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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended October 31, 1999
COMMISSION FILE NUMBER 0-27830
LYCOS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3277338
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
400-2 TOTTEN POND ROAD, WALTHAM, MASSACHUSETTS 02451-2000
(Address of principal executive offices, including Zip Code)
(781) 370-2700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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.
- --- ---
X Yes No
- --- ---
The number of shares outstanding of the registrant's Common Stock as of
December 6, 1999 was 101,588,307.
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LYCOS, INC.
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
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ITEM 1 Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
October 31, 1999 and July 31, 1999....................................... 3
Condensed Consolidated Statements of Operations
Three months ended October 31, 1999 and 1998............................. 4
Condensed Consolidated Statements of Cash Flows
Three months ended October 31, 1999 and 1998............................. 5
Notes to Condensed Consolidated Financial Statements...................... 7
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 10
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings......................................................... 15
ITEM 2 Changes in Securities..................................................... 15
ITEM 3 Defaults Upon Senior Securities........................................... 15
ITEM 4 Submission of Matters to a Vote of Securities Holders..................... 15
ITEM 5 Other Information......................................................... 15
ITEM 6 Exhibits and Reports on Form 8-K.......................................... 15
Signature................................................................. 16
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LYCOS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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OCTOBER 31, JULY 31,
1999 1999
-------------- -------------
(UNAUDITED)
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Assets
Current assets:
Cash and cash equivalents................................................ $ 163,039,067 $152,970,244
Accounts receivable, net................................................. 30,183,953 24,639,514
License fees receivable.................................................. 83,101,473 71,843,202
Prepaid expenses and other current assets................................ 6,655,510 8,680,831
-------------- -------------
Total current assets.................................................. 282,980,003 258,133,791
-------------- -------------
Property and equipment, less accumulated depreciation...................... 6,634,600 7,471,230
Long-term license fees receivable.......................................... 44,537,500 48,029,100
Investments................................................................ 43,340,401 48,000,570
Intangible assets, net..................................................... 477,445,508 505,682,024
Other assets............................................................... 4,419,580 7,325,353
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Total assets.......................................................... $ 859,357,592 $874,642,068
============== =============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable - current.................................................. $ 887,837 $ 2,589,271
Accounts payable......................................................... 3,983,660 1,381,721
Accrued expenses......................................................... 25,894,868 22,438,326
Deferred revenues........................................................ 79,329,241 64,016,249
-------------- -------------
Total current liabilities............................................. 110,095,606 90,425,567
Notes payable.............................................................. 2,060,493 2,599,729
Deferred revenues.......................................................... 42,544,375 55,934,152
-------------- -------------
44,604,868 58,533,881
Commitments and contingencies -- --
Stockholders' equity:
Common stock............................................................. 980,808 967,071
Additional paid-in capital............................................... 811,426,773 801,494,011
Deferred compensation.................................................... (58,169) (69,802)
Accumulated deficit...................................................... (119,817,822) (92,295,457)
Treasury stock, at cost.................................................. (3,286,293) (3,286,293)
Accumulated other comprehensive income................................... 15,411,821 18,873,090
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Total stockholders' equity............................................ 704,657,118 725,682,620
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Total liabilities and stockholders' equity............................ $ 859,357,592 $874,642,068
============== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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LYCOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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THREE MONTHS THREE MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
1999 1998
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Revenues:
Advertising....................................................... $ 39,014,806 $ 17,274,840
Electronic commerce, license and other............................ 17,019,096 7,509,279
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Total revenues................................................. 56,033,902 24,784,119
Cost of revenues.................................................... 11,671,154 5,300,325
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Gross profit................................................... 44,362,748 19,483,794
Operating expenses:
Research and development.......................................... 9,276,672 5,303,566
Sales and marketing............................................... 30,156,272 16,170,301
General and administrative........................................ 5,435,334 2,486,226
Amortization of intangible assets................................. 28,236,516 11,135,885
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Total operating expenses....................................... 73,104,794 35,095,978
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Operating loss...................................................... (28,742,046) (15,612,184)
Interest income, net................................................ 1,699,681 1,896,420
Gain on sale of investments......................................... -- 10,119,831
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Loss before income taxes............................................ (27,042,365) (3,595,933)
Provision for income taxes.......................................... 480,000 --
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Net loss............................................................ $(27,522,365) $ (3,595,933)
============= =============
Basic and diluted net loss per share................................ $(0.29) $(0.04)
============= =============
Shares used in computing basic and diluted net loss per share 95,569,318 83,819,899
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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LYCOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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THREE MONTHS THREE MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
1999 1998
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Operating activities
Net loss............................................................ $(27,522,365) $ (3,595,933)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred compensation............................. 11,633 11,634
Depreciation...................................................... 1,205,688 885,683
Amortization of intangible assets................................. 28,236,516 11,135,885
Allowance for doubtful accounts................................... 1,672,157 (107,018)
Gain on sale of investments....................................... -- (10,119,831)
Changes in operating assets and liabilities:
Accounts receivable............................................... (7,216,596) (2,495,311)
License fees receivable........................................... (7,766,671) (962,810)
Prepaid expenses and other current assets......................... 2,025,321 (12,075,451)
Other assets...................................................... 2,905,773 (1,505,584)
Accounts payable.................................................. 2,601,939 (3,447,969)
Accrued expenses.................................................. 3,456,542 (3,480,814)
Deferred revenues................................................. 1,923,215 2,557,124
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Net cash provided by (used in) operating activities................. 1,533,152 (23,200,395)
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Investing activities
Purchase of property and equipment.................................. (369,058) (166,423)
Acquisition costs paid.............................................. -- (1,114,101)
Cash proceeds from sale of investment............................... -- 12,158,790
Cash acquired through acquisitions.................................. -- 1,906,467
Investment in affiliates............................................ (1,101,099) (1,511,951)
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Net cash provided by (used in) investing activities................. (1,470,157) 11,272,782
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Financing activities
Proceeds from exercise of stock options............................. 11,831,894 778,953
Proceeds from issuance of common stock under ESPP................... 414,604 82,522
Proceeds from note receivable....................................... -- 623,438
Payments on notes payable........................................... (2,240,670) (2,514,331)
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Cash provided by (used in) financing activities..................... 10,005,828 (1,029,418)
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Net increase (decrease) in cash and cash equivalents................ 10,068,823 (12,957,031)
------------- -------------
Cash and cash equivalents at beginning of period.................... 152,970,244 153,728,200
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Cash and cash equivalents at end of period.......................... $163,039,067 $140,771,169
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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LYCOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
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<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
1999 1998
----------------- -------------------
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Schedule of non-cash financing and investing activities:
Issuance of common stock upon acquisition
of WhoWhere? Inc.......................................... -- $157,994,762
Assets and liabilities recorded upon acquisition
Of WhoWhere? Inc.;
Accounts receivable....................................... -- 2,345,834
Prepaids.................................................. -- 1,302,490
Property and equipment.................................... -- 2,914,397
Notes receivable.......................................... -- 623,438
Other assets.............................................. -- 25,351
Notes payable............................................. -- 5,185,591
Accounts payable.......................................... -- 1,588,709
Accrued expenses.......................................... -- 1,661,306
Deferred revenues......................................... -- 1,945,682
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
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LYCOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. THE COMPANY AND BASIS OF PRESENTATION
Lycos, Inc., ("Lycos" or the "Company") is a global Internet navigation
and community network that offers globally branded media properties and
aggregated content distributed primarily through the Web. Under the "Lycos
Network" brand, Lycos provides guides to online content, aggregated third-party
content, Web search and directory services and community and personalization
features. Lycos seeks to draw a large number of viewers to its Websites by
providing multiple destinations for identifying, selecting and accessing
resources, services, content and information on the Web. The Company was formed
in June 1995 by CMG@Ventures L.P., a wholly-owned subsidiary of CMGI, Inc. The
Company operates in one industry segment, generating revenue from selling
advertising, electronic commerce and licensing its products and services. The
Company's fiscal year end is July 31.
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries and have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. In the opinion of management, these financial statements
contain all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results of these interim periods.
Certain information and related footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted, although the Company believes the
disclosures in these financial statements are adequate to make the information
presented not misleading. These financial statements should be read in
conjunction with the Company's audited financial statements for the year ended
July 31, 1999, included in the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission. The results of operations for the
interim periods shown are not necessarily indicative of the results for any
future interim period or for the entire fiscal year.
2. REVENUE RECOGNITION
The Company's advertising revenues are derived principally from short-term
advertising contracts in which the Company guarantees a number of impressions
for a fixed fee or on a per impression basis with an established minimum fee.
Revenues from advertising are recognized as the services are performed.
Electronic commerce revenues are derived principally from "slotting fees" paid
for selective positioning and promotion within the Company's suite of products
as well as from royalties from the sale of goods and services from the Company's
Websites. The Company's license and product revenues are derived principally
from product licensing fees and fees from maintenance and support of its
products. Electronic commerce, license and product revenues are generally
recognized upon delivery provided that no significant Company obligations remain
and collection of the receivable is probable. In cases where there are
significant remaining obligations, the Company defers such revenue until those
obligations are satisfied. Fees from maintenance and support of the Company's
products including revenues bundled with the initial licensing fees are deferred
and recognized ratably over the service period.
Deferred revenues are comprised of license and electronic commerce fees to be
earned in the future on noncancelable agreements at the balance sheet date.
7
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LYCOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. INVESTMENTS
In September 1999, the Company established Lycos Asia as the basis for a joint
venture agreement with Singapore Telecommunications Limited (SingTel) to create
a localized version of the Lycos Network services to be offered in Singapore,
Hong Kong, China, Taiwan, India and certain other countries in Southeast Asia.
The joint venture is owned 50% by Lycos and 50% by SingTel, a telecommunications
provider in Singapore. The investment will be accounted for under the equity
method and accordingly, the Company will recognize 50% of the net losses and
profits of Lycos Asia when realized. The Company is committed to provide a
total of $25 million of capital funding to the joint venture. During November
1999 the Company contributed $5 million of cash to joint venture.
4. COMPREHENSIVE INCOME (LOSS)
Statement of Financial Accounting Standard No. 130 (SFAS 130), "Reporting
Comprehensive Income" establishes standards for the reporting and display of
comprehensive income and its components in the financial statements.
Comprehensive income as defined includes all changes in equity during a period
from non-owner sources. Examples of items to be included in comprehensive
income, which are excluded from net income, include foreign currency translation
adjustment and unrealized gains and losses on available-for-sale securities.
Comprehensive loss was $30,983,634 and $3,516,077 for the quarters ended October
31, 1999 and 1998, respectively. The difference between net loss and
comprehensive loss is due to $(3,461,269) and $79,856 of unrealized (losses)
gains on marketable securities classified as available-for-sale in the quarters
ended October 31, 1999 and 1998, respectively. The $3.4 million unrealized loss
on marketable securities for the quarter ended October 31, 1999 is net of an
approximate $2.3 million tax benefit from stock option exercises, which is
accounted for as a credit to additional paid-in capital rather than a reduction
of income tax.
5. INCOME TAXES
The Company's effective income tax rate has been established at 40% of
operating loss after adjustment for amortization of intangible assets which are
not deductible for tax purposes. This effective income tax rate may change
during the remainder of the year if operating results differ significantly from
the current operating projections.
6. RECLASSIFICATIONs
Certain amounts in the quarter ended October 31, 1998 have been reclassified
to permit comparison to the current period presentation.
7. SUBSEQUENT EVENTS
Acquisition of Quote.com, Inc.
On September 2, 1999, the Company entered into an Agreement and Plan of Merger
(the Agreement) with Quote.com, Inc., a California corporation ("Quote.com") in
a stock-for-stock transaction. On December 6, 1999 the Company completed the
closing of the Merger and Quote.com became a wholly-owned subsidiary of the
Company. As a result, all outstanding shares of Common Stock and Preferred
Stock of Quote.com were converted into an aggregate 1,346,630 shares of Common
Stock of the Company. Additionally, the Company converted all outstanding
Quote.com stock options and warrants into approximately 239,000 Lycos options
and warrants.
8
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LYCOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. SUBSEQUENT EVENTS (CONTINUED)
The acquisition of Quote.com will be accounted for as a purchase. The
purchase price will be allocated to the assets acquired and liabilities assumed
based on their estimated fair values. Intangible assets will be amortized over a
period of five years. Results of operations for Quote.com will be included with
those of the Company for periods subsequent to the date of acquisition.
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The purchase price is expected to be allocated as follows:
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Developed technology, goodwill and other intangible assets $108,300,000
Other assets, principally cash 7,126,000
Liabilities assumed (14,426,000)
---------------
$101,000,000
===============
</TABLE>
Acquisition of Gamesville, Inc.
On December 3, 1999 the Company completed the closing of the Gamesville, Inc.
("Gamesville") merger in a stock-for-stock transaction and Gamesville became a
wholly-owned subsidiary of the Company. Under the terms of the acquisition,
which will be accounted for as a pooling of interests, the Company exchanged
3,605,044 shares of Lycos Common Stock for all outstanding shares of Common
Stock and Preferred Stock of Gamesville. Additionally, the Company converted
all outstanding Gamesville stock options and warrants into approximately 423,085
Lycos options and warrants.
Investment in Lycos Japan Joint Venture
During November 1999 the Company and Sumitomo Corporation each invested an
additional $14.5 million in Lycos Japan. A new partner, Kadokawa Publishing
Co., Ltd. also joined the joint venture via an investment of approximately $7.3
million, representing an approximate 12% ownership interest. As a result of the
additional investments and new partner, the Company's ownership of the joint
venture changed to approximately 35%, while Sumitomo's ownership changed to
approximately 44%. The Company accounts for this investment under the equity
method of accounting. For the three months ended October 31, 1999 the Company
did not record any losses in the joint venture as the Company's carrying value
of the Lycos Japan joint venture was zero. As a result of the additional
investment, the Company has increased its carrying value and may realize
additional equity losses in the joint venture in periods subsequent to the
additional investment.
Investment in Lycos Asia Joint Venture
During November 1999 the Company invested approximately $5.0 million in Lycos
Asia, a joint venture owned 50% by Lycos. Under the joint venture agreement,
the Company is committed to providing aggregate capital investments of $25
million to Lycos Asia. The Company accounts for this investment under the
equity method of accounting. For the three months ended October 31, 1999 the
Company did not record any losses in the joint venture as the Company's carrying
value of the Lycos Asia joint venture was zero. As a result of the investment,
the Company has increased its carrying value and may realize equity losses in
the joint venture in periods subsequent to the additional investment.
Investment in ICOMS
On November 23, 1999, the Company entered into an agreement with iCOMS, Inc.
pursuant to which the Company purchased 3,032,698 shares of iCOMS' Series C
Preferred Stock representing approximately 14% ownership in iCOMS. At the same
time, the Company entered into a Services Agreement with iCOMS pursuant to which
iCOMS will provide certain operational, engineering and merchant support
services to the Company in connection with the Company's LYCOShop e-commerce
initiative. The Company issued 166,080 unregistered shares of Common Stock in
exchange for iCOMS' Series C Preferred Stock and for the services to be rendered
by iCOMS under the Services Agreement. The Company accounts for its investment
in iCOMS on the cost method.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The matters discussed in this report contain forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in this
section and elsewhere in this Report, and the risks discussed in the "Factors
Affecting the Company's Business, Operating Results and Financial Condition"
section included in the Company's 1999 Annual Report on Form 10-K filed with the
Securities and Exchange Commission on October 29, 1999.
RESULTS OF OPERATIONS
Total Revenues Total revenues for the three months ended October 31, 1999
increased 126% to $56.0 million from $24.8 million for the three months ended
October 31, 1998, as a result of the growth in the number of advertisers. As of
October 31, 1999, deferred revenues increased to $121.9 million, compared to
$120.0 million at July 31, 1999, attributable to advertising contracts and
guaranteed commitments under license and electronic commerce agreements for
which there are significant obligations of the Company remaining.
Advertising Revenues Advertising revenues increased 126% to $39.0 million for
the three months ended October 31, 1999, representing 70% of total revenues, as
compared to advertising revenues of $17.3 million for the three months ended
October 31, 1998, which represented 70% of total revenues. The increase in
advertising revenue was attributable primarily to an increase in the number of
advertisers.
The Company currently derives a substantial portion of its revenues from the
sale of advertisements on its Websites, primarily through banner advertisements
and sponsorships. Advertising contracts are primarily sold as: (1) a "run of
site" contract under which a customer is guaranteed a number of impressions; (2)
a "key word" contract in which a customer purchases the right to advertise in
connection with specified word searches; or (3) a "targeted" contract where the
customer purchases a specified number of impressions in one of the targeted
categories or on a specified page or service.
Electronic Commerce, Licensing and Other Revenues Electronic commerce,
licensing and other revenues increased 127% to $17.0 million for the three
months ended October 31, 1999, representing 30% of total revenues as compared to
$7.5 million for the three months ended October 31, 1998, representing 30% of
total revenues. The increase in electronic commerce, licensing and other revenue
is attributable primarily to the addition of several new partners including,
among others, WebMD, FirstUSA, Lifeminders and Fidelity.
Electronic commerce revenues are derived principally from "slotting fees" paid
for selective positioning and promotion within the Company's suite of products
as well as from royalties from the sale of goods and services from the Company's
websites. The Company's license and product revenues are derived principally
from product licensing fees and fees from maintenance and support of its
products. Electronic commerce, license and product revenues are generally
recognized upon delivery provided that no significant Company obligations remain
and collection of the receivable is probable. In cases where there are
significant remaining obligations, the Company defers such revenue until those
obligations are satisfied. Fees from maintenance and support of the Company's
products including revenues bundled with the initial licensing fees are deferred
and recognized ratably over the service period.
Cost of Revenues Cost of revenues totaled $11.7 million for the quarter ended
October 31, 1999, representing 21% of total revenues, as compared to $5.3
million in the quarter ended October 31, 1998, which represented 21% of total
revenues. Cost of revenues consist primarily of expenses associated with the
ongoing maintenance and support of the Company's products and services,
including compensation, consulting fees, equipment costs, networking and other
related indirect costs.
10
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OPERATING EXPENSES
Research and Development Research and development expenses totaled $9.3
million for the three months ended October 31, 1999, representing 17% of total
revenues as compared to $5.3 million for the three months ended October 31,
1998, or 21% of total revenues. Research and development expenses consist
primarily of equipment and salary costs. The overall increase in research and
development expenses was primarily due to increased engineering staffing to
continue to develop and enhance the Company's expanded product offerings, while
the percentage decrease is attributable to operational synergies achieved
through the integration of the Company's various acquisitions.
With the exception of acquired technology, all research and development costs
have been expensed as incurred. The Company believes that significant
investments in research and development are required to remain competitive. As a
consequence, the Company expects to continue to commit substantial resources to
research and development in the future.
Sales and Marketing Sales and marketing expenses totaled $30.2 million for
the three months ended October 31, 1999, representing 54% of total revenues, as
compared to $16.2 million for the three months ended October 31, 1998,
representing 65% of total revenues. Sales and marketing expenses consist
primarily of compensation, advertising, public relations, trade shows, travel
and costs of marketing literature. The spending increases were due to the
addition of sales and marketing personnel, increased commissions associated with
higher sales, and expenses pertaining to the Company's advertising, marketing
and public relations campaign. The percentage decrease is attributable to
economies of scale achieved through the integration of the Company's various
acquisitions. The Company expects continued increases in sales and marketing
expenses in future periods.
General and Administrative General and administrative expenses totaled $5.4
million for the three months ended October 31, 1999, representing 10% of total
revenues, as compared to $2.5 million for the three months ended October 31,
1998, representing 10% of total revenues. General and administrative expenses
consist primarily of compensation, rent expenses and fees for professional
services. The increases in spending were primarily due to the expansion of the
Company's corporate infrastructure, including the addition of finance and
administrative personnel and increased costs for professional services.
Amortization of Intangible Assets Amortization of intangible assets was
approximately $28.2 million for the three months ended October 31, 1999 versus
$11.1 million for the three months ended October 31, 1998. The increase is
attributable to increased amortization related to developed technology and
goodwill and other intangible assets recorded upon the acquisitions of Wired
Ventures and Internet Music Distribution, Inc.
Interest Income, Net Net interest income was approximately $1.7 million for
the three months ended October 31, 1999 versus $1.9 million for the three months
ended October 31, 1998. Interest income is generated from investment of the
Company's cash equivalents. Interest expense was not significant in either
period.
Gain on sale of Investments In August 1998, pursuant to an Agreement and Plan
of Merger, Amazon.com acquired all of the outstanding capital stock of
PlanetAll. The Company received 322,128 shares of Amazon.com valued at
approximately $12.8 million at the time of acquisition in exchange for its
shares of PlanetAll. The Company sold 289,917 shares of Amazon.com resulting in
a gain of $10.1 million in the quarter ended October 31, 1998.
Income Taxes The Company's effective income tax rate has been established at
40% of operating loss after adjustment for amortization of intangible assets
which are not deductible for tax purposes. This effective income tax rate may
change during the remainder of the year if operating results differ
significantly from the current operating projections.
11
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FACTORS WHICH MAY AFFECT FUTURE OPERATIONS
There are a number of business factors which singularly or combined may affect
the Company's future operating results. These factors include, without
limitation, the level of usage of the Internet and traffic to the Company's
Internet site, continued acceptance of the Company's products, demand for
Internet advertising, seasonal trends in advertising sales, the advertising
budgeting cycles of individual advertisers, capital expenditures and other costs
relating to the expansion of operations, the introduction of new products or
services by the Company or its competitors, the mix of the services sold and the
channels through which those services are sold, pricing changes, general
economic conditions and specific economic conditions in the Internet industry
and other risks detailed in the Company's filings with the Securities and
Exchange Commission.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1999, the Company had cash and cash equivalents of
approximately $163.0 million. The Company regularly invests excess funds in
short-term money market funds, government securities and commercial paper.
The Company generated cash from operations of approximately $1.5 million
during the three months ended October 31, 1999. The Company generated cash from
financing activities of approximately $7.7 million during the nine months ended
October 31, 1999, due primarily to proceeds received by the Company from the
exercise of employee stock options.
At October 31, 1999, the Company had deferred revenues of $121.9 million
representing primarily fees to be earned in the future on noncancelable
electronic commerce agreements.
The Company currently believes that available funds and cash flows expected to
be generated by operations, if any, will be sufficient to fund its working
capital and capital expenditures requirements for at least the next twelve
months. Thereafter, the Company may need to raise additional funds. The Company
may need to raise additional funds sooner in order to fund more rapid expansion,
to develop new or enhanced products and services, to respond to competitive
pressures or to acquire complementary businesses or technologies. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of the stockholders of the Company will be reduced, stockholders may
experience additional dilution, and such equity securities may have rights,
preferences or privileges senior to those of the Company's Common Stock. There
can be no assurance that additional financing will be available when needed on
terms favorable to the Company or at all. If adequate funds are not available
or are not available on acceptable terms, the Company may be unable to develop
or enhance products or services, take advantage of future opportunities or
respond to competitive pressures, which could have a material adverse effect on
the Company's business, results of operations or financial condition.
BUSINESS COMBINATIONS
Acquisition of Quote.com, Inc.
On September 2, 1999, the Company entered into an Agreement and Plan of Merger
(the Agreement) with Quote.com, Inc., a California corporation ("Quote.com") in
a stock-for-stock transaction. On December 6, 1999 the Company completed the
closing of the Merger and Quote.com became a wholly-owned subsidiary of the
Company. As a result, all outstanding shares of Common Stock and Preferred
Stock of Quote.com were converted into an aggregate 1,346,630 shares of Common
Stock of the Company. Additionally, the Company converted all outstanding
Quote.com stock options and warrants into approximately 239,000 Lycos options
and warrants.
The acquisition will be accounted for as a purchase. The purchase price will
be allocated to the assets acquired and liabilities assumed based on their
estimated fair values. Intangible assets will be amortized over a period of five
years. Results of operations for Quote.com will be included with those of the
Company for periods subsequent to the date of acquisition.
12
<PAGE>
Acquisition of Gamesville, Inc.
On December 3, 1999 the Company completed the closing of the Gamesville, Inc.
("Gamesville") merger in a stock-for-stock transaction and Gamesville became a
wholly-owned subsidiary of the Company. Under the terms of the acquisition,
which will be accounted for as a pooling of interests, the Company exchanged
3,605,044 shares of Lycos Common Stock for all outstanding shares of Common
Stock and Preferred Stock of Gamesville. Additionally, the Company converted
all outstanding Gamesville stock options and warrants into approximately 423,085
Lycos options and warrants.
INVESTMENTS
Investment in Lycos Japan Joint Venture
During November 1999 the Company and Sumitomo Corporation each invested an
additional $14.5 million in Lycos Japan. A new partner, Kadokawa Publishing
Co., Ltd. also joined the joint venture via an investment of approximately $7.3
million, representing an approximate 12% ownership interest. As a result of the
additional investments and new partner, the Company's ownership of the joint
venture changed to approximately 35%, while Sumitomo's ownership changed to
approximately 44%. The Company accounts for this investment under the equity
method of accounting. For the three months ended October 31, 1999 the Company
did not record any losses in the joint venture as the Company's carrying value
of the Lycos Japan joint venture was zero. As a result of the additional
investment, the Company has increased its carrying value and may realize
additional equity losses in the joint venture in periods subsequent to the
additional investment.
Investment in Lycos Asia Joint Venture
During November 1999 the Company invested approximately $5.0 million in Lycos
Asia, a joint venture owned 50% by Lycos. Under the joint venture agreement,
the Company is committed to providing aggregate capital investments of $25
million to Lycos Asia. The Company accounts for this investment under the
equity method of accounting. For the three months ended October 31, 1999 the
Company did not record any losses in the joint venture as the Company's carrying
value of the Lycos Asia joint venture was zero. As a result of the investment,
the Company has increased its carrying value and may realize equity losses in
the joint venture in periods subsequent to the additional investment.
Investment in ICOMS
On November 23, 1999, the Company entered into an agreement with iCOMS, Inc.
pursuant to which the Company purchased 3,032,698 shares of iCOMS' Series C
Preferred Stock representing approximately 14% ownership in iCOMS. At the same
time, the Company entered into a Services Agreement with iCOMS pursuant to which
iCOMS will provide certain operational, engineering and merchant support
services to the Company in connection with the Company's LYCOShop e-commerce
initiative. The Company issued 166,080 unregistered shares of Common Stock in
exchange for iCOMS' Series C Preferred Stock and for the services to be rendered
by iCOMS under the Services Agreement. The Company accounts for its investment
in iCOMS on the cost method.
13
<PAGE>
YEAR 2000 COMPLIANCE
LYCOS' SYSTEM MAY EXPERIENCE DIFFICULTIES RELATED TO YEAR 2000 COMPUTER
PROBLEMS.
The codes of many currently installed computer systems and software products
accept only two-digit entries in the date code field and cannot distinguish 21st
century dates from 20th century dates. Many companies' software and computer
systems, including those of Lycos and the companies on which Lycos depends, may
need to be upgraded or replaced so that they will be able to distinguish 21st
century dates from 20th century dates in order to comply with year 2000
requirements and therefore be year 2000 compliant.
Lycos' State Of Year 2000 Readiness. Lycos is currently evaluating the Year
2000 readiness of the hardware and software products it sells, the information
technology systems it uses and its non-information technology systems, like
building security, voice mail and other systems. This evaluation includes the
following phases: identification of all hardware and software products it sells
and information technology systems and non-information technology systems it
uses; assessment of repair or replacement requirements; repair or replacement;
testing; implementation; and creation of contingency plans in the event of Year
2000 failures. Lycos has completed its assessment of all current versions of
these hardware and software products and believes that they are Year 2000
compliant. Lycos is currently completing its testing of these systems. There
can be no assurance that these tests will be successful. Whether a complete
system or device that uses hardware or software used by Lycos will process 21st
century dates depends on other components that are supplied by parties other
than Lycos. The suppliers of Lycos' critical information systems have informed
Lycos that their software is Year 2000 compliant. Lycos relies, both
domestically and internationally, upon various service providers that are
outside of its control including: various vendors; governmental agencies;
utility companies; telecommunications service companies; delivery service
companies; and other service providers. These third parties may suffer a Year
2000 business disruption caused by the inability of various systems to process
21st century dates that could hinder Lycos' ability to conduct its business. To
the extent that Lycos fails to identify and remedy any non-compliant internal or
external Year 2000 problems, or the Year 2000 phenomenon creates a systemic
failure beyond Lycos' control, like a prolonged telecommunications or electrical
failure or a prolonged failure of third-party software on which Lycos relies,
Lycos could be prevented from operating its business and permitting users access
to its web sites.
Costs Of Year 2000 Compliance To Lycos. To date, Lycos has not incurred any
material expenditures in connection with identifying or evaluating Year 2000
compliance issues. Most of its expenses thus far relate to retaining third party
consultants to assist Lycos in its compliance efforts and to the opportunity
cost of time spent by Lycos employees evaluating its software, the current
versions of the hardware and software sold by Lycos and Year 2000 compliance
matters generally.
Status Of Lycos' Contingency Plan. Lycos has not yet developed a Year 2000-
specific contingency plan. If Lycos discovers Year 2000 compliance issues, it
will evaluate the need for contingency plans relating to these issues.
14
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
In February 1999, the Company announced its intention to enter into a
transaction with USA Networks, Inc. and certain affiliated companies pursuant to
which, among other things, Lycos would have been merged into a subsidiary of USA
Networks. In May 1999, the parties to the proposed transaction terminated the
merger by mutual agreement.
Prior to such termination, eight purported class action lawsuits were filed in
the Court of Chancery for the State of Delaware in and for New Castle County, by
shareholders of the Company allegedly on behalf of all common stockholders of
the Company. The complaints request, among other things, that the proposed
transaction be enjoined or that rescissionary damages be awarded to the
purported class and that plaintiffs be awarded all costs and fees, including
attorneys' fees. Although the proposed merger has since been terminated, the
suits have not been dismissed. The Company believes that the allegations in the
complaints are without merit and intends to contest them vigorously.
Also prior to the termination of the proposed merger, a series of purported
securities class action lawsuits were filed in the United States District Court
for the District of Massachusetts. The suits, which have since been
consolidated, allege, among other claims, violations of United States Federal
securities law through alleged misrepresentations and omissions relating to the
announced transaction with USA Networks. The consolidated complaint seeks an
unspecified award of damages. The Company believes that the allegations in the
consolidated complaint are without merit and intends to contest them vigorously.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11.1: Statement of Computation of Basic and Diluted Net
Loss Per Share herein included on page 17.
Exhibit 27.1: Financial Data Schedule
(b) The following reports on Form 8-K were filed during the quarter
ended October 31, 1999:
On August 8, 1999 the Company filed a current report on Form 8-K
reporting the Agreement and Plan of Merger with Internet Music
Distribution, Inc. On October 7, 1999 the Company filed a Form
8-K/A which amended the Company's current report on Form 8-K
originally filed on August 8, 1999.
On September 16, 1999 the Company filed a current report on Form
8-K reporting the Agreement and Plan of Merger with Quote.com.
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LYCOS, INC.
Date: December 15, 1999 By: /s/ Edward M. Philip
----------------------
Edward M. Philip
Chief Operating Officer and
Chief Financial Officer
(Principal Financial and Accounting Officer,
Authorized Officer)
16
<PAGE>
EXHIBIT 11.1
LYCOS, INC.
COMPUTATION OF SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
OCTOBER 31, 1999 OCTOBER 31, 1998
---------------- ----------------
<S> <C> <C>
Common stock, beginning of period......................... 94,891,910 71,982,903
Weighted average common shares
issued during the period, net........................... 677,408 11,836,996
Common stock options and warrants
using the modified treasury method....................
---------------- ----------------
95,569,318 83,819,899
=============== ===============
Net loss.................................................... $(27,522,365) $(3,595,933)
=============== ===============
Basic and diluted net loss per share (1).................... $ (0.29) $ (0.04)
=============== ===============
</TABLE>
(1) Diluted net loss per share was not materially different from basic net loss
per share.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JUL-31-2000 JUL-31-1999
<PERIOD-START> AUG-01-1999 AUG-01-1998
<PERIOD-END> OCT-31-1999 OCT-01-1998
<CASH> 163,039,067 152,970,244
<SECURITIES> 0 0
<RECEIVABLES> 34,233,110 27,016,514
<ALLOWANCES> 4,049,157 2,377,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 282,980,003 258,133,791
<PP&E> 13,092,348 19,933,487
<DEPRECIATION> 6,634,600 12,462,257
<TOTAL-ASSETS> 859,357,592 874,642,068
<CURRENT-LIABILITIES> 110,095,606 90,425,567
<BONDS> 0 0
0 0
0 0
<COMMON> 980,808 967,071
<OTHER-SE> 703,676,310 724,715,549
<TOTAL-LIABILITY-AND-EQUITY> 859,357,592 874,642,068
<SALES> 56,033,902 24,784,119
<TOTAL-REVENUES> 56,033,902 24,784,119
<CGS> 11,671,154 5,300,325
<TOTAL-COSTS> 84,775,948 40,396,303
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (27,042,365) (3,595,933)
<INCOME-TAX> 480,000 0
<INCOME-CONTINUING> (27,522,365) (3,595,933)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (27,522,365) (27,522,365)
<EPS-BASIC> (0.29) (0.04)
<EPS-DILUTED> (0.29) (0.04)
</TABLE>
