OVERVIEW
Quokka Sports is a leading provider of sports entertainment for the digital world.
Around the world, sports enthusiasts immerse themselves in their favorite sports, both as spectators and as participants. This passion for sports translates into billions of dollars of spending on sports entertainment and related sporting products and services. We believe that this market will continue to expand as advances in technology create more opportunities to fuel the passions of sports enthusiasts.
We use the power of emerging digital media and technology to bring sports enthusiasts closer to their favorite sports. We leverage our scalable, multi-platform, digital technology to offer live event coverage, news and information, audio and text dispatches from athletes, games, community forums and content created by fans, as well as opportunities for the fan to purchase premium products in order to provide our audience a complete sports experience. We believe that media coverage is most effective when it allows the viewer to feel a real connection to other individuals, events and venues. As a result, the sports experiences on the Quokka Sports Network and for our distribution partners are intended to allow our viewers to reach halfway around the world in real time to experience all of the excitement of a major sporting event direct from wherever they happen to be. In addition, we seek to use our proprietary digital media technology to allow our technology clients to provide compelling interactive digital experiences for their own customers.
Through this immersive approach to digital media coverage, we seek to win the "hearts and minds" of enthusiasts of the sports events we cover and create ongoing communities around these sports events. The Quokka Sports experience is designed to appeal to a global audience. Our production and technology expertise has extended to the following sports: golf, Major League Baseball, college sports, sailing, motor racing, and action sports such as skiing, climbing, hiking, snowboarding, adventure racing and mountain biking, and the Olympics. The Quokka Sports Network currently includes coverage of some of the world's largest sporting events like the biennial Olympic Games, the Men's and Women's NCAA basketball tournaments and the PGA golf tour. The properties of the Quokka Sports Network have attracted an audience of sports enthusiasts that averaged over 4.0 million unique visitors per month during the December 2000 quarter, according to our internal tracking systems.
Since our inception, we have sought to lead our industry with innovations that allow for the delivery of content across a wide variety of digital platforms. We believe that new interactive technologies provide exciting opportunities for making information-intensive programming also entertaining. In addition to our extensive capabilities as a digital sports media company, we have also developed a core proprietary technology infrastructure and business processes that are designed to enable the collection and customization of up-to- the-minute media assets and distribution of such content quickly, efficiently and in real-time across a wide variety of digital platforms.
Recognizing the two distinct core competencies within Quokka, in February 2001, we reorganized our operations into two separate divisions, "QMedia," our media production division, and "QTech," our live content technology solutions division. We believe that each division is a leading company in its respective market sector.
QMEDIA. QMedia is the premier digital media company for live-event interactive sports coverage. QMedia's principal activities include the acquisition or control of digital rights, production of live sports and 3 4
entertainment content, publishing and production of Web content, such as web site development for live events, content production and website maintenance, and creative sponsorship campaign development and sales. Over the past four years, QMedia has developed sponsorship campaigns for some of America's leading corporations including General Motors, Anheuser-Busch, Visa International, adidas America and General Electric. The majority of our 2000 revenues were derived from sponsorship of live events. Moving forward, QMedia expects to increase revenue through new strategic alliances. These alliances include, broadcasters wishing to create a digital media product to complement their broadcast coverage, rightsholders seeking an experienced partner to help maximize the value of their digital rights, and corporate partners seeking to create custom digital productions. QMedia currently has approximately 115 employees.
QTECH. QTech develops and manages our proprietary Live_IP(TM) technology, and services that focus on delivering real-time and near real-time immersive rich media content for the Internet, broadband, Interactive/ Enhanced TV and wireless platforms. In general, our Live_IP platform, consists of two primary components -- a near real-time content viewer and a live content publishing system. These tools offer content producers a browser-based publishing platform for creating, editing, assembling and laying out media-rich content into overlapping content layers that aid the content producer in the complete production of the project. Our Live_IP technology permits the user to sequence, customize and tag assets for presentation as well as manipulate content acquisition and routing. In addition, this system can accommodate increased traffic levels without slowing down the ability to provide up-to-the-minute coverage of live events across a wide variety of digital platforms. QTech will offer customers its technology platform as well as training, systems integration and pre-production services. Clients of the QTech solution currently include Major League Baseball Advanced Media LP, and, in partnership through the QMedia division, broadcasters and sports organizations such as NBC Olympics, Inc., The Salt Lake Organizing Committee for the Olympic Winter Games of 2002 and the National Collegiate Athletic Association. In February 2001, Quokka decided to establish QTech as a separate business division with the expectation that the QTech unit would generate revenues from licensing of its technology and through the provision of managed technology services. QTech currently has approximately 61 employees.
Through February 2001, our revenue has been primarily derived from sponsorship of live events. Past sponsors of Quokka's events include; adidas America, IBM, Visa, Ford, Anheuser-Busch, General Electric and General Motors. Moving forward, we anticipate that we will continue to generate revenue through our QMedia division primarily from business customers through sales of sponsorships and advertising or through sales of media production services, and, to a lesser extent, from media companies through revenue from content syndication, and, as a supplement to our other media-based revenue generating activity, from consumers through sales of officially licensed merchandise, sports equipment and other products and services.
In addition, as a result of our business restructuring in February 2001, we intend to generate revenue through our QTech division from business customers and media companies through fees from the licensing of our proprietary live-event coverage and publishing technology, and by providing managed technology services and system integration services.
In August 1996, we adopted our current business model and incorporated in Delaware under the name Quokka Productions, Inc. Shortly thereafter in September 1996, we changed our name to Quokka Sports, Inc. In November 2000, Total Sports Inc., which was incorporated in Delaware, was merged into Quokka Sports, Inc.
MARKET OPPORTUNITY
Around the world, sports enthusiasts immerse themselves in their favorite sports, both as spectators and as participants. This enthusiasm for sports is an almost universal phenomenon. It seems that almost everyone has a strong attachment to at least one sport. For example, a recent ESPN Chilton Sports Poll estimates that 86% of the general United States population 12 years of age or older are sports fans. They further estimate that approximately 20% of this population accesses sports information with their computer.
This passion for sports translates into billions of dollars of spending on sports entertainment and related sporting products and services. A huge industry has emerged to serve the passions of sports enthusiasts. Sports 4 5
broadcasting and publishing, athletic and outdoor gear, team apparel, travel services, training, and venue access comprise several billion-dollar industry segments. The Georgia Institute of Technology estimates that revenue streams derived from spectator sports, sporting goods and sporting publications in the United States alone exceeded $130 billion in 1995. The industry continues to grow at a robust rate. For example, Paul Kagan Associates Inc. estimates that U.S. advertisers will increase their investment in sports-related TV advertising by 38% between 1998 and 2003.
The emergence of the Internet has added to the expansion of the sports entertainment industry. Jupiter Communications, Inc. estimates that global consumers will spend approximately $3.0 billion per year online on sporting goods, apparel, footwear and tickets by 2003. In addition, Forrester Research, Inc. projects that total U.S. online ad spending on advertisements will grow to $22 billion in 2004. We believe that this market will continue to expand as advances in technology create more opportunities to fuel the passions of sports enthusiasts.
The demand for more immersive and interactive content continues to redefine the ways in which broadcasters and content producers view the Internet. As demand increases for more compelling content, broadcasters and content producers will require more powerful tools to develop, produce and manage digital content across all areas, including sports, music, corporate financial announcements and product launches, distance learning, and others, to meet the expectations of consumers.
In addition to the sports and entertainment market, the market opportunity for other applications for live and interactive content publishing solutions are substantial. For example, Needham & Co. estimates the annual market opportunity for online higher education and corporate training at approximately $40 billion and $63 billion, respectively. Similarly, Perey Research estimates the market opportunity for managed video services at approximately $22 billion per year. Quokka Sports believes that as other vertical markets realize the value of creating more compelling content, the market opportunity for its solutions will increase substantially.
ADVANCE OF DIGITAL MEDIA PLATFORMS
We believe that the world is currently undergoing a revolution in the way it enjoys entertainment. The growth of the Internet is well documented, but broadband delivery of content is also advancing quickly. Forrester Research projects that 22 million U.S. households will have high-speed broadband access by 2003. Other digital media platforms are also emerging. Jupiter Communications estimates that the total user base of mobile personal Internet appliances such as "smart" phones, pagers and PDAs will reach almost 26 million by 2002.
Converged media devices are starting to develop as well. Forrester Research projects that so-called "Interactive TV" applications like enhanced broadcast TV and web on TV will reach a total of 37 million households by 2004. Advances in digital media platforms will someday allow sports enthusiasts to follow their favorite sports 24 hours a day, 7 days per week, whether they are on the road, at the office, on the golf course or at home in the living room.
QUOKKA SPORTS -- PROVIDING THE COMPLETE SPORTS EXPERIENCE
Through our QMedia division, we have developed an extensive live-production expertise in a wide range of sports verticals, including college basketball, Major League Baseball, golf, action sports such as skiing, climbing, hiking, snowboarding, adventure racing and mountain biking, motor sports, sailing and Olympics-scale sporting events. Our proven ability to manage the extensive technical elements required to deliver successful live event coverage has allowed us to drive significant user traffic to our own media network. We believe that we can apply this expertise to the media networks of other companies as well.
We believe that a substantial market opportunity will develop for digital media tools designed to increase the quality and immersiveness of digital media content. Many broadcasters and other content developers are seeking to expand the boundaries of narrowband and broadband Internet coverage, as well as content for wireless applications and enhanced and interactive television. However, initial enthusiasm for rich digital media content by these companies has been tempered by high production and technology development costs, 6
which often proved to be a distraction from their core businesses. In order to maximize the value of their rights to or investment in events and content, rightsholders and other businesses are seeking media partners to monetize the assets for them, or experts to provide them with the tools to assist them in monetizing these assets themselves. We believe that our QMedia and QTech divisions are well positioned to deliver against this growing demand.
MULTIPLE REVENUE STREAMS
QMEDIA. Through our QMedia division's expertise, we have identified three distinct sets of customers for our immersive sports experience. These customers include advertisers looking to connect with our highly valued audience, media companies seeking compelling and unique content, and the individual fans who seek out premium gear, memorabilia and services to complete their experience with their favorite sport.
Sponsorship and Advertising Revenue. In 2000, sponsors and advertisers provided approximately 76% of our revenue. We have established multi-year sponsorship arrangements with Computer Associates and Intel Corporation as "Quokka Performance Team" members. We offer these sponsors multi-dimensional marketing opportunities across the Quokka Sports Network. In addition, we also have had sponsors and advertisers that focused on particular sport verticals in our network, such as IBM, Ford Motor Corporation, Qwest Communications, Visa International, adidas America, Subaru and Anheuser Busch.
We believe these advertisers find our primary audience, the hard-to-reach male professional, to be extremely attractive. This audience enjoys our rich content at home, and even in the office, one of the toughest places to get the attention of these professionals. Because of their passion for sport, we believe the audience is also emotionally engaged in the content. The emergence of the sports media and sponsorship industry demonstrates the value that marketers see in these intense relationships.
We present our sponsors' and advertisers' brands and products as an integral part of the sports content, and rich media presentations of these messages to help bring their brands to life. Some of our sponsors leverage our content on their own web sites. In addition, some technology sponsors also work with us to develop new infrastructure solutions that enable our coverage. These "custom solutions" then become marketing tools for the technology providers as they look to expand their presence in the new digital media marketplace.
Three customers accounted for approximately 40% of our revenues in 2000, three customers accounted for approximately 65% of our revenues in 1999 and three customers accounted for approximately 81% of our revenues in 1998. In 2000, our relationship with Compaq accounted for 22% of our revenues, our relationship with Intel Corporation accounted for 11% of our revenues, and our relationship with Computer Associates accounted from 7% of our revenues. In 1999 our relationship with Compaq accounted for 27% of our revenues, our relationship with Computer Associates accounted for 23% of our revenues, and our relationship with Intel Corporation accounted for 15% of our revenues. In 1998 our relationship with Compaq (through Tandem Computer) accounted for 52% of our revenues, our relationship with CompuServe accounted for 16% of our revenues and our work for the International Olympic Committee accounted for 13% of our revenues.
Media Production Services. As part of our restructuring of our business model, QMedia has refocused its efforts on providing media production services. In the past, we generated these services primarily as a method of generating embedded, long-term sponsorship opportunities. However, the current Internet advertising and digital content business environment has created an opportunity for us to increase our efforts in providing major sports-related entities, major advertisers and other corporations with production services that feature our signature live-event productions capabilities. Past media production projects have included developing the web site for the International Olympic Committee in 1998, providing live coverage of the 2000 24 Hours of Le Mans for General Motors' Cadillac and Corvette divisions and providing the GM Experience Live coverage of the 2000 North American International Auto Show for General Motors. Qmedia intends to pursue production services business that is profitable on a project-by-project basis.
Content Syndication. Media companies are emerging as significant customers of ours. Our primary media customers today are Internet companies, but wireless and converged media customers are also 7
emerging. The Internet content providers -- often portals -- are interested in our content, because they believe it will help them create longer user visits. Our exclusive access to event properties and our rich media presentations have attracted these companies. Current narrowband "portal" customers include Yahoo!. In February 2000, we produced content for wireless devices with Nokia, our initial development partner for this product. In March 2000, we partnered with WebTV Networks, Inc. to develop content for their interactive television platform. In September 2000, we entered into an agreement with DIRECTV to develop interactive television programming for their satellite platform.
As proprietary digital entertainment content becomes available to new media companies, we expect this trend toward content syndication to continue. The historical growth of the cable television industry is an example of how content syndication models develop. For instance, ESPN commanded subscription fees from cable providers as the ESPN television business matured. We believe that a similar business model will progress as the Internet evolves from a pure news and information medium to one that also provides exclusive entertainment experiences.
Revenue from Consumers. Sports enthusiasts go to great lengths to wear the uniforms and use the gear authentic to their sports, and wear the marking and colors of their favorite teams or athletes. Further, many fans that follow a particular sport also participate in that sport on a recreational level. We seek to leverage our relationships with event owners to establish exclusive partnerships with the merchandise partners for these events. We offer exclusively licensed event merchandise, high-end sports equipment and apparel. For example, in December 2000, we partnered with The Golf Warehouse to provide our Golf.com property with electronic commerce services.
QTECH. Technology Licensing and Related Managed Services. We have recently begun to license our proprietary technology to content developers and rightsholders that desire to leverage our technology to efficiently produce and develop their own content. In addition, we also intend to provide other services such as systems integration to business customers in need of our live-event interactive coverage expertise. In December 2000, we licensed our TotalCast technology to MLB Advanced Media for coverage of all Major League Baseball games.
BUSINESS ARCHITECTURE
The backbone of our immersive digital entertainment products and services is our Live_IP business architecture and technology developed and managed by our QTech division. QTech's business architecture consists of two primary components, the Comus(TM) Publishing System and the TotalCast(TM) system. The primary difference between the two systems is the source and nature of the content initially flowing into the systems.
COMUS(TM) Publishing System
The Comus publishing system enables us to receive data and information from many sources in multiple formats and convert, manipulate and distribute this data in different forms on the Quokka Sports Network or the web sites of our syndication partners. The system also allows us to rapidly repackage content into a wide variety of templates each with a different look, feel and presentation for multiple digital media platforms.
Collecting Media Assets. The publishing system receives news, statistics and other content from multiple sources in different formats, including email, computer files, facsimiles, proprietary data formats, news or sports wire transmissions, photographs and satellite data streams. The system can process tens of thousands of data files per day.
Converting the Assets. The publishing system converts this diverse stream of media assets into a format that can be stored in our databases and used to create new digital content. As part of this process, the system knows the business rules for each source of the assets. For instance, some wire services will allow web sites to display stories for a certain period of time before they must be removed from the site. The data conversion process automatically ensures that all content is used consistently with any relevant contractual provisions. 8
Creating the Content. Editors, either from Quokka or our affiliates, partners or clients, can adjust the display, change headlines, or change the display priority of any content on their respective web sites. The system creates pages to conform to the look and feel of each Quokka affiliate and partner. The content creation process can display a story in more than 100 different formats.
Both the TotalCast system and the Comus publishing system are designed to handle rapid changes in design and load. The architecture can accommodate new affiliates and partners and increased traffic levels without slowing down our ability to update web sites, limiting our customers' ability to change their site or changing the user's experience. The architecture is also designed to distribute our content to various non-Internet devices such as in-venue displays, pagers, mobile computers, cellular phones and hand-held computing devices, as well as our traditional publishing unit.
TotalCast(TM) System
The TotalCast system receives media assets in real-time from a sports event, processes the information, so that it can be stored and manipulated in our databases and then, using the assets, creates graphical and textual descriptions and analyses of the event. Our business architecture is comprised of three primary processes that create the ability to reuse and redistribute media assets across many different platforms in a variety of ways.
Collecting Real-Time Media Assets. At the sports venue, our operators input data relating to the sporting event into a computer that relays the information to the production studio over the Internet. The computers used by our operators have software featuring an easy-to-use graphical display, immediate quality control feedback and artificial intelligence that knows the rules and situations of each sport. We believe that the ease-of-use and intelligence built into the software allow our operators to capture significantly more data during the event than other data collection methods. The data is sent real-time to our servers in a format ready for conversion.
Converting the Assets. The TotalCast system receives and immediately converts the media assets into a format that can be stored in our databases and used to create new, customized content. The data conversion process will manage situations where problems occur during an event. For instance, if there is an interruption in service, once communications are re-established, the data conversion process will synchronize all missing information and create new content. This enables us to deliver accurate and complete coverage to its users and to make available complete archives of events.
Creating the Content. The content creation process immediately takes the media assets from the TotalCast database and creates data visualizations, statistical presentations and text descriptions for the play during a sporting event. The TotalCast system also can integrate audio files, video files and still photographs or deliver that content separately.
The system can create many different presentations of each discreet event like a pitch in baseball or an assist and successful shot in basketball. Our production team can easily design a presentation layout incorporating each media asset into a specified form for distribution. We believe that it typically takes approximately ten seconds from the time the operator enters the information into the computer at the sport venue to when all the different presentations are available on the Internet.
Once the digital content is created, it can be distributed across a variety of digital media platforms, such as narrowband and broadband Internet, interactive television and wireless access devices.
JOINT VENTURES AND RIGHTS AGREEMENTS
By way of our QMedia division, we plan to secure rights to cover sporting events through a variety of methods, including direct acquisition and the formation of joint ventures with rights holders or other entities having established relationships with rights holders. We have experience with both methods. To date, we have acquired the rights to events such as the Major League Baseball games directly from the rights holders, we have acquired Internet rights to NCAA Championships via the NCAA's marketing partner, Host Communi- 9
cations, and we have entered into a joint venture with NBC Olympics, Inc. in connection with the Olympic Games.
Joint Venture with NBC. In February 1999, we formed NBC/Quokka Ventures, LLC with NBC Olympics, Inc., a wholly owned subsidiary of National Broadcasting Company, Inc. In connection with the formation of the joint venture, we contracted with the joint venture to provide the services necessary for the joint venture to provide interactive digital coverage. Consequently, we expect that the joint venture's interactive digital coverage of the Olympics on its web site will showcase Quokka's distinctive style of programming and will complement NBC's television coverage.
NBC Olympics, Inc. granted the joint venture the following interactive media rights, subject to limitations, in connection with the Olympic Games and certain United States qualifying events through 2004:
- United States interactive rights to incorporate limited highlights of NBC video into its coverage;
- an exclusive license to produce the official NBC interactive media coverage of the Games;
- a license to incorporate still photographs and sequential still photographs taken from video produced from the Games by NBC Olympics into the joint venture's coverage;
- a license to incorporate into the joint venture's coverage historical Games footage, non-competition video and all research and other materials, whether text, audio, video, still footage, written or fixed in any other medium relating to the Games produced by NBC Olympics;
- the right to distribute the joint venture's coverage in interactive media throughout the United States; and
- a license to use the composite NBC/Olympic logo on the joint venture's web site in connection with the production, operation, promotion, marketing and distribution of the joint venture's coverage of the Games.
In order to protect its broadcast rights and brand, however, NBC Olympics, Inc. can restrict the joint venture's use of any of the foregoing interactive media rights if:
- NBC lacks the ability to grant such rights to the joint venture as a result of contractual limitations or restrictions imposed by, or conflicts with any legal rights held by the International Olympic Committee or any other person or entity possessing intellectual property or other rights in the still photographs, sequential still photographs or video, whether Games, non-competition or historical;
- a use conflicts with NBC's current sponsors or advertisers or the sponsors or advertisers of the International Olympic Committee, United States Olympic Committee, Sydney Organizing Committee of the Olympic Games, Salt Lake Olympic Organizing Committee or the 2004 Games Organizing Committee;
- the digital assets are involved in any transaction by us or the joint venture with any NBC Competitor, as defined below;
- a use competes with NBC's broadcast, cable or direct broadcast satellite coverage of the Games; or
- a use violates NBC's, NBC Sports', the International Olympic Committee's, the United States Olympic Committee's or other Olympic organizations' editorial policies and practices.
NBC/Quokka Ventures, LLC is owned 51% by Quokka and 49% by NBC Olympics, Inc., and management is vested in a board of directors, three of whom are currently appointed by Quokka and two of whom are currently appointed by NBC Olympics, Inc. Under the terms of the venture's operating agreement, Quokka is solely responsible for making cash capital contributions to the venture. The terms of the operating agreement for the venture require Quokka to make quarterly capital contributions in amounts necessary to fund the venture's operations on an ongoing basis in accordance with the annual operating plan. Accordingly, the amounts and timing of these capital contributions will be based on the actual activities of the venture and are unknown at this time. Additionally, we issued warrants to purchase 2,100,000 shares of Quokka common 10
stock. Based on the Noreen-Wolfson fair value model with a volatility of 70%, these warrants have a fair value of $4.9 million. NBC Olympics, Inc.'s obligation to the joint venture is to contribute interactive media rights as described above as well as on-air promotion of the site, access to NBC personalities and research.
NBC Olympics, Inc. has the right to terminate the joint venture in the event an NBC Competitor:
- merges or otherwise consolidates with us in a transaction where we are not the surviving entity;
- becomes the beneficial owner of 15% or more of Quokka outstanding equity securities;
- becomes entitled to elect, appoint or replace a member or members of our board of directors unless NBC Olympics, Inc. is also granted the same right; or
- acquires all or substantially all of Quokka's assets.
For these purposes, an "NBC Competitor" includes any media company that is significantly engaged in any of the primary businesses of NBC Olympics, Inc., National Broadcasting Company, Inc. or its subsidiaries or any telecommunications, Internet or similar company that is significantly engaged in any of the primary businesses of NBC Olympics, Inc., National Broadcasting Company, Inc., its subsidiaries or Snap! LLC or successor entities. However, an NBC Competitor shall not include any entity identified by Quokka in writing to NBC Olympics, Inc. that NBC Olympics, Inc. does not designate as an NBC Competitor in writing to Quokka within 30 days of our written notice. On March 14, 2001, we amended our master venture agreement with NBC Olympics, Inc. and NBC/Quokka Ventures, LLC to provide, among other things, for the termination of that agreement on May 1, 2001 unless agreed-upon conditions to fund or find a strategic partner or buyer that is satisfactory to both NBC Olympics, Inc. and the Salt Lake Organizing Committee for the Winter Olympics of 2002. For additional discussion, see "-- Recent Developments."
Golf.com L.L.C. In October 2000, we completed our purchase of 71% of Golf.com L.L.C., which operates the Golf.com website. The remaining 29% of Golf.com L.L.C. is owned by a subsidiary of National Broadcasting Company, Inc. Management of the venture is vested in a five-person board of managers, three of whom are appointed by Quokka and two of whom are appointed by NBC. The approval by persons owning at least 66 2/3%, and each person owning at least 10%, of the ownership interests of Golf.com L.L.C. are required to remove a manager or officer of the company, to approve any annual budget and operating plan of the company and to approve any variance of any authorized budget and operating plan that is greater than ten percent. NBC has the right to sell its 29% interest in Golf.com to us in exchange for approximately $9.2 million of our stock after October 2002, based on our then-current stock price.
In November 2000 as part of our acquisition of Total Sports, we entered into a relationship with Host Communications, the NCAA's marketing partner, to operate the official web sites for NCAA Championships coverage on the Internet, including coverage of the Men's and Women's NCAA basketball tournament, through June 2002.
In December 2000 we entered into an agreement with Major League Baseball Advance Media whereby we licensed our live event coverage software and technology to MLBAM in exchange for, among other things, license fees and the right to provide TotalCast coverage of Major League Baseball games through the 2005 season.
COMPETITION
The markets for digital interactive media, digital publishing tools and technology and managed technology services are relatively new, intensely competitive and rapidly changing. Since the Internet's commercialization in the early 1990's, the number of web sites on the Internet competing for consumers' attention and spending has proliferated, as has the number of technology companies providing applications and support services for the expansion of the Internet. We expect that even with the shakeout that has occurred in the Internet and technology industries, the competition will continue to be extremely intense.
For our media business, we believe that our programming does not compete directly with traditional media, primarily because we believe our coverage can substantially enhance the coverage provided by 11
traditional media. However, we anticipate that, as the Internet and other interactive systems, such as cable and satellite systems, converge with traditional television broadcasting and traditional cable networks, significant competition may come from the cable arena, including such sports-oriented cable networks as the ESPN networks.
We believe that the principal competitive factors in attracting and retaining audience are the ability to offer compelling and entertaining sports programming, the depth, breadth and timeliness of coverage and brand recognition. We believe that the principal competitive factors in securing and retaining long-term digital rights to cover sporting events include the ability to do the following:
- Offer high quality live event coverage
- Establish and maintain relationships with rights holders
- Deliver attractive audience demographics
- Maintain credibility as a leading provider of digital entertainment
We may be unable to compete successfully with respect to one or all of these factors.
In addition, we have only recently restructured our business model to develop a business unit focused on providing live content technology solutions. The market for content technology solutions is also very competitive. The principal competitive factors affecting the market for our live content technology are:
- depth and breadth of functionality offered;
- ease of application development;
- availability of knowledgeable developers;
- time required for application development;
- product reliability;
- proven track record;
- scalability;
- maintainability;
- personalization and other features;
- product quality;
- price; and
- customer support.
We may be unable to compete successfully with respect to one or all of these factors.
INFRASTRUCTURE, OPERATIONS AND TECHNOLOGY
The properties of the Quokka Sports Network are hosted by three data centers operated by Intel's Online Services group. These datacenters are located in Santa Clara, California, Chantilly, Virginia and London, England. In addition, we have a production and hosting facility operated by Frontier GlobalCenter in Herndon, Virginia that was acquired with our merger with Total Sports. This facility houses equipment owned by us. The NBCOlympics.com and SaltLake2002.com web sites are hosted by Logictier, Inc. facilities located in Sunnyvale, California, and McLean, Virginia.
Our network infrastructure is composed of Cisco Systems, Inc. and Foundry, Inc. products in redundant configurations. Network connectivity is provided through multiple routes through redundant providers from our headquarters in San Francisco and our office in Raleigh, North Carolina. The computer and networking equipment used to operate our properties is configured with redundant network interfaces, disk configurations, 12
and power supplies. Both Intel and Frontier GlobalCenter provide generator backup power for at least two weeks.
Our operations depend upon our ability to protect systems against damage from fire, earthquakes, power loss, telecommunications failure, break-ins, computer viruses, hacker attacks and other events beyond our control. A disaster or malfunction that disables either our San Francisco or Herndon production facilities could significantly and adversely impact our programming, limit the quantity or timeliness of updates to our productions or limit the speed at which our audience can access our content. We are currently updating our disaster recovery plan to account for the addition of facilities and equipment resulting from our merger with Total Sports.
The market for digital media is characterized by rapid growth, rapidly changing technology, evolving industry standards and frequent announcements of new developments. To be successful, we must adapt to our rapidly changing environment by continually improving the performance, features and reliability of our services as well as adapting to new technologies. We may also incur substantial costs if we need to modify our programming or distribution processes to adapt to these changes. Our business could be adversely affected if we incur significant costs without adequate results or cannot adapt to these changes.
INTELLECTUAL PROPERTY
We regard the protection of our copyrights, service marks, trademarks, trade dress and trade secrets as critical to our success. We rely on a combination of copyright, trademark, service mark, patent and trade secret laws and contractual restrictions to protect our proprietary rights in products and services. The measures taken by us to protect our intellectual property may not prevent misappropriation of our technology or deter independent third-party development of similar technologies.
We also cannot guarantee that infringement or other claims will not be asserted or prosecuted against us in the future whether resulting from our internally developed intellectual property or licenses or content from third parties. Others might assert infringement or other claims against us, whether resulting from our internally developed intellectual property or licenses or content from third parties. For example, in late 1999, DDB Technologies contacted us to solicit a license under three patents held by DDB Technologies. Likewise, in July 2000 we received a letter from Geoworks Corporation explaining its position that any service using wireless application protocol requires a license from Geoworks. We are considering these matters and have retained patent counsel to assist in evaluating the patents and determining our strategy relating to this request. Any future assertions or prosecutions could materially adversely affect our business, operating results and financial condition. Any claims, with or without merit, could be time-consuming, result in costly litigation and diversion of technical and management personnel or require us to introduce new content or trademarks, develop non-infringing technology or enter into royalty or licensing agreements. These royalty or licensing agreements, if required, might not be available on acceptable terms, if at all. In the event a claim of infringement is successful and we fail or are unable to introduce new content, develop non-infringing technology or license the infringed or similar technology on a timely basis, our business, operating results and financial condition could be materially and adversely affected.
GOVERNMENT REGULATION
We are subject to the same federal, state and local laws as other businesses on the Internet. Today there are relatively few laws directed towards online services. However, due to the increasing popularity and use of the Internet and other online services, it is possible that a number of laws and regulations may be adopted with respect to the Internet or other online services.
We are qualified to do business in eight states in the United States, and failure by us to comply with foreign laws or to qualify as a foreign corporation in a jurisdiction where we are required to do so could subject us to taxes and penalties for the failure to qualify and could result in the inability to enforce contracts in such jurisdictions. Any such new legislation or regulation, or the application of laws or regulations from jurisdictions whose laws do not currently apply to our business, could have a negative effect on our business. 13
EMPLOYEES
As of February 27, 2001, we had 266 employees, including 110 in production and programming, 72 in engineering, software development and network operations, 45 in marketing, sales and e-commerce and 39 in administration. Of those employees, approximately 115 employees are dedicated to our QMedia division and approximately 61 employees are dedicated to our QTech division. We consider our relations with our employees to be good. We believe that our future success will depend in part on our continued ability to retain and motivate highly qualified technical and managerial personnel and upon the continued service of our senior management and key creative personnel, none of whom is bound by an employment agreement except for Messrs. Gough and Saralegui. There can be no assurance that we will be successful in retaining and motivating a sufficient number of qualified personnel to conduct our business in the future.
PROPERTIES
Our principal administrative, marketing, production and research and engineering facilities are located in approximately 40,000 square feet of office space in San Francisco, California under a lease that expires in March 2006. We have options to renew this lease for two successive five-year terms. We have entered into an additional office lease in San Francisco, California of approximately 88,000 located one block away to accommodate additional personnel. We have additional office space of approximately 27,000 square feet in Raleigh, North Carolina under a lease that expires in June 2009. We also have small sales offices located in London, England; Troy, Michigan; Chicago, Illinois; Schaumburg, Illinois; and Norwalk, Connecticut for local sales activities. We believe that our existing facilities are more than adequate to meet our current and near-term needs, and we are actively considering options to sublease portions of our San Francisco and Raleigh facilities.
LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings. We may from time to time become a party to various legal proceedings arising in the ordinary course of our business.
RECENT DEVELOPMENTS
On March 14, 2001, we entered into an agreement with NBC Olympics, Inc. in which we amended the master venture agreement among Quokka, NBC Olympics, and NBC/Quokka Ventures, LLC, or "NQV." This amendment provides, among other things, for the expiration of the term of the letter agreement on May 1, 2001, unless Quokka or NQV is able to enter into a strategic partnership or sale transaction with a party that is acceptable to NBC Olympics and the Salt Lake Organizing Committee for the Winter Olympic Games of 2002, or "SLOC." Additionally, NQV contemporaneously entered into an agreement with SLOC whereby NQV and SLOC amended the letter agreement that granted the joint venture the rights to produce SLOC's official web site for the 2002 Olympic Games. This amendment provides, among other things, for the expiration of SLOC's letter agreement on May 1, 2001 upon identical terms as the NBC Olympics amendment. If Quokka finds an acceptable partner or buyer of Quokka's interest in NQV prior to May 1, 2001, then both NBC Olympics and SLOC would enter into a subsequent agreement with that party upon terms similar to those in the agreements in existence prior to the amendments. Both NBC Olympics and SLOC have agreed to work together with Quokka in finding a suitable financial partner for NQV.
To be acceptable to NBC and SLOC, a strategic partner or buyer may not be a NBC competitor or an Olympic sponsor competitor. That partner or buyer would also need to assume or guarantee Quokka's obligations under the master venture agreement with NBC Olympics and the letter agreement with SLOC, provide funding for NQV through the 2002 Olympic Games, demonstrate that it can meet agreed-upon financial covenants, demonstrate it has the capability to maintain the same standard of production, and, if it is a publicly-traded company, have a market capitalization of at least $500 million. According to the amended agreements, an acceptable party that partners with Quokka or acquires Quokka's interest in NQV would have the right to acquire the rights to produce SLOC's official web site for the 2002 Olympics and NBC Olympic's official web site for the 2002 and 2004 Olympics upon terms similar to those in place prior to the amendments. 14
DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN KEY EMPLOYEES
The following table sets forth certain information regarding Quokka's directors, executive officers and certain other key employees as of March 8, 2001:
--------------- (1) Member of the nominating committee
(2) Member of the compensation committee
(3) Member of the audit committee
Alvaro J. Saralegui joined Quokka in April 1999 as our Chief Operating Officer and in October 2000, he was named President, Chief Executive Officer and a member of our Board of Directors. From March 1998 to April 1999, Mr. Saralegui was employed by the People Magazine Group where he initially served as Vice President of People Weekly until he was promoted to Group Publisher in January 1999. From September 1983 to March 1998, Mr. Saralegui was employed at Sports Illustrated, Inc., where he served as General Manager from November 1992 to March 1998. During his fifteen years at Sports Illustrated, Inc., Mr. Saralegui also served as that company's Business Manager, Director of Marketing and Sales Development and Advertising Sales Director. Mr. Saralegui holds a B.A. in History and Economics from Dartmouth and an M.B.A. from Columbia University.
Alan S. Ramadan has served as our Chairman of the Board since October 2000, and served as our President and Chief Executive Officer and as a director from August 1996, when we incorporated in Delaware under the name Quokka Productions, Inc., and October 2000. Additionally, Mr. Ramadan served as Managing Director of our Company from 1990 to August 1996, during which period we were known as Ozware Developments Unit Trust and operated in Australia. In January 1993, Mr. Ramadan joined Fluid Thinking, Pty. Ltd. in Melbourne, Australia as that company's Chief Executive Officer until June 1995. As Chief Executive Officer of Fluid Thinking, Pty. Ltd., Mr. Ramadan was responsible for drawing together a team of specialists that, together with the Technology Foundation, developed key technology used by one Australia in the America's Cup challenge. Mr. Ramadan also founded Best Knowledge Systems, a consulting company, and worked as a research scientist at BHP Steel and as a computer scientist at Monash University in Melbourne, Australia. Mr. Ramadan holds a B.Sc. in Computer Science and Applied Mathematics from Monash University and is a 1995 graduate of the Stanford Business School's Executive Program for Growing Companies.
Richard H. Williams has served as a director since August 1996, when the Company incorporated in Delaware under the name Quokka Productions, Inc. From April 1997 until October 2000, Mr. Williams has served as our Chairman of the Board, and since October 2000, he has served as our Vice-Chairman of our Board. From December 1993 to February 1996, Mr. Williams was President and Chief Executive Officer of Illustra Information Technologies, Inc. In February 1996, Illustra Information Technologies, Inc. was acquired by Informix Software, Inc., where Mr. Williams served as Senior Vice President until August 1996. 15
From October 1991 to May 1992, Mr. Williams was Executive Vice President of Sales for Novell, Inc., and General Manager of that company's Digital Research Systems Group. Prior to that time, Mr. Williams served as President and Chief Executive Officer of Digital Research, Inc. Before joining Digital Research, Inc., Mr. Williams was employed by IBM for twenty-two years, where he served as Vice President of Plans, Controls and Product Management for the General Products Division from May 1984 to December 1986. Mr. Williams holds a B.S. in Mathematics from the University of North Dakota and conducted graduate studies at the University of Minnesota in numerical analysis and statistics.
Michael W. Gough joined Quokka in July 1997 as our Vice President, Design and Creative Director and was promoted to Chief Creative Officer and Executive Producer in September 1998. In August 1995, Mr. Gough co-founded Construct Internet Design, a digital media design firm, where he served as Creative Director until July 1997. Prior to that, Mr. Gough co-founded Jones, Partners: Architecture, a design-focused architecture firm, where he served as Managing Partner from December 1994 to August 1995. Earlier in his career, Mr. Gough was an architect for Holt Hinshaw Pfau Jones and, before that, an architect for the San Jose Redevelopment Agency. Mr. Gough studied Architecture at California Polytechnic State University.
Thomas P. Newell has served as our Chief Operating Officer since February 2001. He joined Quokka in March 1998 as Vice President of Business Affairs and was promoted to Senior Vice President, Business and Legal Affairs in October 1998. In October 1999, he was promoted to Senior Vice President, Olympics and was appointed as General Manager, NBC/Quokka Ventures, LLC, our joint venture with NBC Olympics, Inc. From November 2000 to January 2001, he served as our Senior Vice President, Production. From May 1994 to August 1997, Mr. Newell served as Executive Vice President and General Counsel for GGP Productions, LP, an independent sports television production, syndication and sports marketing company. There, he handled the company's financial and business operations for three and a half years until its sale to International Management Group, a sports marketing, event management and television company. From April 1992 to April 1994, Mr. Newell served as Vice President, Business Affairs and Operations of CBS Enterprises for CBS, Inc. During his seven years at CBS, Inc., Mr. Newell also served as Litigation Counsel, then as Broadcast Counsel and as Director of Business Affairs of CBS Sports, in which capacity he conducted negotiations that resulted in CBS Sports' opportunity to cover the 1992 Olympic Winter Games. Mr. Newell holds a B.A. from Stanford University and a J.D. from USC Law School.
Pascal Wattiaux joined Quokka in June 1999 as our Senior Vice President, Engineering. From August 1996 to June 1999, Mr. Wattiaux served as Director of Technology at the International Olympic Committee in Lausanne, Switzerland, where he was responsible for all Olympic technology functions, including timing, scoring, telecommunications and information systems, as well as managing relationships with strategic technology partners. From January 1996 until August 1996, he served as senior manager at Price Waterhouse LLP, which has been renamed PricewaterhouseCoopers LLP, and was responsible for developing a systems integration practice in Europe. From August 1993 until January 1996, Mr. Wattiaux served as Information Technology Director for International Operations at Reebok International Ltd., having previously served as Management Information Systems Director for Reebok France since January 1993. Prior to that, Mr. Wattiaux worked at Andersen Consulting for nine years in Paris, France, first as a consultant and then as a director. Mr. Wattiaux holds a Diplome d'Ingenieur from Ecole Nationale Superieure des Telecommunications.
Mark J. Ellis joined Quokka in May 1999 as our Vice President, Sales and has served as our Senior Vice President, Worldwide Sales since April 2000. From March 1998 to April 1999, Mr. Ellis served as a Vice President/Publisher for Time Inc. New Media. From November 1997 to March 1998, Mr. Ellis served as the Publishing Director for Sports Illustrated Presents. From July 1991 to November 1997, Mr. Ellis served as the Detroit Advertising Director for Sports Illustrated. Mr. Ellis holds a B.A. in Marketing from the University of Notre Dame and an M.B.A. from the University of Detroit.
G. Michael Novelly joined Quokka in August 1998 as our Controller and was promoted to Vice President, Finance and Controller in January 1999. Since January 2001, he has served as our interim Chief Financial Officer. From March 1995 to August 1998, Mr. Novelly served as the Senior Vice President and Chief Financial Officer of PolyGram Television, a division of the publicly traded global music and entertainment 16
group, PolyGram, N.V. During his years at PolyGram, Mr. Novelly oversaw all financial and administrative aspects of the Company's film production, acquisition and worldwide distribution of its library of over 10,000 hours of filmed entertainment programming. Before joining PolyGram Television, Mr. Novelly was employed by KPMG Peat Marwick LLP, an accounting firm, where he provided auditing and consulting services to film production and distribution companies, including Metro-Goldwyn-Mayer Inc, Ticketmaster Corporation and Gramercy Pictures. Mr. Novelly is a CPA and holds a B.S. in Accounting and Finance from the University of Colorado at Boulder.
John Bertrand, A.M. has served as a director since August 1996 when we incorporated in Delaware under the name Quokka Productions, Inc. From April 1997 to October 2000, Mr. Bertrand served as the our Vice Chairman of the Board. From June 1993 to the present, Mr. Bertrand has been the Chairman of the Southern Cross Foundation, an Australian scholarship foundation for engineering and applied science students. Mr. Bertrand holds a B.S. in Mechanical Engineering from Monash University and a M.S. in Naval Architecture from M.I.T. During his twenty-nine year international sailing career, from 1970 to the present, Mr. Bertrand has represented Australia in five America's Cups and two Olympic Games. Mr. Bertrand won the America's Cup for Australia in September 1983 and is a life member of the Australia's Sports Hall of Fame as well as the International America's Cup Hall of Fame.
Frank A. Daniels, III became a director of Quokka in November 2000. Mr. Daniels served as the Chairman and Chief Executive Officer of Total Sports, Inc. from March 1997 until its merger into Quokka in November 2000. From 1990 to 1995, Mr. Daniels served as Vice President, Executive Editor and Director of the daily newspaper The News and Observer in Raleigh, North Carolina. From August 1995 to August 1996, Mr. Daniels served as President and Publisher of Nando.net, an integrated digital publishing and internet services company. In January 1996, Mr. Daniels founded KOZ inc., the predecessor company of Total Sports, a builder of community and group publishing systems. Mr. Daniels currently serves on the board of Cadmus Communications Co.
Walter W. Bregman became a director of Quokka in October 1997. From January 1988 to the present, Mr. Bregman has served as Chairman and Joint Chief Executive Officer of S&B Enterprises, a marketing and consulting company. In 1985, Mr. Bregman co-founded Cormorant Beach Club in St. Croix USVI and served as its Chief Executive Officer and Manager from 1985 to 1987. Prior to that time, Mr. Bregman was President of International Playtex, Inc. a manufacturer of intimate apparel, toiletries, pantyhose and baby nursers. Before joining International Playtex, Inc., Mr. Bregman served as Vice President of Marketing and Advertising for E&J Gallo Winery and as President of NCK, Inc., a worldwide advertising agency. Mr. Bregman also serves on the boards of directors for Symantec, Inc. and Sento, Inc. Mr. Bregman holds an A.B. in English Literature from Harvard College.
Barry M. Weinman became a director of Quokka in December 1997. From May 1993 to the present, Mr. Weinman has been a General Partner at Media Technology Ventures/AVI Management and has been making high tech venture capital investments in Silicon Valley since 1980. AVI Management and Allegis Capital (Media Technology Ventures family of funds), had approximately $500 million under management as of December 31, 2000. Mr. Weinman is also on the boards of directors of Women.com Networks (Women's Wire), Be, Inc. and TalkCity, Inc. Mr. Weinman holds a B.S. in Industrial Engineering from Clarkson College of Technology and an M.A. in International Relations from the London School of Economics/ University of Southern California.
BOARD COMPOSITION
Quokka's board of directors is currently comprised of seven members and is divided into three classes, Class I, Class II and Class III, with each class serving staggered three-year terms. At each annual meeting of stockholders after the initial classification, the successors to directors whose terms will then expire will be selected to serve from the time of election and qualification until the third annual meeting following the election or special meeting held in lieu thereof. Pursuant to a Warrant Issuance Agreement dated August 22, 2000, NBC, at its sole election, may either elect a board member to Quokka's board of directors or exercise board observer rights. 17
