringement by third parties of the GO Network trademarks. If Infoseek were
restricted from using the GO Network name or logo, Infoseek's financial
position, results of operations or prospects could be seriously harmed.
(See-Note 13 to the "Notes to Condensed Consolidated Unaudited Interim
Financial Statements")
CHANGES IN LAWS GOVERNING THE INTERNET COULD DECREASE THE DEMAND FOR
INFOSEEK'S SERVICES
At present there are few laws and regulations that apply to the
access or commerce on the Internet, both in the United States and overseas.
Infoseek is, however, subject to general laws and regulations that apply to
all businesses. Proposals for regulation are presented to federal, state and
foreign governments frequently. If any of these proposals are adopted,
Internet use may decrease, and in turn demands for Infoseek's products and
services may decrease. Similarly, Infoseek's operating expenses may increase
as a result of new regulations. These effects could seriously harm Infoseek's
business, results of operations, financial condition and prospects.
Laws or regulations may be passed regarding the Internet on such
issues as:
- user privacy (including sending of unsolicited e-mail, or
"spamming"),
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<PAGE>
- consumer protection for products and services,
- media regulation, such as libel and obscenity,
- intellectual property, and
- liability of Internet service providers.
In addition, courts are still determining how existing laws
regarding property, copyrights, trade secrets, libel and defamation, and
privacy apply to the Internet. Infoseek may face copyright claims for
materials distributed through its online or Internet services to others, such
as the chat room. Infoseek has little control over these users' content.
Infoseek may also face claims because materials may be downloaded
through its online or Internet services and then distributed to others. Some
of Infoseek's products and services, such as chat rooms, messaging, and
hosted Web pages, contain content provided by users. Infoseek has little
control over these users' content. Claims might be made against Infoseek
under a variety of media and intellectual property laws for the nature,
content, publication and distribution of its materials or its users'
materials. For example, Infoseek might be subject to claims of copyright or
trademark infringement, obscenity, or libel brought against it for content
that appears on its site. These types of claims have been brought against
online service providers in the past, some of which have been successful.
Infoseek provides a variety of third-party information through its
services. For example, Infoseek's service provides news, stock quotes,
analyst estimates and other stock trading information. If this information
contains errors, Infoseek could be sued for losses suffered by users who
relied on the information. Infoseek also offers Web-based e-mail services.
E-mail may further expose Infoseek to potential risks. For example, Infoseek
may be subject to claims or liabilities from spamming, lost or incorrectly
delivered messages, use of e-mail for illegal purposes or fraud, harassment
or interruptions or delays in e-mail service.
Although Infoseek carries general liability insurance, such
insurance may not cover all claims or may not be sufficient to reimburse
Infoseek for all liabilities that may occur.
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<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company may be a party to litigation and
claims incident to the ordinary course of its business. Although the results
of litigation and claims cannot be predicted with certainty, the Company
believes that the final outcome of such matters will not have a material
adverse effect on the Company's financial position, results of operations, or
cash flows.
On January 26, 1999, Civix-DDI, LLC, filed a complaint against
Infoseek Corporation and nineteen other defendants, Civil Action No. 99-B-172
in the United States District court for the District of Colorado claiming
patent infringement of U.S. Patent No. 5,682,525. The patent suit claims
infringement of an electronic mapping system and seeks unspecified damages
and a preliminary injunction. Infoseek denies any infringement and is
defending against the claims.
On February 18, 1999, GoTo.Com, Inc. filed a complaint GOTO.COM,
INC. V. THE WALT DISNEY COMPANY, DISNEY ENTERPRISES, INC., INFOSEEK
CORPORATION, AND MONTROSE CORPORATION, Civ. No. 99-01674 TJH, in the United
States District Court for the Central District of California. The complaint
alleges that the defendants' use of the GO NETWORK Green Traffic Light Logo
is confusingly similar to the plaintiff's unregistered GOTO.COM Logo. The
complaint seeks an unspecified amount of damages and a preliminary and
permanent injunction against the use of the logo. The Company denies all the
material allegations of the complaint and is defending against them.
On May 11, 1999, Internet Shopping Network, LLC filed a complaint
against Infoseek Corporation, Steven Kirsch, Harry Motro, Bhagwan D. Goel,
Civ. No. CV 781824, in the Superior Court of California, Santa Clara County
alleging misappropriation of trade secrets; breach of fiduciary duty; breach
of contract; tortious interference with contract; unfair competition,
conversion, and conspiracy. The suit demands an unspecified amount of damages
and a preliminary injunction. The Company and the individual defendants deny
all claims.
On July 12, 1999, KOTRIN V. INFOSEEK CORP., ET AL., Civ. A.
No.17285NC, one of a number of similar purported shareholder class action
complaints, was filed in Delaware Court of Chancery against Infoseek, its
board of directors, and Disney. On July 15 and July 16, 1999, respectively,
MICHAEL RICHARDS V. INFOSEEK CORP., ET AL, Case No. CV783265 and MICHAEL
BASTA V. INFOSEEK CORP., ET AL., Case No. CV783282, both of which are
stockholder class action complaints, were filed in the Superior Court of
the State of California, Santa Clara County. All actions allege similar
breaches of fiduciary duty and seek to enjoin the proposed Infoseek and
Disney merger and the related transactions as unfair to Infoseek's
stockholders. Infoseek believes that each of the stockholder class action
complaints received to date is without merit, and Infoseek intends to
vigorously defend itself against each of such claims.
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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on May
14, 1999. The following sets forth the actions taken by the stockholders of
the Company at the Annual Meeting and the results of the votes on such
matters:
- Election of the directors: Harry M. Motro, Steven T. Kirsch, Steven M.
Bornstein, Robert A. Iger, L. William Krause, Matthew J. Stover, Jacob
J. Winebaum and John E. Zeisler
<TABLE>
<CAPTION>
Election of Directors For Withheld
--------------------- --- --------
<S> <C> <C>
Harry M. Motro 57,309,801 386,392
Steven T. Kirsch 57,510,283 185,910
Steven M. Bornstein 57,490,255 205,938
Robert A. Iger 57,486,750 209,443
L. William Krause 57,520,976 175,517
Matthew J. Stover 57,525,281 170,912
Jacob J. Winebaum 57,422,231 273,962
John E. Zeisler 57,524,565 171,912
</TABLE>
- Ratification and approval of an amendment to the 1996 Stock
Option/Stock Issuance Plan (the "1996 Option Plan") to increase the
number of shares available for grant thereunder by the lesser of (i)
2,400,000 shares, (ii) 4% of the outstanding shares and (iii) such
lesser number of shares as the Board determines to take place after
stockholder approval and annually thereafter
<TABLE>
<CAPTION>
For Against Abstain Broker non-votes
--- ------- ------- ----------------
<S> <C> <C> <C>
48,823,512 8,796,134 76,547 0
</TABLE>
- Ratification and approval of an amendment to the 1996 Option Plan to
(i) increase the number of shares automatically granted to non-employee
directors upon becoming a director from 15,000 shares to 40,000
shares, (ii) decrease the number of shares automatically granted to
non-employee directors at each annual stockholder meeting (after
becoming a director) from 7,500 shares to 5,000 shares and (iii)
establish an additional automatic option grant to non-employee
directors at each annual stockholder meeting for each committee on
which a director serves
<TABLE>
<CAPTION>
For Against Abstain Broker non-votes
--- ------- ------- ----------------
<S> <C> <C> <C>
48,769,827 8,843,562 82,804 0
</TABLE>
- Ratification and approval of an amendment to the Company's Employee
Stock Purchase Plan to annually increase the number of shares
available for issuance thereunder by the lesser of 800,000 shares, 1%
of the outstanding shares of Common Stock of the Company or such
lesser number of shares as determined by the Board of Directors
<TABLE>
<CAPTION>
For Against Abstain Broker non-votes
--- ------- ------- ----------------
<S> <C> <C> <C>
56,749,758 876,783 69,652 0
</TABLE>
- Ratification of the appointment of Ernst & Young LLP as independent
auditors of the Company for the fiscal year ending October 2, 1999.
<TABLE>
<CAPTION>
For Against Abstain Broker non-votes
--- ------- ------- ----------------
<S> <C> <C> <C>
57,592,137 54,354 49,702 0
</TABLE>
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibit
27.1 Financial Data Schedule
b) Reports on Form 8-K
1. On July 19, 1999, Infoseek filed a current report on Form 8-K
dated July 10, 1999 reporting Infoseek's execution of an
Agreement and Plan of Reorganization with The Walt Disney
ompany and Bingo Acquisition Corp. as more fully described
therein.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
INFOSEEK CORPORATION
Date: August 13, 1999 By: /s/ Cynthia Stephens
-----------------------
Cynthia Stephens
Vice President and
Chief Financial Officer
45 of 45
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-02-1999
<PERIOD-START> OCT-04-1998
<PERIOD-END> JUL-3-1999
<CASH> 33,252
<SECURITIES> 53,213
<RECEIVABLES> 34,922
<ALLOWANCES> (12,513)
<INVENTORY> 0
<CURRENT-ASSETS> 123,497
<PP&E> 58,712
<DEPRECIATION> (32,082)
<TOTAL-ASSETS> 996,178
<CURRENT-LIABILITIES> 79,552
<BONDS> 0
0
0
<COMMON> 1,262,026
<OTHER-SE> (391,444)
<TOTAL-LIABILITY-AND-EQUITY> 996,178
<SALES> 95,954
<TOTAL-REVENUES> 95,954
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 308,530
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 323
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (212,186)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (212,186)
<EPS-BASIC> (3.76)
<EPS-DILUTED> (3.76)
</TABLE>
