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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 [Fee Required]
For the fiscal year ended December 31, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[No Fee Required]
For the transition period from __________ to __________
Commission file number 0-20939
CNET, 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
Common Stock, $0.0001 par value Nasdaq Stock Market
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 February 27, 1998 approximated
$205 million.
The total number of shares outstanding of the issuer's common stock (its
only class of equity securities), as of February 27, 1998, was 14,845,270.
Information is incorporated by reference into Part III of this
Form 10-K from the registrant's definitive proxy statement for its
1998 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
BUSINESS
CERTAIN INFORMATION IN THIS ANNUAL REPORT MAY CONTAIN "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACT
ARE "FORWARD-LOOKING STATEMENTS" FOR PURPOSES OF THESE PROVISIONS, INCLUDING
ANY PROJECTIONS OF EARNINGS, REVENUES OR OTHER FINANCIAL ITEMS, ANY
STATEMENTS OF THE PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS,
ANY STATEMENTS CONCERNING PROPOSED NEW PRODUCTS OR SERVICES, ANY STATEMENTS
REGARDING FUTURE ECONOMIC CONDITIONS OR PERFORMANCE, AND ANY STATEMENT OF
ASSUMPTIONS UNDERLYING ANY OF THE FOREGOING. IN SOME CASES, FORWARD-LOOKING
STATEMENTS CAN BE IDENTIFIED BY THE USE OF TERMINOLOGY SUCH AS "MAY," "WILL,"
"EXPECTS," "BELIEVES," "PLANS," "ANTICIPATES," "ESTIMATES," "POTENTIAL," OR
"CONTINUE," OR THE NEGATIVE THEREOF OR OTHER COMPARABLE TERMINOLOGY.
ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN ITS
FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH
EXPECTATIONS OR ANY OF ITS FORWARD-LOOKING STATEMENTS WILL PROVE TO BE
CORRECT, AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED OR
ASSUMED IN THE COMPANY'S FORWARD-LOOKING STATEMENTS. THE COMPANY'S FUTURE
FINANCIAL CONDITION AND RESULTS, AS WELL AS ANY FORWARD-LOOKING STATEMENTS,
ARE SUBJECT TO INHERENT RISKS AND UNCERTAINTIES, SOME OF WHICH ARE SUMMARIZED
IN ITEM 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS - OUTLOOK AND UNCERTAINTIES".
CNET: The Computer Network is a media company focused on
providing original Internet content and television programming
relating to information technology and the Internet. The Company also
operates Snap!, a free online service that aggregates Internet
content and offers Internet directory and searching capabilities.
The Company's technology publishing division is comprised of
the following eight technology-focused Internet sites: CNET.COM,
NEWS.COM, GAMECENTER.COM, SHAREWARE.COM, SEARCH.COM, BUILDER.COM,
DOWNLOAD.COM and COMPUTERS.COM. The Company seeks to use its
editorial, technical, and programming expertise to create compelling
content to engage technology-oriented consumers and attract
advertisers wishing to reach this audience. The Company believes
that its strategy of combining Internet and television-based
programming enhances its ability to promote the CNET brand, improves
its ability to create high quality content, and provides the Company
with a source of competitive advantage and differentiation. The
Company is focused on leveraging its market position, the awareness
of its brand among consumers and its relationship with advertisers to
create new Internet sites and services related to information
technology and the Internet, and to capitalize on new business
opportunities such as Internet-based electronic commerce. Based on
the volume of traffic on its Internet sites and the size of its
television audience, the Company believes that it has established a
leadership position in its targeted content market. Nevertheless,
because of the substantial expenses incurred by the Company in
developing, operating and promoting its Internet sites, the Company
has incurred significant operating losses and net losses. As of
December 31, 1997, the Company had an accumulated deficit of $54.1
million. The Company may continue to incur losses in the future.
See Item 7, "Management's Discussion and Analysis."
Snap! is a free online service built for the Internet
consisting of two complementary components - a robust Web site that
provides a comprehensive overview of the Internet organized by
channel, and the Snap! Starter Kit, a CD-ROM designed to help new
users learn how to use the Internet and get online easily. The Snap!
Web site is organized into sixteen channels, which are regularly
infused with editorial content, news, headlines, and customizable
data from a range of well recognized brands on the Web. Snap! also
features its own directory of Web sites for fast, efficient and high-
quality searches. The site is designed to make searching the Web
easy by organizing leading search engines into a consistent and
powerful user experience. As part of its distribution strategy for
Snap!, CNET builds customized, co-branded versions of the service for
Internet service providers, computer hardware manufacturers,
telecommunication companies and others, helping them offer their
customers a compelling Internet experience and maintain a
relationship with their customers online. Since the service was
first announced in June 1997, Snap! has signed distribution
agreements with more than 35 companies, including 20 Internet service
providers.
The Company produces four television series. CNET CENTRAL
launched in April 1995 and is a half-hour magazine format program
devoted to exploring the world of information technology and the
Internet. THE NEW EDGE launched in July 1996 and is a half-hour
magazine format program showcasing technological breakthroughs and
how they will change our lives. THE WEB also launched in July 1996
and is a one hour program showing viewers the hottest Web sites and
technologies and includes interviews with industry leaders. TV.COM is
a syndicated program, which launched in September 1996 and showcases
for a broadcast audience the world of the Internet and digital
technologies. CNET's television shows are produced by the Company
and, with the exception of TV.COM, are carried nationally on the USA
Network and the Sci-Fi Channel, both of which are owned by USA
Networks. TV.COM is produced in conjunction with Trans World
International ("TWI"), and is syndicated into over 115 markets
nationally. Additionally, CNET television has been licensed to
broadcasters in Japan, Taiwan, Singapore, Panama, Canada, Spain,
Sweden and Argentina.
The Company is a Delaware corporation and was formed in 1992.
The Company's principal executive offices are located at 150 Chestnut
Street, San Francisco, California 94111, and its telephone number is
(415) 395-7800.
INDUSTRY BACKGROUND
The Company believes that a significant opportunity exists to
provide Internet content and television programming related to
information technology and the Internet, and to develop a free online
service providing users an easy way to locate information on the
Internet. Growing use of the Internet and the World Wide Web (the
"Web") has created opportunities for content providers and their
advertising customers to reach and interact with millions of Internet
users. Due to its interactive nature, the Web is emerging as a
vehicle that is complementary and, in several respects, superior to
traditional television and print media in terms of its ability to
provide targeted content to consumers and to generate cost-effective
results for certain advertisers.
The Company believes that the market for content relating to
information technology and the Internet is growing rapidly and is
emerging as an area well-suited to a combined Internet and
television-based programming approach. According to Jupiter
Communications, the market for U.S.... advertising on the Internet was
approximately $560 million in 1997, up from $260 million in 1996, and
is expected to grow to over $5 billion by the year 2000.
The advertising model that is emerging on the Internet is
similar to the model prevalent in print and television media and
involves the payment by advertisers to Internet content and service
providers of advertising fees, based primarily on the demographics of
the audience and the number of impressions delivered. The Company
believes that the opportunities for Internet content providers to
generate advertising revenues are growing due to increasing Internet
usage by businesses and consumers and the growing recognition by
advertisers of the potential advantages of Internet-based advertising
over advertising in traditional media.
STRATEGY
The Company's objective is to be the leading provider of
Internet content and television programming related to information
technology and the Internet, and to develop Snap! into a leading free
online service. Through the end of 1997, the Company has focused
primarily on developing and launching premier Internet services
designed to serve a broad audience of users interested in information
technology and the Internet. As a result of these efforts, the
Company has incurred significant operating losses and net losses
since its inception. See Item 7, "Management's Discussion and
Analysis." Having completed development of sites that cover the key
areas of interest for the Company's target audience, the Company is
now focused on improving revenue growth and carefully managing costs
with the goal of reducing losses and, ultimately, achieving
profitability. Key elements of the Company's strategy to achieve
this goal include:
Provide Compelling Content
The Company seeks to provide current, comprehensive and
entertaining editorial content through its Internet sites and
television programs and to provide a quality free online service,
with the objective of building a loyal audience of repeat Internet
users and television viewers.
Further Develop Market Awareness and Brand Recognition
The Company believes that further leverage of the CNET and
Snap! brands is a critical aspect of its efforts to attract and
expand its Internet and television audiences. The Company seeks to
promote and reinforce its brands through leveraging traffic on its
network of Internet sites, through the continued launch of new sites
which address the editorial needs of information technology
consumers, and through its television programming.
Leverage Television Programming
In addition to using its television programming to promote the
CNET and Snap! brands, the Company believes that its experience in
developing and producing television programming complements and
strengthens its ability to develop high-quality Internet content. The
Company believes that the Internet as a medium is closely analogous
to a hybrid between television and print, and that quality Internet
sites should be produced as multimedia offerings, rather than being
written like printed publications.
Leverage Technology to Enhance Content
The Company seeks to capitalize on available technology to
create compelling Internet content, to improve the speed and
performance of its Internet sites and to enhance the user's
experience through customization and personalization of content. The
Company strives to improve the attractiveness and usefulness of its
Internet content by using the latest software tools and supporting
the latest technology standards, including Macromedia's Shockwave,
Microsoft's ActiveX, Progressive Networks' RealAudio and Sun
Microsystems' Java, as well as the leading Web browsers.
Create Value for Advertisers
The Company believes that its Internet users, given their
interest, ability and willingness to obtain information over the
Internet, are generally an attractive audience for advertisers and
are relatively comfortable buying goods and services over the
Internet. The Company employs a combination of proprietary and third
party advertising generation, placement, tracking and feedback
technologies and services to help advertisers qualify and quantify
the effectiveness of their Internet advertising campaigns.
Leverage Brand, Infrastructure and Existing Relationships
The Company is continually exploring opportunities to leverage
its brands, infrastructure, existing audience and advertising
customer base. For example, the Company believes that the successful
introduction of COMPUTERS.COM in November 1997 was facilitated by the
Company's ability to use its existing knowledge and infrastructure.
The Company's site management software is also available to enhance
the functionality of all of the Company's sites, and features
developed for one site can often be employed by other sites. The
Company attempts to move quickly to take advantage of new
opportunities, and believes that a significant competitive advantage
could be obtained by seizing market initiatives more quickly and
decisively than its competitors.
The Company's future success depends upon its ability to
deliver original and compelling Internet content and services in
order to attract and retain users. There can be no assurance that the
Company's content and services will be attractive to a sufficient
number of Internet users to generate advertising revenues. There also
can be no assurance that the Company will be able to anticipate,
monitor and successfully respond to rapidly changing consumer tastes
and preferences so as to attract a sufficient number of users to its
sites. Internet users can freely navigate and instantly switch among
a large number of Internet sites, many of which offer competing
content and services, making it difficult for the Company to
distinguish its content and services and to attract users. In
addition, many other Internet sites offer very specific, highly
targeted content that could have greater appeal than the Company's
sites to particular subsets of the Company's target audience. If the
Company is unable to develop Internet content and services that allow
it to attract, retain and expand a loyal user base possessing
demographic characteristics attractive to advertisers, the Company
will be unable to generate advertising revenues, and its business,
financial condition and operating results will be materially
adversely affected.
INTERNET SITES AND SERVICES
All of the Company's Internet sites are offered under the CNET
and Snap! brands and provide content and services to users interested
in information technology and the Internet. The Company's Internet
sites attracted over 8 million unique users in February 1998
according to Relevent Knowledge.
Internet sites currently operated by the Company include:
LAUNCH DATE DESCRIPTION
----------- ------------
CNET.COM June 1995 The Company's flagship site, offering news, product
reviews, feature stories, interviews and other editorial
content about information technology and the Internet
SHAREWARE.COM November 1995 Editorial site, search engine and
download facility focused on freeware and shareware
SEARCH.COM March 1996 Organized collection of over 450 search
engines and directories, including
popular, broad-based search engines and
directories and those dedicated to
specific subject areas
NEWS.COM September 1996 Editorial site featuring the latest news and
analysis about the Internet and the
computer industry
DOWNLOAD.COM October 1996 Editorial site, search engine
and download facility focused on software
GAMECENTER.COM November 1996 Editorial site featuring reviews and
information about popular computer games and
links to downloadable games
SNAP.COM September 1997 Free online service consisting of a proprietary directory combined
with search and content aggregation features. Snap! allows for the
creation of co-branded services with Internet providers, computer
hardware manufacturers, telecommunications companies and others
seeking to provide Internet access to their customers.
COMPUTERS.COM November 1997 Computer hardware information site combining broad product listings,
descriptions and review, updated daily with real-time pricing and
where to-buy links to manufacturers, retailers and resellers.
BUILDER.COM November 1997 Product review and industry news for the Web building community.
CNET.COM. CNET.COM was launched in June 1995 and serves as a
central point on the Internet for the members of the CNET community.
The Company believes that CNET.COM has become a leading source on the
Internet of news, reviews and other editorial content related to
information technology and the Internet.
SHAREWARE.COM. The Company's second Internet site, SHAREWARE.COM, was
launched in November 1995. SHAREWARE.COM accesses CNET's Virtual
Software Library ("VSL"), through which users can search, browse and
download from a master index of over 290,000 shareware and freeware
titles available on the Internet. Users of SHAREWARE.COM can search
the VSL index based on their particular computer or operating system
or by keywords related to the functions of the software. Users can
also browse through the contents of the database by category (for
example, utilities, games, business applications or communications)
or browse through a listing of new arrivals or the most popular
titles.
SEARCH.COM. Launched in March 1996, SEARCH.COM is an organized
collection of search engines and directories, including popular,
broad-based search engines and directories and those dedicated to
specific subject areas. As the amount of content on the Internet has
grown, numerous companies have developed very specific search engines
that allow users to find Internet sites or information related to
specific subject areas. SEARCH.COM provides easy access to the
Internet's most popular search engines, as well as specialty search
engines, and currently presents them in the following fourteen
categories: Automotive, Classifieds, Computing, Employment,
Entertainment, Health, Learning, Living, Local, Money, News,
Shopping, Sports and Travel. Users also have the ability through
SEARCH.COM to personalize their default page with search boxes from
pre-selected search engines and links to particular Internet sites
chosen by the user.
NEWS.COM. In September 1996, the Company launched NEWS.COM, which
is an editorial site focused exclusively on providing daily coverage
of breaking news and scheduled events, in-depth analyses and original
reporting related to the computer industry, the Internet and computer
industry personalities. NEWS.COM is designed to provide broad
coverage of these industries and to appeal to information technology
professionals, as well as industry participants, corporate
information systems officers and members of the financial community.
The site competes with weekly computer trade publications by
offering more current news and information and by integrating text,
audio and video to deliver high quality content. As a complement to
its daily news, the Company produces daily audio reports on the
latest digital news. Using Progressive Networks' RealAudio software
(which users can download through the Company's Internet sites),
users can hear the voices of the newsmakers themselves on the issues
of the day, such as a U.S. Congressman responding to the morning's
developments on telecommunications reform or the president of a
technology company announcing a new Internet product.
DOWNLOAD.COM. In October 1996, the Company launched DOWNLOAD.COM to
provide search, browse and download capabilities similar to
SHAREWARE.COM. Whereas SHAREWARE.COM is a search engine for users
trying to find an ftp site for a specific title across a database
encompassing hundreds of thousands of software titles, DOWNLOAD.COM
is an organized directory of approximately 14,000 files which have
descriptions and can be sorted by the user to find the most popular
titles in a given category.
GAMECENTER.COM. Launched in November 1996, GAMECENTER.COM provides
the latest news and information about popular computer games and
serves online game players with current information and interactive
product reviews, as well as links to popular downloads of the newest
games, tips and tricks, and information for connecting with other
game players.
SNAP.COM. Snap!, launched in September 1997, is a free online
service consisting of a proprietary directory combined with search
and content aggregation features. The Snap! Directory is
comprehensive, numbering nearly 200,000 sites and growing, organized
around sixteen topics. All directory entries are developed to fit
intuitively into these topics, which currently consist of Arts,
Business & Money, Computing, Education, Entertainment, Health, Kids &
Family, Living, Local, News, Oddities, People, Science, Shopping,
Sports and Travel.
In addition to the editorially-driven Snap! Directory, Snap!
has formed strategic partnerships with key content providers to
enhance each of Snap!'s sixteen information channels. For example,
CNET and Snap! recently announced an agreement with Bloomberg L.P., a
premier provider of news and financial data, to create broad, in-
depth financial information resources for online users. CNET, Snap!
and Bloomberg have aligned themselves exclusively within the search
and content aggregation and technology web site publishing
industries. Bloomberg services on CNET and Snap! are scheduled for
launch in the second quarter of 1998.
Snap! contains a built-in search feature in addition to one-
button links to other search services allowing users to quickly and
seamlessly access the Web. Snap! also includes many other search
tools for items such as yellow pages, e-mail addresses, weather and
classifieds.
Snap! is designed to allow for the building of co-branded
versions of the service for Internet service providers, computer
hardware manufacturers and telecommunications companies, among
others, helping them strengthen customer relationships through
branded, client-focused access to the Web. Since the service was
first announced in June 1997, Snap! has developed co-branded versions
and signed distribution agreements with more than 35 companies,
including 20 Internet service providers.
COMPUTERS.COM. Launched in November 1997, COMPUTERS.COM is focused
on providing users the broadest and most in-depth source of real-time
computer hardware information in a convenient, easy-to-use format.
COMPUTERS.COM is organized intuitively into the following eleven
categories: desktops, servers, notebooks, modems, monitors, memory,
storage, printers, graphics, cameras and handhelds. Within each
category, COMPUTERS.COM gives users the ability to customize hardware
configurations feature-by-feature including by price and
manufacturer.
During the customization process, COMPUTERS.COM provides access
to industry-wide product research for improved decision making prior
to purchase. Throughout the customization process each user has
access to COMPUTERS.COM's proprietary, comprehensive database of
product listings by price and manufacturer which is updated many
times each day. This feature gives users an efficient means of
comparing products. At the point of purchase, COMPUTERS.COM helps
connect buyers with sellers by providing buyers with an easy-to-use,
extensive database of where-to-buy and how-to-buy listings of product
manufacturers, retailers and resellers.
BUILDER.COM. Launched in November 1997, BUILDER.COM is the
Internet's central source for product reviews and industry news for
the Web building community, including designers, developers and
producers. The site features reviews of Web development tools,
industry and technology news and downloadable software for Web
production. BUILDER.COM also offers interactive forums and sponsors
trade shows.
There can be no assurance that any of the Company's recently
developed Internet sites or television programming will achieve
market acceptance. The Company's newly launched Internet sites could
also divert users from the Company's pre-existing sites and bring the
Company into direct competition with new competitors. In addition,
any new Internet site or television program launched by the Company
that is not favorably received by consumers could damage the
Company's reputation or its brands. Any effort by the Company to
launch new Internet sites or television programs will require
significant additional expenses and programming and editorial
resources and will strain the Company's management, financial and
operational resources. A failure by the Company to achieve and
maintain market acceptance of existing sites and television programs
or an inability to generate revenues from new sites or television
programs sufficient to offset the associated costs could have a
material adverse effect on the Company's business, financial
condition or operating results.
The launch of Snap! in 1997 represented a significant expansion
of the Company's business and has required a substantial investment
of capital and additional, substantial burdens on the Company's
management personnel and its financial and operational systems. The
expenditures required in connection with Snap! significantly
increased the Company's operating loss during 1997 and could result
in large and prolonged operating losses for the Company in the
future. There can be no assurance that the Snap! service will
achieve market acceptance or reach profitability, and a failure by
the Company to recover the substantial investment required could have
a material adverse effect on the Company's business, financial
condition and operating results.
The Company relies on the cooperation of owners and operators
of other Internet sites in connection with the operation of its Snap!
service, which aggregates content from a range of providers, as well
as its software downloading sites and its SEARCH.COM site. There can
be no assurance that such cooperation will be available on acceptable
commercial terms or at all. The Company's ability to develop original
and compelling Internet content is also dependent on maintaining
relationships with and using products provided by third party vendors
of Internet development tools and technologies, such as Macromedia's
Shockwave, Microsoft's ActiveX, Progressive Networks' RealAudio and
Sun Microsystems' Java. The Company's ability to advertise on other
Internet sites and the willingness of the owners of such sites to
direct users to the Company's Internet sites through hypertext links
are also critical to the success of the Company's Internet
operations. Other Internet sites, particularly search engines,
directories and other navigational tools managed by Internet service
providers and Web browser companies, significantly affect traffic to
the Company's technology sites. Developing and maintaining
satisfactory relationships with third parties could become more
difficult and more expensive as competition increases among Internet
content providers. If the Company is unable to develop and maintain
satisfactory relationships with such third parties on acceptable
commercial terms, or if the Company's competitors are better able to
leverage such relationships, the Company's business, financial
condition and operating results will be materially adversely
affected.
Rapid growth in the use of and interest in the Internet is a
recent phenomenon, and there can be no assurance that acceptance and
use of the Internet will continue to develop or that a sufficient
base of users will emerge to support the Company's business. Revenues
from the Company's Internet operations will depend largely on the
widespread acceptance and use of the Internet as a source of
information and entertainment and as a vehicle for commerce in goods
and services. The Internet may not be accepted as a viable commercial
medium for a number of reasons, including potentially inadequate
development of the necessary network infrastructure, timely
development of enabling technologies or commercial support for
Internet-based advertising. To the extent that the Internet continues
to experience an increase in users, an increase in frequency of use
or an increase in the bandwidth requirements of users, there can be
no assurance that the Internet infrastructure will be able to support
the demands placed upon it. 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. Changes in the pricing or quality of, or insufficient
availability of, telecommunications services to support the Internet
also could result in higher prices to end users or slower response
times and could adversely affect use of the Internet generally and of
the Company's Internet sites in particular. If use of the Internet
does not continue to grow or grows more slowly than expected, or if
the Internet infrastructure does not effectively support growth that
may occur, the Company's business, financial condition and operating
results would be materially adversely affected.
From time to time, the Company entertains new business
opportunities and ventures in a broad range of areas. Any decision by
the Company to pursue a significant business expansion or new
business opportunity would likely require a substantial investment of
capital, which could have a material adverse effect on the Company's
financial condition and its ability to implement its existing
business strategy. Such an investment could also result in large and
prolonged operating losses for the Company. Further, the pursuit of
expansion or new business opportunities would place additional,
substantial burdens on the Company's management personnel and its
financial and operational systems. There can be no assurance that any
new Internet site or service or other new business venture would be
developed in a cost effective or timely manner or would achieve
market acceptance. Any such venture that is not favorably received by
consumers could damage the Company's reputation or the CNET and Snap!
brands. There can be no assurance that any significant business
expansion or new business opportunity would ever be profitable, and a
failure by the Company to recover the substantial investment required
could have a material adverse effect on the Company's business,
financial condition and operating results.
TELEVISION
The Company produces television programming for viewers
interested in information technology and the Internet. The Company's
television programming is intended to complement and strengthen the
Company's Internet operations by building brand awareness, attracting
new users and generating content that can also be presented through
the Internet. Three of the Company's programs are carried nationally
on cable television through the USA Network and the Sci-Fi Channel,
both of which are owned by USA Networks, and one program is aired
nationally on broadcast television. All the programs are produced
in-house by the Company in its San Francisco headquarters studio.
CNET employs a permanent staff of producers, researchers, editors and
directors to create its programs and hires additional freelance
camera crews and freelance producers as appropriate.
DIGITAL DOMAIN. Three of the Company's programs, CNET CENTRAL,
THE WEB, and THE NEW EDGE, are aired in a two hour programming block
on the Sci-Fi Channel and are referred to as The DIGITAL DOMAIN.
Additionally, CNET CENTRAL is aired nationally on USA Network and
locally on KPIX-TV, the San Francisco CBS affiliate. The USA Network
reaches over 73 million cable television homes, and the Sci-Fi
Channel (an affiliate of USA Networks) reaches over 48 million cable
homes. Based on Nielsen Ratings, the three programs reached an
average weekly audience of 1.1 million viewers during the fourth
quarter of 1997.
CNET CENTRAL. Launched in April 1995 as the Company's first
television program, CNET CENTRAL covers the latest in news, features
and human interest stories relating to information technology and the
Internet. The series includes news updates from CNET's news staff and
demonstrations of new and interesting Internet sites. CNET CENTRAL
also covers new product introductions, such as the release of new
games, applications and tools, and related product reviews and
demonstrations. Viewers are encouraged to visit CNET's Internet sites
for more detailed information and reviews and to download available
software.
THE WEB. Launched in July 1996, The Web is an hour long show
focused on the Internet and online services and is similar in style
to CNET CENTRAL, but with increased use of in-studio interviews and
demonstrations. THE WEB shows viewers the hottest Web sites,
explains the latest tools and covers the Internet culture.
THE NEW EDGE. Launched in July 1996, THE NEW EDGE is a
half-hour, magazine format show that focuses on new technological
breakthroughs and how they will change our lives. Each program
contains four segments that cover topics from action/adventure and
entertainment, to the healthcare industry and computer science.
TV.COM. Launched in September 1996, TV.COM is a half-hour
program that offers the latest news, gossip and interviews relating
to information technology and the Internet. TV.COM is distributed
under a syndication agreement with TWI and airs nationally on
broadcast television in over 115 markets. During the fourth quarter
of 1997, TV.COM achieved an average weekly audience of approximately
800,000 viewers.
Using material from its tape library, the Company also produces
90-second inserts about information technology and the Internet for
syndication to local news operations around the country. These
inserts are designed to help promote the CNET brand and typically
feature a host from CNET CENTRAL standing in the CNET studio in front
of the CNET logo. The inserts are syndicated into 41 local markets
(including Los Angeles, California and Cleveland, Ohio) and achieve
an average cumulative audience estimated at over 6 million viewers
per week. The Company's technology inserts are sold by Preview Media
pursuant to an agreement between the two companies under which CNET
is responsible for producing the inserts and Preview Media is
responsible for syndicating and distributing them into local news
markets. The Company and Preview Media share all net revenues of the
venture equally.
There can be no assurance that the Company's television
programming will be accepted by television broadcasters, cable
networks or their viewers. The successful development and production
of television programming 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 and attract and
retain qualified producers, writers, technical personnel and
television hosts. If the Company is unable to develop television
programming that allows it to attract, retain and expand a loyal
television audience, the Company will be unable to achieve its
strategic objectives, and its business, financial condition and
operating results will be materially adversely affected.
AGREEMENT WITH USA NETWORKS
Through June 30, 1996, CNET CENTRAL was carried nationally by
USA Networks pursuant to an agreement between the Company and USA
Networks, entered into in February 1995, under which the Company paid
USA Networks a monthly fee of approximately $147,000 and received the
right to sell all of the available advertising during the program and
to retain all advertising revenues. In connection with this
agreement, the Company issued USA Networks a warrant to purchase an
aggregate of 516,750 shares of Common Stock at an exercise price of
$2.41 per share. The warrant was scheduled to vest in eight equal
quarterly installments beginning July 1, 1996, provided that USA
Networks continued to carry CNET CENTRAL in accordance with the
agreement.
In April 1996, the Company and USA Networks amended their
agreement, effective July 1, 1996. Under the amended agreement, USA
Networks licensed the right to carry CNET CENTRAL, THE WEB and The
New Edge for an initial one year term and became entitled to sell all
available advertising on the three programs. In exchange, USA
Networks agreed to pay a fee to the Company which was limited to the
Company's costs of producing the three programs, up to a maximum of
$5.2 million for the initial one year term. In January 1997, USA
Networks extended the agreement with respect to the three programs
for an additional year (until June 30, 1998), during which the fee
payable to the Company will be limited to the costs of producing such
programs, subject to a maximum amount of $5.5 million. USA Networks
is not required to carry any of the programming that it purchases
from the Company under the agreement. Although the Company is in
negotiations with USA Networks to extend its relationship, there can
be no assurance that the contract with USA Networks will be extended
after June 30, 1998. If USA Networks chooses not to carry the
Company's television programming, there can be no assurance that the
Company would be able to obtain alternative distribution through
other cable channels or networks on acceptable commercial terms or at
all. If the Company is unable to secure and maintain distribution for
its television programming on acceptable commercial terms, the
Company will be unable to achieve the strategic objectives of its
television programming, which would have a material adverse effect on
the Company's business, financial condition and operating results.
Pursuant to the amended agreement, the Company and USA Networks
also agreed to modify the vesting provisions of the warrant
previously granted to USA Networks. Under the amended agreement, the
warrant became exercisable with respect to 206,700 shares of Common
Stock (40% of the total) on July 1, 1996. The warrant became
exercisable with respect to an additional 155,025 shares (30% of the
total) on June 30, 1997, based on USA Networks' transmission of the
three programs during the first year of the agreement. The warrant
will become exercisable with respect to the remaining 155,025 shares
(30% of the total) on June 30, 1998, if during the year ended
June 30, 1998, USA Networks has transmitted at least 90% of the
episodes of such programs during their regularly scheduled time
periods, or during other times at least as favorable. If USA Networks
transmits less than 90% but more than 70% of the required programs
during such year, then the warrant will vest with respect to a
portion of the scheduled amount based on the extent to which such
percentage exceeds 70%.
In connection with the extension of the agreement in January
1997, the Company agreed that the warrants will vest in full on
December 31, 2006, to the extent they have not previously vested. As
a result of this change, the Company incurred a one-time charge to
earnings of approximately $7.0 million during the first quarter of
1997.
During the initial one-year term of the amended agreement,
which ended on June 30, 1997, the Company agreed to pay USA Networks
a fee of $1.0 million for the right to cross-market the Company's
Internet sites on the television programs produced by the Company for
USA Networks. During the second year extension, the Company will pay
a fee of $750,000 for the right to continue such cross-marketing
activities. These fees are reported by the Company as marketing
expenses.
SALES AND MARKETING
The Company's sales and marketing staff consisted of 68
full-time employees at December 31, 1997, located in the Company's
headquarters in San Francisco, California, and in a sales office in
New York, New York.
The Company's Internet revenues are derived from the sale of
advertising by the Company's direct sales organization. The Company
provides discounts from its rate card for multiple package purchases
and for longer-term agreements. CNET provides a number of services
free of charge to its advertisers, including advertising response
tools and advertising targeting.
Under the Company's amended agreement with USA Networks, USA
Networks is entitled to sell all available advertising on the three
programs covered by the agreement, and the Company receives a license
fee payable to the Company by USA Networks. Consequently, the
Company's direct sales force is not involved in the sale of
television advertising for its programs aired on USA Networks.
Beginning March 1, 1998 the Company began to use its direct sales
organization to sell advertisements on TV.COM.
The Company's revenues through December 31, 1997 were derived
primarily from the sale of advertising on its Internet sites and from
advertising and license fees from producing its television programs.
Most of the Company's advertising contracts can be terminated by the
customer at any time on very short notice. Consequently, the
Company's advertising customers may move their advertising to
competing Internet sites or from the Internet to traditional media,
quickly and at low cost, thereby increasing the Company's exposure to
competitive pressures and fluctuations in net revenues and operating
results. In selling Internet advertising, the Company also depends to
a significant extent on advertising agencies, which exercise
substantial control over the placement of advertising for the
Company's existing and potential advertising customers. If the
Company loses advertising customers, fails to attract new customers
or is forced to reduce advertising rates in order to retain or
attract customers, the Company's business, financial condition and
operating results will be materially adversely affected. See Note 7
of Notes to Financial Statements.
The Company's marketing activities are designed to promote the
CNET and Snap! brands and to attract consumers to its Internet sites
and television programming. The Company currently retains up to 20%
of its inventory of Internet advertising banners on certain of its
Web sites to promote its own content and services. The Company also
uses its electronic newsletters, NEWS.COM DISPATCH, DIGITAL DISPATCH
and SOFTWARE DISPATCH, to promote and cross-market its services. The
Company's marketing efforts also include participation in trade
shows, conferences, speaking engagements, print, television, radio
and Internet advertising campaigns and efforts to generate exposure
in trade magazines and general interest magazines and newspapers.
The Company's Internet advertising customers have only limited
experience with the Internet as an advertising medium and neither
such customers nor their advertising agencies have devoted a
significant portion of their advertising budgets to Internet-based
advertising in the past. A significant portion of the Company's
potential customers have no experience with the Internet as an
advertising medium and have not devoted any significant portion of
their advertising budgets to Internet-based advertising in the past.
In order for the Company to generate advertising revenues,
advertisers and advertising agencies must direct a significant
portion of their budgets to the Internet and, specifically, to the
Company's Internet sites. There can be no assurance that advertisers
or advertising agencies will be persuaded to allocate or continue to
allocate significant portions of their budgets to Internet-based
advertising, or, if so persuaded, that they will find Internet-based
advertising to be more effective than advertising in traditional
media such as print, broadcast and cable television, or in any event
decide to advertise or continue to advertise on the Company's
Internet sites. Acceptance of the Internet among advertisers and
advertising agencies will also depend to a large extent on the level
of use of the Internet by consumers, which is highly uncertain, and
on the acceptance of new methods of conducting business and
exchanging information. Advertisers and advertising agencies that
have invested substantial resources in traditional methods of
advertising may be reluctant to modify their media buying behavior or
their systems and infrastructure to use Internet-based advertising.
Furthermore, no standards to measure the effectiveness of
Internet-based advertising have yet gained widespread acceptance, and
there can be no assurance that such standards will be adopted or
adopted broadly enough to support widespread acceptance of
Internet-based advertising. If Internet-based advertising is not
widely accepted by advertisers and advertising agencies, the
Company's business, financial condition and operating results will be
materially adversely affected.
Promotion of the CNET and Snap! brands will depend largely on
the Company's success in providing high quality Internet and
television programming, which cannot be assured. If consumers do not
perceive the Company's existing Internet and television content to be
of high quality, or if the Company introduces new Internet sites or
television programs or enters into new business ventures that are not
favorably received by consumers, the Company will be unsuccessful in
promoting and maintaining its brands. Any expansion of the focus of
the Company's operations beyond providing Internet and television
content related to information technology and the Internet, including
the expansion represented by the launch of Snap!, creates a risk of
diluting the Company's brands, confusing consumers and decreasing the
attractiveness of its audience to advertisers. Furthermore, in order
to attract and retain Internet users and television viewers, and to
promote and maintain the CNET and Snap! brands in response to
competitive pressures, the Company may find it necessary to increase
its budgets for Internet content and television programming or
otherwise to increase substantially its financial commitment to
creating and maintaining a distinct brand loyalty among consumers. If
the Company is unable to provide high quality content or otherwise
fails to promote and maintain its brands, or if the Company incurs
excessive expenses in an attempt to improve its content or promote
and maintain its brands, the Company's business, financial condition
and operating results will be materially adversely affected.
TECHNOLOGY
The Company maintains a technology office in Bridgewater, New
Jersey, which focuses on designing, developing, modifying and
maintaining proprietary and third-party tools to manage and improve
the Company's Internet sites and advertising services. The Company's
efforts to develop Internet site management technologies are focused
on improving the speed and reliability of the Company's Internet
sites, creating publishing tools for Internet content, and
developing advertisement tracking and management tools and building
an infrastructure for doing advanced traffic and user analysis.
Using its internally developed publishing tools, the Company is able
to separate its Internet content, which resides in databases, from
the presentation or formatting of the content on the Internet. This
separation of content and presentation allows the Company to quickly
incorporate new presentation technologies into its sites and to
customize the presentation of content. In addition, the technology
also speeds the production process by enabling the Company's
editorial staff of journalists and editors to enter information
quickly and to post time-sensitive material with minimal lead time.
The Company uses a modified version of the commercial Accipiter
AdManager system that allows the Company to customize the delivery
of advertisements by placing advertisements on specific Internet
pages based on the user's method of Internet access and hardware and
software configuration. The Company has also developed an
Advertising Response and Monitoring program, which allows
advertisers to track and test the effectiveness of their
Internet-based marketing programs.
In July 1996, the Company invested $512,000 in cash and
transferred rights to certain of its proprietary site content
management software systems to Vignette Corporation ("Vignette"), an
Austin, Texas, based software development company, in exchange for a
minority equity interest in Vignette. Vignette is marketing an
Internet site management system to operators of large Internet
sites, such as those operated by the Company. As a result of the
Company's investment in Vignette, certain site management
technologies that were previously proprietary to the Company are now
available to the Company's competitors.
The market for Internet products and services is characterized
by rapid technological developments, frequent new product
introductions and evolving industry standards. The emerging
character of these products and services and their rapid evolution
will require that the Company continually improve the performance,
features and reliability of its Internet content, particularly in
response to competitive offerings. There can be no assurance that
the Company 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 substantial expenditures by the Company to modify or adapt
its Internet sites and services and could fundamentally affect the
character, viability and frequency of Internet-based advertising,
either of which could have a material adverse effect on the
Company's business, financial condition or operating results. New
Internet services or enhancements offered by the Company may contain
design flaws or other defects that could require costly
modifications or result in a loss of consumer confidence, either of
which could have a material adverse effect on the Company's
business, financial condition or operating results. In addition,
failure of any equipment or software used by the Company to operate
properly with regard to the Year 2000 and thereafter could require
the Company to incur unanticipated expenses to remedy any problems,
which could have a material adverse effect on the Company's business
results of operations or financial condition. See Item 7,
"Managements Discussion and Analysis - Year 2000 Compliance"
The satisfactory performance, reliability and availability of
the Company's Internet sites and its network infrastructure are
critical to attracting Internet users and maintaining relationships
with advertising customers. The Company's Internet advertising
revenues are directly related to the number of advertisements
delivered by the Company to users. System interruptions that result
in the unavailability of the Company's Internet sites or slower
response times for users would reduce the number of advertisements
delivered and reduce the attractiveness of the Company's Internet
sites to users and advertisers. The Company has experienced periodic
system interruptions in the past and believes that such
interruptions will continue to occur from time to time in the
future. Additionally, any substantial increase in traffic on the
Company's Internet sites may require the Company to expand and adapt
its network infrastructure. The Company's inability to add
additional software and hardware to accommodate increased traffic on
its Internet sites may cause unanticipated system disruptions and
result in slower response times. There can be no assurance that the
Company will be able to expand its network infrastructure on a
timely basis to meet increased demand. Any increase in system
interruptions or slower response times resulting from the foregoing
factors could have a material adverse effect on the Company's
business, financial condition or operating results.
A party who is able to circumvent the Company's security
measures could misappropriate proprietary information or cause
interruptions in the Company's Internet operations. The Company may
be required to expend significant capital and resources to protect
against the threat of such security breaches or to alleviate
problems caused by such breaches. Concerns over the security of
Internet transactions and the privacy of users may also inhibit the
growth of the Internet generally, particularly as a means of
conducting commercial transactions. To the extent that activities of
the Company or third party contractors involve the storage and
transmission of proprietary information, such as computer software
or credit card numbers, security breaches could expose the Company
to a risk of loss or litigation and possible liability. There can be
no assurance that contractual provisions attempting to limit the
Company's liability in such areas will be successful or enforceable,
or that other parties will accept such contractual provisions as
part of the Company's agreements.
COMPETITION
Competition among content providers is intense and is expected
to increase significantly in the future. The Company's Internet and
television 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 provider, the
Company competes generally with other content providers for the time
and attention of consumers and for advertising revenues. To compete
successfully, the Company must provide sufficiently compelling and
popular Internet content and television programming to attract
Internet users and television viewers and to support advertising
intended to reach such users and viewers. Within the content niche of
information technology and the Internet, the Company competes in
particular with the publishers of computer-oriented magazines, such
as Ziff-Davis Publishing Company, International Data Group and CMP
Publications, and with television companies that offer
computer-related programming, such as the Cable News Network, the
Discovery Channel, Jones Computer Network, Mind Extension University
and MSNBC, a joint venture between Microsoft Corporation and General
Electric's NBC Television Network. Each of these competitors also
offers one or more Internet sites with content designed to complement
its magazines or television programming.
In the market for Internet content, the Company competes with
other Internet content and service providers, including Web
directories, search engines, shareware archives, sites that offer
original editorial content, commercial online services and sites
maintained by Internet service providers. These competitors include
Excite, Inc., Infoseek Corporation, Lycos, Inc., Microsoft
Corporation, Netscape Communications Corporation, Time Warner, Inc.,
PointCast Incorporated, SOFTBANK Corporation, Starwave Corporation
and Yahoo! Inc., as well as America Online, Inc., CompuServe, Inc.
and Prodigy Services Co. The market for Internet content and services
is new, intensely competitive and rapidly evolving. There are minimal
barriers to entry, and current and new competitors can launch new
sites at relatively low cost. In addition, the Company competes for
the time and attention of Internet users with thousands of non-profit
Internet sites operated by individuals, government and educational
institutions. Existing and potential competitors also include
magazine and newspaper publishers, cable television companies and
startup ventures attracted to the Internet market. Accordingly, the
Company expects competition to persist and intensify and the number
of competitors to increase significantly in the future. As the
Company expands the scope of its Internet content and services, it
will compete directly with a greater number of Internet sites and
other media companies. Because the operations and strategic plans of
existing and future competitors are undergoing rapid change, it is
extremely difficult for the Company to anticipate which companies are
likely to offer competitive services in the future. There can be no
assurance that the Company's Internet operations will compete
successfully.
With respect to its television operations, the Company competes
directly with established broadcast and cable television networks and
with other distributors and producers of programming about
information technology and the Internet. The Company also faces
potential competition from a wide range of existing broadcast and
cable television companies, and from joint ventures between
television companies and computer-oriented magazine publishers or
computer hardware or software vendors, any of which could produce
television programming that competes directly with the Company's
television programming. For example, Ziff-Davis has announced plans
to launch a 24 hour cable television network.
EMPLOYEES
As of December 31, 1997, the Company had a total of 581
employees, all of whom are based in the United States. Of the total,
350 were involved in the Company's Internet operations, 68 were
engaged in marketing and sales, 45 were involved in television
production, 62 provided creative services for the Company's Internet
and television operations and 56 were in administration and finance.
The Company's performance is substantially dependent on the continued
services of Halsey M. Minor, Shelby W. Bonnie and the other members
of its senior management team, as well as on the Company's ability to
retain and motivate its other officers and key employees. The Company
does not have "key person" life insurance policies on any of its
officers or other employees. The Company's future success also
depends on its continuing ability to attract and retain highly
qualified personnel. The production of content for the Internet and
television requires highly skilled writers and editors and personnel
with sophisticated technical expertise, and the number of such
personnel available is extremely limited. Competition for such
personnel among companies with operations involving computer
technology, the Internet and television production is intense, and
there can be no assurance that the Company will be able to retain its
existing employees or that it will be able to attract, assimilate or
retain sufficiently qualified personnel in the future. In particular,
the Company has encountered difficulties in attracting qualified
software developers for its Internet sites and related technologies,
and there can be no assurance that the Company will be able to
attract and retain such developers. The inability to attract and
retain the necessary technical, managerial, editorial and sales
personnel could have a material adverse effect on the Company's
business, financial condition or operating results. None of the
Company's employees is represented by a labor union. The Company has
not experienced any work stoppages and considers its relations with
its employees to be good.
The Company has rapidly and significantly expanded its
operations and anticipates that further expansion of its operations
may be required in order to address potential market opportunities.
This rapid growth has placed, and is expected to continue to place, a
significant strain on the Company's management, operational and
financial resources. From January 1, 1997 to December 31, 1997, the
Company grew from 372 to 581 employees. The increase in the number of
employees and the Company's market diversification and product
development activities have resulted in increased responsibility for
the Company's management. The Company's management will be required
to successfully maintain relationships with various advertising
customers, advertising agencies, other Internet sites and services,
Internet service providers and other third parties and to maintain
control over the strategic direction of the Company in a rapidly
changing environment. There can be no assurance that the Company's
current personnel, systems, procedures and controls will be adequate
to support the Company's future operations, that management will be
able to identify, hire, train, motivate or manage required personnel
or that management will be able to successfully identify and exploit
existing and potential market opportunities. If the Company is unable
to manage growth effectively, the Company's business, financial
condition and operating results will be materially adversely
affected.
INTELLECTUAL PROPERTY
The Company's success and ability to compete is dependent in
part on the protection of its original content for the Internet and
television and on the goodwill associated with its trademarks, trade
names, service marks and other proprietary rights. The Company relies
on copyright laws to protect the original content that it develops
for the Internet and television, including its editorial features and
the various databases of information that are maintained by the
Company and made available through its Internet sites. In addition,
the Company relies on federal trademark laws to provide additional
protection for the appearance of its Internet sites. A substantial
amount of uncertainty exists concerning the application of copyright
and trademark laws to the Internet, and there can be no assurance
that existing laws will provide adequate protection for the Company's
original content or its Internet domain names. In addition, because
copyright laws do not prohibit independent development of similar
content, there can be no assurance that copyright laws will provide
any competitive advantage to the Company.
The Company owns two Federal trademark registrations for the
name "CNET" for use in connection with certain software applications
and consulting services that it acquired by assignment. The Company
has filed applications to register a number of its trademarks and
service marks, including the name "CNET" and the related logo and the
names CNET.COM, SHAREWARE.COM, SEARCH.COM and DOWNLOAD.COM, but no
federal registrations have been granted for such names or marks. The
Company also asserts common law protection on certain names and marks
that it has used in connection with its business activities. Two
third parties objected to the Company's application to register the
service mark "c|net: the computer network," and, in connection with
one of these objections, the Company agreed not to use such mark for
any real estate or insurance related services. The Company is also a
defendant in pending litigation concerning its use of the name "Snap!
Online". See Item 3, "Legal Proceedings." There can be no assurance
that the Company will be able to secure registration for any of its
marks. The Company has also invested significant resources in
purchasing Internet domain names for existing and potential Internet
sites from the registered owners of such names. There is a
substantial degree of uncertainty concerning the application of
federal trademark law to the protection of Internet domain names, and
there can be no assurance that the Company will be entitled to use
such domain names.
The Company relies on trade secret and copyright laws to
protect the proprietary technologies that it has developed to manage
and improve its Internet sites and advertising services, but there
can be no assurance that such laws will provide sufficient protection
to the Company, that others will not develop technologies that are
similar or superior to the Company's, or that third parties will not
copy or otherwise obtain and use the Company's technologies without
authorization. The Company has filed patent applications with respect
to certain of its software systems, methods and related technologies,
but there can be no assurance that such applications will be granted
or that any future patents will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide a
competitive advantage for the Company. In addition, the Company
relies on certain technology licensed from third parties, and may be
required to license additional technology in the future, for use in
managing its Internet sites and providing related services to users
and advertising customers. The Company's ability to generate revenues
from Internet commerce may also depend on data encryption and
authentication technologies that the Company may be required to
license from third parties. There can be no assurance that these
third party technology licenses will be available or will continue to
be available to the Company on acceptable commercial terms or at all.
The inability to enter into and maintain any of these technology
licenses could have a material adverse effect on the Company's
business, financial condition or operating results.
Policing unauthorized use of the Company's proprietary
technology and other intellectual property rights could entail
significant expense and could be difficult or impossible,
particularly given the global nature of the Internet and the fact
that the laws of other countries may afford the Company little or no
effective protection of its intellectual property. In addition, there
can be no assurance that third parties will not bring claims of
copyright or trademark infringement against the Company or claim that
the Company's use of certain technologies violates a patent. The
Company anticipates an increase in patent infringement claims
involving Internet-related technologies as the number of products and
competitors in this market grows and as related patents are issued.
Further, there can be no assurance that third parties will not claim
that the Company has misappropriated their creative ideas or formats
or otherwise infringed upon their proprietary rights in connection
with its Internet content or television programming. Any claims of
infringement, with or without merit, could be time consuming to
defend, result in costly litigation, divert management attention,
require the Company to enter into costly royalty or licensing
arrangements or prevent the Company from using important technologies
or methods, any of which could have a material adverse effect on the
Company's business, financial condition or operating results.
As a publisher and a distributor of content over the Internet
and television, the Company also faces potential liability for
defamation, negligence, copyright, patent or trademark infringement
and other claims based on the nature and content of the materials
that it publishes or distributes. Such claims have been brought, and
sometimes successfully pressed, against online services. In addition,
the Company could be exposed to liability with respect to material
indexed in its Virtual Software Library or its various search
services. Although the Company carries general liability insurance,
the Company's insurance may not cover potential claims of this type
or may not be adequate to indemnify the Company 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 the Company's business, financial
condition or operating results.
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, copyrights, obscene or indecent communications and the
pricing, characteristics and quality of Internet products and
services. During 1996, Congress enacted the Communications Decency
Act (the "CDA"), which, among other things, purported to impose
criminal penalties on anyone that distributes "obscene" or "indecent"
material over the Internet. A number of states have adopted or
proposed similar legislation. Although certain provisions of the CDA
have been held to be unconstitutional, the manner in which the CDA
and similar existing or future federal and state laws will ultimately
be interpreted and enforced and their effect on the Company's
operations cannot yet be fully determined, such laws could subject
the Company to substantial liability. For example, the Company does
not and cannot practically screen the contents of the various
Internet sites that are indexed or accessible through the Company's
directories and search engines. Restrictive laws or regulations
could also dampen the growth of the Internet generally and decrease
the acceptance of the Internet as an advertising medium, and could,
thereby, have a material adverse effect on the Company's business,
financial condition or operating results. Application to the Internet
of existing laws and regulations governing issues such as property
ownership, libel and personal privacy is also subject to substantial
uncertainty.
The television industry is subject to extensive regulation at
the federal, state and local levels. In addition, legislative and
regulatory proposals under consideration by Congress and federal
agencies may materially affect the industry and the Company's ability
to obtain distribution for its television programming.
There can be no assurance that current or new government laws
and regulations, or the application of existing laws and regulations,
will not subject the Company to significant liabilities,
significantly dampen growth in Internet usage, prevent the Company
from obtaining distribution for its television programming, prevent
the Company from offering certain Internet content or services or
otherwise cause a material adverse effect on the Company's business,
financial condition or operating results.
ITEM 2. PROPERTIES
The Company leases approximately 143,000 square feet of office
and studio space in various facilities in San Francisco, California,
that house the Company's principal administrative, finance, sales,
marketing, Internet production and television production operations.
In addition, the Company leases approximately 19,000 square feet of
office space in Bridgewater, New Jersey, that is used primarily by
technology personnel and 4,000 square feet of office space in New
York, New York, that is used primarily by sales personnel and has
short term operating leases in Portland, Oregon; Cambridge,
Massachusetts and Chicago, Illinois.
The Company's San Francisco headquarters facility and
television production studio is approximately 54,000 square feet and
is leased through December 31, 1999, with two five year renewal
options. The Company's additional San Francisco, California offices
are located in three buildings under four leases, range in size from
11,000 square feet to 34,000 square feet and expire between May 2001
and October 2004. In September 1997, the Company entered into a
lease for approximately 97,000 square feet of additional office
space in San Francisco for a ten year term commencing June 1, 1998.
The Company plans to use the additional office space to consolidate
its operations and for future growth. During the fourth quarter
1997, the Company determined that the additional office space would
be sufficient to consolidate operations as well as accommodate
growth and determined that it would attempt to sublease two of its
existing facilities totaling 45,000 square feet. The Company
believes that the general condition of its leased real estate is good
and that its facilities are generally suitable for the purposes for
which they are being used.
The Company's Internet and television operations are vulnerable
to interruption by fire, earthquake, power loss, telecommunications
failure and other events beyond the Company's control. All of the
Company's servers and television production equipment is currently
located in San Francisco, California, an area that is susceptible to
earthquakes. Since launching its first Internet site in June 1995,
the Company has experienced system downtime for limited periods of up
to a few hours due to power loss and telecommunications failures, and
there can be no assurance that interruptions in service will not
materially adversely affect the Company's operations in the future.
The Company does not carry sufficient business interruption insurance
to compensate the Company for losses that may occur, and any losses
or damages incurred by the Company could have a material adverse
effect on its business, financial condition or operating results.
ITEM 3. LEGAL PROCEEDINGS
On August 15, 1997, Snap-on Incorporated and Snap-on
Technologies commenced an action against the Company in the U.S.
District Court of the Northern District of Illinois alleging
trademark infringement and trademark dilution in connection with the
Company's announcement of its Snap! Online service. The plaintiffs
sought a temporary restraining order, which was denied, and are now
seeking an injunction to require modification of the name of the
service. The plaintiffs are not seeking monetary damages. The
Company will continue to defend the case vigorously, but there can be
no assurance as to whether, or on what terms, the Company will be
able to continue using the Snap! Online name.
The Company is from time to time a party to other legal
proceedings that arise in the ordinary course of business. There is
no pending or threatened legal proceeding to which the Company is a
party that, in the opinion of the Company's management, is likely to
have a material adverse effect on the Company's business, financial
condition or operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the National Market System of
the Nasdaq Stock Market ("Nasdaq") under the symbol "CNWK".
On July 2, 1996 the Company effected its initial public offering (the
"IPO"). 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.
High Low
------- -------
Year ended December 31, 1996:
Third quarter $20.500 $12.000
Fourth quarter $29.000 $14.188
Year ended December 31, 1997:
First quarter $35.750 $18.750
Second quarter $34.625 $15.750
Third quarter $46.500 $24.250
Fourth quarter $39.750 $19.313
At February 27, 1998, the closing price for the Company's
common stock, as reported by Nasdaq, was $36.25, and the approximate
number of holders of record of the Company's common stock was 128.
The Company has never declared or paid a cash dividend on the
Common Stock. Management intends to retain any earnings to cover
operating losses and working capital fluctuations and to fund
capital expenditures and expansion and does not anticipate paying
cash dividends on the Common Stock in the foreseeable future.
On December 18, 1997, the Company sold 733,000 shares of
common stock at $24.75 per share in a private placement to three
"accredited investors" (as defined in Rule 501(a) under the
Securities Act of 1933). Net proceeds from the offering totaled
approximately $18.1 million. No underwriters were involved in the
transaction, and the Company did not pay any underwriting discounts
or commissions. The private placement was exempt from the
registration requirements of the Securities Act of 1933 pursuant to
Section 4(2) thereof.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data and
other operating information of the Company. The financial data and
operating information is derived from the consolidated financial statements of
the Company and should be read in conjunction with the consolidated
financial statements, related notes, and other financial information included
herein.
Fiscal Year Ended
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------ ----------
Consolidated statements of
operations data:
Total revenues $33,639,589 $14,830,348 $3,500,097 $0 $0
Gross profit(deficit) 6,922,514 (503,156) (2,132,870) 0 0
Operating loss (34,137,871) (15,535,311) (8,470,220) (2,826,549) (945,598)
Net loss ($24,728,092) ($16,948,662) ($8,607,358) ($2,826,549) ($945,598)
Basic and diluted loss per share ($1.82) ($2.13) ($3.19) ($0.38) ($0.18)
Consolidated balance sheet data:
Working capital $19,430,761 $20,222,631 $719,195 $871,078 ($95,514)
Property and equipment, net 19,553,537 11,743,291 2,392,788 288,453 11,748
Non-current portion of long-term 2,611,815 577,543 467,339 0 0
Stockholders' equity 40,642,804 33,098,154 2,798,790 1,192,097 (55,316)
Total assets $58,261,678 $39,841,869 $4,656,804 $1,608,634 $50,569
Number of employees at year-end 581 372 105 16 4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company was formed in December 1992, and began to recognize
revenues in April 1995 with the launch of CNET CENTRAL on the USA
Network and the Sci-Fi Channel. The Company's first Internet site on
the World Wide Web, CNET.COM, became operational in June 1995 and
began to generate advertising revenues in October 1995. The
Company's revenues, cost of revenues and operating expenses have
grown substantially since the Company's inception and the Company has
incurred net losses of $24.8 million, $16.9 million and $8.6 million
in 1997, 1996 and 1995, respectively. These losses reflect
substantial expenditures to develop and launch the Company's various
Internet sites and television programs. In addition, the Company
believes that newly launched services require a certain period of
growth before they begin to achieve adequate revenues to support
their operation. The increase in television programming and Internet
sites has also required increased sales and marketing expenses as
well as increased general and administrative costs. As the Company's
audience for its Internet sites and television programs grows
management believes it will be able to attract additional advertising
customers and increased advertising revenues.
The Company has a limited operating history upon which an
evaluation of the Company and its prospects can be based. The
Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by start-up
companies in the television programming industry and in the new and
rapidly evolving market for Internet products, content and services.
To address these risks, the Company must, among other things,
effectively develop new relationships and maintain existing
relationships with its advertising customers, their advertising
agencies and other third parties, provide original and compelling
content to Internet users and television viewers, develop and upgrade
its technology, respond to competitive developments and attract,
retain and motivate qualified personnel. There can be no assurance
that the Company will succeed in addressing such risks and the
failure to do so could have a material adverse effect on the
Company's business, financial condition or operating results.
Additionally, the limited operating history of the Company makes the
prediction of future operating results difficult or impossible, and
there can be no assurance that the Company's revenues will increase
or even continue at their current level or that the Company will
achieve or maintain profitability or generate cash from operations in
future periods. Since inception, the Company has incurred significant
losses and, as of December 31, 1997, had an accumulated deficit of
$54.1 million. The Company may continue to incur losses in the
future.
RESULTS OF OPERATIONS
REVENUES
TOTAL REVENUES. The Company began to generate revenues in
April 1995, and total revenues were $33.6 million, $14.8 million and
$3.5 million for 1997, 1996 and 1995, respectively.
TELEVISION REVENUES. Revenues attributable to television operations
were $6.9 million, $4.7 million and $3.1 million for 1997, 1996 and
1995, respectively. From April 1995 through June 1996, television
revenues were derived primarily from the sale of advertising during
the Company's CNET CENTRAL television program, which was carried
nationally on USA Network and the SciFi Channel pursuant to an
agreement with USA Networks. Effective July 1, 1996, the Company and
USA Networks amended their agreement, whereby USA Networks licensed
the right to carry the DIGITAL DOMAIN, a two hour programming block
which includes CNET CENTRAL, THE NEW EDGE and THE WEB, on its
networks for an initial one-year term for a fee equal to the cost of
production of those programs up to a maximum of $5.2 million. In
January 1997, USA Networks agreed to extend the agreement for an
additional year beginning July 1, 1997 and revenues will again be
limited to the costs of producing such programs, subject to a maximum
amount of $5.5 million.
In August 1996, the Company entered into an agreement with
Golden Gate Productions, L.P. ("GGP"), whereby the Company produces a
television program, TV.COM, which was exclusively distributed by GGP.
Revenue from the distribution of TV.COM was first used to offset
costs of distribution and production, with any excess being shared
equally by CNET and GGP. In August 1997 the assets of GGP were
acquired by a third party, Trans World International ("TWI") who have
agreed to distribute the program under the same terms as the original
GGP agreement. Beginning March 1, 1998, the Company will be
responsible for the sale of advertisements on TV.COM and will pay a
distribution fee to TWI.
The increase in television revenues of $2.2 million from 1996
to 1997 was primarily related to twelve months of distribution for
the DIGITAL DOMAIN and TV.COM during 1997 as compared to six months
of distribution for the DIGITAL DOMAIN in 1996 and three months of
distribution of TV.COM in 1996. The increase in television revenues
of $1.6 million from 1995 to 1996 was primarily related to the
addition of three television programs during 1996.
INTERNET REVENUES. Revenues attributable to the Company's Internet
operations commenced October 1, 1995 and were $26.7 million, $10.1
million and $393,000 for 1997, 1996 and 1995, respectively. Internet
revenues consist primarily of revenues derived from the sale of
advertisements on pages delivered to users of the Company's Internet
sites. The delivery of an advertisement is recognized by the Company
as an "impression". Advertising revenues are derived principally
from arrangements with the Company's advertising customers that
provide for a guaranteed number of impressions. Advertising rates
vary depending primarily on the particular Internet site on which
advertisements are placed, the total number of impressions purchased
and the length of the advertiser's commitment. Advertising revenues
are recognized in the period in which the advertisements are
delivered. The Company's ability to sustain or increase revenues for
Internet advertising will depend on numerous factors, which include,
but are not limited to, the Company's ability to increase its
inventory of delivered Internet pages on which advertisements can be
displayed and its ability to maintain or increase its advertising
rates.
The increase in revenues of $16.6 million from 1996 to 1997 was
primarily attributable to increased pages delivered and increased
advertisements sold on each of its sites. Average daily pages
delivered on the Company's Internet sites during 1997 approximated
4.3 million pages, an increase of 187% over 1.5 million average daily
pages in 1996. The increase in pages delivered was attributable to a
full year of operations for SEARCH.COM, NEWS.COM, DOWNLOAD.COM, and
GAMECENTER..COM, which ran for 10 months, 4 months, 3 months and 2
months, respectively, in 1996, as well as increased traffic growth on
all of the Company's Internet sites during 1997. In addition,
Internet revenues include non-advertising revenues of $5.1 million
and $144,000 for 1997 and 1996 respectively. Non-advertising
revenues include fees earned from Company sponsored trade shows,
electronic commerce revenues, content licensing revenues, technology
licensing and consulting. The Company first recognized non-
advertising revenues in the third quarter of 1996.
The increase in Internet revenues of $9.7 million from 1995 to
1996 is attributable to three months of revenue generating activities
on the Company's Internet sites that were operating during 1995 as
compared to a full year during 1996, plus the additional revenues
attributable to sites launched during 1996.
During 1997, 1996 and 1995, approximately $905,000, $760,000
and $104,000, respectively, of Internet revenues were derived from
barter transactions whereby the Company delivered advertisements on
its Internet sites 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.
REVENUE MIX. Television operations accounted for 21%, 32% and 89%
and Internet operations accounted for 79%, 68% and 11% of total
revenues for 1997, 1996 and 1995, respectively. This revenue mix was
significantly impacted by the different commencement dates of the
Company's television and Internet operations in 1995, and
additionally by the increase in Internet sites produced by the
Company from two at the end of 1995 to nine at the end of 1997.
The Company expects to experience fluctuations in television
and Internet revenues in the future that may be dependent on many
factors, including demand for the Company's Internet sites and
television programming, and the Company's ability to develop, market
and introduce new and enhanced Internet content and television
programming.
SIGNIFICANT CUSTOMERS. For 1997 and 1996, two customers accounted
for over 10% of the Company's revenues, with USA Networks accounting
for approximately 16% and 19% and Microsoft Corporation accounting
for 10% and 12% of total revenues, respectively. Three customers
accounted for over 10% of total revenues during 1995, with MCI, IBM
and Hewlett-Packard accounting for approximately 23%, 19% and 14% of
total revenues, respectively. 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. The Company's success will
depend on its ability to broaden and diversify its base of
advertising customers. If the Company loses advertising customers,
fails to attract new customers or is forced to reduce advertising
rates in order to retain or attract customers, the Company's
business, financial condition and operating results will be
materially adversely affected.
COST OF REVENUES
TOTAL COST OF REVENUES. Total cost of revenues were $26.7 million,
$15.3 million and $5.6 million for 1997, 1996 and 1995, respectively.
Cost of revenues includes the costs associated with the production
and delivery of the Company's television programming and the
production of its Internet sites. The principal elements of cost of
revenues for the Company's television programming have been the
production costs of its television programs, which primarily consist
of payroll and related expenses for the editorial and production
staff, and costs for facilities and equipment. In addition, prior to
June 30, 1996, cost of revenues for the Company's television
programming included the fee payable to USA Networks under the
Company's agreement with USA Networks as then in effect. The
principal elements of cost of revenues for the Company's Internet
sites have been payroll and related expenses for the editorial,
production and technology staff, as well as costs for facilities and
equipment.
COST OF TELEVISION REVENUES. Cost of revenues related to television
programming were $6.9 million, $6.2 million and $4.7 million, or
100%, 132% and 153% of the related revenues, for 1997, 1996 and 1995,
respectively.
The increase in cost of revenues for television of $700,000
from 1996 to 1997 was primarily related to $1.6 million of additional
production costs for twelve months of production of the Digital
Domain and TV.COM in 1997 as compared to six months of production for
the DIGITAL DOMAIN in 1996 and three months of production of TV.COM
in 1996. The increase in production costs were offset by $869,000 in
fees payable to USA Networks in 1996 under the Company's initial
agreement with USA Networks.
The increase in cost of revenues for television of $1.5 million
from 1995 to 1996 was primarily related to additional production
costs of $2.0 million for the three new programs added during 1996.
These additional productions costs were offset by a reduction in the
fees paid to USA Networks.
COST OF INTERNET REVENUES. Cost of revenues for Internet operations
were $19.8 million, $9.1 million and $891,000 or 74%, 90% and 226%
of the related revenues for 1997, 1996 and 1995, respectively. The
recognition of cost of revenues for Internet operations commenced on
October 1, 1995, the date on which the Company began to sell
advertising on its first Internet site. Costs incurred prior to
October 1, 1995 were recognized as development costs.
The increase in cost of revenues for Internet operations of
$10.7 million from 1996 to 1997 was primarily attributable to costs
associated with Internet sites which operated for a full year in
1997, as compared to a partial year during 1996, and sites which
launched in 1997. Sites that were operational for a partial year in
1996 include SEARCH.COM, NEWS.COM, DOWNLOAD.COM, GAMECENTER.COM, and
BUYDIRECT.COM, which were launched in March 1996, September 1996,
October 1996, November 1996 and November 1996, respectively. Sites
which launched during 1997 include Snap! and COMPUTERS.COM, which
launched in September 1997 and November 1997, respectively.
The increase in cost of revenues for Internet operations of
$8.2 million from 1995 to 1996 was attributable to twelve months of
Internet operations in 1996 as compared to three months of operation
in 1995, and additionally, to the increase in Internet sites produced
by the Company from two at the end of 1995 to six at the end of 1996.
The increase in Internet sites produced by the Company required
significant additional expenditures in payroll and related expenses,
and for facilities and equipment.
The Company anticipates substantial increases in cost of
revenues for Internet production in the future. Until September 30,
1997 and November 30, 1997, the costs of the production of Snap! and
COMPUTERS.COM, respectively, were classified as development expenses.
Commencing October 1, 1997 and December 1, 1997, the Company began to
classify the expenses for Snap! and COMPUTERS.COM, respectively, as
cost of Internet revenues. The classification of Snap! expenses and
COMPUTERS.COM expenses as cost of Internet revenues will
significantly increase cost of revenues in 1998. The increase may
cause a significant reduction in gross profit depending on revenues
generated by the newly launched services.
COST OF REVENUES MIX. Cost of television revenues accounted for 26%,
41% and 84% and cost of Internet revenues accounted for 74%, 59% and
16% of total cost of revenues for 1997, 1996 and 1995, respectively.
This mix of cost of revenues was significantly impacted by the
different commencement dates of the Company's television and Internet
operations in 1995 and by more rapid growth of Internet operations in
1996 and 1997. The Company anticipates that its 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 and
related expenses, consulting fees and advertising expenses. Sales and
marketing expenses were $11.6 million, $7.8 million, $2.4 million for
1997, 1996, and 1995, respectively. Sales and marketing expense
represented 34 %, 53% and 68% of total revenue in 1997, 1996 and
1995, respectively. The increase in sales and marketing expenses of
$3.8 million from 1996 to 1997 was attributable to $2.3 million in
expenses related to Snap!, which were primarily related to
advertising costs. The additional increase in sales and marketing
expenses from 1996 to 1997 were attributable to increased salaries
and related expenses due to an increase in the size of the Company's
sales force. Sales and marketing expenses increased by $5.4 million
from 1995 to 1996, primarily a result of increased salaries and
related expenses of $1.7 million and increased advertising expenses
of $2.7 million. The Company expects sales and marketing expenses to
increase substantially in the future.
DEVELOPMENT
Development expenses consist of expenses incurred in the
Company's initial development of new television programming prior to
the commencement of its production activities in 1995, the
development of new Internet sites and in research and development of
new or improved technologies designed to enhance the performance of
the Company's Internet sites. Development expenses for television
programming included salaries and related expenses, facilities and
production equipment and costs for research and development of new
programming. Development expenses for Internet operations include
expenses for the development and production of new Internet sites 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. Costs
associated with the development of a new Internet site are no longer
recognized as development expenses when the new site begins
generating revenue.
Development expenses were $13.6 million, $3.4 million and $2.3
million for 1997, 1996 and 1995, respectively. Development expenses
represented 41%, 23% and 65% of total revenues for 1997, 1996 and
1995, respectively. The increase in development expenses of $10.2
million from 1996 to 1997, was primarily attributable to $8.3 million
in development expenses for Snap! and $3.8 million in development
expenses for COMPUTERS.COM. Snap! and COMPUTERS.COM became
operational in October 1997 and December 1997, respectively, and
costs incurred to operate the sites were classified as cost of
revenues commencing on those dates. The increases in development
expenses attributable to Snap! and COMPUTERS.COM in 1997 were
partially offset by expenses incurred to develop and launch sites
during 1996, such as DOWNLOAD.COM and BUYDIRECT.COM. Development
expenses increased $1.2 million from 1995 to 1996, primarily due to
the development of the four new Internet sites that the Company
launched at various times during 1996. The costs associated with the
development of new sites are primarily personnel related but also
include other costs, such as facilities and equipment.
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 $6.8 million, $3.8 million and $1.7
million for 1997, 1996 and 1995 respectively. General and
administrative costs represented 20%, 25% and 49% of total revenues
for 1997, 1996 and 1995, respectively. The increase in general and
administrative expense of $3.1 million from 1996 to 1997 was
primarily attributable to increased salaries and related expenses and
other costs related to facilitating the growth of the Company during
1997. The increase in general and administrative expenses of $2.1
million from 1995 to 1996 was primarily attributable to increased
salaries and related expenses for additional personnel.
UNUSAL 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 whereby the Company 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 the Company's television
programs through June 30, 1998.
In the fourth quarter of 1997, the Company recognized an
expense of $1.3 million related to reorganizing its real estate
needs. Also in the fourth quarter of 1997, the Company recognized an
expense of $700,000 relating to a write-off of Internet domain names
that the Company determined it would not use.
OTHER INCOME(EXPENSE)
Other income (expense) consists of interest income, interest
expense and losses from the Company's investments, including the
Company's minority interest in Vignette and the Company's interest in
a joint venture with E! Entertainment Television, Inc. ("E!
Entertainment"). The joint venture was formed in January 1996 to
operate an Internet site, E! Online, and was originally owned 50% by
the Company and 50% by E! Entertainment. The Company provided
approximately $3.0 million in debt financing to the joint venture
through June 30, 1997, which was the venture's sole source of
financing. As a result of the Company's financing commitment to the
joint venture, the Company recognized 100% of any losses incurred by
the joint venture. In June 1997 the Company sold its 50% equity
interest and certain technology licenses and marketing and consulting
services to its joint venture partner for $10.0 million in cash, a
$3.2 million note receivable, and certain additional payments for up
to three years.
Total other income (expense) was $9.4 million, $(1.4) million
and $(137,000) for 1997, 1996 and 1995, respectively. Included in
other income (expense) were gains of $11.0 million for 1997, which
primarily related to the sale of the Company's equity interest in the
joint venture with E! Entertainment. The gain was offset by $1.8
million of losses recognized prior to the sale of the Company's
equity interest in the joint venture and approximately $400,000 in
losses recognized related to the Company's investment in Vignette.
Losses of $1.9 million for the comparable period in 1996 were
primarily related to the recognition of 100% of the losses by the
joint venture.
INCOME TAXES
The Company had a net loss for each of 1997, 1996 and 1995. As
of December 31, 1997, the Company has approximately $45.0 million of
net operating loss carryforwards for federal income tax purposes,
which expire between 2008 and 2012. The Company also has
approximately $18.5 million of net operating loss carryforwards for
state income tax purposes, which expire between 1998 and 2002. The
Company experienced an "ownership change" as defined by Section 382
of the Internal Revenue Code in October 1994. As a result of the
ownership change, the Company's use of its federal and state net
operating loss carryforwards is subject to limitation. The ability to
use net operating loss carryforwards may be further limited should
the Company experience another "ownership change" as defined by
Section 382 of the Internal Revenue Code. See Note 3 of Notes to
Consolidated Financial Statements.
NET LOSS
Net losses were $24.7 million, $16.9 million and $8.6 million
for 1997, 1996 and 1995 respectively. Net loss for each of the years
was primarily attributable to cost of revenues and operating expenses
in excess of total revenues. The increase in net loss of $7.8
million from 1996 to 1997 was primarily attributable to increased
cost of revenues of $11.4 million, increased sales and marketing
expenses of $3.8 million, increased development costs of $10.2
million and increased general and administrative costs of $3.1
million, totaling $28.5 million in increased expenses, which were
offset by an increase of $18.8 million in total revenues. The
increase in net loss of $8.3 million from 1995 to 1996 was primarily
attributable to increased cost of revenues of $9.7 million, increased
sales and marketing expenses of $5.5 million, increased development
expenses of $1.2 million and increased general and administrative
expenses of $2.1 million, totaling $18.5 million which were offset by
an increase in total revenues of $11.3 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company initially financed its operations through private
sales of preferred stock which totaled approximately $23.8 million in
gross proceeds (including approximately $3.6 million in principal and
$118,000 in accrued interest on notes that were canceled in exchange
for preferred stock). In July 1996, the Company effected an initial
public offering (IPO) of 2,000,000 shares of common stock and
simultaneously sold 600,000 shares of common stock to Intel
Corporation ("Intel"). The net proceeds from the two offerings were
$37.8 million.
On July 21, 1997, the Company sold 201,253 shares of common
stock in a private placement to Intel for aggregate net proceeds of
approximately $5.3 million. On December 18, 1997, the Company sold
733,000 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.
Cash flows provided by financing activities in 1997 consisted
primarily of proceeds from the issuance of common stock in private
placements. Cash flows provided by financing activities in 1996
consisted primarily of proceeds from the Company's IPO, the private
sale of common stock to Intel and the issuance of preferred stock.
Cash flows provided by financing activities in 1995 consisted
primarily of proceeds from the issuance of preferred stock. In
addition, the issuance of debt provided cash flows from financing
activities in 1997, 1996 and 1995.
Net cash used in operating activities of $5.9 million,
$8.9 million and $5.3 million for 1997, 1996 and 1995 respectively,
were primarily attributable to net losses in such periods. Net cash
used in investing activities of $19.7 million, $18.5 million and $5.0
million for 1997, 1996 and 1995, respectively, were primarily
attributable to purchases of equipment.
As of December 31, 1997, the Company had obligations
outstanding under a note payable and under certain capital leases of
$4.0 million. Such obligations were incurred to finance equipment
purchases and are payable through May 2008.
As of December 31, 1997 the Company's principal source of
liquidity was approximately $22.6 million in cash and cash
equivalents. During 1997 the Company secured a $10.0 million line of
credit from a bank. The line of credit consists of a $5.0 million
operating line of credit secured by all of the Company's tangible
and intangible assets and a $5.0 million line of credit for up to 65%
of capital equipment purchases. The capital proceeds from the
equipment line will convert to a two year term loan in July, 1998.
As of December 31, 1997, the Company had not yet drawn any of the
operating line of credit and had drawn $768,000 on the capital
equipment line of credit. In February 1998, the Company issued a
letter of credit as a security deposit for a lease of office space in
the amount of $3.3 million. The letter of credit is secured by $3.3
million of the $5.0 million operating line of credit. In addition,
the Company had proceeds of $2.5 million from an asset based loan
secured by certain capital equipment. Both the $10.0 million bank
financing and the $2.5 million asset based loan are subject to
certain financial covenants. At December 31, 1997, the Company was
not in compliance with certain financial covenants, but obtained
waivers from both lenders. The Company believes that these funds
will be sufficient to meet its anticipated cash needs for working
capital and capital expenditures for at least the next 12 months.
See "Outlook and Uncertainties" below.
SEASONALITY
The Company believes 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 the Company's business, financial
condition or operating results.
The Company's quarterly operating results may fluctuate
significantly in the future as a result of a variety of factors,
many of which are outside the Company's control. Factors that may
adversely affect the Company's quarterly operating results
attributable to its Internet operations include the level of use of
the Internet, demand for Internet advertising, seasonal trends in
both Internet use and advertising placements, the addition or loss
of advertisers, advertising budgeting cycles of individual
advertisers, the level of traffic on the Company's Internet sites,
the amount and timing of capital expenditures and other costs
relating to the expansion of the Company's Internet operations, the
introduction of new sites and services by the Company or its
competitors, price competition or pricing changes in the industry,
technical difficulties or system downtime, general economic
conditions and economic conditions specific to the Internet and
Internet media. Quarterly operating results attributable to the
Company's television operations are generally dependent on the costs
incurred by the Company in producing its television programming. If
the cost of producing television programs for USA Networks exceeds
the maximum licensing fee payable by USA Networks, or if production
costs for TV.COM exceed distribution revenues, the Company could
incur a gross deficit with respect to its television operations.
Further, the size and demographic characteristics of the Company's
television viewing audience may be adversely affected by the
popularity of competing television programs, including special
events, the time slots chosen for the Company's programs by the
cable network carrying such programs and the popularity of programs
immediately preceding the Company's programs. As a result of the
Company's strategy to cross market its television and Internet
operations, the Company believes that any decrease in the number of
viewers of its television programs will have a negative effect on
the usage of its Internet sites. Accordingly, a decrease in
viewership of the Company's television programs could have a
material adverse effect on the Company's business, financial
condition or operating results.
Due to all of the foregoing factors, it is likely that the
Company's operating results may fall below the expectations of the
Company, securities analysts or investors in some future quarter.
In such event, the trading price of the Company's Common Stock would
likely be materially adversely affected.
YEAR 2000 COMPLIANCE
In the next two years, most companies could face a potentially
serious information systems problem because many software
applications and operational programs written in the past were
designed to handle date formats with two-digit years and thus may not
properly recognize calendar dates beginning in the Year 2000. This
problem could result in computers either outputting incorrect data or
shutting down altogether when attempting to process a date such as
"0/01/00." The Company has examined all of its critical software and
operational applications and in the opinion of management, there
should be no significant conversion issues related to the Year 2000
issue. In addition, however, the Company could be exposed to a
potential adverse impact resulting from the failure of financial
institutions and other third parties to adequately address the Year
2000 problem. The Company intends to devote the necessary resources
to identify and resolve Year 2000 issues that may exist with third
parties. However, the Company cannot estimate the cost of this
effort at this time, nor can any assurance be given that the Year
2000 problem will not have a material adverse effect on the Company's
business, operating results or financial condition.
OUTLOOK AND UNCERTAINTIES
The Company's future financial condition and results are
subject to substantial risks and uncertainties, some of which are
summarized in this section.
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT; ANTICIPATED
LOSSES. The Company was founded in December 1992 and first
recognized revenues from its television operations in April 1995 and
from its Internet operations in October 1995. Accordingly, the
Company has an extremely limited operating history upon which an
evaluation of the Company and its prospects can be based. See
introduction to Item 7, "Management's Discussion and Analysis."
Since inception, the Company has incurred significant losses and, as
of December 31, 1997, had an accumulated deficit of $54.1 million.
The Company expects to continue to incur significant losses on a
quarterly and annual basis in the future. If currently available
cash and cash generated by operations is insufficient to satisfy the
Company's liquidity requirements, the Company may be required to
sell additional equity or debt securities. The sale of additional
equity or convertible debt securities would result in additional
dilution to the Company's stockholders. There can be no assurance
that financing will be available to the Company in amounts or on
terms acceptable to the Company. See Item 7, "Management's
Discussion and Analysis - Liquidity and Capital Resources."
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The
Company's quarterly operating results may fluctuate significantly in
the future as a result of a variety of factors, many of which are
outside the Company's control, including, the level of use of the
Internet, demand for Internet advertising, seasonal trends in both
Internet use and advertising placements, the addition or loss of
advertisers, advertising budgeting cycles of individual advertisers,
the level of traffic on the Company's Internet sites, the amount and
timing of capital expenditures and other costs relating to the
expansion of the Company's Internet operations, the introduction of
new sites and services by the Company or its competitors, price
competition or pricing changes in the industry, technical
difficulties or system downtime, general economic conditions and
economic conditions specific to the Internet and Internet media.
Due to the foregoing factors, among others, it is likely that the
Company's operating results may fall below the expectations of the
Company, securities analysts or investors in some future quarter.
In such event, the trading price of the Company's Common Stock would
likely be materially adversely affected. See Item 7, "Management's
Discussion and Analysis - Seasonality."
DEPENDENCE ON ADVERTISING REVENUES; CUSTOMER CONCENTRATION. A
substantial percentage of the Company's revenues are derived from
the sale of advertising on its Internet sites and television
programs. Most of the Company's advertising contracts can be
terminated by the customer at any time on very short notice.
Furthermore, most of the Company's revenues have been derived from a
limited number of advertising customers. If the Company loses
advertising customers, fails to attract new customers or is forced
to reduce advertising rates in order to retain or attract customers,
the Company's business, financial condition and operating results
will be materially adversely affected. See Item 1, "Business -
Sales and Marketing" and Note 6 of Notes to Financial Statements.
UNCERTAIN ACCEPTANCE OF THE INTERNET AS AN ADVERTISING MEDIUM.
Use of the Internet by consumers is at a very early stage of
development, and market acceptance of the Internet as a medium for
information, entertainment, commerce and advertising is subject to a
high level of uncertainty. If Internet-based advertising is not
widely accepted by advertisers and advertising agencies, the
Company's business, financial condition and operating results will
be materially adversely affected. See Item 1, "Business - Sales
and Marketing."
UNCERTAIN ACCEPTANCE OF THE COMPANY'S INTERNET CONTENT. The
Company's future success depends upon its ability to deliver
original and compelling Internet content and services in order to
attract users with demographic characteristics valuable to the
Company's advertising customers. There can be no assurance that the
Company's content and services will be attractive to a sufficient
number of Internet users to generate advertising revenues. See Item
1, "Business - Strategy."
UNCERTAIN ACCEPTANCE OF THE COMPANY'STELEVISION PROGRAMMING.
The Company's television programming is critical to its overall
business strategy, and the Company expects to rely to a significant
extent on its television programming to promote the CNET and Snap!
brands and to attract users to its Internet sites. To achieve these
objectives, the Company must develop original and compelling
television programming and obtain distribution for such programming.
The successful development, production and distribution of
television programming is subject to numerous uncertainties, and
there can be no assurance that the Company's television programming
will be accepted by television broadcasters, cable networks or their
viewers. See Item 1, "Business - Television."
COMPETITION. The market for Internet content and services is
new, intensely competitive and rapidly evolving; there are minimal
barriers to entry, and current and new competitors can launch new
sites at relatively low cost. There can be no assurance that the
Company will compete successfully with current or future
competitors. See Item 1, "Business - Competition."
UNCERTAIN ACCEPTANCE AND MAINTENANCE OF BRANDS. The Company
believes that establishing and maintaining the CNET and Snap! brands
is a critical aspect of its efforts to attract and expand its
Internet and television audience and that the importance of brand
recognition will increase due to the growing number of Internet
sites and the relatively low barriers to entry in providing Internet
content and services. If the Company is unable to provide high
quality content and services or otherwise fails to promote and
maintain its brands, or if the Company incurs excessive expenses in
an attempt to improve its content and services or promote and
maintain its brands, the Company's business, financial condition and
operating results will be materially adversely affected. See Item
1, "Business - Sales and Marketing."
MANAGING POTENTIAL GROWTH. The Company has rapidly and
significantly expanded its operations, including the substantial
recent expansion represented by Snap!. This rapid growth has
placed, and is expected to continue to place, a significant strain
on the Company's management, operational and financial resources.
If the Company is unable to manage growth effectively, the Company's
business, financial condition and operating results will be
materially adversely affected. See Item 1, "Business - Sites and
Services" and Item 1, "Business - Employees."
DEPENDENCE ON KEY PERSONNEL. The Company's performance is
substantially dependent on the continued services of Halsey M.
Minor, Shelby W. Bonnie, and the other members of its senior
management team, as well as on the Company's ability to retain and
motivate its other officers and key employees. The Company's future
success also depends on its continuing ability to attract and retain
highly qualified personnel. The inability to attract and retain the
necessary technical, managerial, editorial and sales personnel could
have a material adverse effect on the Company's business, financial
condition or operating results. See Item 1, "Business -
Employees."
RISKS OF TELEVISION DISTRIBUTION; DEPENDENCE ON USA NETWORKS.
The Company's television programming is currently carried primarily
on the USA Network and the Sci-Fi Channel, both of which are owned
by USA Networks, pursuant to an agreement between the Company and
USA Networks, which expires on June 30, 1998. There can be no
assurance that the Company will be able to obtain distribution for
its television programming after June 30, 1998. See Item 1,
"Business - Television - Agreement with USA Networks."
DEPENDENCE ON THIRD PARTIES FOR INTERNET OPERATIONS. The
Company relies on the cooperation of owners and operators of other
Internet sites and on its relationships with third party vendors of
Internet development tools and technologies. The Company's ability
to advertise on other Internet sites and the willingness of the
owners of such sites to direct users to the Company's Internet sites
through hypertext links are also critical to the success of the
Company's Internet operations. There can be no assurance that the
necessary cooperation from third parties will be available on
acceptable commercial terms or at all. If the Company is unable
to develop and maintain satisfactory relationships with such third
parties on acceptable commercial terms, or if the Company's
competitors are better able to leverage such relationships, the
Company's business, financial condition and operating results will
be materially adversely affected. See Item 1, "Business - Internet
Sites and Services."
RISKS OF TECHNOLOGICAL CHANGE.. The market for Internet
products and services is characterized by rapid technological
developments, frequent new product introductions and evolving
industry standards. The emerging character of these products and
services and their rapid evolution will require that the Company
continually improve the performance, features and reliability of its
Internet content, particularly in response to competitive offerings.
There can be no assurance that the Company will be successful in
responding quickly, cost effectively and sufficiently to these
developments. See Item 1, "Business - Technology."
DEPENDENCE ON CONTINUED GROWTH IN USE OF THE INTERNET. Rapid
growth in the use of and interest in the Internet is a recent
phenomenon, and there can be no assurance that acceptance and use of
the Internet will continue to develop or that a sufficient base of
users will emerge to support the Company's business. If use of the
Internet does not continue to grow or grows more slowly than
expected, or if the Internet infrastructure does not effectively
support growth that may occur, the Company's business, financial
condition and operating results would be materially adversely
affected. See Item 1, "Business - Internet Sites and Services."
CAPACITY CONSTRAINTS AND SYSTEM DISRUPTIONS. The satisfactory
performance, reliability and availability of the Company's Internet
sites and its network infrastructure are critical to attracting
Internet users and maintaining relationships with advertising
customers. System interruptions that result in the unavailability
of the Company's Internet sites or slower response times for users
would reduce the number of advertisements delivered and reduce the
attractiveness of the Company's Internet sites to users and
advertisers. See Item 1, "Business - Technology." The Company's
Internet and television operations are also vulnerable to
interruption by fire, earthquake, power loss, telecommunications
failure and other events beyond the Company's control. All of the
Company's servers and television production equipment is currently
located in San Francisco, California, an area that is susceptible to
earthquakes. See Item 2, "Properties."
LIABILITY FOR INTERNET AND TELEVISION CONTENT. As a publisher
and a distributor of content over the Internet and television, the
Company faces potential liability for defamation, negligence,
copyright, patent or trademark infringement and other claims based
on the nature and content of the materials that it publishes or
distributes. See Item 1, "Business - Intellectual Property." The
Company's operations, particularly its Internet directories and
search, which facilitate access to third party content, could also
be subject to a range of existing and proposed laws concerning the
distribution of "obscene" or "indecent" material over the Internet.
See Item 1, "Business - Government Regulation."
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS AND INVESTIMENTS.
The Company's current strategy is to broaden the number, scope and
content of its Internet sites through the acquisition of existing
sites and businesses specializing in Internet-related technologies
and content, as well as through internally developed Internet sites
and services. Any such investments would involve many of the same
risks posed by acquisitions, particularly risks related to the
diversion of resources, the inability to generate revenues, the
impairment of relationships with third parties and potential
additional expenses. There can be no assurance that the Company
would be successful in overcoming these risks or any other problems
encountered in connection with such acquisitions or new investments.
See Item 1 "Business - Business Strategy" and Item 1, "Business -
Employees."
SECURITY. A party who is able to circumvent the
Company's security measures could misappropriate proprietary
information or cause interruptions in the Company's Internet
operations. The Company may be required to expend significant
capital and resources to protect against the threat of such security
breaches or to alleviate problems caused by such breaches. See Item
1, "Business - Technology."
DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS; RISKS OF
INFRINGEMENT. The Company relies on trade secret and copyright laws
to protect its proprietary technologies, but there can be no
assurance that such laws will provide sufficient protection to the
Company, that others will not develop technologies that are similar
or superior to the Company's, or that third parties will not copy or
otherwise obtain and use the Company's technologies without
authorization. See Item 1, "Business - Intellectual Property." The
Company is also a defendant in pending litigation concerning its use
of the name "Snap!." See Item 3, "Legal Proceedings."
DEPENDENCE ON LICENSED TECHNOLOGY. The Company relies on
certain technology licensed from third parties, and there can be no
assurance that these third party technology licenses will be
available or will continue to be available to the Company on
acceptable commercial terms or at all. See Item 1, "Business -
Intellectual Property."
GOVERNEMT REGULATION AND LEGAL UNCERTAINTY. Although there
are currently few laws and regulations directly applicable to the
Internet, it is possible that new laws and regulations will be
adopted covering issues such as privacy, copyrights, obscene or
indecent communications and the pricing, characteristics and quality
of Internet products and services. The adoption of restrictive laws
or regulations could decrease the growth of the Internet or expose
the Company to significant liabilities. See Item 1, "Business -
Government Regulation."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors Report
The Board of Directors,
CNET, Inc.
We have audited the accompanying consolidated balance sheets of CNET,
Inc. and subsidiaries as of December 31, 1997 and 1996 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, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our reponsibility 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
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, Inc. and subsidiaries as of December 31,
1997 and 1996, and the results of their operations and their cash
flows for each of the years in the three-year period ended December
31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
San Francisco, California
February 3, 1998, except as to Note 9
which is as of March 30, 1998
CNET, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
1997 1996
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $22,553,988 $20,155,935
Accounts receivable, net of allowance for
doubtful accounts of $461,000 and $100,000
in 1997 and 1996, respectively 9,149,762 5,292,177
Other current assets 1,134,957 940,691
Restricted cash 1,599,113 --
------------ ------------
Total current assets 34,437,820 26,388,803
Property and equipment, net 19,553,537 11,743,291
Other assets 4,270,321 1,709,775
------------ ------------
Total assets $58,261,678 $39,841,869
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,567,783 $3,338,852
Accrued liabilities 10,080,504 2,546,175
Current portion of long-term debt 1,358,772 281,145
------------ ------------
Total current liabilities 15,007,059 6,166,172
Long-term debt 2,611,815 577,543
------------ ------------
Total liabilities 17,618,874 6,743,715
Commitments and contingencies
Stockholders' equity:
Common stock; $0.0001 par value;
25,000,000 shares authorized; 14,662,185
and 13,281,462 shares issued and
outstanding in 1997 and 1996,
respectively 1,468 1,328
Additional paid-in capital 94,697,595 62,424,993
Accumulated deficit (54,056,259) (29,328,167)
------------ ------------
Total stockholders' equity 40,642,804 33,098,154
------------ ------------
Total liabilities and stockholders' equity $58,261,678 $39,841,869
============ ============
See accompanying notes to consolidated financial statements.
CNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
------------------------------------------
1997 1996 1995
------------- ------------- ------------
Revenues:
Television $6,922,309 $4,696,664 $3,106,642
Internet 26,717,280 10,133,684 393,455
------------- ------------- ------------
Total revenues 33,639,589 14,830,348 3,500,097
------------- ------------- ------------
Cost of revenues:
Television 6,904,471 6,212,959 4,742,109
Internet 19,812,604 9,120,545 890,858
------------- ------------- ------------
Total cost of revenues 26,717,075 15,333,504 5,632,967
------------- ------------- ------------
Gross profit (deficit) 6,922,514 (503,156) (2,132,870)
------------- ------------- ------------
Operating expenses:
Sales and marketing 11,602,746 7,821,454 2,369,759
Development 13,608,846 3,438,333 2,264,455
General and administrative 6,848,793 3,772,368 1,703,136
Unusual items 9,000,000 -- --
------------- ------------- ------------
Total operating expenses 41,060,385 15,032,155 6,337,350
------------- ------------- ------------
Operating loss (34,137,871) (15,535,311) (8,470,220)
Other income(expense):
Gain (loss) on joint venture 8,798,306 (1,865,299) --
Interest income 897,012 766,952 89,448
Interest expense (285,539) (315,004) (226,586)
------------- ------------- ------------
Total other income(expense) 9,409,779 (1,413,351) (137,138)
------------- ------------- ------------
Net loss ($24,728,092) ($16,948,662) ($8,607,358)
============= ============= ============
Basic and diluted net loss per share ($1.82) ($2.13) ($3.19)
============= ============= ============
Shares used in calculating basic
and diluted per share data 13,611,821 7,963,897 2,700,000
============= ============= ============
See accompanying notes to consolidated financial statements.
CNET, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Convertible
Preferred Stock Common Stock Additional Total
--------------------- ------------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
----------- --------- ----------- ------- ------------ ------------- ------------
Balances as of
December 31, 1994 2,854,804 $28,548 2,700,000 $270 $4,935,426 ($3,772,147) $1,192,097
Issuance of Series C
convertible preferred
stock -- -- -- -- 2,500,000 -- 2,500,000
Issuance of Series D
convertible preferred
stock 342,290 3,423 -- -- 4,405,273 -- 4,408,696
Conversion of debt to
Series D convertible
preferred stock 242,108 2,421 -- -- 3,115,934 -- 3,118,355
Issuance of warrants -- -- -- -- 187,000 -- 187,000
Net loss -- -- -- -- -- (8,607,358) (8,607,358)
----------- --------- ----------- ------- ------------ ------------- ------------
Balances as of
December 31, 1995 3,439,202 34,392 2,700,000 270 15,143,633 (12,379,505) 2,798,790
Issuance of Series B
convertible preferred
stock 366,144 3,661 -- -- 362,483 -- 366,144
Issuance of Series D
convertible preferred
stock 2,588 26 -- -- 33,307 -- 33,333
Issuance of Series E
convertible preferred
stock 453,169 4,532 -- -- 8,364,102 -- 8,368,634
Issuance of warrants -- -- -- -- 164,000 -- 164,000
Public stock offering,
net of $3,151,406
issuance costs -- -- 2,600,000 260 37,776,334 -- 37,776,594
Conversion of preferred
stock into common stock (4,261,103) (42,611) 7,816,673 782 41,829 -- --
Exercise of stock options -- -- 153,000 15 369,545 -- 369,560
Employee stock purchase
plan -- -- 11,789 1 169,760 -- 169,761
Net loss -- -- -- -- -- (16,948,662) (16,948,662)
----------- --------- ----------- ------- ------------ ------------- ------------
Balances as of
December 31, 1996 -- -- 13,281,462 1,328 62,424,993 (29,328,167) 33,098,154
Exercise of stock options -- -- 411,457 43 1,175,537 -- 1,175,580
Employee stock purchase
plan -- -- 35,013 4 705,407 -- 705,411
Issuances of common stock -- -- 934,253 93 23,391,658 -- 23,391,751
Warrant compensation -- -- -- -- 7,000,000 -- 7,000,000
Net loss -- -- -- -- -- (24,728,092) (24,728,092)
----------- --------- ----------- ------- ------------ ------------- ------------
Balances as of
December 31, 1997 -- $ -- 14,662,185 $1,468 $94,697,595 ($54,056,259) $40,642,804
=========== ========= =========== ======= ============ ============= ============
See accompanying notes to consolidated financial statements.
CNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------------
1997 1996 1995
------------- ------------- ------------
Cash flows from operating activities:
Net loss ($24,728,092) ($16,948,662) ($8,607,358)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 5,054,980 1,928,496 475,836
Amortization of program costs 6,548,937 4,673,201 3,154,893
Interest expense converted into
preferred stock -- 222,141 118,356
Allowance for doubtful accounts 361,214 75,000 25,000
Reserve for joint venture (1,248,799) 1,865,299 --
Warrant compensation expense 7,000,000 -- --
Changes in operating assets and
liabilities:
Accounts receivable (4,218,799) (4,165,939) (1,226,238)
Other current assets (916,690) 29,750 (164,049)
Other assets (1,515,407) (1,237,499) (76,580)
Accounts payable 228,931 2,807,549 453,769
Accrued liabilities 7,534,213 1,839,558 510,199
------------- ------------- ------------
Net cash used in operating
activities (5,899,512) (8,911,106) (5,336,172)
------------- ------------- ------------
Cash flows from investing activities:
Purchases of equipment, excluding
capital leases (12,213,050) (10,739,354) (1,861,607)
Purchases of programming assets (5,826,476) (5,438,092) (3,132,700)
Loan to joint venture (1,639,139) (1,776,588) --
Investment in Vignette Corporation -- (511,500) --
------------- ------------- ------------
Net cash used in investing
activities (19,678,665) (18,465,534) (4,994,307)
------------- ------------- ------------
Cash flows from financing activities:
Net proceeds from issuance of
convertible preferred stock -- 4,543,826 6,908,695
Net proceeds from initial public
offering -- 37,776,594 --
Net proceeds from issuance of
common stock 23,391,751 -- --
Allocated proceeds from issuance of
warrants -- 164,000 187,000
Proceeds from stockholder receivable -- 594,654 --
Proceeds from employee stock
purchase plan 705,411 169,761 --
Proceeds from debt 3,280,806 3,636,000 3,000,000
Proceeds from exercise of options 1,175,580 141,050 --
Principal payments on capital leases (238,688) (104,542) (230,909)
Principal payments on equipment note (338,630) (91,851) (55,146)
------------- ------------- ------------
Net cash provided by
financing activities 27,976,230 46,829,492 9,809,640
------------- ------------- ------------
Net increase (decrease) in cash and
cash equivalents 2,398,053 19,452,852 (520,839)
Cash and cash equivalents at
beginning of period 20,155,935 703,083 1,223,922
------------- ------------- ------------
Cash and cash equivalents at end
of period $22,553,988 $20,155,935 $703,083
============= ============= ============
Supplemental disclosure of cash flow
information:
Interest paid $254,790 $88,792 $73,587
Supplemental disclosure of noncash
transactions:
Non cash portion of Investment -- $105,000 --
Capital lease obligations incurred $408,408 $297,436 $169,896
Note issued in exchange for
equipment -- $137,551 $548,668
Exercise of stock options through
issuance of note receivable from
stockholder -- $594,654 --
Conversion of preferred stock into
common stock -- $42,611 --
Conversion of debt and interest
into 0, 208,548, and 242,108
shares of convertible preferred
stock, respectively -- $3,858,141 $3,218,356
See accompanying notes to consolidated financial statements.
CNET, INC.
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
CNET, Inc. (the "Company") was incorporated in the state of
Delaware in December 1992 and is a media company integrating television
programming with a network of sites on the World Wide Web. The Company
produces four television programs and operates nine Internet sites.
Revenues for television are derived primarily from licensing fees for
the distribution of the television programming. Internet revenues are
primarily derived from the sale of advertising.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
CNET,Inc., and its majority owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Short-term investments are classified as "available-for-sale" and
are stated at fair value. Any unrealized gains and losses are reported
as a separate component of stockholders' equity, but to date have not
been significant.
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 seven 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
concentration of credit risk consist primarily of cash equivalents and
accounts receivable. The Company maintains substantially all of its cash
equivalents with one financial institution. Management believes the
financial risks associated with such deposits are minimal. Substantially
all of the Company's accounts receivable are derived from domestic
sales. Historically, the Company has not incurred material credit
related losses.
DEVELOPMENT
Development expenses include expenses which were incurred in the
development of new television programming prior to the Company's
commencement of production activities and include expenses incurred in
the development of new Internet sites and in research and development of
new or improved technologies that enhance the performance of the
Company's Internet sites. Costs for development are expensed as
incurred. Costs are no longer recognized as development expenses when a
new Internet site 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
Through June 30, 1996, television revenues were principally derived
from the sale of advertising during the Company's CNET CENTRAL
television program and were recognized upon broadcast based on the
number of viewers of the program. Effective July 1, 1996, the Company
licenses CNET CENTRAL and two additional programs it produces for
broadcast on a cable network. Revenue recognized under the contract
varies on a quarterly basis depending on the delivery of original or
refreshed programming. In September 1996, the Company began producing
TV.COM, which was exclusively distributed by Golden Gate Productions,
L.P. ("GGP"). The revenue from this program was used first to offset
costs of distribution and production and thereafter was shared equally
by CNET and GGP. In August 1997, the assets of GGP were acquired by a
third party who has agreed to distribute the program through Trans World
international, ("TWI"), under the same terms.
Internet revenues are principally derived from the sale of
advertisements on pages delivered to users of the Company's Internet
sites and are recognized in the period in which the advertisements are
delivered. The delivery of an advertisement is recognized by the
Company as an "impression." The Company guarantees to certain customers
a minimum number of impressions to be delivered to users of its Internet
sites for a specified period. To the extent minimum guaranteed
impressions are not met, the Company would defer recognition of the
corresponding revenues until guaranteed impression levels are delivered
NET LOSS PER SHARE
The Company has adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share." In accordance with
SFAS No. 128, primary net loss per share has been replaced with basic
net loss per share, and fully diluted net loss per share has been
replaced with diluted net loss per share which includes potentially
dilutive securities such as outstanding options and convertible
securities, using the treasury stock method. Prior periods have been
restated to conform with SFAS No. 128 and Staff Accounting Bulletin
("SAB") No. 98. Accordingly, the number of shares used and the
resulting net loss per share amounts for 1996 and 1995 differ from those
amounts previously presented. The stock options as described in Note 5,
have been excluded from the calculation of diluted net loss per share as
they are anti-dilutive.
The following table sets forth the computation of net loss per
share and proforma net loss per share (in thousands, except per share
data):
Year ended December 31,
---------------------------------------
1997 1996 1995
-------------- ------------ -----------
Net loss $(24,728) $(16,949) $(8,607)
Basic and diluted: ============== ============ ===========
Weighted average common shares
outstanding used in computing basic 13,612 7,964 2,700
and diluted net loss per share ============== ============ ===========
Basic and diluted net loss per share $(1.82) $(2.13) $(3.19)
============== ============ ===========
Proforma (1):
Weighted average common shares outstanding 7,964 2,700
Preferred Stock 2,869 5,707
Shares issued and stock options and
warrants granted in accordance with SAB 83 407 809
------------ -----------
Shares used in computing proforma net loss
per share 11,240 9,216
============ ===========
Proforma net loss per share $(1.51) $(0.93)
============ ===========
(1) This proforma disclosure of net loss per share represents net loss per
share as previously disclosed by the Company pursuant to rules in
existence prior to the adoption of SAB No. 98 in February 98.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's cash and cash equivalents,
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
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to Be Disposed Of," requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment
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 sites and
expense from barter transactions is recognized when advertisements are
delivered on the other companies' Internet sites. Barter revenues were
approximately $905,000, $760,000 and $104,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting
and displaying comprehensive income and its components in the
consolidated financial statements. It does not, however, require a
specific format for the statement, but requires the Company to display
an amount representing total comprehensive income for the period in that
financial statement. The Company is in the process of determining the
preferred format. This statement is effective for fiscal years
beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the way public business enterprises report
information about operating segments in annual financial statements and
requires those enterprises to report selected information about
operating segments in interim financial reports issued to stockholders.
SFAS No. 131 is effective for financial statements for periods beginning
after December 31, 1997. The Company has not yet determined whether it
has any separately reportable business segments.
In October 1997, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 97-2, "Software Revenue
Recognition," which supersedes SOP 91-1. SOP 97-2 is effective for
transactions entered into after December 31, 1997. SOP No. 97-2
generally requires revenue earned on software arrangements involving
multiple elements to be allocated to each element based on the relative
fair values of the elements. The fair value of an element must be based
on evidence that is specific to the vendor. If a vendor does not have
evidence of the fair value for all elements in a multiple-element
arrangement, all revenue from the arrangement is deferred until such
evidence exists or until all elements are delivered. The Company is
still considering the effect of adopting SOP 97-2, however, the Company
does not anticipate that it will have a material impact on the Company's
consolidated results of operations or financial position.
RECLASSIFICATION
Certain items in the accompanying 1996 consolidated financial
statements have been reclassified in order to conform to the current
year's presentation.
(2) BALANCE SHEET COMPONENTS
CASH AND CASH EQUIVALENTS
The carrying value of cash and cash equivalents consisted of:
December 31,
---------------------------
1997 1996
-------------- ------------
Commercial paper $2,004,131 $19,856,611
Money market mutual funds 17,034,006 249,051
Cash 3,515,851 50,273
-------------- ------------
$22,553,988 $20,155,935
============== ============
All cash equivalents have been classified as available for sale
securities as of December 31, 1997 and 1996.
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,
---------------------------
1997 1996
-------------- ------------
Computer equipment $11,769,291 $6,389,144
Production equipment 2,241,597 2,017,546
Office equipment, furniture & fix 2,230,267 1,174,728
Software 1,745,660 332,111
Leasehold improvements 7,193,769 4,128,625
Assets in progress 1,533,198 50,169
-------------- ------------
26,713,782 14,092,323
Less accumulated depreciation
and amortization 7,160,245 2,349,032
-------------- ------------
$19,553,537 $11,743,291
============== ============
As of December 31, 1997 and 1996, the Company had equipment under capital
lease agreements of $1,168,134 and $759,797, respectively, and accumulated
amortization of $694,747 and $365,881, respectively.
As of December 31, 1997, the Company had purchased equipment
pursuant to a loan agreements with the manufacturer on its balance sheet
n the amount of $948,982. As of December 31, 1997 and 1996, the
equipment had accumulated amortization of $512,612 and $322,816, respectively.
in the amount of $948,982. As of December 31, 1997 and 1996, the
equipment had accumulated amortization of $512,612 and $322,816,
respectively.
ACCRUED LIABILITIES
A summary of accrued liabilities follows:
December 31,
---------------------------
1997 1996
-------------- ------------
Compensation and related benefits $2,594,386 $1,298,700
Marketing and advertising 619,101 734,934
Deferred Revenue 3,233,681 --
Lease Abandonment 1,300,000 --
Other 2,333,336 512,541
-------------- ------------
$10,080,504 $2,546,175
============== ============
DEBT
During 1997, the Company secured a $10.0 million line of credit from
a bank. The line of credit consists of a $5.0 million operating line of
credit at an interest rate of prime (8.5%) plus 0.5%, secured by all of
the Company's tangible assets and a $5.0 million equipment line at an
interest rate of prime (8.5%) plus 1%, for up to 65% of capital
equipment purchases. The capital proceeds from the equipment line will
convert to a two-year term loan in July 1998. As of December 31, 1997,
the Company had not yet drawn any of the operating line and had drawn
$768,000 on the capital equipment line of credit. In addition, the Company
had proceeds of $2.5 million for an asset based loan at an interest rate
equal to the treasury rate plus 5.56%, secured by certain capital
equipment. Both the $10.0 million bank financing and the $2.5 million
asset based loan are subject to certain financial covenants. At
December 31, 1997, the Company was not in compliance with certain
financial covenants, but obtained waivers from both lenders.
During 1996 and 1995, the Company financed certain production
equipment through a note bearing an interest rate of 12.25%. The note is
secured by the equipment financed. The current and long-term portion of
the note is included in the current portion of long-term debt and long-
term debt, respectively, in the accompanying balance sheet (along with
capital lease obligations, see Note 4). The aggregate annual principal
payments for notes payable outstanding as of December 31, 1997, are
summarized as follows:
YEAR ENDING DECEMBER 31,
-----------------------
1998 $ 975,721
1999 1,384,580
2000 1,095,314
2001 29,842
-------------
$3,485,457
=============
(3) INCOME TAXES
The Company's effective tax rate differs from the statutory federal income
tax rate of 34% as shown in the following schedule:
Year Ended December 31,
-----------------------------------------
1997 1996 1995
------------- ------------- -------------
Income tax benefit at statutory rate 34.0% 34.0% 34.0%
Operating losses with no current tax
benefit (34.0%) (34.0%) (34.0%)
------------- ------------- -------------
Effective tax rate -- -- --
============= ============= =============
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets are presented below:
Year Ended December 31,
-----------------------------------------
1997 1996 1995
------------- ------------- -------------
Capitalized "start-up" expenses $ 818,000 $1,217,000 $1,582,000
Net operating losses 16,268,000 9,596,000 2,960,000
Accruals, reserves and other 6,289,000 1,027,000 94,000
------------- ------------- -------------
23,375,000 11,840,000 4,636,000
Less valuation allowance 23,375,000 11,840,000 4,636,000
------------- ------------- -------------
$ -- $ -- $ --
============= ============= =============
The Company has a valuation allowance as of December 31, 1997,
which fully offsets its gross deferred tax assets due to the Company's
historical losses and the fact that there is no guarantee the Company
will generate sufficient taxable income in the future to be able to
realize any or all of the deferred tax assets. The net change in the
total valuation allowance for the year ended December 31, 1997, was an
increase of $11,535,000.
As of December 31, 1997, the Company has approximately $45,000,000
of net operating losses for federal income tax purposes, which expire
between 2008 and 2012. The Company also has approximately $18,500,000 of
net operating loss carryforwards for state income tax purposes, which
expire between 1998 and 2002. Included in the deferred tax assets above
is approximately $2,100,000 related to stock option compensation for
which the benefit, when realized, will be an adjustment to equity.
The Company may have experienced an "ownership change" as defined
by section 382 of the Internal Revenue Code. If an ownership change has
occurred, the Company's ability to utilize its net operating losses may
be limited.
(4) LEASES
The Company has several non-cancelable leases primarily for general office,
facilities, and equipment that expire over the next ten years. Future minimum
lease payments under these leases are as follows:
Capital Operating
YEAR ENDING DECEMBER 31, Leases Leases
----------------------- -------------- ------------
1998 $416,670 $3,722,535
1999 105,012 4,811,236
2000 -- 4,597,742
2001 -- 3,453,308
2002 -- 3,195,162
Thereafter -- 36,589,177
-------------- ------------
Total minimum lease payments 521,682 $56,369,160
============
Less amount representing
interest 36,552
Less current portion 383,051
--------------
$102,079
==============
Rental expense from operating leases amounted to $2,242,186, $789,678, and
$384,777 for the years ended December 31, 1997, 1996 and 1995, respectively.
(5) STOCKHOLDERS' EQUITY
ISSUANCE OF COMMON STOCK
On July 2, 1996 the Company effected an initial public offering
(IPO) of 2,000,000 shares of its common stock for $16 per share.
Simultaneously with the IPO, the Company sold 600,000 shares of common
stock to Intel Corporation at 93% of the IPO price. The net proceeds
from these two offerings (after deducting underwriting discounts and
commissions and offering expenses) were $37.8 million, and were received
on July 8, 1996.
On July 21, 1997, the Company sold 201,253 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 733,000 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.
STOCK SPLIT
In May 1996, the Company effected a three-for-two split of its
common stock in connection with the IPO. The accompanying consolidated
financial statements have been retroactively adjusted to reflect the
stock split.
STOCK OPTION PLANS
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 2,750,000 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 1,000,000 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 stock's
fair market value at the date of grant. All stock options have 10-year
terms and generally vest and become fully exerciseable between three and
four years from the date of grant.
A summary of the status of the Company's stock option plans is
presented below:
Weighted
Number Average
of Exercise
Shares Prices
------------- -------------
Balance as of December 31, 1994 1,137,000 $1.25
Granted 345,250 2.77
Canceled (6,000) 2.41
------------- -------------
Balance as of December 31, 1995 1,476,250 1.60
Granted 864,200 11.44
Exercised (696,967) 1.03
Canceled (79,017) 5.45
------------- -------------
Balance as of December 31, 1996 1,564,466 7.09
Granted 1,263,073 23.73
Exercised (444,696) 2.88
Canceled (121,752) 14.07
------------- -------------
Balance as of December 31, 1997 2,261,091 16.78
============= =============
As of December 31, 1997, 1996 and 1995 the number of options
exerciseable was 429,444, 402,397 and 901,985, respectively, and the
weighted-average exercise price of those options was $6.11, $2.21, and
$1.20, respectively. As of December 31, 1997, there were 347,246
additional shares available for grant under the Plan.
The Company applies APB Opinion No. 25 in accounting for the Plan
and, accordingly, no compensation cost has been recognized for the Plan
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 loss and net loss per share would have
been increased to the pro forma amounts indicated below:
Year Ended December 31,
-----------------------------------------
1997 1996 1995
------------- ------------- -------------
Net Loss
As Reported (24,728,092) ($16,948,662) ($8,607,358)
Pro forma (29,872,164) ($18,259,031) ($8,647,971)
Net Loss Per Share
As Reported (1.82) ($1.51) ($0.93)
Pro forma (2.19) ($1.62) ($0.94)
The effects of applying SFAS 123 in this pro forma disclosure is
not indicative of the effects on reported results for future years.
SFAS 123 does not apply to awards prior to 1995, and additional awards
in future years are anticipated.
The weighted-average fair value of options granted in 1997, 1996
and 1995 was $16.78, $6.07 and $0.31, 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 1997, 1996 and 1995,
respectively: no dividend yield, expected volatility of 75%, 75% and 0%,
risk-free interest rate of 6%, and an expected life of five years, one
year and one year.
The following table summarizes information about stock options
outstanding as of December 31, 1997:
The following table summarizes information about stock options
outstanding as of December 31, 1997:
Options Oustanding Options Exercisable
------------------------------------ ------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of As of Contractual Exercise As Of Exercise
Exercise Prices 12/31/97 Life Price 12/31/97 Price
- - ------------------ ------------ ----------- ----------- ------------ -----------
$1.2000 $2.4100 330,651 7.39 $1.9781 252,581 $1.8445
$8.5900 $8.5900 249,382 8.20 $8.5900 54,053 $8.5900
$12.0000 $13.0000 266,908 8.58 $12.3620 63,423 $12.3670
$13.3700 $20.1300 219,025 8.73 $15.1986 54,574 $14.3736
$20.7500 $20.7500 371,500 9.92 $20.7500 - -
$21.3800 $24.0000 175,825 9.38 $22.5991 1,688 $22.8613
$24.1300 $24.1300 369,700 9.83 $24.1300 - -
$24.2500 $28.7500 215,000 9.43 $27.0406 3,125 $27.5000
$32.8800 $32.8800 40,750 9.66 $32.8800 - -
$34.0000 $34.0000 22,350 9.76 $34.0000 - -
------------ ------------
$1.2000 $34.0000 2,261,091 8.98 $16.7800 429,444 $6.1091
============ ============
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. Participants may elect to contribute a
percentage of their compensation to this plan, up to the statutory
maximum amount. The Company may make discretionary contributions to the
401(k) Plan, but have not done so to date.
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 by contributing a percentage of their
compensation. The maximum percentage allowed is 10%.
(6) MAJOR CUSTOMERS AND CONTRACTS
CUSTOMERS
For the years ended December 31, 1997 and 1996, two customers
accounted for over 10% of the Company's revenues, with USA Networks
accounting for approximately 16% and 19%, and Microsoft Corporation
accounting for approximately 10% and 12% of total revenues,
respectively. Three customers accounted for over 10% of the Company's
revenues during 1995 with MCI Telecommunications Corporation,
International Business Machines Corporation and Hewlett-Packard Company
accounting for 23%, 19% and 14% of total revenues, respectively.
CONTRACTS
In February 1995, the Company entered into an agreement with USA
Networks to carry its television program, CNET CENTRAL. The contract
allowed the Company to sell the available advertising on the program. In
connection with this agreement, the Company issued 516,750 common stock
warrants at an exercise price of $2.41 per share to USA Networks. As of
December 31, 1996, all such warrants were outstanding and 206,700 of
such warrants were exercisable. The warrants expire on December 31, 1999
to the extent they are vested on such date; otherwise the warrants
expire on January 31, 2007.
In April 1996, the agreement with USA Networks was amended,
effective July 1, 1996, to license USA Networks to carry CNET CENTRAL
and two additional programs for broadcast on the USA Network and the
SciFi Channel and certain affiliates for an initial term of one year.
Under the amended agreement, USA Networks licenses the rights to all
three programs for a fee equal to the cost of production of the three
television programs up to a maximum of $5,250,000 for the first year
with an option to extend the term for an additional year. In January
1997, USA Networks exercised this option.
In addition, pursuant to the amended agreement, the Company agreed
to pay USA Networks, a fee of $1.0 million for the right to cross-market
the Company's Internet sites on the television programs produced by the
Company for USA Networks. During the second year extension the Company
will pay a fee of $750,000 for the right to continue such cross-
marketing activities. These fees are reported by the Company as
marketing expenses.
In January 1997, USA Networks exercised its option to extend its
agreement with the Company to carry the Company's three television
programs through June 30, 1998. In connection with this extension to the
agreement, the Company agreed that the warrants held by USA Networks
will vest in full on December 31, 2006, to the extent they have not
previously vested. As a result of this change, the Company incurred a
one-time charge to earnings of approximately $7.0 million during the
first quarter of 1997.
In January 1996, the Company entered into a joint venture agreement
with E! Entertainment Television, Inc. ("E! Entertainment") that
launched an Internet site in August 1996, called E! ONLINE, focusing on
entertainment, news, gossip, movies and television. The Company agreed
to provide $3,000,000 in debt financing to the joint venture during its
first two years of operations, which amount was advanced pursuant to a
seven year note, bearing interest at 9% per annum. In addition, the
Company agreed to provide up to an additional $3,000,000 in equity
capital to the joint venture through January 1999. The Company
accounted for its financing and investments under the modified equity
method. Accordingly, the Company recorded all of the losses incurred by
the joint venture through June 30, 1997, in its consolidated statement
of operations. The joint venture, E! Online LLC, was owned 50% by the
Company and 50% by E! Entertainment.
In June 1997, the Company sold its 50% equity position and certain
technology licenses and marketing and consulting services to its joint
venture partner for $10.0 million in cash and a $3.2 million note
receivable, which is included in other assets, and certain additional
payments for up to three years.
In August 1996, the Company entered into an agreement with GGP
whereby the Company produced a television program, TV.COM, which was
exclusively distributed by GGP. Any revenues from the distribution of
TV.COM were first used to offset costs of distribution and production
and thereafter were shared equally by CNET and GGP. In August 1997, the
assets of GGP were acquired by a third party who has agreed to
distribute the program through TWI under the same terms and conditions.
(7) 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 whereby the Company agreed that the warrants
held by USA will vest in full on December 31, 2006, to the extent that
they have not previously vested.
In the fourth quarter of 1997, the Company recognized an expense
of $1.3 million related to lease abandonment costs. Also, in the fourth
quarter of 1997, the Company recognized an expense of $700,000 relating
to a write off of Internet domain names that the Company had determined
it would no longer use.
(8) RELATED PARTY TRANSACTIONS
Included in other assets on the accompanying balance sheets is an
advance to an officer of the Company for $26,250.
An officer and stockholder of the Company provided capital
infusions to the Company of $165,405 during 1995. An affiliate of this
same stockholder loaned the Company $800,000 in 1996 at an interest rate
of 8% and was granted 9,800 warrants to purchase Series D Convertible
preferred stock at an exercise price of $12.88 per share. This loan was
subsequently converted to Series E convertible preferred stock, which
were subsequently converted to warrants for common stock. As of December
31, 1997, all of these warrants were outstanding and exercisable and
expire in January 2001. Such warrants were valued at estimated fair
market value at the date of issuance.
A stockholder of the Company provided a capital infusion of
$2,500,000 in exchange for 1,385,502 shares of Series C convertible
preferred stock in 1994. The stockholder was obligated to pay an
additional $2,500,000 for these shares if the Company entered into an
agreement with a cable network to carry its television program with a
launch date no later than June 10, 1995. An agreement was entered into
with USA Networks in February 1995 and the Company received the
additional $2,500,000. The same stockholder loaned the Company
$3,000,000 during 1995 at an interest rate of 9%. Interest expense
related to the loan was $118,356 in 1995. The entire principal amount
and accrued interest was converted into 242,108 shares of Series D
preferred stock during 1995. In connection with this loan agreement, the
Company granted the stockholder 36,750 warrants to purchase Series C
convertible preferred stock at an exercise price of $3.61 per share,
which were subsequently converted into warrants for common stock.
Further, the same stockholder loaned the Company an additional
$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 36,750 warrants to purchase
Series D convertible preferred stock at an exercise price of $12.88 per
share, which were subsequently converted to warrants for common stock.
As of December 31, 1996, 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.
In April 1996, a stockholder exercised options to purchase 366,144
shares of Series B preferred stock and 136,500 shares of common stock
for an aggregate of $694,654. The consideration was paid by $100,000 in
cash and the issuance of a note for $594,654, which was repaid in July
1996. Such shares of Series B preferred stock were converted into
549,216 shares of common stock at the IPO.
In December 1997, an officer of the Company purchased 8,000 shares
of common stock for $198,000 as a participant in a private placement.
(9) SUBSEQUENT EVENTS
In February 1998, the Company issued a letter of credit as a
security deposit for a lease of office space in the amount of $3.3
million. The letter of credit is secured by $3.3 million of the $5.0
million dollar operating line of credit.
SCHEDULE II
CNET, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(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
------------ ----------- ----------- ------------ -----------
1997
- - ------------------
Allowance for
doubtful accounts $100 $578 -- $217 (1) $461
1996
- - ------------------
Allowance for
doubtful accounts $25 $75 -- -- $100
1995
- - ------------------
Allowance for
doubtful accounts -- $25 -- -- $25
(1) Accounts written off.
S-2 Independent Auditors' Report on Schedule
The Board of Directors
CNET, Inc.
Under date of February 3, 1998, we reported on the consolidated
balance sheets of CNET, Inc. and subsidiaries as of December 31, 1997
and 1996, 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, 1997, which are listed in the
accompanying index. 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. 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.
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.
KPMG Peat Marwick LLP
San Francisco, California
February 3, 1998
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 1998 annual meeting, which will be filed pursuant
to Regulation 14A (the "1998 Proxy Statement"), under the caption
"Management."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the 1998 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 1998 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 1998 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, 1997 and 1996
Consolidated Statements of Income for the years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flow for the years ended December
31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Independent Auditors' Report of KPMG
(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.
3.1(1) -- Finder.com, Inc. and Virtual Software Library, Inc. into
CNET, Inc.
3.2(1) -- Amended and Restated Bylaws of the Company
4.1(1) -- Specimen of Common Stock Certificate
10.1(1) -- CNET, Inc. Amended and Restated Stock Option Plan
10.2(1) -- Employment Agreement, dated as of October 19, 1994,
between the Company and Halsey M. Minor
10.3(3) -- Employment Agreement, dated as of October 19, 1994,
between the Company and Shelby W. Bonnie
10.4(1) -- Employment Agreement, dated to be effective as
of December 1, 1993 and amended as of August 1,
1995 and as of April 1, 1996, between the
Company and Kevin Wendle
10.5(1) -- Employment Agreement, dated to be effective as
of February 20, 1995 and amended as of September
19, 1995, between the Company and Jonathan
Rosenberg
10.6(1) -- Option Exercise Agreement, dated as of April 9,
1996, between the Company and Kevin Wendle
10.7(1) -- Promissory Note of Kevin Wendle, payable to the
Company, dated as of April 9, 1996
10.8(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
10.9(1) -- Lease, dated as of October 19, 1995, between the
Company and The Ronald and Barbara Kaufman
Revocable Trust, et al.
10.10(1) -- Agreement, dated as of February 1, 1995, between the
Company to USA Networks.
10.11(1) -- Warrant to Purchase Common Stock, dated February 9
1995, issued by the Company to USA Networks
10.12(1) -- Series C Converible Preferred Stock Purchase Warrant,
dated as of May 25, 1995, issued by the Company to
Vulcan Ventures Incorporated
10.13(1) -- Series D Converible Preferred Stock Purchase Warrant,
dated as of January 23, 1996. issued by the Company to
the Bonnie Family Partnership
10.14(1) -- Operating Agreement of E! Online, LLC, dated as of January
30, 1996, between the Company and E! Entertainment
Television, Inc.
10.15(1) -- Series D Converible Preferred Stock Purchase Warrant,
dated as of February 20, 1996. issued by the Company to
Vulcan Ventures Incorporated
10.16(1) -- Amended and Restated Agreement , dated as of July 1, 1996,
between the Company and USA Networks
10.17(1) -- Subscription Agreement, dated as of April 26, 1996,
between the Company and the Series E Purchasers
identified therein
10.18(1) -- 1996 Employee Stock Purchase Plan of the Company
10.19(1) -- Stock Purchase Agreement between Intel Corporation and
the Company dated July 1, 1996
10.20(3) -- Stock Purchase Agreement betweenVignette Corporation and
the Company
10.21(8) -- Letter Agreement, dated February 20, 1997, between the
Company and Kevin Wendle.
10.22(4) -- CNET, Inc. 1997 Stock Option Plan
10.23(5) -- Stock Purchase Agreemtne, date as of June 4, 1997, between
Intel Corporation and the Company
10.24(6) -- Master Agreement, dated as of June 30, 1997, amoung the
Company, E! Entertainment Television, Inc. and E! Online,
LLC
10.25(7) -- Security and Loan Agreement between Imperial Bank and the
Company, dated July 24, 1997
10.26(7) -- Note from the Company to Imperial Bank dated July 24, 1997
10.27(7) -- Loan and Security Agreement between The CIT Group and the
Company dated September 5, 1997
10.28(7) -- Office Lease between One Beach Street, LLC and the Company
dated September 24, 1997
10.29* -- Stock Purchase Agreement, dated as of December 18, 1997,
amoung the Company and the Purchasers identified therein
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 Registration Statement on Form S-8, registration no.
333-34491.
(3) Incorporated by reference from a previously filed exhibit to the
Company's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1996.
(4) Incorporated by reference from an exhibit to the Company's definitive
proxy statement on Schedule 14A for the Company's 1997 annual meeting
of stockholders.
(5) Incorporated by reference from a previously filed exhibit to the
Company's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1997.
(6) Incorporated by reference from a previously filed exhibit to
the Company's Current Report on Form 8-K dated July 11, 1997.
(7) 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.
(8) Incorporated by reference from a previously filed exhibit to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
Incorporated by reference from a previously filed exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31,
1996.
(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/ Halsey M. Minor
----------------------------------
Halsey M. Minor
Chairman of the Board, President
and Chief Executive Officer
Date March 31, 1998
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By /s/ Douglas N. Woodrum
----------------------------------
Douglas N. Woodrum
Chief Financial Officer
and Principal Accounting Officer
Date March 31, 1998
----------------------------------
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, President
and Chief Executive Officer
Date March 31, 1998
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By /s/ Shelby W. Bonnie
----------------------------------
Shelby W. Bonnie
Director, Executive Vice President, Chief
Operating Officer and Secretary
Date March 31, 1998
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By /s/ John C. "Bud" Colligan
----------------------------------
John C. "Bud" Colligan
Director
Date March 31, 1998
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By /s/ Douglas Hamilton
----------------------------------
Douglas Hamilton
Director
Date March 31, 1998
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By /s/ Mitchell Kertzman
----------------------------------
Mitchell Kertzman
Director
Date March 31, 1998
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By /s/ Eric Robison
----------------------------------
Eric Robison
Director
Date March 31, 1998
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By /s/ William Savoy
----------------------------------
William Savoy
Director
Date March 31, 1998
----------------------------------
By /s/ Kevin Wendle
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Kevin Wendle
Director
Date March 31, 1998
----------------------------------
By /s/ Douglas N. Woodrum
----------------------------------
Douglas N. Woodrum
Director and Chief Financial Officer
Date March 31, 1998
----------------------------------