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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF1934
For the fiscal year ended December 31, 1999
/ / 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 0-20939
CNET Networks, Inc.
(Exact Name of registrant as specified in its charter)
Delaware 13-3696170
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
150 Chestnut Street
San Francisco, CA 94111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 395-7800
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
Securities registered under Section 12(g) of the Exchange Act:
Title of class
Common Stock, $0.0001 par value
Indicate by check mark whether the issuer (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 / /
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K ( 229.405 of this chapter) is
not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. /X/
The aggregate market value of common stock held by non-affiliates, based on
the closing price at which the stock was sold, at March 22, 2000 approximated
$3.6 billion.
The total number of shares outstanding of the issuer's common stock (its
only class of equity securities), as of March 22, 2000, was 84,648,866.
Information is incorporated by reference into Part III of this
Form 10-K from the registrant's definitive proxy statement for its
2000 annual meeting of stockholders, which will be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934.
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PART I
Item 1. Business
OVERVIEW
CNET Networks, Inc. is a global media company, producing a branded
Internet network, a computer product database and television and
radio programming for both consumers and businesses. Using
unbiased content as our platform, CNET has built marketplaces for
technology products, and, through our CNET Data Services
subsidiary, is the primary provider of information powering the
computer and electronics sales and distribution channels. CNET's
Internet network serves millions of users each day. CNET Data
Services licenses its multi-lingual product database to U.S. and
European online computer retailers, resellers and e-commerce
companies. CNET television programming airs on CNBC and in
national syndication, as well as in nearly 100 foreign countries.
CNET Radio airs in the San Francisco Bay Area on KNEW 910 AM.
We seek to use our editorial, technical, and programming expertise
and our product databases to provide news, product information,
product reviews, prices and availability to help business and
consumers make informed technology buying decisions. Based on the
volume of traffic over our branded online network, we have
established a leadership position in our market. In 1999, CNETs
millions of online users viewed more than 4 billion pages making
CNET the most used source for computer and technology information.
CNETs products and services provide a platform for advertisers to
create brand awareness and sell products to our large, tech-savvy
audience. At the end of 1999, CNET had relationships with 674
advertisers. CNET is also actively providing information and
services to business to enable and enhance online retailing of
computer and technology products. Our products and services are
designed to inform buyers and link them with sellers of products
and services to create a dynamic, efficient marketplace.
We earn revenues from:
- sales of banner and sponsorship advertisements on our online
network
- fees based on the number of CNET users who visit the websites
of our merchant partners, which we refer to as leads
- advertising sales and licensing fees from our television and
radio programming
- revenues from licensing our original content
- revenues from licensing our product database
MARKET OPPORTUNITY
The Internet has emerged as a global medium, enabling millions of
people to share information, communicate, and conduct business
electronically. The growth in Internet users, combined with the
Webs reach has created a powerful channel for conducting
commerce, marketing and advertising. We believe that there is a
significant opportunity for a company to act as a trusted, value-
added online intermediary to connect buyers and sellers.
CNETs content, products and services are focused on the
technology sector due to its characteristics and size. We believe
that buyers of technology products typically research product
capabilities and compare prices before making a purchase decision.
Due to its interactive nature, the Web has emerged as a medium
that allows buyers to complete that research. At the same time,
advertisers can more easily deliver targeted messages to these
buyers.
The information technology sector in the United States, which is
primarily made up of PCs, software, peripheral, consumer
electronics, wireless services and information technology
services, was estimated to be a $511 billion market in 1999
according to International Data Corporation and CEMA. This
category is expected to grow to $683 billion in 2002. We believe
our revenue opportunity is tied to the amount spent marketing to
generate these sales.
CNET has historically focused on the technology sector for the
reasons just described. Our February 2000 acquisition of mySimon
strengthens our position in the technology sector and expands our
business model to other categories, as described in Recent
Developments.
CUSTOMERS
For the year ended December 31, 1999, there were no customers that
contributed more than 10% of the Company's revenues. For the year ended
December 31, 1998, one customer, USA Networks, accounted for approximately
10% of the Company's revenues. For the year ended December 31, 1997, two
customers accounted for over 10% of the Company's revenues with USA
Networks accounting for approximately 16%, and Microsoft Corporation
accounting for approximately 10% of total revenues.
SOME MAJOR DEVELOPMENTS
In 1999, we significantly strengthened our business in the following
areas:
- Grew our employee base by more than 35%
- Strengthened our management team by filling key senior
management positions including the addition of CNETs current
president.
- Invested $65 million in our brand through marketing efforts
and doubled our brand awareness in our target markets.
- Expanded our products and services with newly developed
content and commerce-focused acquisitions.
New products and services added include:
Launch
Date New Products Description
May 1999 CNET Auctions This is an online service devoted
to technology products. CNET Auctions
links buyers and sellers of new,
used, refurbished and surplus computer
products.
July 1999 Online video CNET integrated relevant segments from
CNET's television programs into our
online network. Users researching
particular products or subjects on the
network can now see video clips
alongside CNET's online product
reviews and news stories.
July 1999 CNET Data Services This is a multi-lingual, Internet-
ready database providing computer
product specifications, descriptions
and images. The data is licensed to
U.S. and European distributors, online
retailers, resellers and e-commerce
content providers to power their
online catalogs.
Aug. 1999 Consumer Electronics This shopping service is designed
after the model of CNET's successful
computer shopping service and is an
extensive resource that helps shoppers
find consumer electronics products and
compare prices from numerous merchants.
Aug. 1999 User reviews CNET incorporated user opinions as
part of its Shopping Services. In the
new forum, users share first-hand
product knowledge with other CNET
users.
Aug. 1999 CNET Store This is a turnkey store-building
service enabling technology merchants
and resellers of unbranded computer
systems to build online stores and
take advantage of CNET's online sales
channel to market their products and
services directly to customers
channel to market their products and
services directly to customers.
Aug. 1999 Business Computing The site offers a complete resource
for enterprise computer buyers and
sellers. The Business Computing
channel is comprised of a solution
provider directory that supplies
detailed information on thousands of
vendors in 12 top-level categories, as
well as a rich editorial resource with
relevant content from both CNET and
the Web at large.
Sep. 1999 CNET Investor CNET acquired Nordby International,
a provider of financial information
in August of 1999. We incorporated
Nordbys financial information to
create an expanded investor site
focused on providing insights about
technology stocks.
Oct. 1999 Search capability CNET acquired Savvy Search, a
proprietary metasearch engine that
provided advanced Internet search
capabilities, and incorporated it into
the CNET network. This enhanced search
capability brings CNET users access
to more comprehensive information
from around the Web.
Oct. 1999 CNET Help This free, easy-to-use center for
tech help on the Internet
combines the power of the Usenet with
CNET's editorial and other Web
resources to help users get answers to
all of their tech questions.
Oct. 1999 CNET News.com This weekly one-hour television program
airs weekly on CNBC, offering viewers
an insider's guide to understanding and
profiting from the new economy,
including the trends driving the stock
market, upcoming IPOs and conversations
with influential players in finance,
technology and the Internet.
Dec. 1999 Game Shopper This specialized version of CNET's
popular Shopper.com allows users to
search and browse data on computer
video games, video game systems,
peripherals, accessories and more,
while comparing prices from
online retailers.
Jan. 2000 CNET Linux Center This is a site for Linux professionals
interested in leveraging the power of
Linux for their businesses. The CNET
Linux Center consolidates the most
relevant Linux information from across
CNET and around the Web.
Jan. 2000 CNET Radio In a joint venture, CNET and AMFM
launched CNET Radio, the country's
first all-technology radio format
serving the San Francisco Bay
Area.
Over the course of 1999, CNET acquired 10 companies for approximately
$200 million, to augment the development of new products and
services, as well as improve its existing product offerings.
These acquisitions enabled the company to significantly expand its
suite of shopping services, adding CNET Store.com, CNET Auctions,
and a consumer electronics channel, as well as enhance its content
offerings at CNET Download.com, CNET News.com and CNET
Builder.com. The acquisition of Savvy Search in October 1999
brought meta-search capabilities to the entire CNET network. In
1999, CNET also acquired Switzerland-based GDT, a provider of
computer product specifications, descriptions and images, to form
CNET Data Services.
CNET ONLINE
Our online division produces a network of information and services
offered under our CNET brand, through CNET.com, our gateway for
users interested in news and information about technology. Among
the services that CNET provides to businesses and consumers are:
Products and Services Description
CNET Computers a comprehensive source for computer
hardware, combining product infor-
mation reviews, prices and availa-
bility
CNET Shopper an extensive resource for determining
where to buy computers, consumer
electronics and other technology
related products with real-time pricing
and links to manufacturers, retailers
and resellers
CNET News an information source offering
news and analysis about the Internet
and technology industries
CNET Investor a source for investors to find
information about companies and stocks
in the technology sector
CNET Builder an information source providing
product reviews and industry news
for the Web-builder community
CNET Gamecenter an extensive gaming resource
offering reviews, download information
and links for popular computer games
CNET Download a comprehensive software download
service
CNET Help a service dedicated to providing answers
to tech-related questions
CNET Business Computing a complete resource for enterprise
computer buyers and sellers
CNET Consumer Electronics a source for consumer electronic
products, combining product information,
reviews, prices and availability
CNET Internet a source of information for finding an
internet service provider and other
related tools and applications
CNET Software a comprehensive source for computer
software, combining product information,
reviews, prices and availability
CNET Tech Jobs a source for job listings and employer
profiles in the technology sector
CNET Auctions an online auction place where users
can buy and sell computer and
technology products
CNET Store a turnkey, online store building
service designed to enable technology
merchants to get online quickly and
easily
CNET Linux Center a site that consolidates the most
relevant Linux information from across
CNET and around the Web
SHOPPING SERVICES
As part of CNETs Internet network, we provide shopping
services designed to link buyers and sellers of technology
products and services. We help businesses and consumers decide
what products to buy by providing news, reviews,
recommendations and product information. We also help
consumers decide where to buy products by providing real-time
prices from competing vendors, merchant ratings, product
availability and shipping costs. Our shopping services are a
very efficient marketplace for sellers of technology products
and services trying to reach a targeted audience of potential
buyers.
CNET shopping services integrate product and price information
from large online retailers, direct manufacturers and value
added resellers (VARs), as well as from CNET Auctions and CNET
Store.com merchants, making CNET the largest and most complete
technology marketplace in the world.
At the end of 1999, CNET had agreements with 150 merchants to
provide sales leads in exchange for a per lead fee. During the
fourth quarter, CNET estimated that we enabled $440 million in
online commerce by delivering 16 million leads to our merchant
partners. Additionally, in the fourth quarter of 1999, CNET
was the top referrer of traffic to the online transaction areas
of several of the worlds leading computer manufacturers Web
sites, including Dell, Gateway, IBM, Acer and Apple Computer
according to Nielsen//NetRatings.
We believe our innovative shopping services are valuable to
consumers because they provide unbiased information and choice.
These shopping services are valuable to merchants and
advertisers because they provide a platform for creating brand
awareness and generating sales leads. Finally, these services
are valuable to CNET and its shareholders because the fees
generated from sales leads are elastic with the amount of
traffic on our site.
CNET DATA SERVICES
A Swiss affiliate of CNET Networks, Inc., CNET Data Services
has developed a multi-language, multi-market database
containing over 150,000 stock keeping units (SKUs) and related
product images, descriptions and specifications. The data is
available on a licensing basis to online computer retailers,
wholesale distributors, VARs, computer dealers, manufacturers,
IT consultants, systems integrators and other vendors. The
service includes management, maintenance and dynamic updating
of database content.
As of March 2000, CNET Data Services had licensed its data to
more than 40 U.S. and European online retailers, resellers,
wholesale distributors and e-commerce content providers. On
February 14, 2000, CNET announced that Ingram Micro, the
world's largest wholesale provider of technology products and
services, would license CNET Data Services' data. The
relationship places CNET-branded content into the world's
largest online business-to-business computer marketplace, with
Ingram Micro providing unprecedented exposure for CNET to
Ingram Micros 140,000 resellers. The relationship positions
CNET as an integral link in the chain of business-to-business
transactions between computer resellers and wholesale
distributors, and further solidifies CNET's role as the leading
content provider for technology products for both business
buyers and consumers.
CNET BROADCAST
CNET TELEVISION
Our television division, intended to strengthen our CNET brand
and compliment our online division, produces two television
shows. CNET launched its most recent show, CNET News.com, in
October 1999. This one-hour program is broadcast on CNBC. We
also produce TV.com, which airs in national syndication.
During the fourth quarter of 1999, CNET launched CNET Media
Productions, a video production service that leverages CNETs
television resources to create promotional programming for hi-
tech companies including marketing, public relations, and
product review programs.
CNET RADIO
On January 27, 2000, CNET and AMFM, the largest radio
broadcaster in the U.S., launched CNET Radio, the first all-
technology radio format. The first station, serving the San
Francisco Bay Area, is broadcast on AMFMs station KNEW 910 AM.
CNET produces the tech-focused programming. CNET and AMFM
share in advertising sales on the new station. We also stream
a live audio feed of the broadcast on www.cnetradio.com. CNET
and AMFM plan to roll out CNET Radio nationally by the end of
2000. The AMFM Radio Group has more than 440 stations in 100
markets and reaches a weekly listener base of approximately 64
million people.
OUR OTHER VENTURES
On November 29,1999, we contributed our effective 40% ownership
interest in Snap! LLC ("snap"), a free Internet directory, search
and navigation portal service controlled by NBC Multimedia, Inc.,
into a new company called NBC Internet, Inc. (Nasdaq: NBCI).
In exchange for our contribution of our interest in Snap.com, we
received approximately 7.1 million shares of common stock or a
12.7% ownership interest in NBC Internet, Inc. On February 3,
2000, we engaged in the public sale of 650,000 of our shares of
NBC Internet, Inc. Our remaining interest is 6.5 million shares,
of which 1.25 million shares have been pledged in an offering of a
Trust Automatic Common Exchange Security.
As of December 31, 1999, CNET also owned a portion of the following
publicly traded companies:
- Approximately 1 million shares of Vignette Corporation
(Nasdaq:VIGN), a manufacturer of Web publishing software
- Nearly 760,000 shares of beyond.com (Nasdaq: BYND), an online
reseller of commercial off-the-shelf computer software
- Approximately 1.8 million shares of Mail.com (Nasdaq: MAIL),
an e-mail provider
- Nearly 875,000 shares of Deltathree (Nasdaq: DDDC), a global
Internet telephony provider
In total, CNET had publicly traded securities valued at
approximately $786 million at December 31, 1999. We have also
made investments in several other privately held technology
companies with whom we have business relations, including Raging
Bull, OpenSite, techies.com, Warranty Now, Niku, FloNetwork, and
Full Circle, among others.
CNET recognized $734 million in gains related to investments in
1999. We intend to continue to monetize our investments over time
to create value for shareholders and to fund the companys growth.
RECENT DEVELOPMENTS
CNET ASIA
On January 12, 2000, CNET and Asiacontent.com, a leading Asian
Internet media network, announced a joint venture to create
CNET Asia, a collection of Internet sites bringing localized
technology news, reviews, product comparisons and shopping
services to Asian audiences. The agreement will expand the
number of local CNET sites in Asia to seven, including
Singapore, Malaysia, Hong Kong, Taiwan, South Korea, China and
India.
MYSIMON
On February 29, 2000, CNET completed its acquisition of
mySimon, Inc. for approximately 11 million shares of CNET
common stock, valued at approximately $736 million on the date
of closing. mySimon (www.mysimon.com), was the leading
comparison-shopping destination on the Internet in December
1999 according to Media Metrix. mySimon's easy-to-use Web
shopping service helps consumers find the best values for
anything sold on the Web. mySimon searches hundreds of millions
of products at thousands of stores online.
The mySimon acquisition solidifies CNETs dominant position in
the comparison shopping space for computers and consumer
electronics. The combination of CNETs depth of content and
mySimons breadth of product categories and merchant search
capabilities is intended to simplify and to organize the e-
commerce landscape by creating a single destination devoted to
informing online shoppers in every category.
In conjunction with the acquisition, CNET changed its corporate
name to CNET Networks, Inc. to reflect the companys expansion
and the growth of additional brands under the CNET Networks
banner. CNET.com will continue to be focused on computers and
technology, and mySimon will maintain its own brand, management
team and staff.
OUTLOOK
In 2000, revenues for CNET Networks, Inc., reflecting the combined
businesses of CNET.com and mySimon.com on a pro forma basis, are
expected to reach approximately $200 million.
TECHNOLOGY
In 1999, we redesigned our key websites using a unified hardware
and software platform. This work was motivated by three goals:
building an improved product, creating a solid foundation for
future product development, and improving operational efficiency.
This redesign resulted in
- a consistent, integrated system architecture for our websites
- the co-location of our most critical sites in secure data
centers
- the ability to implement new features more easily on all of
the websites.
- simplified website maintenance
MARKETING
We design our marketing activities to promote the CNET brand and
to attract users, viewers and listeners to our online network and
television and radio programming. Our marketing programs include
participation in trade shows, conferences, speaking engagements,
print, television, radio and Internet advertising campaigns.
On July 1, 1999, we initiated an 18-month, $100 million multi-
media advertising campaign. The campaign encompasses television,
radio, print, outdoor and online advertising in a number of major
markets and targets information technology professionals,
technology purchase decision makers and technology enthusiasts.
We spent approximately $65 million of the planned expenditure
between July 1, 1999 and December 31, 1999. During that time,
CNET more than doubled its brand awareness in the wired markets
where it ran broadcast advertising according to an Opinion
Research Corporation, International Caravan Telephone Survey
conducted in markets airing CNET broadcast ads in June, 1999 and
again in December, 1999.
We expect to spend the remaining $35 million of the campaign in
2000 and we expect to continue to market our brand, products and
services in the future.
COMPETITION
Competition among content and service providers is intense and is
expected to increase significantly in the future. Our operations
compete against a variety of firms that provide content through
one or more media, such as print, broadcast, cable television and
the Internet. As with any other content or service provider, we
compete generally with other content and service providers for the
time and attention of consumers and for advertising revenues. To
compete successfully, we must provide sufficiently compelling and
popular content and services to attract Internet users, television
viewers and radio listeners and to attract advertisers hoping to
reach such audiences. Within the content niche of information
technology and the Internet, we compete in particular with the
publishers of computer-oriented magazines and Internet services,
such as:
- Ziff-Davis Inc.
- International Data Group
- CMP Publications
In the overall market for Internet users, we compete with other
Internet content and service providers, including Web directories,
search engines, shareware archives, sites that offer original
editorial content, commercial online services, e-commerce sites
and solution providers, and sites maintained by Internet service
providers.
EMPLOYEES
As of December 31, 1999, we had a total of 671 employees.
SEGMENT REPORTING
Information regarding revenues, gross profit (loss) and assets of
CNET's segments is setforth in the consolidated financial statements
included in Item 8 and Note 10 of Notes to the consolidated financial
statements.
CAUTIONARY STATEMENT REGARDING FACTORS THAT MAY AFFECT OUR BUSINESS
AND OUR FUTURE RESULTS
Our disclosure and analysis in this report contains "forward-
looking statements". Forward-looking statements are any statements
about our future that are not statements of historical fact.
Examples of forward-looking statements include projections of
earnings, revenues or other financial items, statements of the
plans and objectives of management for future operations, state-
ments concerning proposed new products or services, statements
regarding future economic conditions or performance, and any
statement of assumptions underlying any of the foregoing. In
some cases, you can identify these statements by the use of
words such as "may", "will", "expects", "should", "believes",
"predicts", "plans", "anticipates", "estimates", "potential",
"continue" or the negative of these terms, or any other words
of similar meaning.
These statements are only predictions. Any or all of our
forward-looking statements in this report and in any other
public statements we make may turn out to be wrong. They can be
affected by inaccurate assumptions we might make or by known or
unknown risks and uncertainties. Many factors mentioned in the
discussion in this report will be important in determining
future results. Consequently, no forward-looking statement can
be guaranteed. Actual events or results may differ materially.
We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new
information, future events or otherwise. You are advised,
however, to consult any further disclosures we make on related
subjects in our 10-Q and 8-K reports to the SEC. Also note that
we provide the following cautionary discussion of risks,
uncertainties and possibly inaccurate assumptions relevant to
our businesses. These are factors that we think could cause our
actual results to differ materially from expected and
historical results. Other factors besides those listed here
could also adversely affect the Company. This discussion is
provided as permitted by the Private Securities Litigation
Reform Act of 1995.
RISK FACTORS
WE HAVE A LIMITED OPERATING HISTORY, WHICH MAKES YOUR
EVALUATION OF US DIFFICULT AND AFFECTS MANY ASPECTS OF OUR
BUSINESS.
We have a limited operating history upon which you
can evaluate us. Our prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by
companies in developing industries, particularly companies in
the relatively new and rapidly evolving market for Internet
products, content and services. These risks for us include, but
are not limited to:
- an evolving and unpredictable business model
- uncertain acceptance of new services
- competition
- management of growth
We cannot assure you that we will succeed in addressing such
risks. If we fail to do so, our revenues and operating results
could be materially reduced.
Additionally, our limited operating history and the
emerging nature of the markets in which we compete makes the
prediction of future operating results difficult or impossible.
We cannot assure you that our revenues will increase or even
continue at their current level or that we will maintain
profitability or generate cash from operations in future
periods. In addition, interest that we pay on our 5%
convertible subordinated notes and costs of our acquisitions,
including amortization of goodwill and other purchased
intangibles and ongoing operating expenses, may further affect
our operating results. We have incurred significant operating
losses since inception. We may incur additional losses in the
future. In view of the rapidly evolving nature of our business
and our limited operating history, we believe that period-to-
period comparisons of our operating results are not necessarily
meaningful and should not be relied upon as indicating what our
future performance will be.
WE MAY EXPERIENCE FLUCTUATIONS IN OUR QUARTERLY
OPERATING RESULTS, AND MAY NOT BE ABLE TO ADJUST OUR SPENDING
IN TIME TO COMPENSATE FOR ANY UNEXPECTED REVENUE SHORTFALL.
Our quarterly operating results may fluctuate significantly in
the future as a result of a variety of factors, many of which
are outside our control. We may be unable to adjust spending in
a timely manner to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall in revenues
in relation to our planned expenditures could materially reduce
our operating results and adversely affect our financial
condition.
Factors that may adversely affect our quarterly
operating results attributable to our Internet operations
include, among others:
- demand for Internet advertising
- the addition or loss of advertisers, and the advertising
budgeting cycles of individual advertisers
- the level of traffic on our network of Internet channels
- the amount and timing of capital expenditures and other costs,
including marketing costs, relating to our Internet, television
and radio operations
- competition
- our ability to manage effectively our development of new
business segments and markets
- our ability to successfully manage the integration of operations
and technology of acquisitions and other business combinations
- our ability to upgrade and develop our systems and infrastructure
- technical difficulties, system downtime, Internet brownouts or
denial of service or other similar attacks
- general economic conditions and economic conditions specific
to the Internet and Internet media
Due to all of the foregoing factors, it is likely that
our operating results may fall below our expectations or the
expectations of securities analysts or investors in some future
quarter. If this happens, the trading price of our common stock
would likely be materially and adversely affected.
OUR TELEVISION, RADIO AND INTERNET CONTENT AND SERVICES
MAY NOT BE ACCEPTED, WHICH COULD ADVERSELY AFFECT OUR
PROFITABILITY.
Our future success depends upon our ability to
deliver original and compelling Internet content and services
that attract and retain users. We cannot assure you that our
content and services will be attractive to a sufficient number
of Internet users to generate revenues sufficient for us to
sustain operations.
The successful development and production of content is
subject to numerous uncertainties, including the ability to:
- anticipate and successfully respond to rapidly changing
consumer tastes and preferences
- obtain favorable distribution rights
- fund new program development
- attract and retain qualified editors, producers, writers,
technical personnel and television and radio hosts
If we are unable to develop content and services that
allow us to attract, retain and expand a loyal user base that
is attractive to advertisers and sellers of technology
products, we will be unable to generate revenue.
OUR FAILURE TO COMPETE SUCCESSFULLY COULD ADVERSELY
AFFECT OUR PROSPECTS AND FINANCIAL RESULT
The market for Internet content and services is new, intensely
competitive and rapidly evolving. It is not difficult to enter this
market and current and new competitors can launch new Internet sites
at relatively low cost. We cannot assure you that we will compete
successfully with current or future competitors. If we do not
compete successfully, our financial results may be adversely
affected.
FAILURE TO EFFECTIVELY MANAGE OUR GROWTH COULD RESULT IN
OUR INABILITY TO SUPPORT AND MAINTAIN OUR OPERATIONS
We have rapidly and significantly expanded our operations and
anticipate that further expansion of our operations may be
required in order to address potential market opportunities.
This rapid growth has placed, and we expect it to continue to
place, a significant strain on our management, operational and
financial resources. We cannot assure you that:
- our current personnel, systems, procedures and controls
will be adequate to support our future operations
- management will be able to identify, hire, train, motivate
or manage required personnel
- management will be able to successfully identify and exploit
existing and potential market opportunities
In addition, we could experience a negative impact on earnings
as a result of expenses associated with growing our operations,
whether through internal development or through acquisitions.
IF WE EXPERIENCE DIFFICULTIES WITH OUR SYSTEM
DEVELOPMENT AND OPERATIONS, WE COULD EXPERIENCE A DECREASE IN
REVENUES
Our Internet revenues consist primarily of revenues
derived from the sale of advertisements and other fees from
sellers of technology products on our Internet channels, in
particular from arrangements with our advertising customers
that provide for a guaranteed number of impressions. If our
Internet channels are unavailable as a result of a system
interruption, we may be unable to deliver the number of
impressions guaranteed by these agreements. We cannot assure
you that we will be able to accurately project the rate or timing
of increases, if any, in the use of our Internet channels or will
be able to, in a timely manner, effectively upgrade and expand
our systems.
OUR FINANCIAL RESULTS WILL BE ADVERSELY AFFECTED IF WE
FAIL TO SUSTAIN OUR ADVERTISING REVENUES OR LEAD FEES.
Our revenues through December 31, 1999 were derived primarily
from the sale of advertising and other fees, such as lead fees,
from sellers of technology products on our Internet channels and
from advertising and license fees from producing our television
programs. Most of our advertising contracts can be terminated
by the customer at any time on very short notice. In addition,
advertisers with longer term contracts sometimes breach their
commitments and obtaining performance following breach can be
costly and difficult. If we lose advertising customers, fail
to attract new customers or are forced to reduce advertising
rates in order to retain or attract customers, our revenues and
financial condition will be materially and adversely affected.
IF WE ARE UNABLE TO CONTINUE LICENSING THE CNET DATA
SERVICES TRANSACTIVE PRODUCT DATABASE WE COULD FAIL TO ACHIEVE
EXPECTATIONS FOR REVENUE GROWTH
CNET receives license fees for the license of the CNET Data
Services transactive product database to manufacturers,
distributors and resellers of computer products. Our ability to
meet expectations for revenue growth may depend in part upon our
ability to continue to license this product to new customers. If
we are unable to attract new customers for this product, we could
fail to achieve revenue growth expectations.
IF OUR USER BASE DOES NOT CONTINUE TO GROW, WE COULD
FAIL TO ACHIEVE EXPECTATIONS FOR REVENUE GROWTH
The rapid growth in the use of and interest in the Internet is a
recent phenomenon. We cannot assure you that acceptance and use of
the Internet will continue to develop or that we will be able to
attract a sufficient users to support growth expectations for
our business.
We also cannot assure you that the Internet
infrastructure will be able to support the demands placed upon
it by:
- increase in number of users
- an increase in frequency of use
- an increase in bandwidth requirements of users
In addition, the Internet could lose its viability as a
commercial medium due to delays in the development or adoption
of new standards and protocols required to handle increased
levels of Internet activity, or due to increased government
regulation. If use of the Internet does not continue to grow or
grows more slowly than expected, if we do not attract
increasing users despite Internet growth, or if the Internet
infrastructure does not effectively support growth that may
occur, our revenues and financial condition would be materially
and adversely affected.
IF THE INTERNET IS NOT ACCEPTED AS AN ADVERTISING MEDIUM
WE COULD EXPERIENCE A DECREASE IN REVENUES
Many of our Internet advertising customers and potential customers
have only limited experience with the Internet as an advertising
medium and neither they nor their advertising agencies have
devoted a significant portion of their advertising budgets to
Internet-based advertising in the past. In order for us to
generate advertising revenues, advertisers and advertising
agencies must direct a significant portion of their budgets to
the Internet and, specifically, to our Internet sites.
Acceptance of the Internet among advertisers and advertising
agencies also depends to a large extent on the growth of use of
the Internet by consumers, which is very uncertain, and on the
acceptance of new methods of conducting business and exchanging
information. If Internet-based advertising is not widely
accepted by advertisers and advertising agencies, our revenues
and financial condition will be materially and adversely
affected. In addition, users can purchase software that is
designed to block banner advertisements from appearing on their
computer screens as the user navigates on the Internet. This
software is intended to increase the navigation speed for the
user. Our revenues could be materially reduced if this software
or other ad-blocking technology becomes widely-used.
IF OUR BRANDS ARE NOT ACCEPTED OR MAINTAINED, OUR
FINANCIAL RESULTS COULD BE ADVERSELY AFFECTED.
Acceptance of our CNET and mySimon brand will depend largely
on our success in providing high quality Internet and television
content and services. If consumers do not perceive our existing
services to be of high quality, or if we introduce new Internet
channels or television or radio programs or enter into new
business ventures that are not favorably received by consumers,
we will not be successful in promoting and maintaining our brand.
If we are unable to provide high quality content and services or
fail to promote and maintain our brands, our revenues and
financial condition will be materially and adversely affected.
INABILITY TO ATTRACT AND RETAIN KEY PERSONNEL COULD
ADVERSELY AFFECT OUR ABILITY TO OPERATE
Our success depends to a large extent on the continued services
of Halsey M. Minor, Shelby W. Bonnie and the other members of
our senior management team. In particular, the loss of the services
of Mr. Minor or Mr. Bonnie, our founders, could have an adverse
effect on us due to their crucial role in our strategic development.
Our success is also dependent on our ability to attract, retain and
motivate other officers, key employees and personnel in a very
competitive job environment. We do not have "key person" life
insurance policies on any of our officers or other employees.
The production of our Internet and television content and
services requires highly skilled writers and editors and
personnel with sophisticated technical expertise. We have
encountered difficulties in attracting qualified software
developers for our Internet channels and related technologies.
If we do not attract, retain and motivate the necessary
technical, managerial, editorial and sales personnel, there
could be a material adverse effect on our business and
operating results.
RISKS ASSOCIATED WITH TECHNOLOGICAL CHANGE COULD
ADVERSELY AFFECT OUR ABILITY TO OPERATE
Characteristics of the market for Internet products and services
include:
- rapid technological developments
- frequent new product introductions
- evolving industry standards
The emerging character of these products and services
and their rapid evolution requires that we continually improve
the performance, features and reliability of our Internet
content, particularly in response to competitive offerings. We
cannot assure you that we will be successful in responding
quickly, cost effectively and sufficiently to these
developments. In addition, the widespread adoption of new
Internet technologies or standards could require us to make
substantial expenditures to modify or adapt our Internet
channels and services and could fundamentally affect the
character, viability and frequency of Internet-based
advertising. Finally, technologies that we adopt could fail to
perform according to expectations, resulting in system
performance problems and increased costs. Any of these events
could have a material adverse effect on our financial condition
and operating results.
OUR FAILURE TO DEVELOP AND MAINTAIN RELATIONSHIPS WITH
THIRD PARTIES COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
We rely on the cooperation of owners and operators of other
Internet sites with whom we have syndication and other
arrangements to generate traffic for our Internet sites.
Our ability to advertise on other Internet sites and the
willingness of the owners of these sites to direct users to our
Internet channels through hypertext links are also critical to
the success of our Internet operations. If we are unable to
develop and maintain satisfactory relationships with such third
parties on acceptable commercial terms, or if our competitors
are better able to capitalize on these relationships, our
financial condition and operating results will be materially
and adversely affected.
WE MAY HAVE DIFFICULTIES WITH OUR ACQUISITIONS AND
INVESTMENTS, WHICH COULD ADVERSELY AFFECT OUR GROWTH AND
FINANCIAL CONDITION
From time to time, we consider new business opportunities
and ventures, including acquisitions, in a broad range of
areas. Any decision by us to pursue a significant business
expansion or new business opportunity could:
- require us to invest a substantial amount capital, which
could have a material adverse effect on our financial
condition and our ability to implement our existing business
strategy
- require us to issue additional equity interests, which
which would be dilutive to our current stockholders
- result in operating losses
- place additional, substantial burdens on our management
personnel and our financial and operational systems
We cannot assure you that we will have sufficient
capital to pursue any investment or acquisition, that we will
be able to develop any new Internet channel or service or other
new business venture in a cost effective or timely manner or
that these ventures would be profitable.
WE MAY HAVE DIFFICULTIES WITH OUR BUSINESS COMBINATIONS
AND STRATEGIC ALLIANCES, WHICH COULD ADVERSELY AFFECT OUR
GROWTH AND FINANCIAL CONDITION
We may choose to expand our operations or market presence
by entering into:
- agreements
- business combinations
- investments
- joint ventures
- other strategic alliances with third parties
Any transaction will be accompanied by risks, which include,
among others:
- the difficulty of assimilating the operations, technology and
personnel of the combined companies
- the potential disruption of our ongoing business
- the possible inability to retain key technical and managerial
personnel
- additional expenses associated with amortization of goodwill
and other purchased intangible assets
- additional operating losses and expenses associated with the
activities and expansion of acquired businesses
- the possible impairment of relationships with existing employees
and advertising customers
We cannot assure you that we will be successful in overcoming
these risks or any other problems encountered in connection
with any transaction or that any transaction will be
profitable.
WE DEPEND ON INTELLECTUAL PROPERTY RIGHTS, AND OTHERS
MAY INFRINGE UPON THOSE RIGHTS, OR THESE RIGHTS MAY BECOME
OBSOLETE, ADVERSELY AFFECTING OUR BUSINESS
We rely on trade secret, trademark and copyright laws to protect
our proprietary technologies and content. We cannot assure
you that:
- these laws will provide sufficient protection
- others will not develop technologies or content that are
similar or superior to ours
- third parties will not copy or otherwise obtain and use our
technologies or content without authorization
Any of these events could have a material adverse effect on our
business.
WE MAY NOT BE ABLE TO ACQUIRE OR MAINTAIN OUR DOMAIN
NAMES, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO OPERATE OUR
ONLINE DIVISION
We currently hold various Web domain names relating to our brand
and sites. The acquisition and maintenance of domain names
generally is regulated by government agencies and their designees.
The regulation of domain names in the United States and in foreign
countries is subject to change. We cannot assure you that we will
be able to acquire or maintain relevant domain names in all
countries in which we conduct business. Any inability to acquire
or maintain domain names could have a material adverse effect on
our business.
CHANGES IN REGULATIONS COULD ADVERSELY AFFECT THE WAY
THAT WE OPERATE
It is possible that new laws and regulations will be adopted
covering issues relating to the Internet, including:
- privacy
- copyrights
- obscene or indecent communications
- pricing, characteristics and quality of Internet products
and services
The adoption of restrictive laws or regulations could:
- decrease the growth of the Internet
- reduce our revenues
- expose us to significant liabilities
We cannot be sure what effect any future material noncompliance
by us with these laws and regulations or any material changes
in these laws and regulations could have on our business.
WE HAVE CAPACITY CONSTRAINTS AND MAY BE SUBJECT TO
SYSTEM DISRUPTIONS, WHICH COULD ADVERSELY AFFECT OUR REVENUES
Our ability to attract Internet users and maintain
relationships with advertising and service customers depends on
the satisfactory performance, reliability and availability of
our Internet channels and our network infrastructure. Our
Internet advertising revenues directly relate to the number of
advertisements delivered by us to users. System interruptions
that result in the unavailability of our Internet channels or
slower response times for users would reduce the number of
advertisements and sales leads delivered and reduce the
attractiveness of our Internet channels to users and
advertisers. We have experienced periodic system interruptions
in the past and believe that such interruptions will continue
to occur from time to time in the future. Any increase in
system interruptions or slower response times resulting from
these factors could have a material adverse effect on our
revenues and financial condition.
Our Internet, television and radio operations are
vulnerable to interruption by fire, earthquake, power loss,
telecommunications failure and other events beyond our control.
Most of our servers and television production equipment are
currently located in the Bay Area of California, an area that
is susceptible to earthquakes. Since launching our first Internet
site in June 1995, we have experienced system downtime for limited
periods due to power loss and telecommunications failures, and we
cannot assure you that interruptions in service will not
materially and adversely affect our operations in the future.
We do not carry sufficient business interruption insurance and
do not carry earthquake insurance to compensate us for losses
that may occur. Any losses or damages that we incur could have
a material adverse effect on our financial condition.
OUR BUSINESS INVOLVES RISKS OF LIABILITY CLAIMS FOR OUR
INTERNET, RADIO AND TELEVISION CONTENT OR TECHNOLOGY, WHICH
COULD RESULT IN SIGNIFICANT COSTS.
As a publisher and a distributor of content over the Internet
and television, we face potential liability for:
- defamation
- negligence
- copyright, patent or trademark infringement
- other claims based on the nature and content of the materials
that we publish or distribute
These types of claims have been brought, sometimes
successfully, against online services. There is currently a
trademark infringement claim pending against us based
on the mySimon mark, as described in Item 3 Legal
Proceedings. In addition, we could be exposed to liability in
connection with material indexed or offered on our sites. There
has been a recent increase in the granting and attempted
enforcement of business process patents that cover practices
that may be widely employed in the Internet industry. If we
are found to violate any such patent and we are unable to enter
into a license agreement on reasonable turns, our ability to
offer our services could be materially and adversely affected.
Although we carry general liability insurance, our insurance
may not cover potential claims of defamation, negligence and
similar claims, it may or may not apply to a particular claim
or be adequate to reimburse us for all liability that may be
imposed. Any imposition of liability that is not covered by
insurance or is in excess of insurance coverage could have a
material adverse effect on our financial condition.
UNAUTHORIZED PERSONS ACCESSING OUR SYSTEMS COULD DISRUPT
OUR OPERATIONS AND RESULT IN THE THEFT OF OUR PROPRIETARY
INFORMATION
A party who is able to circumvent our security measures
could misappropriate proprietary information or cause
interruptions in our Internet operations. We may be required to
expend significant capital and resources to protect against the
threat of security breaches or to alleviate problems caused by
breaches in security. For example, so-called "spiders" have and
can be used in efforts to copy our databases, including our
database of technology products and prices.
Concerns over the security of Internet transactions and
the privacy of users may also inhibit the growth of the
Internet, particularly as a means of conducting commercial
transactions. To the extent that our activities or the
activities of third party contractors involve the storage and
transmission of proprietary information, such as computer
software or credit card numbers, security breaches could expose
us to a risk of loss or litigation and possible liability. We
cannot assure you that contractual provisions attempting to
limit our liability in these areas will be successful or
enforceable, or that other parties will accept such contractual
provisions as part of our agreements.
OUR INABILITY TO UTILIZE TECHNOLOGY THAT WE DO NOT OWN
COULD DISRUPT OUR OPERATIONS
We rely on technology licensed from third parties. We cannot
assure you that these third party technology licenses will be
available or will continue to be available to us on acceptable
commercial terms or at all.
WE MAY EXPERIENCE SEASONALITY IN OUR SALES, WHICH COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR REVENUES AND OPERATING
RESULTS
We believe that advertising sales in traditional
media, such as television, are generally lower in the first and
third calendar quarters of each year than in the respective
preceding quarters and that advertising expenditures fluctuate
significantly with economic cycles. Depending on the extent to
which the Internet is accepted as an advertising medium,
seasonality and cyclicality in the level of advertising
expenditures generally could become more pronounced for
Internet advertising. Seasonality and cyclicality in
advertising expenditures generally, or with respect to
Internet-based advertising specifically, could have a material
adverse effect on our business, prospects, financial condition
and operating results.
We may also experience seasonality in our operating
results, particularly in connection with our shopping services
which may reflect seasonal trends in the retail industry. The
level of consumer retail spending generally decreases in the
first and third calendar quarters. Advertising expenditures,
which account for substantially all of our revenues, are also
subject to seasonal fluctuations and are influenced by consumer
spending patterns.
OUR DEBT EXPOSES US TO RISKS THAT COULD ADVERSELY AFFECT
OUR FINANCIAL CONDITION
As a result of the sale of our 5% convertible subordinated
notes in March 1999, we incurred $172.9 million of additional
debt. We may incur substantial additional debt in the future.
The level of our indebtedness, among other things, could:
- make it difficult for us to make payments on the notes
- make it difficult for us to obtain any necessary financing
in the future for working capital, capital expenditures,
debt service
- requirements or other purposes
- limit our flexibility in planning for, or reacting to
changes in, our business
- make us more vulnerable in the event of a downturn in our
business
We cannot assure you that we will be able to meet our debt
service obligations, including our obligations under the notes.
WE MAY BE UNABLE TO PAY OUR DEBT SERVICE AND OTHER
OBLIGATIONS, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION AND CAUSE US TO DEFAULT UNDER THE NOTES
The interest payable on our 5% convertible subordinated notes
is $8,645,750 each year. If we experience a decline in revenues
due to any of the factors described in this section, we could
have difficulty paying interest and other amounts due on the
notes or our other indebtedness. If we are unable to generate
sufficient cash flow or otherwise obtain funds necessary to
make required payments, or if we fail to comply with the
various requirements of our indebtedness, we would be in
default, which would permit the holders of our indebtedness to
accelerate the maturity of the indebtedness and could cause
defaults under our other indebtedness. Any default under our
indebtedness could have a material adverse effect on our
financial condition.
THE PRICE OF OUR COMMON STOCK IS SUBJECT TO WIDE
FLUCTUATION
The trading price of our common stock is subject
to wide fluctuations. Trading prices of our common stock may
fluctuate in response to a number of events and factors,
including:
- quarterly variations in operating results
- announcements of innovations
- new products, strategic developments or business combinations
by us or our competitors
- changes in our expected operating expense levels or losses
- changes in financial estimates and recommendations of
securities analysis
- the operating and securities price performance of other
companies that investors may deem comparable to us
- news reports relating to trends in the Internet
- other events or factors
In addition, the stock market in general, and the market
prices for Internet-related companies in particular, have
experienced extreme volatility that often has been unrelated to
the operating performance of these companies. These broad
market and industry fluctuations may adversely affect the
trading price of our common stock.
WE HAVE A SUBSTANTIAL NUMBER OF SHARES OF COMMON STOCK
THAT MAY BE SOLD, WHICH COULD AFFECT THE TRADING PRICE OF OUR
COMMON STOCK
We have a substantial number of shares of common
stock subject to stock option, and our notes may be converted
into shares of common stock. We cannot predict the effect, if
any, that future sales of shares of common stock or notes, or
the availability of shares of common stock or notes for future
sale, will have on the market price of our common stock. Sales
of substantial amounts of common stock, including shares issued
in connection with acquisitions, upon the exercise of stock
options or warrants or the conversion of notes, or the
perception that such sales could occur, may adversely affect
prevailing market prices for our common stock and notes.
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW COULD DETER TAKEOVER ATTEMPTS
Some provisions in our certificate of incorporation and
bylaws could delay, prevent or make more difficult a merger,
tender offer, proxy contest or change of control. Our stockholders
might view any transaction of this type as being in their best
interest since the transaction could result in a higher stock price
than the current market price for our common stock. Among other
things, our certificate of incorporation and bylaws:
- authorize our board of directors to issue preferred stock
with the terms of each series to be fixed by our board
of directors
- divide our board of directors into three classes so that only
approximately one-third of the total number of directors is
elected each year
- permit directors to be removed only for cause
- specify advance notice requirements for stockholder proposals
and director nominations
In addition, with some exceptions, the Delaware General
Corporation Law restricts or delays mergers and other business
combinations between us and any stockholder that acquires 15%
or more of our voting stock.
INTELLECTUAL PROPERTY
Our success and ability to compete is dependent in part on the protection
of our original content for the Internet, television and radio and on the
goodwill associated with our trademarks, trade names, service marks
and other proprietary rights. We rely on copyright laws to protect the
original content that we develop, including our editorial features and the
various databases of information that we maintain and make available
through our Internet channels or by license. In addition, we rely on
federal trademark laws to provide additional protection for the
appearance of our Internet channels.
We own a federal trademark registration for the name "CNET" for
computer services, namely, providing databases featuring information in
the general fields of entertainment and education. We also own two
other federal trademark registrations for the name "CNET" for use in
connection with certain software applications and consulting services
that we acquired by assignment. Further, we own a federal trademark
registration for the CNET logo in connection with providing
entertainment services over electronic communication networks. We
have filed a trademark application for mySimon covering a variety of
computer services, including providing search engines for locating
information regarding products or services or product or service prices
and facilitating electronic comparison shopping and covering computer
software for facilitating electronic commerce. We also claim common
law protection on certain names and marks that we have used in
connection with our business activities. We are a defendant in pending
litigation concerning our use of the name "mySimon, as described
under Item 3.
We rely on trade secret and copyright laws to protect the proprietary
technologies that we have developed to manage and improve our
Internet channels and advertising services. We cannot assure you that
such laws will provide sufficient protection to us, that others will not
develop technologies that are similar or superior to ours, or that third
parties will not copy or otherwise obtain and use our technologies
without authorization. We have filed patent applications with respect to
certain of our software systems, methods and related technologies.
Although two of these applications have matured into U.S. patents, we
can offer no assurance that any other applications will be granted. In
addition, we can offer no assurance that any patents will not be
challenged, invalidated or circumvented, or that the rights granted
thereunder will provide a competitive advantage for us. We also rely on
certain technology licensed from third parties. We may be required to
license additional technology in the future for use in managing our
Internet channels and providing related services to users and advertising
customers.
GOVERNMENT REGULATION
Although there are currently few laws and regulations directly
applicable to the Internet, a range of new laws and regulations have been
proposed, and could be adopted, covering issues such as privacy,
obscene or indecent communications, taxation of Internet transactions
and the pricing, characteristics and quality of Internet products and
services. Risks associated with increased legislation are outlined under
Risk Factors-- CHANGES IN REGULATIONS COULD ADVERSELY
AFFECT THE WAY THAT WE OPERATE.
We are a Delaware corporation. Our principal executive offices are
located at 150 Chestnut Street, San Francisco, California 94111. Our
phone number is (415) 364-8900.
Item 2. Properties
We lease approximately 161,000 square feet of office and
studio space in various facilities in San Francisco, California,
that house our principal administrative, finance, sales,
marketing, Internet and television production operations. In
addition, we lease approximately 11,000 square feet of office
space in Bridgewater, New Jersey, that is used primarily by
technology personnel, and approximately 9,000 square feet of
office space in New York City, that is used primarily by sales
personnel. We also have short term operating leases in Lake
Forest, California, Cambridge, Massachusetts, Boulder, Colorado,
Dallas, Texas and Chicago, Illinois.
Our San Francisco offices are located in several buildings
under various leases. These locations range in size from 11,000
to 54,000 square feet and expire between April 2001 and December
2004. In June 1998, we assigned a lease of approximately 97,000
square feet to snap, however, we remain primarily liable under the
terms of the lease. We believe that the general condition of our
leased real estate is good and that our facilities are generally
suitable for the purposes for which they are being used. We
anticipate that we will be required to lease additional facilities
during 2000 to accommodate anticipated growth.
Item 3. Legal Proceedings
In August 1999, the Simon Property Group filed a complaint
against mySimon, Inc., which became our subsidiary on February 29,
2000. The Simon Property Group is a real estate investment trust
that owns mall properties. The complaint, which was filed in the
Southern District of Indiana at Indianapolis, alleges that our
"mySimon" mark infringes the Simon Property Group's "SIMON" mark.
In October 1999, the Simon Property Group moved for a temporary
restraining order in the matter, which was denied. The parties
are now in discovery, with a projected trial date in Fall 2000.
Although we believe that the Simon Property Group has not demon-
strated the merits of its claim, discovery is ongoing, and
accordingly, we cannot predict the outcome of this case.
Although we believe that an unfavorable outcome in this case is
unlikely, if a court were to determine that the mySimon mark
infringes the Simon Property Group mark and forced us to discontinue
use of the mark and/or pay significant damages to the Simon Property
Group, there could be a material adverse effect on our business,
financial condition and results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Our common stock is traded on the National Market System of the
Nasdaq Stock Market ("Nasdaq") under the symbol "CNET".
The following table sets forth the ranges of high and low trading
prices of the common stock for the quarterly periods indicated, as
reported by Nasdaq. The prices in the table have been adjusted to reflect
both 2-for-1 stock splits of our common stock that were distributed on March
8, 1999 and on May 10, 1999 in the form of a stock dividend to holders of
our common stock.
High Low
------- -------
Year ended December 31, 1998:
First quarter $10.03 $ 5.84
Second quarter $17.75 $ 6.31
Third quarter $18.63 $ 7.75
Fourth quarter $16.50 $ 7.25
Year ended December 31, 1999:
First quarter $61.69 $12.00
Second quarter $79.75 $38.63
Third quarter $57.50 $27.50
Fourth quarter $79.88 $43.25
On October 7, 1999, we issued 307,489 shares of our common
stock to the stockholders of SavvySearch Limited together with
$4,333,884 in cash in exchange for all of the outstanding stock of
SavvySearch in a transaction exempt from registration under Section
4(2) of the Securities Act of 1933. No underwriters were involved
in the transaction.
On November 4, 1999, we issued 58,394 shares of our common
stock to the stockholders of Manageable Software Services, Inc. ("MSSI")
in exchange for all of the outstanding stock of MSSI in a transaction
exempt from registration under Section 4(2) of the Securities Act of
1933. No underwriters were involved in the transaction.
At March 22, 2000, the closing price for our common stock
as reported by Nasdaq, was $54.375, and the approximate number of holders
of record of our common stock was 334.
We have never declared or paid a cash dividend on our common stock.
We intend to retain any earnings to cover operating losses and working
working capital fluctuations and to fund capital expenditures and
expansion. We do not anticipate paying cash dividends on our common
stock in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data
and other operating information. The financial data and operating
information do not purport to indicate results of operations as of any
future date or for any future period. The financial data and operating
information is derived from our consolidated financial statements and should
be read in conjunction with the consolidated financial statements, related
notes and other financial information included herein.
(in thousands, except per share data)
Fiscal Year Ended
---------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------ ----------
Consolidated Statement of Operations Data:
Total revenues $112,345 $57,477 $33,640 $14,830 $3,500
Gross profit (deficit) 68,385 27,173 6,923 (503) (2,133)
Total operating expenses* 129,523 24,216 41,061 15,032 6,337
Operating income (loss) (61,138) 2,957 (34,138) (15,535) (8,470)
Total other income (expense) 735,361 66 9,410 (1,413) (137)
Net income (loss) 416,908 3,023 (24,728) (16,949) (8,607)
Basic net income (loss)
per share $5.80 $0.05 ($0.44) ($0.52) ($0.23)
Diluted net income (loss)
per share $5.05 $0.04 ($0.44) ($0.52) ($0.23)
Shares used in basic per
share calculation 71,820 65,783 55,819 32,890 37,381
Shares used in diluted
per share calculation 83,373 71,623 55,819 32,890 37,381
Consolidated Balance Sheet Data:
Cash and cash equivalents $53,063 $51,537 $22,554 $20,156 $703
Working capital 603,709 59,657 19,431 20,223 719
Total assets 1,230,311 88,357 58,262 39,842 4,657
Non-current portion of
long-term debt 179,114 569 2,612 281 467
Stockholders' equity $705,838 $76,473 $40,643 $33,098 $2,799
*Operating expenses included unusual items consisting of an expense reversal of $922,000
in 1998 related to a real estate reserve and expenses of $9.0 million in 1997 comprised of
warrant compensation expense of $7.0 million, a real estate reserve and a write-
off of certain domain names.
The statement of operations data excluding per share data for 1998 includes the historical financial
results of the company and the retroactive effect of material pooling-of-interests transaction.
The shares used in calculating the basic and diluted net income (loss) per share have been adjusted
in prior periods to reflect the Sumo, NetVentures, AuctionGate, and KillerApp pooling-of-interests
transactions as outstanding for all periods, and the two-for-one stock splits on March 8, 1999
and May 10, 1999.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Our revenues, cost of revenues and operating expenses
have grown substantially over the past three years. We earned
net income of $416.9 million and $3.0 million in 1999 and
1998, respectively, and incurred a net loss of $24.7 million
in 1997. Net income in 1999 was generated primarily from gains
on investment sales of $734.1 million, offset by an income tax
provision of $257.3 million and an operating loss of $61.1 million.
The operating loss for 1999 included expenses related to our
marketing campaign to promote the CNET brand of approximately
$65.0 million and goodwill amortization of $15.0 million. Net
income of $3.0 million in 1998 was primarily related to
operating profit. The loss in 1997 primarily reflected
substantial expenditures to develop and launch our various
Internet channels and television programs.
Results of Operations
Revenues
Total Revenues. Total revenues were $112.3 million,
$57.5 million and $33.6 million for 1999, 1998 and 1997,
respectively.
Internet Revenues. Revenues from our Internet
operations were $104.9 million, $50.4 million and $26.7
million for 1999, 1998 and 1997, respectively. Internet
revenues consist primarily of revenues derived from the sale
of advertisements on pages delivered to users of our Internet
network. Advertising programs are generally delivered on
either an "impression" based program or a "performance" based
program. An impression based program earns revenues when an
advertisement is delivered to a user of our Internet network.
A performance based program earns revenues when a user of our
Internet network responds to an advertisement by linking to an
advertisers Internet network. Performance based programs
include revenues generated from leads delivered from
our shopping services. Advertising rates vary depending upon
whether a program is impression or performance based where
advertisements are placed and the amount and length of the
advertiser's commitment. Advertising revenues are recognized
in the period in which the advertisements are delivered. Our
ability to sustain or increase revenues for Internet
advertising will depend on numerous factors, which include,
but are not limited to, our ability to increase our inventory
of delivered Internet pages on which advertisements can be
displayed and our ability to maintain or increase advertising
rates.
The increases in revenues of $54.5 million from 1998
to 1999 and $23.7 million from 1997 to 1998 was primarily
attributable to an increase in impression and lead based
advertising programs sold on our network. This increase in
advertising programs sold was due to increased demand from
advertisers and increased availability of advertising
programs. Additional advertising programs were available due
to an increase in the number of pages delivered to users of
our network and increased leads sent to advertisers on our
network. Average daily pages delivered in 1999 approximated
11.4 million, an increase of 65% over 6.9 million average
daily pages in 1998. During 1999 we averaged approximately
140,000 leads per day from our shopping services, a program
that was launched in the fourth quarter of 1998 and that
averaged approximately 90,000 leads per day only during the
fourth quarter of 1998. Average daily pages delivered in 1998
approximated 6.9 million, an increase of 60% over 4.3 million
average daily pages in 1997.
During 1999, 1998 and 1997, approximately $5.9
million, $3.4 million and $905,000, respectively, of Internet
revenues were derived from barter transactions whereby we
delivered advertisements on our Internet channels in exchange
for advertisements on the Internet sites of other companies.
These revenues and marketing expenses were recognized at the
fair value of the advertisements received and delivered, and
the corresponding revenues and marketing expenses were
recognized when the advertisements were delivered.
Significant Customers. During 1999 we did not have
any customers that contributed more than 10% of our revenues.
USA Networks accounted for approximately 10% and 16% of total
revenues for 1998 and 1997 respectively, and Microsoft
Corporation accounted for 10% of total revenues for 1997.
There can be no assurance that any of these customers will
continue to account for a significant portion of total
revenues in any future period.
Television Revenues. Revenues from television
operations were $7.5 million, $7.1 million and $6.9 million
for 1999, 1998 and 1997, respectively.
For each of the years 1997 through 1999 a significant
portion of our television revenues were derived from our
licensing agreements with USA Networks. These licensing
agreements with USA Networks generated revenues of
approximately $4.5 million, $5.7 million and $5.2 million for
1999, 1998 and 1997, respectively. Effective July 1, 1999 we
reduced the amount of programming under the agreement from
four programs to two programs. The agreement with USA
Networks expired on December 31, 1999 and the two programs
were canceled. The agreement will not be renewed.
In May 1999 we entered into an agreement with the
National Broadcasting Company (NBC) whereby NBC granted
certain rights to CNBC, Inc. (CNBC) to carry the sixty
minute television program we produce called CNET News.com.
The term of the agreement is from October 1, 1999 through
September 30, 2002 and CNBC will pay us an annual fee based on
the cost of production, not to exceed $2.5 million. We also
have the right to sell certain commercial time available on
the program.
We also produce a television program, TV.com, which
is exclusively distributed by Trans World International
(TWI). TV.com has been distributed since August 1996 and
the current contract with TWI expires on September 30, 2000.
We sell advertisements on TV.com and pay a distribution fee to
TWI.
Revenue Mix. Internet operations accounted for 93%,
88% and 79% and television operations accounted for 7%, 12%
and 21% of total revenues for 1999, 1998 and 1997,
respectively. We expect to experience fluctuations in
television and Internet revenues in the future that may be
dependent on many factors, including demand for our Internet
network and television programming, and our ability to
develop, market and introduce new and enhanced Internet
content and television programming.
Cost of Revenues
Total Cost of Revenues. Total cost of revenues were
$44.0 million, $30.3 million and $26.7 million for 1999, 1998
and 1997, respectively. Cost of revenues includes the costs
associated with the production and delivery of our Internet
channels and television programming. The principal elements of
cost of revenues for our Internet operations have been payroll
and related expenses for the editorial, production and
technology staff, as well as costs for facilities and
equipment. The principal elements of cost of revenues for our
television programming have been the production costs of our
television programs, which primarily consist of payroll and
related expenses for the editorial and production staff, and
costs for facilities and equipment.
Cost of Internet Revenues. Cost of revenues for
Internet operations were $35.6 million, $23.6 million and
$19.8 million or 34%, 47%, and 74% of the related revenues for
1999, 1998 and 1997, respectively.
The increase in cost of revenues for Internet
operations of $12.0 million from 1998 to 1999 was primarily
attributable to approximately $6.8 million in additional costs
for personnel and related costs, excluding personnel costs
related to acquisitions. During 1999 our acquisitions of
Winfiles.com, AuctionGate, KillerApp, Sumo, GDT, Nordby and
Savvy Search contributed costs of approximately $4.3 million
to our 1999 cost of revenues. Costs for server depreciation
and bandwidth costs related to delivering an increased number
of average daily pages also increased when compared to 1998.
The increase in cost of revenues for Internet
operations of $3.8 million from 1997 to 1998 was primarily
attributable to $2.3 million in costs associated with an
Internet channel that was launched in November 1997,
approximately $1.0 million in additional costs associated with
Company sponsored trade shows and increases of approximately
$4.0 million related to increased personnel, facilities and
other costs associated with growing its Internet network. The
increases in Internet cost of revenues from 1997 to 1998 were
offset by cost savings resulting from the change in percentage
ownership of snap and BuyDirect which resulted in a reduction
of costs of $3.8 million.
Cost of Television Revenues. Cost of revenues for television
programming were $8.3 million, $6.7 million and $6.9 million,
or 112%, 96% and 100% of the related revenues, for 1999, 1998
and 1997, respectively.
The increase in cost of revenues for television
of $1.6 million from 1998 to 1999 was attributable
to expenses related to the production of CNET News.com, which
commenced in October 1999 and costs associated with
discontinuing the production of programming produced under our
licensing agreement with USA Networks, effective December 31,
1999. Cost of revenues for television programming in 1998 were
comparable to 1997.
Cost of Revenues Mix. Cost of Internet revenues
accounted for 81%, 78% and 74% and cost of television revenues
accounted for 19%, 22% and 26% of total cost of revenues for
1999, 1998 and 1997, respectively. This mix of cost of
revenues was impacted by more rapid growth of Internet
operations in each of 1999 and 1998. We anticipate that our
cost of Internet revenues will continue to account for an
increasing percentage of total cost of revenues in future
periods.
Sales and Marketing
Sales and marketing expenses consist primarily of
payroll, sales commissions, personnel related expenses,
consulting fees and advertising expenses. Sales and marketing
expenses were $91.7 million, $14.5 million and $11.6 million
for 1999, 1998, and 1997, respectively. Sales and marketing
expenses represented 82%, 25% and 34% of total revenues in
1999, 1998 and 1997, respectively.
The increase in sales and marketing expenses of $77.2
from 1998 to 1999 related primarily to the campaign we
launched in July 1999 to build our brand. Expenses related to
this campaign totaled approximately $65.0 million and
consisted primarily of television, radio and print
advertising. Prior to July 1999, we had not marketed our
brand. The additional increase of approximately $12.2 million
related primarily to increases in sales and marketing
personnel and their related expenses.
The increase in sales and marketing expenses of $2.9
million from 1997 to 1998 related primarily to increased
advertising expenditures of $2.8 million and increases of
approximately $2.2 million in sales and marketing personnel
and their related expenses. The increases were partially
offset by a reduction in sales and marketing expenses
resulting from the change in percentage ownership of snap and
BuyDirect, effective December 31, 1997 and March 31, 1998,
respectively. Sales and marketing expenses related to snap and
BuyDirect totaled approximately $2.9 million in 1997.
Development
Development expenses include expenses for the
development and production of new Internet channels and
research and development of new or improved technologies,
including payroll and related expenses for editorial,
production and technology staff, as well as costs for
facilities and equipment. Development expenses were $7.6
million, $3.5 million and $13.6 million for 1999, 1998 and
1997, respectively. Development expenses represented 7%, 6%
and 40% of total revenues for 1999, 1998 and 1997,
respectively.
The increase in development expenses of $4.1 million
from 1998 to 1999 related primarily to additional development
efforts to enhance our networks functionality and performance.
These improvements included integrating new features into our
network, integrating the web sites or technologies of the
companies we acquired and continuing to add new services to
our network. The decrease in development expenses from 1997
to 1998 of $10.1 million relates primarily to the completion
and launch of the snap and Computers.com sites in late 1997.
During 1997 we incurred expenses of $8.3 million for the
development of snap and $3.8 million for the development of
Computers.com. Both services were launched during the fourth
quarter of 1997.
General and Administrative
General and administrative expenses consist of
payroll and related expenses for executive, finance and
administrative personnel, professional fees and other general
corporate expenses. General and administrative expenses were
$15.3 million, $7.2 million and $6.8 million for 1999, 1998
and 1997, respectively. General and administrative costs
represented 14%, 12% and 20% of total revenues for 1998, 1997
and 1996, respectively. The increase in general and
administration of $8.1 million from 1998 to 1999 primarily
related to costs related to facilitating our growth, such as
increased personnel and personnel related costs related to the
growth of our management team and costs related to numerous
acquisitions during the year. General and administrative
costs were comparable for 1997 and 1998.
Unusual Items
In the first quarter of 1997, we incurred a one-time,
non-cash expense of $7.0 million related to an amendment to
the warrant agreement with USA Networks whereby we agreed that
the warrants held by USA Networks will vest in full on
December 31, 2006, to the extent that they have not previously
vested. Additionally, USA Networks exercised its option to
extend its agreement with the Company to carry three of our
television programs through June 30, 1998.
In the fourth quarter of 1997, we recognized an
expense of $1.3 million related to reorganizing our real
estate needs as we had determined that based on existing and
planned headcount we had a significant excess of leased real
estate. Also in the fourth quarter of 1997, we recognized an
expense of $700,000 relating to a write-off of Internet domain
names that we determined that we would not use. Through the
fourth quarter of 1998, we had incurred expenses of
approximately $379,000 related to reorganizing our real estate
needs. During the fourth quarter of 1998 we completed our
planning for 1999 and determined that, due to expected growth
and potential acquisitions, we no longer had excess leased
real estate and would no longer incur expenses related to the
reorganization. We recorded a reversal of the remaining real
estate reserve of $922,000 during the fourth quarter of 1998.
Goodwill Amortization
Goodwill amortization expenses relate to the
amortization of the goodwill we record for companies we have
acquired where we use the purchase method of accounting.
Goodwill amortization expenses were $15.0 million for 1999 and
we did not have any goodwill amortization expenses for 1998
and 1997. During 1999 we acquired six companies for which we
used the purchase method of accounting. These acquisitions
included Winfiles.com, Search Linux, GDT, Nordby, Savvy Search
and Manageable Software Services, Inc. Goodwill attributed
to these acquisitions totaled $105.8 million. We are amortizing
goodwill related to these acquisitions over the estimated
realizable life of three years.
Equity Losses
Equity losses included our interest in snap, our
minority interest in Vignette and our interest in a joint
venture E! Online. Pursuant to an agreement in June 1998,
between NBC Multimedia and us, snap, was formed as a limited
liability company, whereby both companies share control.
Effective January 1, 1998 we recorded snap's financial results
using the equity method of accounting due to certain contractual
control provisions.
Equity losses were $11.8 million and $2.2 million for
1998 and 1997 respectively. All of the equity losses in 1998
were related to snap. The equity losses in 1997 were
attributable to $1.8 million related to the E! Online joint
venture and $417,000 related to our Vignette investment.
Gain on Investment Sales
Gain on investment sales were $734.1 million, $10.5
million and $11.0 million for 1999, 1998 and 1997,
respectively. The gains on investment sales of $734.1 million
for 1999 included a gain of approximately $541.2 million
related to the contribution of our interest in snap to NBC
Internet, Inc. (NBCi). We recorded this gain based on the
closing price of our NBCi stock on its first day of trading
after the completion of the merger of snap, Xoom and NBCi.
Our investment in NBCi is recorded as an investment in
marketable equity securities on our balance sheet and
fluctuations in the value of this investment are recorded net
of deferred taxes as other comprehensive income in the
stockholders equity section of our balance sheet. During
1999 we also sold a portion of our holdings of Vignette
Corporation for a gain of approximately $172.3 million, recorded
a gain of approximately $19.9 million related to the merger
agreement between beyond.com and BuyDirect.com which resulted
in our owning approximately 757,000 shares of beyond.com and
had gains on the sales of other equity investments of
approximately $700,000. The gains on investment sales in 1998
were primarily attributable to a gain related to the sale of a
portion of our Vignette investment of $9.8 million. The gains
on sales in 1997 was related to the sale of all our ownership
in E! Online.
Interest Income (Expense)
Interest income is derived from our cash and cash
equivalents and investments in marketable debt securities.
Interest expense is primarily incurred on our 5% Convertible
Subordinate Notes. Net interest income was $1.2 million, $1.4
million and $611,000 for 1999, 1998 and 1997, respectively.
We earned interest income of approximately $9.4 million, $2.0
million and $865,000 in 1999, 1998 and 1997, respectively.
Interest expense was approximately $8.2 million, $622,000
million and $254,000 in 1999, 1998 and 1997, respectively.
Interest expense in 1999 primarily related to $7.1 million of
interest on our 5% Convertible Subordinated Notes.
Income Taxes
We recorded $674.2 million in net income before taxes
in 1999 against which we recorded a provision for income taxes
of $257.3 million. We had income before taxes of $3.0 million
for 1998 and a net loss of $24.7 million in 1997 and we did not
record a tax provision for either of those years. As of December
31, 1999, we have utilized all of our net operating losses for
federal and state income tax purposes. We have approximately
$195,000 of federal research credit carryforwards, which expire
between [2018 and 2019].
Income (Loss)
We recorded net income of $416.9 million or $5.05 per
diluted share for 1999, net income of $3.0 million or $0.04 per
diluted share for 1998 and a net loss of $24.7 million or
$0.44 per share for 1997. Net income increased by $413.9
million from 1998 to 1999. The increase in net income from
1998 to 1999 was primarily related to an increase in gains on
investment sales of $723.7 million, an increase in income
taxes of $257.3 million and a decrease in operating profit of
$64.1 million. The decrease in operating profit was primarily
due to our campaign to market our brand, which had a cost of
approximately $65.0 million in 1999, and goodwill amortization
of $15.0 million.
Net income was $3.0 million for 1998 as compared to a
net loss of $24.7 million for 1997. The change from 1997 to
1998 was attributable to an increase in total revenues of
$23.8 million, a reduction of unusual items expense of
approximately $8.1 million, a reduction in other income of
$9.3 million and decreases to cost of revenues and operating
expenses (excluding unusual items) of $3.3 million. The net
loss in 1997 was primarily attributable to cost of revenues
and operating expenses in excess of total revenues and other
income.
Liquidity and Capital Resources
As of December 31, 1999, we had cash and cash
equivalents of $53.1 million compared to $51.5 million in
1998. In addition on December 31, 1999 we had investments in short
term and long term marketable debt securities of $175.8 million
and investments in marketable equity securities of $786.0 million.
Net cash used in operating activities of $71.3 million in 1999 was
primarily due to our operating loss of $61.1 million and changes
in operating assets and liabilities (excluding deferred tax
liabilities) of $8.4 million. Cash provided by operating
activities of $9.2 million in 1998 was primarily due to
earnings of $3.0 million, and depreciation, amortization
and the amortization of program costs of $12.1 million. Net
cash used in operating activities of $5.9 million for 1997 was
primarily attributable to the net loss in that period. Net
cash used in investing activities in 1999 of $133.5 million
was due to purchases of marketable debt and equity securities
less proceeds from sales of marketable debt and equity securities
of $19.3 million, investments in privately held companies of $39.4
million, cash paid for acquisitions of $43.7 million and purchases
of equipment and programming assets of $30.7 million. Net cash
used in investing activities of $11.1 million and $19.7 million for
1998 and 1997, respectively, were primarily attributable to purchases
of equipment and programming assets. Cash flows provided by
financing activities of $206.3 million in 1999 were primarily
attributable to the proceeds from the issuance of convertible
debt and the issuance of common stock through the exercise of
options and warrants. Cash flows provided by financing
activities of $30.9 million in 1998 consisted primarily of the
issuance of common stock through a private placement in June
of 1998, and the issuance of common stock through the exercise
of warrants, our stock option plans and our Employee Stock
Purchase Plan. Cash flows provided by financing activities in
1997 consisted primarily of proceeds from the issuance of
common stock in private placements. We believe that existing
funds will be sufficient to meet our anticipated cash needs
for working capital and capital expenditures for the next 12
months.
As of December 31, 1999 we had obligations
outstanding under notes payable totaling of $184.9 million.
Notes payable included $173 million of 5% convertible
subordinated notes, due 2006. Such obligations were incurred
to obtain proceeds for general corporate purchases, to finance
acquisitions and marketing expenditures.
Subsequent Events
In February 2000, we sold 650,000 shares of common
stock of NBC Internet, Inc. ("NBCi") as part of a public offering
by NBCi. Gross proceeds from the sale were $52.9 million.
We will record a gain on sale of equity investments of approx-
imately $744,000, which is comprised of the net proceeds realized
from the sale of the securities, less the historic cost of $49.4
million.
In February 2000, we participated in a public offering of
Trust Automatic Common Exchange Securities ("TRACES") through an
an Automatic Common Exchange Security Trust. Our gross proceeds
from the transaction of the TRACES were approximately $101 million
On February 15, 2003, the securities will be exchanged with
us for either common stock that we hold of NBCi or cash. The
securities will earn interest at an annual rate of 7.25%, which will
be paid on a quarterly basis. As a part of the transaction,
we have pledged 1,250,000 common shares of NBCi and approximately
$20 million to the Trust. We will record this transaction
as long term debt.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
We are exposed to the impact of interest rate changes and changes
in the market values of our investments.
Interest Rate Risk. Our exposure to market rate risk for
changes in interest rates relates primarily to our investment
portfolio. We have not used derivative financial instruments in
our investment portfolio. We invest our excess cash in debt
instruments of the U.S. Government and its agencies, and in high-
quality corporate issuers and, by policy, limits the amount of
credit exposure to any one issuer. We protect and preserve our
invested funds by limiting default, market and reinvestment risk.
Investments in both fixed rate and floating rate interest
earning instruments carries a degree of interest rate risk. Fixed
rate securities may have their fair market value adversely
impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest rates
fall. Due in part to these factors, our future investment income
may fall short of expectations due to changes in interest rates or
we may suffer losses in principal if force to sell securities
which have declined in market value due to changes in interest
rates.
Investment Risk. We invest in equity instruments of
privately-held, information technology companies for business and
strategic purposes. These investments are included in other long-
term assets and are accounted for under the cost method when
ownership is less that 20% and the Company doesn't exert significant
influence. For these non-quoted investments, our policy is
to regularly review the assumptions underlying the operating
performance and cash flow forecasts in assessing the carrying
values. We identify and record impairment losses on long-lived
assets when events and circumstances indicate that such assets
might be impaired.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors Report
The Board of Directors,
CNET Networks, Inc.
We have audited the accompanying consolidated balance sheets of CNET
Networks, Inc. and subsidiaries as of December 31, 1999 and 1998 and
the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of CNET Networks, Inc. and subsidiaries as of December
31, 1999 and 1998, and the results of their operations and their cash
flows for each of the years in the three-year period ended December
31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
San Francisco, California
February 29, 2000
CNET NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(000s, except per share data)
December 31,
--------------------------
1999 1998
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $53,063 $51,537
Investments in marketable debt securities 65,985 -
Investments in marketable equity securities 785,909 -
Accounts receivable, net of allowance for
doubtful accounts of $4,678 and $1,722
in 1999 and 1998, respectively 24,628 15,075
Accounts receivable, related party - 1,710
Other current assets 18,743 1,705
Restricted cash 740 945
--------------- ------------
Total current assets 949,068 70,972
Investments in marketable debt securities 109,802 -
Property and equipment, net 30,044 15,325
Other assets 50,609 2,060
Goodwill 90,788 -
--------------- ------------
Total assets $1,230,311 $88,357
=============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $11,461 $3,476
Accrued liabilities 16,398 6,727
Current portion of long-term debt 5,750 1,112
Income taxes payable 5,398 -
Deferred tax liability 306,352 -
--------------- ------------
Total current liabilities 345,359 11,315
Long-term debt 179,114 569
--------------- ------------
Total liabilities 524,473 11,884
Stockholders' equity:
Common stock; $0.0001 par value;
400,000 and 50,000 shares authorized;
73,923 and 68,709 shares issued and
outstanding in 1999 and 1998,
respectively 7 7
Additional paid in capital 218,670 127,357
Other comprehensive income, net of tax 121,409 -
Retained earnings (deficit) 365,752 (50,891)
--------------- ------------
Total stockholders' equity 705,838 76,473
--------------- ------------
Total liabilities and stockholders' equity $1,230,311 $88,357
=============== ============
See accompanying notes to consolidated financial statements.
CNET NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(000s, except per share data)
Year Ended December 31,
------------------------------------------
1999 1998 1997
------------- ------------- ------------
Revenues:
Internet $104,887 $50,419 $26,717
Television 7,458 7,058 6,923
------------- ------------- -------------
Total revenues 112,345 57,477 33,640
------------- ------------- -------------
Cost of revenues:
Internet 35,619 23,563 19,813
Television 8,341 6,741 6,904
------------- ------------- -------------
Total cost of revenues 43,960 30,304 26,717
------------- ------------- -------------
Gross profit 68,385 27,173 6,923
------------- ------------- -------------
Operating expenses:
Sales and marketing 91,660 14,530 11,603
Development 7,561 3,454 13,609
General and administrative 15,266 7,154 6,849
Unusual items - (922) 9,000
Amortization of goodwill 15,036 - -
------------- ------------- -------------
Total operating expenses 129,523 24,216 41,061
------------- ------------- -------------
Operating income (loss) (61,138) 2,957 (34,138)
Other income(expense):
Equity losses - (11,796) (2,228)
Gain on sale of equity investments 734,138 10,450 11,027
Interest income, net 1,223 1,412 611
------------- ------------- -------------
Total other income 735,361 66 9,410
------------- ------------- -------------
Income (loss) before
income taxes 674,223 3,023 (24,728)
Income taxes 257,315 - -
------------- ------------- -------------
Net income (loss) $416,908 $3,023 ($24,728)
============= ============= =============
Other comprehensive income, net of tax:
Unrealized holding gains arising
during the period 121,409 - -
------------- ------------- -------------
Comprehensive income (loss) $538,317 $3,023 ($24,728)
============= ============= =============
Basic net income (loss) per share $5.80 $0.05 ($0.44)
============= ============= =============
Diluted net income (loss) per share $5.05 $0.04 ($0.44)
============= ============= =============
Shares used in calculating
basic per share data 71,820 65,783 55,819
============= ============= =============
Shares used in calculating
diluted per share data 83,373 71,623 55,819
============= ============= =============
The shares used in calculating the basic and diluted net income (loss)
per share have been adjusted in prior periods to reflect the Sumo,
NetVentures, AuctionGate, and KillerApp transactions as outstanding for
all periods, and the two-for-one stock splits on March 8, 1999 and
May 10, 1999.
See accompanying notes to consolidated financial statements.
CNET NETWORKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(000s, except per share data)
Retained
Common Stock Additional Earnings Total
------------------- Paid-in Comprehensive (Accumulated Stockholders'
Shares Amount Capital Income Deficit) Equity
----------- ------- ------------ ------------ ------------ ------------
Balances as of
December 31, 1996 53,118 $5 $62,421 -- $(29,328) $33,098
Exercise of stock options 1,646 -- 1,176 -- -- 1,176
Employee stock purchase
plan 140 -- 705 -- -- 705
Issuances of common stock 3,737 1 23,391 -- -- 23,392
Warrant compensation -- -- 7,000 -- -- 7,000
Net loss -- -- -- -- (24,728) (24,728)
----------- ------- ------------ ------------ ------------ ------------
Balances as of
December 31, 1997 58,641 6 94,693 -- (54,056) 40,643
Exercise of stock options
and warrants 4,055 1 6,246 -- -- 6,247
Employee stock purchase
plan 113 -- 724 -- -- 724
Issuances of common stock 3,251 -- 26,212 -- -- 26,212
Issuance of common stock for
acquisitions 2,649 -- (518) -- 142 (376)
Net income -- -- -- -- 3,023 3,023
----------- ------- ------------ ------------ ------------ ------------
Balances as of
December 31, 1998 68,709 7 127,357 -- (50,891) 76,473
Exercise of stock options
and warrants 2,482 -- 8,086 -- -- 8,086
Employee stock purchase
plan 32 -- 934 -- -- 934
Other comprehensive income
net of deferred income tax
liability of $80,994 -- -- -- 121,406 -- 121,409
Issuance of common stock for
acquisitions 2,700 -- 50,574 -- (265) 50,309
Tax benefits from exercises
of stock options -- -- 31,719 -- -- 31,719
Net income -- -- -- -- 416,908 416,908
----------- ------- ------------ ------------ ------------ ------------
Balances as of
December 31, 1999 73,923 $7 $218,670 $121,409 $365,752 $705,838
=========== ======= ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
CNET NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000s, except per share data)
Year Ended December 31,
-----------------------------------------
1999 1998 1997
------------- ------------- -------------
Cash flows from operating activities:
Net income(loss) $416,908 $3,023 ($24,728)
Adjustments to reconcile net loss
to net cash provided (used) in
operating activities:
Depreciation and amortization 23,847 6,341 5,055
Amortization of program costs 8,131 5,802 6,549
Allowance for doubtful accounts 2,956 1,261 361
Investments for services provided (6,021)
Gain on investment sales (734,138)
Reserve for joint venture -- -- (1,249)
Warrant compensation expense -- -- 7,000
Changes in operating assets and
liabilities:
Accounts receivable (10,664) (9,730) (4,219)
Other current assets (16,940) 455 (917)
Other assets (3,805) 4,933 (1,515)
Accounts payable 7,978 329 229
Accrued liabilities 9,627 (3,253) 7,534
Income tax liabilities 5,399 -- --
Deferred tax liabilities 225,459 -- --
------------- ------------- -------------
Net cash provided (used) in
operating activities (71,263) 9,161 (5,900)
------------- ------------- -------------
Cash flows from investing activities:
Purchase of marketable debt securities (214,557) -- --
Purchase of marketable equity securities (15,950) -- --
Proceeds from sale of marketable
debt securities 37,539 -- --
Proceeds from sale of marketable equity
securities 173,663 -- --
Privately held companies (39,448) -- --
Cash paid for acquisitions (43,743) (108) --
Purchases of equipment, excluding
capital leases (22,373) (4,879) (12,213)
Purchases of programming assets (8,312) (6,084) (5,826)
Deferred interest (307) -- --
Loan to joint venture -- -- (1,638)
------------- ------------- -------------
Net cash used in investing
activities (133,488) (11,071) (19,677)
------------- ------------- -------------
Cash flows from financing activities:
Tax benefit from exercises of stock
options 31,719 -- --
Net proceeds from issuance of
convertible debt 167,220 -- --
Net proceeds from issuance of
common stock -- 26,213 23,392
Net proceeds from employee stock
purchase plan 934 723 705
Proceeds from debt -- -- 3,281
Net proceeds from exercise of options
and warrants 8,086 6,246 1,176
Principal payments on capital leases (42) (416) (239)
Principal payments on equipment note (1,640) (1,873) (339)
------------- ------------- -------------
Net cash provided by
financing activities 206,277 30,893 27,976
------------- ------------- -------------
Net increase in cash and cash
equivalents 1,526 28,983 2,399
Cash and cash equivalents at
beginning of period 51,537 22,554 20,155
------------- ------------- -------------
Cash and cash equivalents at end
of period $53,063 $51,537 $22,554
============= ============= =============
Supplemental disclosure of cash flow
information:
Interest paid $4,205 $325 $255
Taxes paid 2,625 -- --
Supplemental disclosure of noncash
transactions:
Issuance of debt for acquisitions $10,098 $3,066 --
Capital lease obligations incurred -- -- $408
Unrealized gain in marketable securities
and investments, net of deferred tax
liability $121,409 -- --
Issuance of common stock for
acquisitions $50,553 -- --
See accompanying notes to consolidated financial statements.
CNET NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
CNET Networks, Inc. (the "Company") was incorporated in the state of
Delaware in December 1992 and is a global media company producing a
branded Internet network, a computer product database, and television
and radio programming for both consumers and businesses.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
CNET Networks Inc., and its majority owned controlled subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS, SHORT AND LONG-TERM DEBT AND EQUITY INVESTMENTS
The Company invests its excess cash in debt instruments of the
U.S. Government and its agencies, and in high-quality corporate issuers.
All highly liquid instruments with an original maturity of three months
or less are considered cash equivalents. Investments in marketable debt
securities with original maturities greater than three months and current
maturities less than twelve months from the balance sheet date are considered
current assets. Those with maturities greater than twelve months from the
balance sheet date are considered non-current assets. Investments in
publicly traded companies are considered investments in marketable equity
securities and are classified as a current asset of the Company.
The Company's marketable debt and equity securities are classified as
available for sale as of the balance sheet date and are reported at fair value,
with unrealized gains and losses, net of tax, recorded in shareholders' equity.
Realized gains or losses and permanent declines in value, if any, on
available-for-sale securities are reported in other income or expense as
incurred. As of December 31, 1999, the Company recorded unrealized gains,
net of deferred income taxes, of $121.4 million.
The Company invests in equity instruments of privately-held, information
technology companies for business and strategic purposes. These investments
are included in other assets in the non-current section of the balance sheet.
These investments are accounted for under the cost method when ownership is
less than 20% and the Company doesn't exert significant influence. For these
non-quoted investments, the Company's policy is to regularly review the
assumptions underlying the operating performance and cash flow forecasts in
assessing the carrying values. The Company identifies and records impairment
losses on long-lived assets when events and circumstances indicate that such
assets might be impaired. To date, no such impairment has been recorded.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets which
range from three to forty years. Property and equipment recorded under
capital leases and leasehold improvements are amortized on a straight-
line basis over the shorter of the lease terms or their estimated useful
lives.
CONCENTRATION OF CREDIT RISK
Financial instruments potentially subjecting the Company to
concentrations of credit risk consist primarily of periodic
investments of excess cash and trade accounts receivable.
The majority of the Company's accounts receivable are derived from
domestic sales. The Company invests excess cash in low risk,
liquid instruments. No losses have been experienced on such investments.
DEVELOPMENT
Development expenses include expenses which were incurred in the
development of new Internet channels and in research and development of
new or improved technologies that enhance the performance of the
Company's Internet channels. Costs for development are expensed as
incurred. Costs are no longer recognized as development expenses when a
new Internet channel is launched and is generating revenue.
INCOME TAXES
The Company accounts for income taxes using the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred income tax assets and
liabilities of changes in tax rates is recognized in income in the
period that includes the enactment date.
REVENUE RECOGNITION
Internet revenues consist primarily of revenues derived from the
sale of advertisements on pages delivered to users of our Internet
network. Advertising programs are generally delivered on either an
"impression" based program or a "performance" based program. An
impression based program earns revenues when an advertisement is
delivered to a user of our Internet network. A performance based
program earns revenues when a user of our Internet network responds to
an advertisement by linking to an advertisers Internet network.
Performance based programs include revenues generated from leads
delivered from the Company's shopping services. Advertising
revenues are recognized in the period in which the advertisements are
delivered.
Television revenues consist primarily of revenues derived from the
licensing of programming produced by the company. For each of the years
1997 through 1999, a significant portion of television revenues were
derived from a licensing agreement with USA Networks limited to the
costs of production of the programming and further limited to certain
maximum amounts per the contract. Effective July 1, 1999, the Company
reduced the amount of programming under this agreement and as of December
31, 1999, the agreement expired and will not be renewed. In May, 1999,
the Company entered into an agreement with National Broadcasting Company
("NBC") whereby NBC granted certain rights to CNBC, Inc. ("CNBC") to carry
"CNET News.com". The term of the agreement is from October 1, 1999
through September 20, 2002 and CNBC will pay based on an annual fee not
to exceed the cost of production with further maximum limits per the
contract.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted
average number of outstanding shares of common stock and diluted net
income per share is computed using the weighted average number of
outstanding shares of common stock and common stock equivalents.
Net loss per share for the year ended December 31, 1997 does
not include the effect of approximately 10,155,688 stock options,
with weighted average exercise price of $6.19 because their effects
are anti-dilutive.
The following table sets forth the computation of net income
(loss) per share (in thousands, except per share data):
Year Ended December 31,
---------------------------------------
1999 1998 1997
-------------- ------------ -----------
Net income (loss) available to
common stockholders $416,908 $3,023 ($24,728)
Plus: Interest income, net of taxes
available to convertible
subordinated noteholders 4,471 -- --
-------------- ------------ -----------
Adjusted income (loss) available to
common stockholders $421,379 $3,023 ($24,728)
============== ============ ===========
Weighted-average shares 71,820 65,783 55,819
Plus: Incremental shares from assumed
conversions
Options 7,363 5,356 --
Warrants 428 484 --
Convertible subordinated notes 3,762 -- --
-------------- ------------ -----------
Adjusted weighted-average shares 83,373 71,623 55,819
Basic net income(loss) per share $5.80 $0.05 ($0.44)
============== ============ ===========
Diluted net income(loss) per share $5.05 $0.04 ($0.44)
============== ============ ===========
The shares used in calculating the basic and diluted net income (loss) per
share have been adjusted in prior periods to reflect the Sumo, NetVentures,
AuctionGate, and KillerApp transactions as outstanding for all periods, and
the two-for-one stock splits on March 8, 1999 and May 10, 1999.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based employee compensation plans
using the intrinsic value method. As such, compensation expense is recorded
on the date of grant if the current market price of the underlying stock
exceeded the exercise price.
COMPREHENSIVE INCOME(LOSS)
The Company has adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income", which established standards for reporting and
disclosures of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general purpose financial
statements. Financial statements for earlier periods have been
reclassified for comparative purposes.
During the year ended December 31, 1999 the Company reported
unrealized holding gains (net of tax) arising from investments
classified as available for sale amounting to $121.4 million. As of
December 31, 1999, the Company owned 7,147,584 shares of NBCi,
1,835,165 shares of Mail.com, Inc. ("Mail.com"), 1,047,042 shares
of Vignette Corporation ("Vignette"), 874,056 shares of Deltathree.com,
Inc. ("deltathree"), 757,372 shares of beyond.com, and 5,754 shares
of Digital River.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. Such costs
are included in selling and marketing expense and totaled
approximately $74.8 million, $5.1 million, and $2.3 million during the
years ended December 31, 1999, 1998 and 1997, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's cash and cash equivalents,
marketable debt and equity securities, accounts receivable, accounts
payable, and long-term debt approximate their respective fair values.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews its long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less
costs to sell.
USE OF ESTIMATES
The Company's management has made a number of estimates and
assumptions relating to the reporting of assets and liabilities,
revenues and expenses, and the disclosure of contingent assets and
liabilities to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ
from those estimates.
BARTER TRANSACTIONS
The Company trades advertisements on its Internet sites in exchange
for advertisements on the Internet sites of other companies. These
revenues and marketing expenses are recorded at the fair market value of
services provided or received, whichever is more determinable in the
circumstances. Revenue from barter transactions is recognized as income
when advertisements are delivered on the Company's Internet channels and
expense from barter transactions is recognized when advertisements are
delivered on the other companies' Internet sites. Barter revenues were
approximately $5.9 million, $3.4 million, and $905,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB recently issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at
fair value. For a derivative not designated as a hedging instrument,
changes in the fair value of the derivative are recognized in earnings
in the period of change. The Company must adopt SFAS No. 133 by first
quarter in year-ending December 31, 2001. Management does not believe
the adoption of SFAS No. 133 will have a material effect on the financial
position or operations of the Company.
(2) BALANCE SHEET COMPONENTS
CASH AND CASH EQUIVALENTS
The carrying value of cash and cash equivalents consisted of:
December 31,
(000s)
---------------------------
1999 1998
-------------- ------------
Commercial paper $36,742 $21,452
Money market mutual funds 11,401 23,448
Cash 4,920 6,637
-------------- ------------
$53,063 $51,537
============== ============
RESTRICTED CASH
Restricted cash balance relates to certain deposits in escrow for
leasehold improvements and as collateral for letters of credit relating
to security deposits.
PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
December 31,
(000s)
---------------------------
1999 1998
-------------- ------------
Land $144 --
Buildings 1,169 --
Computer equipment 27,614 12,271
Production equipment 2,661 2,552
Office equipment, furniture & fixtures 5,142 3,132
Software 2,676 1,846
Leasehold improvements 10,193 7,644
Assets in progress 1,018 620
-------------- ------------
50,617 28,065
Less accumulated depreciation
and amortization 20,573 12,740
-------------- ------------
$30,044 $15,325
============== ============
As of December 31, 1999, the Company no longer had any equipment
under capital lease agreements. In 1998, the Company had equipment under
capital lease agreements of $1.2 million, and accumulated amortization
of $1.1 million.
ACCRUED LIABILITIES
A summary of accrued liabilities follows:
December 31,
(000s)
---------------------------
1999 1998
-------------- ------------
Compensation and related benefits $6,744 $4,008
Interest on note 2,900 --
Marketing and advertising 1,581 578
Deferred revenue 3,360 594
Other 1,813 1,547
-------------- ------------
$16,398 $6,727
============== ============
DEBT
On March 8, 1999, the Company completed a private placement with
gross proceeds of $172.9 million of 5% Convertible Subordinated Notes,
due 2006 (the "Notes") The Notes are convertible into the Company's
common stock after June 7, 1999 at a conversion price of $37.40625 per
share, subject to adjustments in certain events, at the option of the
noteholder.
On February 26, 1999, the Company completed the acquisition
of the assets of Winfiles.com, a leading software downloading service
for a total purchase price of $11.5 million, with an imputed interest
rate of 8%, payable in two installments of $5.75 million. The first
installment was due at the closing, and the final installment is due
August 28, 2000.
On July 27, 1999, the Company completed the acquisition of GDT S.A.,
a Swiss Societe Anonyme, ("GDT") through a merger of GDT into the Company.
As a result of the acquisition of GDT, the Company assumed a 5% mortgage
loan for the GDT building with a principal balance of $1.1 million as of
December 31, 1999. The term of the loan is 36 years.
On July 29, 1999, the Company completed the acquisition of Nordby
International, Inc., a Colorado corporation, ("Nordby") through a merger of
Nordby into the Company. Pursuant to the merger, the Company issued a note
payable due July 29, 2001 for $5.0 million with an imputed interest rate
of 8%.
The aggregate annual principal payments for the notes and loan payable
outstanding as of December 31, 1999, are summarized as follows:
YEAR ENDING DECEMBER 31, (000s)
-----------------------
2000 5,750
2001 5,026
2002 28
2003 29
2004 30
Thereafter 174,001
--------------
$ 184,864
==============
(3) ACQUISITIONS
On May 12, 1998, the Company completed the acquisition of
U.Vision, Inc., a California corporation ("U.Vision"), through a merger
between U.Vision and a wholly-owned acquisition subsidiary of the Company
in which the Company issued 2,179,860 shares of common stock
in exchange for all of the outstanding shares of U.Vision. U.Vision
owned and operated ComputerEsp, a pricing and availability engine for
buying computer products on the Internet. Subsequent to the merger, the
Company re-launched the service as Shopper.com. The Company recorded
this transaction using the pooling-of-interests accounting method and
recorded the financial results of U.Vision in its financial statements
effective April, 1, 1998. The financial statements of the Company prior
to April 1, 1998 have not been adjusted for the financial results of
U.Vision as the impact was not material. The shares used in calculating
the basic and diluted net loss per share have been adjusted in
prior periods to reflect the U.Vision transaction as outstanding
for all periods.
On February 16, 1999, the Company completed the acquisition of
NetVentures, Inc., a California corporation ("NetVentures"), through a
merger of NetVentures into the Company. Pursuant to the merger,
the Company issued 414,408 shares of common stock in exchange for all
of the outstanding shares of NetVentures. NetVentures owned and operated
ShopBuilder, an online store-creation system. The Company recorded
this transaction using the pooling-of-interests accounting method and
recorded the financial results of NetVentures in its consolidated financial
statements effective January 1, 1999. The consolidated financial
statements of the Company prior to January 1, 1999 have not been
adjusted for the consolidated financial results of NetVentures as
the impact was not material. The shares used in calculating the basic
and diluted net income (loss) per share have been adjusted in prior
periods to reflect the NetVentures transaction as outstanding for all
periods.
On February 19, 1999, the Company completed the acquisition of
AuctionGate Interactive, Inc., a California corporation ("AuctionGate"),
through a merger of AuctionGate into the Company. Pursuant to the merger,
the Company issued 214,168 shares of common stock in exchange for all of
the outstanding shares of AuctionGate. AuctionGate owned and operated
AuctionGate.com, an online auction site specializing in computer products.
The Company recorded this transaction using the pooling-of-interests
accounting method and recorded the financial results of AuctionGate
in its consolidated financial statements effective January 1, 1999. The
consolidated financial statements of the Company prior to January 1, 1999
have not been adjusted for the consolidated financial results of AuctionGate
the impact was not material. The shares used in calculating the basic
and diluted net income (loss) per share have been adjusted in prior
periods to reflect the AuctionGate transaction as outstanding for all periods.
On February 26, 1999, the Company acquired substantially all of
the assets of Winfiles.com, a download service, from Jensesys LLC, a
Washington limited liability company ("Winfiles"), for a total
purchase price of $11.5 million, of which $5.75 million was paid in
cash and a note for $5.75 will be paid August 26, 1999. The Company recorded
this transaction using the purchase method of accounting and recognized
$11.0 million in goodwill. The goodwill is being amortized on a straight-
line basis over a three year period.
On March 22, 1999, the Company completed the acquisition of
KillerApp Corporation, a California corporation ("KillerApp"), through a
merger of KillerApp into the Company (the "Acquisition"), in which the
Company issued an aggregate of 1,046,800 shares of its common stock to the
former KillerApp shareholders as consideration. KillerApp owned and operated
KillerApp, an online product, merchant and price listing and buying
web site. The Company recorded this transaction using the pooling-of-
interests accounting method. The consolidated financial statements prior
to January 1, 1999 have not been adjusted for the consolidated financial
results of KillerApp as the impact was not material. The shares used in
calculating the basic and diluted net income (loss) per share have
been adjusted in prior periods to reflect the KillerApp transaction as
outstanding for all periods.
On April 30, 1999, the Company completed the acquisition of Sumo,
Inc., a Florida Corporation ("Sumo") in which the Company issued 469,484
shares of common stock to the stockholders of Sumo. Sumo developed Internet
service directories, including webhostlist.com, webdesignlist.com and
webisplist.com. The Sumo acquisition has been accounted for as a pooling-
of-interests, and accordingly, the Company's consolidated financial statements
have been restated for all periods prior to the acquisition to include the
results of operations, financial position and cash flows of the acquisition.
On July 27, 1999, the Company completed the acquisition of GDT
through a merger of GDT into the Company. Pursuant to the merger, the
Company paid $30.0 million in cash, issued 429,185 shares of common
stock valued at $20 million, and recorded goodwill of $49.4 million which
is amortized over three years in exchange for all of the outstanding shares
of GDT. GDT is based in Switzerland and has built a multi-language, multi-
market database of product information. GDT's database of product information
will be used to enhance CNET's Shopping services. The Company recorded this
transaction using purchase accounting.
On July 29, 1999, the Company completed the acquisition of Nordby
International, Inc., a Colorado corporation, ("Nordby") through a merger of
Nordby into the Company. Pursuant to the merger, the Company paid $5.0 million
in cash, issued a note payable due July 29, 2001 for $5.0 million, issued
230,017 shares of common stock to Nordby shareholders valued at $10 million,
and recorded goodwill of $20 million which is amortized over three years in
exchange for all outstanding shares of Nordby. Nordby is a provider of
customized financial information to online and print partners. The Company
recorded this transaction using purchase accounting.
On October 7, 1999, the Company completed the acquisition of
SavvySearch Limited, a Massachusetts corporation ("Savvy"), through a
merger of Savvy into the Company. Pursuant to the merger, the Company
paid $4.4 million in cash, issued 307,489 shares of common stock to
Savvy shareholders valued at $17.6 million, and recorded goodwill of
$22.1 million which is amortized over three years in exchange for all
outstanding shares of Savvy. Savvy is a provider of metasearch services.
The Company recorded this transaction using purchase accounting.
On November 4, 1999, the Company completed the acquisition of
Manageable Software Services Inc., a California corporation ("MSSI"), through
a merger of MSSI into the company. Pursuant to the merger, the Company issued
58,394 shares of common stock to MSSI shareholders valued at $3 million, and
recorded goodwill of $3 million which is amortized over three years in
exchange for all outstanding shares of MSSI. MSSI provides automated PC
management services to keep users' software and hardware up-to-date. The
Company recorded this transaction using purchase accounting.
The following unaudited proforma financial information presents
the combined results of operations of CNET as if the acquisitions of
SavvySearch, MSSI, Nordby, Winfiles and GDT had occurred as of the beginning
of 1998, and 1999, after giving effect to certain adjustments, including
amortization of goodwill. All of these acquisitions were accounted for by the
purchase accounting method. The pro forma financial information does not
necessarily reflect the results of operations that would have occurred had
CNET constituted a single entity during such periods:
Year Ended December 31,
(000s, except per share data)
unaudited
-----------------------
1999 1998
-------------- ---------
Net revenues $113,447 $59,847
Net income (loss) 395,743 ($32,106)
Basic net income loss) per share $5.51 ($0.49)
Diluted net income per share $4.80 ($0.49)
(4) INCOME TAXES
The provision for income taxes is as follows:
Year Ended December 31,
(000s)
----------------------------------------
1999 1998 1997
-------------- ------------ ------------
Current:
Federal 31,023 -- --
State 9,598 -- --
-------------- ------------ ------------
Total current 40,621 -- --
Deferred:
Federal 171,184 -- --
State 45,510 -- --
-------------- ------------ ------------
Total deferred 216,694 -- --
-------------- ------------ ------------
257,315 -- --
============== ============ ============
The Company's effective tax rate differs from the statutory federal income
tax rate of 35% as shown in the following schedule:
Year Ended December 31,
----------------------------------------
1999 1998 1997
-------------- ------------ ------------
Income tax expense at statutory rate 35.00% 34.0% 34.0%
Permanent differences 0.63% -- --
State tax 5.30% -- --
NOL Utilized (2.50%) -- --
R&D credit utilized (0.20%) -- --
Operating losses with no current tax
benefit -- (34.0%) (34.0%)
-------------- ------------ ------------
Effective tax rate 38.23% -- --
============== ============ ============
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets/(liabilities) are presented below:
Year Ended December 31,
(000s)
----------------------------------------
1999 1998 1997
-------------- ------------ ------------
Capitalized "start-up" expenses $94 $457 $818
Net operating losses -- 22,184 16,268
Tangibles and intangibles 2,095 820 1,420
Accruals, reserves and other 4,709 1,615 4,825
Tax credit carryforwards 1,278 840 44
Unrealized gain from investments
available for sale (80,894) -- --
Gain on NBCi and beyond.com for
the sale of stock transactions
deferred for tax purposes (225,458) -- --
-------------- ------------ ------------
(298,176) 25,916 23,375
Less valuation allowance -- (25,916) (23,375)
-------------- ------------ ------------
($298,176) $ -- $ --
============== ============ ============
The Company has no valuation allowance as of December 31, 1999, which is
a result of the gain from investment sales. The Company has generated
sufficient taxable income during 1999 and therefore, it is expected to realize
all of its deferred tax assets. The net change in the total valuation
allowance for the year ended December 31, 1999 was ($25.9) million.
As of December 31, 1999, the Company had utilized all of its net operating
losses for federal and state income tax purposes. The Company has approximately
$563,000 of federal research credit carryforwards, which expire between
2018 and 2019. The Company also has approximately $715,000 of
alternative minimum tax credit carryforwards, which can be carried forward
indefinitely until utilized. Of the deferred tax assets realized, an
adjustment of approximately $31.7 million has been recorded directly to equity
to reflect the tax benefit related to stock option compensation.
(5) LEASES
The Company has several non-cancelable leases primarily for general office,
facilities, and equipment that expire over the next five years. Future minimum
lease payments under these leases are as follows:
Operating
Leases
YEAR ENDING DECEMBER 31, (000s)
----------------------- ------------
2000 $5,003
2001 5,332
2002 3,538
2003 2,824
2004 1,620
Thereafter --
------------
Total minimum lease payments $18,317
============
Rental expense from operating leases amounted to $4.2 million,
$3.2 million, and $2.2 million for the years ended December 31, 1999,
1998 and 1997, respectively.
(6) STOCKHOLDERS' EQUITY
ISSUANCE OF COMMON STOCK
On July 21, 1997, the Company sold 805,012 shares of common stock in
a private placement to Intel for aggregate proceeds of approximately $5.3
million. On December 18, 1997, the Company sold 2,932,000 shares of common
stock in a private placement to three "accredited investors" (as defined
in Rule 501(a) under the Securities Act of 1933) for aggregate net proceeds
of approximately $18.1 million.
In June of 1998, the Company completed the sale of 3,251,200 shares
of common stock to National Broadcasting Company, Inc., ("NBC"). The
aggregate purchase price for the shares sold was $26.2 million.
The Company issued common stock pursuant to acquisitions of 3,169,865
shares and 2,179,860 shares in 1999 and 1998, respectively. The 469,484
shares related to the Sumo pooling-of-interest acquisition are reflected
as issued during 1998 in the accompanying financial statements.
STOCK SPLIT
On May 10, 1999, and March 8, 1999, the Company effected
two-for-one splits, respectively, of its common stock. The accompanying
consolidated financial statements have been retroactively adjusted
to reflect the stock splits.
STOCK OPTION PLAN
In 1994, the Board of Directors adopted a Stock Option Plan (the "1994
Plan") pursuant to which the Company's Board of Directors may grant stock
options to officers and key employees. The 1994 Plan authorizes grants of
options to purchase up to 11,000,000 shares of authorized but unissued common
stock. In 1997, the stockholders approved the 1997 Stock Option Plan (the
1997 Plan"). The 1997 Plan authorizes grants of options to purchase up to
12,400,000 shares of authorized but unissued common stock. Stock options for
both the 1994 and 1997 Plans are granted with an exercise price equal to the
fair market value at the date of grant. All stock options have 10-year
terms and generally vest and become fully exercisable between three and
four years from the date of grant.
A summary of the status of the Company's stock option plans as of December
31, 1999, 1998 and 1997, and changes during each of the years then ended:
Weighted
Number Average
of Exercise
Shares Prices
-------------- -------------
Balance as of December 31, 1996 6,257,864 1.77
Granted 5,294,092 5.93
Exercised (1,778,784) 0.72
Canceled (487,008) 3.52
-------------- -------------
Balance as of December 31, 1997 9,286,164 4.21
Granted 4,945,800 8.37
Exercised (1,841,276) 2.56
Canceled (2,234,920) 5.80
-------------- -------------
Balance as of December 31, 1998 10,155,768 $6.19
Granted 5,061,920 31.98
Exercised (2,330,613) 4.28
Canceled (1,421,563) 11.30
-------------- -------------
Balance as of December 31, 1999 11,465,512 $17.33
============== =============
As of December 31, 1999, 1998 and 1997, the number of options
exercisable was 2,944,082, 2,100,032, and 1,717,776, respectively, and the
weighted average exercise price of those options was $5.94, $3.51, and $1.53,
respectively. As of December 31, 1999, there were 3,195,747 additional shares
available for grant under the Plans.
The Company applies APB Opinion No. 25 in accounting for the Plans and,
accordingly, no compensation cost has been recognized for the Plans in the
financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS 123,
the Company's net income(loss) and net income (loss) per share would have
been increased to the pro forma amounts indicated below:
Year Ended December 31,
(000s, except per share data)
----------------------------------------
1999 1998 1997
-------------- ------------ ------------
Net income(loss)
As reported $416,908 $3,023 ($24,728)
Pro forma $389,596 ($12,607) ($29,872)
Basic net income(loss) per share
As reported $5.80 $0.05 ($0.44)
Pro forma $5.42 ($0.19) ($0.54)
Diluted net income(loss) per share
As reported $5.05 $0.04 ($0.44)
Pro forma $4.67 ($0.19) ($0.54)
The effects of applying SFAS 123 in this pro forma disclosure is
not indicative of the effects on reported results for future years. SFAS
No. 123 does not apply to awards prior to 1995.
The weighted-average fair value of options granted in 1999, 1998 and 1997,
was $23.74, $8.37, and $5.93, respectively.
The fair value of each option grant is estimated on the date of grant
using Black Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1999, 1998 and 1997,
respectively: no dividend yield, expected volatility of 92%, 75%, and 75%,
respectively, risk-free interest rate of 5%, 6%, and 6%, respectively, and
and an expected life of five years, respectively.
The following table summarizes information about stock options
outstanding as of December 31, 1999:
------------------------------------ ------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of As of Contractual Exercise As Of Exercise
Exercise Prices 12/31/99 Life Price 12/31/99 Price
- ------------------ ------------ ----------- ----------- ------------ -----------
$0.30 $0.30 60,000 5.00 $0.30 60,000 $0.30
$0.47 $0.60 121,584 5.50 $0.54 113,108 $0.54
$2.15 $3.08 469,842 6.20 $2.64 469,842 $2.64
$3.25 $4.50 308,214 6.60 $3.57 254,214 $3.56
$5.00 $7.38 3,704,234 7.80 $6.15 1,064,632 $5.86
$8.06 $11.94 2,053,770 8.50 $8.97 938,818 $8.53
$12.55 $17.13 2,119,718 9.00 $12.82 35,968 $15.77
$29.00 $42.94 769,850 9.40 $33.90 0
$44.94 $67.25 1,828,800 9.50 $54.55 7,500 $57.63
$68.09 $74.00 29,500 9.50 $68.62 0
------------ ------------
$0.30 $74.00 11,465,512 8.40 $17.33 2,944,082 $5.94
============ ============
401(k) PROFIT SHARING PLAN
In 1996, the Company adopted a 401(k) Profit Sharing Plan (the "401(k)
Plan") that is intended to qualify under Section 401(k) of the Internal
Revenue Code of 1986, as amended. The 401(k) Plan covers substantially
all of the company's employees, who may contribute up to 15% of their
annual compensation, subject to a limitation of $10,000 in 1999.
Employees vest immediately in their contributions and earnings thereon.
The plan allows for Company matching contributions which amount to 50% of
the employees contribution up to 6% with an annual cap of $500. Employees
vest in the Company's contributions at 50% after one year of service and
100% after two years of service. As of December 31, 1999, the Company
made matching contributions of $168,000.
EMPLOYEE STOCK PURCHASE PLAN
In July 1996, the Company adopted an Employee Stock Purchase Plan
that covers substantially all employees. Participants may elect to
purchase the Company's stock at a 10% discount of the lower of the
closing price at the beginning or end of the quarter by contributing a.
percentage of their compensation. The maximum percentage allowed is 10%.
(7) MAJOR CUSTOMERS AND CONTRACTS
CUSTOMERS
For the year ended December 31, 1999, there were no customers that
contributed more than 10% of the Company's revenues. For the year ended
December 31, 1998, one customer, USA Networks, accounted for approximately
10% of the Company's revenues. For the year ended December 31, 1997, two
customers accounted for over 10% of the Company's revenues with USA
Networks accounting for approximately 16%, and Microsoft Corporation
accounting for approximately 10% of total revenues.
CONTRACTS
For each of the years from 1997 through 1999, the Company had licensing
agreements with USA Networks, whereby the Company produced television
programming for USA Networks. Under these agreements, the Company was paid
a fee equal to the cost of production for the programming produced, not to
exceed certain amounts agreed to during the various contract periods. During
each of the years from 1997 to 1999, the Company agreed to pay fees for the
right to cross-market the Company's Internet channels on the television programs
produced by the Company for USA Networks. On December 31, 1999, the Company's
contract with USA Networks expired and was not renewed or extended.
(8) UNUSUAL ITEMS
In the first quarter of 1997, the Company incurred a one-time,
non-cash expense of $7.0 million related to an amendment to the warrant
agreement with USA Networks. In the fourth quarter of 1997, the Company
recognized an expense of $1.3 million related to lease abandonment costs
and recognized an expense of $700,000 relating to a write off of Internet
domain names that the Company had determined that it would no longer use.
Through the fourth quarter of 1998, the Company had incurred expenses of
$379,000 related to the abandonment of excess real estate and during the
fourth quarter of 1998, the Company determined that it had completed the
abandonment of excess real estate. Accordingly, the Company reversed
approximately $922,000 of this expense in the fourth quarter of 1998.
(9) RELATED PARTY TRANSACTIONS
Included in other assets on the accompanying balance sheets is an
advance to an officer of the Company for $26,250, and a loan to an employee
of the company for $500,000 with an interest rate of 7% per annum due an
payable on April 30, 2001.
An affiliate of an officer and stockholder of the Company
loaned the Company $800,000 in 1996 at an interest rate
of 8% and was granted 19,600 warrants to purchase Series D Convertible
preferred stock at an exercise price of $6.44 per share. This loan was
subsequently converted to Series E convertible preferred stock, which
were subsequently converted to 58,800 warrants to purchase common stock
at an exercise price of $2.15 per share. These warrants were all
exercised in June, 1999.
A stockholder loaned the Company $3,000,000 in 1996 at an interest rate
of 8%. Interest expense related to the loan was $34,000 in 1996.
This loan was subsequently converted to Series E convertible preferred
stock. In connection with this loan agreement, the Company granted the
lender 73,500 warrants to purchase Series D convertible preferred
stock at an exercise price of $6.44 per share, which were subsequently
converted to 220,500 warrants to purchase common stock at an exercise
price of $2.15 per share. As of December 31, 1999, all of these warrants
were outstanding and exercisable and expire on dates from May 2000 to
February 2001. Such warrants were valued at estimated fair market value
at the date of issuance.
BUYDIRECT.COM (BuyDirect) was a wholly owned division of the Company
that distributed electronic software. On March 31, 1998, the Company
contributed its ownership in BuyDirect, and net assets related to
BuyDirect of approximately $744,000, to a new venture that was separately
owned and operated by BuyDirect's existing management group. As part of
the transaction, the Company received a 19% ownership interest in
the new venture. The Company used the cost method of accounting for its
BuyDirect investment thus recorded an investment of approximately
$744,000 on its balance sheet. Initially, the Company also entered
into a multi-year arrangement with the new venture to provide marketing
and promotion through April 30, 2000. Effective October 31, 1998, the
Company terminated the initial contract and entered into a new agreement
in exchange for approximately $7.5 million for marketing and promotion
through September 30, 2000. In conjunction with the new agreement, the
Company received a promissory note maturing on October 31, 2002 in the
amount of $5.6 million, which was paid off in full in 1999.
On May 9, 1999 the Company entered into an agreement to sell
its effective 40% ownership in Snap.com, a free Internet directory, search and
navigation portal service controlled by NBC Multimedia, Inc. The new company
is called NBC Internet. NBC Internet was established upon the merger of
SNAP! LLC, Xoom.com, Inc., and certain Internet related properties of the
National Broadcasting Company, Inc. ("NBC") or its affiliates, including
NBC.com, Videoseeker.com, NBC Interactive Neighborhood and a 10% interest in
CNBC.com. Upon the closing of the transaction in November, 1999, the Company
received common stock aggregating approximately 13% of NBC Internet, which is
a publicly traded company. In connection with the transaction, the Company
recorded a net gain of $324.4 million in 1999.
(10) SEGMENT INFORMATION
The Company has adopted the provisions of SFAS No. 131, "Disclosure
About Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the reporting by public business enterprises
of information about operating segments, products and services,
geographic areas and major customers. The method for determining what
information to report is based on the way that management organizes the
operating segments within the Company for making operating decisions and
assessing financial performance.
The Company's chief operating decision maker is considered to be the
Company's Chief Executive Officer ("CEO"). The CEO reviews financial
information presented on a consolidated basis accompanied by disaggregated
information about revenue and cost of revenue by operating segment for
purposes of making operating decisions and assessing financial performance.
The consolidated information reviewed by the CEO is identical to the
information presented in the accompanying financial statement of
operations. The Company operates in two segments, television and CNET
Online, the Company's Internet operation. Asset information regarding
television and CNET online operations is as follows:
December 31, December 31,
1999 1998
(000s) (000s)
--------- ---------
Television 1,241 2,284
CNET Online 1,229,070 86,073
------------- ----------
Consolidated Total 1,230,311 88,357
============= ==========
Revenues are primarily generated in the U.S., and accordingly, geographic
data is not presented.
(11) Quarterly Financial Data
QUARTER ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
----------------------------------------
September December
1999: March 31 June 30 30 31
-------- -------- --------- ---------
1999:
Net revenues $20,076 $25,552 $28,409 $38,308
Gross profit 11,480 16,317 16,930 23,657
Operating income (loss) 1,759 4,326 (28,003) (39,220)
Income before income taxes 21,872 9,212 69,695 573,444
Net income (loss) 21,872 9,212 29,384 356,440
Basic net income per share* $0.31 $0.13 $0.40 $4.84
Diluted net income per
share* $0.29 $0.11 $0.35 $4.18
1998:
Net revenues $9,869 $13,293 $14,701 $19,614
Gross profit 2,814 5,618 7,549 11,192
Operating income (loss) (2,092) 231 1,171 3,647
Income (loss) before income taxes (5,572) 340 3,867 4,388
Net income (loss) (5,572) 340 3,867 4,388
Basic net income (loss)
per share* ($0.09) $0.01 $0.06 $0.06
Diluted net income (loss)
per share* ($0.09) $0.01 $0.05 $0.06
Note: The 1998 quarterly financial data for the quarters presented above has
been restated to reflect the acquisition of Sumo which was accounted
for as a pooling-of-interests.
* Reflects the two-for-one stock splits effective March 8, 1999 and May 10,
1999.
(12) SUBSEQUENT EVENTS
On January 4, 2000, the Company announced a joint venture
with AMFM Inc., to create CNET Radio, the country's first all-tech radio
format. The first CNET Radio station launched in January in San Francisco
with plans to roll it out nationally by the end of 2000. Under the terms
of the agreement, the Company and AMFM will share revenue on the sale of
advertising on the new station. The Company will be responsible for
production and broadcast of CNET Radio.
On January 12, 2000, the Company announced a joint venture with
Asiacontent.com, a leading Asian Internet media network, to create
CNET Asia, a collection of Internet sites bringing localized
technology news, reviews, product comparisons and shopping services to
Asian audiences. Both partners will co-fund this venture.
The Company retains an option to purchase Asiacontent.com's share of
the venture, at a predetermined price.
On February 23, 2000, the Company acquired Digital Media Services,
Inc., ("DMS") a California Corporation, through the merger of DMS into
the Company. Pursuant to the merger, the Company paid $18 million
in cash and issued 109,091 shares of common stock. Digital Media Services
provides tools that enable manufacturers and merchants to offer
product-specific promotions directly to customers before and at the
point-of-sale, both online and offline. The Company will record this
transaction using purchase accounting.
On February 29, 2000, the Company completed the acquisition of
mySimon inc., a California corporation ("mySimon"), through a merger of
CNET Sub, Inc., a Delaware corporation and wholly-owned direct subsidiary
of the Company, with and into mySimon pursuant to which the Company
issued approximately 11.3 million shares of its Common Stock. MySimon
owns and operates www.mySimon.com, an online comparison shopping
web site. The Company intends to account for this transaction using the
pooling-of-interests accounting method.
The following pro forma unaudited financial information presents
the combined results of operations of CNET as if the acquisition of mySimon*
had occurred as of the beginning of 1998, and 1999.
Year Ended December 31,
(000s, except per share data)
unaudited
-----------------------
1999 1998
-------------- ---------
Net revenues $114,028 $57,480
Net income 401,049 1,738
Basic net income per share $4.82 $.02
Diluted net income per share $4.28 $.02
* mySimon's date of inception was April 27, 1998.
SCHEDULE II
CNET NETWORKS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Numbers presented in thousands)
Additions
-----------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other Deductions at End
of Period Expenses Accounts Describe of Period
------------ ----------- ----------- ------------ -----------
1999
- ------------------
Allowance for
doubtful accounts $1,722 $4,745 $210(3) $1,999 (1) $4,678
1998
- ------------------
Allowance for
doubtful accounts $461 $1,443 $621(3) $743 (1) $1,722
$60 (2)
1997
- ------------------
Allowance for
doubtful accounts $100 $578 -- $217 (1) $461
(1) Accounts written off.
(2) Part of sale of Buy Direct, Inc.
(3) Amounts charged to revenue to cover underdelivery of guaranteed impressions.
S-2 Independent Auditors' Report on Schedule
The Board of Directors
CNET Networks, Inc.
Under date of February 29, 2000, we reported on the consolidated
balance sheets of CNET Networks, Inc., and subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1999, as contained
in the annual report on Form 10-K for the year 1999. In connection
with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial
statements schedule in the annual report on Form 10-K for the year
1999. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
audits.
In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements
taken as a whole presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG LLP
San Francisco, California
February 29, 2000
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the Registrant's definitive Proxy
Statement for its 2000 annual meeting, which will be filed pursuant
to Regulation 14A (the "2000 Proxy Statement"), under the caption
"Management."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the 2000 Proxy Statement, under
the caption "Executive Compensation and Other Information," but
specifically excluding the information under the captions "--
Performance Graph" and "-- Compensation Committee's Report on
Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the 2000 Proxy Statement under
the caption "Security Ownership of Certain Beneficial Owners and
Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the 2000 Proxy Statement under
the caption "Certain Relationships and Related Transactions."
ITEM 14. EXHIBITS,FINANCIAL STATEMENT SCHEDULES LIST AND REPORTS ON FORM 8-K
(a) EXHIBITS:
(1) Financial Statements. The following consolidated financial
statements are filed as a part of this report
under Item 8, "Financial Statements and Supplementary Data":
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flow for the years ended December
31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Independent Auditors' Report of KPMG LLP
(2) Financial Statement Schedules. The following financial
statement schedules are filed as part of this report:
S-1 Schedule II Valuation and Qualifying Accounts
S-2 Independent auditors report on schedule
(3) Exhibits.
1 (1) -- Amended and Restated Certificate of Incorporation of
the Company
3.2 (2) -- Certificate of Amendment of Certificate of Incorporation
of the Company
3.4 * -- Amended and Restated Bylaws of the Company
4.1 (1) -- Specimen of Common Stock Certificate
5.1 (3) -- Indenture dated March 8, 1999 between the Company
and The Bank of New York, as trustee
5.2 (3) -- Form of 5% Convertible Subordinated Note due 2006
10.1 (1) -- CNET, Inc. Amended and Restated 1994 Stock Option Plan
10.2 (4) -- CNET, Inc. Amended and Restated 1997 Stock Option Plan
10.3 (4) -- CNET, Inc. Amended and Restated 1996 Employee Stock Purchase
Plan
10.4 (1) -- Employment Agreement, dated as of October 19, 1994,between the
Company and Halsey M. Minor
10.5 (3) -- Employment Agreement, dated as of October 19, 1994,
between the Company and Shelby W. Bonnie
10.6 (5) -- Employment Agreement dated as of April 27, 1999 by and
between the Company and Richard Marino
10.7 (1) -- Lease Agreement, dated as of January 28, 1994,
between the Company and Montgomery/North
Associates and amended as of January 31, 1995
and as of October 19, 1995
10.8 (1) -- Lease, dated as of October 19, 1995, between the
Company and The Ronald and Barbara Kaufman
Revocable Trust, et al.
10.9 (6) -- Office Lease between One Beach Street, LLC and the Company
dated September 24, 1997
10.10(7) -- Agreement and Plan of Merger, dated as of May 7, 1998
by and among CNET, Inc., and CNET Acquisition Corp.,
Vision Inc. and the stockholders of U.Vision Inc.
10.11(8) -- Contribution Agreement, dated as of June 4, 1998,
by and among the Company, NBC and Snap! LLC.
10.12(8) -- Amended and Restated Limited Liability Company
Agreement of Snap! LLC, dated as of June 30, by and
among the Company and NBC Multimedia, Inc.
10.13(8) -- Stock Purchase Agreement, dated as of June 4, 1998, by and
between the Company and NBC
10.14(9) -- Standstill Agreement between NBC Internet and CNET, Inc.(3)
10.15(9) -- Voting Agreement among Xoom.com, Inc., National Broadcasting
Company, Inc., CNET,Inc., Chris Kitze and Flying Disc
Investments Limited Partnership, dated May 9, 1999
10.16(9) -- Voting and Right of First Offer Agreement between National
Broadcasting Company, Inc. and CNET, Inc. (incorporated by
reference to the exhibits to NBC Internet's Registration
Statement on Form S-4 (Registration No. 333-82639) filed
on July 12, 1999)
10.17(9) -- Preferred Carriage Agreement by and between CNET, Inc.,
National Broadcasting Company,Inc., NBC Multimedia, Inc.
and Snap! LLC., dated June 30, 1998(incorporated by reference
to the exhibits to NBC Internet's Registration Statement on
Form S-4 (Registration No. 333-82639) filed on July 12, 1999)
10.18(9) -- Addendum to Preferred Carriage Agreement between CNET, Inc.
and Snap! LLC, dated June 30, 1998(incorporated by reference
to the exhibits to NBC Internet's Registration Statement on
Form S-4 (Registration No. 333-82639) filed on July 12, 1999)
10.19(9) -- Addendum to the Snap Agreements by and among CNET, Inc.,
National Broadcasting Company, Inc., NBC Multimedia, Inc. and
Snap! LLC., dated May 9, 1999(incorporated by reference to the
exhibits to NBC Internet's Registration Statement on Form S-4
(Registration No. 333-82639) filed on July 12, 1999)
10.20(10)-- Agreement and Plan of Merger, dated as of February 2, 1999,
by and among CNET, Inc., NetVentures, Inc. and the
stockholders of NetVentures, Inc. (incorporated by reference
to an exhibit to the Company's Current Report on Form 8-K
dated March 1, 1999
10.21(10)-- Purchase Agreement, dated as of December 18, 1998, by and
among Jenesys LLC and Steve Jenkins
10.22(10)-- Amendment No. 1 to Purchase Agreement, dated as of January
22, 1999, by and among CNET, Inc. and Jenesys LLC and
Steve Jenkins
10.23(10)-- Amendment No. 2 to Purchase Agreement, dated as of February
11, 1999, by and among CNET, Inc. and Jenesys LLC and
Steve Jenkins
10.24(11)-- Agreement and Plan of Merger, dated as of February
19, 1999, by and among CNET, Inc., AuctionGate Interactive,
and the stockholders of AuctionGate, Inc.
10.25(11)-- Agreement and Plan of Merger, dated as of March 22, 1999,
by and among the Company, KillerApp Corporation and
Benjamin Chiu (incorporated by reference to an exhibit
to the Company'Current Report on Form 8-K dated March 30,
1999)
10.26(12)-- Agreement and Plan of Merger , dated as of April 30, 1999,
by and among the Company and the Company, Sumo, Inc. and
the stockholders of Sumo, Inc.
10.27(13)-- Stock Purchase Agreement, dated as of July 23, 1999, by
and among the Company, GDT, S.A. and the Shareholders of
GDT, S.A.
10.28(13)-- Agreement and Plan of Merger, dated as of July 29, 1999,
by and among the Company, Nordby International, Inc.
and Neil Nordby
10.29(14)-- Agreement and Plan of Merger, dated as of October 7,
1999, by and among the Company, SavvySearch, Ltd. and
the stockholders of SavvySearch Ltd.
10.30(3)-- Registration Agreement dated March 8, 1999 between
the Company and Salomon Smith Barney Inc. BancBoston
Robertson Stephens Inc. and Volpe Brown & Company, LLP,
as Representatives of the Initial Purchasers
21.1(1) -- List of Subsidiary Corporations
23.1* -- Consent of Independent Auditors
*..........Filed herewith.
(1)........Incorporated by reference from a previously filed
...........exhibit to the Company's Registration Statement on
...........Form SB-2, registration no.333-4752-LA.
(2)........Incorporated by reference from a previously filed exhibit to
...........the Company's Quarterly Report on Form 10-Q for the quarter
...........ended June 30, 1998.
(3)........Incorporated by reference from a previously filed exhibit
...........to the Company's Annual Report on Form 10-K for the year
...........ended December 31, 1998.
(4)........Incorporated by reference from a previously filed
...........exhibit to the Company's Quarterly Report on Form 10-Q for
...........the period ended September 30, 1999.
(5)........Incorporated by reference from a previously filed exhibit
...........to the Company's Quarterly Report on Form 10-Q for the period
...........ended June 30, 1999.
(6)........Incorporated by reference from a previously filed
...........exhibit to the Company's Quarterly Report on Form
...........10-QSB for the quarter ended September 30, 1997.
(7)........Incorporated by reference from a previously
...........filed exhibit to the Company's Current Report on
...........Form 8-K filed May 22, 1998.
(8)........Incorporated by reference from a previously filed
...........exhibit to the Company's Current Report on Form
...........8-K filed July 15, 1998.
(9)........Incorporated by reference from a previously filed exhibit
...........to NBC Internet's Registration Statement on Form S-4
...........(Registration No. 333-82639) filed on July 12, 1999
(10).......Incorporated by reference from a previously filedexhibit
...........to the Company's Current Report on Form 8-K filed
...........March 1,1999.
(11).......Incorporated by reference from a previously filed exhibit
...........to the Company's Current Report on Form 8-K filed March
...........30, 1999.
(12).......Incorporated by reference from a previously filed exhibit
...........to the Company's Current Report on Form 8-K filed May
...........14, 1999.
(13).......Incorporated by reference from a previously filed
...........exhibit to the Company's Current Report on Form 8-K filed
...........August 6, 1999.
(14).......Incorporated by reference from a previously filed exhibit
...........to the Company's Current Report on Form 8-K filed October
...........22, 1999.
(b)........No reports on Form 8-K were filed during the last
...........quarter of the period covered by this report.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
By /s/ Shelby W. Bonnie
----------------------------------
Shelby W. Bonnie
Chief Executive Officer
Date March 30, 2000
----------------------------------
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
By /s/ Halsey M. Minor
----------------------------------
Halsey M. Minor
Chairman of the Board
Date March 30, 2000
----------------------------------
By /s/ Shelby W. Bonnie
----------------------------------
Shelby W. Bonnie
Chief Executive Officer
Date March 30, 2000
----------------------------------
By /s/ Richard M. Marino
----------------------------------
Richard M. Marino
President
Date March 30, 2000
----------------------------------
By /s/ Douglas N. Woodrum
----------------------------------
Douglas N. Woodrum
Director, Executive Vice President
and Chief Financial Officer
Date March 30, 2000
----------------------------------
By /s/ John C. "Bud" Colligan
----------------------------------
John C. "Bud" Colligan
Director
Date March 30, 2000
----------------------------------
By /s/ Mitchell Kertzman
----------------------------------
Mitchell Kertzman
Director
Date March 30, 2000
----------------------------------
By /s/ Eric Robison
----------------------------------
Eric Robison
Director
Date March 30, 2000
----------------------------------
By /s/ David P. Overmyer
----------------------------------
David P. Overmyer
Vice President, Finance and Administration
(Principal Accounting Officer)
Date March 30, 2000
----------------------------------