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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF1934
For the fiscal year ended December 31, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-20939
CNET, INC.
(Exact Name of registrant as specified in its charter)
Delaware 13-3696170
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
150 Chestnut Street
San Francisco, CA 94111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 395-7800
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
Securities registered under Section 12(g) of the Exchange Act:
Title of class
Common Stock, $0.0001 par value
Indicate by check mark whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K ( 229.405 of this chapter) is
not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. /X/
The aggregate market value of common stock held by non-affiliates, based on
the closing price at which the stock was sold, at March 12, 1999 approximated
$1.8 billion.
The total number of shares outstanding of the issuer's common stock (its
only class of equity securities), as of March 12, 1999, was 34,767,270
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
General
CNET, Inc. (the Company, which may be referred to as we, us or
our) is a leading media company that provides consumers with
authoritative information online and on television regarding
computers, the Internet and digital technologies. We seek to use
our editorial, technical, product database and programming
expertise to engage consumers and attract advertisers. Based on
the volume of traffic over our branded online network, we believe
that we have an established leadership position in our market. We
believe that our online network is the most frequently used source
of technology information online, with an average of approximately
8.2 million pages viewed daily during the fourth quarter of 1998.
According to Media Metrix, we reached 12.2% of the online
audience in the United States, or approximately 7.1 million unique
users, during January 1999. In addition, we deliver over 3.8
million newsletter dispatches per week to subscribers of our
newsletter services. We earn revenues from a combination of:
* banner and sponsorship advertising on our online network
* advertising and sales lead-based compensation from our
recently introduced online shopping services
* advertising sales and licensing fees from our television
programming.
CNET Online
Through CNET Online, we produce a network of information and
services offered under the CNET brand through CNET.com, our
gateway for consumers interested information technology and
technology products and services. The primary channels accessible
through CNET.com are:
* Search.com
* Computers.com
* Shopper.com
* News.com
* Builder.com
* Gamecenter.com
* Download.com.
Through our shopping services, we help consumers decide what
products to buy and where to buy them. We believe that our
shopping services are a highly efficient marketing channel for
sellers of technology products who seek a targeted audience of
potential buyers. We began providing sales lead-based advertising
services in September 1998 through Computers.com and Shopper.com.
We believe that these services are among the industry's leading
information resources for buyers of technology products.
Within our shopping services we help the consumer with the
beginning phase of a product buying decision by providing high-
quality editorial content, including reviews and recommendations.
We supplement this information by providing real-time pricing
information from competing vendors covering more than 120,000
products. We also provide one-click access to these vendors,
which enables the consumer to order the desired product from the
supplier of their choice. We believe that our online database of
products and prices is the largest publicly-accessible computer
product database in the world. In the fourth quarter of 1998, the
first quarter that we offered these services, we estimate that we
generated approximately $80 million in sales to our 70
participating merchants. We generated an average of 90,000 leads
per day to Internet merchants during December 1998.
CNET Television
Through CNET Television, we seek to strengthen the CNET brand
and complement CNET Online. CNET Television includes the Digital
Domain, which is a two-hour programming block broadcast on the USA
Network and the Sci-Fi Channel. The Digital Domain includes:
* CNET Central (technology news)
* The Web (Internet and online services)
* Cool Tech (consumer-oriented technology products)
* The New Edge (future technologies).
We also produce TV.com (technology products and news) and Tech
Reports (90-second technology inserts for local news programs).
We broadcast CNET Television programming to more than 75 million
households. CNET Television is syndicated nationally and in 40
international markets.
Our Other Ventures
We currently own approximately 81% of SNAP! LLC ("snap."), a
free Internet directory, search and navigation portal service
controlled by NBC Multimedia, Inc. NBC Multimedia currently owns
19% of snap., but has an option to increase its ownership to 60%.
As a result of this option, we effectively own approximately 40%
of snap. In addition to snap., we own approximately 9% (2.3
million shares) of Vignette Corporation (Nasdaq: VIGN), a
manufacturer of Web publishing software, and 16% of BuyDirect.com,
Inc., a Web retailer of downloadable software. BuyDirect.com
recently entered into a merger agreement with beyond.com. This
merger, if completed, would result in our owning approximately
800,000 shares of beyond.com (Nasdaq: BYND).
We are a Delaware corporation. Our principal executive offices
are located at 150 Chestnut Street, San Francisco, California
94111, and our telephone number is (415) 395-7800. We were
incorporated in 1992. We launched CNET.com in June 1995 and since
that time we have continued to build our online content and
services.
Our Recent Developments
* Agreement with America Online. On February 9, 1999, we
announced an agreement with America Online, Inc. whereby
we will become the exclusive provider of computer
hardware and software buying guides on the AOL service
and on AOL.com. We will also serve as the primary
provider of computer buying guides on CompuServe,
Digital City, AOL Hometown and certain AOL international
properties. In addition to buying guides, we will
provide or create a variety of co-branded, computing-
oriented content areas. Under the terms of the
agreement, AOL will receive guaranteed payments from us
of $14.5 million over approximately 27 months. We
believe that the agreement provides us with the
opportunity to extend substantially the reach of our
computer-oriented information and shopping services to a
new audience of consumers.
* Acquisition of NetVentures. On February 16, 1999, we
acquired NetVentures, Inc. in a stock-for-stock exchange
valued at approximately $12.5 million. NetVentures owns
and operates ShopBuilder (www.shopbuilder.com), an
online store-creation system. With the acquisition, we
intend to develop the capacity to enable small and
midsize computer manufacturers and resellers of
unbranded computer systems, known in the industry as
"white box" PCs, to build online stores and use our
online sales channel to market products directly to
customers. In addition, we expect to create the
Internet's first marketplace for unbranded PCs, sales of
which make up an estimated 30% of the $75 billion U.S.
PC market, and expand our Shopper.com service by
incorporating a large segment of products and services
that to date have not been readily available online.
* Acquisition of AuctionGate Interactive. On February 19,
1999, we acquired AuctionGate Interactive, Inc. in a
stock-for-stock exchange valued at approximately $6.5
million. AuctionGate owns and operates AuctionGate.com,
an auction site specializing in computer products. With
the acquisition, we hope to expand our role as an
Internet marketplace linking computer buyers and
sellers. The acquisition also introduces a potential
new revenue stream for us, as participating sellers in
the new auction service will be charged listing fees.
The new auction site will allow individual customers,
resellers and manufacturers to auction their used,
refurbished, end-of-line and surplus items. We intend
to provide links to the auction service at relevant
areas across our Internet network.
* Agreement with Jenesys. On February 26, 1999, we
acquired the assets of Winfiles.com, a leading software
downloading service, from Jenesys LLC for a total
purchase price of $11.5 million, payable in cash in two
installments of $5.75 million. We believe that this
acquisition will increase the market reach of our CNET
Download.com service.
* Stock Split. On March 8, 1999, we effected a 2-for-1
split of our common stock that was distributed in the
form of a stock dividend to our common stock holders as
of February 22, 1999.
* 144A Offering. On March 8, 1999, we completed a private
placement of $172.9 million of our 5% convertible
subordinated notes. The notes are due on March 1, 2006,
and are convertible, at the option of the noteholder,
into shares of our common stock at a conversion price of
$74.8125 per share.
* Acquisition of KillerApp. On March 22, 1999, we
acquired KillerApp Corporation in a stock-for-stock
exchange valued at approximately $46 million. KillerApp
owns and operates KillerApp.com an online comparison
shopping service for computers and consumer electronic
products.
Industry Background
We believe that there is a significant opportunity for a
trusted, value-added on-line intermediary to connect buyers and
sellers of technology products online. Buyers of technology
products typically research product capabilities and compare
prices before making a purchase decision. Due to its interactive
nature, the Web is emerging as a medium that allows buyers of
technology products, both individuals and businesses, to complete
complex product and price comparisons on a real-time basis.
We believe that by connecting sellers of technology products
with buyers online, we address a significant market. According to
Jupiter Communications, PC hardware and software products
represent the largest e-commerce category on the Web. Purchases
of PC hardware and software are expected to constitute 45% of the
estimated $8 billion projected to be spent by consumers online in
1999. Forrester Research estimates that 46%, or approximately $50
billion, of the estimated $108 billion projected to be spent by
businesses online in 1999 will be spent on computers and
electronics.
The revenue opportunities that we see emerging on the Internet
combine certain elements of traditional offline businesses such as
print, television, direct marketing and point-of-purchase
marketing. We believe that there is a growing recognition among
manufacturers and marketers of technology products and services of
the advantages and increasing importance of reaching and selling
to their customers online.
Strategy
Our objective is to be the largest online computer and
technology network and to create a significant online marketplace
connecting buyers and sellers of technology products and services.
Through the end of 1998, we have focused on improving and
broadening our existing content and commerce services. In early
1999, we began a program of strengthening and expanding these
services through selective content and commerce focused
acquisitions.
* We seek to provide compelling content for our users
We seek to provide current, comprehensive and
entertaining editorial content throughout our online
network and television programs. Our goal is to expand
our audience of Internet users and television viewers.
* We seek to further develop market awareness and
recognition of our brand
We believe that further development of the CNET brand is
a critical aspect of our efforts to attract and expand
our Internet and television audiences. We seek to
promote and reinforce our brand by building on the
strength of our online network through our television
programming and through increased marketing efforts.
* We seek to build on our television programming experience
In addition to using our television programming to
promote the CNET brand, we believe that our experience in
developing and producing television programming
complements and strengthens our ability to develop
high-quality Internet content. We believe that the
Internet as a communication medium is similar to a hybrid
between television and print and believe that quality
Internet sites should be produced as multimedia
offerings, rather than being written like printed
publications.
* We seek to create value for manufacturers and marketers
of technology products and services
We believe that our Internet users, who have an interest,
ability and willingness to obtain information and
purchase products over the Internet, are generally an
attractive audience for technology manufacturers and
marketers. We will continue our efforts to create new
marketing programs for manufacturers and marketers and to
provide an efficient means to connect buyers and sellers.
* We seek to create value for our users
We will continue to evaluate acquisitions, which assist
in expanding and strengthening our online content and
commerce services. We are continually exploring
opportunities to leverage our brand, infrastructure and
existing audience. For example, recent acquisitions of
NetVentures (offers creation of online technology stores
within the CNET network), AuctionGate (allows
individuals, manufacturers and resellers to auction used,
refurbished and surplus technology products), WinFiles
(an extension of the downloadable software channel) and
KillerApp (an addition to our shopping services) provides
us with the opportunity to enter new commerce markets and
strengthen our leadership within the downloadable
software channel.
* We seek to utilize our technology to enhance content
We seek to capitalize on available technology to create
compelling Internet content, to improve the speed and
performance of our Internet network and to enhance the
user's experience through customization and
personalization of content. We strive to improve the
attractiveness and usefulness of our Internet content by
using the latest software tools and supporting the latest
technology standards.
CNET Online Network
All of our network channels are offered under the CNET brand
and provide content and commerce services to users interested in
information technology and the Internet. We attracted over 7
million unique users in January 1999 according to Media Metrix.
We currently operate the following network channels:
LAUNCH DATE DESCRIPTION
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CNET.COM June 1995 The Gatewary to our network, offers news, product reviews,
feature stories, interviews and other editorial
content about information technology and the Internet.
SEARCH.COM March 1996 Search and navigational channel focused on providing
smart searches forcused on computers and technology
information.
NEWS.COM September 1996 Editorial channel featuring the latest news and
analysis about the Internet and the
computer industry.
DOWNLOAD.COM October 1996 Editorial channel, search engine
and download facility focused on software.
GAMECENTER.COM November 1996 Editorial channel featuring reviews and
information about popular computer games and
links to downloadable games.
COMPUTERS.COM November 1997 Computer products information channel focused on what-to buy
product reviews and information combined with broad product
listings, 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.
SHOPPER.COM June 1998 Broad product listings updated daily with real-time pricing
with where-to-buy links to manufacturers, retailers and
resellers
CNET.COM. CNET.com was launched in June 1995 and serves as the
gateway for our network. We believe 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.
SEARCH.COM. Launched in March 1996, Search.com provides our
users search functionality focused on providing smart search
results related to computer and technology information.
NEWS.COM. Launched in September 1996, News.com 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 channel 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 our daily news, we produce daily audio
reports on the latest digital news. Using Progressive Networks'
RealAudio software (which users can download through our Internet
channels), 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. Launched in October 1996, Download.com provides
search, browse and download software. 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 Download.com offers 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.
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. Gamecenter.com also provides links to
popular downloads of the newest games, tips and tricks, and
information for connecting with other game players.
COMPUTERS.COM. Launched in November 1997, Computers.com
focuses on providing users the broadest and most in-depth source
of real-time computer products information in a convenient, easy-
to-use format. Computers.com is organized intuitively into
categories including: 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 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 channel features reviews of Web development
tools, industry and technology news and downloadable software for
Web production. Builder.com also offers interactive forums.
SHOPPER.COM. Launched in June 1998, Shopper.com is a leading
information resource for buyers of technology products.
Shopper.com contains real-time pricing information from competing
vendors covering more than 120,000 products. Shopper.com, similar
to Computers.com, provides one-click access to these vendors
which enables the user to order the desired product from the
supplier of their choice. We believe that our online database of
products and prices is the largest publicly-accessible computer
product database in the world.
CNET Television
We produce television programming for viewers interested in
information technology and the Internet. Our television
programming is intended to complement and strengthen our Internet
operations by building brand awareness, attracting new users and
generating content that can also be presented through the
Internet. Four of the Company's programs are carried nationally
on cable television through USA Networks and The Sci-Fi Channel,
both of which are owned by USA Networks. One of our programs is
aired nationally on broadcast television. We produce all of our
programs in-house, in our San Francisco headquarters studio. We
employ a permanent staff of producers, researchers, editors and
directors to create our programs and hire additional freelance
camera crews and freelance producers as appropriate.
Digital Domain. Four of our programs, CNET Central, The Web,
Cool Tech and The New Edge, are produced in a two hour programming
block as The Digital Domain. The Digital Domain is broadcast two
times per week on The Sci-Fi Channel and once per week on USA
Networks. Additionally, CNET Central is aired once per week
locally on KPIX-TV, the San Francisco CBS affiliate. The USA
Network reaches over 75 million cable television homes, and The
Sci-Fi Channel (an affiliate of USA Networks) reaches over 52
million cable homes. Based on Nielsen Ratings, the four programs
reached an average weekly audience of 900,000 viewers during the
fourth quarter of 1998.
CNET Central. Launched in April 1995 as our 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 our 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. We encourage viewers of the program to visit
our Internet channels for more detailed information and reviews
and to download available software.
The Web. Launched in July 1996, The Web is a half-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.
Cool Tech. Launched in July 1998, Cool Tech delivers valuable
consumer-oriented information about the newest personal technology
products.
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. We
distribute TV.Com under a syndication agreement with Trans World
International. TV.COM airs nationally on broadcast television in
over 115 markets. During the fourth quarter of 1998, TV.COM
achieved an average weekly audience of approximately 600,000
viewers.
Using material from our tape library, we also produce 90-second
inserts called Tech Reports, about information technology and the
Internet for syndication to local news operations around the
country. We design these inserts to help promote the CNET brand.
They typically feature a host from CNET Central standing in the
CNET studio in front of the CNET logo. The inserts are syndicated
into 34 local markets.
Agreement with USA Networks
From April 1, 1995 through June 30, 1996, USA Networks carried
CNET Central nationally. Under our initial agreement, we 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, we issued USA Networks a warrant to purchase 1,033,500
shares of our common stock at an exercise price of $1.21 per
share. The warrant was scheduled to vest in eight equal quarterly
installments beginning July 1, 1996 if USA Networks continued to
carry CNET Central in accordance with the agreement. USA Networks
exercised the warrant with respect to all 1,033,500 shares in July
1998.
Effective July 1, 1996, we amended the agreement. Under the
amended agreement, USA Networks licensed the right to carry CNET
Central, The Web and The New Edge as the two hour programming
block called the Digital Domain, for an initial one year term and
became entitled to sell all available advertising on the Digital
Domain. In exchange, USA Networks agreed to pay a fee which was
limited to our costs of producing the three programs, up to a
maximum of $5.2 million for the initial one year term.
Effective July 1, 1997, the agreement was extended for an
additional year and fees payable by USA Networks were increased to
a maximum of $5.5 million. In June 1998, USA Networks extended
the agreement with respect to the Digital Domain and added a
fourth program, Cool Tech, for an additional year (until June 30,
1999), during which the fee payable to us is limited to the costs
of producing such programs, subject to a maximum amount of $5.9
million. USA Networks is not required to carry any of the
programming that it purchases from us under the agreement.
Although we are in negotiations with USA Networks to extend our
relationship, we cannot assure you that the contract with USA
Networks will be extended after June 30, 1999. If USA Networks
chooses not to carry our television programming, we cannot assure
you that we would be able to obtain another source of
distribution. If we are unable to secure and maintain
distribution for our television programming on acceptable
commercial terms, we will be unable to achieve the strategic
objectives of our television programming, which would have a
material adverse effect on our business, prospects, financial
condition and operating results.
Pursuant to the amended agreement, we 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 413,400 shares of common stock (40% of
the total) on July 1, 1996. The warrant became exercisable with
respect to an additional 310,050 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
became exercisable with respect to the remaining 310,050 shares
(30% of the total) on June 30, 1998. In connection with the
extension of the agreement in January 1997, we agreed that the
warrants will vest in full on December 31, 2006, to the extent
they have not previously vested. USA Networks exercised the
warrant with respect to all 1,033,500 shares in July 1998.
During the initial one-year term of the amended agreement,
which ended on June 30, 1998, we agreed to pay USA Networks a fee
of $750,000 for the right to cross-market our Internet channels on
our television programs produced for USA Networks. During the
1998-1999 year extension, we will again pay a fee of $750,000 for
the right to continue these cross-marketing activities. We report
these fees as marketing expenses. USA Networks accounted for
approximately 10% of our total revenues during 1998.
Sales and Marketing
At December 31, 1998, we had a sales and marketing staff of 99
full-time employees located in our headquarters in San Francisco,
California, and in a sales office in New York City.
We earn our online revenues from the sale of advertising by our
direct sales organization and from lead-based compensation from
our shopping services. We provide discounts for multiple package
purchases and for longer-term agreements. We also provide a
number of services to marketers, including advertising response
tools and advertising targeting. Beginning March 1, 1998, we
began to use our direct sales organization to sell advertisements
on TV.COM.
We design our marketing activities to promote the CNET brand
and to attract consumers to our online network and television
programming. We currently retain a portion of our inventory of
Internet advertising banners on certain of our channels to promote
our own content and commerce services. We also use our weekly
online dispatch newsletters to promote and cross-market our
services. Our marketing programs also include participation in
trade shows, conferences, speaking engagements, print, television,
radio and Internet advertising campaigns and programs to generate
exposure in trade magazines and general interest magazines and
newspapers.
Technology
We maintain technology offices in Bridgewater, New Jersey and
San Francisco, California, which focus on designing, developing,
modifying and maintaining proprietary and third-party tools to
manage and improve our Internet channels and advertising
services. We focus our efforts to develop Internet channel
management technologies on:
* improving the speed and reliability of our Internet
network
* creating publishing tools for Internet content
* developing advertisement tracking and management tools
* building an infrastructure for performing advanced
traffic and user analysis.
* building commerce tools for our shopping service
Using our internally developed publishing tools, we are able
to separate our Internet content, which resides in databases,
from the presentation or formatting of the content on the
Internet. This separation of content and presentation allows us
to quickly incorporate new presentation technologies into our
channels and to customize the presentation of content. In
addition, this technology also speeds the production process by
enabling our editorial staff of journalists and editors to enter
information quickly and to post time-sensitive material with
minimal lead time. We use a modified version of the commercial
Accipiter AdManager system that allows us 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. We have 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, we invested $512,000 in cash and transferred
rights to certain of our 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 that we operate. As a result of our
investment in Vignette, certain site management technologies that
were previously proprietary to us are now available to our
competitors.
Competition
Competition among content and service providers is intense and
is expected to increase significantly in the future. Our
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 or service provider, we compete generally with
other content and service providers for the time and attention of
consumers and for advertising revenues. To compete successfully,
we must provide sufficiently compelling and popular Internet
content and service and television programming to attract
Internet users and television viewers and to attract advertisers
hoping to reach such users and viewers. Within the content niche
of information technology and the Internet, we compete in
particular with the publishers of computer-oriented magazines and
Internet services, such as:
* Ziff-Davis Publishing Company
* International Data Group
* 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
* 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 overall market for Internet users, we compete with other
Internet content and service providers, including Web directories,
search engines, shareware archives, sites that offer original
editorial content, commercial online services, e-commerce sites
and solution providers, and sites maintained by Internet service
providers. These competitors include:
* Excite, Inc.
* Infoseek Corporation
* Lycos, Inc.
* Microsoft Corporation
* Netscape Communications Corporation
* The Walt Disney Company
* Time Warner, Inc.
* Yahoo! Inc.
* America Online, Inc.
* eBay Inc.
* Amazon.com, Inc.
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, we compete 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,
we expect competition to persist and intensify and the number of
competitors to increase significantly. As we expand the scope of
our Internet content and services, we will compete directly with a
greater number of Internet sites, including other online retailers
and direct sellers of computer products and other media companies.
Because the operations and strategic plans of existing and future
competitors are undergoing rapid change, it is difficult for us to
anticipate which companies are likely to offer competitive
services in the future. We cannot assure you that our Internet
operations will compete successfully.
With respect to our television operations, we compete directly
with established broadcast and cable television networks and with
other distributors and producers of programming about information
technology and the Internet. We also face 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 our television
programming. For example, Ziff-Davis recently launched and is
operating a 24 hour cable television network focused on
technology.
Employees
As of December 31, 1998, we had a total of 491 employees, all
of whom are based in the United States. Of the total:
* 262 were involved in our Internet operations
* 99 were engaged in marketing and sales
* 53 were involved in television production
* 21 provided creative services for our Internet and
television operations
* 56 were in administration and finance.
Seven of our employees, who consist of our on-air television
talent, are represented by a labor union, the American Federated
Television and Radio Artists. We have not experienced any work
stoppages and we believe that our relations with our employees is
good.
Intellectual Property
Our success and ability to compete is dependent in part on the
protection of our original content for the Internet and television
and on the goodwill associated with our trademarks, trade names,
service marks and other proprietary rights. We rely on copyright
laws to protect the original content that we develop for the
Internet and television, including our editorial features and the
various databases of information that we maintain and make
available through our Internet channels. In addition, we rely on
federal trademark laws to provide additional protection for the
appearance of our Internet channels. A substantial amount of
uncertainty exists concerning the application of copyright and
trademark laws to the Internet, and we cannot assure you that
existing laws will provide adequate protection for our original
content or our Internet domain names. In addition, because
copyright laws do not prohibit independent development of similar
content, we can offer no assurance that copyright laws will
provide any competitive advantage to us.
We own a federal trademark registration for the name "CNET"
for computer services, namely, providing databases featuring
information in the general fields of entertainment and education.
We also own two other federal trademark registrations for the name
"CNET" for use in connection with certain software applications
and consulting services that we acquired by assignment. Further,
we own a federal trademark registration for the CNET logo in
connection with providing entertainment services over electronic
communication networks. We have also filed applications to
register the names CNET.com, Shareware.com, Search.com and
Download.com, but no federal registrations have been granted for
such names or marks. We also claim common law protection on
certain names and marks that we have used in connection with our
business activities. Two third parties objected to our
application to register the service mark "CNET: The Computer
Network," and, in connection with one of these objections, we
agreed not to use such mark for any real estate or insurance
related services. We are also a defendant in pending litigation
concerning our use of the name "Snap". We cannot assure you that
we will be able to secure registration for any of our marks. We
have also invested significant resources in purchasing Internet
domain names for existing and potential Internet sites from the
registered owners of such names. The application of federal
trademark law to the protection of Internet domain names is not
certain, and we cannot assure you that we will be entitled to use
such domain names.
We rely on trade secret and copyright laws to protect the
proprietary technologies that we have developed to manage and
improve our Internet channels and advertising services. We
cannot assure you that such laws will provide sufficient
protection to us, that others will not develop technologies that
are similar or superior to ours, or that third parties will not
copy or otherwise obtain and use our technologies without
authorization. We have filed patent applications with respect to
certain of our software systems, methods and related
technologies. Although two of these applications have matured
into U.S. patents, we can offer no assurance that any other
applications will be granted. In addition, we can offer no
assurance that any patents will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide
a competitive advantage for us. We also rely on certain
technology licensed from third parties. We may be required to
license additional technology in the future for use in managing
our Internet channels and providing related services to users and
advertising customers. Our ability to generate revenues from
Internet commerce may also depend on data encryption and
authentication technologies that we may be required to license
from third parties. We cannot assure you that these third party
technology licenses will be available or will continue to be
available to us. The inability to enter into and maintain any of
these technology licenses could have a material adverse effect on
our business, prospects, financial condition and operating
results.
Policing unauthorized use of our 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 us little or no effective protection of
our intellectual property. In addition, we cannot assure you that
third parties will not bring claims of copyright or trademark
infringement against us or claim that our use of certain
technologies violates a patent. We anticipate 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, we cannot assure you that
third parties will not claim that we have misappropriated their
creative ideas or formats or otherwise infringed upon their
proprietary rights in connection with our 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 us to enter into costly royalty or licensing
arrangements
* prevent us from using important technologies or methods.
Any of the foregoing could have a material adverse effect on our
business, prospects, financial condition and 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. The federal government and a number of states have
adopted or proposed legislation which, among other things, seek to
impose criminal penalties on anyone that distributes "obscene" or
"indecent" material over the Internet. Although certain
provisions of such legislation have been and may be subject to
challenge on constitutional grounds, the manner in which any such
legislation or future federal and state laws will ultimately be
interpreted and enforced and their effect on our operations cannot
yet be fully determined. Any such laws could subject us to
substantial liability. For example, we do not and cannot
practically screen the contents of the various Internet sites that
are indexed or accessible through our 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 our business, prospects, financial
condition and 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 our
ability to obtain distribution for our television programming.
We can offer no assurance that current or new government laws
and regulations, or the application of existing laws and
regulations, will not subject us to significant liabilities,
significantly dampen growth in Internet usage, prevent us from
obtaining distribution for our television programming, prevent us
from offering certain Internet content or services or otherwise
have a material adverse effect on our business, prospects,
financial condition and operating results.
Item 2. Properties
We lease approximately 109,000 square feet of office and studio
space in various facilities in San Francisco, California, that
house our principal administrative, finance, sales, marketing,
Internet and television production operations. In addition, we
lease approximately 19,000 square feet of office space in
Bridgewater, New Jersey, that is used primarily by technology
personnel, and approximately 9,000 square feet of office space in
New York City, that is used primarily by sales personnel. We also
have short term operating leases in Irvine, California, Cambridge,
Massachusetts and Chicago, Illinois.
Our San Francisco headquarters facility and television
production studio is approximately 54,000 square feet and is
leased through December 31, 2004, with a five year renewal
option. Our additional San Francisco offices are located in two
buildings under three leases, ranging in size from 11,000 to
32,000 square feet and expire between January 2001 and September
2004. In June 1998, we assigned a lease of approximately 97,000
square feet to snap., however, we remain primarily liable under
the terms of the lease. We believe that the general condition
of our leased real estate is good and that our facilities
are generally suitable for the purposes for which they
are being used. We anticipate that we will be required to lease
additional facilities during 1999 to accommodate anticipated
growth.
Item 3. Legal Proceedings
In November 1998, Snap Technologies commenced an action
against us in the U.S. District Court for the Northern District
of California alleging trademark infringement and related claims
arising from the name of the snap., portal service. The
plaintiffs seek injunctive relief and unspecified damages. This
proceeding is in its initial stages. We intend to defend this
case vigorously, but we cannot assure you that the name of the
snap., portal service will be able to continue or on what terms
it will be able to continue.
We are 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 we are a party
that, in our opinion, is likely to have a material adverse effect
on our business, prospects, financial condition and operating
results.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Our common stock is traded on the National Market System of
the Nasdaq Stock Market ("Nasdaq") under the symbol "CNET".
On July 2, 1996, we completed our 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. The prices in the table
have been adjusted to reflect a 2-for-1 split of our common stock
that was distributed on March 8, 1999 in the form of a stock
dividend to holders of our common stock as of February 22, 1999.
High Low
------- -------
Year ended December 31, 1996:
Third quarter $10.25 $6.00
Fourth quarter $14.50 $7.09
Year ended December 31, 1997:
First quarter $17.88 $9.38
Second quarter $17.81 $7.88
Third quarter $23.25 $12.13
Fourth quarter $19.88 $9.66
Year ended December 31, 1998:
First quarter $20.07 $11.69
Second quarter $35.50 $12.63
Third quarter $37.00 $15.50
Fourth quarter $33.00 $14.50
At March 12, 1999, the closing price for our common stock
as reported by Nasdaq, was $86.25, and the approximate
number of holders of record of the Company's common stock was 226.
We have never declared or paid a cash dividend on our common stock.
We intend to retain any earnings to cover operating losses and working
working capital fluctuations and to fund capital expenditures and
expansion. We do not anticipate paying cash dividends on our common
stock in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data
and other operating information of the Company. The financial data and
operating informationdo not purport to indicate results of operations as of
any future date or for any future period. The financial data and operating
information is derived from our consolidated financial statement and should be
read in conjunction with the consolidated financial statements, related
notes and other financial information included herein.
(in thousands, except per share amounts)
Fiscal Year Ended
---------------------------------------------------------------------
1,998 1,997 1,996 1,995 1,994
------------- ------------- ------------- ------------ ----------
Consolidated Statement of Operations Data:
Total revenues $56,432 $33,640 $14,830 $3,500 --
Gross profit (deficit) 26,400 6,923 (503) (2,133) --
Total operating expenses* 23,870 41,060 15,032 6,337 2,772
Operating income (loss) 2,530 (34,138) (15,535) (8,470) (2,772)
Total other income (expense) 70 9,410 (1,413) (137) (54)
Net income (loss) 2,600 (24,728) (16,949) (8,607) (2,827)
Basic net income (loss)
per share $0.08 ($0.91) ($1.06) ($0.47) ($0.19)
Diluted net income (loss)
per share $0.07 ($0.91) ($1.06) ($0.47) ($0.19)
Shares used in basic per
share caluclation 31,933 27,224 15,928 18,432 14,907
Shares used in diluted
per share calculation 34,853 27,224 15,928 18,432 14,907
Consolidated Balance Sheet Data:
Cash and cash equivalents $51,534 $22,554 $20,156 $703 $1,224
Working capital 59,787 19,431 20,223 719 871
Total assets 88,354 58,262 39,842 4,657 1,609
Non-current portion of
long-term debt 569 2,612 281 467 --
Stockholders' equity $76,603 $40,643 $33,098 $2,799 $1,192
*Operating expenses included unusual items consisting of an expense reversal of $922,000
in 1998 related to a real estate reserve and expenses of $9.0 million in 1997 related
to warrant compensation expense of $7.0 million, a real estate reserve and a write-
off of certain domain names.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Our revenues, cost of revenues and operating expenses have
grown substantially and we earned net income of $2.6 million in
1998 and incurred net losses of $24.7 million and $16.9 million
in 1997 and 1996, respectively. The losses in 1997 and 1996
reflected substantial expenditures to develop and launch our
various Internet channels and television programs. In addition,
newly launched services required a certain period of growth
before they began to achieve adequate revenues to support their
operation. The increase in television programming and Internet
channels has also required increased sales and marketing expenses
as well as increased general and administrative costs. As the
audience for our Internet channels and television programs grows
we believe that we will be able to attract additional advertising
customers and increased advertising revenues.
Results of Operations
Revenues
Total Revenues. Total revenues were $56.4 million, $33.6 million
and $14.8 million for 1998, 1997 and 1996, respectively.
Television Revenues. Revenues attributable to television
operations were $7.1 million, $6.9 million and $4.7 million for
1998, 1997 and 1996, respectively. From April 1995 through June
1996, television revenues were derived primarily from the sale of
advertising during our CNET Central television program, which was
carried nationally on USA Networks and The Sci-Fi Channel pursuant
to an agreement with USA Networks. Effective July 1, 1996, we
amended our agreement, whereby USA Networks licensed the right to
carry the Digital Domain, a two hour programming block which
included 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 were again
limited to the costs of producing such programs, subject to a
maximum amount of $5.5 million. During the second quarter of
1998, we entered into an agreement for an additional year of
programming with USA Networks beginning July 1, 1998. The
agreement added a fourth program to the Digital Domain called Cool
Tech and decreased The Web from 60 minutes to 30 minutes.
Revenues are limited to the costs of production, subject to a
maximum of $5.9 million.
In August 1996, we entered into an agreement with Golden
Gate Productions, L.P. ("GGP"), whereby we produce 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 us and GGP. In August 1997, the assets of GGP were
acquired by a third party, Trans World International ("TWI") who
has agreed to distribute the program under the same terms as the
original GGP agreement. Beginning March 1, 1998, we assumed
responsibility for the sale of advertisements on TV.COM and will
pay a distribution fee to TWI.
Television revenues increased slightly from 1997 to 1998
primarily due to the contractual increase with USA Networks for
the additional year of television programming that commenced July
1, 1998. The increase in television revenues of $2.2 million from
1996 to 1997 was primarily related to twelve months of
distribution of the Digital Domain and TV.COM during 1997 as
compared to six months of distribution for the Digital Domain in
1998 and three months of distribution of TV.COM in 1996.
Internet Revenues. Revenues attributable to our Internet
operations were $49.4 million, $26.7 million and $10.1 million
for 1998, 1997 and 1996, respectively. Internet revenues consist
primarily of revenues derived from the sale of advertisements on
pages delivered to users of our Internet network. Advertising
programs are generally delivered on either an "impression" based
program or a "performance" based program. An impression based
program earns revenues when an advertisement is delivered to a
user of our Internet network. A performance based program earns
revenues when a user of our Internet network responds to an
advertisement by linking to an advertisers Internet network.
Advertising rates vary depending upon whether a program is
impression or performance based, where advertisements are placed
and the amount and length of the advertiser's commitment.
Advertising revenues are recognized in the period in which the
advertisements are delivered. Our ability to sustain or increase
revenues for Internet advertising will depend on numerous
factors, which include, but are not limited to, our ability to
increase our inventory of delivered Internet pages on which
advertisements can be displayed and our ability to maintain or
increase advertising rates. In the fourth quarter of 1998 CNET
began generating revenue from lead-based compensation from its
shopping services.
The increases in revenues of $22.7 million from 1997 to
1998 and $16.6 million from 1996 to 1997 was primarily
attributable to increased pages delivered and increased
advertisements sold on our network. Average daily pages
delivered in 1998 approximated 6.9 million, an increase of 60%
over 4.3 million average daily pages in 1997. The increased
traffic from 1997 to 1998 primarily relates to an increase in the
number of users of our network. A portion of the increased
traffic was related to the addition of Shopper.Com in May, 1998.
Average daily pages delivered on our Internet channels 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 our Internet
channels during 1997. In addition, Internet revenues include
non-advertising revenues of $2.7 million, $5.1 million and
$144,000 for 1998, 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.
During 1998, 1997 and 1996, approximately $3.4 million,
$905,000 and $760,000, respectively, of Internet revenues were
derived from barter transactions whereby we delivered
advertisements on our Internet channels in exchange for
advertisements on the Internet sites of other companies. These
revenues and marketing expenses were recognized at the fair value
of the advertisements received and delivered, and the
corresponding revenues and marketing expenses were recognized when
the advertisements were delivered.
Revenue Mix. Television operations accounted for 13%, 21%
and 32% and Internet operations accounted for 87%, 79% and 68% of
total revenues for 1998, 1997 and 1996, respectively. We expect
to experience fluctuations in television and Internet revenues in
the future that may be dependent on many factors, including demand
for our Internet network and television programming, and our
ability to develop, market and introduce new and enhanced Internet
content and television programming.
Significant Customers. USA Networks accounted for
approximately 10%, 16% and 19% of total revenues for 1998, 1997
and 1996 respectively, and Microsoft Corporation accounted for 10%
and 12% of total revenues for 1997 and 1996, 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.
Cost of Revenues
Total Cost of Revenues. Total cost of revenues were $30.0
million, $26.7 million and $15.3 million for 1998, 1997 and 1996,
respectively. Cost of revenues includes the costs associated with
the production and delivery of our television programming and the
production of our Internet channels. The principal elements of
cost of revenues for our television programming have been the
production costs of our television programs, which primarily
consist of payroll and related expenses for the editorial and
production staff, and costs for facilities and equipment. In
addition, prior to June 30, 1996, cost of revenues for our
television programming included the fee payable to USA Networks
under our agreement with USA Networks as then in effect. The
principal elements of cost of revenues for our Internet operations
have been payroll and related expenses for the editorial,
production and technology staff, as well as costs for facilities
and equipment.
Cost of Television Revenues. Cost of revenues for
television programming were $6.7 million, $6.9 million and $6.2
million, or 95%, 100% and 132% of the related revenues, for 1998,
1997 and 1996, respectively.
Cost of revenues for television programming in 1998 were
comparable to 1997. 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.
Cost of Internet Revenues. Cost of revenues for Internet
operations were $23.3 million, $19.8 million and $9.1 million or
47%, 74%, and 90% of the related revenues for 1998, 1997 and 1996,
respectively.
The increase in cost of revenues for Internet operations of
$3.5 million from 1997 to 1998 was primarily attributable to $2.3
million in costs associated with an Internet network that was
launched in November 1997, approximately $1.0 million in
additional costs associated with Company sponsored trade shows and
increases of approximately $4.0 million related to increased
personnel, facilities and other costs associated with growing its
Internet network. The increases in Internet cost of revenues from
1997 to 1998 were offset by cost savings resulting from the change
in percentage ownership of snap. and BuyDirect which resulted in a
reduction of costs of $3.8 million.
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 channels which operated for a full
year in 1997, as compared to a partial year during 1996, and
channels which launched in 1997. Channels that were operational
for a partial year in 1996 include CNET.Search.com,
CNET.News.com, CNET.Download.com, CNET.Gamecenter.com, and
Buydirect.com, which were launched in March 1996, September 1996,
October 1996, November 1996 and November 1996, respectively.
Channels which launched during 1997 include snap. and
Computers.com, which launched in September 1997 and November
1997, respectively. The Company anticipates increases in cost of
revenues for Internet production in the future.
Cost of Revenues Mix. Cost of television revenues accounted
for 22%, 26% and 41% and cost of Internet revenues accounted for
78%, 74% and 59% of total cost of revenues for 1998, 1997 and
1996, respectively. This mix of cost of revenues was impacted by
more rapid growth of Internet operations in each of 1998 and 1997.
We anticipate that our cost of Internet revenues will continue to
account for an increasing percentage of total cost of revenues in
future periods.
Sales and Marketing
Sales and marketing expenses consist primarily of payroll,
sales commissions, personnel related expenses, consulting fees and
advertising expenses. Sales and marketing expenses were $14.5
million, $11.6 million and $7.8 million for 1998, 1997, and 1996,
respectively. Sales and marketing expense represented 26%, 34%
and 53% of total revenues in 1998, 1997 and 1996, respectively.
The increase in sales and marketing expenses of $2.9 million
from 1997 to 1998 related primarily to increased advertising
expenditures of $2.8 million and increases of approximately $2.2
million in sales and marketing personnel and their related
expenses. The increases were partially offset by a reduction in
sales and marketing expenses resulting from the change in
percentage ownership of snap. and BuyDirect, effective
December 31, 1997 and March 31, 1998, respectively. Sales and
marketing expenses related to snap. and BuyDirect totaled
approximately $2.9 million in 1997.
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, and to increased salaries and related expenses
due to an increase in the size of our sales force. We expect
sales and marketing expenses to increase in the future as we may
pursue a more aggressive brand building strategy and as we
continue to expand our sales force.
Development
Development expenses include expenses for the development
and production of new Internet channels and research and
development of new or improved technologies, including payroll and
related expenses for editorial, production and technology staff,
as well as costs for facilities and equipment. Costs associated
with the development of a new Internet channel are no longer
recognized as development expenses when the new channel begins
generating revenue.
Development expenses were $3.5 million, $13.6 million and
$3.4 million for 1998, 1997 and 1996, respectively. Development
expenses represented 6%, 41% and 23% of total revenues for 1998,
1997 and 1996, respectively.
During 1997 we incurred expenses of $8.3 million for the
development of snap. and $3.8 million for the development of
Computers.com. Both services were launched during the fourth
quarter of 1997. During 1998, our development efforts were
primarily focused on enhancing our existing Internet network's
functionality and performance. The decrease in development
expenses from 1997 to 1998 of $10.1 million relates primarily to
the completion and launch of the snap. and Computers.com sites in
late 1997.
The increase in development expenses of $10.2 million from
1996 to 1997 was primarily attributable to the development
expenses for snap. and Computers.com incurred in 1997. The
increases in development expenses attributable to snap. and
Computers.com in 1997 were partially offset by expenses incurred
to develop and launch channels during 1996, such as Download.com
and Buydirect.com.
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, $6.8
million and $3.8 million for 1998, 1997 and 1996 respectively.
General and administrative costs represented 12%, 20% and 25% of
total revenues for 1998, 1997 and 1996, respectively.
General and administrative costs for 1998 were comparable to
1997. 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 our growth during 1997.
Unusual Items
In the first quarter of 1997, we incurred a one-time, non-
cash expense of $7.0 million related to an amendment to the
warrant agreement with USA Networks whereby we agreed that the
warrants held by USA Networks will vest in full on December 31,
2006, to the extent that they have not previously vested.
Additionally, USA Networks exercised its option to extend its
agreement with the Company to carry three of our television
programs through June 30, 1998.
In the fourth quarter of 1997, we recognized an expense of
$1.3 million related to reorganizing our real estate needs as we
had determined that based on existing and planned headcount we had
a significant excess of leased real estate. Also in the fourth
quarter of 1997, we recognized an expense of $700,000 relating to
a write-off of Internet domain names that we determined that we
would not use. Through the fourth quarter of 1998, we had
incurred expenses of approximately $379,000 related to
reorganizing our real estate needs. During the fourth quarter of
1998 we completed our planning for 1999 and determined that, due
to expected growth and potential acquisitions, we no longer had
excess leased real estate and would no longer incur expenses
related to the reorganization. We recorded a reversal of the
remaining real estate reserve of $922,000 during the fourth
quarter of 1998.
Other Income (Expense)
Total other income (expense) was $70,000, $9.4 million and
($1.4) million for 1998, 1997 and 1996, respectively. Other
income (expense) consists of equity losses, gains on the sales of
equity investments and net interest income and interest expense.
Equity losses include our interest in snap., our minority interest
in Vignette and our interest in a joint venture E! Online.
Pursuant to an agreement in June 1998, between NBC Multimedia and
us, snap., was formed as a limited liability company, whereby both
companies share control. We have recorded snap's financial
results using the equity method of accounting effective January 1,
1998.
Equity losses were $11.8 million, $2.2 million and $1.9
million for 1998, 1997 and 1996, respectively. All of the equity
losses in 1998 were related to snap. The equity losses in 1997
were attributable to $1.8 million related to the E! Online joint
venture and $417,000 related to our Vignette investment. All of
the equity losses in 1996 related to E! Online.
Gains on the sale of equity investments were $10.5 million
and $11.0 million for 1998 and 1997, respectively. The gain on
sales of equity investment in 1998 were primarily attributable to
a gain related to the sale of a portion of our Vignette investment
of $9.8 million. The gain on sale of equity investments in 1997
was related to the sale of all our ownership in E! Online.
Income Taxes
We had net income for 1998 and a net loss for each of 1997
and 1996. As of December 31, 1998, we had approximately $61
million of net operating loss carryforwards for federal income tax
purposes, which expire between 2008 and 2018. We also have
approximately $24 million of net operating loss carryforwards for
state income tax purposes, which expire between 1999 and 2003. We
experienced an "ownership change" as defined by Section 382 of the
Internal Revenue Code in October 1994. As a result of the
ownership change, our use of the federal and state net operating
loss carryforwards is subject to limitation. The ability to use
net operating loss carryforwards may be further limited should we
experience another "ownership change" as defined by Section 382 of
the Internal Revenue Code. See Note 3 of Notes to Consolidated
Financial Statements.
Income (Loss)
We recorded net income of $2.6 million or $0.7 per diluted
share for 1998, compared to net losses of $24.7 million or $0.91
per share and $16.9 million or $1.06 per share for 1997 and 1996,
respectively. Net income was $2.6 million for 1998 as compared to
a net loss of $24.7 million for 1997. The change from 1997 to
1998 was attributable to an increase in total revenues of $22.8
million, a reduction of unusual items expense of approximately
$8.1 million, a reduction in other income of $9.3 million and
increases to cost of revenues and operating expenses (excluding
unusual items) of $4.0 million. The net loss for each of the
years 1997 and 1996 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.
Liquidity and Capital Resources
As of December 31, 1998, we had cash and cash equivalents of
$51.5 million compared to $22.6 million in 1997. Cash provided by
operating activities of $9.2 million in 1998 was primarily due to
earnings of $2.6 million and depreciation, amortization and the
amortization of program costs of $12.1 million. Net cash used in
operating activities of $5.9 million and $8.9 million for 1997 and
1996 respectively, were primarily attributable to net losses in
such periods. Net cash used in investing activities of $11.0
million, $19.7 million and $18.5 million for 1998, 1997 and 1996,
respectively, were primarily attributable to purchases of
equipment and programming assets. Cash flows provided by financing
activities of $30.8 million in 1998 consisted primarily of the
issuance of common stock through a private placement in June of
1998, and the issuance of common stock through the exercise of
warrants, our stock option plans and our Employee Stock Purchase
Plan. Cash flows provided by financing activities in 1997
consisted primarily of proceeds from the issuance of common stock
in private placements. Cash flows provided by financing
activities in 1996 consisted primarily of proceeds from our IPO,
the private sale of common stock to Intel and the issuance of
preferred stock. We believe that existing funds will be sufficient
to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 12 months.
As of December 31, 1998 we had obligations outstanding under
a note payable and under certain capital leases of $1.7 million.
Such obligations were incurred to finance equipment purchases and
are payable through May 2008.
On March 31, 1998, we contributed our ownership in
BuyDirect and net assets related to BuyDirect of approximately
$744,000, to a new venture that was separately owned by
BuyDirect's existing management group. Prior to the transaction,
BuyDirect was a wholly owned division of the Company that
distributed electronic software. As part of the transaction, we
received a 19% ownership interest in the new venture,
BuyDirect.com. We used the cost method of accounting for the
investment, effective April 1, 1998. Prior to March 31, 1998 the
operating results of BuyDirect were included in our consolidated
results. BuyDirect.com recently entered into a merger agreement
with beyond.com. This merger will result in our owning
approximately 800,000 shares of beyond.com.
In May of 1998 we acquired U.Vision Inc. In the
acquisition, we issued 1,089,930 shares of common stock in
exchange for all of the outstanding shares of U.Vision. U.Vision
owned and operated ComputerESP, a pricing and availability engine
for buying computer products on the Internet. Subsequent to the
merger, we relaunched ComputerESP as Shopper.com. We recorded
this transaction using the pooling-of-interests accounting method
and recorded the financial results of U.Vision in our
consolidated financial statements effective April 1, 1998. The
financial statements prior to April 1, 1998 were not adjusted for
the financial results of U.Vision as the impact was not material.
In June of 1998 we entered into an agreement with NBC
Multimedia, Inc. ("NBC Multimedia") to form a limited liability
company to operate the snap. Internet portal service. The newly
formed company was called Snap! LLC. Prior to the agreement,
snap. was a wholly owned division of the Company. Pursuant to
the agreement, we contributed to Snap! LLC substantially all of
the assets used exclusively in the operation of the snap.
service. Initially, we own 81% of Snap! LLC and NBC Multimedia
owns 19%. However, NBC Multimedia has an option to increase its
ownership to 60%. Effective January 1, 1998, we recorded snap.'s
financial results using the equity method of accounting, due to
certain contractual control provisions. Prior to January 1,
1998, the operating results of snap. were included in our
consolidated results.
In June of 1998 we completed the sale of 1,625,600 shares
of common stock to National Broadcasting Company, Inc. ("NBC").
The aggregate purchase price for the shares sold was $26.2
million.
On February 9, 1999, we announced an agreement with
American Online, Inc. whereby we will become the exclusive
provider of computer hardware and software buying guides on the
AOL service and on AOL.com, as well as the primary provider of
computer buying guides on CompuServe, Digital City, AOL Hometown
and certain AOL international properties. Under the terms of the
agreement, AOL will receive guaranteed payments from us of $14.5
million over approximately 27 months.
On February 16, 1999, we acquired NetVentures, Inc. in a
stock-for-stock exchange valued at approximately $12.5 million.
NetVentures owns and operates ShopBuilder (www.shopbuilder.com),
an online store-creation system.
On February 19, 1999, we acquired AuctionGate Interactive,
Inc. in a stock-for-stock exchange valued at approximately $6.5
million. AuctionGate owns and operates AuctionGate.com, an
auction site specializing in computer products.
On February 26, 1999, we acquired the assets of
Winfiles.com, a leading software downloading service, from
Jenesys LLC for a total purchase price of $11.5 million, payable
in cash in two installments of $5.75 million.
On March 8, 1999, we effected a 2-for-1 split of our common
stock that was distributed in the form of a stock dividend to our
common stock holders as of February 22, 1999.
On March 8, 1999, we also completed a private placement
with gross proceeds of $172.9 million of our 5% convertible
subordinated notes. The placement will be subject to certain
fees and expenses. The notes are due March 1, 2006, and we pay
interest on March 1 and September 1 of each year. The notes are
convertible beginning June 7, 1999, at the option of the
noteholder, into shares of our common stock at a conversion price
of $74.8125 per share. The conversion price of the notes will be
adjusted if certain events that are described in the terms of the
notes occur. We may repurchase or redeem the notes at our option
at any time beginning March 6, 2002 at the following prices, plus
accrued and unpaid interest and liquidated damages, if any,
Year Redemption Price Year Redemtion Price
2002 102.857% 2004 101.429%
2003 2.143% 2005 100.714%
A noteholder may require us to repurchase the notes if a change
of control of the Company, as described in the terms of the
notes, occurs or if our common stock is no longer listed for
trading on Nasdaq or another stock exchange. If one of these
events occurs and the noteholder requires us to repurchase the
notes, we will repurchase the notes at a purchase price equal to
the face amount of the notes, plus accrued and unpaid interest
and liquidated damages, if any.
In connection with the private placement, we also agreed to
file a registration statement with the Securities and Exchange
Commission so that the noteholders, and the holders of shares of
our common stock issued upon the conversion of the notes, will be
able to resell the notes and the common stock. If we fail to
file the registration statement by May 7, 1999, fail to cause the
registration statement to become effective by August 5, 1999, or
if we suspend the use of the related prospectus in excess of 60
days within any 12-month period, we will be required to pay
additional interest on the notes. This additional interest is
referred to as liquidated damages. We will pay an additional
.25% of interest on the notes for the first 90 days of any such
failure, and pay an additional .50% of interest on the notes for
the period of time that our failure exceeds 90 days.
The notes are general, unsecured obligations of the Company
and are subordinate to all of our senior debt, as defined in the
terms of the notes. The terms of the notes do not limit our
ability to incur other indebtedness and we are not required to
make periodic payments on the principal of the notes except as
described above.
On March 22, we acquired KillerApp Corporation in a stock-
for-stock exchange valued at approximately $46 million.
KillerApp owns and operates KillerApp.com, an online comparison
shopping service for computer and consumer electronics products.
Seasonality
We believe that advertising sales in traditional media,
such as television, are generally lower in the first and third
calendar quarters of each year than in the respective preceding
quarters and that advertising expenditures fluctuate
significantly with economic cycles. Depending on the extent to
which the Internet is accepted as an advertising medium,
seasonality and cyclicality in the level of advertising
expenditures generally could become more pronounced for Internet
advertising. Seasonality and cyclicality in advertising
expenditures generally, or with respect to Internet-based
advertising specifically, could have a material adverse effect on
our business, prospects, financial condition and operating
results.
We may also experience seasonality in our operating results,
particularly in connection with our shopping services which may
reflect seasonal trends in the retail industry. The level of
consumer retail spending generally decreases in the first and
third calendar quarters. Advertising expenditures, which account
for substantially all of our revenues, are also subject to
seasonal fluctuations and are influenced by consumer spending
patterns.
Year 2000 Compliance
We are aware of the issues associated with the programming
code and embedded technology in existing systems as the year 2000
approaches. The "Year 2000 Issue" arises from the potential for
computers to fail or operate incorrectly because their programs
incorrectly interpret the two digit date fields "00" as 1900 or
some other year, rather than the year 2000. The year 2000 issue
creates risk for us from unforeseen problems in our own computer
systems and from third parties, including customers, vendors and
manufacturers, with whom we deal. Failures of our and/or third
parties' computer systems could result in an interruption in, or
a failure of certain normal business activities or operations.
Such failures could materially and adversely affect our business,
prospects, financial condition and operating results.
To mitigate this risk, we have established a formal year 2000
program to oversee and coordinate the assessment, remediation,
testing and reporting activities related to this issue. We are
currently in the assessment phase of our year 2000 program. As
part of this assessment, we will review the following systems to
determine if they are year 2000 compliant:
* our application systems (financial systems, various
custom-developed business applications)
* technology infrastructure (networks, servers, desktop
equipment)
* facilities (security systems, fire alarm systems)
* vendors/partners and products.
This review will include:
* the collection of documentation from software and
hardware manufacturers
* the detailed review of programming code for custom
applications
* the physical testing of desktop equipment using software
designed to test for year 2000 compliance
* the examination of key vendors'/partners' year 2000
programs
* the ongoing testing of our products as part of normal
quality assurance activities.
We anticipate that we will complete the assessment and
remediation phase and begin the testing phase of our year 2000
program by the third quarter of 1999. We have not made estimates
for the costs associated with completing our year 2000 program,
but will do so after completion of the assessment phase of the
project. Costs incurred to date, including costs of personnel,
have not been material. We can offer no assurance that we will
not experience serious unanticipated negative consequences and/or
additional material costs caused by undetected errors or defects
in the technology used in our internal systems, or by failures of
our vendors/partners to address their year 2000 issues in a
timely and effective manner.
Should miscalculations or other operational errors occur as a
result of the year 2000 issue, we or the parties on which we
depend may be unable to produce reliable information or to
process routine transactions. Furthermore, in the worst case, we
or the parties on which we depend may be incapable of conducting
critical business activities which include, but are not limited
to, the production and delivery of our Internet channels,
invoicing customers and paying vendors, which could have a
material adverse effect on our business, prospects, financial
condition and operating results.
Cautionary Statement Regarding Factors That May Affect Our
Business and Our Future Results
Our disclosure and analysis in this report contains
"forward-looking statements". Forward-looking statements are any
statements other than statements of historical fact. Examples of
forward-looking statements include projections of earnings,
revenues or other financial items, statements of the plans and
objectives of management for future operations, statements
concerning proposed new products or services, statements
regarding future economic conditions or performance, and any
statement of assumptions underlying any of the foregoing. In
some cases, you can identify forward-looking statements by the
use of words such as "may," "will," "expects," "believes",
"plans," "anticipates," "estimates," "potential," or "continue,"
and any other words of similar meaning.
Any or all of our forward-looking statements in this report
and in any other public statements we make may turn out to be
wrong. They can be affected by inaccurate assumptions we might
make or by known or unknown risks and uncertainties. Many
factors mentioned in the discussion in this report will be
important in determining future results. Consequently, no
forward-looking statement can be guaranteed. Actual future
results may vary materially.
We undertake no obligation to publicly update any forward-
looking statements, whether as a result of new information,
future events or otherwise. You are advised, however, to consult
any further disclosures we make on related subjects in our 10-Q
and 8-K reports to the SEC. Also note that we provide the
following cautionary discussion of risks, uncertainties and
possibly inaccurate assumptions relevant to our businesses.
These are factors that we think could cause our actual results to
differ materially from expected and historical results. Other
factors besides those listed here could also adversely affect the
Company. This discussion is provided as permitted by the Private
Securities Litigation Reform Act of 1995.
We Have A Limited Operating History and an Accumulated
Deficit. We have a limited operating history upon which you can
evaluate us. Our prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by
companies in developing industries, particularly companies in the
relatively new and rapidly evolving market for Internet products,
content and services. Such risks for us include, but are not
limited to:
* an evolving and unpredictable business model
* uncertain acceptance of new services including CNET
Shopper.com
* competition
* management of growth.
To address these risks, we must, among other things:
* develop new relationships and maintain existing
* relationships with our advertising customers, their
' advertising agencies and other third parties
* provide original and compelling content to Internet users
and television viewers
* develop and upgrade our technology
* implement and successfully execute our business and
marketing strategy
* successfully expand into new products, services or
markets
* effectively manage and integrate acquisitions and other
business combinations
* respond to competitive developments
* attract, retain and motivate qualified personnel.
We cannot assure you that we will succeed in addressing such
risks. If we fail to do so, our revenues and operating results
could be materially reduced.
Additionally, our limited operating history and the emerging
nature of the markets in which we compete makes the prediction of
future operating results difficult or impossible. We can offer no
assurance that our revenues will increase or even continue at
their current level or that we will maintain profitability or
generate cash from operations in future periods. In addition,
interest that we pay on our 5% convertible subordinated notes and
costs of our acquisitions, including amortization of goodwill and
other purchased intangibles and ongoing operating expenses, will
or may further affect our operating results. From our inception
until the third quarter of 1998, we incurred significant losses.
As of December 31, 1998, we had an accumulated deficit of $51.2
million. We may continue to incur losses in the future. For
example, if we were to increase significantly our marketing
expenses, which we are considering, it is possible that we would
incur losses as a result. In view of the rapidly evolving nature
of our business and our limited operating history, we believe that
period-to-period comparisons of our operating results are not
necessarily meaningful and should not be relied upon as an
indication of future performance.
If currently available cash and cash generated by operations
is insufficient to satisfy our liquidity requirements, we 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 our stockholders. There can be no
assurance that financing will be available in amounts or on terms
that we find acceptable.
We May Experience Fluctuations in Our Quarterly Operating
Results. Our quarterly operating results may fluctuate
significantly in the future as a result of a variety of factors,
many of which are outside our control. Factors that may
adversely affect our quarterly operating results attributable to
our Internet operations include, among others:
* demand for Internet advertising
* the addition or loss of advertisers, and the advertising
budgeting cycles of individual advertisers
* the level of traffic on our network of Internet channels
* the amount and timing of capital expenditures and other
costs (including marketing costs) relating to the
expansion of our Internet operations
* competition
* our ability to manage effectively our development of new
business segments and markets
* our ability to successfully manage the integration of
operations and technology of acquisitions and other
business combinations
* our ability to upgrade and develop our systems and
infrastructure
* technical difficulties, system downtime or Internet
brownouts
* governmental regulation and taxation policies
* general economic conditions and economic conditions
specific to the Internet and Internet media.
We may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Accordingly, any
significant shortfall in revenues in relation to our planned
expenditures could materially reduce our operating results and
adversely affect our financial condition.
Quarterly operating results attributable to our television
operations are generally dependent on the costs we incur in
producing our television programming. If the costs of producing
television programs exceed licensing and distribution revenues, we
could incur a gross deficit with respect to our television
operations. As a result of our strategy to cross market our
television and Internet operations, a decrease in the number of
viewers of our television programs may have a negative effect on
the usage of our Internet channels which would materially reduce
our revenues and adversely affect our financial condition.
Due to all of the foregoing factors, it is likely that our
operating results may fall below our expectations or the
expectations of securities analysts or investors in some future
quarter. In such event, the trading price of our common stock
would likely be materially adversely affected.
Our Internet Content and Services May Not be Accepted. Our
future success depends upon our ability to deliver original and
compelling Internet content and services in order to attract and
retain users. We cannot assure you that our content and services
will be attractive to a sufficient number of Internet users to
generate revenues sufficient for us to sustain operations. If we
are unable to develop Internet content and services that allow us
to attract, retain and expand a loyal user base possessing
demographic characteristics attractive to advertisers and sellers
of technology products, we will be unable to generate revenue.
Our Television Programming May Not be Accepted. We cannot
assure you that television broadcasters, cable networks or their
viewers will accept our television programming. 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
* attract and retain qualified producers, writers,
technical personnel and television hosts.
We may be unable to increase or sustain our revenues if we fail
to develop television programming that allows us to attract,
retain and expand a loyal television audience, or if we fail to
retain or develop distribution channels for our television
programming.
We Face Significant 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 we will compete successfully with
current or future competitors.
We May Have Difficulties Managing Our Growth. We have
rapidly and significantly expanded our operations and anticipate
that further expansion of our operations may be required in order
to address potential market opportunities. This rapid growth has
placed, and is expected to continue to place, a significant strain
on our management, operational and financial resources. We cannot
assure you that our current personnel, systems, procedures and
controls will be adequate to support our future operations, 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.
We Have Risks Associated With System Development and
Operations. Our Internet revenues consist primarily of revenues
derived from the sale of advertisements and other fees from
sellers of technology products on our Internet channels, in
particular from arrangements with our advertising customers that
provide for a guaranteed number of impressions. Any system
interruptions that result in the unavailability of our Internet
channels may result in us being unable to deliver the number of
impressions guaranteed by such agreements. During 1998, we
experienced two power interruptions which resulted in the
unavailability of our Internet channels and services for portions
of two days. We can offer no assurance that we will be able to
accurately project the rate or timing of increases, if any, in
the use of our Internet channels or will be able to, in a timely
manner, effectively upgrade and expand our systems.
We are Dependent on Our Advertising Revenues. Our revenues
through December 31, 1998 were derived primarily from the sale of
advertising and other fees from sellers of technology products on
our Internet channels and from advertising and license fees from
producing our television programs. Most of our advertising
contracts can be terminated by the customer at any time on very
short notice. If we lose advertising customers, fail to attract
new customers or are forced to reduce advertising rates in order
to retain or attract customers, our revenues and financial
condition will be materially adversely affected.
The Internet May Not Be Accepted as an Advertising Medium.
Our 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. Some of our potential customers have
little or no experience with the Internet as an advertising medium
and have not devoted significant portions of their advertising
budgets to Internet-based advertising in the past. In order for
us to generate advertising revenues, advertisers and advertising
agencies must direct a significant portion of their budgets to the
Internet and, specifically, to our Internet sites. Acceptance of
the Internet among advertisers and advertising agencies also
depends to a large extent on the growth of use of the Internet by
consumers, which is highly uncertain, and on the acceptance of new
methods of conducting business and exchanging information. If
Internet-based advertising is not widely accepted by advertisers
and advertising agencies, our revenues and financial condition
will be materially adversely affected. In addition, users can
purchase software that is designed to block banner advertisements
from appearing on their computer screens as the user navigates on
the Internet. This software is intended to increase the
navigation speed for the user. Our revenues could be materially
reduced if this software or other ad-blocking technology becomes
widely-used.
Brand May Not Be Accepted or Maintained. Promotion of the
CNET brand will depend largely on our success in providing high
quality Internet and television programming. If consumers do not
perceive our existing Internet and television content to be of
high quality, or if we introduce new Internet channels or
television programs or enter into new business ventures that are
not favorably received by consumers, we will not be successful in
promoting and maintaining our brand. If we are unable to provide
high quality content and services or otherwise fail to promote
and maintain our brand, or if we incur excessive expenses in an
attempt to or promote and maintain our brand, our revenues and
financial condition will be materially adversely affected.
The Loss of Key Personnel Could Adversely Affect Our
Business. Our performance is substantially dependent on the
continued services of Halsey M. Minor, Shelby W. Bonnie and the
other members of our senior management team, as well as on our
ability to retain and motivate our other officers and key
employees. We do not have "key person" life insurance policies
on any of our officers or other employees. Our future success also
depends on our ability to attract and retain highly qualified
personnel. The production of content and services for the
Internet and television requires highly skilled writers and
editors and personnel with sophisticated technical expertise. We
have encountered difficulties in attracting qualified software
developers for our Internet channels and related technologies.
The failure to attract and retain the necessary technical,
managerial, editorial and sales personnel could have a material
adverse effect on our business and operating results.
We Have Risks Associated With Television Distribution and
We Are Dependent on USA Networks. Our 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 that expires on June 30, 1999. We cannot assure you
that we will be able to obtain distribution for our television
programming after June 30, 1999. In such event, our brand,
revenues and financial condition may be materially and adversely
affected.
We Are Subject to Risks Associated With 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 we continually improve the
performance, features and reliability of our Internet content,
particularly in response to competitive offerings. We can offer
no assurance that we will be successful in responding quickly,
cost effectively and sufficiently to these developments. In
addition, the widespread adoption of new Internet technologies or
standards could require substantial expenditures by us to modify
or adapt our Internet channels and services and could
fundamentally affect the character, viability and frequency of
Internet-based advertising. Any of these events could have a
material adverse effect on our financial condition and operating
results.
We Depend on Third Parties for Our Internet Operations. We
rely on the cooperation of owners and operators of other Internet
sites in connection with the operation of our Internet channels
and services. We can offer no assurance that such cooperation
will be available on acceptable commercial terms or at all. Our
ability to develop original and compelling Internet content and
service 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
* Sun Microsystems' Java
Our ability to advertise on other Internet sites and the
willingness of the owners of such sites to direct users to our
Internet channels through hypertext links are also critical to the
success of our Internet operations. If we are unable to develop
and maintain satisfactory relationships with such third parties on
acceptable commercial terms, or if our competitors are better able
to leverage such relationships, our financial condition and
operating results will be materially adversely affected.
We Have Risks Associated With Our Potential Acquisitions
and Investments. From time to time, we consider new business
opportunities and ventures, including acquisitions, in a broad
range of areas. Any decision by us to pursue a significant
business expansion or new business opportunity would likely
require a substantial investment of capital, which could have a
material adverse effect on our financial condition and our ability
to implement our existing business strategy, or the issuance of
additional equity interests, which would be dilutive to our
current stockholders. Any investment could also result in
operating losses for us. Further, the pursuit of expansion or new
business opportunities would place additional, substantial burdens
on our management personnel and our financial and operational
systems. In addition, we can offer no assurance that we will have
sufficient capital to pursue any investment or acquisition. We
can offer no assurance that we will be able to develop any new
Internet channel or service or other new business venture in a
cost effective or timely manner or that it would achieve market
acceptance. We cannot assure you that any significant business
expansion or new business opportunity would ever be profitable.
We Have Risks Associated With Business Combinations and
Strategic Alliances. We may choose to expand our operations or
market presence by entering into agreements, business
combinations, investments, joint ventures or other strategic
alliances with third parties, such as our agreement with America
Online, or our joint venture with an affiliate of NBC to operate
the snap. Internet portal service. Any such transaction will be
accompanied by risks commonly encountered in such transactions,
which include, among others:
* the difficulty of assimilating the operations,
technology and personnel of the combined companies
* the potential disruption of our ongoing business
* the possible inability to retain key technical and
managerial personnel
* additional expenses associated with amortization of
goodwill and other purchased intangible assets
* additional operating losses and expenses associated with
the activities and expansion of acquired businesses
* the possible impairment of relationships with existing
employees and advertising customers.
There can be no assurance that we will be successful in
overcoming these risks or any other problems encountered in
connection with such business combination, investments, joint
ventures or other strategic alliances, or that such transactions
will be profitable.
We Are Dependent on Intellectual Property Rights and Others
May Infringe Upon Those Rights. We rely on trade secret and
copyright laws to protect our proprietary technologies. We
cannot assure you that such laws will provide sufficient
protection, that others will not develop technologies that are
similar or superior to ours, or that third parties will not copy
or otherwise obtain and use our technologies without
authorization.
We Have Risks Associated with Domain Names. We currently
hold various Web domain names relating to our brand and sites.
The acquisition and maintenance of domain names generally is
regulated by governmental agencies and their designees. For
example, in the United States, the National Science Foundation
has appointed Network Solutions, Inc. as the current exclusive
registrar for the ".com," ".net" and ".org" generic top-
level domains. The regulation of domain names in the United
States and in foreign countries is subject to change. We cannot
assure you that we will be able to acquire or maintain relevant
domain names in all countries in which we conduct business.
Furthermore, the relationship between regulations governing
domain names and laws protecting trademarks and similar
proprietary rights is unclear. We, therefore, may be unable to
prevent third parties from acquiring domain names that are
similar to, or infringe upon or otherwise decrease the value of
our trademarks and other proprietary rights. Any such inability
could have a material adverse effect on our business.
We Have Risks Associated With Government Regulation and
Legal Uncertainties. 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 us to
significant liabilities.
We are Dependent on the Continued Growth in Use of the
Internet. Rapid growth in the use of and interest in the Internet
is a recent phenomenon. We can offer no assurance that
acceptance and use of the Internet will continue to develop or
that a sufficient base of users will emerge to support our
business.
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, we can offer 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. 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, our revenues and financial condition would be materially
adversely affected.
We Have Capacity Constraints and May be Subject to System
Disruptions. The satisfactory performance, reliability and
availability of our Internet channels and our network
infrastructure are critical to attracting Internet users and
maintaining relationships with advertising customers. Our
Internet advertising revenues are directly related to the number
of advertisements delivered by us to users. System interruptions
that result in the unavailability of our Internet channels or
slower response times for users would reduce the number of
advertisements delivered and reduce the attractiveness of our
Internet channels to users and advertisers. We have experienced
periodic system interruptions in the past and believe that such
interruptions will continue to occur from time to time in the
future. Any increase in system interruptions or slower response
times resulting from the foregoing factors could have a material
adverse effect on our revenues and financial condition.
Our Internet and television operations are vulnerable to
interruption by fire, earthquake, power loss, telecommunications
failure and other events beyond our control. All of our servers
and television production equipment is currently located in San
Francisco, California, an area that is susceptible to
earthquakes. Since launching our first Internet site in June
1995, we have experienced system downtime for limited periods 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 our operations in
the future. We do not carry sufficient business interruption
insurance and do not carry earthquake insurance to compensate us
for losses that may occur, and any losses or damages incurred by
us could have a material adverse effect on our financial
condition.
We May Be Liable for Our Internet and Television Content.
As a publisher and a distributor of content over the Internet and
television, we also face potential liability for defamation,
negligence, copyright, patent or trademark infringement and other
claims based on the nature and content of the materials that we
publish or distribute. Such claims have been brought, and
sometimes successfully pressed, against online services. In
addition, we could be exposed to liability with respect to
material indexed or offered on our sites. Although we carry
general liability insurance, our insurance may not cover
potential claims of this type or may not be adequate to indemnify
us for all liability that may be imposed. Any imposition of
liability that is not covered by insurance or is in excess of
insurance coverage could have a material adverse effect on our
financial condition.
We Have Security Risks. A party who is able to circumvent
our security measures could misappropriate proprietary
information or cause interruptions in our Internet operations. We
may be required to expend significant capital and resources to
protect against the threat of such security breaches or to
alleviate problems caused by such breaches. For example, so-
called "spiders" have and can be used in efforts to copy our
databases, including our database of technology products and
prices.
Concerns over the security of Internet transactions and the
privacy of users may also inhibit the growth of the Internet,
particularly as a means of conducting commercial transactions.
To the extent that activities of us or third party contractors
involve the storage and transmission of proprietary information,
such as computer software or credit card numbers, security
breaches could expose us to a risk of loss or litigation and
possible liability. There can be no assurance that contractual
provisions attempting to limit our liability in such areas will
be successful or enforceable, or that other parties will accept
such contractual provisions as part of our agreements.
We Are Dependent on Licensed Technology. We rely 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 us on acceptable
commercial terms or at all.
We Have Substantial Indebtedness. As a result of the sale
of our 5% convertible subordinated notes in March 1999 we
incurred $172.9 million of additional indebtedness. Along with
the notes, we may incur substantial additional indebtedness in
the future. The level of our indebtedness, among other things,
could:
* make it difficult for us to make payments on the notes
* make it difficult for us to obtain any necessary
financing in the future for working capital, capital
expenditures, debt service requirements or other
purposes
* limit our flexibility in planning for, or reacting to
changes in, our business
* make us more vulnerable in the event of a downturn in
our business.
We can offer no assurance that we will be able to meet our
debt service obligations including our
obligations under the notes.
We May Be Unable To Pay Our Debt Service and Other
Obligations. Our operating income and cash flow generated during
1998 would have been insufficient to pay the amount of interest
payable annually on our indebtedness, including our notes. We
can offer no assurance that we will be able to pay interest and
other amounts due on the notes or our other indebtedness. If we
are unable to generate sufficient cash flow or otherwise obtain
funds necessary to make required payments, or if we otherwise
fail to comply with the various covenants in our indebtedness, we
would be in default under the terms thereof, which would permit
the holders of such indebtedness to accelerate the maturity of
such indebtedness and could cause defaults under our other
indebtedness. Any such default could have a material adverse
effect on our financial condition.
We Face Uncertainty Relating to the Year 2000 Issue. We
are in the assessment phase of our year 2000 program. We can
offer no assurance that we will not experience serious
unanticipated negative consequences and/or additional material
costs caused by undetected errors or defects in the technology
used in our internal systems, or by failures of our
vendors/partners to address their year 2000 issues in a timely
and effective manner.
The Price of Our Common Stock Is Subject to Wide
Fluctuation. The trading price of our common stock is subject to
wide fluctuations. Trading prices of our common stock may
fluctuate in response to a number of events and factors, such as:
* quarterly variations in operating results
* announcements of innovations
* new products, strategic developments or business
combinations by us or our competitors
* changes in our expected operating expense levels or
losses
* changes in financial estimates and recommendations of
securities analysts
* the operating and securities price performance of other
companies that investors may deem comparable to us
* news reports relating to trends in the Internet.
* other events or factors many of which are beyond our
control.
In addition, the stock market in general, and the market
prices for Internet-related companies in particular, have
experienced extreme volatility that often has been unrelated to
the operating performance of such companies. These broad market
and industry fluctuations may adversely affect the trading price
of our common stock, regardless of our operating performance.
Certain Provisions of Our Certificate of Incorporation,
Bylaws and Delaware Law Could Deter Takeover Attempts. Some
provisions in our certificate of incorporation and bylaws could
delay, prevent or make more difficult a merger, tender offer,
proxy contest or change of control. Our stockholders might view
any such transaction as being in their best interest since the
transaction could result in a higher stock price than the current
market price for our common stock. Among other things, our
certificate of incorporation and bylaws:
* authorize our board of directors to issue preferred
stock in series with the terms of each series to be
fixed by our board of directors
* divide our board of directors into three classes so that
only approximately one-third of the total number of
directors is elected each year
* permit directors to be removed only for cause
* specify advance notice requirements for stockholder
proposals and director nominations
In addition, with certain exceptions, the Delaware General
Corporation Law restricts mergers and other business combinations
between us and any stockholder that acquires 15% or more of our
voting stock.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
We are exposed to the impact of interest rate changes and changes
in the market values of our investments.
Interest Rate Risk. Our exposure to market rate risk for
changes in interest rates relates primarily to our investment
portfolio. We have not used derivative financial instruments in
our investment portfolio. We invest our excess cash in debt
instruments of the U.S. Government and its agencies, and in high-
quality corporate issuers and, by policy, limits the amount of
credit exposure to any one issuer. We protect and preserve our
invested funds by limiting default, market and reinvestment risk.
Investments in both fixed rate and floating rate interest
earning instruments carries a degree of interest rate risk. Fixed
rate securities may have their fair market value adversely
impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest rates
fall. Due in part to these factors, our future investment income
may fall short of expectations due to changes in interest rates or
we may suffer losses in principal if force to sell securities
which have declined in market value due to changes in interest
rates.
Investment Risk. We invest in equity instruments of
privately-held, information technology companies for business and
strategic purposes. These investments are included in other long-
term assets and are accounted for under the cost method when
ownership is less that 20%. For these non-quoted investments, our
policy is to regularly review the assumptions underlying the
operating performance and cash flow forecasts in assessing the
carrying values. We identify and record impairment losses on
long-lived assets when events and circumstances indicate that such
assets might be impaired. In February 1999, one of these
investments in a privately-held company became a marketable equity
security when the investees completed an initial public offering.
Such investment, which is in the Internet industry, is subject to
significant fluctuations in fair market value due to the
volatility of the stock market, and is recorded as long-term
investments.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
We are exposed to the impact of interest rate changes and changes
in the market values of our investments.
Interest Rate Risk. Our exposure to market rate risk for
changes in interest rates relates primarily to our investment
portfolio. We have not used derivative financial instruments in
our investment portfolio. We invest our excess cash in debt
instruments of the U.S. Government and its agencies, and in high-
quality corporate issuers and, by policy, limits the amount of
credit exposure to any one issuer. We protect and preserve our
invested funds by limiting default, market and reinvestment risk.
Investments in both fixed rate and floating rate interest
earning instruments carries a degree of interest rate risk. Fixed
rate securities may have their fair market value adversely
impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest rates
fall. Due in part to these factors, our future investment income
may fall short of expectations due to changes in interest rates or
we may suffer losses in principal if force to sell securities
which have declined in market value due to changes in interest
rates.
Investment Risk. We invest in equity instruments of
privately-held, information technology companies for business and
strategic purposes. These investments are included in other long-
term assets and are accounted for under the cost method when
ownership is less that 20%. For these non-quoted investments, our
policy is to regularly review the assumptions underlying the
operating performance and cash flow forecasts in assessing the
carrying values. We identify and record impairment losses on
long-lived assets when events and circumstances indicate that such
assets might be impaired. In February 1999, one of these
investments in a privately-held company became a marketable equity
security when the investees completed an initial public offering.
Such investment, which is in the Internet industry, is subject to
significant fluctuations in fair market value due to the
volatility of the stock market, and is recorded as long-term
investments.
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, 1998 and 1997 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, 1998. 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 a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of CNET, Inc. and subsidiaries as of December 31,
1998 and 1997, and the results of their operations and their cash
flows for each of the years in the three-year period ended December
31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
San Francisco, California
February 9, 1999, except
as to paragraph 5 of
footnote 5 and footnote 10,
which are as of March 22, 1999
CNET, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
1998 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $51,533,655 $22,553,988
Accounts receivable, net of allowance for
doubtful accounts of $1,721,625 and $461,000
in 1998 and 1997, respectively 15,074,639 9,149,762
Accounts receivable, related party 1,710,745 --
Other current assets 1,704,765 1,134,957
Restricted cash 945,330 1,599,113
------------ ------------
Total current assets 70,969,134 34,437,820
Property and equipment, net 15,325,512 19,553,537
Other assets 2,059,806 4,270,321
------------ ------------
Total assets $88,354,452 $58,261,678
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,476,654 $3,567,783
Accrued liabilities 6,592,819 10,080,504
Current portion of long-term debt 1,112,512 1,358,772
------------ ------------
Total current liabilities 11,181,985 15,007,059
Long-term debt 569,245 2,611,815
------------ ------------
Total liabilities 11,751,230 17,618,874
Commitments and contingencies
Stockholders' equity:
Common stock; $0.0001 par value;
50,000,000 shares authorized; 34,119,948
and 29,324,370 shares issued and
outstanding in 1998 and 1997,
respectively 3,412 2,936
Additional paid-in capital 127,770,245 94,696,127
Accumulated deficit (51,170,435) (54,056,259)
------------ ------------
Total stockholders' equity 76,603,222 40,642,804
------------ ------------
Total liabilities and stockholders' equity $88,354,452 $58,261,678
============ ============
See accompanying notes to consolidated financial statements.
CNET, INC.
CONDOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
------------------------------------------
1998 1997 1996
------------- ------------- ------------
Revenues:
Internet $49,374,195 $26,717,280 $10,133,684
Television 7,057,885 6,922,309 4,696,664
------------- ------------- ------------
Total revenues 56,432,080 33,639,589 14,830,348
------------- ------------- ------------
Cost of revenues:
Internet 23,291,215 19,812,604 9,120,545
Television 6,741,133 6,904,471 6,212,959
------------- ------------- ------------
Total cost of revenues 30,032,348 26,717,075 15,333,504
------------- ------------- ------------
Gross profit (deficit) 26,399,732 6,922,514 (503,156)
------------- ------------- ------------
Operating expenses:
Sales and marketing 14,530,355 11,602,746 7,821,454
Development 3,454,387 13,608,846 3,438,333
General and administrative 6,806,886 6,848,793 3,772,368
Unusual items (921,839) 9,000,000 --
------------- ------------- ------------
Total operating expenses 23,869,789 41,060,385 15,032,155
------------- ------------- ------------
Operating income(loss) 2,529,943 (34,137,871) (15,535,311)
Other income(expense):
Equity losses (11,795,944) (2,228,430) (1,865,299)
Gain on sale of equity investments 10,450,342 11,026,736 --
Interest income (expense), net 1,415,616 611,473 451,948
------------- ------------- ------------
Total other income (expense) 70,014 9,409,779 (1,413,351)
------------- ------------- ------------
Net income (loss) $2,599,957 ($24,728,092) ($16,948,662)
============= ============= ============
Basic net income (loss) per share $0.08 ($0.91) ($1.06)
============= ============= ============
Diluted net income (loss) per share $0.07 ($0.91) ($1.06)
============= ============= ============
Shares used in calculating 31,932,530 27,223,642 15,927,794
basic per share data ============= ============= ============
Shares used in calculating
diluted per share data 34,852,938 27,223,642 15,927,794
============= ============= ============
See accompanying notes to consolidated financial statements.
CNET, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Convertible
Preffered Stock Common Stock Additional Total
-------------------- ------------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
----------- -------- ----------- ------- ------------ ------------ ------------
Balances as of
December 31, 1995 3,439,202 34,392 5,400,000 540 15,143,363 (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 -- -- 5,200,000 520 37,776,074 -- 37,776,594
Conversion of preferred
stock into common stock (4,261,103) (42,611) 15,633,346 1564 41,047 -- --
Exercise of stock options -- -- 306,000 30 369,530 -- 369,560
Employee stock purchase
plan -- -- 23,578 2 169,759 -- 169,761
Net loss -- -- -- -- -- (16,948,662) (16,948,662)
----------- -------- ----------- ------- ------------ ------------ ------------
Balances as of
December 31, 1996 -- -- 26,562,924 2,656 62,423,665 (29,328,167) 33,098,154
Exercise of stock options -- -- 822,914 86 1,175,494 -- 1,175,580
Employee stock purchase
plan -- -- 70,026 8 705,403 -- 705,411
Issuances of common stock -- -- 1,868,506 186 23,391,565 -- 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 -- -- 29,324,370 2,936 94,696,127 (54,056,259) 40,642,804
Exercise of stock options
and warrants -- -- 2,027,662 202 6,246,092 -- 6,246,294
Employee stock purchase
plan -- -- 56,386 4 723,553 -- 723,557
Issuances of common stock -- -- 1,625,600 162 26,212,556 -- 26,212,718
Issuance of common stock in
relation to the UVision
acquisition -- -- 1,089,930 108 (108,083) 285,867 177,892
Net income -- -- -- -- -- 2,599,957 2,599,957
----------- -------- ----------- ------- ------------ ------------ ------------
Balances as of
December 31, 1998 -- -- 34,119,948 3,412 127,770,245 (51,170,435) 76,603,222
=========== ======== =========== ======= ============ ============ ============
See accompanying notes to consolidated financial statements.
CNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------------
1998 1997 1996
------------- ------------- ------------
Cash flows from operating activities:
Net income(loss) $2,599,957 ($24,728,092)($16,948,662)
Adjustments to reconcile net loss
to net cash provided (used) in
operating activities:
Depreciation and amortization 6,341,217 5,054,980 1,928,496
Amortization of program costs 5,802,074 6,548,937 4,673,201
Interest expense converted into
preferred stock -- -- 222,141
Allowance for doubtful accounts 1,260,625 361,214 75,000
Reserve for joint venture -- (1,248,799) 1,865,299
Warrant compensation expense -- 7,000,000 --
Changes in operating assets and
liabilities:
Accounts receivable (9,730,143) (4,218,799) (4,165,939)
Other current assets 455,340 (916,690) 29,750
Other assets 4,933,084 (1,515,407) (1,237,499)
Accounts payable 328,540 228,931 2,807,549
Accrued liabilities (2,833,799) 7,534,213 1,839,558
------------- ------------- ------------
Net cash provided (used) in
operating activities 9,156,895 (5,899,512) (8,911,106)
------------- ------------- ------------
Cash flows from investing activities:
Purchases of equipment, excluding
capital leases (4,879,353) (12,213,050) (10,739,354)
Purchases of programming assets (6,083,639) (5,826,476) (5,438,092)
Loan to joint venture -- (1,639,139) (1,776,588)
Investment in Vignette Corporation -- -- (511,500)
------------- ------------- ------------
Net cash used in investing
activities (10,962,992) (19,678,665) (18,465,534)
------------- ------------- ------------
Cash flows from financing activities:
Net proceeds from issuance of
convertible preferred stock -- -- 4,543,826
Net proceeds from inital public
offering -- -- 37,776,594
Net proceeds from issuance of
common stock 26,212,718 23,391,751 --
Net proceeds from the issuance of common
stock in relation to the UVision
acquisition (107,975)
Allocated proceeds from issuance
warrants -- -- 164,000
Proceeds from stockholder reveivable -- -- 594,654
Proceeds from employee stock
purchase plan 723,557 705,411 169,761
Proceeds from debt -- 3,280,806 3,636,000
Proceeds from exercise of stock
and warrants 6,246,294 1,175,580 141,050
Principal payments on capital leases (416,377) (238,688) (104,542)
Principal payments on equipment note (1,872,453) (338,630) (91,851)
------------- ------------- ------------
Net cash provided by
financing activities 30,785,764 27,976,230 46,829,492
------------- ------------- ------------
Net increase (decrease) in cash and
cash equivalents 28,979,667 2,398,053 19,452,852
Cash and cash equivalents at
beginning of period 22,553,988 20,155,935 703,083
------------- ------------- ------------
Cash and cash equivalents at end
of period $51,533,655 $22,553,988 $20,155,935
============= ============= ============
Supplemental disclosure of cash flow
information:
Interest paid $324,762 $254,790 $88,792
Supplemental disclosure of noncash
transactions:
Non cash portion of Investment $3,066,449 -- $105,000
Capital lease obligations incurred -- $408,408 $297,436
Note issued in exchange for
equipment -- -- $137,551
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 0,0, and 208,548
shares of convertible preferred
stock, respectively -- -- $3,858,141
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 channels on the World Wide Web. The Company
produces five television programs and operates an Internet network
focused on computers and technologies. 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 controlled subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
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
concentrations of credit risk consist primarily of periodic
investments of excess cash and trade accounts receivable.
Substantially all of the Company's accounts receivable are derived from
domestic sales. Historically, the Company has not incurred material
credit related losses. The Company invests excess cash in low risk,
liquid instruments. No losses have been experienced on such investments.
DEVELOPMENT
Development expenses include expenses which were incurred in the
development of new Internet channels and in research and development of
new or improved technologies that enhance the performance of the
Company's Internet channels. Costs for development are expensed as
incurred. Costs are no longer recognized as development expenses when a
new Internet channel is launched and is generating revenue.
INCOME TAXES
The Company accounts for income taxes using the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred income tax assets and
liabilities of changes in tax rates is recognized in income in the
period that includes the enactment date.
REVENUE RECOGNITION
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, and subsequently
renewed through June 30, 1999, the Company licensed a two hour programming
block it produces for broadcast on a cable network for a license fee
limited to the costs of production of the programming block and
further limited to certain maximum amounts per the contract. In
September 1996, the Company began producing TV.com which was exclusively
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 the
Company and GGP. In August 1997, the assets of GGP were acquired by a
third party who agreed to distribute the program through Trans World
International, ("TWI"), under the same terms. Beginning March 1, 1998,
the Company assumed responsibility for the sale of advertisements on
TV.com and pays a distribution fee to the third party.
Internet revenues consist primarily of revenues derived from the
sale of advertisements on pages delivered to users of our Internet
network. Advertising programs are generally delivered on either an
"impression" based program or a "performance" based program. An
impression based program earns revenues when an advertisement is
delivered to a user of our Internet network. A performance based
program earns revenues when a user of our Internet network responds to
an advertisement by linking to an advertisers Internet network.
Advertising revenues are recognized in the period in which the
advertisements are delivered. In the fourth quarter of 1998, the
Company began generating revenue from lead-based compensation from
its shopping services.
NET INCOME (LOSS) PER SHARE
Basic net income per share is computed using the weighted average
number of outstanding shares of common stock and diluted net income
per share is computed using the weighted average number of
outstanding shares of common stock and common stock equivalents.
Basic and diluted net loss per share are computed using the
weighted average number of outstanding shares of common stock. Net
loss per share for the years ended December 31, 1997 and 1996, does
not include the effect of approximately 5,077,844 and 3,128,932
stock options, with weighted average exercise prices of $12.37 and
$3.55, respectively, because their effects are anti-dilutive.
The following table sets forth the computation of net income
(loss) per share (in thousands, except per share data):
Year Ended December 31,
---------------------------------------
1998 1997 1996
-------------- ------------ -----------
Net income (loss) $2,600 ($24,728) ($16,949)
Basic and diluted: ============== ============ ===========
Weighted average common shares
outstanding used in computing basic 31,933 27,224 15,928
net income(loss) per share ============== ============ ===========
Basic net income(loss) per share $0.08 ($0.91) ($1.06)
============== ============ ===========
Weighted average common shares
and common stock equivalents
outstanding used in computing diluted
net income(loss) per share 34,853 27,224 26,928
============== ============ ===========
Diluted net income(loss) per share $0.07 ($0.91) ($1.06)
============== ============ ===========
STOCK-BASED COMPENSATION
The Company accounts for its stock-based employee compensation plans
using the intrinsic value method. As such, compensation expense is recorded
on the date of grant if the current market price of the underlying stock
exceeded the exercise price.
COMPREHENSIVE INCOME(LOSS)
The Company has no significant comprehensive income(loss) and,
accordingly, the comprehensive income(loss) is the same as net income
(loss) for all periods.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. Such costs are
included in selling and marketing expense and totalled approximately
$5,081,308, $2,267,154 and $3,697,314 during the years ended December 31,
1998, 1997 and 1996, repectively.
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
The Company reviews its long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less
costs to sell.
USE OF ESTIMATES
The Company's management has made a number of estimates and
assumptions relating to the reporting of assets and liabilities,
revenues and expenses, and the disclosure of contingent assets and
liabilities to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ
from those estimates.
BARTER TRANSACTIONS
The Company trades advertisements on its Internet sites in exchange
for advertisements on the Internet channels of other companies. These
revenues and marketing expenses are recorded at the fair market value of
services provided or received, whichever is more determinable in the
circumstances. Revenue from barter transactions is recognized as income
when advertisements are delivered on the Company's Internet channels and
expense from barter transactions is recognized when advertisements are
delivered on the other companies' Internet sites. Barter revenues were
approximately $3,369,000, $905,000, and $760,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB recently issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at
fair value. For a derivative not designated as a hedging instrument,
changes in the fair value of the derivative are recognized in earnings
in the period of change. The Company must adopt SFAS No. 133 by July 1,
1999. Management does not believe the adoption of SFAS No. 133 will
have a material effect on the financial position or operations of the
Company.
(2) BALANCE SHEET COMPONENTS
CASH AND CASH EQUIVALENTS
The carrying value of cash and cash equivalents consisted of:
December 31,
---------------------------
1998 1997
-------------- ------------
Commercial paper $21,452,792 $2,004,131
Money market mutual funds 23,447,941 17,034,006
Cash 6,632,922 3,515,851
-------------- ------------
$51,533,655 $22,553,988
============== ============
All cash equivalents have been classified as available for sale
securities as of December 31, 1998 and 1997.
RESTRICTED CASH
Restricted cash balance relates to certain deposits in escrow for
leasehold improvements and as collateral for letters of credit relating
to security deposits.
PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
December 31,
---------------------------
1998 1997
-------------- ------------
Computer equipment $12,270,491 $11,769,291
Production equipment 2,552,420 2,241,597
Office equipment, furniture & fixtures 3,131,737 2,230,267
Software 1,845,777 1,745,660
Leasehold improvements 7,644,246 7,193,769
Assets in progress 620,165 1,533,198
-------------- ------------
28,064,836 26,713,782
Less accumulated depreciation
and amortization 12,739,324 7,160,245
-------------- ------------
$15,325,512 $19,553,537
============== ============
As of December 31, 1998 and 1997, the Company had equipment under
capital lease agreements of $1,168,134 , and accumulated amortization of
$1,084,125 and $694,747, respectively.
As of December 31, 1998, the Company had purchased equipment
pursuant to loan agreements in the amount of $948,982. As of
December 31, 1998 and 1997, the equipment had accumulated amortization of
$702,408 and $512,612, respectively.
ACCRUED LIABILITIES
A summary of accrued liabilities follows:
December 31,
---------------------------
1998 1997
-------------- ------------
Compensation and related benefits $4,007,614 $2,594,386
Marketing and advertising 577,872 619,101
Deferred Revenue 594,212 3,233,681
Lease Abandonment -- 1,300,000
Other 1,413,121 2,333,336
-------------- ------------
$6,592,819 $10,080,504
============== ============
DEBT
During 1997, the Company secured a $10.0 million line of credit from
a bank. The line of credit consisted 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 Company did not renew the $10.0 million line of credit upon its
expiration 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 which was paid off in July, 1998. In addition, the
Company had proceeds of $2.5 million from an asset based loan bearing
interest equal to the treasury rate plus 5.56% secured by certain
capital equipment. The $2.5 million asset based loan is subject to
certain financial covenants. At December 31, 1998 the Company was in
compliance with those covenants.
During 1996 and 1995, the Company financed certain production equipment
in the amounts of $189,256 and $759,726, repectively, through notes at an
an interest rate of 12.25%. The notes are secured by the equipment
financed. The current and long-term portion of the notes are included
in current portion of long-term debt and long-term debt, respectively,
in the accompanying balance sheet (along with capital lease obligations,
Note 4). The aggregate annual principal payments for notes payable
outstanding as of December 31, 1998, are summarized as follows:
YEAR ENDING DECEMBER 31,
-----------------------
1999 994,177
2000 535,728
2001 33,517
--------------
$1,563,422
==============
(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,
----------------------------------------
1998 1997 1996
-------------- ------------ ------------
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,
----------------------------------------
1998 1997 1996
-------------- ------------ ------------
Capitalized "start-up" expenses $457,000 $818,000 $1,217,000
Net operating losses 22,184,000 16,268,000 9,596,000
Accruals, reserves and other 3,275,000 6,289,000 1,027,000
-------------- ------------ ------------
25,916,000 23,375,000 11,840,000
Less valuation allowance 25,916,000 23,375,000 11,840,000
-------------- ------------ ------------
$ -- $ -- $ --
============== ============ ============
The Company has a valuation allowance as of December 31, 1998, 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, 1998, was $2,541,000
As of December 31, 1998, the Company has approximately $61,000,000 of net
operating losses for federal income tax purposes, which expire between 2008 and
2018. The Company also has approximately $24,000,000 of net operating loss
carryforwards for state income tax purposes, which expire between 1999 and 2003.
Included in the deferred tax assets above is approximately $5,500,000 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
----------------------- -------------- ------------
1999 $129,140 $4,548,163
2000 -- 3,519,185
2001 -- 2,396,254
2002 -- 1,421,819
2003 -- 981,674
Thereafter -- 598,910
-------------- ------------
Total minimum lease payments 129,140 $13,466,005
============
Less amount representing
interest 10,805
--------------
Capital lease obligation, all current $118,335
==============
Rental expense from operating leases amounted to $3,226,310, $2,242,186,
and $789,678 for the years ended December 31, 1998, 1997 and 1996,
respectively.
(5) STOCKHOLDERS' EQUITY
ISSUANCE OF COMMON STOCK
On July 2, 1996, the Company effected an initial public offering (IPO) of
4,000,000 shares of its common stock for $8 per share. Simultaneously with
the IPO, the Company sold 1,200,000 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 402,506 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 1,466,000 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.
On May 12, 1998, the Company completed the acquisition of
U.Vision, Inc., a California corporation ("U.Vision"), through a merger
between U.Vision and a wholly-owned acquisition subsidiary of the Company
("the merger"), in which the Company issued 1,089,930 shares of common stock
in exchange for all of the outstanding shares of U.Vision. U.Vision
owned and operated ComputerEsp, a pricing and availability engine for
buying computer products on the Internet. Subsequent to the merger, the
Company relaunched the service as Shopper.com. The Company recorded
this transaction using the pooling-of-interests accounting method and
recorded the financial results of U.Vision in its financial statements
effective April, 1, 1998. The financial statements of the Company prior
to April 1, 1998 have not been adjusted for the financial results of
U.Vision as the impact was not material. The shares used in calculating
the basic and diluted net loss per share data have been adjusted in
prior periods to reflect the U.Vision transaction as outstanding
for all periods.
In June of 1998, the Company completed the sale of 1,625,600 shares
of common stock to National Broadcasting Company, Inc., ("NBC"). The
aggregate purchase price for the shares sold was $26.2 million.
STOCK SPLIT
On March 8, 1999, the Company effected a two-for-one split of its
common stock. The accompanying consolidated financial statements
have been retroactively adjusted to reflect the 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 PLAN
In 1994, the Board of Directors adopted a Stock Option Plan (the "1994
Plan") pursuant to which the Company's Board of Directors may grant stock
options to officers and key employees. The 1994 Plan authorizes grants of
options to purchase up to 5,500,000 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
5,000,000 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
fair market value at the date of grant. All stock options have 10-year
terms and generally vest and become fully exercisable between three and
four years from the date of grant.
A summary of the status of the Company's stock option plans as of December
31, 1998, 1997 and 1996, and changes during each of the years then ended:
Weighted
Number Average
of Exercise
Shares Prices
-------------- ------------
Balance as of December 31, 1995 2,952,500 0.80
Granted 1,728,400 5.72
Exercised (1,393,934) 0.52
Cancelled (158,034) 2.73
-------------- ------------
Balance as of December 31, 1996 3,128,932 3.55
Granted 2,647,046 11.87
Exercised (889,392) 1.44
Cancelled (243,504) 7.04
-------------- ------------
Balance as of December 31, 1997 4,643,082 8.42
Granted 2,472,900 16.74
Exercised (920,638) 5.12
Cancelled (1,117,460) 11.60
-------------- ------------
Balance as of December 31, 1998 5,077,884 $12.37
============== ============
As of December 31, 1998, 1997 and 1996, the number of options
exercisable was 1,050,016, 858,888 and 804,794, respectively, and the
weighted average of those options was $7.01, $3.06, and $1.11, respectively.
As of December 31, 1998, there were 2,218,152 additional shares available
for grant under the Plans.
The Company applies APB Opinion No. 25 in accounting for the Plans and,
accordingly, no compensation cost has been recognized for the Plans in the
financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS 123,
the Company's net income(loss) and net income (loss) per share would have
been increased to the pro forma amounts indicated below:
Year Ended December 31,
----------------------------------------
1998 1997 1996
-------------- ------------ ------------
Net income(loss)
As reported $2,599,957 ($24,728,092)($16,948,662)
Pro forma ($13,130,574)($29,872,164)($18,259,031)
Basic net income(loss) per share
As reported $0.08 ($0.91) ($1.06)
Pro forma ($0.41) ($1.10) ($0.81)
Diluted net income(loss) per share
As reported $0.07 ($0.91) ($1.06)
Pro forma ($0.38) ($1.10) ($0.81)
The effects of applying SFAS 123 in this pro forma disclosure is
not indicative of the effects on reported results for future years. SFAS
No. 123 does not apply to awards prior to 1995.
The weighted-average fair value of options granted in 1998, 1997 and 1996,
was $16.74, $11.87 and $5.72, 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 1998, 1997 and 1996,
respectively: no dividend yield, expected volatility of 75%, risk-free
interest rate of 6%, and an expected life of five years, five years
and one year.
The following table summarizes information about stock options
outstanding as of December 31, 1998:
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 12/31/98 Life Price 12/31/98 Price
- - ------------------ ------------ ----------- ----------- ------------ -----------
$0.6000 $4.2950 543,544 6.86 $2.5307 376,086 $1.9915
$6.0000 $7.3150 551,624 7.56 $6.5059 253,860 $6.4988
$7.7500 $10.0650 80,250 8.10 $8.9125 18,626 $8.4692
$10.3750 $10.3750 638,298 8.92 $6.9167 154,700 $10.3750
$10.6900 $12.0650 805,124 8.63 $11.7106 168,184 $11.6537
$12.1250 $13.7500 173,736 8.53 $13.3392 36,138 $13.3415
$13.9400 $13.9400 921,574 9.24 $13.9400 3,876 $13.9400
$14.0000 $14.7500 121,086 8.65 $14.2317 20,320 $14.0931
$16.1250 $16.1250 664,000 9.42 $16.1250 -- --
$16.4400 $34.2500 578,648 9.63 $23.3122 18,226 $22.6535
------------ ------------
$0.6000 $34.2500 5,077,884 8.68 $12.3702 1,050,016 $7.0065
============ ============
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 has 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 at a 10% discount of the lower of the
closing price at the beginning or end of the quarter by contributing a.
percentage of their compensation. The maximum percentage allowed is 10%.
(6) MAJOR CUSTOMERS AND CONTRACTS
CUSTOMERS
For the year ended December 31, 1998, one customer, USA Networks,
accounted for approximately 10% of the Company's revenues. 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.
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 1,033,500 common stock
warrants at an exercise price of $1.21 per share to USA Networks. As of
December 31, 1998, all such warrants were exercised.
Effective July 1, 1996, the agreement with USA Networks was amended
to license to USA Networks the right to carry a two hour programming block
produced by the Company, called "Digital Domain" for broadcast on the USA
Network and The SciFi Channel for an initial term of one year. Under
the amended agreement, USA Networks licensed the rights to Digital
Domain for a fee equal to the cost of production of the 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 channels on the television programs produced by the
Company for USA Networks. During the second year extension the Company
paid 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 Digital Domain through June 30,
1998. In connection with this extension to the agreement, the
Company agreed that the warrants held by USA Networks would vest in
full on December 31, 2006, to the extent they had 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 July 1998, the Company entered into an agreement with USA
Networks to again license to USA Networks the right to carry Digital
Domain for broadcast on the USA Network and The SciFi Channel for a
one year period. The Company agreed to pay USA Networks a fee of
$750,000 for the right to cross-market the Company's Internet
channels on the television programs produced by the Company for USA
Networks.
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 was included in other assets in the balance sheet and
certain additional payments for up to three years. The note receivable
was paid in full in November, 1998.
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.
Beginning March 1, 1998, the Company assumed responsibility for the
sale of advertisements on TV.com and pays a distribution fee to TWI.
(7) UNUSUAL ITEMS
In the fourth quarter of 1997, the Company recognized an expense
of $1.3 million related to lease abandonment costs and recognized an
expense of $700,000 relating to a write off of Internet domain names that
the Company had determined that it would no longer use. Through the
fourth quarter of 1998, the Company had incurred expenses of $379,000
related to the abandonment of excess real estate and during the fourth
quarter the Company determined that it had completed the abandonment
of excess real estate. Accordingly, the Company reversed approximately
$922,000 of this expense in the fourth quarter of 1998.
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 would vest in full on December 31, 2006, to the extent that
they had not previously vested.
(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 affiliate of an officer and stockholder of the Company
loaned the Company $800,000 in 1996 at an interest rate
of 8% and was granted 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 29,400 warrants to purchase common stock.
at an exercise price of $4.29 per share. 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 loaned the Company $3,000,000 in 1996 at an interest rate
of 8%. Interest expense related to the loan was $34,000 in 1996.
This loan was subsequently converted to Series E convertible preferred
stock. In connection with this loan agreement, the Company granted the
lender 36,750 warrants to purchase Series D convertible preferred
stock at an exercise price of $12.88 per share, which were subsequently
converted to 110,250 warrants to purchase common stock at an exercise
price of $4.29 per share. As of December 31, 1998, 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 273,000 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
1,098,432 shares of common stock at the IPO.
In December 1997, an officer of the Company purchased 16,000 shares
of common stock for $198,000 as a participant in a private placement.
BUYDIRECT.COM (BuyDirect) was a wholly owned division of the Company
that distributed electronic software. On March 31, 1998, the Company
contributed its ownership in BuyDirect, and net assets related to
BuyDirect of approximately $744,000, to a new venture that is separately
owned and operated by BuyDirect's existing management group. As part of
the transaction, the Company received a 19% ownership interest in
the new venture. The Company uses the cost method of accounting for its
BuyDirect investment thus recorded an investment of approximately
$744,000 on its balance sheet. Initially, the Company also entered
into a multi-year arrangement with the new venture to provide marketing
and promotion through April 30, 2000. Effective October 31, 1998, the
Company terminated the inital contract and entered into a new agreement
in exhange for approximately $7.5 million for marketing and promotion
through September 30, 2000. In conjunction with the new agreement, the
Company received a promissory note maturing on October 31, 2002 in the
amount of $5.6 million.
For the year ended December 31, 1998, the Company recognized $2,510,422
in revenues related to advertising purchased by BuyDirect and to the
licensing of technology. As of December 31, 1998, the Company had a
$1.7 million receivable balance from BuyDirect related to
advertising purchased, licensing of technology and payments made by
CNET on behalf of the venture. The balance is included on the
balance sheet as a related party accounts receivable.
Pursuant to an agreement dated June 4, 1998 among the Company, NBC
Multimedia, Inc. a Delaware corporation ("NBC Multimedia"), and Snap
LLC, a Delaware limited liability company (the LLC), the Company and
NBC Multimedia agreed to form the LLC to operate the Snap Internet
portal service, which was previously operated as a division of
the Company. In connection with the formation and initial capitalization
of the LLC, which was completed on June 30, 1998, the Company
contributed to the LLC substantially all of its assets used exclusively
in the operation of the Snap service. Initially, the LLC will be owned
81% by the Company and 19% by NBC Multimedia, however, NBC Multimedia
has an option to increase its ownership stake in the LLC to 60% and
currently shares control of the LLC with the Company. The
accompanying financial statements present Snap's financial results using
the equity method of accounting effective January 1, 1998. Included in
equity losses on the accompanying 1998 statement of operations are losses
of $11,796,344 related to Snap. As of December 31, 1998 the Company's
investment in Snap has been reduced to zero.
(9) SEGMENT INFORMATION
The Company has adopted the provisions of SFAS No. 131, "Disclosure
About Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the reporting by public business enterprises
of information about operating segments, products and services,
geographic areas and major customers. The method for determining what
information to report is based on the way that management organizes the
operating segments within the Company for making operating decisions and
assessing financial performance.
The Company's chief operating decision maker is considered to be the
Company's Chief Executive Officer ("CEO"). The CEO reviews financial
information presented on a consolidated basis accompanied by disaggregated
information about revenue and cost of revenue by operating segment for
purposes of making operating decisions and assessing financial performance.
The consolidated information reviewed by the CEO is identical to the
information presented in the accompanying financial statement of
operations. The Company operates in two segments, television and CNET
Online, the Company's Internet operation.
(10) SUBSEQUENT EVENTS
On February 9, 1999, the Company announced an agreement with America
Online, Inc., ("AOL"), whereby the Company will become the exclusive provider
of computer hardware and software buying guides on the AOL service and on
AOL.com, as well as the primary provider of computer buying guides on
CompuServe, Digital City, AOL Hometown and certain AOL international
properties. Under the terms of the agreement, AOL will receive
guaranteed payments from the Company in the amount of $14.5 million over
approximately 27 months.
On February 16, 1999, the Company acquired NetVentures, Inc., in a stock
("NetVentures"), in a stock-for-stock exhange valued at approximately $12.5
million. NetVentures owns and operates ShopBuilder, an online store-creation
system.
On February 19, 1999, the Company acquired AuctionGate Interactive, Inc.,
("AuctionGate"),in a stock-for-stock exchange valued at approximately $6.5
million. AuctionGate owns and operates AuctionGate.com, an auction site
specializing in computer products.
On February 26, 1999, the Company acquired the assets of Winfiles.com,
a leading downloading service, from Jenesys, LLC, for a total purchase price
of $11.5 million, payable in cash in two installments of $5.75 million
On March 8, 1999, the Company completed a private placement with
gross proceeds of $172,915,0000 of 5% converitble subordinated notes. The
placement will be subject to certain fees and expenses. The notes are
convertible, at the option of the noteholder, into shares of common stock.
On March 22, 1999, the Company acquired KillerApp Corporation in a
stock-for-stock exchange valued at approximately $46 million. KillerApp
owns and operates KillerApp.com, an online comparison shopping service
for computer and consumer related products.
In March 1999, BuyDirect entered into a merger agreement with
beyond.com. This merger will result in our owning approximately
800,000 shares of beyond.com as a result of our ownership interest
in BuyDirect.
SCHEDULE II
CNET, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(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
------------ ----------- ----------- ------------ -----------
1998
- - ------------------
Allowance for
doubtful accounts $461 $1,443 $621(3) $743 (1) $1,722
$60 (2)
1997
- - ------------------
Allowance for
doubtful accounts $100 $578 -- $217 (1) $461
1996
- - ------------------
Allowance for
doubtful accounts $25 $75 -- -- $100
(1) Accounts written off.
(2) Part of sale of Buy Direct, Inc.
(3) Amounts charged to revenu to cover underdelivery of quaranteed impressions.
S-2 Independent Auditors' Report on Schedule
The Board of Directors
CNET, Inc.
Under date of February 9, 1999, except as to paragraph 5 of footnote 5
and foonote 10, which are as of March 22, 1999, we reported on the
consolidated balance sheets of CNET, Inc., and subsidiaries as of
December 31, 1998 and 1997, 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, 1998, as contained
in the annual report on Form 10-K for the year 1998. In connection
with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial
statements schedule in the annual report on Form 10-K for the year
1998. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
audits.
In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements
taken as a whole presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
San Francisco, California
March 22, 1999
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 1999 annual meeting, which will be filed pursuant
to Regulation 14A (the "1999 Proxy Statement"), under the caption
"Management."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the 1999 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 1999 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 1999 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, 1998 and 1997
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flow for the years ended December
31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report of KPMG LLP
(2) Financial Statement Schedules. The following financial
statement schedules are filed as part of this report:
S-1 Schedule II Valuation and Qualifying Accounts
S-2 Independent auditors report on schedule
(3) Exhibits.
3.1(1) -- Finder.com, Inc. and Virtual Software Library, Inc. into
CNET, Inc.
3.2(2) -- Certificate of Amendment of Certificate of Incorporation
of the Company
3.3(3) -- Certificate of Ownership and Merger of Gamecenter.com,
Inc., Finder.com, Inc., Buyer.com, Inc. and Virtual
Software Library, Inc. into CNET, Inc.
3.4(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(4) -- Stock Purchase Agreement betweenVignette Corporation and
the Company
10.21(5) -- Letter Agreement, dated February 20, 1997, between the
Company and Kevin Wendle.
10.22(2) -- CNET, Inc. 1997 Stock Option Plan
10.23(6) -- Stock Purchase Agreement, dated as of June 4, 1997, between
Intel Corporation and the Company
10.24(7) -- Master Agreement, dated as of June 30, 1997, amoung the
Company, E! Entertainment Television, Inc. and E! Online,
LLC
10.25(8) -- Security and Loan Agreement between Imperial Bank and the
Company, dated July 24, 1997
10.26(8) -- Note from the Company to Imperial Bank dated July 24, 1997
10.27(8) -- Loan and Security Agreement between The CIT Group and the
Company dated September 5, 1997
10.28(8) -- Office Lease between One Beach Street, LLC and the Company
dated September 24, 1997
10.29(9) -- Stock Purchase Agreement, dated as of December 18, 1997,
amoung the Company and the Purchasers identified therein
10.30(10) -- Agreement and Plan of Merger, dated as of May 7, 1998
by and among CNET, Inc., and CNET Acquisition Corp.,
U. Vision Inc. and the stockholders of U.Vision Inc.
10.31(11) -- Contribution Agreement, dated as of June 4, 1998,
by and among the Company, NBC and Snap! LLC.
10.32(11) -- Amended and Restated Limited Liability Company
Agreement of Snap! LLC, dated as of June 30, by and
among the Company and NBC Multimedia, Inc.
10.33(11) -- Stock Purchase Agreement, dated as of June 4, 1998,
by and between the Company and NBC
10.34(2) -- Agreement, dated as of July 1, 1998, between USA
Networks and the Company
10.35(12) -- Agreement and Plan of Merger, dated as of February 2,
1999, by and among CNET, Inc., NetVentures, Inc. and
the stockholders of NetVentures, Inc.
10.36(12) -- Purchase Agreement, dated as of December 18, 1998,
by and among Jenesys LLC and Steve Jenkins
10.37(12) -- Amendment No. 1 to Purchase Agreement, dated as of
January 22, 1999, by and among CNET, Inc. and Jenesys
LLC and Steve Jenkins
10.38(12) -- Amendment No. 2 to Purchase Agreement, dated as of
February 11, 1999, by and among CNET, Inc. and Jenesys
LLC and Steve Jenkins
10.39(12) -- Agreement and Plan of Merger, dated as of February 19,
1999, by and among CNET, Inc., AuctionGate Interactive,
Inc. and the stockholders of AuctionGate, Inc.
10.40* -- Indenture dated March 8, 1999 between the Company
and The Bank of New York, as trustee
10.41* -- Form of 5% Convertible Subordinated Note due 2006
10.42* -- Registration Agreement dated March 8, 1999 between the
Company and Salomon Smith Barney Inc. BancBoston
Robertson Stephens Inc. and Volpe Brown & Company, LLP,
as Representatives of the Initial Purchasers
21.1(1) -- List of Subsidiary Corporations
23.1* -- Consent of Independent Auditors
* Filed herewith.
(1) Incorporated by reference from a previously filed exhibit to
the Company's Registration Statement on Form SB-2, registration no.
333-4752-LA.
(2) Incorporated by reference from a previously filed exhibit to
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998.
(3) Incorporated by reference from a previously filed exhibit to
the Company's Registration Statement on Form S-8, registration
no. 333-34491.
(4) 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.
(5) Incorporated by reference from an exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
(6) 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.
(7) Incorporated by reference from a previously filed exhibit to
the Company's Current Report on Form 8-K dated July 11, 1997.
(8) 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.
(9) Incorporated by reference from a previously filed exhibit to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
(10) Incorporated by reference from a previously filed exhibit to
the Company's Current Report on Form 8-K filed May 22, 1998.
(11) Incorporated by reference from a previously filed exhibit to
the Company's Current Report on Form 8-K filed July 15, 1998.
(12) Incorporated by reference from a previously filed exhibit to
the Company's Current Report on Form 8-K filed March 1,1999.
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
By /s/ Halsey M. Minor
----------------------------------
Halsey M. Minor
Chairman of the Board, President
and Chief Executive Officer
Date March 31, 1999
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By /s/ Douglas N. Woodrum
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Douglas N. Woodrum
Chief Financial Officer
Date March 31, 1999
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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, 1999
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By /s/ Shelby W. Bonnie
----------------------------------
Shelby W. Bonnie
Director, Executive Vice President, Chief
Operating Officer and Secretary
Date March 31, 1999
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By /s/ Douglas N. Woodrum
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Douglas N. Woodrum
Chief Financial Officer
Date March 31, 1999
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By /s/ John C. "Bud" Colligan
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John C. "Bud" Colligan
Director
Date March 31, 1999
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By /s/ Mitchell Kertzman
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Mitchell Kertzman
Director
Date March 31, 1999
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By /s/ Eric Robison
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Eric Robison
Director
Date March 31, 1999
----------------------------------