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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Event Reported):
December 3, 1999
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LYCOS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or other jurisdiction of incorporation or organization)
0-27830 04-3277338
(Commission File Number) (IRS Employer Identification
No.)
400-2 Totten Pond Road
Waltham, MA 02451
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code (781) 370-2700
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The undersigned registrant hereby amends the following items, financial
statements, exhibits, or other portions of the Current Report on Form 8-K filed
by the registrant on December 21, 1999 as set forth in the pages attached
hereto:
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Not applicable
(b) Not applicable
(c) Exhibits
2.1 Agreement and Plan of Merger, dated as of November 22, 1999, by
and among Lycos, Inc., Barbados Acquisition Corp.,
Gamesville.com, Inc., and the stockholders of Gamesville.com,
Inc.*
2.2 Registration Rights Agreement, dated as of November 22, 1999,
among Lycos, Inc. and the stockholders*
2.3 Indemnification and Escrow Agreement, dated as of November 22,
1999, among Lycos, Inc., State Street Bank and Trust Company,
the stockholders and Jerry Colonna*
99.1 Selected Supplemental Consolidated Financial Data
99.2 Supplemental Management's Discussion and Analysis of Financial
Condition and Results of Operations
99.3 Supplemental Consolidated Financial Statements
*Previously filed with Form 8-K dated December 21, 1999.
SIGNATURES
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 hereunto duly authorized.
LYCOS, INC.
Dated: January 4, 2000 By: /s/ Edward M. Philip
----------------------------------
Edward M. Philip
Chief Operating Officer, and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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EXHIBIT 99.1
EXHIBIT 99.2
EXHIBIT 99.3
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LYCOS, INC.
SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
The following selected supplemental consolidated financial data of Lycos as
of and for the years ended July 31, 1999, 1998, 1997 and 1996 and as of July
31, 1995 and for the period from Inception (June 1, 1995) to July 31, 1995 have
been derived from the supplemental consolidated financial statements of Lycos,
which have been audited by KPMG LLP, independent certified public accountants.
The Lycos selected supplemental consolidated financial data as of October 31,
1999 and for the three months ended October 31, 1999 and 1998 have been derived
from the unaudited supplemental condensed consolidated financial statements of
Lycos, which have been prepared on the same basis as the audited supplemental
consolidated financial statements of Lycos. The supplemental consolidated
financial statements give retroactive effect to the merger of Lycos, Inc. and
Gamesville, Inc. on December 3, 1999, which has been accounted for as a
pooling-of-interests. The selected supplemental consolidated financial data
should not be considered to be indicative of future results and should be read
in conjunction with Lycos' supplemental consolidated financial statements, the
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included herein.
<TABLE>
<CAPTION>
Three Months
Inception Ended
(June 1, 1995) Year Ended July 31, October 31,
to July 31, ------------------------------------ -----------------
1995 1996 1997 1998 1999 1998 1999
-------------- ------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
Advertising............ $ -- $ 4,478 $17,668 $ 42,854 $ 96,459 $17,630 $ 38,839
Electronic commerce,
license and other..... 5 779 4,856 14,292 42,081 7,509 17,019
------ ------- ------- -------- -------- ------- --------
Total revenues....... 5 5,257 22,524 57,146 138,540 25,139 55,858
Cost of revenues........ 27 2,901 4,467 12,758 29,273 5,390 11,998
------ ------- ------- -------- -------- ------- --------
Gross profit........... (22) 2,356 18,057 44,388 109,267 19,749 43,860
Operating expenses:
Research and
development........... 16 906 4,521 9,724 26,963 5,394 9,808
In process research
and development....... -- 452 -- 17,280 -- -- --
Sales and marketing.... 30 4,748 19,318 35,250 79,325 16,204 32,506
General and
administrative........ 37 1,692 2,856 5,883 17,528 2,607 7,258
Amortization of
intangible assets..... -- 360 540 7,614 52,428 11,136 28,237
------ ------- ------- -------- -------- ------- --------
Total operating
expenses............ 83 8,158 27,235 75,751 176,244 35,341 77,809
------ ------- ------- -------- -------- ------- --------
Operating loss.......... (105) (5,802) (9,178) (31,363) (66,977) (15,592) (33,949)
Interest income......... -- 714 2,129 3,050 6,274 1,897 1,872
Other income, net....... -- -- -- -- 8,759 10,120 --
------ ------- ------- -------- -------- ------- --------
Loss before income
taxes.................. (105) (5,088) (7,049) (28,313) (51,944) (3,575) (32,077)
Provision for income
taxes.................. -- -- -- -- 138 -- (1,158)
------ ------- ------- -------- -------- ------- --------
Net loss................ $ (105) $(5,088) $(7,049) $(28,313) $(52,082) $(3,575) $(30,919)
====== ======= ======= ======== ======== ======= ========
Basic and diluted net
loss per share......... $ -- $ (0.11) $ (0.12) $ (0.44) $ (0.59) $ (0.04) $ (.31)
====== ======= ======= ======== ======== ======= ========
Weighted average shares
used in computing basic
and diluted net loss
per share.............. 44,051 47,970 57,457 64,144 88,960 86,098 99,174
====== ======= ======= ======== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
July 31,
--------------------------------------- October 31,
1995 1996 1997 1998 1999 1999
----- ------- ------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents.. $ 446 $44,142 $40,766 $153,980 $166,506 $175,326
Working capital............ 329 39,974 38,129 146,889 181,305 181,867
Total assets............... 1,317 53,661 65,419 317,784 889,799 874,471
Long-term portion of
deferred revenues, net of
current portion........... -- -- 5,100 26,160 55,934 42,544
Long-term portion of notes
payable................... -- -- -- 161 2,600 2,825
Total stockholders'
equity.................... 1,145 44,106 37,495 237,138 739,470 715,053
</TABLE>
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SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to restated historical information, the following discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those discussed herein. You should
read the following discussion of our financial condition and results of
operations in conjunction with our supplemental consolidated financial
statements and the related notes included herein, 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.
The following discussion of the results of operations and financial
condition of Lycos, Inc. ("Lycos" or the "Company") and the accompanying
restated supplemental consolidated financial information has been prepared to
give retroactive effect to the merger of Lycos with Gamesville, Inc.
("Gamesville") on December 3, 1999. The restated supplemental consolidated
financial statements reflect the combination of the historical consolidated
financial statements of Lycos with the historical financial statements of
Gamesville, which have been restated to reflect the same fiscal year end of
Lycos. In connection with the Gamesville business combination the Company
expects to incur approximately $2.0 million of merger-related costs. The
merger-related costs consist primarily of fees for investment bankers,
attorneys, accountants and financial printing. This Supplemental Management's
Discussion and Analysis addresses the periods covered by the supplemental
consolidated financial statements included in this filing.
Quarter Ended October 31, 1999 Compared to Quarter Ended October 31, 1998
Results of Operations
Revenues. Total revenues for the three months ended October 31, 1999
increased 122% to $55.9 million from $25.1 million for the three months ended
October 31, 1998. 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 we have significant obligations remaining.
Advertising Revenues. Advertising revenues increased 120% to $38.8 million
for the three months ended October 31, 1999, representing 70% of total
revenues, as compared to advertising revenues of $17.6 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 as well as growth in the average contract size and
value.
We currently derive a substantial portion of our revenues from the sale of
advertisements on our websites, primarily through banner advertisements and
sponsorships. Advertising contracts are primarily sold as: (1) a "site-based"
or "network-based" contract under which a customer is guaranteed a number of
impressions placed throughout a particular site or the entire Lycos Network; or
(2) contracts targeted to a particular audience or user, either in connection
with one of our topical WebGuides or in connection with specified word searches
(for example, when "automobile" is searched, an automotive or car manufacturer
advertisement appears).
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 our suite of products as
well as from royalties from the sale of goods and services from our websites.
Our license and product revenues are derived principally from product licensing
fees and fees
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from maintenance and support of products. Electronic commerce, license and
product revenues are generally recognized upon delivery provided that we have
no further significant obligations and collection of the receivable is
probable. In cases where there are significant remaining obligations, we defer
such revenue until those obligations are satisfied. Fees from maintenance and
support of our 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 $12.0 million for the quarter
ended October 31, 1999, representing 21% of total revenues, as compared to $5.4
million in the quarter ended October 31, 1998, which also represented 21% of
total revenues. Cost of revenues consist primarily of expenses associated with
the ongoing maintenance and support of our products and services, including
compensation, consulting fees, equipment costs, networking and other related
indirect costs.
Operating Expenses
Research and Development. Research and development expenses totaled $9.8
million for the three months ended October 31, 1999, representing 18% of total
revenues as compared to $5.4 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 our expanded product offerings, while the
percentage decrease is attributable to operational synergies achieved through
the integration of our various acquisitions.
Research and development costs have been expensed as incurred. We believe
that significant investments in research and development are required to remain
competitive. As a consequence, we expect to continue to commit substantial
resources to research and development in the future.
Sales and Marketing. Sales and marketing expenses totaled $32.5 million for
the three months ended October 31, 1999, representing 58% of total revenues, as
compared to $16.2 million for the three months ended October 31, 1998,
representing 64% of total revenues. Sales and marketing expenses consist
primarily of compensation, advertising, public relations, trade shows, travel,
prizes 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 our advertising, marketing and
public relations campaign. The percentage decrease is attributable to economies
of scale achieved through the integration of our various acquisitions. We
expect continued increases in sales and marketing expenses in future periods.
General and Administrative. General and administrative expenses totaled $7.3
million for the three months ended October 31, 1999, representing 13% of total
revenues, as compared to $2.6 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 our
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 $1.9 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
our cash equivalents. Interest expense was not significant in either period.
Gain on Sale of Investments. In August 1998, Amazon.com acquired all of the
outstanding capital stock of PlanetAll. We received 322,128 shares of
Amazon.com valued at approximately $12.8 million at the time of
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acquisition in exchange for our shares of PlanetAll. We 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
after adjustment for amortization of intangible assets and certain other items
which are not deductible for tax purposes. This effective income tax rate may
change during the remainder of 2000 if operating results differ significantly
from the current operating projections.
Fiscal 1999 Compared To Fiscal 1998
Results Of Operations
Revenues. Total revenues for the year ended July 31, 1999 increased $81.4
million or 142%, to $138.5 million from $57.1 million for the year ended July
31, 1998, primarily as a result of the growth in the number and size of
advertising contracts as well as an increase in the number and value of
electronic commerce agreements.
Advertising Revenues. Advertising revenues increased $53.6 million, or 125%,
to $96.5 million for the year ended July 31, 1999, representing 70% of total
revenues. For the year ended July 31, 1998, advertising revenues were $42.9
million, representing 75% of total revenues. The increase in advertising
revenue was attributable primarily to an increase in the number of advertisers
as well as growth in the average contract size and value.
Electronic Commerce, License and Other Revenues. Electronic commerce,
license and other revenues increased $27.8 million or 194%, to $42.1 million
for the year ended July 31, 1999, representing 30% of total revenues. For the
year ended July 31, 1998, electronic commerce, license and other revenues were
$14.3 million, representing 25% of total revenues. For the year ended July 31,
1999, the increase in electronic commerce, license and other revenues is
attributable primarily to the addition of several new partners during the year,
including, among others, Microsoft, Fleet Bank, WebMD and First USA Bank.
Cost of Revenues. Cost of revenues increased $16.5 million or 129%, to $29.3
million for the year ended July 31, 1999, representing 21% of total revenues.
Cost of revenues for the year ended July 31, 1998 were $12.8 million,
representing 22% of total revenues. The overall increase in the cost of
revenues was primarily due to increased usage of our services. We expect
increases in the cost of revenues as demand for our product offerings increase.
Operating Expenses
Research and Development. Research and development expenses increased $17.2
million or 177%, to $27.0 million for the year ended July 31, 1999,
representing 19% of total revenues. For the year ended July 31, 1998, research
and development expenses were $9.7 million, or 17% of total revenues. The
overall increase in research and development expenses was primarily due to
increased engineering staffing to continue to develop and enhance our product
offerings.
Sales and Marketing. Sales and marketing expenses increased $44.1 million,
or 125%, to $79.3 million for the year ended July 31, 1999, representing 57% of
total revenues for the year. For the year ended July 31, 1998, sales and
marketing expenses were $35.3 million, representing 62% of total revenues. The
spending increases were due to the addition of sales and marketing personnel,
increased commissions, and expenses associated with our expanded advertising,
marketing and public relations campaign. Sales and marketing expenses also
includes the cost of our "Premier Provider" Agreements with Netscape and
Microsoft, which totaled $17.6 million, $4.3 million, and $4.5 million in the
fiscal years ended July 31, 1999, 1998 and 1997, respectively.
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General and Administrative. General and administrative expenses increased
$11.6 million, or 198%, to $17.5 million for the year ended July 31, 1999,
representing 13% of total revenues. For the year ended July 31, 1998, general
and administrative expenses were $5.9 million, representing 10% of total
revenues. Included in general and administrative expenses for the year ended
July 31, 1999 are non- recurring expenses of $4.2 million related to the
terminated USA Network acquisition, as well as expenses associated with the
consolidation of our Pittsburgh offices. Excluding these costs, general and
administrative costs increased $7.5 million, or 127%, to $13.3 million for the
year ended July 31, 1999, representing 10% of total revenues. Net of these non-
recurring charges, the increases in spending were primarily due to the
expansion of our corporate infrastructure, including the addition of finance
and administrative personnel and increased costs for professional services.
Amortization of Intangible Assets. Amortization of intangible assets
increased $44.8 million, or 589%, to $52.4 million for the year ended July 31,
1999, representing 38% of revenues. For the year ended July 31, 1998,
amortization of intangible assets was $7.6 million, representing 13% of total
revenues. The increase is attributable to increased amortization related to
intangible assets recorded upon the acquisitions of WhoWhere?, Wired Ventures,
and Internet Music Distribution. We amortize intangible assets recorded upon
the acquisitions over a five year period. We believe that our use of a five
year amortization period is appropriate based on the following factors:
. Independently, none of these companies held leadership positions in the
Web search, navigation, or e-commerce markets.
. The Internet industry has very low barriers of entry for companies
offering competing services to these companies.
. Each company acquired was less than five years old and had a history of
operating losses.
. Industry practice has demonstrated certain technology companies
utilizing amortization periods of three to five years.
. The determination of the useful life of goodwill and other intangible
assets requires a significant amount of judgment on the part of
management.
Interest Income. Interest income increased $3.2 million or 106%, to $6.3
million for the year ended July 31, 1999, representing 5% of total revenues.
Interest income was approximately $3.1 million for the year ended July 31,
1998, representing 5% of total revenues. Interest income was derived primarily
from the investment of the net proceeds received upon the closing of our public
offerings of common stock in April 1996 and June 1998, as well as acquired
cash.
Other income, net. Other income, net for the year ended July 31, 1999,
consists of a $10.1 million gain on sale of equity securities, net of a $1.4
million loss in our equity share of losses in affiliates.
Income Taxes. As of July 31, 1999, we had approximately $151 million in
Federal and state net operating loss carryforwards. The Federal net operating
losses will expire beginning in 2004 if not utilized. The state net operating
losses will expire beginning in 2004 if not utilized. A portion or all of the
net operating loss carryforwards which can be utilized in any year may be
limited by changes in our ownership, pursuant to Section 382 of the Internal
Revenue Code and similar statutes.
Acquisitions
WhoWhere?
On August 13, 1998, we acquired WhoWhere? in a stock-for-stock transaction
valued at approximately $159.1 million, resulting in intangible assets of
$161.3 million. The transaction was accounted for as a purchase, and
accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their respective fair values.
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Wired Ventures
On June 30, 1999, we acquired Wired Ventures in a stock-for-stock
transaction valued at approximately $290.9 million, resulting in intangible
assets of $268.0 million. The transaction was accounted for as a purchase, and
accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their respective fair values.
Internet Music Distribution
On July 27, 1999, we acquired Internet Music Distribution in a stock-for-
stock transaction valued at approximately $49.0 million, resulting in
intangible assets of $50.0 million. Terms of the merger also provide for future
purchase payments, not to exceed $15.0 million, contingent upon unique user
downloads of the Sonique Player. We have retained security interests in certain
common stock that was issued in this transaction. The transaction was accounted
for as a purchase, and accordingly, the purchase price was allocated to the
assets acquired and liabilities assumed based on their respective fair values.
Fiscal 1998 Compared To Fiscal 1997
Results of Operations
Revenues. Total revenues for the year ended July 31, 1998 increased $34.6
million, or 154%, to $57.1 million from $22.5 million for the year ended July
31, 1997, primarily as a result of the growth in the number and size of
advertising contracts as well as an increase in the number and value of
electronic commerce agreements.
Advertising Revenues. Advertising revenues increased $25.2 million, or 143%,
to $42.9 million for the year ended July 31, 1998 representing 75% of total
revenues. For the previous year ended July 31, 1997, advertising revenues were
$17.7 million representing 78% of total revenues. The increase in advertising
revenue was attributable primarily to an increase in the number of advertisers
as well as growth in the average contract size and value.
Electronic Commerce, License and Other Revenues. Electronic commerce,
license and other revenues increased $9.4 million, or 194%, to $14.3 million
for the year ended July 31, 1998, representing 25% of total revenues. For the
year ended July 31, 1997, electronic commerce, license and other revenues were
$4.9 million, representing 22% of total revenues. For the year ended July 31,
1998, the increase in electronic commerce, license and other revenues is
attributable primarily to the addition of several new partners during the year,
including, among others, AT&T, Barnes and Noble, Microsoft and CDnow.
Cost of Revenues. Cost of revenues increased $8.3 million or 186%, to $12.8
million for the year ended July 31, 1998, representing 22% of total revenues.
Cost of revenues for the year ended July 31, 1997 were $4.5 million,
representing 20% of total revenues. The overall increase in the cost of
revenues was primarily due to increased usage of our services.
Operating Expenses
Research and Development. Research and development expenses increased $5.2
million, or 115%, to $9.7 million for the year ended July 31, 1998,
representing 17% of total revenues for the year, but declined 3% as a
percentage of total revenues. For the year ended July 31, 1997, research and
development expenses were $4.5 million, or 20% of total revenues. The overall
increase in research and development expenses was primarily due to increased
engineering staffing to continue to develop and enhance our product offerings.
In-process research and development. During 1998, we initiated a strategy of
purchasing selected technologies as opposed to developing the products
internally, in an effort to enhance the speed with which we could bring new
product offerings to market. From February 1998 through July 1998, we purchased
two such
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technologies of significance: homepage building tools from Tripod in February
1998 and automated directory services from WiseWire in April 1998. Each of
these companies was in an early stage of development, had yet to develop any
significant revenue streams and had devoted most of its efforts to date to the
development of new technologies for the Internet. As a result of acquisitions
during 1998, we recorded an in-process research and development charge of $17.3
million during the fiscal year ended, representing the purchased in-process
research and development that had not yet reached technological feasibility and
had no alternative future use.
Subsequent to the end of our 1998 fiscal year, we continued our acquisition
strategy. However, whereas the previous acquisitions focused on purchasing
technologies, the addition of WhoWhere? in August 1998 and Wired Ventures in
October 1998 centered around adding new users as well as a suite of more
established products and services to our product offerings. This change in
focus was part of our strategic initiative to change our focus from technology
to a mass market media focus.
The following is a description of each of our acquisitions, including a
summary of all major in-process research and development projects at the time
of acquisition. The technologies described below for each acquisition have been
determined to be in-process research and development assets. These technologies
had not reached a state of technological feasibility as of the acquisition
date, nor did they exhibit any alternative future use or uses as determined by
our management.
Tripod
We acquired Tripod on February 12, 1998 for total purchase consideration of
$61.4 million. The portion of the purchase price allocated to in-process
research and development was $7.2 million, or approximately 12% of the total
purchase price. At the acquisition date, Tripod's major in-process project was
the development of an advanced Home Page Building (HPB) technology and related
web site management infrastructure to integrate and support this new HPB
technology. The objective of the project was to develop and package a community
building technology product that could be licensed to other companies to build
and manage their own community-oriented sites. The new HPB technology was
designed to build everything from simple web pages to complex websites. Beyond
the basic technology, the in-process HPB technology would offer two important
features: plug-ins and templates. Plug-ins provide new interactive software
tools to homepage builders without altering the basic HPB technology. For
instance, plug-ins can enable users to easily add games, quizzes, electronic
commerce capabilities and other interactive elements to their homepages. The
HPB technology will also provide multiple template types, allowing a user to
fill in a web form and build an electronic brochure without learning the HTML
programming language.
At the date of acquisition, we estimated that completion of the HPB
technology product would be accomplished by May 31, 1998. The initial
development effort to create a licensable HPB technology product had commenced
in June 1997. The major obstacle to launching the product was completing
software development, integrating the various components into a functional
online system, completing the Application Programming Interface (API) and the
development of a user interface. At the acquisition date, the new HPB
technology product had not reached a completed prototype stage and beta testing
had not yet commenced. The project was delayed due to unexpected technical
difficulty in completing software development, integrating and packaging the
technology and creating a new user interface that performed in a live
production environment. At the acquisition date, approximately 24 man-months of
effort had been invested in the HPB project and related development. An
additional 12 man-months of effort was necessary to complete the project in
September 1998. At the time of our purchase, the project was approximately 67%
complete.
WiseWire
We acquired WiseWire on April 30, 1998 for a total purchase price of $39.4
million. The portion of the purchase price allocated to in-process research and
development was $9.1 million, or approximately 23% of the total purchase price.
The theoretical concepts underlying WiseWire's technology were conceived at
Carnegie Mellon's Artificial Intelligence Labs. The WiseWire technology is
generally described by management as
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"super personalization through adaptive machine learning techniques". Despite
four years of development at Carnegie Mellon University and another three years
at WiseWire, the primary components of the technology still had not yet reached
a state of technological feasibility as of the acquisition date.
At the acquisition date, WiseWire was developing two primary product lines:
WiseWire Community Directory, aimed at the consumer user and those websites
that seek to attract high volumes of consumers; and WiseWire for Web
Sites/WiseWire Professional for the corporate intranet market segment.
The Community Directory was intended to enable clients to utilize WiseWire's
machine learning and collaborative filtering technology to rapidly deploy a
full-featured directory of Internet, Net News, product descriptions, and
proprietary content. WiseWire Community Directory product automatically creates
and manages the entire directory structure, thereby eliminating the need for
large editorial support. The directory is intended to be dynamic in that it is
constantly changing and being updated with new material independent of actions
by an editorial staff. Over time, the content will change and reflect the needs
and interests of the community of users. At the acquisition date, a prototype
of this product was being used to power the Web Guides on the Lycos Network;
however, it was estimated that only about one-third of the technology's long-
term intended performance capability and functionality was being utilized.
Although a subset of the Community Directory technology was developed and was
functioning on the Lycos Network in a limited capacity, approximately two-
thirds of its intended performance capability and feature set was still in
development at the acquisition date.
At the acquisition date, approximately 36 man-months of effort had been
invested in the project and it was estimated that the Community Directory R&D
project would be completed within three to four months. Thus, at the time of
our purchase, the project was estimated to be approximately 90% complete.
In addition to the Community Directory, WiseWire was developing two other
components of its product line as part of an expanded offering to the
corporate, rather than consumer, user:
WiseWire for Web Sites: The WiseWire for Web Sites product will allow
companies to easily integrate the WiseWire technology into their existing
web site, offering direct links to continuously updated, real-time
information specific to their business objectives. WiseWire uses artificial
intelligence to search the broadest variety of online content tailored to
the topics that their users have defined. Sources include hundreds of
online newspapers and periodicals, Web pages, online discussion groups,
news wire feeds, and Lycos' proprietary content. Since the WiseWire
technology is interactive, users of the site contribute to the evolution
and quality of the information.
WiseWire Professional: The WiseWire Professional product provides a low-
cost, high-value tool for personalizing a company's view of the Internet.
WiseWire technology easily integrates with our existing online network
to give their employees high-quality information while blocking content
that is not applicable or is recreational in nature.
At the acquisition date, working prototypes of these products were in the
testing and debugging phase. Significant technological advancements regarding
portability of the technology to a client's site and scalability for high
volume environments had yet to be resolved. In addition, many of the usability
enhancements described below needed to be integrated with the products so that
customers could actually use the product as designed without our continuous
intervention and support.
At the acquisition date, it was estimated that the WiseWire for Web Sites
and WiseWire Professional technology projects would be completed within three
to six months, depending on resource availability, at a tax adjusted cost of
$600,000.
The WiseWire in-process technology projects were completed by December 1998.
10
<PAGE>
In projecting the net earnings attributable to the in-process research and
development projects, management estimated revenues, revenue growth rates,
operating expenses, income taxes, and the costs associated with the utilization
of working capital and other complementary assets. These estimates are based on
the following assumptions:
Projections of revenue growth over a five year forecast period are based
on management's estimates of market potential that are supported by
independent industry data regarding the Internet. Tripod generated revenues
of approximately $350,000 in 1996 and $900,000 in 1997. WiseWire generated
revenues of $4,346 in fiscal year 1996 and $8,647 in fiscal year 1997. Both
Tripod and WiseWire were development stage enterprises when acquired by
Lycos. Because of the absence of meaningful historical revenues for Tripod
and WiseWire, management projected revenues for the initial year of the
forecast period based on its assessment of future market potential and each
company's ability to successfully launch its new product offerings. After
the initial year of the five year forecast period, revenues were predicted
to grow at rates comparable to the growth of Internet users and online
activity and the impact such growth would have on Internet advertising and
electronic commerce. For Tripod, forecasted annual growth rates range from
133% in 1999 to 39% in the fifth year of the projection period. For
WiseWire, forecasted annual growth rates range from a high of 200% in 2001
and then decline to an annual rate of 97% in the fifth year of the
forecast.
Forecasted operating expenses were estimated at 70% of revenues for both
Tripod and WiseWire. Income taxes were estimated at a provisional rate of
40%. The estimated after tax margin as a percentage of revenue of 18% is
consistent with future industry expectations for businesses operating in
this segment of the Internet marketplace. The 70% rate is consistent with a
convergence of the industry averages evident in the computer, software and
telecommunications industries. We believe that the 70% rate takes into
account ongoing maintenance and research and development costs typically
associated with software technologies, as well as the costs to integrate
the products into the Lycos Network. As a result of a 70% operating expense
ratio, pre-tax income is 30% and after tax income is 18%, assuming a 40%
tax rate. We believe that an 18% profit margin is reasonable and consistent
with industry expectations.
The return on working capital and other assets necessary to support the
growth of each company has been estimated so as to derive an income stream
specifically attributable to the in-process technology. Net working capital
requirements have been estimated at 15% of revenues. The 8% rate applied to
working capital reflects the long term expectation for interest rates for
working capital loans. The projected return on working capital is based
upon a market rate of return of 8%, or 4.8% on an after-tax basis. Tangible
assets have been estimated based upon the level of tangible assets
currently deployed in each business and upon anticipated capital
expenditures for normal asset replacement. The tangible asset base required
to support Tripod's R&D activities is estimated at approximately $1.0
million over the 5 year forecast period. The tangible asset base required
to support WiseWire's R&D activities is estimated at approximately $920,000
over the 5 year forecast period. The 12% interest rate applied to fixed
assets reflects the long term lending rate expectation for financing the
purchase of equipment. The projected return on tangible assets is based
upon a market rate of return estimate of 12%, or 7.2% on an after-tax
basis.
The calculated weighted average cost of capital (WACC) is approximately
16%. The 16% rate was based upon an analysis of the WACC for publicly
traded companies within the same industry. The WACC calculation produces
the average required rate of return of an investment in an operating
enterprise. The required rate of return for working capital and tangible
assets would generally be lower than the WACC given the fact that less risk
is associated with such assets. As stated above, management estimates an 8%
return on working capital and a 12% return on tangible assets. For
intangible assets that reflect a considerably higher degree of risk, such
as in-process technology, a rate range of 25.2% to 28.8% has been utilized
depending on the relevant risk of the earning stream associated with the
technology. The risk rates used to calculate the present value of the
earnings streams relating to in-process research and development are
approximately 20% higher than the rates used for valuing the developed
technology. We believe that this additional increment in the discount rate
accounts for the additional risks involved in completing the project and
gaining customer acceptance.
11
<PAGE>
If actual results differ significantly from the above assumptions, we may be
adversely affected in future periods. In addition, the value of other assets
acquired may become impaired.
Sales and Marketing. Sales and marketing expenses increased $15.9 million or
82%, to $35.3 million for the year ended July 31, 1998, representing 62% of
total revenues for the year. For the year ended July 31, 1997, sales and
marketing expenses were $19.3 million, representing 86% of total revenues, but
declined 4% as a percentage of total revenues. The spending increases were due
to the addition of sales and marketing personnel, increased commissions, and
expenses associated with our expanded advertising, marketing and public
relations campaign. Sales and marketing expenses also includes the cost of our
"Premier Provider" Agreements with Microsoft and Netscape, which totaled $17.6
million, $4.3 million and $4.5 million in the fiscal years ended July 31, 1999,
1998 and 1997, respectively.
General and Administrative. General and administrative expenses increased
$3.0 million, or 106%, to $5.9 million for the year ended July 31, 1998,
representing 10% of total revenues. For the year ended July 31, 1997, general
and administrative expenses were $2.9 million, representing 13% of total
revenues. The increases in spending were primarily due to the expansion of our
corporate infrastructure, including the addition of finance and administrative
personnel and increased costs for professional services.
Amortization of Intangible Assets. Amortization of intangible assets
increased $7.1 million, to $7.6 million for the year ended July 31, 1998,
representing 13% of revenues. For the fiscal year ended July 31, 1997,
amortization of intangibles were $540,000, representing 2% of total revenues.
The increase is attributable to increased amortization related to developed
technology and goodwill and other intangible assets recorded upon the
acquisitions of Tripod, WiseWire and GuestWorld.
At July 31, 1998, we had total net assets of $237.1 million, of which $78.8
million pertained to goodwill and other intangible assets. We continually
evaluate the existence of long-lived assets impairment in accordance with the
provisions of SFAS 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be disposed of." We wrote off $98,000 of goodwill related
to Point Communications and $830,000 related to its license agreement with
Carnegie Mellon University.
Interest Income. Interest income increased $921,000 or 43%, to $3.1 million
for the year ended July 31, 1998, representing 5% of total revenues. Interest
income was approximately $2.1 million for the year ended July 31, 1997,
representing 9% of total revenues. Interest income is derived primarily from
the investment of the net proceeds received upon the closing of our public
offerings of common stock in April 1996 and June 1998.
Income Taxes. We have not recorded an income tax expense or benefit because
we have incurred net operating losses since inception. As of July 31, 1998, we
had approximately $38.0 million in Federal and State net operating loss
carryforwards. Of this amount, approximately $13.0 million relates to the
acquisitions of Point Communications, Tripod, WiseWire, and GuestWorld and will
reduce goodwill when utilized. The Federal net operating losses will expire
beginning in 2007 if not utilized. The state net operating losses will expire
beginning in 1998 if not utilized. A portion or all of net operating loss
carryforwards which can be utilized in any year may be limited by changes in
our ownership, pursuant to Section 382 of the Internal Revenue Code and similar
statutes.
Liquidity and Capital Resources
At October 31, 1999, we had cash and cash equivalents of approximately
$175.3 million. We regularly invest excess funds in short-term money market
funds, government securities and commercial paper.
The Company generated cash from operations of approximately $411,000 during
the three months ended October 31, 1999. The Company used cash from investing
activities of approximately $2.4 million during the three months ended October
31, 1999, due primarily to cash used to acquire property and equipment. The
Company generated cash from financing activities of approximately $10.8 million
during the three months ended October 31, 1999, due primarily to proceeds
received by us from the exercise of employee stock options.
12
<PAGE>
At October 31, 1999, we had deferred revenues of $121.9 million representing
primarily fees to be earned in the future on noncancelable electronic commerce
agreements.
From time to time, we expect to evaluate the acquisition of products,
businesses and technologies that complement our business. As of the date of
this prospectus, we do not have any understandings, commitments or agreements
with respect to any material acquisitions.
We currently believe that available funds and cash flows generated by
operations, if any, will be sufficient to fund our working capital and capital
expenditures requirements for at least the next twelve months. Thereafter, we
may need to raise additional funds. We 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 additional equity securities, the percentage equity
ownership by our stockholders will be reduced, stockholders may experience
dilution, and such equity securities may have rights, preferences or privileges
senior to those of our common stock. There can be no assurance that additional
financing will be available when needed on terms favorable to us or at all. If
adequate funds are not available or are not available on acceptable terms, we
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 our business, results of operations or financial
condition.
Year 2000 Compliance
Our 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 ours and the companies on which we
depend, 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.
Our State Of Year 2000 Readiness. We continue to monitor the Year 2000
readiness of the hardware and software products we sell, the information
technology systems we use and our non-information technology systems, like
building security, voice mail and other systems. We have completed our
assessment of all current versions of the hardware and software products and
technology information systems that we use and believe that they are Year 2000
compliant. We have also completed all of our testing of these technology
information systems. Whether a complete system or device that uses hardware or
software used by us will process 21st century dates depends on other components
that are supplied by parties other than us. The suppliers of our critical
information systems have informed us that their software is Year 2000
compliant. We rely, both domestically and internationally, upon various service
providers that are outside of our 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 our ability to conduct
our business. To the extent that we fail to identify and remedy any non-
compliant internal or external Year 2000 problems, or the Year 2000 phenomenon
creates a systemic failure beyond our control, like a prolonged
telecommunications or electrical failure or a prolonged failure of third-party
software on which we rely, we could be prevented from operating our business
and permitting users access to our web sites. To date, we have not suffered any
significant Year 2000 problems, but we continue to monitor our various systems.
Costs Of Our Year 2000 Compliance. To date, we have not incurred any
material expenditures in connection with identifying or evaluating Year 2000
compliance issues. Most of our expenses thus far relate to retaining third
party consultants to assist in our compliance efforts and the opportunity cost
of time spent by our employees evaluating its software, the current versions of
the hardware and software sold by us and Year 2000 compliance matters
generally.
13
<PAGE>
Subsequent Events
Acquisition of Quote.com
On December 6, 1999, we closed the merger of Quote.com. 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.
Results of operations for Quote.com will be included with those of Lycos for
periods subsequent to the date of acquisition. Under the terms of the
acquisition, we exchanged 1,346,630 shares of Lycos common stock for all
outstanding shares of common stock and preferred stock of Quote.com.
Additionally, we converted all outstanding Quote.com options and warrants into
Lycos options and warrants to acquire a total of 239,000 shares of our common
Stock.
Lycos Asia Joint Venture
In September 1999, we 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. We own 50% of the joint venture and 50% is owned by SingTel, a
telecommunications provider in Singapore. The investment will be accounted for
under the equity method and accordingly, we will recognize 50% of the net
losses and profits of Lycos Asia when realized.
New Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", which establishes guidelines
for the accounting for the costs of all computer software developed or obtained
for internal use. We adopted SOP 98-1 effective August 1, 1999. The adoption of
SOP 98-1 did not have a material impact on our consolidated financial
statements.
In April, 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities." The statement is effective for fiscal years beginning
after December 15, 1998. The statement requires costs of start-up activities
and organization costs to be expensed as incurred. We adopted SOP 98- 5
effective August 1, 1999. The adoption of SOP 98-5 did not have a material
impact on our consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities", which requires that all derivative instruments be recorded on the
balance sheet at their fair value. We currently expect to adopt SFAS 133, as
amended by SFAS 137, for the year ending July 31, 2001. Management has
determined there will be no impact on its results of operations or financial
position resulting from the adoption of SFAS 133 because we currently do not
hold derivative instruments.
Quantitative and Qualitative Disclosures about Market Risk
Lycos owns financial instruments that are sensitive to market risks as part
of its investment portfolio. Our investment portfolio is used to preserve our
capital until it is required to fund operations. None of these market-risk
sensitive instruments are held for trading purposes. We do not own derivative
financial instruments in our investment portfolio. The investment portfolio
contains instruments that are subject to a decline in equity markets.
Investment Rate Risk--Lycos' investment portfolio includes primarily certain
commercial paper which is subject to interest rate risk. Due to the short
duration and conservative nature of these instruments, Lycos does not believe
that it has a material exposure to interest rate risk.
14
<PAGE>
INDEX TO SUPPLEMENTAL FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Page
----
LYCOS, INC. SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS:
Audited Supplemental Consolidated Financial Statements:
Independent Auditors' Report.............................................. F-2
Supplemental Consolidated Balance Sheets at July 31, 1999 and 1998........ F-3
Supplemental Consolidated Statements of Operations for the years ended
July 31, 1999, 1998 and 1997............................................. F-4
Supplemental Consolidated Statements of Stockholders' Equity and
Comprehensive Income (Loss) for the years ended July 31, 1999, 1998 and
1997..................................................................... F-5
Supplemental Consolidated Statements of Cash Flows for the years ended
July 31, 1999, 1998 and 1997............................................. F-6
Notes to Supplemental Consolidated Financial Statements................... F-8
Unaudited Supplemental Consolidated Financial Statements:
Supplemental Condensed Consolidated Balance Sheets at October 31, 1999
(Unaudited) and July 31, 1999............................................ F-32
Supplemental Condensed Consolidated Statements of Operations for the Three
Months Ended October 31, 1999 and 1998 (Unaudited)....................... F-33
Supplemental Condensed Consolidated Statements of Cash Flows for the Three
Months Ended October 31, 1999 and 1998 (Unaudited)....................... F-34
Notes to Supplemental Condensed Consolidated Financial Statements
(Unaudited).............................................................. F-35
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Lycos, Inc.:
We have audited the accompanying supplemental consolidated balance sheets
of Lycos, Inc. as of July 31, 1999 and 1998 and the related supplemental
consolidated statements of operations, stockholders' equity and comprehensive
income, and cash flows for each of the years in the three year period ended
July 31, 1999. These supplemental consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these supplemental 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 misstatement. 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.
The supplemental consolidated financial statements give retroactive effect
to the merger of Lycos, Inc. and Gamesville, Inc. on December 3, 1999, which
has been accounted for as a pooling-of-interests as described in Note 1 to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that
do not include the date of consummation. These financial statements do not
extend through the date of consummation. However, they will become the
historical consolidated financial statements of Lycos, Inc. after financial
statements covering the date of consummation of the business combination are
issued.
In our opinion, the supplemental consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of Lycos, Inc. at July 31, 1999 and 1998, and the results of its
operations and cash flows for each of the years in the three year period ended
July 31, 1999, in conformity with generally accepted accounting principles
applicable after financial statements are issued for a period which includes
the date of consummation of the business combination.
/s/ KPMG llp
Boston, Massachusetts
January 4, 2000
F-2
<PAGE>
LYCOS, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, July 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $166,505,998 $153,980,292
Accounts receivable, less allowance for doubtful
accounts of $2,442,000 and $1,208,000 at July
31, 1999 and 1998, respectively................. 25,830,284 11,074,756
Electronic commerce and license fees receivable.. 71,843,202 30,223,986
Prepaid expenses................................. 8,782,844 5,900,243
------------ ------------
Total current assets........................... 272,962,328 201,179,277
------------ ------------
Property and equipment, less accumulated
depreciation and amortization..................... 7,726,006 4,126,689
Electronic commerce and license fees receivable.... 48,029,100 21,537,371
Investments........................................ 48,000,570 8,874,568
Intangible assets, less accumulated amortization... 505,682,024 78,787,554
Other assets....................................... 7,399,453 3,278,994
------------ ------------
Total assets................................... $889,799,481 $317,784,453
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable--current........................... $ 2,949,480 $ 604,230
Accounts payable................................. 2,055,267 4,996,956
Accrued expenses................................. 22,636,751 17,276,357
Deferred revenues................................ 64,016,249 31,412,239
------------ ------------
Total current liabilities...................... 91,657,747 54,289,782
Deferred tax liability............................. 138,000 --
Notes payable...................................... 2,599,728 160,613
Deferred revenues.................................. 55,934,152 26,159,754
Other liabilities.................................. -- 36,667
------------ ------------
58,671,880 26,357,034
Commitments and contingencies ..................... -- --
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, none issued or outstanding.......... -- --
Common stock, $.01 par value; 300,000,000 shares
authorized, 100,311,847 shares at July 31, 1999
and 80,260,563 at July 31, 1998 issued and
outstanding..................................... 1,003,121 802,609
Additional paid-in capital....................... 815,706,221 278,105,181
Deferred compensation............................ (75,276) (116,338)
Accumulated deficit.............................. (92,751,009) (40,669,222)
Treasury stock, at cost, 1,814,893 shares at July
31, 1999 and 1,417,348 shares at July 31, 1998.. (3,286,293) (984,593)
Accumulated other comprehensive income........... 18,873,090 --
------------ ------------
Total stockholders' equity..................... 739,469,854 237,137,637
------------ ------------
Total liabilities and stockholders' equity..... $889,799,481 $317,784,453
============ ============
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-3
<PAGE>
LYCOS, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------
July 31, 1999 July 31, 1998 July 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Advertising............................ $ 96,459,369 $ 42,854,588 $17,668,379
Electronic commerce, license and
other................................. 42,080,564 14,291,698 4,855,654
------------ ------------ -----------
Total revenues....................... 138,539,933 57,146,286 22,524,033
Cost of revenues......................... 29,273,068 12,758,338 4,467,253
------------ ------------ -----------
Gross profit......................... 109,266,865 44,387,948 18,056,780
Operating expenses:
Research and development............... 26,963,391 9,724,180 4,520,427
In process research and development.... -- 17,280,000 --
Sales and marketing.................... 79,324,559 35,250,392 19,318,082
General and administrative............. 17,527,969 5,883,282 2,855,738
Amortization of intangible assets...... 52,427,704 7,613,711 540,416
------------ ------------ -----------
Total operating expenses............. 176,243,623 75,751,565 27,234,663
------------ ------------ -----------
Operating loss........................... (66,976,758) (31,363,617) (9,177,883)
Interest income.......................... 6,273,565 3,049,850 2,129,224
Equity share of losses in affiliates..... (1,360,425) -- --
Gain on sale of investments.............. 10,119,831 -- --
------------ ------------ -----------
Loss before income taxes................. (51,943,787) (28,313,767) (7,048,659)
Provision for income taxes............... 138,000 -- --
------------ ------------ -----------
Net loss................................. $(52,081,787) $(28,313,767) $(7,048,659)
============ ============ ===========
Basic and diluted net loss per share..... $ (0.59) $ (0.44) $ (0.12)
============ ============ ===========
Shares used in computing basic and
diluted net loss per share.............. 88,959,992 64,143,655 57,456,663
============ ============ ===========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-4
<PAGE>
LYCOS, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME (LOSS)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Treasury Stock Other
---------------------- Paid-in Deferred Accumulated --------------------- Comprehensive
Shares Amount Capital Compensation Deficit Shares Amount Income (Loss)
----------- ---------- ------------ ------------ ------------ --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at July 31,
1996.................. 57,449,275 $ 574,493 $ 49,492,336 $(376,161) $ (5,306,796) -- -- --
Comprehensive income
(loss):
Net loss............ -- -- -- -- (7,048,659) -- -- --
Other comprehensive
income (loss):
Unrealized gains
on available-for-
sale securities...
Comprehensive
income (loss)...
Issuance of common
stock in connection
with Employee Stock
Purchase Plan......... 14,896 148 18,254 -- -- -- -- --
Cancellation of
options............... -- -- (49,067) 49,067 -- -- -- --
Amortization of
deferred
compensation.......... -- -- -- 141,658 -- -- -- --
----------- ---------- ------------ --------- ------------ --------- ----------- -----------
Balances at July 31,
1997.................. 57,464,171 574,641 49,461,523 (185,436) (12,355,455) -- -- --
Comprehensive income
(loss):
Net loss............ -- -- -- -- (28,313,767) -- -- --
Other comprehensive
income (loss):
Unrealized gains
on available-for-
sale securities...
Comprehensive
income (loss)...
Issuance of common
stock in connection
with Employee Stock
Purchase Plan......... 17,176 172 65,870 -- -- -- -- --
Cancellation of
options............... -- -- (22,562) 22,562 -- -- -- --
Issuance of common
stock in connection
with exercise of stock
options............... 4,094,040 40,940 3,201,254 -- -- 123,112 $ (307) --
Purchase of treasury
stock in connection
with exercise of stock
options............... -- -- -- -- -- 1,216,368 (467,589) --
Issuance of common
stock in connection
with exercise of
warrants.............. 414,456 4,144 1,359,444 -- -- 37,672 (113,581) --
Issuance of common
stock in connection
with strategic
investments, net of
offering costs........ 602,056 6,024 7,876,419 -- -- -- -- --
Issuance of common
stock and warrants in
connection with
acquisitions.......... 8,298,284 82,984 104,766,071 -- -- 40,196 (403,116) --
Issuance of common
stock in connection
with Secondary Public
Offering, net of
offering costs........ 9,350,000 93,500 111,097,366 -- -- -- -- --
Issuance of common
stock in connection
with services
rendered.............. 20,380 204 299,796 -- -- -- -- --
Amortization of
deferred
compensation.......... -- -- -- 46,536 -- -- -- --
----------- ---------- ------------ --------- ------------ --------- ----------- -----------
Balances at July 31,
1998.................. 80,260,563 802,609 278,105,181 (116,338) (40,669,222) 1,417,348 (984,593) --
Comprehensive income
(loss):
Net loss............ -- -- -- -- (52,081,787) -- -- --
Other comprehensive
income (loss):
Unrealized gains
on available-for-
sale securities,
net of tax........ -- -- -- -- -- -- -- $18,873,090
Comprehensive
income (loss)...
Issuance of common
stock in connection
with Employee Stock
Purchase Plan......... 19,112 191 247,300 -- -- -- -- --
Issuance of non-
qualified stock
options............... -- -- 29,844 (29,844) -- -- -- --
Issuance of common
stock in connection
with exercise of stock
options............... 3,120,163 31,201 15,512,243 -- -- 397,545 (2,301,700) --
Tax benefit of stock
option exercises...... -- -- 12,582,000 -- -- -- -- --
Issuance of common
stock in connection
with acquisitions..... 13,306,965 133,070 495,317,069 -- -- -- -- --
Issuance of common
stock of subsidiary... 3,605,044 36,050 13,912,584 -- -- -- -- --
Amortization of
deferred
compensation.......... -- -- -- 70,906 -- -- -- --
----------- ---------- ------------ --------- ------------ --------- ----------- -----------
Balances at July 31,
1999.................. 100,311,847 $1,003,121 $815,706,221 $ (75,276) $(92,751,009) 1,814,893 $(3,286,293) $18,873,090
=========== ========== ============ ========= ============ ========= =========== ===========
<CAPTION>
Comprehensive
Total Income (Loss)
------------- --------------
<S> <C> <C>
Balances at July 31,
1996.................. $ 44,383,872
Comprehensive income
(loss):
Net loss............ (7,048,659) $ (7,048,659)
Other comprehensive
income (loss):
Unrealized gains
on available-for-
sale securities... --
--------------
Comprehensive
income (loss)... $ (7,048,659)
==============
Issuance of common
stock in connection
with Employee Stock
Purchase Plan......... 18,402
Cancellation of
options............... --
Amortization of
deferred
compensation.......... 141,658
-------------
Balances at July 31,
1997.................. 37,495,273
Comprehensive income
(loss):
Net loss............ (28,313,767) $(28,313,767)
Other comprehensive
income (loss):
Unrealized gains
on available-for-
sale securities... --
--------------
Comprehensive
income (loss)... $(28,313,767)
==============
Issuance of common
stock in connection
with Employee Stock
Purchase Plan......... 66,042
Cancellation of
options............... --
Issuance of common
stock in connection
with exercise of stock
options............... 3,241,887
Purchase of treasury
stock in connection
with exercise of stock
options............... (467,589)
Issuance of common
stock in connection
with exercise of
warrants.............. 1,250,007
Issuance of common
stock in connection
with strategic
investments, net of
offering costs........ 7,882,443
Issuance of common
stock and warrants in
connection with
acquisitions.......... 104,445,939
Issuance of common
stock in connection
with Secondary Public
Offering, net of
offering costs........ 111,190,866
Issuance of common
stock in connection
with services
rendered.............. 300,000
Amortization of
deferred
compensation.......... 46,536
-------------
Balances at July 31,
1998.................. 237,137,637
Comprehensive income
(loss):
Net loss............ (52,081,787) $(52,081,787)
Other comprehensive
income (loss):
Unrealized gains
on available-for-
sale securities,
net of tax........ 18,873,090 18,873,090
--------------
Comprehensive
income (loss)... $(33,208,697)
==============
Issuance of common
stock in connection
with Employee Stock
Purchase Plan......... 247,491
Issuance of non-
qualified stock
options............... --
Issuance of common
stock in connection
with exercise of stock
options............... 13,241,744
Tax benefit of stock
option exercises...... 12,582,000
Issuance of common
stock in connection
with acquisitions..... 495,450,139
Issuance of common
stock of subsidiary... 13,948,634
Amortization of
deferred
compensation.......... 70,906
-------------
Balances at July 31,
1999.................. $739,469,854
=============
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-5
<PAGE>
LYCOS, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
---------------------------------------
July 31, July 31, July 31,
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Operating activities
Net loss.............................. $(52,081,787) $(28,313,767) $(7,048,659)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Amortization of deferred
compensation....................... 70,906 46,536 141,658
Amortization of intangible assets... 52,427,704 7,613,711 540,416
Depreciation........................ 3,549,058 1,525,132 728,649
Allowance for doubtful accounts..... 1,234,000 654,000 405,000
Gain on sale of investments......... (10,119,831) -- --
Equity share of losses in
affiliates......................... 1,360,425 -- --
In process research and development
expense............................ -- 17,280,000 --
Issuance of common stock for
services rendered.................. -- 300,000 --
Deferred taxes...................... 138,000 -- --
Changes in operating assets and
liabilities:
Accounts receivable................. (7,281,355) (4,778,501) (3,851,722)
Electronic commerce and license fees
receivable......................... (68,110,945) (42,045,551) (7,731,585)
Prepaid expenses.................... (1,762,954) (1,266,676) (3,300,180)
Other current assets................ 182,844 (326,292) --
Other assets........................ (3,272,683) (2,895,379) (216,000)
Accounts payable.................... (5,771,223) 854,278 576,493
Accrued expenses.................... (9,208,801) 8,343,401 5,640,589
Deferred revenues................... 60,432,726 40,450,223 12,478,136
Other liabilities................... (36,667) (29,105) (449,495)
------------ ------------ -----------
Net cash used in operating
activities........................... (38,250,583) (2,587,990) (2,086,700)
------------ ------------ -----------
Investing activities
Purchase of property and equipment.... (1,915,391) (1,186,867) (1,880,713)
Sale of investment.................... 12,158,790 -- --
Cash acquired through acquisitions,
net.................................. 21,750,667 2,540,619 --
Investment in affiliates.............. (5,120,296) (992,125) --
------------ ------------ -----------
Net cash provided by (used in)
investing activities................. 26,873,770 361,627 (1,880,713)
------------ ------------ -----------
Financing activities
Proceeds from issuance of stock, net
of offering costs.................... 13,856,968 111,223,808 18,402
Proceeds from exercise of stock
options.............................. 15,543,444 3,299,464 191,494
Proceeds from issuance of common stock
under Employee Stock Purchase Plan... 247,491 66,042 419,369
Proceeds from exercise of warrants.... -- 1,250,007 --
Repayments of notes payable........... (3,443,684) -- --
Cash used to repurchase treasury
stock................................ (2,301,700) (467,589) --
------------ ------------ -----------
Net cash provided by financing
activities........................... 23,902,519 115,371,732 629,265
------------ ------------ -----------
Net increase (decrease) in cash and
cash equivalents..................... 12,525,706 113,145,369 (3,338,148)
Cash and cash equivalents at beginning
of year.............................. 153,980,292 40,834,923 44,173,071
------------ ------------ -----------
Cash and cash equivalents at end of
year................................. $166,505,998 $153,980,292 $40,834,923
============ ============ ===========
</TABLE>
F-6
<PAGE>
LYCOS, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
<TABLE>
<CAPTION>
Year Ended
---------------------------------------
July 31, July 31,
1999 1998 July 31, 1997
------------ ------------ -------------
<S> <C> <C> <C>
Schedule of non-cash financing and
investing activities:
Issuance of common stock upon
acquisition of WhoWhere?, Wired
Ventures, and Internet Music
Distribution, Inc.................... $495,571,649 -- --
Assets and liabilities recognized upon
acquisition of WhoWhere?, Wired
Ventures, and Internet Music
Distribution, Inc.
Accounts receivable................ 8,643,173 -- --
Prepaid expenses................... 1,302,490 -- --
Property and equipment............. 5,318,369 -- --
Goodwill and other intangible
assets............................ 479,322,174 -- --
Marketable securities.............. 5,950,000 -- --
Other assets....................... 773,676 -- --
Accounts payable................... 2,829,532 -- --
Accrued expenses................... 17,868,511 -- --
Notes payable...................... 8,218,591 -- --
Deferred revenues.................. 1,945,682 -- --
Issuance of common stock upon
acquisition of Tripod, Inc.,
WiseWire, Corp., and GuestWorld,
Inc................................. -- $104,445,939 --
Assets and liabilities recognized
upon acquisition of Tripod, Inc.,
WiseWire Corp., and GuestWorld, Inc.
Accounts receivable................ -- 209,235 --
Prepaid expenses................... -- 23,284 --
Property and equipment............. -- 1,995,601 --
Developed technology............... -- 12,331,195 --
Goodwill and other intangible
assets............................ -- 72,827,020 --
Accounts payable................... -- 809,756 --
Accrued expenses................... -- 1,858,481 --
Deferred revenues.................. -- 92,780 --
Issuance of common stock in
connection with strategic
investments......................... -- 7,882,443 --
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-7
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The Company
Lycos, Inc., ("Lycos" or the "Company") is a network of globally branded
media properties and aggregated content distributed primarily through the
World Wide Web. Under the "Lycos Network" brand, Lycos provides aggregated
third-party content, Web search and directory services, community and
personalization features, personal Web publishing and online shopping. Lycos
seeks to draw a large number of viewers to its Websites by providing a one-
stop destination for information, communication and shopping services on the
Web. The Company was formed in June 1995 by CMG@Ventures L.P., a wholly-owned
subsidiary of CMGI, Inc. ("CMGI"). The Company conducts its business in one
segment, generating revenue from selling advertising, electronic commerce and
licensing its products and services. The Company's fiscal year end is July 31.
The restated consolidated financial statements of Lycos give retroactive
effect to the merger with Gamesville, Inc. ("Gamesville"), which was
consummated on December 3, 1999. The merger was accounted for as pooling of
interests. On December 3, 1999, each issued and outstanding share of common
stock of Gamesville was converted into the right to receive 0.1822 shares of
common stock of Lycos. Lycos issued 3,605,044 shares in exchange for all of
the outstanding shares of Gamesville. Additionally, Lycos converted all
outstanding Gamesville stock options and warrants into approximately 423,085
Lycos options and warrants. The restated consolidated financial statements
reflect the combination of the historical consolidated financial statements of
Lycos with the historical financial statements of Gamesville, which have been
restated to reflect the same fiscal year end of Lycos. Intercompany
transactions have been eliminated.
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.
Cost of Revenues
Cost of revenues specifically attributable to advertising and electronic
commerce, license and product revenues are not separately identifiable and
therefore are not separately disclosed in the consolidated statements of
operations.
Deferred Revenues
Deferred revenues are comprised of license and electronic commerce fees to
be earned in the future on non-cancelable agreements existing at the balance
sheet date.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original
or remaining maturities of three months or less to be cash equivalents. At
July 31, 1999 and 1998, the Company had no investments with maturities greater
than three months.
F-8
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Investments
The Company accounts for marketable securities under Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments
in Debt and Equity Securities." SFAS 115 establishes accounting and reporting
requirements for all debt securities and for investments in equity securities
that have readily determinable fair value. All marketable securities must be
classified as one of the following: held-to-maturity, available-for-sale, or
trading. All of the Company's investments are classified as available-for-sale
and, as such, are carried at fair value, with unrealized holding gains and
losses, net of deferred taxes reported as a separate component of
stockholders' equity.
Property and Equipment
Property and equipment are stated at cost, net of accumulated amortization
and depreciation. Property and equipment are depreciated on a straight-line
basis over the estimated useful lives of the assets (three to five years).
Leasehold improvements are amortized on a straight-line basis over the lesser
of the estimated useful life of the asset or the lease term.
Intangible Assets
Intangible assets primarily relate to the Company's acquisitions and include
developed technology, licensed technology, trademarks, trade names, content
copyrights, customer base and goodwill. In connection with acquisitions
accounted for under the purchase method of accounting (see Note 4), the
Company recorded these intangible assets based on the excess of the purchase
price over the identifiable tangible net assets of the acquiree on the date of
purchase. Intangible assets are reported at cost, net of accumulated
amortization, and are being amortized over their estimated useful life of five
years. At July 31, 1999 and 1998, the balance of developed technology, trade
names and other intangible assets, net of accumulated amortization was
$17,796,214 and $3,384,981, respectively.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited of 5 years. The Company evaluates whether changes have
occurred that would require revision of the remaining estimated useful life or
impact the recoverability of the goodwill. If such changes occur, the Company
would use an estimate of the undiscounted future operating cash flows to
determine the recoverability of the goodwill. At July 31, 1999 and 1998 the
balance of goodwill, net of accumulated amortization was $487,885,810 and
$75,402,573, respectively.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company accounts for long-lived assets in accordance with the provisions
of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. This statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
F-9
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
The Company records 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 and the tax effect of net operating loss carryforwards. 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 tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Research and Development Costs
Research and development expenditures are expensed as incurred. Software
development costs are required to be capitalized when a product's
technological feasibility has been established either by completion of a
detail program design or a working model of the product and ending when a
product is available for general release to consumers. To date, attainment of
technological feasibility of the Company's products and general release to
customers have substantially coincided. As a result, the Company has not
capitalized any software development costs since such costs have not been
significant.
Advertising Costs
The Company expenses advertising production costs as incurred. Advertising
expense was approximately $11,822,000, $5,700,000 and $4,427,000 for the years
ended July 31, 1999, 1998 and 1997, respectively.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 ("SFAS 123") requires
that companies either recognize compensation expense for grants of stock,
stock options, and other equity instruments based on fair value, or provide
pro forma disclosure of net income (loss) and earnings (loss) per share in the
notes to the financial statements. The Company applies APB Opinion 25 and
related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized under SFAS 123 for the Company's stock
option plans, and footnote disclosure is provided in Note 7.
Employee Benefit Plan
The Company maintains a 401(K) Profit Sharing Plan (the "Plan") for its
employees. Each participant in the Plan may elect to contribute from 1% to 15%
of their annual compensation to the Plan. The Company matches employee
contributions at a rate of one-third of the first six percent of compensation
deferred. During 1999, 1998 and 1997, the Company's contributions amounted to
approximately $230,000, $87,000 and $27,000, respectively.
Concentration of Credit Risk
The Company performs ongoing credit evaluations of its customers' financial
conditions and generally does not require collateral on accounts receivable.
The Company maintains allowances for credit losses and such losses have been
within management's expectations. Bad debt expense was $1,234,000, $654,000
and $405,000 in 1999, 1998 and 1997, respectively. No single customer
accounted for greater than 10% of total revenues during the years ended July
31, 1999, 1998 and 1997.
F-10
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's services are provided to customers in several industries
primarily in North America. Sales to foreign customers for the years ended
July 31, 1999, 1998 and 1997 were approximately $1,990,000, $2,640,000 and
$1,700,000, respectively.
Financial Instruments
The recorded amounts of financial instruments, including cash equivalents,
receivables, accounts payable, accrued expenses and deferred revenues,
approximate their fair market values as of July 31, 1999 and 1998. The Company
has no investments in derivative financial instruments.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Treasury Stock
In connection with a license agreement with Carnegie Mellon University,
CMG@Ventures, Inc. has agreed to sell to the Company the number of shares of
common stock equal to the shares issuable upon exercise of certain options
granted, as defined, at a price equal to the exercise price of the underlying
options exercised (see Note 7). Under this agreement, the Company issues
shares of Company stock to employees upon exercise of options and subsequently
buys an equivalent number of Company shares at the respective exercise price
from CMG@Ventures, resulting in treasury stock.
Comprehensive Income
The Company adopted Statement of Financial Accounting Standard No. 130
("SFAS 130"), "Reporting Comprehensive Income" during the year ended July 31,
1999. SFAS 130 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 $33,208,697 for the year ended July 31,
1999. The difference between net loss and comprehensive loss for the year
ended July 31, 1999 is due to $18,873,090 of net unrealized gains on the
Company's remaining investments, which are classified as available-for-sale
investments under SFAS 115. The Company had no "other comprehensive income"
items in the years ended July 31, 1998 or 1997.
New Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", which establishes guidelines
for the accounting for the costs of all computer software developed or
obtained for internal use. The Company adopted SOP 98-1 effective August 1,
1999. The adoption of SOP 98-1 did not have a material impact on the Company's
supplemental consolidated financial statements.
F-11
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In April, 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities." The statement is effective for fiscal years beginning
after December 15, 1998. The statement requires costs of start-up activities
and organization costs to be expensed as incurred. The Company adopted SOP 98-
5 effective August 1, 1999. The adoption of SOP 98-5 did not have a material
impact on the Company's supplemental consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities", which requires that all derivative instruments be recorded on the
balance sheet at their fair value. The Company currently expects to adopt SFAS
133, as amended by SFAS 137, for the year ending July 31, 2001. Management has
determined there will be no impact on its results of operations or financial
position resulting from the adoption of SFAS 133 because the Company currently
does not hold derivative instruments.
2. Investments
The Company invests in equity instruments of privately held Internet related
companies. These investments are accounted for under the cost method as the
Company's ownership represents less than 20% of each investee. The Company's
carrying value of these investments approximates fair value at July 31, 1999.
For non-quoted investments, the Company regularly reviews the assumptions
underlying the operating performance and cash flow forecasts in assessing the
carrying values.
Marketable Securities
In April 1998, the Company acquired an approximate 14% ownership stake in
Sage Enterprises, Inc. (PlanetAll) which, at the time, was owned 29% by CMGI,
a related party, in exchange for shares of the Company's Common Stock valued
at $2.5 million at the time of the transaction. Launched in November 1997,
PlanetAll provides free core contact management services through the Internet.
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, resulting in
a gain of $10.1 million in the year ended July 31, 1999. The Company sold
289,917 shares of Amazon.com in October 1998, resulting in $12.2 million of
cash proceeds. The Company has 32,211 shares of Amazon.com remaining at July
31, 1999.
In April 1998, the Company acquired an ownership stake in Mail.com in
exchange for 400,248 shares of the Company's common stock valued at
approximately $4,600,000 at the time of the transaction. Mail.com is a leading
global provider of e-mail systems. On June 14, 1999, Mail.com completed an
initial public offering of its common stock. The Company's investment in
Mail.com has been adjusted to reflect its fair value of $35,750,000, based on
its closing market price on July 31, 1999.
The cost of marketable securities carried at fair value was $11,805,646 at
July 31, 1999. There was no investments held as available-for-sale at July 31,
1998. Gross unrealized gains and losses relating to securities held as
available-for-sale for the year ended July 31, 1999 are as follows:
<TABLE>
<S> <C>
Gross Unrealized Gains....................................... $33,117,590
Gross Unrealized Losses...................................... (1,662,500)
-----------
Net Unrealized Gains....................................... $31,455,090
===========
</TABLE>
F-12
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Joint Ventures
In May 1997, the Company established Lycos Bertelsmann as the basis for a
joint venture agreement with Bertelsmann Internet Services to create localized
versions of the Lycos search and navigation service throughout Europe. The
joint venture is owned 50% by Lycos and 50% by Bertelsmann. Bertelsmann
Internet Services, a subsidiary of Bertelsmann AG, has committed to provide
capital, infrastructure and employees for the venture while Lycos will provide
the core technology and brand name. The carrying value of the Company's
investment in Lycos Bertelsmann was not material at July 31, 1999 or 1998. The
investment is accounted for under the equity method and accordingly, the
Company will recognize 50% of the net profits of Lycos Bertelsmann when
realized.
In April 1998, the Company established Lycos Japan KK as the basis for a
joint venture with Sumitomo Corporation, one of Japan's largest trading
companies, and Internet Initiative Japan (IIJ), the country's largest Internet
Service Provider. The joint venture is owned 40% by Lycos, 50% by Sumitomo
Corporation and 10% by IIJ. The investment is accounted for under the equity
method. For the year ending July 31, 1999, Lycos' share of the net loss was
approximately $1,000,000. For the year ending July 31, 1998, Lycos' share of
the net loss was not material.
In March 1999, the Company established Lycos Korea as the basis for a joint
venture agreement with Mirae Corporation to create a localized version of the
Lycos Network services to be offered in Korea. The joint venture is owned 50%
by Lycos and 50% by Mirae, a Korean high technology company. The investment is
accounted for under the equity method. For the year ending July 31, 1999,
Lycos' share of the net loss was approximately $360,000.
Lycos Ventures Limited Partnership
In July 1999, the Company formed a venture capital fund to make strategic
early-stage investments in companies that are involved with electronic
commerce, online media or the development of Internet technology, content or
services. The Company, as a limited partner, is committed to providing $10
million to Lycos Ventures, L.P. (the "Fund"). The other limited partners,
which include Bear Stearns, Mellon Ventures, Inc., Mirae Corporation, Sumitomo
Corporation, Vulcan Ventures, and others, will provide approximately $60
million to the Fund. The general partner of the fund is Lycos Triangle
Partners, LLC, a Delaware limited liability company formed by Lycos and
Triangle Capital Corporation. As of July 31, 1999 the Company has not provided
any of its $10 million commitment to the Fund.
3. Property and Equipment
Property and equipment, at cost, consisted of the following:
<TABLE>
<CAPTION>
July 31,
-------------------------
1999 1998
------------ -----------
<S> <C> <C>
Computers and equipment........................... $ 14,545,989 $ 3,854,806
Furniture and fixtures............................ 1,637,013 1,094,143
Leasehold improvements............................ 2,985,698 1,368,223
Purchased software................................ 1,188,241 525,197
------------ -----------
20,356,941 6,842,369
Less accumulated depreciation and amortization.... (12,630,935) (2,715,680)
------------ -----------
$ 7,726,006 $ 4,126,689
============ ===========
</TABLE>
F-13
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Acquisitions
Tripod, Inc.
On February 11, 1998, the Company entered into an Agreement and Plan of
Merger (the "Agreement") by and among the Company, Pod Acquisition Corp., a
Delaware corporation and a wholly-owned subsidiary of the Company ("PAC"),
Tripod, Inc., a Delaware corporation ("Tripod"), William Peabody and Richard
Sabot, providing for the merger of PAC with and into Tripod (the "Merger"). On
February 12, 1998, the Company completed the closing of the Merger and Tripod
became a wholly-owned subsidiary of the Company. In accordance with the terms
of the Agreement, Richard Sabot was elected, effective May 1, 1998, to the
Company's Board of Directors for a term expiring at the first Annual Meeting
of the Company's stockholders held after the Company's fiscal year ending July
31, 2000.
The acquisition was accounted for as a purchase. The purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values. Results of operations for Tripod have been included
with those of the Company for periods subsequent to the date of acquisition.
In the Merger, all outstanding shares of Common Stock and Preferred Stock of
Tripod and options and warrants to purchase Common Stock and Preferred Stock
of Tripod were converted into 6,241,652 shares and options and warrants to
purchase Common Stock of the Company. All outstanding options to purchase
Common Stock of Tripod have been assumed by the Company and converted into
options to purchase Common Stock of the Company, and all outstanding warrants
to purchase Preferred Stock of Tripod have been assumed by the Company and
converted into warrants to purchase Common Stock of the Company.
The purchase price of Tripod was allocated as follows:
<TABLE>
<S> <C>
In process research and development............................. $ 7,200,000
Developed technology, goodwill and other intangible assets...... 52,219,935
Other assets, principally cash and equipment.................... 3,633,449
Liabilities assumed............................................. (1,603,731)
-----------
$61,449,653
===========
</TABLE>
Accumulated amortization on intangible assets was $15,230,814 and $4,786,827
at July 31, 1999 and 1998, respectively.
WiseWire Corporation
On April 30, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") by and among the Company, Wise Acquisition Corp., a
Pennsylvania corporation and a wholly-owned subsidiary of the Company ("WAC"),
and WiseWire Corporation, a Pennsylvania corporation ("WiseWire"), pursuant to
which WAC was merged with and into WiseWire (the "Merger"). As a result of the
Merger, WiseWire became a wholly-owned subsidiary of the Company.
The acquisition was accounted for as a purchase. The purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values. Results of operations for WiseWire are included with
those of the Company for periods subsequent to the date of acquisition.
In the Merger, all outstanding shares of Common Stock and Preferred Stock of
WiseWire and options to purchase Common Stock of WiseWire were converted into
3,297,020 shares and options to purchase Common
F-14
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock of the Company. All outstanding options to purchase Common Stock of
WiseWire have been assumed by the Company.
The purchase price of WiseWire was allocated as follows:
<TABLE>
<S> <C>
In process research and development............................. $ 9,080,000
Developed technology, goodwill and other intangible assets...... 30,107,698
Other assets, principally cash and equipment.................... 1,085,290
Liabilities assumed............................................. (857,286)
-----------
$39,415,702
===========
</TABLE>
Accumulated amortization on intangible assets was $7,526,925 and $1,505,385
at July 31, 1999 and 1998, respectively.
GuestWorld, Inc.
On June 16, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") by and among the Company, VW Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of the Company ("VW"), GuestWorld,
Inc., a California corporation ("GuestWorld"), and all of the stockholders of
GuestWorld, acquired all of the outstanding capital stock of GuestWorld
through the merger of VW with and into GuestWorld (the "Merger"). As a result
of the Merger, GuestWorld became a wholly-owned subsidiary of the Company.
In the Merger, all outstanding shares of Common Stock of GuestWorld were
converted into an aggregate of 252,368 shares of Common Stock of the Company.
The acquisition was accounted for as a purchase. Results of operations for
GuestWorld are included with those of the Company for periods subsequent to
the date of acquisition.
The purchase price of GuestWorld was allocated as follows:
<TABLE>
<S> <C>
In process research and development.............................. $1,000,000
Goodwill and other intangible assets............................. 2,830,584
Property and equipment........................................... 50,000
Liabilities assumed.............................................. (300,000)
----------
$3,580,584
==========
</TABLE>
Accumulated amortization on intangible assets was $636,881 and $70,765 at
July 31, 1999 and 1998.
Acquisition of WhoWhere? Inc.
On August 7, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") by and among the Company, What Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of the Company ("WWAC"), WhoWhere?,
Inc., a California corporation ("WhoWhere?"), and certain shareholders of
WhoWhere? providing for the merger of WWAC with and into WhoWhere? (the
"Merger"). On August 13, 1998, the Company completed the closing of the Merger
and WhoWhere? became a wholly-owned subsidiary of the Company.
F-15
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The acquisition was accounted for as a purchase. The purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values. Results of operations for WhoWhere? have been included
with those of the Company for periods subsequent to the date of acquisition.
In the Merger, all outstanding shares of Common Stock and Preferred Stock of
WhoWhere? were converted into an aggregate of 8,285,714 shares of Common Stock
of the Company (the "Lycos Common Stock"), and all outstanding options and
warrants to purchase Common Stock or Preferred Stock of WhoWhere? were assumed
by the Company and became options or warrants, as the case may be, to purchase
an aggregate of 2,670,488 shares of Lycos Common Stock.
Under the terms of the Agreement and related Escrow Agreement dated August
13, 1998, an aggregate of 377,038 shares of Lycos Common Stock and options and
warrants to purchase an additional 133,540 shares of Lycos Common Stock will
be held in escrow for the purpose of indemnifying the Company against certain
liabilities of WhoWhere? and its stockholders. The escrow expires on August
13, 1999.
The purchase price of WhoWhere? was allocated as follows:
<TABLE>
<S> <C>
Goodwill and other intangible assets........................... $161,322,174
Other assets, principally cash and equipment................... 8,117,977
Liabilities assumed............................................ (10,381,288)
------------
$159,058,863
============
</TABLE>
Accumulated amortization on intangible assets was $30,937,080 at July 31,
1999.
Acquisition of Wired Ventures, Inc.
On October 5, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") by and among the Company and Wired Ventures, Inc., a
California corporation ("Wired"). On June 30, 1999, the Company completed the
closing of the Merger and Wired became a wholly-owned subsidiary of the
Company.
The acquisition was accounted for as a purchase. The purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values. Results of operations for Wired have been included with
those of the Company for periods subsequent to the date of acquisition.
In the Merger, all outstanding shares of Common Stock and Preferred Stock of
Wired were converted into an aggregate of 6,192,848 shares of Common Stock of
the Company (the "Lycos Common Stock"). All outstanding options to purchase
Common Stock of Wired have been assumed by the Company and converted into
options to purchase Common Stock of the Company.
Under the terms of the Agreement and related Escrow Agreement dated June 30,
1999, an aggregate of 203,103 shares of Lycos Common Stock will be held in
escrow for the purpose of indemnifying the Company against certain liabilities
of Wired and its stockholders. The escrow expires on June 30, 2000.
The purchase price of Wired was allocated as follows:
<TABLE>
<S> <C>
Goodwill and other intangible assets........................... $268,000,000
Other assets, principally cash and equipment................... 38,915,414
Liabilities assumed............................................ (16,017,346)
------------
$290,898,068
============
</TABLE>
F-16
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accumulated amortization on intangible assets was $4,466,667 at July 31,
1999.
Acquisition of Internet Music Distribution, Inc.
On July 17, 1999, the Company entered into an Agreement and Plan of Merger
(the "Agreement") by and among the Company and Internet Music Distribution,
Inc., a California corporation ("IMDI"). On July 27, 1999 the Company
completed the closing of the Merger and IMDI became a wholly-owned subsidiary
of the Company.
The acquisition was accounted for as a purchase. The purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values. Results of operations for IMDI have been included with
those of the Company for periods subsequent to the date of acquisition.
All outstanding shares of Common Stock of IMDI were converted into an
aggregate of 1,106,094 shares of Common Stock of the Company. Terms of the
merger also provide for future purchase payments, not to exceed $15,000,000,
contingent upon unique user downloads of the Sonique Player. The Company has
retained security interests in certain Common Stock that was issued in this
transaction.
The purchase price of IMDI was allocated as follows:
<TABLE>
<S> <C>
Goodwill and other intangible assets............................ $50,000,000
Other assets, principally cash and equipment.................... 78,400
Liabilities assumed............................................. (1,090,266)
-----------
$48,988,134
===========
</TABLE>
Accumulated amortization on intangible assets was not significant at July
31, 1999.
Pooling-of-Interests Merger with Gamesville, Inc.
On December 3, 1999 Lycos issued 3,605,044 shares of its common stock in
exchange for all of the outstanding shares of Gamesville, Inc. This business
combination has been accounted for as a pooling-of-interests combination. The
results of operations for the separate companies and the combined amounts
presented in the consolidated financial statements are as follows:
<TABLE>
<CAPTION>
Year Ended July 31,
---------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Net Revenues:
Lycos............................. $135,520,826 $ 56,060,305 $22,273,042
Gamesville........................ 3,019,107 1,085,981 250,991
------------ ------------ -----------
$138,539,933 $ 57,146,286 $22,524,033
============ ============ ===========
Net Income (Loss):
Lycos............................. $(52,043,564) $(28,439,484) $(6,619,190)
Gamesville........................ (38,223) 125,717 (429,469)
------------ ------------ -----------
$(52,081,787) $(28,313,767) $(7,048,659)
============ ============ ===========
</TABLE>
In-Process Research and Development
In connection with the acquisitions of Tripod, WiseWire and GuestWorld, the
Company recorded an in process research and development charge of $17.3
million representing purchased in-process research and development that has
not yet reached technological feasibility and has no alternative future use.
The Company's
F-17
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
management made certain assessments with respect to the determination of all
identifiable assets resulting from, or to be used in, research and development
activities as of the respective acquisition dates. Each of these activities
was evaluated as of the respective acquisition dates so as to determine their
stage of development and related fair value. The Company's review, as of the
acquisition date, indicated that the in-process research and development had
not reached a state of technological feasibility and evidenced no alternative
future use. In the case of in-process projects, the Company made estimates to
quantify the cost-to-complete for each project, identifying the project date
of introduction, the estimated life of the project, the project's "fit" within
the Company's own in-process research projects, the revenues to be generated
in each future period and the corresponding operating expenses and other
charges to apply to this revenue stream. In order to determine the value of
the earnings stream attributable to the in-process research and development,
the excess earnings from the projects were calculated by deducting the
earnings stream attributable to all other assets including working capital and
tangible assets. Based upon these assumptions, after-tax cash flows
attributable to the in-process project(s) were determined, appropriately
discounted back to its respective net present value, taking into account the
uncertainty surrounding the successful development of the purchased in-process
technology.
In the Tripod and WiseWire acquisitions, the in-process research and
development projects were valued using an Income Approach, which included the
application of a discounted future earnings (excess earnings) methodology. In
both methodologies, the value of the in-process technology is comprised of the
total present value of the future earnings stream attributable to the
technology throughout its anticipated life. As a basis for the valuation
process, the Company made estimates of the revenue stream to be generated in
each future period and the corresponding operating expenses and other charges
to apply to this revenue stream. In order to determine the value of the
earnings stream that was specifically attributable to the in-process
technology, the excess earnings of the projects were calculated by deducting
the earnings streams attributable to all other assets, including working
capital and tangible assets. Based upon these assumptions, the future after-
tax income streams relating to the in-process technologies were discounted to
present value using a risk adjusted discount rate that reflected the
uncertainty involved in successfully completing and commercializing the in-
process technologies.
The significant assumptions used as a basis for the in-process research and
development valuations include: future revenues and expenses forecasted for
each project; future working capital needs; estimated costs to complete; date
of project completion and product launch; and the probability and risk of
project completion as reflected in the discount rate selected to compute net
present values.
The period in which material net cash inflows from significant projects was
expected to commence was within three to six months or less after the
respective acquisition dates of Tripod and WiseWire. In the case of the Tripod
acquisition, the projects required an additional four months beyond the
initial time estimate to complete the in-process technology. In the case of
the WiseWire acquisition, the in-process technology was completed in December
1998.
In the case of Tripod, management does believe that other intangible assets
had been created at the acquisition date. As a result, in addition to valuing
in-process research and development, management has also allocated a
proportion of the purchase price, based on their respective fair values, to
existing technology employed in the creation and management of pods as well as
to other intangible assets associated with the existing community members.
WhoWhere? offers an array of products that allow users to locate home
addresses, e-mail addresses and phone numbers. In addition, through its
MailCity product, WhoWhere? also offers its users free, personalized, web-
based e-mail. Identifiable assets at the acquisition date consisted primarily
of developed technology, and projects under development at that time were
determined to be enhancements or refinements to existing developed
technologies. As a result, management determined that there was no technology
which would qualify for in-process research and development.
F-18
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Wired offers search capabilities through HotBot, a popular search and
navigation site. Wired licenses the HotBot principal technology and subsequent
enhancements from a third party. Other Wired properties, which include Wired
News, HotWired and Suck.com provide online content. Wired either produces,
licenses or purchases this content. Based upon the nature of Wired businesses,
management determined the Company does not possess any significant technology
assets nor was there any technology which would qualify for in-process
research and development.
Management assessed the fair market value in continued use of Internet Music
Distributors, Inc. assets to serve as a basis for allocation of purchase
price. It was determined that intangible assets consisted of developed
technology and the Company's trade name, Sonique. Each identifiable asset was
analyzed and valued based upon an Income Approach. In performing its
assessment, management determined there was no in-process research and
development.
Pro Forma Financial Information
The following unaudited pro forma financial information presents the
combined results of operations of Lycos, Wired, WhoWhere? and IMDI as if the
acquisitions had occurred as of the beginning of fiscal 1999 and 1998, after
giving effect to certain adjustments, including amortization of goodwill and
other intangible assets. The pro forma financial information does not
necessarily reflect the results of operations that would have occurred had
Lycos, Wired, WhoWhere? and IMDI constituted a single entity during such
period.
<TABLE>
<CAPTION>
Pro forma year ended
July 31,
----------------------------
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Revenues....................................... $ 162,350,961 $ 78,308,286
Net loss....................................... $(133,922,717) $(103,165,767)
Loss per share................................. $ (1.51) $ (1.29)
</TABLE>
5. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
July 31, July 31,
1999 1998
----------- -----------
<S> <C> <C>
Compensation and benefits........................... $ 7,430,112 $ 2,262,015
Advertising and royalties........................... 3,691,320 9,021,716
Professional fees................................... 3,730,144 1,262,351
Other............................................... 7,785,175 4,730,275
----------- -----------
$22,636,751 $17,276,357
=========== ===========
</TABLE>
6. Commitments and Contingencies
The Company leases its facilities and certain other equipment under
operating lease agreements expiring through 2007. Future noncancelable minimum
payments as of July 31, 1999 under these leases for each fiscal year end are
as follows:
<TABLE>
<S> <C>
2000............................................................. $14,576,370
2001............................................................. 9,480,535
2002............................................................. 4,764,682
2003............................................................. 2,249,081
2004 and thereafter.............................................. 3,520,695
-----------
$34,591,363
===========
</TABLE>
F-19
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rent expense under non-cancellable operating leases was $12,079,289,
$5,079,128, and $2,104,478 for the years ended July 31, 1999, 1998 and 1997,
respectively.
7. Stockholders' Equity
Stock Splits
In July 1998, the Company's Board of Directors approved a two-for-one common
stock split. On August 25, 1998, shareholders received one additional share
for every share held on August 14, 1998 (the record date).
In May 1999, the Company's Board of Directors approved a two-for-one common
stock split. On July 26, 1999, shareholders received one additional share for
every share held on July 16, 1999 (the record date). All share and per share
numbers in these supplemental consolidated financial statements and notes
thereto have been adjusted for all periods presented to reflect the two-for-
one common stock splits.
Secondary Offering
On June 4, 1998, the Company completed a secondary offering of its common
stock in which 9,000,000 of the Company's shares were sold under a
registration statement filed with the SEC. Of the 9,000,000 shares sold,
8,000,000 shares were sold by the Company and 1,000,000 were sold by CMGI. The
Company did not receive any proceeds from the sale of shares by CMGI. Proceeds
to the Company were approximately $95 million, before deduction of expenses
payable by the Company of $350,000. The Underwriters exercised an option to
purchase 1,350,000 additional shares of Common Stock, resulting in additional
proceeds to the Company of approximately $16 million.
1995 Stock Option Plan
During 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Plan") under which nonqualified stock options to purchase common stock may be
granted to officers and other key employees. Under the Plan, options to
purchase 4,000,000 shares of common stock may be granted at an exercise price
determined by the Board of Directors. Options granted under the 1995 Plan vest
over a five year period from date of grant, except that the vesting of certain
options are subject to acceleration upon the occurrence of certain events.
Options under the 1995 Plan expire six years from date of grant. The total
weighted average contractual life of options outstanding at July 31, 1999 was
2.3 years.
F-20
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of option activity under the 1995 Plan is as follows:
<TABLE>
<CAPTION>
Weighted-
Average
Number of Exercise
Options Price
---------- ---------
<S> <C> <C>
Outstanding at July 31, 1996.............................. 3,905,104 $1.48
Granted................................................. 320,000 3.60
Exercised............................................... (203,200) 0.02
Terminated.............................................. (382,688) 0.86
----------
Outstanding at July 31, 1997.............................. 3,639,216 1.37
----------
Granted................................................. -- --
Exercised............................................... (1,260,368) 0.17
Terminated.............................................. (424,160) 0.63
----------
Outstanding at July 31, 1998.............................. 1,954,688 1.56
----------
Granted................................................. -- --
Exercised............................................... (274,880) 0.67
Terminated.............................................. (7,200) 0.58
----------
Outstanding at July 31, 1999.............................. 1,672,608 $1.71
----------
Exercisable at July 31, 1999.............................. 1,061,440 $1.68
==========
</TABLE>
The following table summarizes information about the Company's stock options
outstanding at July 31, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ ------------------------
Weighted-
1995 Stock Average
Option Remaining Weighted- Weighted-
Plan Range of Number Contractual Average Number Average
Exercise Outstanding at Life Exercise Exercisable at Exercise
Prices July 31, 1999 (years) Price July 31, 1999 Price
------------- -------------- ----------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$0.01 - $0.58 584,272 2.0 $0.01 329,744 $0.01
$2.40 - $2.40 882,336 2.5 $2.40 705,696 $2.40
$2.84 - $3.97 206,000 2.2 $3.56 26,000 $3.37
--------- ---------
1,672,608 1,061,440
========= =========
</TABLE>
Pursuant to the License Agreement, CMG@Ventures has agreed to sell to the
Company a number of shares of common stock equal to the shares issuable upon
exercise of options granted under the 1995 Plan prior to the initial public
offering at a price equal to the exercise price of the options as such options
are exercised.
The Company has recorded deferred compensation expense of approximately
$610,000 for the difference between the grant price and the estimated fair
value (determined by independent valuations or by reference to third party
transactions) of certain of the Company's stock options granted. This amount
is being amortized over the vesting period of the individual options on a
straight-line basis, determined separately for each portion of the options
that vest in each year. Deferred compensation expense recognized for the year
ended July 31, 1999, 1998 and 1997 was approximately $70,906, $47,000 and
$142,000, respectively.
1996 Stock Option Plan
On February 2, 1996, the 1996 Stock Option Plan (the "1996 Plan") was
adopted by the Board of Directors. Pursuant to the 1996 Plan, 4,000,000 shares
of common stock may be issued upon exercise of options. On
F-21
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 27, 1997, the Company's Board of Directors voted to authorize an
additional 8,800,000 shares for grant under the 1996 Plan. On September 9,
1998 the Company's Board of Directors voted to authorize an additional
12,000,000 shares for grant under the 1996 Plan. Additionally, the Board of
Directors approved an amendment to the 1996 Plan, which provides that the
shares authorized under the 1996 Plan will increase annually, beginning on
August 1, 1999, in an amount equal to 5% of the Company's issued and
outstanding shares as of each fiscal year end.
Under the 1996 Plan, incentive stock options may be granted to employees and
officers of the Company and non-qualified stock options may be granted to
consultants, employees and officers of the Company. The exercise price of such
incentive stock options cannot be less than the fair market value of the
common stock on the date of grant, or less than 110% of fair market value in
the case of employees or officers holding 10% or more of the voting stock of
the Company. The Compensation Committee of the Board of Directors has the
authority to select optionees and to determine the terms of the options
granted. Options granted under the 1996 Plan on June 30, 1999 or prior
generally vest over a five year period from date of grant. Options granted
under the 1996 Plan on July 1, 1999 or later generally vest over a four year
period from date of grant. Options under the 1996 Plan expire ten years from
the date of grant and certain options are subject to acceleration of vesting
upon the occurrence of certain events. The total weighted average contractual
life of options outstanding at July 31, 1999, was 8.2 years.
A summary of option activity under the 1996 Plan is as follows:
<TABLE>
<CAPTION>
Weighted-
Number of Average
Options Exercise Price
---------- --------------
<S> <C> <C>
Outstanding at July 31, 1996......................... 212,000 $ 3.92
Granted............................................ 4,999,688 2.99
Exercised.......................................... -- --
Terminated......................................... (457,600) 3.29
----------
Outstanding at July 31, 1997......................... 4,754,088 2.97
----------
Granted............................................ 6,895,800 11.30
Exercised.......................................... (709,192) 2.90
Terminated......................................... (716,400) 4.07
----------
Outstanding at July 31, 1998......................... 10,224,296 7.68
----------
Granted............................................ 13,429,588 38.51
Exercised.......................................... (1,491,960) 6.89
Terminated......................................... (1,071,300) 13.70
----------
Outstanding at July 31, 1999......................... 21,090,624 $27.06
==========
Exercisable at July 31, 1999......................... 845,843 $ 8.02
==========
</TABLE>
F-22
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about the Company's stock options
outstanding at July 31, 1999.
<TABLE>
<CAPTION>
Options
Outstanding Options Exercisable
------------------------------------- ------------------------
Weighted-
Average Weighted- Weighted-
1996 Stock Option Number Remaining Average Number Average
Plan Range of Outstanding at Contractual Exercise Exercisable at Exercise
Exercise Prices July 31, 1999 Life (years) Price July 31, 1999 Price
- ----------------- -------------- ------------ --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$0.01 - $1.45 100,000 7.0 $ 1.45 40,000 $ 1.45
$1.46 - $2.59 786,814 7.1 $ 2.24 79,601 $ 2.26
$2.59 - $2.79 539,950 6.7 $ 2.77 67,750 $ 2.77
$2.79 - $3.94 668,300 7.4 $ 3.11 89,900 $ 3.04
$3.94 - $5.38 2,054,932 7.8 $ 4.32 245,892 $ 4.28
$5.38 - $12.50 2,350,900 8.0 $ 9.83 75,500 $ 9.74
$12.51 - $25.00 5,735,166 7.9 $14.43 207,200 $15.35
$25.01 - $40.00 818,000 9.0 $29.62 40,000 $28.03
$40.01 - $55.00 5,258,686 8.9 $46.57 -- --
$55.01 - $65.50 2,777,876 9.4 $65.27 -- --
---------- -------
21,090,624 845,843
========== =======
</TABLE>
In September 1996, the Company canceled 338,928 options previously granted
to employees under the 1995 Plan and 1996 Plan at various exercise prices and
granted an equivalent number of additional options to those same employees
pursuant to the 1996 Plan at an exercise price of $2.40 per share. No
compensation expense was recognized by the Company as the exercise price of
these options on the date of grant was at or above fair market value.
1995 Tripod Stock Option Plan
In connection with the acquisition of Tripod, the Company assumed the 1995
Stock Option Plan under which incentive stock options and nonqualified stock
options to purchase common stock may be granted to officers, key employees and
advisors. Under the Plan, options to purchase 735,852 shares of common stock
were reserved for grants. Options under the 1995 Tripod Stock Option Plan vest
over a four year period from date of grant. Options under the 1995 Tripod
Stock Option Plan expire ten years from the date of grant. The total weighted-
average contractual life of options outstanding at July 31, 1999 was
approximately 8.3 years.
A summary of option activity under the 1995 Tripod Stock Option Plan is as
follows:
<TABLE>
<CAPTION>
Weighted-
Number of Average
Options Exercise Price
--------- --------------
<S> <C> <C>
Outstanding at February 12, 1998...................... 735,852 $0.33
Granted............................................. -- --
Exercised........................................... (268,984) 0.32
Terminated.......................................... (49,640) 0.41
--------
Outstanding at July 31, 1998.......................... 417,228 0.32
--------
Granted............................................. -- --
Exercised........................................... (220,766) 0.31
Terminated.......................................... (76,264) 0.37
--------
Outstanding at July 31, 1999.......................... 120,198 $0.31
========
Exercisable at July 31, 1999.......................... 38,628 $0.31
========
</TABLE>
F-23
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
under the 1995 Tripod Stock Option Plan at July 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- --------------------------
Weighted-
Tripod 1995 Stock Option Average Weighted- Weighted-
Plan Range of Exercise Number Remaining Average Number Average
Prices Outstanding at Contractual Exercise Exercisable Exercise
- ------------------------ July 31, 1999 Life (years) Price at July 31, 1999 Price
-------------- ------------ --------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
$0.25 - $0.38 119,592 8.2 $0.31 38,628 $0.31
$0.38 - $1.00 606 10.4 $0.77 -- $0.77
------- ------
120,198 38,628
======= ======
</TABLE>
1995 and 1996 WiseWire Stock Option Plans
In connection with the acquisition of WiseWire, the Company assumed the 1995
and 1996 Stock Option Plan under which incentive stock options and
nonqualified stock options to purchase common stock may be granted to
officers, key employees and advisors. Under these plans, the Company may grant
either incentive stock options or non-qualified stock options. The employee
plan was adopted in 1995 and is restricted to Company employees. These options
generally have a term of ten years from the date of grant with 20% vesting
after a brief probationary period and the remainder vesting over a four-year
period. The non-employee plan was adopted in 1996 and is intended primarily
for directors or other non-employees. Options granted under the non-employee
plan typically vest immediately. The total weighted average contractual life
of options outstanding under the 1995 and 1996 WiseWire Stock Option Plans at
July 31, 1999 was approximately 6.9 and 7.4 years, respectively.
A summary of option activity under the 1995 WiseWire Stock Option Plan is as
follows:
<TABLE>
<CAPTION>
Weighted-
Number of Average
Options Exercise Price
--------- --------------
<S> <C> <C>
Outstanding at April 30, 1998......................... 420,548 $1.34
Granted............................................. -- --
Exercised........................................... (126,048) 1.01
Terminated.......................................... (54,192) 3.19
---------
Outstanding at July 31, 1998.......................... 240,308 1.35
---------
Granted............................................. -- --
Exercised........................................... (139,016) 0.98
Terminated.......................................... (33,678) 1.92
---------
Outstanding at July 31, 1999.......................... 67,614 $1.82
=========
Exercisable at July 31, 1999.......................... 8,579 $2.91
=========
</TABLE>
F-24
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
under the 1995 WiseWire Stock Option Plan at July 31, 1999:
<TABLE>
<CAPTION>
Options
Outstanding Options Exercisable
------------------------------------- --------------------------
Weighted-
WiseWire Average Weighted- Weighted-
1995 Stock Option Number Remaining Average Number Average
Plan Range of Exercise Outstanding at Contractual Exercise Exercisable Exercise
Prices July 31, 1999 Life (years) Price at July 31, 1999 Price
- ---------------------- -------------- ------------ --------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
$0.50 - $ 1.00 38,414 7.0 $0.67 5,401 $0.67
$2.50 - $26.88 29,200 6.9 $3.33 3,178 $6.72
------ -----
67,614 8,579
====== =====
</TABLE>
A summary of option activity under the 1996 WiseWire Stock Option Plan is
as follows:
<TABLE>
<CAPTION>
Weighted-
Number of Average
Options Exercise Price
--------- --------------
<S> <C> <C>
Outstanding at April 30, 1998.......................... 42,068 $6.60
Granted.............................................. -- --
Exercised............................................ -- --
Terminated........................................... (26,932) 6.55
-------
Outstanding at July 31, 1998........................... 15,136 6.68
-------
Granted.............................................. -- --
Exercised............................................ (4,964) 6.68
Terminated........................................... -- --
-------
Outstanding at July 31, 1999........................... 10,172 $6.68
=======
Exercisable at July 31, 1999........................... 10,172 $6.68
=======
</TABLE>
The following table summarizes information about stock options outstanding
under the 1996 WiseWire Stock Option Plan at July 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- --------------------------
Weighted-
WiseWire Average Weighted- Weighted-
1996 Stock Option Number Remaining Average Number Average
Plan Range of Exercise Outstanding at Contractual Exercise Exercisable Exercise
Prices July 31, 1999 Life (years) Price at July 31, 1999 Price
- ---------------------- -------------- ------------ --------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
$5.35 - $8.02 10,172 7.4 $6.68 10,172 $6.68
====== ======
</TABLE>
1995 WhoWhere? Stock Option Plan
In connection with the acquisition of WhoWhere?, the Company assumed the
1995 Stock Option Plan under which incentive stock options and nonqualified
stock options to purchase common stock may be granted to officers, key
employees and advisors. Under this plan, the Company may grant either
incentive stock options or non-qualified stock options. These options vest
over a four year period from date of grant. These options generally have a
term of ten years from the date of grant. Upon consummation of the acquisition
of WhoWhere? by the Company, vesting of all outstanding options accelerated by
six months. The total weighted average contractual life of options outstanding
under the 1995 WhoWhere? Stock Option Plans at July 31, 1999 was approximately
6.4 years.
F-25
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of option activity under the 1995 WhoWhere? Stock Option Plan is
as follows:
<TABLE>
<CAPTION>
Weighted-
Number of Average
Options Exercise Price
--------- --------------
<S> <C> <C>
Outstanding at August 13, 1998........................ 1,922,784 $4.01
Granted............................................. -- --
Exercised........................................... (869,126) 2.95
Terminated.......................................... (439,764) 3.40
---------
Outstanding at July 31, 1999.......................... 613,894 $5.94
=========
Exercisable at July 31, 1999.......................... 211,729 $6.47
=========
</TABLE>
The following table summarizes information about stock options outstanding
under the 1995 WhoWhere? Stock Option Plan at July 31, 1999:
<TABLE>
<CAPTION>
Options
Outstanding Options Exercisable
------------------------------------ --------------------------
WhoWhere Weighted-
1995 Stock Average
Option Remaining Weighted- Weighted-
Plan Range of Number Contractual Average Number Average
Exercise Outstanding at Life Exercise Exercisable Exercise
Prices July 31, 1999 (years) Price at July 31, 1999 Price
- ---------------- -------------- ----------- --------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
$0.01 - $0.50 59,988 7.6 $ 0.46 26,984 $ 0.46
$0.51 - $6.55 242,562 7.8 $ 1.96 59,486 $ 1.68
$6.56 - $13.10 311,344 5.1 $10.10 125,259 $10.04
------- -------
613,894 211,729
======= =======
</TABLE>
Gamesville 1999 and 1997 Stock Option Plans
In connection with the acquisition of Gamesville, the Company assumed the
1999 and 1997 Stock Option Plans under which incentive stock options and
nonqualified stock options to purchase common stock may be granted to
officers, employees, directors, consultants and advisors. Options under the
Stock Option Plans vest over periods of one to four years from date of grant
and expire ten years from the date of grant. The weighted average exercise
price for these shares was $4.07 at July 31, 1999. The total weighted-average
contractual life of options outstanding at July 31, 1999 was approximately
9.18 years.
A summary of option activity under the Gamesville Stock Option Plans is as
follows:
<TABLE>
<CAPTION>
Weighted-
Number of Average
Options Exercise Price
--------- --------------
<S> <C> <C>
Outstanding at December 31, 1997.................... -- --
Granted........................................... 47,834 $2.20
Exercised......................................... -- --
Terminated........................................ -- --
-------
Outstanding at July 31, 1998........................ 47,834 2.20
Granted........................................... 277,572 4.39
Exercised......................................... -- --
Terminated........................................ -- --
-------
Outstanding at July 31, 1999........................ 325,406 $4.07
=======
Exercisable at July 31, 1999........................ 32,204 $3.52
=======
</TABLE>
F-26
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ -------------------------------
Gamesville Weighted-Average
Stock Option Number Remaining Number
Plan Range of Outstanding at Contractual Weighted-Average Exercisable at Weighted-Average
Exercise Prices July 31, 1999 Life (years) Exercise Price July 31, 1999 Exercise Price
--------------- -------------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$2.20 47,834 8.5 $2.20 12,642 $2.20
$4.39 277,572 9.3 $4.39 19,562 $4.39
------- ------
325,406 32,204
======= ======
</TABLE>
1996 Non-Employee Director Stock Option Plan
On February 2, 1996, the 1996 Non-Employee Director Stock Option Plan (the
"Director Plan") was approved by the Board of Directors. The Director Plan
authorizes the issuance of a maximum of 400,000 shares of common stock. The
Director Plan is administered by the Board of Directors. Under the Director
Plan each non-employee director first elected to the Board of Directors after
the completion of the initial public offering will receive an option for
10,000 shares on the date of his or her election. The exercise price per share
for all options granted under the Director Plan will be equal to the fair
market value of the common stock as of the date of grant. All options vest in
three equal installments beginning on the first anniversary of the date of
grant. Options under the Director Plan will expire ten years from the date of
grant and are exercisable only while the optionee is serving as a director of
the Company. As of July 31, 1999, 120,000 options had been granted at an
exercise price of $2.88 and $4.50 per share and remained outstanding under the
Director Plan, of which 93,334 were exercisable.
1996 Employee Stock Purchase Plan
On February 2, 1996, the 1996 Employee Stock Purchase Plan ("1996 Purchase
Plan") was adopted by the Company's Board of Directors. The 1996 Purchase Plan
authorizes the issuance of a maximum of 1,000,000 shares of common stock and
is administered by the Compensation Committee of the Board of Directors. All
employees of the Company who have completed six months of service with the
Company are eligible to participate in the 1996 Purchase Plan with the
exception of those employees who own 5% or more of the Company's stock and
directors who are not employees of the Company may not participate in this
plan. Employees elect to have deducted from 1%-10% of their base compensation.
The exercise price for the option is the lesser of 85% of the fair market
value of the common stock on the first or last business day of the purchase
period (6 months). An employee's rights under the 1996 Purchase Plan terminate
upon his or her voluntary withdrawal from the Plan at any time or upon
termination of employment.
Stock-Based Compensation
The Company has adopted the disclosure provisions of SFAS No. 123 with
respect to its stock-based compensation. The effects of applying SFAS No. 123
in this pro forma disclosure may not be representative of the effects on
reported income or loss for future years. SFAS 123 does not apply to awards
prior to 1995. The Company anticipates additional awards in future years. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the grant date fair value in accordance with SFAS 123, the
Company's net loss and net loss per share for the years ended July 31, 1999,
1998 and 1997 would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
As Reported Pro Forma
---------------------------- -----------------------------
Net Loss Loss Per Share Net Loss Loss Per Share
------------ -------------- ------------- --------------
<S> <C> <C> <C> <C>
Year ended July 31,
1999................... $(52,081,787) $(0.59) $(133,616,782) $(1.51)
Year ended July 31,
1998................... $(28,313,767) $(0.44) $ (35,448,839) $(0.55)
Year ended July 31,
1997................... $ (7,048,659) $(0.12) $ (9,588,118) $(0.17)
</TABLE>
F-27
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The grant date fair value of each stock option was estimated using the
Black-Scholes option-pricing model with the following assumptions: expected
life of four years for 1999, 1998 and 1997; volatility of 115% for 1999, 100%
for 1998 and 70% for 1997; dividend yield of 0% for 1999, 1998 and 1997;
weighted average risk-free interest rate of 6.00% in 1999, 5.48% in 1998 and
6.25% in 1997. The weighted average grant date fair values of options granted
in 1999, 1998 and 1997 were $8.24, $2.44 and $0.81, respectively.
8.Income Taxes
The actual tax expense for 1999, 1998 and 1997 differs from "expected" tax
expense (benefit), computed by applying the statutory U.S. Federal corporate
tax rate of 34% to earnings before income taxes, as follows:
<TABLE>
<CAPTION>
Year Ended July 31,
--------------------------
1999 1998 1997
-------- ------- -------
(In thousands)
<S> <C> <C> <C>
Computed "expected" tax benefit................. $(17,660) $(9,626) $(2,396)
Nondeductible amounts and other differences:
In Process Research and Development........... -- 5,875 --
Goodwill amortization......................... 16,881 2,301 --
Tax on conversion of S Corporation to C
Corporation.................................. 138 -- --
S Corportion (earnings) losses not (taxed)
benefited.................................... -- (43) 145
Other......................................... 91 85 (326)
Change in valuation allowance for deferred taxes
allocated to income tax expense................ 688 1,408 2,577
-------- ------- -------
$ 138 $ -- $ --
======== ======= =======
</TABLE>
At July 31, 1999 and 1998 deferred income tax assets and liabilities result
from temporary differences in the recognition of income and expense for tax
and financial reporting purposes. The sources and tax effects of these
temporary differences are presented below:
<TABLE>
<CAPTION>
July 31,
------------------
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax liabilities:
Book over tax basis of developed technology.............. $ 5,259 $ 2,806
Financial basis in excess of income tax basis of
available-for-sale securities........................... 12,582 --
-------- --------
Total deferred liabilities................................. 17,841 2,806
-------- --------
Deferred tax assets:
Deferred Revenue......................................... 2,086 2,169
Reserves................................................. 4,977 2,307
Tax in excess of book basis for differences in equity
investments............................................. (2,410) 2,164
Net operating losses and credit carryforwards............ 57,050 15,979
Other.................................................... 2,501 594
-------- --------
Total gross deferred tax assets............................ 64,204 23,213
Less valuation allowance................................... (46,501) (20,407)
-------- --------
Net deferred tax asset..................................... 17,703 2,806
-------- --------
Net deferred income taxes.................................. $ (138) $ --
======== ========
</TABLE>
F-28
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In assessing the realizability of deferred tax assets, the Company
considers whether it is more likely than not that some or all of the deferred
tax asset will not be realized. The Company believes that sufficient
uncertainty exists regarding the realizability of the deferred tax assets such
that valuation allowances of $46,501,000 and $20,407,000 for July 31, 1999 and
1998 respectively, have been established for deferred tax assets.
At July 31, 1999, the Company had approximately $151,418,000 of federal and
state net operating loss carryforwards which will begin to expire in 2007 for
federal purposes and 2004 for state purposes. Utilization of the net operating
losses may be subject to an annual limitation imposed by change in ownership
provisions of Section 382 of the Internal Revenue Code and similar state
provisions.
In accordance with FAS 109, the accounting for the tax benefits of acquired
deductible temporary differences, which are not recognized at the acquisition
date because a valuation allowance is established, and recognized subsequent
to the acquisitions will be applied first to reduce to zero, any goodwill and
other noncurrent intangible assets related to the acquisitions. Any remaining
benefits would be recognized as reduction of income tax expense. As of July
31, 1999, $21,098,000 of the Company's deferred asset pertains to acquired
companies, the future benefits of which will be applied first to reduce to
zero any goodwill and other noncurrent intangible assets related to the
acquisitions prior to reducing the Company's income tax expense. Deferred tax
assets and related valuation allowance of approximately $23,370,000 relate to
certain operating loss carryforwards resulting from the exercise of employee
stock options, the tax benefit of which, when recognized, will be accounted
for as a credit to additional paid-in capital rather than a reduction of
income tax.
The Company's deferred tax liability relates solely to the difference in
bases of acquired assets as well as the tax effects of unrealized gains of
available-for-sale securities. A portion or all of net operating loss
carryforwards which can be utilized in any year may be limited by changes in
ownership of the Company, pursuant to Section 382 of the Internal Revenue Code
and similar statutes.
9. Related Party Transactions
In connection with the formation of the Company, the Company, Carnegie
Mellon University ("CMU"), CMG@Ventures and CMGI entered into a license
agreement ("License Agreement") pursuant to which CMU granted the Company a
perpetual, exclusive (with certain limited exceptions), worldwide license to
use the Lycos Internet search and indexing technology and the Lycos Catalog.
The Company paid licensing fees and additional payments equal to 50% of
certain cash receipts, as defined, totaling approximately $1,250,000. All
amounts due under the License Agreement were paid as of July 31, 1996. The
Company also issued 4,000,000 shares of common stock in connection with this
Agreement. The License Agreement was fully amortized as of July 31, 1998.
On February 9, 1996, the Company sold 366,320 shares and 160,000 shares of
common stock and options to acquire 238,904 shares and 104,344 shares of
Common Stock to CMU and Dr. Michael Mauldin, respectively, for an aggregate
purchase price of $328,950, pursuant to the exercise of preemptive rights
granted to these parties in the License Agreement. These preemptive rights
were exercised in connection with the issuance of shares of common stock
pertaining to the Company's acquisition of Point Communications on October 12,
1995. The options granted to Dr. Mauldin and CMU have an exercise price of
$0.50 per share and became fully vested upon completion of the Company's
initial public offering in April 1996.
In addition to amounts paid to CMU in connection with the License
Agreement, the Company was also required to pay to CMU an additional $525,000
pursuant to two licenses granted by CMU which were assigned to the Company.
In April 1998 the remaining carrying value of the License Agreement of
approximately $831,000 was written off as it was not considered to have any
remaining future economic benefit.
F-29
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Litigation
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 the 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 Lycos allegedly on behalf of all common stockholders
of Lycos. The complaints requested, 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
attorney's fees. Since the proposed merger was terminated, the suits have been
inactive. We believe that the allegations in the complaints are without merit
and, as a result of the termination of the proposed merger, are now moot.
Also prior to the termination of the proposed merger, certain 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
securities laws through alleged misrepresentations and omissions relating to
the announced transaction with USA Networks. The consolidated complaint seeks
an unspecified award of damages. We believe that the allegations in the
consolidated complaint are without merit and intend to contest them
vigorously. On October 22, 1999, we filed a motion with the court to have the
lawsuit dismissed for failure to adequately allege violations of the
securities laws.
A former employee of Lycos has brought suit in Federal District Court in
California, seeking compensatory and punitive damages, unpaid and lost wages,
attorneys' fees and prejudgment interest based on alleged gender
discrimination, harassment, retaliation, wrongful discharge, breach of implied
contract, fraud, and wage and hour violations. The matter is currently
scheduled for trial in March 2000. We believe that the allegations in the
complaint are without merit, and we have contested, and will continue to
contest, them vigorously.
In November 1999, AIWF Trust, a former shareholder of WiseWire corporation,
filed a lawsuit in the Court of Common Pleas of Allegheny County,
Pennsylvania, against WiseWire, representatives of former shareholders of
WiseWire, and Lycos, as WiseWire's alleged successor in interest. In this
lawsuit, AIWF Trust alleged that pursuant to a 1996 subscription agreement
between AIWF Trust and WiseWire, AIWF Trust was entitled to 2,500,000 shares
of WiseWire common stock instead of the 25,000 shares it received. AIWF Trust
seeks the equivalent of 2,500,000 shares of WiseWire in Lycos common stock,
which amounts to approximately 748,000 shares of Lycos common stock. Lycos
believes that the allegations in the complaint are without merit and intends
to contest them vigorously. In addition, Lycos has asserted a claim against
the escrow deposit created in connection with Lycos' acquisition of WiseWire,
which currently contains approximately 329,000 shares of Lycos common stock.
The Company is also subject to legal proceedings and claims which arise in
the ordinary course of its business.
In the opinion of management, the amount of ultimate liability with respect
to all of the above actions will not materially affect the financial position,
results of operations or cash flows of the Company.
F-30
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Subsequent Events (unaudited)
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. 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. Results of
operations for Quote.com will be included with those of the Company for
periods subsequent to the date of acquisition.
Lycos Asia Joint Venture
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.
12. Selected Quarterly Financial Information (unaudited)
The following table sets forth selected quarterly financial information for
the years ended July 31, 1999 and 1998. The operating results for any given
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Fiscal 1999 Quarter Ended Fiscal 1998 Quarter Ended
------------------------------------- ---------------------------------
Oct. 31 Jan. 31 Apr. 30 Jul. 31 Oct. 31 Jan. 31 Apr. 30 Jul. 31
------- -------- -------- -------- ------- ------- -------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues.......... $25,139 $ 31,115 $ 35,838 $ 46,448 $9,603 $12,894 $ 15,343 $19,306
Gross profit............ 19,784 24,542 28,561 36,380 7,747 10,073 10,505 16,063
Net income (loss)....... (3,576) (13,813) (13,220) (21,473) 243 394 (22,028) (6,923)
Basic and diluted net
income (loss) per
share.................. $ (.04) $ (.16) $ (.15) $ (.22) $ 0.00 $ 0.00 $ (.35) $ (.09)
</TABLE>
F-31
<PAGE>
LYCOS, INC.
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, July 31,
1999 1999
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 175,325,701 $166,505,998
Accounts receivable, net........................ 29,316,878 25,830,284
Electronic commerce and license fees receivable. 83,101,473 71,843,202
Prepaid expenses and other current assets....... 8,170,825 8,782,844
------------- ------------
Total current assets.......................... 295,914,877 272,962,328
------------- ------------
Property and equipment, less accumulated
depreciation..................................... 7,692,635 7,726,006
Electronic commerce and license fees receivable... 44,537,500 48,029,100
Investments....................................... 43,340,401 48,000,570
Deferred tax asset................................ 1,020,000 --
Intangible assets, net............................ 477,445,508 505,682,024
Other assets...................................... 4,519,580 7,399,453
------------- ------------
Total assets.................................. $ 874,470,501 $889,799,481
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable--current.......................... $ 1,246,537 $ 2,949,480
Accounts payable................................ 4,731,214 2,055,267
Accrued expenses................................ 28,716,168 22,636,751
Deferred revenues............................... 79,354,241 64,016,249
------------- ------------
Total current liabilities..................... 114,048,160 91,657,747
Deferred tax liability............................ -- 138,000
Notes payable..................................... 2,824,757 2,599,728
Deferred revenues................................. 42,544,375 55,934,152
------------- ------------
45,369,132 58,671,880
Commitments and contingencies..................... -- --
Stockholders' equity:
Common stock.................................... 1,016,858 1,003,121
Additional paid-in capital...................... 825,639,202 815,706,221
Deferred compensation........................... (58,169) (75,276)
Accumulated deficit............................. (123,670,210) (92,751,009)
Treasury stock, at cost......................... (3,286,293) (3,286,293)
Accumulated other comprehensive income.......... 15,411,821 18,873,090
------------- ------------
Total stockholders' equity.................... 715,053,209 739,469,854
------------- ------------
Total liabilities and stockholders' equity.... $ 874,470,501 $889,799,481
============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-32
<PAGE>
LYCOS, INC.
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
-------------------------
1999 1998
------------ -----------
<S> <C> <C>
Revenues:
Advertising....................................... $ 38,838,955 $17,629,907
Electronic commerce, license and other............ 17,019,096 7,509,279
------------ -----------
Total revenues.................................. 55,858,051 25,139,186
Cost of revenues.................................... 11,998,365 5,390,322
------------ -----------
Gross profit.................................... 43,859,686 19,748,864
Operating expenses:
Research and development.......................... 9,807,961 5,394,435
Sales and marketing............................... 32,505,870 16,204,097
General and administrative........................ 7,258,072 2,607,461
Amortization of intangible assets................. 28,236,516 11,135,885
------------ -----------
Total operating expenses........................ 77,808,419 35,341,878
------------ -----------
Operating loss...................................... (33,948,733) (15,593,014)
Interest income, net................................ 1,871,532 1,897,214
Gain on sale of investments......................... -- 10,119,831
------------ -----------
Loss before income taxes............................ (32,077,201) (3,575,969)
Provision (benefit) for income taxes................ (1,158,000) --
------------ -----------
Net loss............................................ $(30,919,201) $(3,575,969)
============ ===========
Basic and diluted net loss per share................ $ (0.31) $ (0.04)
============ ===========
Shares used in computing basic and diluted net loss
per share.......................................... 99,174,362 86,097,590
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-33
<PAGE>
LYCOS, INC.
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Operating activities
Net loss.......................................... $(30,919,201) $ (3,575,969)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization of deferred compensation........... 17,107 11,634
Depreciation.................................... 1,292,533 899,275
Amortization of intangible assets............... 28,236,516 11,135,885
Allowance for doubtful accounts................. 1,760,000 (107,018)
Gain on sale of investments..................... -- (10,119,831)
Deferred taxes.................................. (1,158,000) --
Changes in operating assets and liabilities:
Accounts receivable............................. (5,246,594) (2,635,674)
License fees receivable......................... (7,766,671) (962,810)
Prepaid expenses and other current assets....... 612,019 (12,071,876)
Other assets.................................... 2,879,873 (1,505,584)
Accounts payable................................ 2,675,947 (3,409,808)
Accrued expenses................................ 6,079,636 (3,480,874)
Deferred revenues............................... 1,948,215 2,557,124
------------ ------------
Net cash provided by (used in) operating
activities....................................... 411,380 (23,265,526)
------------ ------------
Investing activities
Purchase of property and equipment................ (1,259,162) (170,128)
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)
------------ ------------
Net cash provided by (used in) investing
activities....................................... (2,360,261) 11,269,077
------------ ------------
Financing activities
Borrowings on note payable........................ 762,756 40,500
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)
------------ ------------
Cash provided by (used in) financing activities... 10,768,584 (988,918)
------------ ------------
Net increase (decrease) in cash and cash
equivalents...................................... 8,819,703 (12,985,367)
------------ ------------
Cash and cash equivalents at beginning of period.. 166,505,998 153,980,292
------------ ------------
Cash and cash equivalents at end of period........ $175,325,701 $140,994,925
============ ============
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.
F-34
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL 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 restated unaudited condensed consolidated financial statements of Lycos
give retroactive effect to the merger with Gamesville, Inc., which was
consummated on December 3, 1999. The merger was accounted for as a pooling of
interests. On December 3, 1999, each issued and outstanding share of common
stock of Gamesville was converted into the right to receive 0.1822 shares of
common stock of Lycos. Lycos issued 3,605,044 shares in exchange for all of
the outstanding shares of Gamesville. Additionally, Lycos converted all
outstanding Gamesville stock options and warrants into approximately 423,085
Lycos options and warrants. The restated unaudited consolidated financial
statements reflect the combination of the historical consolidated financial
statements of Lycos with the historical financial statements of Gamesville,
which have been restated to reflect the same fiscal year end of Lycos.
Intercompany transactions have been eliminated.
The results of operations for the separate companies and the combined
amounts presented in the unaudited supplemental condensed consolidated
financial statements are as follows:
<TABLE>
<CAPTION>
Three Months Ended
October 31,
-------------------------
1999 1998
------------ -----------
<S> <C> <C>
Net Revenues:
Lycos.............................................. $ 56,033,902 $24,784,119
Gamesville......................................... 1,824,149 355,067
Eliminations....................................... (2,000,000) --
------------ -----------
$ 55,858,051 $25,139,186
============ ===========
Net Income (Loss):
Lycos.............................................. $(29,522,365) $(3,595,933)
Gamesville......................................... (1,396,836) 19,964
------------ -----------
$(30,919,201) $(3,575,969)
============ ===========
</TABLE>
The accompanying unaudited supplemental 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 supplemental
consolidated
F-35
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
financial statements for the year ended July 31, 1999, included herein. 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.
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 the 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 $34,380,470 and $3,496,113 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 $3.5 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.
F-36
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Income Taxes
The Company's effective income tax rate has been established after
adjustment for amortization of intangible assets and certain other items which
are not deductible for tax purposes. This effective income tax rate may change
during the remainder of 2000 if operating results differ significantly from
the current operating projections.
6. Litigation
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 laws 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.
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.
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 up to five years. Results of operations for Quote.com
will be included with those of the Company for periods subsequent to the date
of acquisition.
The purchase price is expected to be allocated as follows:
<TABLE>
<S> <C>
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>
F-37
<PAGE>
LYCOS, INC.
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
F-38
